From a year of record funding to valuation check, how have things changed?

For any startup, raising funds is an inevitable part of the journey, and it highly depends on how the company is valued. VC funding sky-rocketed in 2021 with over $643 Bn going into global venture investment. This marked a 92% growth compared to the previous year. Consequently, we witnessed more than 10 new unicorns being minted each week on an average, adding around $1.8 Tn in value.

The amount of funds that went to higher-risk, early-stage startups was notable in 2021 as it witnessed almost 100% YoY growth in early-stage funding, with $201 Bn in about 8,000 startups. However, the good times do not seem to continue in 2022. Often, startups overvalue themselves in order to raise funds without giving up much of their equity. This may be detrimental in the long run — in case the company struggles to meet the expectations of the investors, it will have to raise funds at a lower valuation in the future rounds. Moreover, external factors like geopolitical tensions, inflation, underperforming IPOs and public markets have also affected the startup valuations. Through this article, we try to understand the different reasons for the decline in valuations and the kind of impact it could have on investors and startups.

Valuation reset for overvalued tech unicorns

After the hyped market in 2021, venture capitalists are now renegotiating their deals. As reported by WSJ, Tiger Global Management which has been one of the most prolific startup investors is renegotiating the investments for several companies, reducing the valuations by more than 20%. Manhattan Venture Partners also noted a nearly 10% plunge in the stock purchases of certain private companies in the first month of 2022. Some high-growth startups are even scaling back the funding rounds or delaying their IPOs that could value them lower than expected.

Let’s have a look at some recent examples where startups have been revalued by the investors or have themselves reset their valuations.

• Philadelphia-based growth startup, Dbt Labs Inc, scaled back its funding round that valued it at around $4 Bn instead of the initially negotiated $6 Bn.
• Fidelity, which has an investment in fintech giant Stripe, recently marked down the value of the company by over 9%.
• The delivery giant, Instacart slashed its valuation by about 40%, valuing the company at $24 Bn down from its earlier valuation of $39 Bn.
• Startups like OYO and Pharmeasy, who were preparing to go public are now considering downsizing their IPO valuations considering the market conditions.

The effect of tech sell-offs in public market is also visible in the private secondary market as there is a heightened interest in selling shares at a discounted price, typically 10% — 30% lower than the last quarter of 2021. With fewer IPOs, shareholders are looking for liquidity solutions in the secondary market, ready to sell their shares at a discount.

VC pull-back and a shift in focus

As market correction started happening in the public markets, its effects have been trickled down to the private market as well. As a result of huge tech sell-offs and dropping valuations in the public market, many VC firms have tightened their grip on startup funding as well. Investors are rechecking the startups’ valuation at a lower level to account for the pressure on the public peers. Firms like Tiger Global Management and D1 Capital have pulled back from investing in late-stage startups. The growth stage and later-stage funding seem to be stagnated. At times like these, some startups may be in desperate need of raising funds, so they will have to lower down their valuation expectations to be able to raise some cash. Meanwhile, startups that had raised huge rounds last year are being advised to use their funds wisely and prepare for even worse times.

The plunging tech stocks facilitated by inflationary concerns and rising interest expectations added to the pessimistic lending behaviour. The stocks of public companies, which typically guide the valuation of startups, saw a decline in valuation. By the end of January, companies that went public last year were down an average of 32.6% since their listings. Less proven companies performed even worse. Not only did the drop hold back investors, but also delayed the startups from going ahead with the IPO. The reset in startup valuations was well predicted, but what is surprising is that historically there has always been a long lag in the private market’s reaction to a public market slowdown, now it’s much faster.

However, things are not the same for all the sectors. While consumer businesses have taken more brunt of the pullback, companies dealing with blockchain, cryptocurrency, and cybersecurity have continued to attract VC interest. Despite the tight funding hand, investors’ focus has been shifted to seed and early-stage startups. The risk may be high with early startups and they are far away from taking a meaningful exit, but they allow investors to write smaller checks that could still give them some returns.

