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IoT In Action: 5 Questions with James Turino, Managing Partner, Drake Star Partners

June 19, 2018

 

Q1: How would you describe the current state of IoT?

A1: IoT is a sector that lots of people are trying to get their arms around and understand. The term IoT itself means different things to different people, given the various business models that comprise the layers of the stack – hardware, software, services and connectivity.

 

Q2: What are investors looking for in an IoT company?

There are a lots of private equity players looking for the holy grail – a company with recurring revenue of $100M+ a year, good growth, large, multi-industry addressable market, high gross margin and sustainable pricing. The larger IoT companies are typically providing hardware that is not sold on a recurring revenue model, or connectivity services such as an MVNO. While Private Equity (PE) companies prefer larger investments, they will also look at profitable businesses generating $25-$50M in revenue with subscription business models. There is also a market for the myriad of vertically siloed companies, but the horizontal market is bigger and more attractive to most financial buyers.

 

On the strategic side, IoT touches a broader universe of large buyers than most people imagine. It includes manufacturing, utilities, energy, telecom, telematics, and just about anything vehicle related. Many of the strategic parties we talk to are still in the formulation stage of their IoT strategies, but many are actively looking for acquisitions.

 

Q3: The Buy side sounds very busy, but what are you seeing on the Sell side?

A3: Lots of companies are looking for either an exit or financing as an IoT business or division reaches a certain point. Many are trying to decide when to consider an outright sale vs, say a growth capital financing, and are not sure how to translate a desired transaction into a decision tree in terms of value and timing. Companies with any reasonable scale ($25-$100M revenue) are being called on by potential buyers. One of the challenges for sellers in this market is setting appropriate valuation expectation that are in line with the market. Size is a factor as larger companies are frequently sold for higher valuations, and there are generally more interested buyers around the table for larger rather than for smaller companies.

 

Q4: How do you describe the difference between strategic and financial investors?

A4: Private Equity interest remains very strong in IoT, and especially in companies that have the target qualities described above. In today’s market, we find that PEs are generally able to transact more quickly and more deliberately as they seek to put capital to work, and some have teams dedicated to finding assets in the IoT sector. Strategic players that are still formulating their IoT strategies are generally more selective, focusing on product fit, sales model and integration.  Many are faced with the “build vs buy” decision as they seek to expand offerings in IoT.  Some which are not sure whether to acquire are making a few well-placed investments as a way to learn about the industry. Valuation is driven by the level of fit, with large buyers often willing pay a premium for a good property that accelerates their strategy.

 

Q5: How do you see the space evolving over the next 12 months?

A5: Fundamentally, the lowering of unit pricing over time, the demonstrated ROI of actual IoT implementations and clarity around emerging protocols and standards are all catalysts of long term sector growth.  When we think about sector M&A dynamics, we see the number of potential buyers continuing to increase as IoT touches a broad universe of enterprise, and as a result we believe deal activity and capital formation in IoT will expand in the foreseeable future.

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