How Startups Can Be Invited to the Big IoT Party Small businesses need the right game plan if they hope to compete in the IoT space.

The Internet of Things (IoT) is billed as a multitrillion-dollar party, and thousands of startups are knocking on the door. But, who will be let in and invited to stay?

In my experience, too many startups are locked out of IoT because they show up with the wrong game plan. So, how do you open the door of the IoT opportunity? The first step is to throw assumptions and principles that worked in the previous technology waves out the window.

The disconnect started a few years ago. IoT hype accelerated after Google bought Nest and Gartner placed IoT at the top of its hype cycle for two years running. IoT became the hottest ticket on the planet as new IoT tradeshows and media outlets attracted a global influx of startups aligning themselves to this market transition. In fact, according to Angel List, the number of business-to-business IoT startups soared more than six-fold between 2013 and 2015 -- from 127 to 940.

Related: The Next Big Opportunity for Tech Entrepreneurs? 'Smart' Homes.

Understand your place to play.

Initially, many of these startups presented themselves as horizontal IoT platform companies -- providing broad capabilities that enable IoT applications across all kinds of industries. They followed the recipe that worked in technology before IoT: Develop a horizontal value proposition or find a way to attract millions of users to your platform. They tried to appeal to multiple industrial segments or masses of consumers by making "middleware" that connects various sensors -- often-proprietary devices specialized in a particular application and industry -- and other end devices. For a while, the onslaught of these IoT startups was so great that I stopped meeting with them all together. Unfortunately, many soon discovered that they were stuck in a no-man's land: They did not have differentiated horizontal offerings, and they lacked vertical market expertise. So, where was their place to play?

Startups viewing IoT as a new horizontal market must adjust to new realities. IoT changes the established technology paradigm. The typical vertical markets associated with IoT applications include industrial segments such as manufacturing, transportation, oil and gas, and mining, as well as other markets such as agriculture, retail, insurance, healthcare, education and smart cities. Each of these huge markets has many submarkets, and even within each submarket there are many overlapping, often long-standing ecosystems. For example, think of car manufacturers in Europe versus the United States; each has its own vocabulary, technologies, supply chain and challenges. With few exceptions, IoT deployments are in "brownfield" environments, where innovations have to coexist with legacy technologies and processes. What all these submarkets have in common are their business challenges, the need for business-driven solutions and the desire to improve operational performance while generating new revenue streams.

Related: How the Internet of Things Inspired a New Startup Niche

Know your customer.

As a result, my first guidance to startups is to make sure you have a deep understanding of your customer's industry, priorities and business challenges. And specifically, you need to understand your customer's role within the company: Is she responsible for line-of-business (LoB) decisions? Does he manage IT? Are they driving advanced research, or driving the business? Do they own the budget to deploy the solution in production? Customers no longer have the time or patience for technology experiments.

A few years ago, I chatted with the person in charge of oil field operations for a major oil and gas company. I wanted to talk about solutions, but he saw my company as just an infrastructure provider and directed me to work with one of his system integrators if I wanted to become part of the solution he would consider buying. Amazingly, he did agree to meet with me for a follow-up conversation. This time, I brought along an industry expert, and the conversation ended quite differently. The oil executive was now raving about how we understood his business problems, how we had answers to his top priorities, and how we spoke the same language.

Related: How to Make Your First IoT Product a Great One

The lesson here is to step outside of the traditional role of a technology company that sells to IT, service providers, or consumers. The goal of IoT is to address the specific care-abouts of LoB decision makers in specific vertical markets. More and more, LoB executives are the ones making technology purchase decisions. In fact, 70 percent of customers who visit Cisco's customer experience centers are LoB leaders.

Choose your path to success.

How do you get access to this major technology-buying center? You have two options:

1. Take a horizontal approach and partner for vertical expertise. Develop a differentiated horizontal module that can fit into vertical solutions. Your module could address security, connectivity, real-time analytics, visualization or any other broad IoT capability. Build relationships with large horizontal players who have vertical ecosystems, or work directly with vertical players to get your module designed into vertical solutions. That way, you don't have to become a vertical expert in order to sell into vertical markets. You can focus on developing the best horizontal technology based on input from your partners and their customers.

2. Alternatively, you can go deep into one market segment. Focus on one use case in one market or sub market. Perhaps you have a remote asset management solution for oil and gas. Or predictive maintenance software for mining equipment. The key to success in this scenario is to build deep relationships with customers and truly understand their industry and their business -- from history to technologies, regulations, culture and organizational constraints. Don't think that you have to have a broad reach to be successful. Many industry submarkets have huge total addressable markets. Thus, you can focus on one or two use cases in one or two vertical segments and build a successful business.

Related: 9 Examples of How the Internet of Things Is Already Disrupting Just About Everything

Don't go it alone.

Both of these options require one more thing -- and it's one of the basic tenets of working in IoT: Know your unique role in the larger partner ecosystem. No company today can go it alone at the IoT party. It's like a swing dance where you constantly change partners depending on the project. You'll need to partner with vertical players, horizontal solution providers, global vendors and other startups. Companies that try to do it all may find themselves as a party of one.

And because your platform must interoperate flawlessly with other parts of the solution, you will have to work closely with key standards bodies and industry consortia. Traditionally, sensors, actuators and other sources of IoT data all operate under different proprietary protocols. However, the industry is now working to standardize interfaces, formats, and foundational data fields. For example, they are establishing uniform ways to express "temperature" or "pressure" values -- so that if a drill bit is running too hot, the system can understand that and send an alert. This sort of basic interoperability is critical to fit your horizontal module or vertical capability into a comprehensive IoT solution.

And that's it. Once you pick the option you want to follow and build your partner ecosystem, the door will open. Welcome to the IoT party.