AWS Lambda, a serverless computing service by Amazon Web Services, has gained popularity due to its scalability, cost efficiency, and ease of management. Combining AWS Lambda with TimescaleDB, an open-source time-series database built on PostgreSQL, offers a robust solution for managing IoT data pipelines. This integration allows developers to focus on application logic rather than infrastructure management. To set up the integration, create a Lambda function, install necessary libraries, use Lambda layers for dependency management, and store sensitive information in environment variables. Best practices include efficient data processing techniques, monitoring and logging with AWS CloudWatch, and security considerations such as using IAM roles and encrypting sensitive data.