How is the valuation reset going to impact the stakeholders?

A drop in valuations is a double-edged sword. Investors may welcome the dip in valuation as it would mean that they would get new deals at a meaningfully lower value. VCs would love to offer lower prices on new deals, but also want their existing portfolio companies to be marked up in subsequent rounds. There is also a significant chance that the public companies, that guide startup valuations, will normalize back to the mean of the last couple of years. Consequently, VCs have tightened their lending capacity and shifted their focus to early-stage startups. Many startups had raised huge amounts for the early rounds, which raised the expectations and hence the valuation of the company. Now, slashing their valuation in order to raise funds would mean that startups will have to dilute a greater chunk of their equity.

The kind of valuation reset that we have started to witness was much needed after all the craziness in 2021. However, whether this is just a minor correction or has a long-term impact is difficult to determine now and we will have to wait and see at least till Q2 or Q3 of this year to understand where this goes. Till then, startups need to utilize their available cash prudently.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Today’s digital era is making several advancements and one such on-going development that is creating a buzz these days is metaverse. While there exists no perfect definition of the concept of metaverse as it is still emerging, it can be best described as seamless convergence of physical and digital lives, which creates a unified, virtual community where we can work, play, relax, socialize, or engage in commercial transactions.

As the concept of metaverse is developing and moving closer towards reality, VCs have already poured in over $10 Bn in 2021 alone backing companies related to metaverse related companies. This includes Epic Games’ $1 Bn round being in the lead, other significant investments include funds raised by The Sandbox, Mythical Games, Niantic, among others. Even big tech players are placing their bets in the future of the digital world. The term ‘metaverse’ particularly gained popularity among the public after the social media giant, Facebook rebranded itself as ‘Meta’ to put focus on its strategy to build in the direction of metaverse. It is anticipated that metaverse will expand across almost every sector in the coming years, with market opportunity estimated at over $1 Tn in yearly revenues.

How different industry segments are growing in the virtual world?

Expected to build over a trillion-dollar economy, businesses across different industries are exploring opportunities in the metaverse space. The global gaming market is projected to reach over $218 Bn by 2023, with global player base growing over 3 billion during the same period. The use of AR & VR along with in-game assets have enhanced user experiences. Further it is estimated that estimates revenue from virtual gaming could reach close to $400 Bn by 2025.

Roblox, which went public last year through a blockbuster IPO valuing the company over $45 Bn, is considered to be one of the most successful metaverse player already. The company currently has over 47 million daily active users (DAUs) and monetizes its user base through sale of its virtual currency — Robux (R$). Gaming companies are investing heavily in enhancing user experience by improving gamers’ virtual identity and avatars.

A report by JP Morgan suggests that over $54 Bn are transacted every year on virtual goods. As virtual game developers monetize from sale of in-game assets, it opens the door to social commerce and retail in the metaverse. Several physical retail brands are now looking forward to enter the meta-world by setting up virtual malls and stores. The immersive experience provided by these virtual stores could end up enhancing brand’s revenues. Research by virtual store platform, Obsess, suggests that 70% of the consumers who visited a virtual store ended up buying an item.

Brands like Walmart, Adidas, Nike, etc. are planning to set up their virtual stores and some are even purchasing virtual land, which also gives rise to the commercial realty sector on the metaverse. The metaverse real estate market is expected to grow with a CAGR of 31% from 2022 to 2028. Last year, the sale of real estate on 4 major metaverse platforms exceeded $500 Mn, and its figure is expected to almost double this year. With current trends, we can even expect the virtual real estate market to facilitate land credit, mortgage, rental agreements, etc. in the future.

Apart from gaming, retail and real estate, Metaverse allows immersive experiences for users across many other industry segments, including education, music, aerospace, etc. While they are still in early stage, such segments have the capacity to grow big in the future.

