Is it ALL about the money?

The Experts from IoTC NEXT Weigh In

INVESTOR PANEL: Financing an IoT Project

*In November 2019, the Internet of Things Consortium (IoTC) launched its inaugural IoTC NEXT: The Connected Future Summit, the first IoT event of its kind that, above all, seeks to answer the crucial question, How can we create a connected and ethical future? Technology leaders, brand executives, investors, entrepreneurs and top media committed to the development, integration and implementation of connected technology came together at TheTimesCenter in New York to build impactful partnerships, share real world opportunities and spur creativity to advance innovation, ethical standards and inspiration in the connected home, retail, wearables, smart cities and mobility verticals.

Without a doubt, this was the money panel at IoTC NEXT in every sense, and attendees were so engrossed—hanging on to every word—you could hear a pin drop. For startups, there has not been a better time in recent history to raise capital. According to Pitchbook, U.S. venture capital (VC) investment reached $130.9 billion in 2018, surpassing levels from the dot-com era in 2000 and signifying VC ecosystem maturation.

Speakers for the INVESTORS PANEL: Financing an IoT Project included the following experts: 

·       Nate Williams, Founder, UNION Labs

·       Dan Herscovici, Partner, Edison Partners

·       Gus Warren, Managing Director, Ventures, Samsung NEXT

·       Deborah Zajac, Director, Touchdown Ventures

Here are the key takeaways and wisdom from the experts: 

When it comes to founders, characteristics funders look for include:

·       self-awareness and the ability to know you're the right person to do the job

·       motivation for starting a company beyond the “cool” factor

·       a demonstrated command and knowledge of the marketplace

·       a vision for where this market is headed that others might not see

·       the ability to see around corners and understand opportunities 

·       hiring, vision and leadership chops

·       transparency

·       Do not underestimate how powerful the distribution channels are of some of the big players—the major companies, whether it's Nestle, Procter & Gamble, Comcast or Tyco. 

·       Keep in mind where you are in the funding cycle. If you are a startup trying to define a category for the first time, there's a lot of value in having a fully integrated direct-to-consumer tack, but once a market has been established, it makes a lot more sense to go through distribution channels.

·       Understand the channel’s needs. If you're not helping it grow, you will not be a priority in the ecosystem.

·       Be patient, thoughtful and prepared. Six to 12 months of in-house testing with a new product would be lightning fast. There must be a tremendous amount of testing before shipping simply because when shipping happens, it’s done a on a massive scale – potentially launching in 200 countries on the same day.

·       The first step for any good entrepreneur is to be able to show value, then having the ability to paint the big vision. Those who can do both tend to be the ones that get funding and make it to profitability.

·       When it comes to approaching a VC firm, understand what the firm is investing in, then build and use your network, look for a connection or a referral to get you in front of their people—which means anyone, not just a partner. Talk to somebody who can understand your story. And don't be hierarchical about who that is. Panelists say they will respond to respond to cold emails, if they are engaged.

Categorical questions from moderator Sarah Krouse, reporter for The Wall Street Journal, extracted invaluable information from panelists who represented a wide swath of the industry. Once past the establishing question of what investors seek from the companies they choose to fund (to which all panelists replied “return”), the conversation quickly expanded. 

“One of the things that we think is interesting about venture capital these days is that there's so much venture capital dollars available now, and a lot of that money has been quite passive. And unfortunately, when we think of the complexity around the businesses that you're building right now, trying to do a deal with a Nestle or Comcast or Google requires real subject matter experience. Given that, we think the best early stage investors have the ability not only to have capital but also to have access to these networks that can speed the time from series A. At Kleiner Perkins, I did a regression analysis of around 300 companies that we passed on, and I looked for explanatory variables. Some of those variables had to do with the size of the team and the construction, how they took money, but most importantly, it was the path they took from founding to series A. We live in a world now where folks are taking a serpentine route, pre-seed, seed, post seed, and they keep changing the strategy. If I've learned anything from my grandparents, who both worked in construction, it is measure twice and cut once. What I hope happens, with us being a newer fund in this marketplace, is to really back entrepreneurs and have that open discussion of how to build durable IoT brands in a way that doesn't deploy massive amount of capital.” - Nate Williams

