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Make waves or sink. That’s the hard reality for startups in the competitive smart buildings space. Whether seeking acquisition, greater investment, or IPO, startups have to gain traction and take opportunities to scale their operations. They must create some buzz around the corporate and investment communities, and the best way to do that is by increasing market share. It is not as simple as having a good idea, startups must be able to develop a viable business, and that’s why most startups fail.
“Venture capital investors operate with the belief that about 95% of the start-ups that they give money to will fail completely, 4% will turn into viable businesses that they can exit with a profit in a few years’ time, and 1% will be unicorns,” said Memoori in an article within Project Haystack’s Connections Magazine. This harsh landscape has been quantified with a few landmark studies on the topic.
Shikhar Ghosh, a senior lecturer at Harvard Business School published one of the most important objective detailed studies on startup failure rates in 2012. He found that about 75% of venture-backed firms in the USA do not return investors’ capital. His findings were based on research of more than 2,000 venture-backed companies that raised at least $1 million from 2004 to 2010. The situation is similar In Europe where DealRoom.co found that only 20-30% of seeded European startups get to series A.
“It is an unfortunate fact that the prevalence of failure in the world of venture-backed startups is high,” says Ghosh, whose research was more challenging due to the mysterious absence of data on failed companies. “Venture capital firms bury their dead very quietly. The deceased are quickly removed from the portfolio companies section of websites, never to be spoken of again,” he continued.
Ghosh would no doubt agree that there are also different definitions of failure but returning investment and reaching a series A funding round are indicative metrics. There are also different definitions of success. The dream for many startups is to launch an Initial Public Offering (IPO) as a Publicly Listed Company, for example, but only 13 smart building startups have listed since 2012, according to research by Memoori. 10 out of those 13 IPOs was based in either Australia or Sweden due to the unique market conditions in those countries, the study explains, in greater detail.
“Startups that have gone down the IPO route are few and far between, so the options remain to stay private or be acquired. We have seen a wave of consolidations in 2018 as businesses mature, investors wish to reap the benefits and the founders look to further scale their businesses,” explains our latest report StartUps and their Impact on Smart Buildings 2019. “The increasing level of market consolidation in the fragmented smart buildings space within the last 2 years, which accounts for almost 60% of the total number of startup acquisitions since 2012, confirms the trend and the increasing recognition by potential purchasers of the benefits of closer collaboration with startups.”
Whatever their route to success, the main challenge for new market entrants is gaining traction and scaling up. To achieve this, startups must develop viable distribution channels. In the smart building industry, many new entrants have found benefit working with platform providers to establish themselves as part of a strong software-platform ecosystem and gain visibility with end-users.
Most solutions delivered based on a SaaS model, are supplier agnostic, and often seek to derive additional value from pre-existing components, building systems and data streams. New players in a variety of market segments are offering flexible low-cost solutions and services to previously under-serviced areas of the market. Thereby gain traction by providing accessibility, often in niche markets, to application areas that are under-served by traditional, larger operators.
“The question is what will happen to these companies in 3 to 5 years? While there will undoubtedly be some very successful startups, there will also be failures for a variety of reasons,” our latest Startups report points out. “Most innovations that fail are not because the concept and raison d’etre is not valuable but because the business model fails to find an appropriate route to market that satisfies all those in the decision-making chain,” it continues.
The report details the criticality of time and effort that is spent by startups at the accelerator and incubator stages, before launch, not just to refine the technology but to establish the most appropriate business model and entry into the market. It also explains the need for startups to recognize the benefits of early interactions with corporate partners, not only to explore new technologies and business models but as a possible way to accelerate or deepen an existing relationship.
“We believe that partnerships with major players will be fundamental to the success of many of the startups in the smart buildings space and they will also bring benefits to the incumbents, as IoT solutions for buildings evolve in the coming months and years,” states the Q1 2019 report. “In this overcrowded marketplace of smart building startups, new entrants will need to differentiate themselves, either through their business model, partnerships or innovative technologies, in order to succeed.”