Investments in the Industrial Internet of Things are slowing down as the industry enters the so-called “trough of disillusionment,” according to the “IoT State of the Union 2016” study released by Wing Venture Capital Wednesday.

Still, proponents of the Industrial Internet shouldn’t be too disheartened, the study’s authors say, as “grassroots entrepreneurial activity still appears moderately healthy” despite the apparent slowdown. Instead, the study says the current state of investment in the Industrial IoT can be likened to electricity industry back in the early 1990s.

“We can see the potential of this new wave, but only a small fraction of things are currently connected to the Internet and the pace of change has been slower than many would like,” the report’s authors note. “That’s reflected in recent negative media headlines, which echo a view that the IoT has been overhyped and has under-delivered.”

There are plenty of signs to suggest things will pick up again soon, the study claims. It points out that most industrial and enterprise IoT startups have demonstrated a swift return on investment for customers that leverage predictive analytics for applications like maximizing capacity utilization or minimizing downtime on the factor floor.

What’s not clear is when Industrial IoT technology will extend to other sectors besides the factory floor, as there is contrasting evidence of its uptake elsewhere. On the one hand, the startup accelerator Techstars reported a twofold increase in IoT applications between 2014 and 2016, while GitHub code repositories that use “IoT” as a keyword are on track to double by the end of this year. Despite this, the study found that the rate of growth in IoT investments seems to be slowing down.

“It will be interesting to see if signs of an overall slowdown in grassroots activity become more pronounced in 2017,” the authors wrote.

One reason for optimism is that the number of mergers and acquisitions in the Industrial IoT space totaling more than $200 million are on pace to increase this year. One of the biggest deals this year includes Cisco Systems Inc.’s $1.4 billion cash buy of Jasper Technologies Inc., which builds IoT connectivity management products. A second major deal saw water supply technology provider Xylem Inc. snap up Sensus, which builds smart water meters, for $1.7 billion last August.

Referencing Gartner Inc.’s famous “Hype Cycle,” the report’s authors concluded that the Industrial IoT sector has passed through the second “peak of inflated expectations” cycle and was now moving into the third cycle, which is the notorious “trough of disillusionment” during which a lot of negative sentiments are felt. The study notes that recent, well-publicized Industrial IoT security incidents like the recent denial-of-service attack in October have only fueled this perception.

Gartner’s “hype cycle”

The report also points out the need for greater interoperability in the Industrial IoT before the technology makes its way to the “plateau of productivity,” where it finally becomes mainstream.

Main image credit: Scott Norris via flickr.com