Some exciting startups in the metaverse

1. Niantic Labs

· HQ: San Francisco, California, USA

· Total Funding: $770 Mn

· Last Round: Series D

· Valuation: $9 Bn

Started as an internal startup within Google, Niantic is an augmented reality company and also the developer of games like Pokémon GO. It aims to build a real world metaverse which will use technology to improve experience of the world as it has been known for thousands of years. The popular game Pokémon GO turned out to be so successful for the company that on an average it earned over $1 Bn per year from 2016–2020 and generated over $641 Mn in H1 2021 itself. The company is working on its Lightship platform that will attempt to incorporate the real world metaverse into products like Field Trip, Ingress, and Pokémon GO. It has also partnered with companies that provide hardware like AR glasses and microprocessors, that will help them to provide an amazing user experience.

2. Sky Mavis

· HQ: Vietnam

· Total Funding: $161 Mn

· Last Round: Series B

· Valuation: $3 Bn

Sky Mavis is the producer of Axie Infinity, which is the company’s flagship game built on Ethereum. It follows a play-to-earn model, where users are rewarded through NFTs. Earlier this year, Sky Mavis released a governance token (RON) on its Ethereum sidechain Ronin, which allows users to pay for DeFi features like community governance and future utility via staking through validators to earn rewards. As per the co-founder, within a month of Ronin’s release, Axie experienced a 300% increase in monthly NFT trading volume.

3. The Sandbox

· HQ: San Francisco, California, USA

· Total Funding: $95 Mn

· Last Round: Series B

The Sandbox offers a community-driven platform where creators can monetize voxel ASSETS and gaming experiences on the blockchain. Known for its virtual real estate marketplace, the platform has been successful in getting brands like The Walking Dead, Snoop Dogg, and Atari to buy their own virtual land. With about 2 million registered users, Sandbox already has 19,000 land owners. The Sandbox is committed towards building the idea of the metaverse as a continuous shared digital space.

4. Decentraland

· HQ: Genesis City, Metaverse

· Total Funding: $26 Mn

· Last Round: Venture Round

Decentraland provides a platform which uses Ethereum blockchain, where users can buy virtual plots of lands as NFTs through MANA cryptocurrency. Decentraland is scaling fast and its user base has increased by 3,300%. The demand for virtual land on the platform is increasing, which has also resulted in the rise of its crypto token MANA, appreciating by over 4,100% over last year. Financial institutions like JP Morgan, IMA Financial Group have already set up their plots on the platform.

5. MetaMall

· HQ: London, England, United Kingdom

· Total Funding: $4.6 Mn

· Last Round: Seed

Built on the Solana Blockchain network, Metamall is a decentralized mall on the metaverse where users can socialize, trade, and carry out business interactions through an immersive experience powered by VR technology. Metamall allows users to buy virtual real estate and earn token money by leasing, staking, advertising and developing it. It features separate zones for commercial properties to set up shops, showrooms and business interactions, along with lifestyle experiences such as casinos, clubs, VR games and NFT art galleries.

6. ByondXR

· HQ: New York, USA

· Total Funding: $7.5 Mn

· Last Round: Seed

ByondXR helps brands, retailers and wholesalers to create immersive metaverse e-commerce platforms for their customers. Till now ByondXR has created virtual stores for many luxury brands, including Armani, L’Oréal, Lancôme and La Roche-Posay, as well as household giants like P&G and Target. Although the company is still at an early stage, it aims to transform the future of retail industry.

FinTech supporting the Metaverse movement

As businesses evolve themselves to operate on the metaverse, fintech can provide a bridge for both personal and business interactions, by managing finances and transactions. Financial services companies like brokers, lenders, banks are looking forward to adopt metaverse initiatives to enhance their reach. South Korea’s Shinhan Bank has partnered with KT to set up its space in the metaverse which will offer a virtual banking branch and financial education. Looking at the limitless opportunities in this industry, JP Morgan has become one of the first leading banks to launch in the metaverse, banking on the scope of growth in the virtual real estate market. It is believed that for financial services, decentralized finance (DeFi) collateral management will come into play, which would be managed by decentralized autonomous organizations (DAO) rather than traditional finance companies. In the foreseeable future, we can expect more businesses trying to make practices of managing financial transactions supplied by fintech solutions similar to real life.

