Risks of Video Surveillance StartupsBy: John Honovich, Published on Jul 10, 2009
In discussions with video surveillance startups and investors, both routinely over-estimate the size and the potential of the video surveillance market. This increases risk of integrators/end users to be stuck with end of life products as startups fail.
The main risk is over-funding video surveillance companies resulting from infeasible growth/revenue targets. While startups focus on how big the video surveillance market is, the most important issue is how large any particular company can likely become. In video surveillance, a manufacturer that generates $10-20M USD annual revenue is already quite large. It's difficult to exceed that revenue level and only a few dozen companies globally it. Even the most successful video surveillance startup of the last decade (Axis) only generates about $250 M USD annual revenue. Arguably the next largest is Mobotix and their 2008 annual revenue was about $40 M USD.
Video surveillance startups that require tens of millions of startup capital have to become one of the biggest companies ($30M+ USD annual revenue) in the industry in a very short of period in order to justify their investments. In a fragmented market like video surveillance, this is extremely hard to do, especially since incumbents are developing competitive products (IP, analytics, etc.). The other alternative is an acquisition that pays out $50-100M USD for the startup despite low revenue. Outside of the Cisco acquisitions a few years ago, this is not happening. March bought Cieffe for about $16M USD, Honeywell bought ActiveEye and Siemens bought Vistascape for less than the amount invested in it.
The risk for integrators and end users is getting stuck with discontinued or abandoned products. Because of this systematic over-estimation, the risk is high.
Whenever I talk with video surveillance startups, I urge them to focus on funding and growth that allows them to be successful at no more than $10-20M USD in revenue, a realistic target that will force them to limit burn rate.