Lesson #221: The Internet of Things is Coming, Hang on to Your Hats!!

I recently completely a deep dive on the Internet of Things (IoT) space for one of my clients, and I was blown away with what I learned.  If we think the consumer Internet as we know it is a big deal, IoT will become an even bigger deal, over time.  Gartner predicts the IoT industry to be $1.9TN in size by 2020, and McKinsey thinks it could be as large as $6.2TN by 2025, in terms of economic impact.  Yes Trillion!!  Intel forecasts 15BN devices will already be connected to the internet in 2015 alone.  That's a lot of demand for embedded smart modules, cloud computing, connectivity, data security, mobile apps and analytics reporting alone.

To be clear, when I talk about IoT, I am largely talking about devices connected to the internet (e.g., think a Nest thermostat), or Machine-to-Machine (M2M) technologies.  IoT applications run across these primary sectors:  Consumer, Commercial, Industrial, Buildings, and Government.  And, get further segmented across these major industries:  Retail, Transportation, Security/Safety, IT, Manufacturing, Automotive, Energy and Healthcare, to name a few. Research suggests Manufacturing and Healthcare are the largest two of these industries, in terms of potential and investment to date.  From there, it drills down even further.  For example, in the Security/Safety space, it splits out into Real Time Alerts, Asset Tracking, Fire Safety, Environmental Safety, Elderly/Child Protection, Power Protection, Supply Chain Visibility and beyond.

So, don't try to be all things to all people, find your sizeable niche and dominate it.  Understanding a lot of big companies are also carving out their niches.  As examples, in just the smart home space, niches are being created around lighting control (Hager, Legrand, Leviton, Lutron, Matsushita), access control (Honeywell, Siemens, Tyco, UTC), connected home security (Alarm.com, Bosch, Kwikset), energy efficiency (Belkin, Nest), home automation (e.g., Smart Things) and appliance control (GE, LG, Maytag, Samsung).  So, even if you pick a good niche, odds are some big companies are already trying to figure out solutions in that space.

And, with this kind of next-generation market opportunity, it is attracting a lot of investment from a lot of big players.  In terms of financial investors, over $1.6BN was invested into IoT companies by venture capital firms in 2014 alone.  And, as for strategic players putting a lot of investment into IoT opportunties, it is an impressive list of expected companies, including Apple, AT&T, Bosch, Cisco, Eaton, Emerson, Ericsson, Fujitsu, GE, Google, Hewlett Packard, Hitachi, Honeywell, IBM, Intel, Johnson Controls, Lantiq, Microsoft, NEC, Oracle, Phillips, PTC, Qualcomm, Rockwell, Schlumberger, Schneider Electric, Siemens, Texas Instruments,Tyco and Verizon, to name just a few. So, get ready for a slug fest from a lot of well-funded companies that are also trying to get their piece of the overall IoT pie, across all industies.  These will most likely be the companies you sell your successful IoT startup, down the road.

The IoT is going to change everything.  In your homes, lights will automatically turn on and off as you drive your car in and out of your driveway.  In buildings, fire departments will exactly know who is in the building and where they are, in case of emergencies.  In corporate offices, window shades will automatically open and close based on the weather, to save on energy costs.  In restaurants, food will be re-ordered based on how many times the refrigerator door is opened or closed.  In logistics, police will be immediately notified if trucks veer off course.  In healthcare, drones will deliver medical supplies faster than ambulances. In factories, data from parts usage will predict when a machine will break, and automatically order the part and a repairman before it does. As you can imagine, life in 2025 will look materially different than it looks in 2015, as the pace of technology change accelerates, thanks in large part to the coming IoT boom.

So, if you are a startup looking to hitch your wagon to a rising tide, grab the coattails of the coming IoT tidal wave, and hang on for the ride of your life.

For future posts, please follow me on Twitter at: @georgedeeb.

Mark Suster's "Venture Outlook 2016"

We just read Mark Suster's recently published "Venture Outlook 2016" and needed to share it with all of you.  Mark is a successful serial entrepreneur turned venture capitalist at Upfront Ventures, and author of the Both Sides of the Table blog.  Mark's post, linked above, is jammed packed with great stats about recent tech valuations and whether or not we are in the middle of another internet bubble, with valuations ahead of themselves. SPOILER ALERT:  Mark says we are.

Directly quoting Mark's high level outlook for 2016:

1. "I suspect 2016 will be the year that the over heated private tech markets cool but I’ve been saying that for 2 years so who the fuck knows. I do know the markets are over valued but one individual actor can’t change market prices, which is why the Bin38 scandal was always a red herring. I will keep funding early-stage technology companies who have a vision to fundamentally change some part of an industry over a normal (8-12 year+) time horizon. There are no quick bucks in venture outside of bubbles.
2. We will continue to see over-funding of late-stage venture financings until the bloom comes off the rose and then I predict rational non-VCs will return to their day jobs chasing returns in other corners of the financial world and we people who only know how to do venture will continue doing just that.
3. The rise of crowd-funding as a viable alternative to VC will continue to grow unabated. Too much capital will be allocated to this channel relative to its value until the next downturn when many unsophisticated investors will be burned or until the SEC begins to crack down on the less reputable platforms or investors in these platforms. I suspect this won’t pop until after 2016 when retail investors tire of the promise of easy money in tech.
4. In the meantime, the arc of technical progress will continue whatever the interim valuation scorecards of startups show. Technology continues to have profound impacts on society and industry and will continue to capture an increased portion of the total economic pie. And I suspect for the long-term venture capital will play an important role in helping support great entrepreneurs."

