Investment Opportunities in Commercial Drones

From 300 drones flying in formation to promote the new Wonder Woman movie to crop health monitoring, drone technology is now ubiquitous and naturally, attracts investors’ interest. In the US alone, 181 VC investors already participated in 82 deals in 2017 representing $1.2 billion; a new all-time high. This technology’s future seems bright as Gartner estimate the global civil market revenue (personal and commercial drones) to reach $6 billion this year and almost double by 2020. In 2016, while commercial drone represented only 5% of the 2.1 million units sold in the civil market, it made up 62% of the $4.5 billion revenue.

From shooting terrorists to shooting holiday pictures

Reginald L. Denny and Walter H. Righter are considered the fathers of today’s Unmanned Aerial Vehicle (UAV) industry. In 1935, they built the first radio controlled pilotless target aircraft for gunnery training. More recently, Abe Karem created the robotic plane known as the Predator in 2001. Just like the internet and GPS before, the first applications of drones were military before reaching the mass market.

But how did multi-million dollar military drones evolve into a mass market flying toy? This is mostly due to the declining cost of drone components. In the 2000s, the smartphone industry had a profound impact on core components used in todays’ drones. For example, sensors, microcontrollers and batteries have seen their price considerably decrease while their performance got better.

The first ‘low-cost’ drones were born within DIY communities in 2007, the same year as the first iPhone. In 2010, