2016 has been a transformative year for the security industry so far, which continues to grow and innovate — due in part to the impressive gains video surveillance technology. Investors and lenders are paying close attention to advances in this quickly evolving segment and are looking for ways to capitalize on the talent and innovation that continues to set the security industry apart.
For security companies, this presents an opportunity to think bigger and make strategic moves into new services and markets; however, before you decide to change up or expand your business model, it is critical to understand what investors and lenders are focused on, and how you can evolve your strategy to attract investment and financing dollars to fuel your growth.
Video Powering Growth
First, a closer look at the numbers. A Capital One survey of security system professionals last year found that 85 percent of respondents expect improved financial performance in the security sector. Video monitoring — and Video Surveillance-as-a-service (VSaaS) business models in particular — will likely continue to be a stand-out segment.
Global market consultant IHS, Inc. predicts that VSaaS, from a small base, could grow at 17 to 18 percent for the five-year period ending in 2019, while access control as a cloud service could grow at 20 to 21 percent. This makes video one of the fastest-growing segments in the industry.
What’s driving the strong gains, and are they sustainable? Growth across the security industry has accelerated due to a combination of factors including major advances in technology and business model changes resulting from those advances.
With new video technologies, companies can offer commercial clients more ways to customize applications and analytics. These new capabilities are revolutionizing the security industry, strengthening traditional monitoring and offering valuable consumer insights. As technology has improved, analytic solutions have become more affordable, more efficient and more effective. As a result, more security companies have access to the video space than ever before.
Companies are also overcoming resistance to moving to the cloud, enabling the security industry to offer them a new universe of cloud-based video services that extend far beyond providing a recording device on location. While the cameras need to be situated onsite, much of the data and information can live in the cloud. With recent advances in compression technology, uploading and downloading high-resolution streams is becoming faster and easier, and so is storage, search and retrieval.
Thanks to these new technologies, companies are transforming their business models to broaden their offerings and gain a fuller picture of their commercial clients’ businesses. They are able to deliver more sophisticated data and analytics that are helping these companies not only update their security processes but also sharpen their customer insights and business strategies.
For example, companies such as a fast-food restaurant or retail business can leverage video surveillance to enhance loss prevention, compliance and safety. Are servers adhering to proper procedures when they prepare and serve meals? Are they taking the right precautions when they serve steaming hot coffee? Are they charging customers the right amounts for the food the customers receive?
Businesses can also capitalize on insights from video surveillance to gauge customer appetites for new products. Instead of simply trying out a new food offering and tracking sales, the same restaurant can add a new, “smart” dimension to a product pilot by monitoring (through video) which customers are buying what products in what location at what time of day – all information that is easily available and searchable through new cloud video technology and analytics.
VSaaS and Company Valuation
The opportunities and applications for VSaaS are promising, and many investors and lenders are keeping a close eye on this segment of the market. As more companies rush to take advantage of these services, VSaaS providers are generating higher margins and lower client attrition.
At Capital One, we are focused on four major trends — developments that we believe will have a critical impact on investment and financing activity in the entire security industry over the next several years:
- Traditional guard (or manned guard) businesses are starting to invest more in video. They are not necessarily viewing it as a way to replace their guard force; instead to supplement and enhance the services that guards provide. Video surveillance capabilities will allow these companies to get guards into more places than ever before, which in turn will allow VSaaS companies to upsell their services, further strengthen their profit margins and scale.
- Managed video services are now able to create a long-term recurring revenue stream, as opposed to a one-time sale of equipment. This has game-changing implications for VSaaS providers over time. Contractual terms are also evolving as the VSaaS segment grows. Advance rates for monitored video services contracts, historically lower than most other security services, have started to increase, as margins have become more comparable to alarm monitoring, for example, and contracts have incorporated standardized terms.
- Access control providers are also becoming more interested in video surveillance, and for good reason. These companies realize that video will enable them to expand their business models and offer new services and analytics. As a result, many access control companies are moving to the cloud and layering on cloud-based video solutions. Right now, they are mostly buying capabilities from the VSaaS companies outright vs. forming a supplier/partner relationship; however, as the industry evolves, the relationships and business models may change shape as well.
- Private equity is getting into the game. As VSaaS companies grow in size, they are generating greater interest from larger and more sophisticated investors, such as private equity firms. The influx of private equity money raises the stakes — and the competition — across the video segment and the entire security industry, potentially driving up the value of companies and funding the next generation of technologies and innovation.
Take Advantage
How can your security business take advantage of this new “age of opportunity” in the industry? The first step is to explore how new technologies and other advances in the security sector can benefit your company, and enable you to play in a much bigger space. As a lender, our team works closely with borrowers to provide financing to build out your business model and capabilities so your company can reach its full potential.
Given the pace of innovation within the sector
If your security business is not involved in VSaaS, investigate the opportunity. If you are in the video space, think about how you can go deeper and broader to capitalize on the growing demand before your competition gets there.
If you are exploring ways to finance your expansion, look for a financing company or investor that knows the security industry and understands the nuances of new and emerging technologies — including what investments you need to make to benefit from them, and how these technology advances will shape the video segment and the entire security industry in the coming years.
John Robuck is Managing Director of the Security Finance lending practice within Capital One Bank's Commercial and Specialty Finance business. Request more information about Capital One at www.securityinfowatch.com/12070948.
