John Mack at CONNECTIONS: AI, M&A and the Future of the Connected Home
Key Highlights
- The security and safety sector is seeing M&A activity at levels not seen in 25 years, driven by record private equity dry powder and corporate cash on balance sheets actively seeking deployment.
- AI is creating measurable revenue impact, with companies like SimpliSafe seeing roughly 30% of new customers choosing premium video monitoring packages that nearly double average revenue per user.
- Investors are focused on real metrics, specifically cash-flow-positive growth and the Rule of 40, and have little patience for companies pitching future profitability without the numbers to support it.
Investor interest in the connected home and security sector is running at levels John Mack says he has not seen in 25 years. Mack, managing director and sector co-head of Security & Safety at Raymond James, says a convergence of factors is driving that momentum: record amounts of private equity dry powder, corporate balance sheets flush with cash, and a growing recognition that hardware-anchored businesses with AI-enabled services represent a compelling investment thesis.
Mack shared those observations during a keynote presentation at Parks Associates’ recent CONNECTIONS conference in Santa Clara, Calif., where he outlined how investors are evaluating AI-driven security and connected home companies, what valuation metrics they are focused on, and where he sees the industry heading.
The M&A climate is unusually active
Mack opened with the macro picture. Despite the war in Iran disrupting global energy supply, credit markets have held up better than most expected. Growth has moderated slightly, the Fed has not eased and interest rates remain elevated, yet M&A activity has not slowed down the way it typically would under those conditions.
“The market’s gotten used to where the cost of capital is today,” Mack said.
What is driving deal activity, he explained, is the sheer amount of capital sitting on the sidelines. Private equity firms are sitting on somewhere between one and two trillion dollars in uninvested capital. Corporate balance sheets are carrying roughly eight trillion dollars globally, a substantial chunk of which is concentrated in just a handful of major U.S. companies. All of that money has to go somewhere: back to shareholders through buybacks and dividends, into organic growth, or into acquisitions, and that dynamic is pushing valuations up across the board.
In the security and safety sector specifically, Mack said deal activity is as strong as he and his colleagues have seen it in 25 years. His annual security investor conference, which he once had to work hard to populate with private equity attendees, drew over a hundred PE participants this year — and he had to cap attendance.
Hardware is having a moment
Mack pointed to a meaningful shift in how investors are now talking about hardware-driven business models.
For years, when he and his industry colleagues pitched the security and smart home sector to investors, they kept running into the same response: “We don’t want hardware businesses. We want software businesses with high margins and recurring revenue.” The argument that hardware could serve as a solid foundation for recurring revenue rarely gained traction.
Now investors are calling him asking about hardware-anchored models. Mack said people are worried about SaaS pullbacks and AI disintermediating software businesses, and they want business models with a strong physical foundation driving the core service. “Hardware is sexy,” he said, adding it would have been a strange thing to say even a year ago.
His point was straightforward: you cannot do video surveillance without a sensor, and you cannot automate door access without a physical device. The hardware creates the entry point, the customer relationship and the platform for services. Companies that have built recurring revenue on top of that foundation are now drawing serious investor interest.
AI is showing up in valuation, if the results are real
Mack walked through several concrete examples of companies using AI to change what their products can do and what customers will pay for them.
Alarm.com's outdoor cameras offer a concrete example of AI in action. The cameras can now detect an intruder, verbally confront them, identify them by description and escalate to dispatch.
SimpliSafe, which was acquired by GTCR last year in a multibillion-dollar deal, offers another example of AI expanding revenue. The company has built a perimeter security offering that upgrades the average customer from roughly $20 to $30 per month to $60 to $80 per month when video monitoring is included. Mack also pointed to Vivint, which has a significant effort underway to use AI to deliver better customer service outcomes than live operators alone can provide.
Vivint is taking a different approach, with Mack pointing to a significant effort underway to use AI to deliver better customer service outcomes than live operators alone can provide.
The through-line across these examples: AI is enabling companies to move security from the interior of the home to the perimeter, offer more proactive services rather than reactive ones and command higher prices in the process.
“I don’t want to know my motion detector has been activated in my living room,” Mack said. “That’s a bad outcome. I want to know the camera on the fence line has been activated and I can confront them before they ever get in.”
The convergence of physical and cyber security
One trend Mack flagged as not getting enough attention is the intersection of physical security devices and cybersecurity risk. Citing a CrowdStrike report from a few years back, he noted that IoT-enabled physical security devices represent upward of 30% of the vulnerability points across an enterprise.
He said the industry has not done a good enough job hardening those devices against cyber threats, and that the imperative to address it is growing on both the consumer and business side.
What investors are actually scoring
When asked about the gap between what companies think they are worth and what investors are willing to pay, Mack said companies doing the right things do not have a valuation disconnect. Those that do, in his view, have business model elements that are not fundamentally attractive, whether they recognize it or not.
He used the Rule of 40 as his framework, a metric where a company’s growth rate plus its EBITDA margin should sum to at least 40. A company growing at 30% with 10% EBITDA margins hits that threshold and tends to command strong valuations. In 2021, the market was paying huge premiums for companies with 60% growth and negative cash flow. That era is over.
“The market has corrected dramatically from 2021,” Mack said. “People are looking for cash-flow-positive growth.”
Companies struggling with valuation today, he said, are the ones pitching future profitability without the metrics to back it up.
The customer acquisition problem persists
Another audience question surfaced a persistent issue: customer acquisition costs and the long-running pattern, particularly on the residential side, of spending too much to create customers whose lifetime value does not justify the investment.
Mack said this dynamic has left real problems in the industry. Companies gave away hardware, ran expensive promotional pricing, and watched attrition erode the economics before the investment was ever recovered. He said investors have not forgotten it.
He pushed back, though, on the idea that any upfront investment in customer creation is a red flag. The distinction is discipline. SimpliSafe and Arlo are both examples of companies that invest to acquire customers, and in Arlo's case essentially give away cameras, but both are disciplined about tracking what they spend against the lifetime value of the customer. SimpliSafe grew to a multi-billion dollar exit under that model. Arlo has scaled to nearly $350 million in annual recurring revenue.
“Are there models where you can invest and create a negative cash flow event to create the customer and then earn it back? Absolutely,” Mack said. “But what we saw in the drunken sailor era five to 10 years ago is something we never want to come back to.”
The bigger picture: A home that manages itself
Mack closed with his longer-term view on where the connected home is heading. He said he thinks the timeline for a fully autonomous home is shorter than many people project, and that the home will essentially manage itself.
His example: the home tells you it ordered a new water heater and scheduled the installation for when you are out of town, without you ever having to think about it. Extrapolate that to every major system in a home and the scale of the opportunity becomes clear.
With over 100 million dwelling units in the U.S. alone, the installed base for that kind of transformation is large. Mack said companies that can build the sensor networks, the AI intelligence, and the service ecosystem to deliver on that vision will be in a strong position to create value.
“Will companies who can help to create that ecosystem have an opportunity to create some good value?” Mack asked. “Yeah.”
About the Author
Rodney Bosch
Editor-in-Chief/SecurityInfoWatch.com
Rodney Bosch is the Editor-in-Chief of SecurityInfoWatch.com. He has covered the security industry since 2006 for multiple major security publications. Reach him at [email protected].