Telematics: Attracting investors to support growth

Telematics: Attracting investors to support growth

As telematics continues to enter the mainstream, investment funds are beginning to find their way to these businesses. Thus far, the areas of greatest interest seem to be fleet management and insurance telematics. But both Andrea Traversone, a partner at European venture firm Amadeus Capital Partners, and Matt Spetzler, principal at global private equity firm Francisco Partners, believe there is additional potential.

“Overall, there’s still a small investment opportunity in the sector,” says Traversone, whose firm offers startup investments. “But that’s going to grow significantly over the next few years. This is a very early stage.”

Spetzler, whose firm focuses on adding value to established companies (usually those valued at $50 to $250 million), notes that as telematics businesses evolve over the next three to five years, “a handful of large, profitable players will emerge.”

Investors like Francisco Partners, he says, will seek to help “create and consolidate those leaders. This is a market that hasn’t occurred yet. The process has started, but not finished.” (For more on fleets, see Special report: Fleet telematics; for more on insurance telematics, see Special report: Insurance telematics.)

The situation for startups

Investors have noticed, along with everyone else, that right now it’s challenging to find automotive “telematics the consumer is willing to pay for,” notes Traversone, with two exceptions: services that track the location of speed cameras and police officers in France and satellite radio in the US.

There are a few other telematics verticals, such as insurance telematics, that are large enough now to have a working business model, but those are still B2B endeavors. “There may or may not be a consumer link,” Traversone says.

Therefore, it’s B2B companies that are attracting the most investor interest at the moment. And the most intriguing of these are related to insurance telematics or fleet management and scheduling for vehicles, including trains and small yachts.

“Where we see investment opportunities that make sense is not [with] technology enablers, which are already commoditized, but with hardware or physical infrastructure around the service,” says Traversone. There are also service opportunities, he says, such as packaging services or selling data to infrastructure owners or development companies.

Beyond automotive

Beyond the automotive sector, he notes some “interesting deals” developing in connected home and connected healthcare, including a security service that uses wireless cameras to better discern legitimate threats from false alarms and a surgical sensor that enables doctors to be sure they haven’t left anything in a patient’s body after a procedure.

“Those are not telematics per se,” says Traversone. “Those are just wireless technology applications. To us, telematics is connected vehicle-related services and technologies, and infrastructure is the hold up there.” (For more on connected home and healthcare applications, see Special report: Telematics, electric vehicles and the connected home and Special report: Telematics and machine-to-machine communications.)

What service will justify the first-time installation of the needed telematics infrastructure in a vehicle? “We’re at the stage where there’s a chicken-and-egg issue,” according to Traversone. “Once there’s enough infrastructure and most cars are connected, God knows what services people will invent.” And investors will certainly take notice.

The outlook for established companies

Companies already established and profitable in the telematics sector may have some luck attracting investors seeking to consolidate a fragmented market or help a particular market expand, reports Spetzler. A company’s business model and the opportunity for ROI for both the company and their customers is usually what sets apart an investment-worthy firm.

This is the reason fleet management-related companies are so captivating to investors like Francisco Partners. For a relatively low-cost initial investment, fleet telematics generates great returns for the company as well as “very tangible ROI for the customer,” according to Spetzler.

Some of the same technology used in fleet management can be applied to insurance telematics, he adds, but because the business is different and the volume is lower, the ultimate returns are less.

Beyond business model, Spetzler says a company’s ability to grow and be profitable, as well as be a leader in the marketplace, are additional factors that would set it apart for investors: “Telematics is a business where adding in incremental units is expensive, so there are certain thresholds of use to become profitable. Having a larger company means you can build a more profitable company.”

Within the newer areas of telematics, those sectors with high-volume potential, such as healthcare, are definitely of interest, though Spetzler’s company has not yet done any investing there. “Those markets are not as mature yet, and their business model is not as defined, so the companies are not yet large enough,” he says. (For more on telematics and healthcare, see Telematics and mobile health: Meet your personal OnStar.)

Clear product strategies

If you’re planning a new endeavor, Traversone recommends a “very clear product strategy” as a good way to attract some venture capital. “You need an end-to-end view of the service you want to sell [and proof] that customers will invest in and subsidize the infrastructure needed to render this service. Otherwise, you need a strategy that’s not service focused.”

And Spetzler’s advice for established companies? Find a partner, or find a way to “compete in a differentiated fashion,” he says. Companies should find and highlight their own unique value so they can grow to lead the market, find their niche, or else join forces with others in the industry to create a consolidated and more profitable force.

“There will be big players in the market,” he says, and they will attract the investors.

Jessica Royer Ockenis a regular contributor to TU.

For all the latest telematics trends, visit Telematics India and South Asia 2013 on April 17-18 in Bangalore, Insurance Telematics Europe 2013 on May 7-8 in London, Data Business for Connected Vehicles Japan 2013 on May 15-16 in Tokyo, Telematics Detroit 2013 on June 5-6, Content & Apps for Automotive Europe 2013 on June 18-19 in Munich, V2V & V2I for Auto Safety USA 2013 on July 9-10 in Novi, MI, Insurance Telematics USA 2013 on September 4-5 in Chicago, Telematics Russia 2013 on September 9-10 in Moscow and Telematics Munich 2013 on November 11-12.

For exclusive telematics business analysis and insight, check out TU’s reports: In-Vehicle Smartphone Integration Report, Human Machine Interface Technologies and Smart Vehicle Technology: The Future of Insurance Telematics.

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