Q1: How would you describe the current state of IoT?
Five plus years ago, the sector was massively overhyped and there was an expectation that IoT would take off quickly and disrupt multiple industries. Today, all of the data points on number of connected devices are far below those original projections. Investors were very excited about the long-term growth opportunity of IoT, but once you dig into what IoT really is, it has been a challenge to build scale. The cost of implementing an IoT solution is still very high to put together once you factor in hardware, data connectivity costs, cloud and software. As customers think about the long-term ROI benefit, the cost of putting together a solution is a major inhibitor when the derived value and business insights are still playing out. Security has also been a big challenge. Many solutions in the market were are not architected with security in mind, and management teams take this into account when considering deployments and connecting their assets.
Another key point is around vertical focus. It is already challenging to master one use case in one end-market. We often speak to companies trying to be horizontal solution providers with multiple use cases across many end-markets. Horizontal approaches are much tougher, and the struggle has colored the market in a negative way. We are seeing much more specialization and our view is that companies that have vertical focus will be the ones that have the most success.
Q2: Private equity seems to be interested in IoT, but at the same time struggles to find companies that fit their investment criteria. How do you think about potential investments?
IoT is challenging for private equity given the industry is still so nascent. Typically private equity firms require companies to have significant scale to justify an investment and that is very difficult to find in this space. LLR is positioned at the nexus of venture capital and private equity which allows us to focus on growth stage businesses. We typically target businesses north of $15M of revenue with significant recurring revenue. We’re also comfortable with enablers of IoT including hardware and managed services which is not always the case with other firms that focus on software only. Within IoT, we have thematic focus areas and spend time in sub-sectors that have demonstrated the most traction and have the most relative scale including telematics, asset tracking, condition monitoring and supply chain.
Q3: You have owned 3SI for over two years. What have you learned?
3SI has been a great investment for LLR and was the catalyst for launching our dedicated focus in IoT in 2017. 3SI provides GPS tracking solutions for banking and retail customers to protect high value, high theft items including cash, iPhones, pharmaceutical products and luxury retail products. 3SI’s success has been driven by a great team and by focusing on its core use case of loss prevention which delivers measurable ROI to its customers. 3SI has also done a great job of becoming the standard in banking and applying that success to expand into the retail vertical. As we’ve seen with other IoT and asset tracking businesses, these businesses become very profitable as they scale and build the base of recurring revenue.
Q4: What are the biggest misconceptions that you have seen in the market lately?
If you don’t spend time in the market, you can lose yourself in a lot of hype and noise. IoT is also not a market in and of itself – it’s a tool that can be used to solve business problems that applies to all kinds of markets and businesses.
Q5: What does the next year look like for the industry?
From our perspective it feels like the market is gaining momentum. We are seeing more deal activity and more deals of scale. We try to position ourselves by getting to know companies at an early stage to help understand the industry and have a strong perspective on emerging technologies and trends. The next few years will be very interesting as the cost of connectivity and hardware continue to come down and we will continue to see larger deployments. Ultimately, I don’t expect a massive explosion of growth but I do expect there to be steady, gradual growth.
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