Be sure to also read Mark's great SlideShare presentation on this same topic:

Final venture outlook 2016 from Mark Suster

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So, You're a Startup CEO, What Do You Do All Day?

Chief Executive Officer? Chief Visionary? Chief Cheerleader? Chief Salesman? Chief Funding Officer? Chief Communications Officer? Chief Team Builder? Chief Lightbulb Changer? Chief Coffee Maker? Yup, all of these titles apply to the role of a startup CEO. It is perhaps one of the hardest jobs to do in the business world, given the wide range of skills required to excel. This is one of the reasons only 1-in-10 startups actually succeed, as it takes a really special person that has the right combination of skills and startup DNA. In many ways, it is a much harder job than a CEO of a Fortune 500 company. 

Here are the core skills a startup CEO needs.

Read the rest of this post in The Next Web, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #220: Venture Debt Financing, A Hybrid Between Debt and Equity

Back in Lesson #109, we compared equity to convertible debt to bank debt as finacing options for your early stage business.  There is actually another class of investment called venture debt, which is structured as a hybrid between equity and bank debt.  It has a lot of the debt features associated with a loan, although at typically higher costs, plus some equity-based incentives through the form of warrants or other royalty on revenues.

The weighted average of cost of capital for venture debt ends up around 25% per year, in the middle of bank debt at 5-10% per year and equity at 40-50% per year.  And, it is designed for companies that financially sit in between the two stages (e.g., have some revenues and traction, but not large enough to secure a typical bank loan).

Below are representative terms for venture debt:

Amount:  Depending on lender, but in the $250K to $2.5MM range
Term:  Up to 5 years (more flexible than bank debt at up to 2 years)
Interest Rate:  10-12% (which is about double a typically bank loan)
Structure:  It is a debt instrument and must be repaid (unlike equity which does not)
Ranking:  Suborbinated to senior bank loans, and senior to everything else
Security:  It is often secured by the assets of the company (just like bank debt)
Paydown:  Interest only for two years, then principal paydown starts in last three years (vs. bank debt which is interest only until balloon payment of principal at end of term)
Board Rights:  Most venture debt lenders want rights to participate with your board of directors, as member or observer (much like equity investors, but unlike bank debt that does not typically require any board rights)
Equity Incentive:  1% to 5% "equity value" through warrants to purchase stock or some other royalty on revenues, based on the amount raised (where bank debt has no equity incentives, and equity investors would want a much larger stake).

In terms of a few lenders in the venture debt space, here are some that I am aware of:  Super G (Novus), Monroe Capital, Gibralter, Point Financial, Triple Point Capital, ATEL Capital Group, Trinity Capital Investments, Western Tech, Plymouth Ventures, Aldine Capital, Amerifi and Cambridge Capital Mangement.  And, sometimes hedge funds like Citadel and Fortress play this space, depending on size.  I am sure there are many others to research, as well.  But, before reaching out to them, research their industry focus and investment criteria on their websites, to ensure a good fit.

But, beware the key pitfall to consider here:  venture debt must be repaid, just like bank debt.  So, only take on debt, of any form, if you are 100% sure you can pay it back per the terms of the agreement.  Otherwise, any inability to repay your debt will be a noose around your neck and could force you into bankruptcy.

So, if you are having trouble raising bank debt, but you have pretty good traction and revenues (at least $1MM), venture debt could be the way to go.  Especially, if you are trying to protect dilution of your equity and stockholders, and are willing to pay a high cost of capital to do that (albeit not as high as raising straight equity).

For future posts, please follow me on Twitter at: @georgedeeb.

The Right Way to Give Equity to Your Employees

As a rule, entrepreneurs are very protective of their equity, and try to keep 100 percent ownership for themselves.  Usually this is fine, provided that important key parties (e.g., employees, partners) are appropriately motivated to help you succeed. Sometimes that motivation comes in the form of cash compensation (e.g., lucrative sales commission plan, profit share plan), and sometimes that comes in the form of equity or equity linked incentives (e.g., stock, options, warrants).

Read the rest of this post in The Next Web, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

What Would Entrepreneurs Have Done Differently?

I have previously written about the importance of planning ahead for proof-of-concept marketing based on my first-hand experience seeing the same consistent mistakes being made by the hundreds of startups calling Red Rocket for help: too much focus on product, and not enough focus on planning for a proof-of-concept around that product (which is what most venture capital firms are looking for before they make an investment in a company). And, to achieve such proof-of-concept, it requires inexperienced entrepreneurs to seek out experienced coaches or mentors to help create smart customer acquisition strategies and to budget for them accordingly.

Read the rest of this post in Forbes, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.