IoT Startups Rake In Cash

Funding is free-flowing for the field, but hurdles persist.

popularity

Corporate and venture investors are still eagerly backing Internet of Things startups, with more than $850 million committed during the first six months of 2017.

This year’s total may not reach the heights of 2014, when investors put more than $5 billion into IoT startups, or 2016, which saw IoT firms receiving about $4.75 billion, the Venture Scanner website estimates. Still, a once white-hot market remains red hot, at least.

The Industrial IoT (IIoT) market has enjoyed increasing support from investors, rising from $685 million in 121 deals during 2012 to more than $2.2 billion in 321 deals during 2016, according to CB Insights.

Some IoT startups are embracing the related fields of Artificial Intelligence, machine learning, and deep learning as they strive to offer a more comprehensive portfolio of hardware, software, and services for a variety of applications, such as autonomous driving, home automation, and robotics.

Here are some of the 2017 fundings so far in IoT, based upon industry and company data:

The IoT has a genuine “unicorn,” a privately held company valued at more than $1 billion, in C3 IoT of Redwood City, Calif. The enterprise software company was founded in 2009 as C3 Energy, providing sensors and smart meters for electrical utilities. It has raised $122.6 million from private investors, including a $70 million round last year, led by TPG Growth.

C3 IoT received Series E financing of a reported $11.8 million earlier this year, a modest amount of investment, led by Breyer Capital. What was big news about the Series E funding was the pre-money valuation placed on the IIoT venture — $1.4 billion, compared with less than $1 billion 10 months earlier.

Other C3 investors include InterWest Partners, Sutter Hill Ventures, and Wildcat Venture Partners.

C3 Energy was rebranded as C3 IoT in early 2016, after fielding requests by retailers and other companies outside the energy sector to use C3’s IoT platform. It is led by Chairman and CEO Thomas Siebel, the founder of Siebel Systems. The tech billionaire has been an investor in C3, along with Patricia House, the co-founder of C3 and the company’s executive vice chairman. Ed Abbo, C3 IoT’s president and chief technology officer, is a veteran of Siebel Systems and Oracle.

The “platform-as-a-service” company reported revenue in its 2017 fiscal year ended March 31 increased 65% from the prior year, without disclosing actual revenue numbers. Bookings were up about 600% from fiscal 2016, C3 IoT said, while the company had cash-positive operations for the year. It now has 100 million sensors and other devices under management, C3 IoT added.

The company has customers in aerospace, financial services, health care, manufacturing, oil and gas, retail, and utilities.

“C3 IoT is seeing dramatic demand growth globally across all industry sectors driven by CEO-led corporate digital transformation mandates that encompass big data, AI, machine learning, and IoT. We are expanding our delivery, strategic alliance, and customer service capacity apace to serve this growing market demand,” Siebel said in a statement.

Chicago-based Uptake Technologies, an IIoT vendor, this year is reported to be valued at $2 billion. Its investors include Caterpillar and Revolution Growth.

“The Internet of Things has the possibility for potential of being the platform that could finally make flexible electronics into a viable market,” said Dean Freeman, a research vice president at Gartner, at last month’s 2017FLEX conference and exhibition in Monterey, Calif. “Sensors are seen emerging as a huge marketplace. Very quickly, Gartner’s IoT definition: It’s a network of dedicated physical objects. It contains something that senses, processes, and communicates. Other Gartner analysts who talk about the Internet of Things say: ‘Why is your forecast so low, when everybody says 50 billion things out there by the year 2020?’ Well, Gartner doesn’t include PCs or cellphones, and we don’t include barcodes. We’re forecasting 20 billion live endpoints by the year 2020. We’re looking at 24 billion things. We’re going to see a 33% CAGR in the year 2020 in overall devices growth perspective. Business is going to lead the market…and the consumer is going to follow. Consumer’s going to have a lot more revenue, a lot more things. Where business is going to win out is in the services part of the marketplace.”

But the IoT also defies neat categorization because it’s not just a single opportunity. It’s a collection of connected devices across a number of markets that may or may not have any obvious connection to each other.

“You can see the fragmentation of the Internet of Things,” Freeman said. “One of our analysts has said it’s not just the Internet of Things, it’s the Internet of Many Different Things. This creates challenges in how you build the silicon for the electronics for this marketplace. The Internet of Things is also going to be one of the large growth engines for the semiconductor market at the moment. By 2020, it will be about 8% of the total semiconductor market. We’re expecting roughly a 24% CAGR, which goes up to about $35 billion by the year 2020. And from a unit perspective, we see about $28 billion. Each one of these silicon devices is going to be roughly about a dollar. So we need to find inexpensive ways to manufacture these devices. We’ll get microcontrollers that will be roughly 25 cents apiece in high volumes. Printed electronics allows us to get to that volume if we create enough gates and memory to create the technology. But it does have great applications in the sensors, and in some cases, the NFC and the RFID.”

As an analyst in Gartner’s Semiconductor Internet of Things Center of Excellence, Freeman and other analysts have issued a number of reports, including recent ones on smart streetlamps, use cases for IoT gateways, and intelligent lighting systems.

Another Gartner analyst, Emil Berthelsen, co-authored a report on Cool Vendors in IoT Solutions, 2017, highlighting ambyint, Filament Networks, SensorInsight, and Uptake. He said funding for the Industrial IoT is strong, as well.

“I cannot vouch for that most start-up funding is going to the IIoT sector, but we are seeing significant levels of activity in this area, which tends to encourage this community,” Berthelsen said. “Medium and larger enterprises have always had experience and positive results with SCADA and telemetry, and they are now exploring the opportunities in OT, IT and IoT convergence (centered around IIoT) and have also identified some early returns through such applications as predictive maintenance and asset management.

