VX2016: Financing Opportunity Aplenty in the Internet-of-Things Space

Abby Stoller: The focus of today’s panel is investment opportunities in the Internet of Things space. Where do investors see growth opportunities within this space? How will these developments change the way we live and the way we operate our businesses? What are the new breakthroughs and challenges that arise from this space?

The Internet of Things concept is certainly not new. For years, we’ve observed as companies have started to use data from connected equipment—whether that’s wind turbines, street lighting, cars, or buildings—to deliver new insights and create value around operational efficiency, increased productivity, and altogether new customer solutions.

From GE’s perspective, this means wind turbines that can speak to one another to optimize output at the farm level. It means sensors in street lighting that can share information to help improve parking, public safety, and traffic flow. It’s the reinvention of how we think about the physical world.

Allan, as a pension fund manager, how do you think about this disruption and the opportunities that connectivity creates? How do you direct your portfolio managers accordingly?

Allan Emkin: I had the privilege of speaking at the first VerdeXchange, and there’s been an enormous sea change since then. But the financial services industry is highly skeptical, to say the very least, of people who represent themselves as doing good. There is a fundamental belief in this business that they want something for free. Whether you say you’re doing good for people or for the environment, they’re going to assume that you have an agenda inconsistent with their own.

There’s an orthodoxy that the markets work efficiently, and anyone who’s using non-market characteristics to make an investment decision is doing it incorrectly. You need to elevate people’s level of knowledge and comfort with the idea that that is not the case.

Unfortunately, there’s a real basis for that belief: All of the early movers in almost any area ask for something that requires a subsidy when they approach my clients (who are large pension plans). They have good intent. But instead of looking for a public agency or a charity to provide that support, they’re asking an institutional investor.

The single most important sustainability issue for a pension plan is sustaining the ability to pay benefits to the beneficiaries. If you say they should sacrifice return, which effectively makes it more difficult to meet the financial obligations to pay for benefits, it’s going to be a very tough row to hoe.

Nine years ago, anyone in your space was called a social investor—equivalent to someone asking for a subsidy. I used to include “social investor” and “social disease” in the same sentence.

What’s changed? Number one: science. There’s a whole body of data that now proves there are, in fact, better ways to do things and that people can make money doing that. My clients care about making money, because the more money they make, the more likely it is that they’ll have the ability to pay the benefits that they promised.

Second: There are now more products. It’s hard to believe, but BlackRock, the largest manager of publicly traded assets in the world, has an Environmental, Social & Governance team and they’re actively involved. KKR, a huge leverage buyout multi-asset platform, has a team of over 20 people just doing ESG. In fact, the head of that group used to be the head of the Republican Party. Prudential—a huge investor in real estate, at hundreds of billions of dollars—has a huge team that does nothing but integrate technology to reduce water usage and conserve energy. There’s now a group called the Sustainability Accounting Standards Board, in large part funded by Mike Bloomberg, to provide a whole framework to measure the impact of sustainability on corporations.

In my opinion, the most important change is the attitude of many large institutional investors. They’re now open to ideas that they might not have been open to before—but only for one reason: They’ve seen people making fortunes investing in this space. To the extent that they can link their investment with making a lot of money and also doing good, that’s a homerun.

Abby Stoller: Steve, can you please you paint a picture of where the Internet of Things space is going? Where are the growth opportunities?

Steve Westly: We all understand that we’re moving toward a renewables era, and that is great. But the best energy is not necessarily new energy you generate, even if it’s free. It is energy you can save or not use to start with.

We’re moving into this accelerated period of what people refer to as the “connected home,” where every aspect of your home life will have Internet connectivity. It will be “smart.”

With the connected car and connected transportation, we’re heading toward a massive move to autonomous vehicles. I live in Silicon Valley. Almost every week now, you see vehicles going by that a person is not driving. I mentioned this a few years ago and it sounded like science fiction. Folks, it is here now. Tesla has cars on the street today where the steering wheel will move itself on the freeway. Within five years, virtually every automaker will have largely self-driving cars on the road. Within 10, you will see fully autonomous vehicles.

Lastly, we will get to the connected person. The impacts are dramatic for reducing energy use. The results are huge in terms of opportunities to make money, and to make our lives better and more efficient. But like everything else in the world, there are some things you need to be careful about. Top among them are privacy issues and cybersecurity.

Ponder this: Cisco says there will be 50 billion connected devices within the next five years. I would like to suggest that the number will be much greater. You’ve seen the proliferation of smartphones around the world. This is just the beginning—the early chapters—of what people are already calling the “fourth technological revolution.” 

Abby Stoller: Dennis, what does Internet of Things mean to the military? How do you think about it both in terms of an investment opportunity, and the cybersecurity challenges that arise?

