Nokia CEO Rajeev Suri announced at Mobile World Congress a new $350M commitment to Nokia Growth Partners (NGP) focused on the Internet of Things (IoT). The announcement begs three questions: Why IoT? Why now? And how will it be invested? Recent market turmoil is reintroducing a healthy dose of skepticism, so a new commitment to a new space deserves some explanation. We believe the response is important both for entrepreneurs and investors considering forays into IoT.
The Internet of Things is a network of smart, connected devices and sensors that collect and exchange data enabling new services and analytics. Since 2005, mobile phones have increased 3.4x to 6.8 billion worldwide in 2015 and accounted for 70% of all connected devices as of 2012. But a new generation of sensors and connected devices is emerging that will dwarf mobile phone unit volume. While analysts project a 3.3x growth in the next five years to 50 billion IoT devices, 80% are “things” that barely existed in 2012. More data has been created in the past five years than in prior human history, yet current data rates may again be dwarfed as connected devices are expected to produce 44 billion zetabytes of data by 2020. McKinsey notes that 90% of global GDP is untouched by the Internet. IoT will substantially touch – and possibly disrupt – many of these greenfield sectors.
|Sources: Gartner, IDC, Statistica, Cisco, RCR Wireless|
As the Gartner hype cycle suggests, the tech industry tends to overestimate the near term impact of new technologies. Similarly, the impact of IoT is likely to be confounding at first. The vast majority of data emerging from connected devices – “data exhaust” – is unutilized and, as Nate Silver notes, data noise initially drowns out signal.
Yet if over optimism prevails in the near term, we often fail to anticipate the long term structural impact of new technologies. IoT connectivity is but an entry level requirement for a new data and services that will create new consumer experiences, enable persistent user engagement, facilitate intelligent and predictive customer service, and disrupt industries that have previously been untouched by the Internet. Nokia was an early mover in mobile professing the potential for 10% mobile penetration and moving into emerging markets when industry experts considered this ridiculous. As a long term investor, NGP is an early mover in IoT and prepared to be patient in realizing value in a space that we believe will be no less disruptive than the Internet and mobile has been.
Through our IoT investments over the past two years, we have observed a few trends that inform future opportunities for investors and entrepreneurs:
- “Internet of Things” is a misnomer. “Things” are an enabler, connectivity is essential, yet services and data analytics are preeminent as value rises to the top of the stack and end of the value chain. “Things” unlock new pools of data creating new user experiences (ie Fitbit and the quantified self) and augmenting or disrupting existing industries. RetailNext1 uses sensors to enhance customer engagement in the retail sector. MetroMile seeks to disrupt the auto insurance industry with sensors to monitor and improve driver behavior.
- Primary v. Secondary Use Cases: Many companies fall in love with secondary opportunities but ignore primary use cases. They imagine the opportunity to leverage data and insight when the system is at scale but overlook creating a compelling initial use case that attracts a loyal user in the first place. The first order of business is delighting the user. Only then are secondary opportunities possible.
- IoT will disrupt numerous industry sectors – many of which have not previously been touched by the Internet – but industry partners will play an even greater role in IoT than in Internet and mobile applications. Specifically, connected devices enable persistent user engagement creating partner opportunities with traditional industry players who want better visibility into their customers. Whistle1for example, a pet activity monitoring device, is partnering with veterinary and pet food firms to improve pet health and extend life longevity.
- China will emerge as a leading global IoT innovator. The Chinese tech market is developing rapidly and IoT plays to its strengths in combining hardware and services. “Made in China” is morphing into “Innovated, Designed and Made in China.” Xiaomi, Dididache, Xiaoyi, Rockid and Sensoro1 are a small sample of the companies to watch emerging from China.
- IoT ecosystems supersede killer apps. McKinsey estimates that data siloes erode 40% of potential IoT value. Interoperability is required to seamlessly integrate data across platforms enabling full functionality among autonomous systems. Fully autonomous driving requires ubiquitous vehicle to vehicle (V2V) and environment (V2E) communications. Moovit1 is integrating multi-modal transport data to help consumers optimize their public transport commutes in over 400 cities worldwide.
The Internet of Things is a broad landscape enabling myriad opportunities to meaningfully augment or disruptive existing markets. But the winners will be those with well-crafted solutions for specific markets and use cases. Data security and privacy will be entry level requirements. Entrepreneurs that can address these needs have an opportunity to create iconic, long lasting companies.
1NGP is an investor in these companies.