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The Internet of Things
Market Overview and Proprietary
Financial Intelligence
SVB Analytics
provides business
analytics solutions
to every stakeholder
in the venture
capital ecosystem.

Advisory Servi...
Executive
Summary

11

Advancements in technology have
created a renaissance for the
Internet of Things. Specific
sub-sect...
Table of Contents

Overview of the Internet of Things
6

The Internet of Things in 2013

9

What has changed | Case Study ...
Table of Contents

Overview of the Internet of Things
6

The Internet of Things in 2013

9

What has changed | Case Study ...
What is the Internet of Things in 2013?
The “Internet of Things” is not
an industry.
It is an umbrella term encapsulating ...
Internet of Things v.2
Introducing the Gartner Hype Cycle

Re-Introducing the Gartner Hype Cycle

1998

2012 – 2013

MIT c...
What Has Changed in IoT?
Successful IoT v1

Emerging IoT v2

M2M Communications

Consumer and Quantified Self

Wireless Pa...
Case Study | Apparel Industry – IoT V1

Linear, one-dimensional information flow
 Static data points
 Focus on improving...
Case Study | Apparel Industry – IoT V2

Complex, multi-dimensional information flow
 Dynamic, rich data points collected ...
Advancements Powering IoT v2 | Key Convergences
Moore’s Law

Metcalfe’s Law

 Decreasing prices of wireless
sensors, hard...
Challenges Facing IoT v2

 Phasing out of 2G spectrum
 Fragmentation of Wireless
Communication Standards
 Battery techn...
Table of Contents

Overview of the Internet of Things
6

The Internet of Things in 2013

9

What has changed | Case Study ...
Push vs. Pull | A Clear Business Case

Large Tech

Buyers are pulling through:

Push demand for products

Low cost, high u...
Relative Overall Performance
IoT Companies Struggle at the Early Stages Relative to a Broad index of Same-Size Peers

0.43...
Small IoT | Net Sales Less Than $1.5M
Viral Growth is Observed
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

Small IoT companies ...
Medium IoT | Net Sales Between $1.5M and $10M
Viral Growth Slows, Acquisition Costs Accelerate
REVENUE/EXPENSE
GROWTH
(ANN...
Large IoT | Net Sales Greater Than $10M
Scale is Achieved
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

Revenue
(23.3%)

As IoT c...
Table of Contents

Overview of the Internet of Things
6

The Internet of Things in 2013

9

What has changed | Case Study ...
VC Market Dynamics Affecting IoT
The “Series A Crunch”

Declining Venture Capital Investment
Venture Dollars Raised Fall 2...
Does a “Series A Crunch” Affect IoT
Disproportionately?
IoT Companies by Round of Funding
Estimates of Silicon Valley Bank...
Who is Investing in IoT?
Investor Types and Round Preference
FUNDING
DISTRIBUTION

INVESTOR ACTIVITY

11%

Strategic
Angel...
How Much are VCs Investing?

Total Invested Capital

$47

$50

Median Round Size

$US Millions

$45
$40
$35

$29

$30
$25
...
Revenue by Stage of Development
Median Revenue at Financing
Revenue progression from Series B to Series C indicates that
m...
Value Progression

Up-Rounds
Flat Rounds
Down Rounds

80%

75%

75% of Series D
rounds are at higher
valuations than the
S...
Table of Contents

Overview of the Internet of Things
6

The Internet of Things in 2013

9

What has changed | Case Study ...
IoT Segmentation

Communication
• Backhaul
• Data Transfer

Connected
Healthcare
• Remote
Monitoring
• Telehealth

Energy ...
Niche Spotlight | Enablement

The Brains

Software

 Enables underlying M2M
interactions, creating a unifying
experience ...
Spotlight | Enabling the Internet of Things
Hardware

Software

Enabling late-stage consumer-facing product development

E...
Niche Analysis | Enablement
Organic Growth Observed
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

Revenue
(27.3%)

IoT enablement...
Enablement | Software
Organic Growth Observed
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

Much of the current excitement in
the...
Enablement | Mobile Devices
Falling Hardware Prices
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

Revenue
(-7.5%)

The prices of ...
Company Spotlights | Enablement
Hardware

Software

Overview

Overview

 Founded in 2011, Electric Imp is developing Imp,...
Niche Spotlight | Connected Health
A Clear Business Case:
 Demographic changes leading to an increasing target market
 R...
Niche Analysis | Connected Health
Modest Growth, Lack of Scale
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

Revenue
(11.5%)

IoT...
Company Spotlight | Healthsense
Overview:
 Founded in 2003, Healthsense is a Minnesota based company
providing technology...
Niche Spotlight | Energy Efficiency in the Home
Current State of the Smart Energy Home:
 Smart Energy technologies employ...
Niche Analysis | Energy Efficiency
Organic Growth Observed
REVENUE/EXPENSE
GROWTH
(ANNUALIZED %)