What the future holds?

In the long run, the aim of metaverse is to make it interoperable. What currently exists is the Web 2.0 version of the metaverse, where the users are restricted as they operate within a confined space as the companies collect huge amounts of user data for their innovation and enhancement. The Web 3.0 version of the metaverse will transform the way we interact, conduct businesses and the internet economy at large by providing a more open and decentralized space where no single entity has control over users’ data and assets. This may take a while to achieve with the on-going debates around the credibility of Web 3.0. However, going forward we expect that apart from large-scale platforms, several companies will transform and evolve their business models in order to operate within the Metaverse.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

The present SPAC ecosystem

From a year of record funding to valuation check, how have things changed?

For any startup, raising funds is an inevitable part of the journey, and it highly depends on how the company is valued. VC funding sky-rocketed in 2021 with over $643 Bn going into global venture investment. This marked a 92% growth compared to the previous year. Consequently, we witnessed more than 10 new unicorns being minted each week on an average, adding around $1.8 Tn in value.

The amount of funds that went to higher-risk, early-stage startups was notable in 2021 as it witnessed almost 100% YoY growth in early-stage funding, with $201 Bn in about 8,000 startups. However, the good times do not seem to continue in 2022. Often, startups overvalue themselves in order to raise funds without giving up much of their equity. This may be detrimental in the long run — in case the company struggles to meet the expectations of the investors, it will have to raise funds at a lower valuation in the future rounds. Moreover, external factors like geopolitical tensions, inflation, underperforming IPOs and public markets have also affected the startup valuations. Through this article, we try to understand the different reasons for the decline in valuations and the kind of impact it could have on investors and startups.

Valuation reset for overvalued tech unicorns

After the hyped market in 2021, venture capitalists are now renegotiating their deals. As reported by WSJ, Tiger Global Management which has been one of the most prolific startup investors is renegotiating the investments for several companies, reducing the valuations by more than 20%. Manhattan Venture Partners also noted a nearly 10% plunge in the stock purchases of certain private companies in the first month of 2022. Some high-growth startups are even scaling back the funding rounds or delaying their IPOs that could value them lower than expected.

Let’s have a look at some recent examples where startups have been revalued by the investors or have themselves reset their valuations.

• Philadelphia-based growth startup, Dbt Labs Inc, scaled back its funding round that valued it at around $4 Bn instead of the initially negotiated $6 Bn.
• Fidelity, which has an investment in fintech giant Stripe, recently marked down the value of the company by over 9%.
• The delivery giant, Instacart slashed its valuation by about 40%, valuing the company at $24 Bn down from its earlier valuation of $39 Bn.
• Startups like OYO and Pharmeasy, who were preparing to go public are now considering downsizing their IPO valuations considering the market conditions.

The effect of tech sell-offs in public market is also visible in the private secondary market as there is a heightened interest in selling shares at a discounted price, typically 10% — 30% lower than the last quarter of 2021. With fewer IPOs, shareholders are looking for liquidity solutions in the secondary market, ready to sell their shares at a discount.

VC pull-back and a shift in focus

As market correction started happening in the public markets, its effects have been trickled down to the private market as well. As a result of huge tech sell-offs and dropping valuations in the public market, many VC firms have tightened their grip on startup funding as well. Investors are rechecking the startups’ valuation at a lower level to account for the pressure on the public peers. Firms like Tiger Global Management and D1 Capital have pulled back from investing in late-stage startups. The growth stage and later-stage funding seem to be stagnated. At times like these, some startups may be in desperate need of raising funds, so they will have to lower down their valuation expectations to be able to raise some cash. Meanwhile, startups that had raised huge rounds last year are being advised to use their funds wisely and prepare for even worse times.

