How should IoT startups protect their intellectual property?

You need to identify your value, is it in the (unique) sensors, the datastream you collect, the analytics provided, or coverage? If patent infringement is a big worry, there are insurance schemes (their value needs to be assessed separately). but there are other ways to protect IP like trade-secrets on the cloud server, copyright over the database, establishing strong partnerships and best of all, delivering a service so superior that an incumbent would rather buy you out than to duplicate. See https://groups.google.com/d/msg/openfrog/8uiken0c-y8/Nrpsw-5zAwAJ for commentary on a real case example where AirBnB could be a co-opetitor.

If you have an invention that is unique and not obvious to a person having ordinary skill in the art, you should consider patenting it. If there is a way to implement the invention in your product without the customers and competitors knowing it is there, you could also consider keeping it as a trade secret. Ideally your product would contain a few different inventions, some patented, some kept as trade secret.
If a VC (not a mere angel) is truly interested in investing in your company, then you shouldn't worry about the cost of defending your IP. If your patent is strong and valuable, then the VC should be willing to back you up. That's why he invested in you in the first place.
You need to develop a patenting strategy. In which countries do you need the protection? What is it going to cost you? E.g. if you plan to patent just in the US, a patent may cost you $20-25k from the moment you start talking with a patent firm until the moment it is granted. Will the patent firm give you a somewhat fixed price? Under what circumstance could it change anyway? You need to budget your stuff for your VC. It is a lot of money, but then the patent portfolio might ultimately determine the value of your startup.
I haven't spoken about IoT. Even though my own company designs ICs for IoT, and I'm a patent agent, I have not filed any IoT related patents. I would if I saw we had something unique beyond the capability to perform ultra-low-power designs, and I will for every ultra-low-power technique we will invent. Contact me if you want to talk more (at ICSWpatents.com).