IoT companies focused on...
Company Spotlight | Energy Efficiency
Overview:
 Founded in 2008, ThinkEco is a New York City-based company developing
ea...
Table of Contents

Overview of the Internet of Things
6

The Internet of Things in 2013

9

What has changed | Case Study ...
Summary and Key Takeaways

 Despite the attention being paid to the Internet of Things by large tech companies and media,...
Definitions
Term

Definition

API

Application Programming Interface

CES

Consumer Electronics Show

COGS

Cost of Goods ...
SVB Biographies
Steve Allan | Managing Director
Steve Allan is a managing director with SVB Analytics, responsible for
lea...
SVB Financial Group
3003 Tasman Drive
Santa Clara, California 95054
408.654.7400
svb.com

SVB Analytics
555 Mission Street...
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SVB Analytics Report on The Internet of Things

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SVB Analytics completed an in-depth analysis of the Internet of Things (IoT). IoT refers to everyday objects — like cars, food, pets and toys — that are connected to the Internet via smart chips which sense and share information about themselves and their surroundings. The report was developed as part of our strategic advisory service, which provides investors and entrepreneurs with an assessment of a company's value in support of acquisitions, mergers, investments, and other strategic financing activities.

SVB Analytics Report on The Internet of Things

  1. 1. The Internet of Things Market Overview and Proprietary Financial Intelligence
  2. 2. SVB Analytics provides business analytics solutions to every stakeholder in the venture capital ecosystem. Advisory Services: Client Focus:  Due diligence support  Valuation Guidance  Proprietary market intelligence Corporate venture, innovation and development groups Valuation Services:  409A Valuations (Stock Options)  Purchase Price Allocation (post-M&A Accounting)  Goodwill and Intangible Asset Impairment Client Focus: Venture-backed companies 6,000 Valuations completed since 2006 Research: 1,200  Proprietary Research and Data  Customized Studies  Thought Leadership Active clients in 2012 Client Focus: Corporate and venture ecosystem 2
  3. 3. Executive Summary 11 Advancements in technology have created a renaissance for the Internet of Things. Specific sub-sectors show promise, but significant technological hurdles still remain to realize the holistic vision. 14 Dissonance exists between products and services that large tech companies are pushing and where strong growth is observed. 21 Innovation capital providers continue to be skeptical until quantifiable benefits exist beyond a promise of widespread benefits to society. 3
  4. 4. Table of Contents Overview of the Internet of Things 6 The Internet of Things in 2013 9 What has changed | Case Study in Apparel 11 Advancements Powering IoT v2 12 Challenges Facing IoT v2 Market Forces at Work 14 Push vs. Pull – A Clear Business Case 15 Relative Overall Performance of IoT Companies 16 Sales Trends of IoT Companies by Size Financing the Internet of Things 20 VC Market Dynamics Affecting IoT 22 IoT investments – Who and How Much 24 Revenue Growth and Value Progression Niche Performance Mapping 27 Internet of Things Segmentation 28 Enablement – Spotlight & Analysis 34 Connected Healthcare – Spotlight & Analysis 37 Energy Efficiency – Spotlight & Analysis 41 Summary and Key Takeaways 42 Definitions 4
  5. 5. Table of Contents Overview of the Internet of Things 6 The Internet of Things in 2013 9 What has changed | Case Study in Apparel 11 Advancements Powering IoT v2 12 Challenges Facing IoT v2 Market Forces at Work 14 Push vs. Pull – A Clear Business Case 15 Relative Overall Performance of IoT Companies 16 Sales Trends of IoT Companies by Size Financing the Internet of Things 20 VC Market Dynamics Affecting IoT 22 IoT investments – Who and How Much 24 Revenue Growth and Value Progression Niche Performance Mapping 27 Internet of Things Segmentation 28 Enablement – Spotlight & Analysis 34 Connected Healthcare – Spotlight & Analysis 37 Energy Efficiency – Spotlight & Analysis 41 Summary and Key Takeaways 42 Definitions 5
  6. 6. What is the Internet of Things in 2013? The “Internet of Things” is not an industry. It is an umbrella term encapsulating a collection of interrelated industries. Each sub-industry has its own stakeholders, value chains, and economics, and therefore each must be evaluated individually. The Internet of Things is also the buzz word of 2013 in the tech media, Kickstarter world (the “Quantified Self”), and of large technology companies worldwide. Qualcomm CEO Paul Jacobs at CES 2013, courtesy of TheVerge 6
  7. 7. Internet of Things v.2 Introducing the Gartner Hype Cycle Re-Introducing the Gartner Hype Cycle 1998 2012 – 2013 MIT coins the term Version 2 of IoT re-emerges at the top of large enterprises’ key strategic initiatives, expectations peaking RFID to bring about a ubiquitously connected world by 2005 What happened to IoT v.1? “It is important to take into account that the ‘Internet of Things’ is a concept invented by academics, and not a response to any expressed market need.” – Bob Williams, Synthesis Journal, 2008 7