Deborah Zajac made the important point that while her company is as interested in strong financial returns like every other venture investor, both institutional and corporate, it's critical to have both strategic returns as well. There are different types of benefits from funding startups, whether that’s insight into a particular technology or adding to your brand or reputation for bringing subject matter expertise back to them. Determining the path to profitability and sustainable growth, then, becomes more complex. 

Dan Herscovici noted that capital efficiency one of the metrics Edison uses to decide whether or not a accompany is efficient. If the metric of monies raised over revenue realized today—or revenue run rate—is worse than 1.25, Edison tends to question the dynamics: Can this team grow into capital efficiency? While it is not standard across the board historically to use this specific metric, investors are beginning to realize they are underestimating the structural impact on the venture business. 

Panelists agreed that entrepreneurs should be smart about sources of capital and the cost of capital, which over the last couple of years has been mostly free, but they also predict a market change where it's going to get tougher. Entrepreneurs will need to select the right market and have a keen understanding of the channel, as well as discipline in every funding cycle.

“If a $100 billion fund ends up being underwater as it were, and starts slowing down and starts selling assets, that's going to have some impact on valuations and how a lot of firms look at things, in part because of SoftBank’s VisionFund and in part because of what's going on with the trade wars, etc. We've been looking at a lot of different companies, IoT verticals included. If we see two companies in a vertical that we're really interested in and one has a very expensive burn—a swing-for-the-fence mentality and not thinking about profitability—and the other one is thinking about profitability soon, we're more likely to go with the latter these days.” - Gus Warren

“In the past six months, I think I've had three conversations where I've convinced entrepreneurs to take less money, where previous to the conversation they just thought because capital is flowing, they should raise as much as possible now—waiting for perhaps a desert in the future. But then they have the pressure of making that capital work. Our position is that it just doesn't make any sense deluding yourself, and that this may not be the smart way to do it.” 

- Dan Herscovici

That approach is particularly important in many IoT cases because distribution is so critical, and control over your startup’s destiny is still up in the air. There is a big difference between the funding needs of a software company or an online business that doesn't have any piece of hardware versus one that is building hardware. If you've got hardware, and you're trying to do consumer IoT or customer acquisition, that can be an expensive proposition. There is also the question of channel partnerships.

“There are a number of different ways to approach it, particularly in the consumer space. I was there in the days when GE partnered with Quirky and rolled out their first product together. Building a brand is expensive, but it does give you certain privileges. I think at the end of the day, what clears through all of the clutter is a real compelling value proposition. If you look at the state of the channels today, you have these large companies, the Samsungs and the Amazons and others already in the smart home space. Why not leverage that infrastructure, that brand, that access, that channel and distribution, and create something very compelling off of it? The two don't have to be mutually exclusive. What you can strive to be is the best of breed for that channel.” - Deborah Zajac

Above all, the VC process is democratized. Don’t forget it. And don’t give up.

To download the full session, visit IoTC Next. 

We invite you to get involved with the IoT Consortium at our upcoming events at the Consumer Electronics Show 2020 in January in Las Vegas. You won’t want to miss the opportunity to join the uniting of the most powerful and influential brands, executives, investors and entrepreneurs. We are hosting our next members meeting on Monday, January 6, from 3 pm- 6pm at the Westin, a Connected Mobility breakfast on Tuesday, January 7 from 8 a.m. – 10 a.m. at the Venetian Hotel and a Connected Home VIP dinner on Thursday, January 9 from 5:30 p.m. – 9:30 p.m. at the Wynn. For more information, email [email protected]