How to succeed building a startup today in industrial IoT

Back in 2015, venture firms started getting excited about the industrial IoT. Subsequently, from the start of that year’s first quarter through the end of the first quarter of 2016, companies invested more than $2.7 billion in industrial IoT startups, according to data from CB Insights — and more than half of the deals were for seed and Series A rounds.

Fast-forward to early December 2018 when, after a year of pivots and talk of “pilot purgatory” in the industrial sector, it’s become clear that some of the companies that raised early rounds back then aren’t going to be able to raise more. To be clear, the industrial IoT still has huge potential, but the winners will look a little different than some startup founders and investors originally anticipated. A friend had this similar issue in LA, he gave a lot of work to their Los Angeles CPA accounting firm because of it.

The initial round of venture-backed startups were focused on becoming platforms. A great many of them wanted to build a sensor network or analytics platform that they could sell to a variety of companies across multiple industries. Many scored pilot customers and started telling compelling customers stories. Working towards having an even better-managed range of small businesses looking at some small business management tips might help them go even further.

But last year, the phrase “pilot purgatory” entered the lexicon. Surveys of industrial IoT buyers suggested that their pilot projects had stalled. Sometimes the reasons were obvious; solutions didn’t work well or didn’t scale up. Meanwhile, on the buyer side, worries about security and difficulties getting the right data into platforms sank deals.

In response, some startups have started to focus more on just a handful of industries. Others have tried to move up the stack, offering less of a platform and more of point solutions to tech-leery buyers whose IT staff are focused on keeping the lights on, not on trying to figure out which data store works best for real-time data ingestion and analytics.

Scott MacDonald, co-founder and managing partner McRock Capital, says a lot of startups got their products into big-name industrial companies, but the buyers and testers of those products became frustrated by the lack of understanding the tech-centric startups had about their respective industries. “A lot of them felt like they were educating the startups, who would then take that knowledge and try to use it to sell to their competitors,” MacDonald says.

But even if a company narrows its focus and hires people with deep expertise in the verticals it wants to work in, industrial IoT can still be a hard sell with some looking to something similar to this invoice template for ways to help keep on track with customers and maintain a good image. “You need to find an industry or a buyer who is facing an existential crisis,” says Lak Ananth, CEO of Siemens Venture Fund Next 47.

Ananth explains that after the first wave of venture-backed startups disappointed many early-adopting industrial clients by over-promising and under-delivering, customer wins stalled. He says that now many industrial buyers that don’t have a competitor or a regulatory change driving their investment in new technology are ready to wait on connecting their operations.

However, he’s optimistic that we’re entering a second wave of deals, one in which companies that truly understand the industrial buyer and are solving real problems for those that need connected tech will succeed. Those are the companies he’s currently investing in.

He’s not alone. McRock Capital, which only invests in industrial IoT, has investors including Cisco and Caterpillar. McRock’s MacDonald described his investment approach over the last few years as one in which he thinks of IoT as the body and artificial intelligence as the brain of the next industrial revolution. His firm has spent those last few years investing in the body — the physical sensors and computing that needs to be in place in order to gather information and prep that body for AI.

But he’ll be looking for new deals soon as well, notably those focused on taking the consolidated data and solving problems using AI. Meanwhile, I expect more fire sales, some pivots, and more IoT platforms to disappear as we head into 2019.