  8. 8. What Has Changed in IoT? Successful IoT v1 Emerging IoT v2 M2M Communications Consumer and Quantified Self Wireless Patient Monitoring Energy Management Fleet Management and Asset Tracking Mass Enablement Technologies An “Internet of Some Things” Primarily enterprise-class, dedicated hosting, high investment, ROI-driven solutions. An “Internet of More Things” A new class of tools and solutions driven by decreasing hardware prices and cloud infrastructure. 8
  9. 9. Case Study | Apparel Industry – IoT V1 Linear, one-dimensional information flow  Static data points  Focus on improving logistics  Limited or no feedback to marketing/sales, design teams 9
  10. 10. Case Study | Apparel Industry – IoT V2 Complex, multi-dimensional information flow  Dynamic, rich data points collected at many points in the distribution channel  Real time data collection and analytics allowing agile product design and product improvements  Greatly enhanced product mix, market segment targeting and better customer experience 10
  11. 11. Advancements Powering IoT v2 | Key Convergences Moore’s Law Metcalfe’s Law  Decreasing prices of wireless sensors, hardware  Penetration of smartphones and tablets  Public, private, and hybrid cloud-based architectures and resources  Storage and compute resources  Wireless connectivity technologies (3G/4G/LTE, WiFi, ZigBee, Bluetooth)  Smaller, more diverse, and powerful chips  Ultra-low power Micro-controller Units (MCUs) Internet of Things Big Data Analytics A confluence of technologies have been key drivers advancing the Internet of Things  Exploding volume of data  Cloud storage systems are dated  Converting data into actionable intelligence  Controlling decisions, optimizing resources, lowering uncertainty in real time 11
  12. 12. Challenges Facing IoT v2  Phasing out of 2G spectrum  Fragmentation of Wireless Communication Standards  Battery technologies and alternative power sources (solar, motion, vibration, temperature)  Software architectures and APIs  Costs to retro-fit current generation “things”  Master ontology to facilitate interdevice communication “A new Wireless Intelligence report estimates more than 200 LTE networks will have launched around the world by 2015. That’s great news, but they’ll use 38 different frequencies.” — Kevin C. Tofel, GigaOm (December 2011) 12
  13. 13. Table of Contents Overview of the Internet of Things 6 The Internet of Things in 2013 9 What has changed | Case Study in Apparel 11 Advancements Powering IoT v2 12 Challenges Facing IoT v2 Market Forces at Work 14 Push vs. Pull – A Clear Business Case 15 Relative Overall Performance of IoT Companies 16 Sales Trends of IoT Companies by Size Financing the Internet of Things 20 VC Market Dynamics Affecting IoT 22 IoT investments – Who and How Much 24 Revenue Growth and Value Progression Niche Performance Mapping 27 Internet of Things Segmentation 28 Enablement – Spotlight & Analysis 34 Connected Healthcare – Spotlight & Analysis 37 Energy Efficiency – Spotlight & Analysis 41 Summary and Key Takeaways 42 Definitions 13
  14. 14. Push vs. Pull | A Clear Business Case Large Tech Buyers are pulling through: Push demand for products Low cost, high utility High need, high ROI Mobile Operators Push demand for services Large, and frequently slow-growth, enterprises have been the main drivers of IoT use cases. Particularly around the connected home, investments in “marketing the future” have failed to drive widespread consumer demand for those services. Conversely, innovation in Healthcare IT and Energy Management has come directly from the VC-backed market, and in response to buyer-driven business cases. 14
  15. 15. Relative Overall Performance IoT Companies Struggle at the Early Stages Relative to a Broad index of Same-Size Peers 0.43% 0.50% Sales Growth Relative to SVB Universe 0.22% IoT companies with less than $10M in revenue underperform relative to a broad peer group. However, companies with more than $10M in revenue outperform their peers. 0.00% This can be seen in the progression of comparable sales growth from the sub-$1.5M sales growth segment to the large, over-$10M segment. -0.50% -0.48% -1.00% -1.50% -2.00% -2.50% -2.75% -3.00% All IoT Sub $1.5 M n=14 Median Sales: $403K $1.5 to $10 M n=17 Median Sales: $4.24M Over $10 M n=12 Median Sales: $13.9M Source: SVB Analytics 15
  16. 16. Small IoT | Net Sales Less Than $1.5M Viral Growth is Observed REVENUE/EXPENSE GROWTH (ANNUALIZED %) Small IoT companies are able to grow revenues faster then their sales and marketing spending. This ability to grow revenues faster than their operating expenses is an indication of viral growth. 4.50 4.00 Revenue (67.3%) 3.50 3.00 COGS (76.9%) Operating Expenses (28.1%) However, given their small sales volume, these companies lack economies of scale and struggle to keep their production costs (COGS) in check. As such, we observe high fixed costs relative to net revenue. 2.50 2.00 1.50 1.00 0.50 2.50 2.00 1.50 VIABILITY RATIO 1.00 n=14 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.95) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Median Sales: $403K Source: SVB Analytics 16
