3 key lessons we have learned from investing in Smart Buildings space
By Q Motiwala
Smart Buildings has become a hot space in recent times as an application vertical for internet of things (IoT). We have been involved in this space for several years through our investment in Enlighted, more recently in Notion and reviewing several investment opportunities. Along the way, we have learned several lessons — highlighting the three key lessons which we think are valuable to startups entering the space.
1. Pick a high value application. Sell pain killers not vitamins
Once you deploy sensors in buildings, you can enable several applications with the gathered data and generated insights: energy efficiency, usage of space, employee productivity, customer productivity (in retail for example). Not all applications are created equal. There are three reasons why one should care about picking the right application:
a. The value captured (proportional to value created) in $/sq.ft./year varies widely between different applications. For instance, employee productivity is ten times more valuable than real estate efficiency which in turn is ten times more valuable than energy efficiency.
b. On a related note, the ROI threshold for adoption also varies between these different applications. A 10% reduction in energy consumption might not get you a meeting with the executive management whereas a 10% improvement in employee productivity might get you to the C-suite.
c. A good way to think about this is by tying the application to an enterprise’s top line revenue or cost structure. Companies are always looking for top line growth and therefore driving revenue growth is always a good application to go after. On the expense side, human resource is a significant line item for most enterprises whereas facility/energy may not be. Can your solution get enterprises to treat human resource as an investment rather than an expense?
2. Avoid getting stuck at one pilot on one floor
There are several things you can do to scale quickly within an organization’s real estate portfolio.
a. Think of how you can start selling at the executive level, not at the facilities manager level. This relates to picking the right application: top line revenue growth can get the attention of a CEO or a business unit head and targeting a significant cost item on the balance sheet will get you the CFO’s ears.
b. An exception here is companies that care enough about their work environment to have created an exec-level position to manage their work environment globally. In these companies, you might find titles such as “VP of Global Workplace Innovation or VP of Sustainability.” This can get you an Executive champion and a good initial thrust but only takes the case so far.
c. Make a clear ROI case by integrating into the work flow/business process. Avoiding positioning as a “Facilities project,” which often get the least priority and are not considered strategic to the company. Hypothetically, let’s say your sensor can keep track of employee motion inside a work environment. Can you tie the data and analytics to employee productivity? Can you automate a section of employee annual review process, and save the manager’s and employee’s time by integrating into existing HR management systems?
3. Keep the upfront (hardware) costs low. Maybe zero!
a. Keeping the upfront infrastructure upgrade/deployment costs to a minimum (zero is even better) always helps with scaling. One of the questions we always ask of companies is if there is a sustainable business model where there is no upfront cost to the customer.
b. This has worked well for Enlighted. Enlighted has implemented the Global Energy Optimization (GEO) financing option, where a customer can get the lighting systems with sensors deployed at no upfront costs. They are able to finance this infrastructure with energy savings as a collateral. Customers repay the infrastructure costs through realized utility bill savings.
c. The larger the upfront costs to the enterprise, the more it competes with investing in core business activities and that impedes the startup’s scalability.
In the end, revenues for companies in this space are a product of just two factors: (a) unit value captured in $/sq. ft./year and (b) area deployed in sq. ft. Therefore, a startup has to aim to maximize both these numbers. The three lessons above have done just that for our portfolio Enlighted. If you are a startup or investor in this space, or would like to develop applications on top of the installed Enlighted sensor network, we would love to hear from you.
I will be discussing this topic on a panel at an upcoming MIT VLAB Enterprise forum on Smart Buildings: Silicon Valley Delivers Data-Driven Office Space to be held on February 16. Join us to hear more detailed insights and network with startups and investors in the Smart Buildings space. Got your ticket?