3 key trends peer into the future of connected buildings
Investors are still skittish about early-stage startups selling automation and energy-management apps, but the market for software, sensors and services for smarter offices, factories and groceries stores is maturing gracefully.
The internet of things (IoT) and smart-building technologies continue to grab headlines and the attention of facility managers. Leading research firms predict significant growth over the next five to 10 years.
Specifically, Navigant Research projects that revenue for energy-management systems will grow to $10.8 billion in 2024 from $2.4 billion in 2015. Another research firm, Memoori, figures that cumulative funding of startups specializing in smart-building technologies reached $3.9 billion from 2008 through 2016, with almost 250 companies targeting the space. Memoori also estimates that the internet of things in commercial buildings — which includes hardware, software and services — will grow at a 20 percent combined annual growth rate from 2015 to 2021.
These are certainly positive macro-trends, and the past year brought positive developments — with Oracle acquiring Opower and Current by GE buying Daintree. But there were some struggles. EnerNOC laid off employees and is seeking "strategic alternatives," and Current by GE also pared back its organization. Many small firms found that raising venture capital was more difficult than years past. Looking at Cleantech Group’s analysis of investment in energy efficiency (a category that includes smart-building and energy-management software), 2015 and 2016 brought less investment than years past both in the sheer number of deals and total dollars invested.
No. 1: Late-stage startups build momentum
However, these setbacks may have been an adjustment rather than a sign that demand for smart-building software is waning. There are positive signs that smart buildings have smart value in 2017.
First, fundraising has rebounded. Funding is more readily available for firms that have shown initial success in the market. There have been some promising signs in the past few months: Blue Pillar announced $10 million in funding from existing and new partners, Powerhouse Dynamics raised $2.6 million, and most recently, Urjanet raised $20 million.
What's more, there is a sharper focus on software and technologies for specific building types or vertical-specific applications, rather than on one-size-fits-all smart building offerings.
In the past, many investors were interested broadly in smart buildings and energy-management sector rather than in particular companies, so some software firms probably attracted funding before they had managed to hone in on a specific product-market fit. The building and facility management market is attractive, but it’s complex, requiring investors to pick their bets wisely. The most recent batch of capital-raising firms are established, proven businesses securing later-stage rounds — suggesting that the potential is maturing.
While investors still appear to be skeptical of early-stage investments in smart-building software, some firms are emerging from the complex vendor landscape and proving their value to users in a repeatable and scalable way, which attracts funding. Moving forward, it is likely that the complex and overcrowded market will continue to naturally pick winners, which will be where capital flows.
Learn more about adaptive and smart buildings at VERGE 17, Sept. 19-21, in Santa Clara, California.
No. 2: Partnerships become more strategic
Small and large firms also appear to be more comfortable partnering with each other, a phenomenon that will provide better outcomes to facility managers and help reduce duplication and confusion in the market.
In his book "The Third Wave," AOL founder and former CEO Steve Case highlights the need for enterprise IoT firms to partner with industry leaders to succeed. Partnerships are especially important in buildings because a compelling smart-building solution requires a variety of components: a robust set of sensors and actuators in facilities; the ability to collect and send data to the cloud; analysis capabilities to turn the information into actionable insight; and a user interface to enable internal teams and customers to interact with the product.
This is a lot for a small startup to build on its own. On the flip side, larger firms could invest across this technology stack but may find that more innovative approaches are available in the market. Additionally, these established firms typically own the channel to market and customer relationships, so they may have less pressure to bring innovative solutions to market.
The lack of strategic partnerships between innovative startups and established building technology vendors created confusion and required many small firms to invest heavily in their own sales and marketing resources when they may have been better off selling through an existing channel. Large firms now co-sell products from startups and the startups are open to offering their technology as a white labeled offering.
Firms both large and small are working to integrate their services organizations. Specifically, Dell has established a robust IoT partnership built around its hardware and gateway devices, promoting partners to higher tiers as they align more closely. This tiered model is common across other technology verticals, but new to building technology. Another example is a recent Eaton and Enlighted announcement: Eaton will integrate Enlighted’s technology and lead its North American agent representative network. This is a more integrated partnership than many previous smart buildings tie-ups in the past.
Finally, Agilis Energy, an interval data analytics startup, white-labels its product to Trane. This partnership was established a few years ago, but Trane began promoting it more heavily in recent months.
No. 3: Key applications become more sharply focused
Many companies selling smart-building software have become more focused on particular building types or industry verticals rather than trying to sell across many kinds of commercial buildings. This beachhead approach, as described by Geoff Moore in "Crossing the Chasm," enables a company to focus on solving a critical mass of problems for a given user type — rather than partially solving problems for a wide range of users — and is a proven way to establish and scale a product company.
As a sales engineer in 2010 and 2011, I remember meeting with industrial manufacturers, restaurant chains and office building owners — users with very different issues and challenges. It was hard to build and sell a compelling solution to all of these users, especially as a small startup. Many companies have had similar struggles and are focusing on specific verticals with specific pain points.
For example, Verisae built a successful energy and facilities management software product that primarily focused on grocery stores, which Accruent acquired in late 2016. Axiom Exergy’s product, called a refrigeration battery, speicifically helps groceries curtail peak demand. While grocery stores make up only a small portion of total commercial buildings, their high energy load from refrigeration and notoriously small operating margins make smart-building software a compelling value proposition.
Firms such as Entouch Controls are deploying software and equipment specifically for retail and restaurant buildings, which are usually too small to invest in building automation. But across a large corporate portfolio, a few percentage points in efficiency savings can add up.
It’s likely that more firms will focus their product development, sales and marketing efforts on particular building types that match well with their offerings. As these firms build a beachhead, they will expand to new, adjacent building types.
As with all markets being disrupted by innovative technology, there will continue to be progress and setbacks, along with vendor churn and plenty of confused users and software buyers. But, as growth capital becomes more available, partnering becomes more strategic and vendors focus their value propositions on particular building types, the market for smart building solutions will continue to shake out to the benefit of customers and investors.