  17. 17. Medium IoT | Net Sales Between $1.5M and $10M Viral Growth Slows, Acquisition Costs Accelerate REVENUE/EXPENSE GROWTH (ANNUALIZED %) Revenue (14.2%) As they grow, revenues at IoT companies continue to outpace sales and marketing spending (as tracked by their operating expenses), exhibiting slower yet still present organic growth. 2.00 1.75 1.50 COGS (22.8%) Operating Expenses (6.6%) However, the widening gap between Revenue growth and COGS growth indicates trouble scaling from early-adopters to a wider customer base. 1.25 1.00 0.75 0.50 1.50 1.25 1.00 VIABILITY RATIO 0.75 n=17 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.19) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Median Sales: $4.24M Source: SVB Analytics 17
  18. 18. Large IoT | Net Sales Greater Than $10M Scale is Achieved REVENUE/EXPENSE GROWTH (ANNUALIZED %) Revenue (23.3%) As IoT companies achieve size and scale, revenue growth not only outstrips sales and marketing costs, but also production costs (i.e. COGS growth). In contrast to smaller companies, large companies’ operating expenses begin to be affected by the scale of revenues 2.00 1.75 1.50 COGS (17.3%) Operating Expenses (11.6%) 1.25 1.00 As can be observed in all three revenue buckets, IoT companies exhibit the ability to grow revenues without excessive investments in sales and marketing expenses. 0.75 0.50 1.50 1.25 1.00 VIABILITY RATIO 0.75 n=12 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.28) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Median Sales: $13.9M Source: SVB Analytics 18
  19. 19. Table of Contents Overview of the Internet of Things 6 The Internet of Things in 2013 9 What has changed | Case Study in Apparel 11 Advancements Powering IoT v2 12 Challenges Facing IoT v2 Market Forces at Work 14 Push vs. Pull – A Clear Business Case 15 Relative Overall Performance of IoT Companies 16 Sales Trends of IoT Companies by Size Financing the Internet of Things 20 VC Market Dynamics Affecting IoT 22 IoT investments – Who and How Much 24 Revenue Growth and Value Progression Niche Performance Mapping 27 Internet of Things Segmentation 28 Enablement – Spotlight & Analysis 34 Connected Healthcare – Spotlight & Analysis 37 Energy Efficiency – Spotlight & Analysis 41 Summary and Key Takeaways 42 Definitions 19
  20. 20. VC Market Dynamics Affecting IoT The “Series A Crunch” Declining Venture Capital Investment Venture Dollars Raised Fall 27% Below 15-Year Trailing Median Tomasz Tunguz, Tech Crunch, July 22, 2012 Dan Lyons, CB Insights, December 3, 2012 There are more angel/seed-funded companies than institutional dollars available to continue to fund them. 20
  21. 21. Does a “Series A Crunch” Affect IoT Disproportionately? IoT Companies by Round of Funding Estimates of Silicon Valley Bank’s market share in the VC-backed market exceed 50% in the U.S.. A review of identified IoT companies shows an even distribution by stage of development between Series A, B, and C. Series D 11% Series A 30% However, IoT companies as a % of SVB’s total client base is small (~3%), indicating an overall lack of VC enthusiasm for the space thus far. An important thing to note, SVB’s portfolio does not cover a majority of the angel-backed market (or seed-stage companies). Activity in IoT at the seed-stage is high, but most products being developed are not “venture fundable.” Series C 30% Series B 28% Note: Chart may not add up to 100% due to rounding Source: SVB Analytics 21
  22. 22. Who is Investing in IoT? Investor Types and Round Preference FUNDING DISTRIBUTION INVESTOR ACTIVITY 11% Strategic Angels/Individuals VC Series A 30% 32% 50% Series B Series C 30% Series D 18% 28% The ratio of Strategic-to-VC (excluding angels) is higher in IoT than other sectors. This further illustrates the strategic imperative for large enterprises to create a market for IoTrelated products and services. The even distribution between Series A, Series B, and Series C supports the view of two iterations of IoT and that certain sub-industries have progressed from product development to product-market fit. Notable VCs include KPCB, DAG, Khosla, Lighthouse, and NEA. Notable Strategic Investors include Intel, BestBuy, Cisco, and Comcast. Source: SVB Analytics 22
  23. 23. How Much are VCs Investing? Total Invested Capital $47 $50 Median Round Size $US Millions $45 $40 $35 $29 $30 $25 $18 $20 $12 $15 $10 $18 $6 $11 Series B Series C $6 $5 $0 Series A Series D Important Note: “Series A” in SVB databases refers to institutional VC rounds. Angel rounds are considered to be “Seed” rounds. To get a product to market and successfully expand (Series C and beyond), it takes, on average, $30M+ in total invested capital. Given some of the quick hits in recent years (e.g. Instagram), IoT factors such as hardware development, inventory management, long sales cycles and/or slower than expected up-take may explain the lack of investment activity. Source: SVB Analytics 23
