How to Make Smart Investments in Smart Cities



According to IDC research, global spending on smart city and Internet of Things (IoT) technology will rise to $1.7 trillion in 2020 – making it one of the fastest growing markets in the nation. With these numbers, it’s no wonder that Fortune 500 companies, banks and financiers are looking to gobble up a piece of the IoT pie – despite the fact that many are still unfamiliar with the industry.

Warren Buffett put it best:

There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.

It’s a common story; an investor comes across an industry that’s ripe for growth, catches a case of gold rush fever, leaps without looking and then comes up empty-handed. Sure, a bit of patience may have made all of the difference but what’s most often missing when investors head into uncharted territory is a sound strategy.

As investors in smart city waste management technology, we know that the IoT space is full of complexities, nuances and pitfalls – here are a few steps that we take to ensure we’re adding the right IoT companies to our portfolio.

Look for the problem solvers

While there are a number of attractive IoT investment options, investors will get the most benefit by seeking out a space where IoT technology can solve a major problem. One example is cybersecurity, an industry that’s critical to the concept of smart cities – where everyone and everything is connected to each other. Studies show that nearly three-quarters of all IoT devices are still vulnerable to cyber-attacks, making it a lucrative sector for most smart city companies.

Another smart city problem that investors should follow is waste management. The World Bank estimates that urban waste generation will grow by 70 percent in the next decade, increasing waste management expenses by $170 billion. Numerous green-tech and sustainability focused companies have started to design and develop machine-to-machine (M2M) sensor technology to address this need, making it an industry with significant growth opportunities.

Much like waste management, transportation is a growing concern for both the private and the public sector. In fact, the Department of Transportation is already testing vehicle-to-vehicle communications in search of a solution that will enable cars to sense and respond to a variety of traffic risks. As populations grow and budgets shrink, it’s likely that more and more municipalities will turn to companies for options that will make driving, flying and public transit more efficient.

Don’t fly too close to the sun

As an investor, you can benefit from following smart city solutions providers and problem solvers but just make sure you’re not chasing the trend of the moment. Avoid verticals and companies that other firms or investors or flocking towards. Due to the amount of competition from other financiers, IoT companies and trends that are in the spotlight can become expensive overnight. But remember, a trend is often just a short-term fix for a much larger problem.

Additionally, crowded niches within the IoT space are more likely to collect higher valuations as a result of intense competition between interested PE and VC firms. Smart city investment is a long-term activity, try and think outside of the box and look for markets that — although not be as sexy today — will still provide a clear value proposition and efficiency play in the future.

Focus on the B2B market

The B2C market is unpredictable because consumers are likely to move from one IoT space to the next. Focusing solely on consumers means you’ll always have to ask yourself, what’s the flavor of the week? Consumers can be fickle and, as investors, it’s hard to judge what the next hot trend could be; it might be smart home automation this week, but next week it might be smart cars and connected vehicles. Instead, it’s far more secure to invest in B2B companies that are capable of addressing a more sizable market and have a higher selling price to the customer.

By focusing on the B2B market, avoiding spotlight verticals and spaces, following smart city solution providers, and ensuring that the technology of an IoT device — as well as its corresponding software — is both scalable and proven, investors can mitigate a number of significant risks when investing in smart cities.




Image Credit: CC by Pat Guiney

About the author: Kristina Heinze

Kristina Heinze is a partner at ParkerGale, a private equity firm that acquires profitable, founder-owned software and technology-enabled services companies and helps them with their product development, sales, and growth strategy.

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