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Who’s Funding the Industry?

Profit margins are weak in the custom electronics industry, and there isn't enough recurring revenue. Unless both integrators and manufacturers adapt, it will remain a cottage industry with little to no outside investment.


Crowdfunding

In the past few months several companies have turned to “crowdfunding” methods to garner financial backing for product launches. Why is this industry so unattractive to traditional investors?

We all know the old money-related sayings: “Money makes the world go around,” “Money makes money,” “Money doesn’t grow on trees,” etc.

But in the custom electronics industry, it seems the most apropos statement is “Show me the money” because the funding that once stimulated and supported the industry has seemingly disappeared. The investments from major corporations, venture capitalists, angel investors, banks and other financial institutions is like finding water in the Sahara Desert. For engineers and inventors, it means their product or great idea can’t become reality. For integrators, the lack of bank credit means unsteady cash flow and makes it tough to keep the doors of your business open.

How do I know this? In just the past few months there have been several examples of companies turning to unique “crowdfunding” methods to garner financial backing. In short order, three manufacturers - U-turn Audio, Olive Media, Securifi and Ube - have begun raising funds via grass-roots online crowdfunding websites like Kickstarter and Indiegogo. For those not familiar, in these new mechanisms consumers are encouraged to contribute money to the website for the new company/idea … just for the sake of entrepreneurship.

The websites take a small cut of the money raised, with minimum goals outlined. The consumers who contribute will, in some instances, receive gifts depending on the amount of their pledge. For instance, U-Turn will give a sticker to those who donate $5 or more, an Orbit turntable in matte black for donations of $150 or more. Other time consumers who contribute get nothing other than the satisfaction of knowing that they helped a new entrepreneur turn his or her idea into a real product.

In the case of U-Turn, the company raised $234,000 for the development of a new turntable. Yes, a turntable. The company’s original goal was just $60,000. I can imagine the reaction the company founders would have received from a stodgy banker had they tried to walk in and request $234,000 for the creation of a “new” turntable.

But the larger point is that these entrepreneurs were likely rejected by traditional means of funding. It’s eerily similar to the experience many CE pros likely encounter when they walk into their local bank with a business plan in hand to talk about obtaining a line of credit.

So I ask: why is this industry so unattractive to traditional investors? Here are my two big conclusions:

The industry profit margins are weak. Both integrators and many manufacturers are simply not earning the profit percentages required to be able to give a portion of it away to a VC or bank. The latest CEDIA Benchmarking Study reported an average profit of 12.5 percent for integrators. Investors are greedy … they want 12 percent returns (at least) for themselves, and don’t want to have to share that with the integrator. If you want outside investment, you might have to raise your hourly rates or boost your equipment markup to increase pro t. Neither of those things is easy to do.

There is not enough recurring revenue. Recurring monthly revenue (RMR) is the lifeblood of the security industry that drives investment. Security dealers can get loans and subsidize installations because they have a highly sellable contractual asset in RMR. Bankers and investors will continue to ignore this industry until RMR business models are adopted… and that financial disregard carries over to the manufacturers too.

Every manufacturer in this industry should be encouraging its dealer base to aggressively pursue long- and short-term service contracts for home networks, remote managed services and power management, along with security and home automation monitoring. (Remember CE Pro 100 company Vivint was sold in 2012 for $2 billion and it wasn’t just because they are nice guys).

We all know this is a legitimate industry with real businesses, but unless both integrators and manufacturers adapt, it will remain a cottage industry with little to no outside investment. Small manufacturers - both established and new - will be forced to go the crowdfunding route or their new products simply may never see the light of day.

So, tell me what you are doing to stimulate investment in your business?





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About the Author

Jason Knott, Editor, CE Pro
Jason has covered low-voltage electronics as an editor since 1990. He joined EH Publishing in 2000, and before that served as publisher and editor of Security Sales, a leading magazine for the security industry. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He is currently a member of the CEDIA Education Action Team for Electronic Systems Business. Jason graduated from the University of Southern California.

5 Comments (displayed in order by date/time)

Posted by jhamill1  on  03/11  at  11:20 AM

Ooo, impassioned cottage industry and grass roots funding. Capitalists and socialists are cringing equally. Go internet people!

Posted by BigPapa  on  03/11  at  08:57 PM

The writing has been on the wall for some time. This business won’t get ‘serious’ until we recognize it’s a service based industry not a Shiny New Thing based product industry.

If there isn’t a Shiny New Thing that can be created and sold in a product cycle of several quarters, or no RMR, then investors are interested.

Posted by 2 cents  on  03/12  at  11:51 AM

Jason,

Great story about people that want to “build” things.  Why not talk about the core of this business - the “CePro”!  We install the stuff.  Would love to hear about the options for the guys like us.  I am not looking to build a light switch or a turntable.  I want to put cool stuff in peoples homes and businesses. People like us need access to other things besides American Express.

Posted by BobbyB  on  03/12  at  12:13 PM

Great article Jason. You are doing a great service to the industry. So many people are unaware of the nuances to this subject matter. This rarely gets covered in the “sound bite” press. Small manufacturers have big problems with funding and brand recognition. They and their prospective integrator customers have so much vested interest in making this work and supporting each other. As you infer, its a collective responsbility. Otherwise the big companies, like the big banks win everything. Terrific reporting.

Posted by Jason Knott  on  03/12  at  12:34 PM

@2 cents—You’re right. I have been calling for years for outside funding entities to help integrators. Now that CE pros are adding recurring revenue to their repertoire, there is a “bankable” asset that will force bankers to loosen their purse strings a bit. Subsidized home theater IS coming, I’m just not exactly sure when.

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