  24. 24. Revenue by Stage of Development Median Revenue at Financing Revenue progression from Series B to Series C indicates that many mid-stage IoT companies experience trouble creating rapid growth. $25 Successful Series C companies take invested capital and fuel strong growth going into their Series D rounds. There are much fewer Series D companies than Series C, indicating that winners and losers separate at this stage of development. $20 $US Millions Lucrative for those that execute (survivorship from Series C to Series D) Unfortunately, the cost to get an IoT company through its Series C financing is high (~ $30M.) $15 $21.8 $10 Traction challenges $5 $6.1 $4.7 $0.1 $0 Series A Series B Series C Series D Source: SVB Analytics 24
  25. 25. Value Progression Up-Rounds Flat Rounds Down Rounds 80% 75% 75% of Series D rounds are at higher valuations than the Series C 70% 60% 60% 53% 50% 37% 40% 30% 20% 17% 25% 23% 11% 10% 0% The relatively higher proportion of down-rounds at the Series C financing again highlights the growth challenges mid-stage companies face. 0% A-to-B B-to-C C-to-D 200% Average Step-up Average Step-down Those that successfully execute are rewarded with higher valuations in the Series D round. 157% 150% 100% 58% 50% 23% 0% 0% -50% -45% -45% -100% A-to-B B-to-C C-to-D Source: SVB Analytics 25
  26. 26. Table of Contents Overview of the Internet of Things 6 The Internet of Things in 2013 9 What has changed | Case Study in Apparel 11 Advancements Powering IoT v2 12 Challenges Facing IoT v2 Market Forces at Work 14 Push vs. Pull – A Clear Business Case 15 Relative Overall Performance of IoT Companies 16 Sales Trends of IoT Companies by Size Financing the Internet of Things 20 VC Market Dynamics Affecting IoT 22 IoT investments – Who and How Much 24 Revenue Growth and Value Progression Niche Performance Mapping 27 Internet of Things Segmentation 28 Enablement – Spotlight & Analysis 34 Connected Healthcare – Spotlight & Analysis 37 Energy Efficiency – Spotlight & Analysis 41 Summary and Key Takeaways 42 Definitions 26
  27. 27. IoT Segmentation Communication • Backhaul • Data Transfer Connected Healthcare • Remote Monitoring • Telehealth Energy and Environment Enterprise and IT • Water Sensor • Smart Meter/Utilities • Data Center Monitoring • MDM Enablement • Toolkits • Cloud Services Retail and Commerce Heavy Industry • Process Control • PetroChemical • Locationbased Commerce Security and Safety • Emergency Response • Data Privacy Smart Buildings • Automation • Energy Management Transportation and Logistics • Supply Chain Management • Asset Tracking Distribution of SVB IoT Companies 35% 30% 25% 20% 15% 10% 5% 0% Communication Connected Healthcare Enablement Energy and Environment Enterprise and IT Heavy Industry Retail and Commerce Security and Safety Smart Buildings Transportation and Logistics Source: SVB Analytics 27
  28. 28. Niche Spotlight | Enablement The Brains Software  Enables underlying M2M interactions, creating a unifying experience across platforms  Maximizes the limits of the operating environment through intelligent, robust and lean software  Increases the focus on an information and decision-based world delivered through apps The Sensory Network Hardware  The majority of connected devices in IoT are located at the “last inch” of the network  Bridging the gap between access networks such as the Internet or utility networks to a localized home area network or sensor nodes Source: ZTE Technologies - Opportunities, Challenges and Practices of the Internet of Things [2010] 28
  29. 29. Spotlight | Enabling the Internet of Things Hardware Software Enabling late-stage consumer-facing product development Empowering IoT end-to-end and unifying user experience 1. Interoperability through Standardized Protocols  Uniformity across frequencies, communications protocols  Minimize device, node and band fragmentation  TCP/IP support along the communications channel 1. Single Control Interface  Creating rich, cross-platform native experiences across connected devices 2. Superior Power Efficiency  Ability to operate for months/years on low power sources  Ability to harvest energy from environment 3. Ease of Installation/Deployment  Consumer-facing devices with negligible capacity for user error, ease of installation in a host of environments  Developer-facing devices with ease of developing and deploying firmware updates, design, debug and optimize 2. App-Platform Consolidation  Build out application-development environments spanning multiple devices  Enable development of consumer electronics devices – tablets, smartphones, set-top boxes, social TV, in-car entertainment 3. Optimize Cloud-Based Service Deployments  Developing smart software for tracking, situational awareness, decision analytics, resource and process optimization – all deployed and controlled through the cloud  Enhanced network optimization for content delivery 29
