5 reasons why enterprise IoT is a tough market for startups

Unlike other emerging IT markets, the enterprise IoT platform sector seems to be dominated by incumbents like GE, Amazon, Microsoft or IBM instead of startups. Let's examine the characteristics of the enterprise IOT market that make it a challenging arena for early-stage startups.

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The IoT platform market has been growing at a record pace. Just a couple of years ago, the market only counted a few early vendors that were starting to court enterprises and device manufacturers. Today, the IoT platform space is a hypercompetitive market encompassing a broad set of companies from telecommunication operators to platform as a service (PaaS) providers. However, for being such as fast-growing, emerging market, the enterprise IoT platform space hasn’t seen a large number of startups become relevant. Today, the bulk of the innovation in that arena appears to be coming from big corporate labs instead of garages.

IoT is challenging the traditional enterprise technology cycle

The patterns in the enterprise IoT platform sector certainly challenge the conventional wisdom of how fast-growing enterprise technology markets evolve. Traditionally, the initial wave of innovation and early adoption in an enterprise software market is driven by innovative startups that are able to move faster than the incumbents. As the market develops, incumbents enter the fray, relying heavily on acquisitions helping to consolidate the market. That wave of M&A activity is a clear sign of a mature enterprise software market that is approaching its peak. Subsequently, the market evolves into a phase dominated by the incumbents and a handful of startups that survived the M&A phase and became strong independent companies.

From every angle, the enterprise IoT platform space is challenging the traditional enterprise software market cycle. Almost since its inception, incumbents like GE, Microsoft, IBM and Amazon are leading the innovation in the enterprise IoT market. More importantly, despite a handful of early platform vendors like Xively or ThingWorx, the IoT platform market is lacking startups that can claim significant market share. Here's a look at the factors contributing to the enterprise IoT market's unique dynamics.

5 factors that are conspiring against enterprise IoT platform startups

Enterprise IoT systems require professional services

Enterprise IoT systems are incredibly complex and often involve integration with existing enterprise technologies and processes. Consequently, many enterprise IoT systems require a significant level of professional services in the form of consulting and implementation assistance. This factor is challenging for many startups that don’t have the resources to invest in large professional services groups or haven’t developed the sufficient number of strategic alliances with system integrators and IoT professional services firms.

Partnerships with device manufacturers are slow and challenging

Many industrial or enterprise IoT systems start with the goal of deploying specific types of hardware and sensors that can optimize enterprise business processes. In these scenarios, hardware manufacturers can be incredibly influential in recommending and selecting an enterprise IoT platform for the solution. This dynamic typically favors enterprise IoT incumbents like GE or IBM that have spent significant resources developing strong strategic alliances with device manufacturers and optimizing the interoperability of their platforms with those specific devices. IoT platform startups would have to devote precious resources to nurture relationships with smart device manufacturers so they are not at a disadvantage with the incumbents in the space.

Industry expertise is required

Developers of industrial IoT systems are trying to reimagine existing mission-critical business processes and solutions or implement brand-new business processes. From this standpoint, enterprise IoT systems typically require a certain level of domain or industry knowledge in order to have a meaningful impact. Companies like GE, IBM or Microsoft have decades of experience across dozens of industries — which is very relevant in enterprise IoT scenarios. In contrast, enterprise IoT platform startups often have to travel the tortuous path of developing strong credibility in specific industries before they are considered serious contenders in the enterprise IoT segment.

Sales cycles are long

Enterprise IoT solutions are notoriously complex and many times require significant investment from the buyer. This translates into long sales cycles and never-ending pilots and proof-of-concept implementations. Many of the self-service models that disrupted other enterprise software markets simply don’t apply in the enterprise IoT space. Over the years, incumbents have mastered the long sales cycle game as a way to challenge leaner and more innovative startups in that market. In the enterprise IoT market, long sales cycles are the rule and not the exception. Consequently, enterprise IoT startups are forced to recruit B2B-savvy sales executives to be effective competing with bigger companies.

The incumbents entered the race early

Unlike other enterprise software markets, incumbents like IBM, Microsoft, Amazon and GE managed to enter the IoT market from the very beginning. More impressively, these incumbents managed to build incredibly innovative platforms that can compete with some of the more advanced offerings of IoT startups. Beyond companies like Xively, ThingWorx and a handful of other early IoT platform startups that managed to establish a relevant market share, the rest of the enterprise IoT platform startup ecosystem is extremely challenged when it comes to competing with larger and truly innovative IoT incumbents. As a result, many of these early IoT platform startups are likely to become M&A targets in the near future which will help to consolidate the market even more.

Does this mean that enterprise IoT platforms are exclusively a big boys' game?

Not necessarily but it is important to recognize that the enterprise IoT platform market is exhibiting unique characteristics. In order to stay relevant, IoT platform startups should build very strong network effects in areas that can have a big impact and might not be the immediate focus of the incumbents. Here are some ideas: 

  • Developer communities: Even though IoT platforms like Azure IoT Suite or AWS IoT enjoy vibrant developer communities, there is still room in the market for an enterprise IoT platform with a massive developer following.
  • Open-source distributions: Complementing the previous point, an open-source distribution model with a large developer community could also help to disrupt the enterprise IoT platform incumbents.
  • Partnerships with hardware startups: There are many super innovative hardware startups that don’t get any attention from companies like IBM, Microsoft, Amazon or GE. This creates an opportunity for an IoT platform startup to develop a new distribution channel by partnering with fast-growing smart device companies.

There are other factors that can help IoT platform startups to remain competitive in the enterprise. However, recognizing the unique DNA of the enterprise IoT platform ecosystem is vital to developing comprehensive business models that allow startups to become and stay relevant in this important enterprise software market.

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