Gadgets

Here’s why the Internet of things just became very interesting

Above: The Nest Protect smart smoke and carbon monoxide detector.

Image Credit: Devindra Hardawar/VentureBeat

Experts are heralding the Internet of Things (IoT) computing phase as the next industrial revolution, estimating 50 billion connected devices and IoT solutions reaching $7.1 trillion by 2020.

While we won’t refute these arguments, a focus on shareholder positioning will help us better understand where we are in the IoT cycle and how positioning IoT into a company’s story just became that much more pressing.

Early and trending higher – inviting companies to talk about IoT

Technologists have long predicted a Jetsons-like connected world, but their conjectures have been proven premature. To better understand why, we decided to analyze the timing of the current IoT trend, focusing on growth manager positioning, to glean clues as to when long-term tech investors place their respective bets.

By integrating a basket of public IoT semiconductor companies (highlighted by Goldman Sachs; note: Making S-E-N-S-E of the next mega-trend) with Google Trends’ data containing the phrase “IoT,” we see that an obvious inflection point does not occur until Q4’13 (see Exhibit 1 below). After six consecutive quarters of net asset outflows by growth managers, those firms have finally started to buy into the IoT theme. During the Q4’13 inflection point, Google Trends’ data traversed from a prolonged period of stagnation to rapid ascension. For the first time in two years, companies looking to explore IoT now have the wind at their backs.

Growth managers buying into IoT hardware

Public Market Not Ready for IoT

Though still in its early stages, IoT remains a tough space for public investors to gain exposure, especially to what Gartner describes as the high value layers (apps, services and analytics to capture 80 percent of the net value created). Further highlighting the early-cycle IoT thesis, Goldman Sachs describes it well in their Internet of Things – Volume 2 note:

“Like the mobile revolution, IoT will create new companies and new categories. The importance of IoT expands beyond “pure play” enablers… as the market begins to take shape {and} continues to evolve; we expect a similar ecosystem of software vendors to develop.”

Despite the limited public pure-play IoT options, firms are exhibiting their bullishness towards publicly available layers. To classify a firm’s bullishness, we analyzed recent buying trends, net capital allocation to IoT plays, and portfolio concentration towards the IoT basket. Of the firms we deem to be increasingly bullish, a total of $3.9B has been poured into select IoT names over the trailing three quarters, demonstrating that these investors see potential in IoT.

What IoT says about broader technology market trends

The IoT market is young in two senses of the word: managers are just beginning to allocate capital, and IoT is undeveloped in that it has downfalls, specifically due to its investable limitations. These limits to gaining exposure drive a broader shift in technology investing. We believe that IoT acts as a microcosm for a larger market theme—traditional investors are now looking beyond the public markets to play technology trends.

Looking at private market funding for Gartner’s high value layers, we see that investors are flooding into the IoT private company ecosystem with $1.1B deployed into relevant startups in 2013. It is with this understanding that we arrive at our original point: public investors are venturing beyond the confines of public markets.

As we have seen in recent late stage funding rounds by Uber, Snapchat, and Dropbox, private companies are able to stay private longer. This trend is likely to continue as brand name mutual fund managers, as well as hedge funds, blur the lines of public and private markets.

Effects on Communication with Investors

By examining the Internet of Things investment landscape, we collide directly with a market phenomenon currently under way – traditional, public capital crossing over from public to private markets.

This shift is forcing investors to make a difficult choice: invest in the publicly available hardware layers, wait for public investable options, or venture into the private markets. Irrespective of public or private monikers, many investors can now go anywhere they’d like, a shift that has broad implications for companies.

Managers are adapting to the times, and as a company, understanding this and prepping your story to benefit from the macro tailwind is crucial. The number of competitors for IoT investable dollars just grew exponentially, and as such, getting ahead of the pack just became ever more important.

Michael Stiller, Rayner Turley, and Mark Krivis are technology sector-focused experts within Advisory Services at NASDAQ OMX.


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35 comments
Lance Cassidy
Lance Cassidy

Google acquired nest... Who's ignoring it...

Paul Wallbank
Paul Wallbank

Tony, have a read of my Networked Globe site; this is exactly the stuff we discuss.

Anthony Freed
Anthony Freed

 The IoT also creates some very serious privacy and security issues. The rush to bring "smart" devices (or as we like to call them, "vanity tech" because they are largely unnecessary) to market swiftly means almost certainly that security was not taken into consideration in the development process, and end users will likely  be exposing themselves and their personal information to a plethora of threats. Worse yet, your "smart fridge" may be commandeered to become a node in a massive botnet that could be used to attack your bank - just one scenario. We need to make security of these devices a priority from the concept and design phase on through production and distribution, else we are only creating more insecurity for ourselves.

Dave Meeker
Dave Meeker

Yes, it just now got interesting. It wasn't interesting 3 years ago when we were making connected devices.

Paul Sykes
Paul Sykes

Sure Akio but not by our toaster. Lol.

Rob Melich
Rob Melich

Gobbledygook nothing more nothing less. Please post meaningful content not biz cliches.

Akio Fujii
Akio Fujii

Paul , We were already tracked & monitored on PC & smartphone browser via HTTP Cookie. Since iOS banned the usage of such as well as their UDID codings, App developers are now embedding user trackable SDK into native titles (merely because Apple's Ad Identifier is useless). Some IoT may be too much. It's good to be curious but we have to be careful as to what to apply and what not.

Betty Leyman
Betty Leyman

Lol you'll be fine long ad he is not drunk or anything. Lol

Chung Yang
Chung Yang

Every time I hear the term "internet of things" I want to, for lack of better words, vomit.

Tyson Williams
Tyson Williams

My business is building an IoT product, hopefully it catches on! Interesting article.

Danny Williams
Danny Williams

Stupid people fear technology or what they don't understand.

Kevin Akat
Kevin Akat

Cisco is the only one that got it right so far by calling it the Internet of Everything (IoE). Connecting ordinary *things* is simply the enabler. Many think it's just connecting your AC to the internet, being able to shut it off from your phone and get some data about how it's affecting your electric bill. No, the real power is when all these devices are talking to one another w/o human assistance via machine to machine communication, when these devices share data to the cloud and can make smart decisions for you. When large-scale traffic data can help Google self-driving cars prevent any and all accidents from occurring. When large-scale food consumption data can help pinpoint the exact cause of cancers or diseases that would not have been discovered otherwise. This is much bigger than connecting shit to the internet.

Adil Najmuddin
Adil Najmuddin

I wonder how effective 'this is going to be HUGE' titles are? Especially since you guys use them on every other article

Rick Bakas
Rick Bakas

Yeah, because it wasn't interesting before.

Paul Sykes
Paul Sykes

Just ... No. I hate it Akio. This is the end of humanity as its been for thousands of years. This makes us biological android cattle. Tracked and monitored 24/7 and logged for our entire lives.

Tyson Quick
Tyson Quick

The headline over hyped this yawn of a read.

Petr Horak
Petr Horak

This Jenn, this is the Internet. :D

Patty J's
Patty J's

Can't wait for every move we make to really be under Survailence