iotuk industry insights uk iot investment · is being brought to market in 2016. den is now an...

Get in touch: IoTUK.org.uk @[email protected] UK IoT Investment IoTUK Industry Insights

IoTUK INDUSTRY INSIGHTS

UK IoT INVESTMENT BY VCs, ANGELS AND THE CROWD

AUGUST 2016

UK IoT Investment IoTUK Industry Insights 1Get in touch: IoTUK.org.uk @[email protected]

IoTUK has been collecting data on investments in UK Internet of Things ( IoT) companies from private finance sources to build up a picture of the volume and value of investments, and to identify where the money is going. By talking to venture capital companies (VCs) and business angels about the ways they invest in IoT in the UK, the state of the financial health of IoT in the UK can be assessed. The Digital Catapult is supporting SMEs to help them develop and grow faster and boosting digital transformation in larger corporations to help grow the UK’s digital economy. Understanding and profiling the private investment marketplace in the UK is critical to the successful delivery of these aims.

The early-stage picture looks promising - we have identified 45 companies across the UK that have received private funding, ranging

SUMMARY

from a few thousand to multi-million pounds; the companies receiving investment range from small startups to established companies with new IoT ideas. In total, we have identified over £42m of publicly announced, private funding, much of it made since mid-2015. However as an investment category IoT is relatively new to the market and deals in 2015 tended to be smaller in value; according to Ascendant Corporate Finance, who have been tracking the UK and Irish VC markets since 1997, total technology investment for 2015 was £2.59bn in 534 deals by 421 investors1. IoT investing then, represents around 8% of deals being negotiated in 2015, but only 2% of the value offered. Many VCs and angels stated their investment in IoT had only started in 2015.

1 See the Digital Catapult blog post from Stuart McKnight of Ascendant, April 2016 www.digitalcatapultcentre.org.uk/rise-of-the-angels


INTRODUCTION

When it comes to tech start-ups, the UK is an attractive home for many aspiring entrepreneurs. In fact, London is ranked as the number one city in Europe for supporting both startups and scale-ups in the European Digital City Index2 2015. Investment has been growing year on year, reaching over £1bn in 2015 according to research from London and Partners3.

Chair for Tech City UK and Partner at Passion Capital Eileen Burbidge said:

“In little more than five years we have seen investment in London’s tech sector increase tenfold. Even more importantly, we are now starting to see more later-stage investments which support the scaling of more London tech businesses. Today’s figures and the fact that London is home to more software developers than anywhere else in the world validate the fact that London’s tech sector is maturing and is one of the world’s leading tech hubs.” 4

The Internet of Things is proving to be an exciting investment opportunity for all kinds of investors. From venture capitalists to crowdfunders, many people are seeing the potential for the technology in all industries from healthcare, transport, energy through to entertainment. With over 40 million devices already part of the IoT in the UK and this number expected to grow eight-fold by 20225 , it is a field ripe for those that are looking to invest in innovative technologies. The Prime Minister in 2014 said the IoT had the potential to underpin a new ‘industrial revolution’.6

IoTUK’s research has shown that the term ‘Internet of Things’ has only recently started to be applied to companies and their products and services by investors; IoT doesn’t currently register as a separate investment class for many. This makes tracking relevant investments difficult. But, speaking to IoT companies to get a clear picture of the landscape as well as undertaking interviews with venture capital firms and crowdfunding networks ensures our research findings are based on an on-the-ground view as well as a look at the state of the nation’s IoT investments from a big picture perspective.

2 https://digitalcityindex.eu/

3 http://www.londonandpartners.com/media-centre/press-re-leases/2015/20150917-london-worlds-most-attractive-city-for-foreign-investment

4 https://uk.finance.yahoo.com/news/london-partners-re-cord-venture-capital-230100006.html

5 According to OfCOM: http://stakeholders.ofcom.org.uk/consul-tations/radio-spectrum-internet-of-things/

6 https://www.gov.uk/government/speeches/cebit-2014-david-camerons-speech


Angel investors and seed investors – an individual, or group of individuals, that provides financial backing for small startups or entrepreneurs, quite often known personally. Finance is generally provided at an early stage in the case of seed investors, who typically provide finance for startup costs though angels may provide support later too.

Incubators and accelerators – organisations that provide facilities and expertise for a startup company in the case of incubators or those starting to scale up in the case of accelerators. Only private incubator and accelerator investments are covered in this research.

Venture capital investors – VC investment is typically made in companies the investor knows is risky, but which has high long-term growth potential. VCs often look to provide operational and technical expertise to companies they invest in. This research includes included specialist VC arms of universities and large enterprises.

