Investing in connected devices could gather considerable steam in 2015 as markets for wearables, smart TVs, the connected car and even the smart home begin to mature.
But a significant shift appears to be taking shape. Investors are thinking less about hardware and more about software, infrastructure and security, the enablers of the Internet-of-Things universe.
This was the key take away from the sprawling Consumer Electronics Show in Las Vegas in January, where VCs took the temperature of consumer electronics business and caught a glimpse of products expected in 2015. VCJ spent several days at the show and talked to dozens of GPs, entrepreneurs and executives.
What stood out was this: Connected devices were everywhere, and the investment excitement for apps and enabling technologies appears on the rise. Fueling the interest is an Internet-of-Things market, Gartner expects it to nearly double in two years and almost triple in three.
“The connected car and home are as big an opportunity as the connected phone,” said Venky Ganesan, a managing director at Menlo Ventures. “When the iPhone came out in 2007 we had a difficult time seeing all the things that would emerge out of that platform. Similarly, it will be tough to envision and predict all the innovations that are going to emerge out of this platform, but I am sure they will and it will be equally transformative.”
The challenge is where and when to place bets. For some VCs, it is still too early. Standards are evolving and device interoperability is minimal. But if the show was a guide, smart homes, TVs, devices and cars are coming at a rapid pace and key pieces of the infrastructure will be needed sooner rather than later.
“The points of connectivity are proliferating,” said Jason Krikorian, a general partner at DCM. “It’s imperative that all these devices and systems work together in a way that is comprehensive.”
Perhaps, the most investor excitment is reserved for the smart home. Products hoping to remake everyday items, such as door locks, light bulbs and washing machines, were everywhere at the show.
Schlage showed off an Internet connected door lock that opens with a voice command. (It will interface with Apple’s HomeKit.) Chamberlain’s connected garage door opener let’s homeowners check remotely whether they’ve left the garage door open. Sengled displayed LED light bulbs with speakers and cameras.
The biggest hurdle is that platform standards to permit easy installation and interoperability haven’t arrived. Competing formats such as Bluetooth, ZigBee, HomeKit, Iris and SmartThings aren’t likely to converge this year, making investment bets complicated to time.
For DominateFund Managing Partner Ben Parr, it is not too early to get involved. “I think we probably will make our first investment this year,” Parr said. Companies have trouble getting traction and getting prices down, but “there will only be a small set of winners.”
Yet successful products this year are likely to be the most practical ones: Electrical plug adapters that enable smartphone control, connected water leak detectors and motion sensors that function without broad network integration. Over the next year or two, the market will transform from an appliance, or hardware, focus to a services business, said Radek Tadajewski, CEO of hardware maker OORT. Services providers, perhaps manufacturers, utilities or telcos, may give hardware away at low cost in exchange for lucrative services contracts, Tadajewski said.
This could open up opportunities for young companies. One VC already examining the space is Randy Hawks, a managing director at Claremont Creek Ventures: “It’s not about the devices. It’s about the information they are giving me.”
This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story in VCJ with accompanying data by clicking here. To subscribe to VCJ, click here for the Marketplace.
Photo illustration by Janet Yuen for VCJ.