Recommendations for Surveillance Startups / Investors

By: John Honovich, Published on Aug 08, 2009

While there are many startups in video surveillance, many of them have under-achieved, especially the most prominent, VC backed companies in the market. Indeed, this has caused VentureBeat to symbolize the security startup market as a sinking ship. VentureBeat concludes with a quote from a VC lamenting:

“If you aren’t in it for the passion, forget about it,” she said. “If you you’re in it for the bucks, don’t bother."

Now, this seems overly pessimistic as a description of the entire market. US VC backed startups? Yes. Other startups around the world? Not necessarily.

Nonetheless, there are many challenges that video surveillance startups encounter. With such a heavy influx of companies with IT background, there's a steep learning curve for these startups (an element we addressed in our Top 5 Mistakes IT People Make in Physical Security). Beyond that, inflated expectations and market forecasts have contibuted to unsuccessful strategies.

The global market for video surveillance products may be $10 B USD but no manufacturer has a dominant share. Pelco, widely regarded as the largest, has revenue of about $600-700 M USD or about 6-7% of the market. IMS reports Axis as the 6th largest and their revenue is 'only' about $250M USD.

The video surveillance market has never been "winner takes all." As such, startup business plans that assume their company can achieve even 1% market share in 5 years are defying the history of the industry.

Let's examine the forces that undermine vendor dominance.

Mature Market

Video surveillance is a mature market where most customers already have systems deployed. While IP video may seem newer and more disruptive, IP video is an outgrowth of existing video surveillance systems (for instance, that's why so many encoders are sold).

Lock-In to Existing Systems

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Very few buyers are willing or able to scrap their existing system for a new product. They neither have the budget nor the ability to justify why they are abandoning capital equipment that can work for 5 - 7 years. 

Furthermore, interopability is limited so using the startup's product at one location and the incumbent at others can be challenging. For instance, if you offer an NVR/VMS, most customers are negatively inclined to use multiple client operating software (which is almost always required). If you are an IP camera manufacturer, even if your cameras are supported by a few large VMS providers, you will still not work with 70-80% of the systems on the market.

The startup needs to accomadate this or it is impossible to get broad traction. Sure, you can win a few dozen deals but the cost of sales and marketing will be very expensive.

Long Sales Cycle

The video surveillance sales cycle is notoriously slow. It's common for even modest size deals ($50,000 USD to $100,000 USD) to take 6 months to 1 year to finalize. Million dollar projects can take years to close. This is generally because investments in security are lower priorities for most businesses or are dependent on government funding. The main exception to this is in times of crisis (terrorism, etc.) In normal times, security funding is slow.

This is a key problem for startups estimating their growth plans. Even if you can get 10 large clients who want your product in Year 1, maybe only 1 of those 10 buy in the first year, 5 in Year 2 and the remainder in Year 3. This is a major cause of overestimating revenue for video surveillance startups.

The Importance of "Little" Features

Most video surveillance startups lead with a technological breakthrough - a powerful but single feature that differentiates themselves from existing products. This is often sufficient to get the startups meetings from large integrators and end-users.

However, because the market is mature and there are so many providers, significant emphasis is placed on 'little features'. By this, I mean the dozens of features and functionalities that are listed in data sheets or provided by existing products (this could be as seemingly minor as form factor options for cameras or scheduling recording for VMS systems, etc.). Time and again, large buyers will reject a startup's product because they lack too many of the 'little' but important details that mature systems offer.

Video surveillance startups tend to rationalize this by arguing, "My new breakthrough saves you $1000 but the minor features I lack only cost you $200," etc. Most buyers, unless their pain is so great in the one area you solve, will not agree even if the printed ROI makes sense. They will decline and delay because the product is 'not ready yet'.

Buyers Reluctant to Buy on Soft Cost Savings

Because video surveillance systems rarely increase revenue, buyers are limited in how they can justify purchasing these systems. The two key areas buyers focus on is reducing operational costs and loss (e.g., theft, shrink, etc.).

The easiest and most reliable way to justify the sale of a product is through reduced hard cost reduction. Specifically, this means products that are cheaper or can reduce the total amount of products bought (e.g., 1 megapixel camera instead of 2 SD cameras). Alternatively, this includes products that have lower daily maintenance costs (e.g., DVRs eliminated the need to change and maintain tapes for VCRs).

Soft costs improvements, like making a facility 'more secure', can be a hard sell. This is even more difficult for the many organizations where crime is rare. Corporate offices are a good example of this. They may have 1 incident per month, making it hard to tell or justify that the new system caused a reduction in crime.

Beware of Pricing Product at Premium When Entering Market

Many, perhaps most, startups charge higher prices that incumbents selling similar products. Startups will justify this because of their novel technology and the higher costs of delivering that technology. Because of lock-in and cost justification challenges described above, this severely handicaps the startup.

Startups will argue that they are targeting the 'early adopters' and are 'profit maximizing'. In reality, this tends to turn off integrators who tend to be reluctant to sell an immature product for more money. Secondly, it makes it hard for most end users to buy because it's beyond their budget.

Worse, I have seen over a dozen startups repeatedly drop their prices or introduce lower priced offerings. Not only is it confusing to the market, it creates a perception of weakness externally and frustration internally.

Startup's Product Price Should be the Same as Incumbents

As a rule of thumb, it's hard for a startup's product to be widely adopted unless it's the same price of the incumbent's. This is partially a function of tight budgets by end users and partially a result of limited cost justifications.

