What’s the IoT Investment Hypothesis?

With Hardware and the Internet of Things all over the media, and at what seems to be the “peak of inflated expectations”, there still seems to be an uneasy relationship of the investment community with this latest cycle in internet technology.

Talking with friends whose startups are currently looking for funding, and with the odd investor who is actually willing to comment on this, it has become clearer to me that most of the investment community hasn’t yet developed an investment hypothesis around consumer IoT startups, that is: they have no idea about the growth potential and liquidity events in this industry. After all, this industry can’t run on Web2.0 business models¹. Not only do hardware startups require orders of magnitude more capital² but it’s more illiquid as well, bound in machining and securing vendors.

But I feel the most problematic point is not that the uncertainty about liquidity events is large – I think the point holding back investors in this space is that they cannot count on a breakaway success that provides an entire fund with returns. Hardware doesn’t follow the model, because it doesn’t have the lock-in, winner-takes-it-all network effects of so many of those 2.0 startups.

So my question is: what are the investment hypotheses VCs currently have about the hardware space? Is there any movement, any desire to get in on the market? Or are we to play with the R&D funds of the big players? Adhere to “Internet of Everything” and “Industrial Internet”?

There’s plenty of very interesting start-ups out there, but as long as they can’t get funding, there’s not a lot of room to manoeuvre, not a lot of leeway to find out what this collection of technologies can be used for other than more efficiency in so-and-so’s supply chain.

I’m really curious about this one. One thing is clear: relying on Kickstarter won’t cut it.³