The plunging tech stocks facilitated by inflationary concerns and rising interest expectations added to the pessimistic lending behaviour. The stocks of public companies, which typically guide the valuation of startups, saw a decline in valuation. By the end of January, companies that went public last year were down an average of 32.6% since their listings. Less proven companies performed even worse. Not only did the drop hold back investors, but also delayed the startups from going ahead with the IPO. The reset in startup valuations was well predicted, but what is surprising is that historically there has always been a long lag in the private market’s reaction to a public market slowdown, now it’s much faster.

However, things are not the same for all the sectors. While consumer businesses have taken more brunt of the pullback, companies dealing with blockchain, cryptocurrency, and cybersecurity have continued to attract VC interest. Despite the tight funding hand, investors’ focus has been shifted to seed and early-stage startups. The risk may be high with early startups and they are far away from taking a meaningful exit, but they allow investors to write smaller checks that could still give them some returns.

How is the valuation reset going to impact the stakeholders?

A drop in valuations is a double-edged sword. Investors may welcome the dip in valuation as it would mean that they would get new deals at a meaningfully lower value. VCs would love to offer lower prices on new deals, but also want their existing portfolio companies to be marked up in subsequent rounds. There is also a significant chance that the public companies, that guide startup valuations, will normalize back to the mean of the last couple of years. Consequently, VCs have tightened their lending capacity and shifted their focus to early-stage startups. Many startups had raised huge amounts for the early rounds, which raised the expectations and hence the valuation of the company. Now, slashing their valuation in order to raise funds would mean that startups will have to dilute a greater chunk of their equity.

The kind of valuation reset that we have started to witness was much needed after all the craziness in 2021. However, whether this is just a minor correction or has a long-term impact is difficult to determine now and we will have to wait and see at least till Q2 or Q3 of this year to understand where this goes. Till then, startups need to utilize their available cash prudently.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

In India, around 48 startups have already made it to the unicorn club, as per CB Insights data. Well over $38.4 Bn has been raised till December 4th this year, with several of the rounds producing Indian unicorns in 2021. India will manage to get more than 100 unicorns by 2022, much earlier than the previewed estimation of 2023 reports in the past. The pace with which these companies are gaining valuations is truly remarkable. India’s pace of unicorn growth has surpassed that of China. The Indian economy is capitalizing on a host of international and national factors that are expected to create many more such companies.

What is Driving Private Market Investors into ESG Investments?

India has been emerging as the startup hub all across the world. From a time when India produced one unicorn per year during the period 2011–2014, the country has produced 34 unicorns in 2021 alone! The count is highest ever for the country and shows no sign of stopping. The growing trend of unicorns is indicative of growing interest and faith of global VCs and investors in the Indian startups. The most recent startup to gain the unicorn status is the insurtech company, Acko, which witnessed its valuation increasing from $400 Mn to $1.1 Bn in its recent funding round.

 Pre-IPO And Secondary Market Trading

In the recent times, the pre-IPO market has emerged as an attractive alternative class for investors as they allow them to reap out the maximum benefits before the company goes public. While the pre-IPO market is considered to be a good opportunity for providing early access to huge potential gains, it may have some liquidity constraint. However, the pre-IPO secondary market allows the founders, early employees, and investors to receive liquidity much sooner in a company’s life cycle. The secondary market balances the need for liquidity and allows founders to stay motivated and focussed on building the company, while staying private for longer durations.

Secondaries trading platform like Torre Capital are committed to democratizing the Pre-IPO market, by making it secure and accessible to all. With a large number of companies achieving the unicorn status and having a great IPO exit, the pre-IPO space is booming more than ever. We shall look upon the various factors that have motivated the companies to stay private for longer and delayed their exit.

Pre-IPO Secondaries Volume Growth

Secondary market trading are stock transactions in which an existing stockholder sells their stock for cash to third parties or back to the company itself before the company undergoes a merger, acquisition, or initial public offering. While the secondaries market was impacted in the early 2020, due to the pandemic, it has rebounded and witnessed continued growth since then. With over $50 Bn secondary deals completed in the first half of 2021, the transaction is projected to reach $100 Bn by the end of the year. It is estimated that over the next five years, the annual secondary volume could reach $250 Bn as limited partners manage their portfolios more actively.