Crowdfunding – investment platforms through which members of the public pledge small amounts of money to invest in a company in return for specific rewards from that company in due course, assuming it is successful. Examples include Kickstarter and Seedrs.

This research does not include the money spent by companies on internal developments, or on acquisition of IoT companies, such as the £44m purchase by British Gas of home energy management platform company AlertMe8, or any kind of public sector finance including development grants. These are covered in a later IoTUK Insights report on Projects, Deployments and Public Implementations.

THERE ARE A NUMBER OF DIFFERENT INVESTORS FUNDING IOT TECHNOLOGY IN THE UK7

WHO IS INVESTING?

Small business startup Den based in Shoreditch, London, received over £1.1m investment through crowdfunding via Seedrs. With a team of 9 people, their IoT technology is being brought to market in 2016.

Den is now an angel-backed technology start-up that is transforming the way we use light switches and plug sockets around the world, in ways that provide safety, energy saving, security and convenience. They’ve received international publicity from the likes of Bloomberg, Financial Times, The Guardian, Sky News, and lots more.

They initially raised over £1.1m via Seedrs (£500k & £625k), becoming the most overfunded campaign to have launched there, and Yasser Khattak became the youngest founder to ever raise funds on the platform.

Yasser was speaking about his experience of crowdfunding. He said: ‘I think the benefits to crowdfunding are being able to validate whether the public have an interest in your product or service and being able to have a large group of individual investors that have a vested interest and who can act as early adopters and first customers. We have over 1000 investors. However, you don’t receive the same level of mentorship that you would from experienced angel investors and VC’s.

He chose Seedrs as the inital launch platform to raise funds. ‘I got introduced to the guys at Seedrs and they’re great. They offer a nominee structure unlike other crowdfunding sites which means we only have 1 investor (Seedrs Nominee) on our CAP table and not 1000!’

Would he use crowdfunding again? He said: ‘It depends. I personally probably wouldn’t raise seed funding via crowdfunding in my future ventures only because I now know a large group of angel investors and VC’s who I could raise money from - however I would use it just before a product launch as a marketing tool.’

£1.1 MILLION FOR SMART HOME ENERGY PRODUCT DEVELOPMENT

7 See the IoTUK blog “Show Me The Money” 16th March, 2016 https://iotuk.org.uk/show-me-the-money/

8 https://www.centrica.com/news/british-gas-acquire-connect-

ed-homes-company-alertme


WHERE IS THE MONEY GOING?

THE PATTERNS OF INVESTMENT HAVE BEEN INVESTIGATED IN A NUMBER OF WAYS:

By region, based on the location of the recipient company

By role in the IoT value chain played by the investee companies’ products and services9

Where applicable, by type of device produced

By type of end-user for the product or service

By setting, i.e., what types of location the products and services are likely to be used in

9 See the IoTUK Insight report, “Enterprises” August 2016, for a

definition of the IoT value chain


Looking at the geographical destination of private IoT investment funds, the East of England and London dominate. However, the figure for the East is skewed by very large investments made in Cambridge low-power radio communications company Neul, now acquired by Huawei (see box). If Neul is removed from the data, the London dominance becomes clearer: 50% of private investments have been in London-based companies. In the North East, North West and South West regions, IoT companies don’t appear to receive private finance.

One company in Wales received funding of an undisclosed value. However, a Cambridge-headquartered company, PragmatIC Printing which received £5.4m in known private investment from Cambridge Innovation Capital and ARM Holdings10, does have a manufacturing facility in County Durham. This means that there is potential to develop other digital hubs across the areas that are not currently being used. This can be done through education and through public investment, and through the active stimulation of private investment in targeted areas. The London dominance is backed up by information from VCs and angels, reflecting a similar pattern across high-tech private investment. London taking most of the funds, with Scotland next. The analysis also shows the East Midlands figure is boosted by investments of £4m in one Northampton company, Intamac Systems.11

Total amounts or financial details are not always available, so the following analysis is based on the number of companies receiving private funding, rather than the value of those investments. Percentages in the charts do not add up to 100% as a company’s products and services may be applicable to multiple user types and settings, and the company might occupy multiple roles in the IoT value chain, that is, the devices, components, data layer, network, platforms and also applications. More information on the IoT value chain can be found in the IoTUK Insights Enterprise report.

