Why Did Funding for Drone Technologies Fall 64% in 2016?

When drones arrived on the scene as a relatively accessible technology that could provide insights and perform tasks from above, several industries, including agriculture, got very excited.

Not only was the technology very cool — it’s a remote control flying robot after all — but the promise it held to bring value and new efficiencies to industries, resulted in a lot of hype. There was talk of drones shooting inputs into the soil autonomously and using imagery to provide real-time crop stress alerts with plenty of time to act.

This came to a head, in agriculture at least, in 2015, when startups identifying agriculture a key sector of focus, raised $326 million in venture capital funding, a whopping 189% increase on the year before.

In 2016, this funding fell 68% on 2015 levels. Some 19startups raised $118 million, according to AgFunder’s 2016 AgTech Investing Report.

In many ways this was unsurprising considering how hot — or possibly even overhyped — the drones space was in 2015. The largest deal that year was DJI’s $75 million Series B followed by 3D Robotics’ $64 million Series C. In 2016, the largest deal was 3D Robotics’ $27 million Series D by comparison and the majority of drone tech deals closed during the year were seed stage (15 out of 25), whereas there was an even split between later stage and seed stage drone tech deals in 2015.

There are a few possible reasons for these dynamics and the dip in funding. But despite this pullback, overall I’m positive about the potential for drones to revolutionize certain aspects of farming.

As Paul Turner, CEO of AgDNA (an AgFunder alumnus) wrote recently on Medium: “Once drones are able to take off autonomously, scan a field, upload data, recharge and continue operation without human intervention — this will be a game changer.”

When they’re able to carry a much heavier payload, with extended battery life and spot apply inputs onto fields (DJI is already doing this, but for small fields in China) and deliver food, that will also be a game-changer.

Here is my take on what’s been going on in drone tech for agriculture (but I’m very open to your suggestions too! Comment below or email me).

Wait and See: It was Too Early for Agriculture

I think it’s safe to say that overall expectations for drones in agriculture have not yet met the hype and this may have pushed some investors to pause in their enthusiasm for the technology in agriculture. It’s also pushed some drone companies to move away from agriculture as a focus industry — AirWare, Skycatch and CyPhy all once appeared to target agriculture, but have now removed the industry from their websites as a focus area.

Below are a few reasons why the technology might not yet be a scalable solution for the industry. Investors might be waiting to see how the below plays out with existing investments before doubling down on those or making new investments in the space.

• Limited battery life — today a commercial drone can fly for around 40 minutes which Paul says can fly up to around 200 acres depending on the type of drone, wind speed, and the flight path. This limits the ability for drones to fly across large expanses of land, and has pushed some precision ag analytics companies to turn to airplane imagery for these large holdings instead.
• Regulations and Autonomy — even if battery life was extended, currently regulations requires that drone pilots always keep the UAV within “visual line of sight” limiting the distances they can cover in one go and the potential for this to become a fully autonomous tool. But even if we didn’t have to have manual operators and line of sight, I’m not sure we’d have software for automating a data collection process. (Do you know where this technology stands today?)
• Image processing and analysis (& rural broadband connectivity) — many solutions relied on the cloud for image uploading or even returning to a PC to upload images and then push through an analytics program to create NDVI maps and alerts. With limited cellular coverage in many agricultural regions, and large distances to travel between fields and the office, farmers and agronomists have complained this became an arduous process that often resulted in too many “pretty pictures” that did not provide timely, actionable insights and therefore were not worth the time and cost. Fixing the infrastructure to bring broadband to remoter agriculture regions will be critical for smart agriculture.
• Limited payload capacity — as mentioned above, The DJI Agras MG-1 is a smart crop-spraying drone, but it can only fly for 12 minutes and carry 10 kg of liquid. This means around 60 acres can be covered per hour, meaning there’s still some way to go before it will be efficient for US farms, which average at 418 acres, but go all the way into the tens of thousands of acres, not to mention other very large farms in countries like Brazil and Australia.

Many of the above issues cause the use of drones, whether by a drones service or by a farmer himself, to be costly time-wise but also monetarily. Some agronomists believes there is some way to go before there’s a clear cost benefit for the industry. (I’ll be delving into how agronomists view drone tech in a future story on AgFunderNews in the coming weeks so stay tuned!).

Technological Cyclicality Driving New Tech, Smaller Deals

Technological innovation often comes in waves and there are bumps in the road between new discoveries. At AgFunder, we believe that we are now looking at the second wave of venture capital-backed agtech startups. These startups are building on the experiences of those before them, iterating and improving on previous solutions across the agtech spectrum. But they’re also at the start of their journeys and therefore raising smaller, earlier stage rounds than their more mature predecessors were in 2015.

A relatively new technology in 2015, many drones companies were building their own UAVs for the purpose of imaging fields. They had to build a full-stack solution just to deliver an MVP (minimum viable product) to their customers: hardware, operating systems, software applications, and communication systems. Spreading their limited resources too thin they were not always able to deliver on the promises of the technology.

Now, with the commoditization and resulting drop in costs of the actual unmanned aerial systems, drone tech startups are focusing on improving the various constituent parts of providing value to farmers; they’re specializing and can piece together the hardware and services from other providers and focus their resources on building solutions that satisfy customers.

First there were drones manufacturers like DJI, which manufactured UAV hardware technology and placed a generic camera on it to collect data. Next came DroneDeploy, an operating system designed to help drone pilots operate and offer some basic analytics of the imagery. Today we have Gamaya, which has built a hyperspectral camera to attach to drones for increased resolution, and IntelinAir, which is using machine learning to analyze third party drone imagery through an application.

(Read more about this second wave of drone tech in my article on AgFunderNews here.)

These younger startups are all at the beginning of their journeys and therefore raising smaller amounts than their more mature counterparts were in 2015. The average drone tech deal was $9 million in 2016 compared to $6 million in 2015.

General Venture Capital Funding Pullback

Funding for agriculture technology fell overall in 2016 reflecting the pullback in the broader venture capital markets, despite deal activity rising. We attribute this to increased investor caution, particularly around valuations that many venture capitalists argues were overheating in 2015 across industries. There’s no reason to think drone technologies were immune to this overall pullback, and bearing in mind the above limitations of the first wave of technologies, it’s very likely they were valuing them more cautiously in 2016 than in 2015 as they wait to see how the technology proves itself out.

These are some thoughts on why funding fell so dramatically. Please let me know your thoughts. Also do take a look at my story on AgFunderNews for a more in-depth look at the next wave of drone technology for agriculture and the startups leading the pack.