  30. 30. Niche Analysis | Enablement Organic Growth Observed REVENUE/EXPENSE GROWTH (ANNUALIZED %) Revenue (27.3%) IoT enablement technologies are the base upon which all other IoT products are built, and this dependence is reflected in the robust sales growth. 2.00 1.75 1.50 COGS (27.4%) Operating Expenses (18.7%) However, strong organic growth is matched with increasing COGS and operating expenses. 1.25 1.00 0.75 0.50 1.50 1.25 1.00 VIABILITY RATIO 0.75 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.07) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Distribution of Companies in this Niche ($M): Sub $1.5 $1.5 to $10 Over $10 Source: SVB Analytics 30
  31. 31. Enablement | Software Organic Growth Observed REVENUE/EXPENSE GROWTH (ANNUALIZED %) Much of the current excitement in the IoT enablement space is driven by advancements in Big Data. 3.00 2.75 Revenue (44.0%) 2.50 The Cloud links sensors, networks, people and applications, allowing for the analysis of Big Data. Software revenue models allow for fast scaling after high initial investments in R&D. 2.25 COGS (51.1%) 2.00 1.75 1.50 Operating Expenses (26.9%) 1.25 1.00 0.75 0.50 1.50 1.25 1.00 VIABILITY RATIO 0.75 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.14) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Distribution of Companies in this Niche ($M): Sub $1.5 $1.5 to $10 Over $10 Source: SVB Analytics 31
  32. 32. Enablement | Mobile Devices Falling Hardware Prices REVENUE/EXPENSE GROWTH (ANNUALIZED %) Revenue (-7.5%) The prices of mobile enablement devices have continued to fall, resulting in decreased revenue levels. 2.00 1.75 Production costs for these companies have risen modestly but have been offset by proactive management of operating expenses. 1.50 COGS (3.7%) Operating Expenses (-7.6%) 1.25 1.00 0.75 0.50 1.50 1.25 1.00 VIABILITY RATIO 0.75 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.00) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Distribution of Companies in this Niche ($M): Sub $1.5 $1.5 to $10 Over $10 Source: SVB Analytics 32
  33. 33. Company Spotlights | Enablement Hardware Software Overview Overview  Founded in 2011, Electric Imp is developing Imp, a platform that leverages WiFi and cloud technologies to connect everyday electrical devices to the Internet.  Founded in 2000, UIEvolution provides the UIEngine platform, tool suite, and specialized services to support real-time data application services, rich storefront clients, multimedia applications, casual games, and device/service User Interfaces (UIs) to a large number of devices and wireless/broadband users. UIEvolution employs both a traditional packaged software delivery model and an SaaS-based delivery model for its products.  Imp-enabled devices can be accessed through the web or mobile devices using Electric Imp’s application or other third-party applications.  The Imp chip will be available as a user-installable card integrated with a processor and WiFi capability. The chip can automatically recognize the device in which it is inserted to retrieve software required to operate the device. Value Proposition To Developers: Value Proposition  Write-once application logic that adapts to many native platforms and adapts itself to different screen types. To Developers: To Manufacturers/Businesses:  Open Imp API, which connects to most Web services, servers and applications.  The connected car vertical is very promising – from audio today to enhanced driving and increased safety in the future.  Web-based IDE maintains software and pushes new features instantly.  Creates seamless rich, cross-platform native user experience on multiple platforms across multiple devices. To Manufacturers:  Pre-built scalable, reliable and secure connectivity solution.  Design, test and deploy network integration into unconventional devices.  Integrate back end services: takes your existing Enterprise web services and optimizes them to work better with your mobile applications.  Diverse app management: easily modify the content of applications across diverse platforms and screens. 33
  34. 34. Niche Spotlight | Connected Health A Clear Business Case:  Demographic changes leading to an increasing target market  Rapid decrease in size and cost of devices  Federally mandated re-admission penalties leading to increased provider demand for telehealth and remote patient monitoring solutions  Gradual shift in payer framework to accountable care organizations resulting in greater reimbursement for connected healthcare solutions  U.S. Department of Health and Human Services launching the Health Data Initiative, which provides greater amounts of health data in more usable formats “While the focus of funding has been in the Health Information Management [HIM] category, which covers technologies on the Healthcare Practice side, there is significant investment and funding going into companies that engage the consumers— like mobile health, telehealth, personal health, and social health.” – Mercom Capital Group “HIT 2012 Annual Funding and M&A Report” Risks and Challenges:  Long sales cycles associated with selling into healthcare markets lead to delays in successful product commercialization  Complex regulatory requirements associated with healthcare devices that many technology entrepreneurs are unfamiliar with leading to product delays  Security and privacy concerns related to the data generated by wireless devices lead to delayed customer acceptance  Lack of standards leads to fragmented solutions, inability to scale efficiently Source: Perficient.com 34