LONDON RECEIVES THE BULK OF PRIVATE SECTOR INVESTMENT

DISTRIBUTION OF UK IoT PRIVATE INVESTMENT VALUE BY REGION (£M)

East

London

East Midlands

Scotland

Yorkshire & The Humber

South East

Northen Ireland

West Midlands

Wales

South West

North West

North East

5 10 15 20 25

22.1615.53

3.12

2.13

1.75

0.15

0

0

0

0

1.16

2.10

LOW-POWER RADIO COMPANY NEUL RECEIVED LARGE PRIVATE INVESTMENT

Cambridge-based Neul was acquired by Chinese telecom network equipment giant Huawei in September 2014. Our database logs £16.7m in funding before the acquisition, over a number of years.

The scale of the investment in Neul, which had changed the direction of its development work as it found a niche for its pioneering work in radio communication, dwarfs that of any other IoT investments in the IoTUK database. This is taken into account in the analysis.

‘We explored the idea of Huawei investing in Neul and over time it seemed to make sense for an outright purchase’, said CEO Stan Boland. They had been working together on technologies in narrow band cellular IoT. He was brought into the business to maximise value for VC investors.

This investment is so large because of the potential of the technology that it is supporting, potentially impacting large sections of the IoT.

10 http://www.pragmaticprinting.com/news/smart-objects-becom-

ing-reality-as-pragmatic-secures-major-investment-from-cam-

bridge-innovation-capital-and-arm_32.htm 11 http://www2.intamac.com/news/intamac-systems-receives-4-mil-

lion-investment-to-develop-webbased-energy-monitoring-system.html


During our research, IoTUK examined the activities of the companies receiving investment monies – in order to gather a picture of where in the IoT value-chain investors’ money is being deployed, and which sectors of the IoT market are attracting their attention. Taking into account both value and volume, more companies developing end-user-facing applications and services receive investment than those at lower levels of the value-chain.

This is not surprising as markets at an early stage in their development tend to be more fragmented at the higher level of a value-chain than at the lower, more consolidated layers. It is easier to innovate, or at least easier to attract funding, for retail-level ideas than for enabling technologies.

INVESTMENT IS GOING INTO COMPANIES DEVELOPING END-USER APPLICATIONS AND SERVICES

UK IoT INVESTMENT BY ROLE IN THE VALUE CHAIN (% OF COMPANIES INVESTED IN)

User facing application/service/solution

Data layer

Devices

Network

Component

Development platform

Integrated multilayer system

10 20 30 40 50 60

56

42

42

24

90

13

Many in the investor community tended to exhibit a bias in favour of software or services rather than hardware modules and sensors because services offer the prospect of recurring revenue, and the hardware is considered simply as an enabler of greater value higher up the chain. There is also the perception that investing in software and service startups represented a lower risk than investment in hardware technology companies.


IoT businesses with a focus on domestic appliances and devices embedded in buildings are succeeding in attracting funding. Examples of companies that are using service based models include Canary Care12, who has developed a home monitoring system for the elderly utilising heat, light and motion sensors. Alerts are sent to families if unusual activity is detected.

Investors view healthcare-related IoT as a strong area to invest in right now. It is perhaps surprising then that wearable technology is not higher on the list of companies receiving private investment in the UK though this may reflect the existence of some well-established players in North America and continental Europe in this sector.

COMPANIES PRODUCING SYSTEMS FOR DOMESTIC SETTINGS AND OTHER BUILDINGS ARE RECEIVING INVESTMENTS

Another key area is security with 38% of the investments analysed in IoTUK’s research falling to companies where security formed an intrinsic part of the product, service or solution being provided. Recent high-profile cases of breaches of security in connected systems means that companies with novel concepts for making IoT more secure are likely to be sought out by private capital13.

UK IoT INVESTMENT BY DEVICE TYPE (% OF COMPANIES INVESTED IN)

Domestic appliances

Buildings

Products

General assets

Lights

Traffic systems

Vehicles

Wearables

Advertising media (billboards,

smart screens) 10 15 20 25 30

“ [The] Internet of Things is a real investment area; our focus is on software rather than hardware Macro trends are creating an ageing population in developed economies and healthcare costs are increasing, particularly in later life. Diagnosis and prevention will reduce overall costs… though security of health data remains a barrier to adoption of this technology. We have security of data as an investment theme.”