“One of the more notable areas of investment is naturally in the analytics space where the ability to process and generate new insights from the data is showing huge value – e.g., in the oil and gas industry as a prime example.”

Asked about the big rounds of funding and high valuations for C3 IoT and Sigfox (reportedly valued at nearly $680 million), the Gartner analyst responded, “C3 IoT is emerging as a IIoT platform vendor with a highly scalable platform, whereas Sigfox continues to develop its LPWA connectivity solution as more suitable and cost effective for many IoT applications (although for the latter, this is a combination across consumer and industrial markets).”

Berthelsen speculated that investors would continue to focus on deep analytics startups, platform providers, and cybersecurity companies.

Security’s dark (and growing) shadow
Initial exuberance over IoT’s growth potential appears to be coming under scrutiny these days. In a report earlier this year, IDTechEx said, “We do not repeat the mantra about tens of billions of nodes being deployed in only a few years. The many analysts sticking to such euphoria ignore the fact that, contrary to their expectation, very little IoT was deployed in 2016. They are ‘bubble pushing’ with their forecasts, predicting ever steeper takeoff, now a physical impossibility.”

The report went on to say that a large market will emerge, but not primarily for nodes, which will be rapidly commoditized. “The money will lie in the systems, software, and support examined in this study, though we also look closely at node design to reveal all the impediments to progress, as well as the things coming right, and the potential for enhanced functionality and payback. For example, the ongoing major breaches of Internet security with small connected devices sit awkwardly with system and software manufacturers’ claims year after year that they have cracked the problem.”

Security is, in fact, far from solved when it comes to the IoT and IIoT. For both markets this is a very big deal, and that has made many potential customers skeptical about freely using connected devices. That skepticism is particularly acute where sensitive or personal data is involved, which is a large part of the perceived value of the IoT.

“We need trusted endpoints where you can do updates, and we need fallback mechanisms,” said Bernd Stamme, vice president of product marketing at Kilopass . “In effect, we need end-to-end control that includes how keys are distributed over a network. It can’t be ‘secure to here’ and not after that. You’re starting to see that with banking requirements on end devices. What everyone is finding out is this whole thing is bigger than they expected it to be. Standards are still in development.”

And those standards are likely to be in development for some time. The problem is certainly larger than people initially expected, but it’s also constantly in flux for a couple reasons. First, systems are constantly being updated with software or firmware, so in many cases what needs to be secured is not what was initially developed. And second, the value of data is growing as more devices are interconnected and the overall volume increases.

That has repercussions throughout the semiconductor design chain, as well. The IP used to develop IoT devices is suddenly more vulnerable as a potential vector for hackers, in addition to becoming more valuable as a product.

“Data can be stored anywhere, but how you manage it and link to it is the key,” said Ranjit Adhikary, vice president of marketing at ClioSoft. “We hear a lot more about IP theft than in the past. And it’s not just China. It’s India, Europe and the United States, too. People are copying data to USBs. The only way to effectively deal with that is with access control and a good, customizable work flow. You shouldn’t be able to just download IP.”

Adhikary said that IP downloads in many cases should require sign-off from a C-level executive. “You should know why they’re using the IP, what project they’re using it for, and also figure out ways that it can be copied from a USB to prevent that from happening. If you have a customizable flow and someone makes a request for that IP, they may not get authorization to use it.”

So far, security has not been a big add-on market for IoT, however. It adds to the cost of developing IoT devices in terms of time to market, complexity of the devices, and the time it takes to verify and validate them. It also can impact power and performance, which is particularly problematic in portable electronic devices.

Moreover, historically customers have been unwilling to pay for it in many markets. Where it exists, it has been built into devices and work flows for specific companies and products, particularly on the IP side.

“This can be expensive for small devices,” said Asaf Ashkenazi, senior director of product management in Rambus‘ Security Division. “Any small change can increase the bill of materials by 10%. On top of that, a device will have to adapt over time. But who is going to pay the price for that?”

The answer may depend on the market. “There is certainly awareness of security in the enterprise,” said Dipesh Patel, president of the IoT Service Group at Arm. “And with devices like the iPhone, there has been work to make sure it cannot compromise the internal network. So at one level, the connected device is a cool thing. We can talk to an entire group and send messages around. What’s missing is a secure mark the way we have an energy market. Is this device at Level A, B or E? How well does your end device do?”

This would go a long way toward helping IoT market growth, particularly as communication on the IoT increasingly moves from hard-wired to wireless.

Conclusion
Still, the assumption is that there is enough opportunity in the IoT these days—with much more in the future—to warrant investments in such things as security, a better communications infrastructure, and even energy harvesting.

In effect, the bigger play is not so much in the chips or even some discrete devices as in the systems. “We look at expenditure on IoT enabling technology which currently runs to billions of dollars yearly, mainly coming from governments and aspiring suppliers,” said IDTechEx. “Most of those reporting these and other IoT figures are puffing their data with things that may never be a part of the IoT scene, such as sensor research, in general. Expenditure on buying and installing actual IoT networks is much more modest, contrary to heroic forecasts made by most analysts and manufacturers in the past. IDTechEx was disbelieving about the huge projections by others for the last four years, and we have been proved right so far. Nevertheless, even our node forecasts have now been reduced in the light of what has happened, though our systems figures have been increased. It adds up to $20 billion in actual networks including nodes in 10 years from now, and rapid progress after that.”

—Ed Sperling contributed to this report.

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