  35. 35. Niche Analysis | Connected Health Modest Growth, Lack of Scale REVENUE/EXPENSE GROWTH (ANNUALIZED %) Revenue (11.5%) IoT companies developing patient-monitoring products are seeing solid fundamental consumer demand for their products. 2.00 1.75 However, companies in this niche tend to be relatively small (less than $10M in sales,) resulting in higher COGS growth due to a lack of scale. 1.50 COGS (27.4%) Operating Expenses (5.0%) 1.25 1.00 0.75 0.50 1.50 1.25 1.00 VIABILITY RATIO 0.75 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.06) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Distribution of Companies in this Niche ($M): Sub $1.5 $1.5 to $10 Over $10 Source: SVB Analytics 35
  36. 36. Company Spotlight | Healthsense Overview:  Founded in 2003, Healthsense is a Minnesota based company providing technology-enabled care solutions for the entire senior care continuum.  Healthsense has its platform in over 100 senior living communities serving approximately 10,000 seniors.  Full suite of WiFi-enabled products for remote monitoring, nurse calling, emergency response and wellness management.  Healthsense plans to offer their products and services to all at-home care customers. Value Proposition:  Aging demographic yields large and growing market for senior care.  PPACA (Obamacare) expected to increase incentives and financing options for assisted living programs. Medicare and Medicaid incentives driving more long-term preventative care spending.  Potential to be a key provider of highly valuable data and services.  Partnerships with strong partners such as Verizon, Sodexo, as well as NIH.  ROI benefits of a single standards-based platform solution. 36
  37. 37. Niche Spotlight | Energy Efficiency in the Home Current State of the Smart Energy Home:  Smart Energy technologies employ two primary approaches to reducing peak demand:  Energy Efficiency: Cutting unnecessary energy consumption, such as plug-load waste and vacant home temperature control.  Load Management: Shifting energy consumption away from peak demand times, optimizing utility generating capacity.  Energy efficiency models are already prevalent in the Smart Energy Home— they enable real-time energy use monitoring, remote control of devices and appliances, and aggregate consumption data and trends for better informed decision making.  Load management is critical to reducing peak energy demand but requires residential customers to know the current price of electricity, and be charged dynamically as opposed to a flat rate. Installing “smart meters”, digital meters which enable two-way communication, is the first step a utility can make toward enabling the Smart Energy Home. Risks and Challenges: Source: geappliances.com  Metering: Legacy meters must be overhauled to enable two-way communication of real-time electricity pricing based on peak demand.  End Use: Residential energy consumption is fragmented over several dozen end uses, each contributing differently to a user’s energy bill.  Affordability: Broad consumer adoption requires technologies to be priced to provide users with a reasonable rate of return on their energy expenses.  Security & Privacy: Devices and technologies must be transparent about what information is collected and communicated and for what purpose. 37
  38. 38. Niche Analysis | Energy Efficiency Organic Growth Observed REVENUE/EXPENSE GROWTH (ANNUALIZED %) IoT companies focused on developing products for improving energy efficiency are performing exceedingly well. Revenue growth well exceeds increases in both COGS and operating expenses. 4.50 4.00 Revenue (71.4%) 3.50 3.00 COGS (50.5%) Operating Expenses (10.0%) Benefits from improving energy is easily quantifiable, making the case for the adoption of products easy to justify. For example, smart meters for various utilities, such as electric, natural gas and water, have proven their value in reducing waste and improving bottom lines. 2.50 2.00 1.50 1.00 0.50 3.50 3.00 2.50 2.00 VIABILITY RATIO 1.50 1.00 Q3.12 Q2.12 Q1.12 Q4.11 Q3.11 Q2.11 Q1.11 Q4.10 Q3.10 Q2.10 0.50 Q1.10 Viability Ratio (1.56) CHANGE IN NET REVENUE CHANGE IN OPERATING EXPENSES Distribution of Companies in this Niche ($M): Sub $1.5 $1.5 to $10 Over $10 Source: SVB Analytics 38