The high amounts of funding rounds in the recent time period, along with optimistic valuations in the future, will continue to give a positive indication about the growth in secondaries activity.

Why are more companies opting to remain private?

Companies that go public gain an instant infusion of money by selling all or part of their firm in a public offering. While this may appeal to certain businesses, others recognise that public ownership has a cost. They avoid having to report to a big group of shareholders and can keep their company strategies and finances confidential by opting to remain private.

It can be seen that from the late 1990s to 2016, the number of publicly traded firms decreased by 52%. Despite this steep decrease, the entrepreneurial spirit has never been greater everywhere on the planet. The United States is ranked first in the world in the Global Entrepreneurship Index.

People are eager to establish their businesses. They just don’t want to share them with the rest of the world. The additional restrictions needed of publicly listed firms are one of the reasons companies don’t want to cope with the inconveniences of becoming public. The Securities and Exchange Commission is enacting increasingly harsh restrictions, which most firms would want to avoid.

This is especially true in situations when a large number of employees are also stockholders. Employees are free to focus on their tasks rather than the statistics since they don’t have to worry about what the stock is doing and what that could entail for their money.

Another reason a business could prefer to remain private is to have more control over its operations. A firm can remain in the hands of a few select people or families by remaining private. In addition, private firms are not subject to the whims of stockholders.

Private equity firms alone spent $130.9 Bn in biotech and tech start-ups in 2018. IPOs, on the other hand, took in $50.3 Bn. It should come as no surprise that, with so much money at risk and considerably fewer headaches, more private firms are opting for private equity.

There are several motivating factors for a company to go public. However, such access comes at a hefty cost in the form of SEC and shareholder scrutiny. As a result, many private firms opt to remain private and seek funding from other sources. Traditional lending institutions offer secured loans and shares that may be used as personal money or sold to employees to raise funds. This implies that while investing in private firms is feasible, it generally necessitates intimate links to the company.

How Has The Decision Benefited Tech Companies

The decision about whether to go public or stay private varies from company to company. Having a successful IPO may be important for a company, however it comes with several hassles, in terms of regulation level and the time involved. The dynamic of software firms within the IPO space is such that they do not wish to take the hassle and risk involved in secondary market trading or pre-IPO placements. With IPOs definitely a lot of risk is involved in not being able to match up to the investment that has been made and generating enough profits. Going public does help raise capital but it is an expensive endeavour for the company itself.

Software firms are approaching private equity firms instead for capital as that opportunity comes with less risk involved and fewer drawbacks. This is due to the sheer amount of capital in private equity that gives a strong standing to the firm. Technology corporations have raised successful funds in the private rounds that have made them achieve the decacorn status while staying private. On the other hand, entering into a public market through IPO may also possess the risk of downside. Astudy by Battery Ventures estimated that over 40% of the unicorns that have gone public since 2011 have underperformed their final private-market valuations. From company’s average age of 4 years to go public, in 1999, to the 2014 average age of 11 years, we see a change in preference of the companies in the decision to stay private.

Late Stage Investors Enjoy Higher Returns

As mentioned before the growing scale of fundraise rounds lead to inflated valuation of startups. While high valuation may be good for the company, overvaluation may pose a risk of downside. As a result investors, especially late stage investors avoid counting on IPOs to make money. On the contrary, early stage investors remain unaffected with the downside risk as they invest early enough to gain positive returns.

As early employees and investors seek liquidity, the private market activity steps up in such a scenario. A delayed IPO would give the late stage investors more time to reap the benefits of the growing valuation and greater returns.