Dennis McGinn: The promise is speed and efficiency. The more connected you can be with the Internet of Things, the faster and more reliably you can get things done, assuming that the medium by which things are connected is reliable.

Think about electricity. The mantra for utility companies has been: We want safe, affordable, and, now, clean and reliable electric power, for example. As we go into the Internet of Things, we want those same attributes. I would add speed to that list, in terms of efficiency.

We do need to be careful about how we design our systems. How many times have you been moving through your life with your smartphone and been a little bit frustrated because there was no Wi-Fi available, or the Wi-Fi was not always there when you needed it? Going to an airport, we have our boarding passes and all of our information on our smartphones, but then right at the moment of truth when you need to check in with the airline, you can’t get it because the particular wi-fi doesn’t work with your device.

The way to deal with this from a military perspective is to have backups. If there’s a cyber threat—and there is—we say, “Our systems will be hacked.” From a risk-management standpoint, you have to be concerned about two things: first, the probability of something going wrong, which we try to keep as low as possible through cyber defenses; and second, how you deal with the consequences of failure. That comes into system design. If this particular part of our Internet of Things is not available or is being controlled by someone, what are the consequences? What is the backup for individual, for unit, and for overall enterprise operations?

Steve mentioned self-driving cars. Great! But I don’t want anybody hacking into my self-driving car and taking me on an off-ramp that I don’t particularly want to go on. We need to be concerned about this.

We need to listen to the lessons of the past as we have introduced new technologies in this Internet age. But we also shouldn’t be fearful and not do things that make a lot of sense.

Wearable, personal connectedness is already here. At a Disney theme park, Snow White may come up to a child and say, “Hello, Abby, how are you today?” That’s because she’s wearing a connected wristband, which tells Snow White that Abby is in the park.

As we move into this personal connectedness, the privacy issue is very important. While it may be one thing for Dad to tell Disney that he likes frosted mugs for his beer at lunch, it’s another for Dad to be in a hospital or medical treatment facility with all of his medical data on there.

Press ahead, but do it wisely and think through the probabilities and consequences of failure. Design systems so that we have resiliency. That is the key. 

Abby Stoller: As another equity investor in the space, how do you see the Internet of Things, Tom? Where do you see promising investment opportunities? 

Tom Soto: The better question is where do I not see opportunity? It’s just so prevalent.

The Internet of Things has become a $340-billion market, and between now and 2020, it will total almost $500 billion.

A Silicon Valley product manager or app developer considers Internet of Things the dovetail between those platforms, devices, and the psychology of the people in the market using them. That’s how they optimize their participation and gain higher sales and volume.

The World Bank might say that the Internet of Things is going to have a tremendous effect on increasing productivity. But also, automation of productivity through IoT is going to affect employment rates and create some displacement. They consider that not a dovetail, but maybe a collision.

As an investor, I view it as an intersection. I want to be able to stand at the intersection where all of the factors within this equation are going to be a ripe place for investment.

What types of investments would those be? They would be companies that we know could contribute, through increased efficiency and productivity gain, a reduction in greenhouse gases, and be a disruptor in the space.

You can see the obvious effect right now in how energy is being generated and distributed. It’s a disruptor that’s helped to bring the cost of economies down to not just a realistic level, but beyond a competitive level when you’re talking about other sources of energy. When you take into account especially all the externalities within those costs, such as coal, nuclear, and so forth, there’s no question that the Internet of Things has allowed us to maximize the volume of sales.

All of this is accessible and has increased the appetite for participation, because the cost of all the technologies associated with the Internet of Things has dropped logarithmically over the past 10 years. Sensors were $2 to make and are now $0.50. They’ll probably be $0.10 cents in the next five years. Bandwidth is 40 times greater today than it was just 10 years ago. Processing is down 60 times from 10 years ago.

All of these factors within this larger equation help to drive a capacity for the Silicon Valley and Silicon Beach intellects to apply them in a practical manner, like an app that you could download for $2 or get for free because you’re going to be promoting some economic model that they’re all invested in.

Let me suggest that we have not scratched beyond 5 percent of the capacity of the Internet of Things. This fourth industrial revolution is going to have a mongo effect on the future of energy. It will be a key contributor to outcomes of COP 21, in terms of climate change adaptation and resiliency. It will probably be the single biggest force within local and federal government in helping to meet these new demands so that they can serve their communities as effectively as they promised, as appointed or elected officials and bureaucracies.

Abby Stoller: Our panel has clearly kicked off a rich conversation. We could all, if we had more time, be here for quite a while longer talking about investment and the Internet of Things, and how it’s changing our world. Please help me thank all of the panelists for their participation, and I look forward to the conversation a year from now at VX2017.