  39. 39. Company Spotlight | Energy Efficiency Overview:  Founded in 2008, ThinkEco is a New York City-based company developing easy-to-use energy efficiency solutions for homes and businesses.  Its flagship product, the Modlet—short for “modern outlet”—is a hardwaresoftware solution for saving money and energy on plug loads, both at home and in the office.  The Modlet plugs directly into any standard outlet and communicates wirelessly to a user’s Internet-connected computer, allowing users to:  Monitor real-time energy consumption;  Remotely control plugged-in devices via the web or smartphone; and  Set schedules for controlling plugged-in devices. Internet of Things:  The Modlet enables remote control and connectivity to virtually any appliance that plugs into a standard outlet. Through the use of proprietary algorithms, the Modlet software helps detect when electronic devices are unused and turns them off at the source.  Internet of Things Clear Value Proposition:  Prevention of plug-load waste, the fastest growing segment of commercial energy use.  6-8 month payback period, reducing home energy use by 6-10%. 39
  40. 40. Table of Contents Overview of the Internet of Things 6 The Internet of Things in 2013 9 What has changed | Case Study in Apparel 11 Advancements Powering IoT v2 12 Challenges Facing IoT v2 Market Forces at Work 14 Push vs. Pull – A Clear Business Case 15 Relative Overall Performance of IoT Companies 16 Sales Trends of IoT Companies by Size Financing the Internet of Things 20 VC Market Dynamics Affecting IoT 22 IoT investments – Who and How Much 24 Revenue Growth and Value Progression Niche Performance Mapping 27 Internet of Things Segmentation 28 Enablement – Spotlight & Analysis 34 Connected Healthcare – Spotlight & Analysis 37 Energy Efficiency – Spotlight & Analysis 41 Summary and Key Takeaways 42 Definitions 40
  41. 41. Summary and Key Takeaways  Despite the attention being paid to the Internet of Things by large tech companies and media, there remain significant financial and technical hurdles to overcome.  Compelling use cases have not, so far, translated directly into viable business cases, with the exceptions of healthcare IT, energy efficiency, and enablement technologies.  Venture Capital, and in turn, venture-backed companies, fuel innovation and disruption. However, the future of the VC industry, and the thousands of seed-stage companies needing funding, is uncertain.  IoT companies appear to be starting strong out of the gates financially but fight strong headwinds as they attempt to scale their businesses. The Internet of Things offers the promise of enormous socio-economic benefits, but the providers of innovation capital will continue to proceed cautiously until use cases evolve into compelling business cases. 41
  42. 42. Definitions Term Definition API Application Programming Interface CES Consumer Electronics Show COGS Cost of Goods Sold IoT Internet of Things M2M Machine-to-machine MDM Mobile Device Management Metcalfe's Law The value of a network is equal to the square of the number of devices connected to it Moore's Law The number of transistors on integrated circuits doubles approximately every two years Organic Sales Growth that comes from existing customers, word of mouth, and viral sources, versus from increased sales and marketing efforts RFID Radio-frequency identification ROI Return on Investment SaaS Software-as-a-Service Step-up Refers to the percentage increase in the original issuance price of the preferred securities between two rounds of financing SVB Silicon Valley Bank WSN Wireless Sensor Network 42
  43. 43. SVB Biographies Steve Allan | Managing Director Steve Allan is a managing director with SVB Analytics, responsible for leading SVB Analytics in executing client engagements, issuing valuation opinions for private companies, and conducting research in the technology and life science private financing arena. Allan brings a strong financial background and passion for entrepreneurship to his leadership role at SVB Analytics. Sallan@SVB.com | 415.764.3135 Rob Tompkins | Director Rob Tompkins is a director with SVB Analytics and leads SVBA’s research, strategy and business development initiatives. Tompkins has extensive experience valuing privately-held technology companies with a focus on the intersection of energy and technology. Prior to joining SVB, Tompkins provided strategic and financial advisory services to startups in the U.S. and Latin America. Rtompkins@SVB.com | 512.372.6769 Special acknowledgement to Russ MacTough CFA, the principal author of this report. Contributing Authors: Dan Zaelit Paul Schroeder Steven Kakowski Sean Lawson Amrit Sareen 43
  44. 44. SVB Financial Group 3003 Tasman Drive Santa Clara, California 95054 408.654.7400 svb.com SVB Analytics 555 Mission Street, Suite 900 San Francisco, California 94105 800.760.9644 svb.com This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by SVB Financial Group and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer to acquire or dispose of any investment or transaction. ©2013 SVB Financial Group. All rights reserved. Member Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide tax or legal advice. Please consult your tax or legal advisors for such guidance. Rev. 12-18-13

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