What IOT Really Means To An Investor
I have seen the journey of Investing and building businesses over 10 years with Lumis Partners. That very perspective applies when I see investments in IOT, ML, AI & Supply chain. That means being deeply involved in the portfolio company’s operations. That also means being able to see pretty closely — what is working and what is not, way before the financial performance starts to tell a story.
Over the last few years, we have been evaluating and investing in what is fashionably called “Internet of Things” firms. These firms aim at managing the IT-OT confluence for their clients in the manufacturing, industrial and utilities space. In today’s Industrial world, IT and OT is converging together really fast, both on the Process Manufacturing and Discrete Manufacturing side. The biggest reason is that the devices have become smart. They are not just obeying commands that originated from the Operating Tech, but also generating a wealth of data which can be captured by Information Tech. Producing rich data that can be analysed and acted upon. I want to talk about what we see as critical success factors in an IoT company, but for that, lets first talk about the IoT Value Chain.
IoT Value Chain
Hardware: Enables the data connectivity. It includes smart modules, smart equipment and data plumbing equipment.
Connectivity: Large wireless service provider firms like AT&T/Verizon, MVNOs/aggregators as well as start-ups like Integron provide connectivity roll-out & management solutions.
Application Enablement Platforms (AEP): They do a lot of data management, cleaning and storage, and contextualize it as per the business processes and requirements.
Analytics Layer: With firms like Uptake and Bitstew who analyse the data to provide insights, most of them have their own proprietary algorithms/data analysis methods built on top of open stack architecture. They would productise this analytics and sell it on a platform+apps model.
So far, so good. But what excites us? It is not the sexiness of the Tech, but how relevant the output is.
Thus enters the last category: Client Process Management Firms, this category enable all the above 4 aspects: Hardware, Connectivity, AEP and Analytics. But what do they take responsibility for? It is the End Outcome on Business Metrics
End outcome is the key here. These firms start owning up systems/processes which would deliver results. They take responsibility of large organisational metrics — like improving Total Operational Equipment Effectiveness of the whole Factory floor OR reducing the quality defects on the shop floor by recommending modifications to standard operating procedures.
Operating Investor’s Angle
From an investor’s point of view, we are fundamentally biased towards firms that can generate impact at the output level, not at the input level.
To illustrate this, let’s take a real live example — We had come across an IoT company who had the best technology / analytics engine to correctly predict the time to failure of that complete piece of machinery. It had built the best machine log parser, had gone at great lengths to create accurate description of machine conditions from even sparse data, could automatically categorise thousands of machine logs into various individual components of machine etc. Ultimately, they were the best in Analysis of “INPUT data”. But they had left the rest of the things to the user. What a user does after he gets this analysis, which is time to failure? That was left for the user to decide.
What would have made this company really interesting to us? If they had figured out the “OUTPUT level”. Can they suggest changes to the machine operating conditions such that the failure probability reduces? Can they increase the operating efficiency of the machine so that machine’s production efficiency increase? Can they directly tie up with the replacement / repair vendors so that automatic repair / replacement of machines happen as and when needed? These are the really right metrics to look at.
The ubiquity and depth of data, and its applicability in driving real impact on business metrics, is our basis for investment in an IoT firm.
Its fair to say that IoT is a very exciting space, and there is a massive amount of play left in the game. There are plenty players trying to get the strategy right, but the ‘rules to win’ are not yet decided. We have and will continue to bet on companies which deliver results on the business and output metrics of a client, rather than technology or input metrics. We have taken bets on a number of ideas in this space, and hopefully the portfolio companies would be able to scale more, pivot better and still be nimble. Let’s see if these bets actually hold ground in the era of constant disruption.
By Ashutosh Mayank, Vice President, Lumis Partners
