Is Industry 4.0 The Dotcom Bubble Of The 2010’s?

The 1990s will be remembered for the fall of the Soviet Union, the end of apartheid and the birth of the internet. During this decade we witnessed the emergence of a new global elite: Amazon, Google, and Facebook. At the same time, billions of investments were made in startups that have all but vanished including pet.com and AOL.

Today, we hear echoes of the 1990’s. Terms such as “game-changing,” “disruptive” and “new business model” have been applied to the so-called fourth industrial revolution, Industry 4.0. We are also witnessing a surge in Venture Capital investments. According to PwC MoneyTree report for 2017, in the US alone VC-backed investments topped $70 billion, a post-2000 record. For comparison, in Europe, “funding activity stood at $17.6B across 2,483 deals, respectively up 40% and 16% from 2016.”

2017 was noted for the record investment in Artificial Intelligence related technologies, with each quarter exceeding $1billion in the US alone. In this article, we explore the differences between Industry 4.0 and the dotcom bubble and the role of startups in this space.

Full disclosure: I am a co-founder of Presenso, a leading, investor-backed startup that provides Artificial Intelligence for Predictive Asset Maintenance.

The Late 1990’s In Perspective

The dotcom era was marked by stratospheric valuations that did not last. After the stock market crash in 2000, the value of the 280 stocks in the Bloomberg US Internet Index fell by $1.755 trillion.

In hindsight, we can draw two conclusions:

First, the small investors that drove up stock price evaluations were acting speculatively. Some spectacular failures include pets.com, mothernature.com, furniture.com, and beautyjungle.com that were not financially sustainable because customer acquisition costs significantly exceed the lifetime value of a customer. At the time, an analyst interviewed by Time Magazine stated that some online retailers were losing between $10 million and $30 million a quarter and predicted correctly that many owners would simply run out of cash.

A second conclusion from the 1990’s was that even if some companies failed, the economic (and social) changes were fundamental. Comparisons between the Tulip Mania or the Railway Mania and the dotcom bubble are not valid because the latter was not based on speculation alone. Brick and mortar stores may never have disappeared, but commerce changed forever. Today, the services offered by Facebook, Amazon, Netflix, and Google (collectively known as FANG) are based on new business models and customer experiences.

In summary, when we separate the financial bubble from the underlying change in consumer and corporate behavior, much of the hyperbole and hype was justifiable.

Dotcom vs. Industry 4.0

One of the meaningful ways to compare Industry 4.0 and the dotcom era is in their genesis. Putting aside the exact sequence of its birth, the brain trust and oxygen that propelled the internet in its early days was based in optimistic California. Industry 4.0 is rooted in the industrial German heartland that is considered conservative and risk-averse.

Why is this important? As a co-founder of Presenso I am actively engaged with both current and prospective investors that represent both corporate VC’s and private investment funds. I cannot speak for all investors and startups, however, in our case, investors have invested significant time understanding our business. Their valuations are based on sober assessments of the market potential and a granular understanding of our financial projections. Furthermore, valuations are being made by professional investors and not driven by day traders or mom-and-pop speculators.

This Time Is Different

Many seasoned investors consider “this time is different” to be the four most dangerous words in any economic cycle. Putting this concern aside, I’d like to point out some of the differences for startups in the Industry 4.0 space, especially in the European market.

#1 Governmental Subsidies

Many European governments are providing funding and infrastructure to support Industry 4.0 including tax incentives and grants. For example, in Italy, the government has allowed companies to benefit from “hyper amortization” for the purchase of certain Industry 4.0 related assets.

There are different ways for startups to benefit. In some cases, funding is made available for educational institutions to support Industry 4.0 research and development, and startups can tap into direct grants via programs such as Horizon 2020.

#2 Corporate Sponsorship

There is recognition on the part of large corporations of the value that startups generate. In Israel, we are often invited to present our solution to visiting European trade delegations or are approached directly by multinationals scouting for Industry 4.0 technologies.

Large companies are finding creative ways to tap into innovation of startups by sponsoring innovation hubs and startup accelerators focused on Industry 4.0. These are win-win situations: the corporate sponsor gains access to new solutions and the startup can gain valuable experience and market exposure working with potential channels and end customers.

#3 Level Playing Field

Although Artificial Intelligence is not a new concept until recently it was often confined to the world of academia. The main reason was a wide dispersion of data in multiple locations with minimal computing resources. The cloud revolution enabled concentration of all data in one location and simultaneously applying unlimited computing power to it. With the realization that Big Data and Machine Learning can now be applied to the industrial domain, startups with these capabilities are gaining market attention.

Industry behemoths such as Siemens are developing their Industry 4.0 platform infrastructure with the intent of developing a partner ecosystem. When these companies open their platform to third-party applications, startups are given an opportunity to capitalize and engage directly with large industrial customers without their own internal enterprise-grade sales and marketing capabilities.

There are also more opportunities to approach industrial plants directly. Large manufacturers lack the skilled staff to develop Artificial Intelligence competencies internally and are turning to startups to fill these missing gaps. There is openness on the part of corporate executives to hear the pitch of relatively young startups that lack deep relationships but can demonstrate expertise in Machine Learning.

#4 New Business Models

Many traditional industrial equipment manufacturers have already recognized that Industry 4.0 represents a risk or an opportunity for their existing business. Although embedded sensors in their machinery are generating significant operational data, they are not yet providing tools to operationalize, analyze and benefit from the data.

Inevitably, these OEM’s will explore ways to tap into the data that is generated by their equipment and provide a modern service offering. In the era of Industry 4.0, we expect OEM’s to offer their industrial customers Hardware as a Service and to partner with startups with Big Data and Analytics domain expertise in order to enable it.

Industry 4.0 Is Not A Bubble

Industry 4.0 is an industrial revolution and even bloodless revolutions are marked by chaotic change. New leaders will emerge, and existing elites may lose their power.

The executives of leading industrial plants are including Industry 4.0 in their strategy and expect their Information Technology and Operational Technology groups to include Machine Learning and Artificial Intelligence in their roadmaps and plans.

Industry 4.0 is not a bubble or marketing fad. Those startups with deep expertise in Machine Learning and AI stand to gain from the new order.

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