The exception of this is when a startup can eliminate another component (e.g., megapixel eliminates multiple SD cameras, analytics eliminate guards, IP cameras eliminate analog fiber converters, etc.). The problem is that startups almost always over-estimate how much they can eliminate of other system components (e.g, megapixel cameras can eliminate 12 analog cameras, analytics can eliminate 90% of guards, etc.). Buyers perception is much lower than startup companies marketing projections.

The lower the price, especially in the beginning when the startup is battling to break into the market and suffering from the lack of 'little features', the easier it is to get a foothold in the market. As you expand and add more features, you can always increase the price or offer newer product lines with higher prices.

Get Initial Customers with Low Cost or Free Products

It's vitally important that startups build a customer base ASAP. First, it's critical to have a reference base because in a conservative market like security, most buyers do not want to take risks. Secondly, having customers helps to work out the inevitable bugs and deficiencies your products will have. Finally, you can use this to gain free press and develop case studies.

Startups should not worry about under-valuing their products and the expense of giving their product away or selling it for less than cost. This is an important investment that will make it far easier for you sales team and for future customers to approve your products.

IT Will Not Save You

Most video surveillance startups come from a software/IT background. As such, it's understandable that these companies target and hope for IT to make decisions. 

However, the move to IT is slow and disapointing. Cisco has clearly struggled in video surveillance despite Cisco 'controlling' many IT department's buying decisions. If Cisco cannot dominate with their sales and marketing power, there's little hope that your startup can.

This is not to say that I believe IT is unimportant. Simply, IT's role cannot overcome all the other issues - lack of budgets, lock-in to legacy systems, difficulty in justifying increased spending, etc.

Embrace or Ignore the Traditional Channel

Many startups try to simultaneously go through and around the traditional security sales channel. This only creates problems. You should pick one or the other.

The traditional security channel has manufacturers selling to integrators who then sell to end users (this is a simplified model -- reps and distributors also play intermediate roles between manufacturers and integrators). However, in the traditional model, manufacturers do not sell direct to end users, they do not sell to service providers or promote on-line selling.

Security integrators tend to be very protective of their relationships with end users. If they perceive you going around them, they can burn you with the specific end user, or more broadly with their customer base.

Whether you choose the traditional route or not, you should understand the risks and be clear about which one you choose. However, if your financial projections target tens of millions of revenue in the first few years, you almost have to go through the traditional security channel.

Don't Underestimate the Importance of Domain Expertise

It's common for video surveillance startups to have no executives with video surveillance experience. This is highly problematic and results in serious errors and painful course corrections.

The most common tactic is for the startup is to hire a VP of Sales from inside the industry. At this point, it's usually too late. The VP of Sales is there to grow revenue. VP of Sales are generally not experts at marketing or product development and may not appreciate issues with poor product fits. Even if the VP of Sales does recognize it, they do not have the time to fix it. The startup may view this as an excuse and, even if they accept it, product enhancements will take 6-12 months to develop, test and release.

The best solution is for the founders to have expertise when they start designing and developing the product. I'd go so far to say it's better for a potential founder to work for a few years for an existing manufacturer before starting their own company. This way, you are paid to learn the details and issues of the industry rather than burning through your own money to do so. Either way, it's going to take a few years to understand the business well - better to do it while being paid by an incumbent.

Quick Revenue Ramp-Up is Extremely Hard

All of the issues above combine to make it very hard to ramp-up revenue quickly. You frequently hear investors and founders talk about reaching $50 M USD in revenue in 5 years. In video surveillance, this is almost an impossibility. 

"Big" VC Funding Increases Likelihood for Failure

Over the last decade, numerous video surveillance startups have received over $20 M USD in VC investment. The problem is that to justify that investment, investors will be expecting tens of millions of revenue by year 5. However, this is nearly impossible to achieve and will force the startup to take bigger risks that weaken the startup's position.

If you want to pursue the video surveillance market, you are better off with lower expectations to start and steadier growth over a longer time (this is how many significant successes in IP video like Axis, Genetec and Milestone did it).

Security Manufacturers Do Not Pay Premiums for Startups

Startups often hope that incumbents will buy them for significant premiums (10x to 20x their revenue) based on their long term potential and growth prospects.

However, this history of the industry shows that security manufacturers do not this. Most acquistions are asset purchases (Intellivid, Vistascape, Covi, ActivEye, Tident Tek). Even the ones where the startup does better (ExtremeCCTV, Cieffe), the cost is only 1x or 2x revenue.

The incumbent security manufacturers know they have leverage (including customer lock-in) and they are not scared that most startups will disrupt them. Also, most of them have fairly low market capitalizations so it's not feasible for them to pay $50M or $100M USD for a startup (e.g., March Network's valuation is about $100M USD and they bought Cieffe, an IP video startup for $16M USD).

IT Manufacturers Have Not Paid Significant Premiums for Startups

The hope for many video surveillance startups is that a big IT company with a multi-billion dollar valuation will purchase them. Only one company has done this - Cisco with their twin acquisitions (Sypixx and Broadware) and these investment have not become big winners for Cisco.

Maybe IT manufacturers will dive in with big valuations but there is little precedent for it happening and no success yet.

Concluding Recommendations

With these points in mind, here is a summary of key recommendations for startups/investors targeting video surveillance:

  1. Establish modest revenue projections ($10M USD after 5 years)
  2. Do not take more funding than can support those projections
  3. Have domain expertise before launching or as part of the founding team
  4. Worry about getting customers first. Don't worry about premium pricing
  5. Work hard to reduce interoperability problems with existing systems
  6. Be clear and consistent with the channel about how you go to market

1 report cite this report:

Training: Basics for the Video Surveillance Business on May 17, 2010
This report provides a 48 minute video presentation that teaches the basics of the video surveillance business including: Size and structure of...
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