29

27

24

24

16

13

11

7

4

As one VC, Alex Van Someren, Managing Partner of the Early Stage Funds at Amadeus Capital Partners said:

12 https://www.canarycare.co.uk

13 For examples of coverage on connected systems data breaches, see: http://www.techworld.com/security/uks-11-most-infamous-data-breaches-2015-3604586/3/ and https://www.theguardian.com/public-leaders-network/2015/apr/15/inter-

net-of-things-security-risks-public-sector


It is not just companies developing systems and services for consumer use that are attracting funding. In fact, many of the privately funded companies we identified are developing components, solutions, products or services with broad applicability across end user types. Only one recipient of private money focused purely on a b2b model, Northampton-based Intamac Systems. As quoted publically, the company has received £4m to develop a broadly applicable, open IoT connectivity and application development platform, delivered as a service14.

The capability of companies to disrupt traditional business models is something investors are looking for when choosing where to put their money. One VC, Robert Trezona from IP group15, added that it would actively look for companies whose innovations had the potential to transform traditional conservative, infrastructure-heavy industries in uncrowded markets.

COMPANIES WITH BUSINESS END-USERS ALSO RECEIVE INVESTMENT

UK IoT INVESTMENT BY END USER TYPE (% OF COMPANIES INVESTED IN)

Business

Consumer

Public sector

Charity

20 40 60 80

64

62

29

2

14 Op. Cit.

15 http://www.ipgroupplc.com/

Inflowmatix is a company developing a system for monitoring utility network water flow and quality. It uses continuous sensing, real-time data analysis and hydraulic modelling to identify potential problems. This enables maintenance and repair tasks to be more effectively prioritised.

The company’s innovation spans the devices and data layers of the IoT value chain. Its real value is in the systems’ capability to analyse complex fluid dynamics data continuously from a network of connected sensors; at present, pressure logging every 15 minutes underpins water utility monitoring.

The VC arm of Imperial College (in whose Infrasense Lab the idea was developed) took a 42.5% stake in Inflowmatix with a £1m investment in July 2015.

IMPERIAL INNOVATIONS TAKES A STAKE IN A WATER INDUSTRY SPIN-OUT


Our analysis of companies suggests that many have products, services or solutions that are applicable to multiple settings although those with relevance for the home setting – including consumer devices, home energy and personal safety - dominate the list.

However, taken together, industrial and commercial settings are where many IoT products and solutions will be deployed, and companies targeting relevant sectors are also receiving investment.

Many companies are receiving investment for specialist innovations in utility networks for power and water, and in transportation networks. Inflowmatix, now based in Southampton, is a good example (see box)16.

WHAT SETTINGS ARE COMPANIES DEVELOPING IOT FOR?

UK IoT INVESTMENT BY SETTING (% OF COMPANIES INVESTED IN)

Home

Urban/city

Multiple

Transport or utility networks

Industrial

Vehicle

Personal

Retail/warehousing

Rural

Office

Other public buildings and cultural spaces

10 20 30 40

40

24

16

16

1611

1111

9

9

7

16 https://inflowmatix.com/


Looking ahead, VCs and angel investors believe that UK companies are well placed to receive new investment funding. The UK is attracting innovators and, in particular in London, there is dynamism and ready access to capital. Support for IoT development in the UK is good, although issues of definition and understanding of IoT need work, as do ‘legacy’ standard terms and conditions for software licences and Internet services. IoTUK has a responsibility to our growing digital economy to listen to these investors and ensure that their concerns are dealt with through promoting and engaging with policymakers.

Understanding of the Internet of Things has to be more clearly defined, brought into people’s lives in the here and now, and taught in schools. This will happen as the technology moves from early adopter use into more mainstream, average users homes and businesses.

In addition, political understanding of the potential in the industry could still be improved. Investors hope that this will lead to a more beneficial taxation and regulatory climate for further growth in the IoT sector as it matures.

THE FUTURE TRAJECTORY OF INVESTMENT

A 2016 report from the Centre for Economics and Business Research with analytics software firm SAS assessed that the IoT and big data analysis are set to bring around £322bn to the global economy over the next five years based on the responses of IT directors across various sectors17.

Mark Wilkinson, SAS regional vice president for Northern Europe and Russia, said:

“The combined benefits of IoT and big data will fuel our economy like nothing else. The global environment continues to be in a state of flux, with only one thing certain – that everything is changing.

Just under half of UK businesses are not using any form of big data analytics, and those that are will sometimes be using it infrequently in just one or a few areas of the business. Less than one in three have adopted IoT.18”

If you are able to supply additional information on private funding of IoT companies in the UK, please contact us at [email protected]

17 http://www.sas.com/en_gb/offers/16q1/cebr-big-data-inter-

net-of-things.html

18 http://www.sas.com/en_gb/news/press-releases/2016/febru-

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