Today, computer savvy\u00a0and other technically proficient people are sometimes pejoratively referred to as\u00a0propellerheads\u00a0thanks to the one-time popularity of the propeller beanie. \u2013 from\u00a0Wikipedia\nSeveral media outlets have reported that GE is on an \u201cIoT buying spree.\u201d I took note a few months ago when GE bought a propeller company for about 8 times EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization). I noted this because Softbank had just bought ARM Holdings for about 80 times EBITDA in what was called an Internet of Things (IoT) acquisition. ARM Holdings doesn\u2019t have any factories \u2014 they don\u2019t even produce a physical product. ARM Holdings is a company of tech savvy and proficient processor designers who arguably have created the foundation of much of the world\u2019s IoT computing, i.e. propellerheads. Apparently propellerhead companies are 10 times more valuable than propeller manufacturing companies.\nThis valuation chasm is important because many companies in the traditional industrial manufacturing space, everything from equipment to modules, gateways and modems, are looking to catch the IoT valuation wave by adding more software value; more X-as-a-Service (XaaS) offerings, via acquisition. I have discussed IoT valuations with several manufacturing company CEO\u2019s working on such strategies recently and all have had the same comment: \u201cWe can\u2019t pay those kinds of prices\u201d \u2014 referring to XaaS targets \u2014 \u201cOur board and shareholders don\u2019t think that way.\u201d The propeller-versus-propellerhead valuation chasm is unnavigable.\nSome believe that a bubble explains this valuation chasm saying buyers like GE and Softbank have been overzealous, perhaps even foolish, in their purchases. But this is not a bubble. As Michael Burry advised in The Big Short: \u201cNo one can see a bubble.\u00a0 That\u2019s what makes it a bubble.\u201d IoT leaders like GE see and deal with the valuation difference. They pay multiples of EBITDA and multiples of revenue simultaneously because they understand the difference. But many of those who live under traditional earnings-based valuations and who do not have Fortune 50 scale struggle to invest in those IoT companies valued on future promise.\nLet\u2019s go back to GE: four months ago GE announced that they were effectively moving their IoT cloud platform business, Predix, onto Microsoft Azure. Predix was one of the big five IoT cloud platforms \u2014 Amazon AWS, Microsoft Azure, IBM BlueMix and Google Cloud being the other four. Google, by the way, hands out propeller beanies to its employees, so apparently cloud operations companies are proud to be known as \u201cpropellerheads.\u201d So what gives? Why does GE appear to be moving out of a business 10 times more valuable than others it is buying?\nThe recent activities give some insight. First, the \u201cIoT buying spree\u201d has been led by GE Digital, not the GE industrial group who bought the propeller company. GE Digital paid 15 times revenue for ServiceMax and as much as 10 times revenue for Meridium (exact figures were not available) followed quickly with similar high valuations for near startups Wise.io and Bit Stew. The \u201cbuying spree\u201d highlights three key insights for those looking at acquiring in the IoT space.\n\nValue flourishes near the application layer. The Predix-Azure announcement confused me at first \u2014 why move out of the cloud space where valuation is so high? But the ServiceMax acquisition announcement showed that Predix is now more of an operating system for IoT application services than cloud infrastructure. Cloud services are already consolidating and losing value, similar to connectivity, so GE is moving closer to the application layer and acquiring service application platform companies like ServiceMax and Meridium. Ten to fifteen times revenue is still a stratospheric valuation by industrial standards, but the IoT application layer captures customer value at its origin and customer data creates continued value creation.\nPeople with the right experience and training are everything.\u00a0One of the driving forces of valuation chasm is the land grab, or in this case a people grab, by companies who can see that their path forward require the teams that make their IoT vision come true. They are grabbing the increasingly scarce technical resources needed to build the future. Bit Stew has over 100 data analytics experts. Wise.io has world leading machine learning experts and Meridium has over 400 predictive maintenance experts. A Silicon Valley executive once told me it\u2019s cheaper to buy 50 engineers at 5 times revenue than take two years to find and hire 50 individuals. The right people with the right skills are always critical to business success, but the intense, critical thinking skills necessary to create value in the IoT have made people a value driving acquisition theme.\nBig data creates new value and adoption generates big data. Acquisitions that pay for revenue are entirely about people \u2014 either the technologists in the company who create the products as discussed above, or the customers who have adopted the products thereby validating the offering driving both future cash flows and data generation. In the case of the IoT, where most applications are still in the hands of early adopters, both groups are technology-centric \u2014 propellerheads. The ServiceMax and Meridium acquisitions recognize this part of the equation citing worldwide customer adoption in each announcement.\n\nUnfortunately understanding the nature of the IoT valuation chasm does not make the problem of transforming through acquisition any easier for those who do not have GE\u2019s or Softbank\u2019s deep pockets. \u201cLand grabs,\u201d in this case employee and customer grabs, are speculative and not for the faint of heart. Softbank CEO Son firmly believes that \u201cARM is going to scatter 1 trillion chips around the globe\u201d every year as the key to creating big data. His belief and his confidence to pursue it strategically allows him to pay multiples of revenue. Many buyers may believe in the promise XaaS offers in IoT, but they don\u2019t have an investment thesis or the timelines that allow the risk acceptance necessary to acquire.\nA solution lies in a new line of thinking that leverages the manufacturing assets of the propellers with the creativity and innovative transformation capability of the propellerheads. The investment thesis has to believe that software and data will transform the business models and value of traditional manufacturing assets. Harry\u2019s Razors bought a hundred-year-old razor factory and is now disrupting the razor industry with direct-to-consumer \u201cbetter shaving experience\u201d model powered by internet-enable software. Casper mattress company is shaking up the biggest names in the industry by jumping the retail channel model with parcel-sized mail order mattress products and direct sales that simplify the customer experience. Old school manufacturing powered and delivered with a software driven business model in a millennial experience package works.\nIf hardware-based IoT companies are going to bridge the valuation chasm they have to re-consider the value of tech savvy resources and how they can dramatically increase the value of manufacturing assets (EBITDA) already in hand. Executives and investors have to believe in the power of both assets and human ingenuity. Consolidating manufacturing assets is tried and true, but it is not transformative. Believing in and facilitating ingenuity is hard. But the reward is not just higher profits, it\u2019s higher multiples.\nPropellers or propellerheads? It\u2019s \u201cand\u201d not \u201cor,\u201d if you are going to succeed in navigating your company across the IoT valuation chasm with acquisition.