Cities are already smart, just not connected. It's here that there is a big opportunity for CVC investors to get involved.

So-called “smart cities” are having a moment. A growing number of them are popping up around the world, such as Toyota’s Woven City, a new urban hub at the foot of Japan’s Mt. Fuji, which is being built from the ground up as a cohesive smart city and which will serve as a future test bed for technologies, particularly in mobility.

Others include Saudi Arabia’s NEOM (and The Line project being built within it), and California Forever – a new walkable city in California’s Solano County, which is being bankrolled by numerous prominent Silicon Valley investors. Thailand last year unveiled plans to establish over 100 smart cities over the next few years. Similar projects are springing up in places like Accra with Hope City, and even to a smaller, neighbourhood-scale smart city projects like Vision City in Kigali.

The obsession with cities is understandable. Over half the planet’s population lives in cities, and that number is only going up. Over 80% of the world’s GDP comes from cities, according to the World Bank, and the world’s urban population is set to double by 2050 when seven out of 10 people will live in them.

“Cities are already smart. Just not connected.”

Nicole LeBlanc, Woven Capital

It is also a growing area of interest for corporate investors. While few CVC’s have gone as all-in as Woven with an explicit tie to a specific smart city, many corporate are backing technologies that are relevant for a smarter built environment. This includes backing technologies like eVTOL (JetBlue Ventures, Geely Automobile, NEOM Energy), smart EV charging or autonomous vehicle technology (BP Ventures, InMotion Ventures), smart buildings (JLL Spark, JCI Ventures).

The smart city challenge: who owns the infrastructure layer?

The thing about cities, however, is that they’re not one entity but a collection of moving parts. Even if you introduce a piece of technology in one place, it will not necessarily mean it’ll be adopted widely. What defines a smart city is the ability to connect everything into a cohesive, sustainable ecosystem.

“Cities are already smart – they’re full of technology, it’s just not connected. So when I talk about smart cities, I say smart and connected cities,” says Nicole LeBlanc, partner at car manufacturer Toyota’s growth-stage investment arm, Woven Capital.

Beyond that, nailing down a precise definition of smart cities technology is not simple. The range of technologies that fall under that banner is wide – Internet of Things (IoT), smart energy management systems, big data analytics, intelligent transportation, 5G, urban mobility, digital twins and just about anything else that makes life more convenient, connected and sustainable.

Who manages it? Who maintains it? Who’s in charge of governance?

Nicole LeBlanc

Flying taxis, responsive grid-scale batteries, clever thermostats, smart streetlights, digital wallets and fancy waste management systems all fall into the same eclectic bucket.

The name of the game is simple: make life easier for people. Can’t get to work on time because of traffic or bad public transport? Are energy prices too high? Not getting a mobile signal underground? Is your neighbourhood unsafe? Do you not have enough interaction with your government? All of these have potentially lucrative solutions.

“There’s solving today’s problem, and then once you solve that problem, there’s all the other opportunities that can come with it,” says LeBlanc. “It’s about assessing the whole value chain and where the opportunity is now and where the opportunities will come from.”

The trouble is these tend to be high-capex technologies, which cities can’t necessarily fund themselves amid budget constraints, and while these are all fine by themselves, only become more than the sum of their parts when they can be integrated as part of a larger ecosystem. It requires a strong underlying digital infrastructure layer connecting myriad disparate pieces of hardware made by disparate parties.

“The question is who owns [the digital infrastructure layer]? Who manages it? Who maintains it? Who’s in charge of governance? Who owns the data? That answer hasn’t been determined yet,” says LeBlanc.

It’s akin to electric vehicle charging points – widespread charging networks would be an integral part of future urban areas, but will it be a Tesla-type company owning them or will the cities themselves have some control? Will the standard charging model be moulded by market forces or will the public sector step in to standardise across the entire category?

Rendering of Woven City

No love for cities?

Some investors may shy away from putting money behind startups focused on smart cities due to a perception that they’d be selling to a municipal or public sector customer – meaning that decisions may get bogged down in bureaucracy and drawn out through long procurement processes. But there’s no shortage of scope for solutions that don’t need municipal involvement.

“Maybe the city has to be a core decision maker [for some technologies], but maybe it’s about just energy or housing or transportation. These are unregulated problems that can be solved without actually having to get formal approval from the city itself,” says LeBlanc.

Even if you’re not selling to the city, you should be engaging them.

Nicole LeBlanc

Even if you’re hesitant to invest in a startup that sells to a public sector customer, however, avoiding interaction with municipalities altogether would be a mistake. They will, after all, be a major stakeholder, and can provide a lot of input into the product you’re trying to build.

“Cities want to be involved in these discussions. Even if you’re not selling to the city, you should be engaging them. They’re really smart people who do this day in and day out.”

Rendering of California Forever

City officials would have their own problems to overcome, chief of which is the integration challenge, and the general lack of a unified platform to oversee everything – tech made by different companies may not fit well together, preventing it from functioning to its potential, and different municipalities may have different regulatory expectations that make it difficult for a smart city strategy to align across the board.

Even in a “good” scenario, where a technology provider has a solution that would make a real impact, public sector contracts tend to be sticky and they run the risk of over-reliance on a particular vendor which, coupled with the risk of technological obsolescence, can see outdated technology overstay its welcome.  

What they can certainly do, though, is remove barriers and kickstart strategic roadmaps for others to make waves. Singapore is widely regarded as the “smartest” city today – and, as a city-state, can call itself a smart nation – but the likes of London, Barcelona, Helsinki, Amsterdam, and many others also have ambitious smart cities programmes in place.

Efficiency or innovation?

How you’re able to make cities “smarter” also depends on where you are in the world. The flow of data is central to the idea of a smart city – more connectivity means more data flying around, and how that data is governed will determine what can get done and when.

Centrally-planned economies, for example, will be able to get things off the ground efficiently and cohesively, albeit largely at the expense of data privacy and innovation. In more western cities, where data privacy is a bigger public concern, things are likely to move slower even if the environment is more conducive to innovation.

Rendering of The Line

Ultimately, the development of any “smart” ecosystem will depend on the city itself, which holds the power of the framer. “The city’s the decision maker because they’re the ones that make the regulation. They’re the ones that decide what can and can’t be done,” says LeBlanc.

This is one area where having corporate backing can really make a difference, particularly large multinationals with plenty of experience navigating governments and regulatory hurdles. Any startup that wants investment from a VC will have to have a very clear idea of what the regulatory landscape looks like, and ideally will also have the built-in flexibility to dodge regulatory bullets.

For LeBlanc, who has previously held posts in sovereign wealth funds and financial VCs, the corporate resources that can be brought to bear make a real difference.

“The reason I came to Toyota is because I really enjoy having the expertise in-house that comes with being part of the CVC.”

Fernando Moncada Rivera

Fernando Moncada Rivera is a reporter at Global Corporate Venturing and also host of the CVC Unplugged podcast.