In part 2 of our discussion with Scott MacDonald, co-founder of McRock Capital, the first venture capital fund focused exclusively on the Industrial Internet of Things (IIoT), we delve into some of the misconceptions and challenges of the IIoT. See part 1 of our conversation, which talked about the differences between the consumer and industrial Internet of Things (IoT). And stay tuned for further highlights of our conversation with Scott, which will cover the IIoT landscape and what stage it’s in; opportunities and who’s succeeding in this emerging industry; and what to expect from the 2014 McRock IIoT Symposium.
Wendy Toth: What are some of the misconceptions about the IIoT?
Scott MacDonald: There are two major ones that we see.
The first is that the IIoT is future, that it’s something that will happen. It absolutely is happening now. There are lots of companies in the IIoT segment. Many of the companies that have been built in the last 10 to 20 years, like Echelon, are already capitalizing on the IIoT products and services. The market is accelerating, so it’s getting lots of attention now because it’s at an inflection point. But it’s not a new thing or a future thing. It is a $trillion dollar thing.
We know it’s not a futuristic market because we’ve been investing as venture capitalists in IIoT companies for more than a decade. We’ve made money by building and selling companies in this space, and we have lots of examples of wins.
The second point is more of a confusion than a misconception. The confusion is about the boundary between the consumer IoT and the industrial IoT. To distinguish, you just need to think about who is buying a product. Not who installed it or who put it up on the wall, but who’s interacting with it, who’s using it? Like many things in life, there are a few grey areas. Nest, for instance, makes a consumer IoT thermostat for home energy management but the electric utility as an industrial player can benefit from this technology interface.
TOTH: What’s the harm in people confusing popular consumer IoT products with the IIoT?
MACDONALD: I fear there will be a backlash from a marketing perspective in the consumer IoT segment. Consumer devices and gadgets are emerging at a blistering pace. Not all of these devices will add value or deliver the intended benefits of connectivity. So it’s important to carve out the industrial IoT as something different from the consumer IoT.
The consumer side is going crazy right now. Everyone’s coming out with a new ankle bracelet, or FitBit device, or watch. As IIoT investors, that’s not what we want to be associated with. There will be a few winners in the consumer space, but there will be a lot more losers. We are cautious about the hype surrounding the consumer IoT.
TOTH: What are some challenges specific to the IIoT space?
MACDONALD: Among the larger industrial customers, the challenges come from two directions.
Imagine a barbell. On one end of the barbell are traditional industrial organizations that are technology-averse. They’re used to a certain pace and way of operating, and they’re not enthusiastic about doing anything differently. But many of these companies underestimate how much technology has changed in the past 24 months, and how that affects their prospects.
On the other end of the barbell are these new technology solutions and the skill sets they demand from an organization’s employee base. These skill sets are not traditional in industries such as power generation or building automation, but they’re common in consumer IoT companies, many of which have Silicon Valley roots.
Now, the traditional industrial companies are having to compete against tech-savvy companies for the best talent. If you’re the younger tech talent, and you’re choosing between working for Google or GE, this may not be a difficult decision. Traditional industrial companies are going to need to step-up to win the talent battle.
TOTH: It sounds like something of a cultural divide. Is that how you see it?
MACDONALD: Absolutely. Silicon Valley looks at the industrial space and marvels at how slowly it can move. We have to constantly remind companies in the IIoT space to not get caught in 10 year pilots prior to their technology being commercially adopted.
It comes down to a tension between what we call the Customer Viral Coefficient and the Lifetime Value of a Customer. An app like SnapChat might get 10,000 users in five minutes. It has a really high viral coefficient. There’s practically zero viral coefficient for products in industrial markets.
On the other hand, industrial markets have high lifetime customer value. IIoT companies need to consider how much it costs to win one customer, then how much more they can wring out of that customer over the lifetime of the relationship?
TOTH: As a Venture investor, is it hard to make money in the IIoT space?
MACDONALD: There’s money being made with industrial companies. To cite just one example, we made a $4 million investment in a smart grid company, and it was acquired by a big tech company for $440 million. That’s a very good investment return.
Contrast that with some of the consumer-based companies that are attracting hundreds of millions of dollars of venture capital. To make money for their investors, they have to become billion-dollar companies. It’s not easy to build a billion-dollar company.
I’ve spent 15 years as a venture capitalist, always in industrial markets. And we’re doing very well. We’ve proven that from a strictly financial standpoint, the IIoT is worthy of an investment firm 100% targeted at the industrial space.
IIoT Talks is a conversation between industry luminaries and Echelon Corporation about the opportunities of the Industrial Internet of Things (IIOT) market. Echelon's Chief Marketing Officer, Wendy Toth, will share highlights of these conversations via the company blog. If you are interested in participating, please send an email to email@example.com.