The emerging scope for institutional investors in the secondary markets 

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Internet of Things (IoT) is one of the most prominent technology trends, IoT is disrupting both the consumer (retail, healthcare, and services) and industrial sectors, such as transportation, water, oil and gas, agriculture, and manufacturing. In the manufacturing sector, the business of extracting and transporting oil and gas is filled with challenges. There are several drivers of growth for this sector. A report by McKinsey mentioned that the number of businesses that use the IoT technologies has increased from 13% in 2014 to about 25% today. And the worldwide number of IoT-connected devices is projected to increase to 43 billion by 2023, an almost threefold increase from 2018. The IoT cloud platform market is expected to grow from US$ 6.4 Bn in 2020 to USD$ 11.5 Bn by 2025. The IoT solution segment has dominated the overall IoT monetization market.

The trend in the market is expected to continue both as a result and an impetus of constant technological advancements. The pandemic, along with our lives, has also affected the way this trend is developing. In a world where work from home is a norm, more intelligent automated scheduling and calendar tools, as well as better quality, more interactive video conferencing, and virtual meeting technology will be required while working remotely. Healthcare witnessed a drastic change in the way it is delivered from telemedicine to smart wearables to sensors.

Source: Pitchbook, Gartner

IoT is not just a technology initiative anymore, after the worldwide lockdown imposed by the pandemic businesses will look for ways to improve efficiencies. The emphasis on the business outcome from implementing has increased significantly IoT initiatives are no longer driven by the sole purpose of internal operational improvement.

Industry Performance in the Recent Years

The global market for Internet of things (IoT) end-user solutions is expected to grow to $212 Bn in size by the end of 2019. The technology reached 100 Bn in market revenue for the first time in 2017, and forecasts suggest that this figure will grow to around 1.6 Tn by 2025.

Source: Pitchbook, Gartner

Key Highlights

• In 2021, there are more than 10 billion active IoT devices. In 2019, around 127 new devices per second connect to the web.

• It’s estimated that the number of active IoT devices will surpass 25.4 billion in 2030.

• 83% of organizations have improved their efficiency by introducing IoT technology.

• The amount of data generated by IoT devices is expected to reach 73.1 ZB (zettabytes) by 2025.

• In 2018, 57% of businesses adopted IoT in some way. By the end of 2021, the figure should hit 94%.

VC Investment Sentiments

VCs poured close to $11.1 Bn in IoT companies in 2020, though the deal count was less the total was on 2018 level. Majority of the drop came from early stage VC deals, which fell to its lowest since 2016. At the product category level, the IoT-compatible chipsets, manufacturing & supply chain, connected vehicles, smart home, and IoT security segments each raised over $1 Bn in VC, driving the year’s total deal value.

Instead of a sole value driver IoT is more suited for driving diversified software and hardware companies. Business dealing in connectivity devices, energy and utilities and connected commercial real estate witnessed sharp increase in funding. Each segment drew over 2x gains in deal value YoY, although each was dramatically affected by the pandemic.

The IoT industry set VC exit records in 2020, achieving $14.0 billion in total value across 61 exits. Exit values have never crossed $4 Bn in previous years. The star of the show was C3.ai, which had a record $3.4 Bn IPO in the US market. 2020 was also a strong year for M&A activities with 48 deals valuing up to $2.8 Bn. IoT hardware, IoT software, and connected buildings generated most of the activity.

Segment-wise Analysis of Performance and Opportunities

○ IoT Hardware and Devices

The IoT hardware includes sensing devices that have the capabilities to collect and route data to enable control and communication through the internet. Continuous innovations in chipsets, sensor systems, and connectivity devices for IoT networks, may result in an innovator’s dilemma for the incumbents. However, startups have an advantage as they can experiment and develop freely. The reducing cost of production for IoT hardware and greater connectivity are driving the market. Moreover, as the devices are becoming cost efficient, it has encouraged their adoption and innovation.

It is estimated that the IoT hardware market constitutes nearly 48% of the total IoT industry and would reach $271 Bn by the end of 2021, growing at a CAGR of 12% during 2021–2026. The segment had a positive response from VC investment last year, raising over $2.5 Bn. During the pandemic, China was in particular the driver of deal flow in the segment. The custom chips for IoT applications witness higher inflow of funds from China compared to the USA.

One can capture great market opportunities within the segment by focussing on future possibilities for growth in Tiny ML microcontrollers and battery sensors. It is projected that the Tiny ML device market would grow at a CAGR of 41% from 2021–2024. Some startups that are already focussing on this opportunity are Arm, Greenwaves, Syntiant, etc.

○ IoT Networking Infrastructure

The IoT network connects the device data to cloud networks. The segment is expected to witness growth as the governments across the world provide incentives for building smart cities, and enterprises prefer novel networking for asset tracking and predictive maintenance.

So far, the segment is expected to grow with a CAGR of 17% from 2020–2022. The investment deal activity has relatively plateaued in 2020, but still managed to raise over $500 Mn last year. Majority of the VC investments have inclined towards 5G technology. Some firms that appear to benefit from growth in 5G are EdgeQ, Blue Danube, Siklu, among others. However, the pandemic has delayed the execution and deployment of 5G technology.

○ IoT Software Solutions

IoT softwares enable various functions throughout the IoT value chain. These include connectivity routing, application enablement, device management, data management and analytics, etc. Analytics is required in almost every field today. Therefore, IoT devices with abilities such as sensory data, AI and ML algorithms will witness a huge market opportunity.

The market for IoT software is expected to grow at a CAGR of 11.4% from 2021–2024. However, the share of the segment in total market for IoT is expected to decline over time as more processing shifts onto the devices themselves. AI and ML play an important role in driving the segment due to its widespread adoption. It is suggested that startups will be able to provide improvements in the area by upto 10x, making it a competitive marketplace. Some companies that are already working in this direction include C3.ai, SparCognition, FogHorn, Noodle.ai, among others.

○ IoT and Industry 4.0

Industry 4.0 includes IoT technologies that facilitate the growth of smart capital intensive industries, including manufacturing, agriculture, energy and utilities. Such technologies are largely implemented to empower autonomous equipment operations.

The segment is projected to grow at a CAGR of about 23% during the period 2021–2028. The VC investment in the segment remained strong even during the pandemic due to faster adoption of digital operation in capital-intensive industries. There are several opportunities within this segment that are expected to witness fast growth in the coming years. These include asset-tracking, drones, predictive maintenance using ML, among others. Samsara, CloudLeaf, Embention, Clobotics are some companies that will benefit through their operations in these areas.

○ Smart Services and Infrastructure

IoT can be a great help in offering smart assistance through smart healthcare, connected mobility, smart cities and other consumer services. These innovations will also favour the goals of sustainability and positive environment impact.

The market is expected to reach $200 Bn by 2021 and is projected to grow at the annual rate of 13%. Investments in connected services, particularly healthcare and vehicles have grown even during the pandemic. The demand for vehicle connectivity is expected to grow in the future as it is suggested that 60% of vehicles will have vehicle-to-vehicle connectivity (V2V) by 2023. Some companies that are expected to progress in the smart mobility and smart healthcare services segment are Kymeta, Smartdrive, Whoop, etc.

Industry Outlook and Key Limitations

Large internet of things (IoT) and operational technology (OT) security companies can be built across segments of the edge device value chain as well as for individual device types. However, IoT-focused platforms are limited in addressing the leading use cases for IoT security spending including manufacturing, natural resources, and transportation given devices’ limited connectivity to the cloud.

To overcome the industry’s concerns, security incumbents will be expected to address IoT security across the value chain and across product kinds. To date, security software providers have sought to address the IoT security opportunity with point solutions that aren’t tailored to specific industry threats. As a result, IoT security adoption is still low and uneven across organisations. More comprehensive vulnerability assessment and communications security capabilities will be included in future XDR platforms. As a result, we expect infosec incumbents to continue to improve their IoT security capabilities throughout the value chain.

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This article has been co-authored by Ayush Dugar and Tamanna Kapur, who is in the Research and Insights team of Torre Capital.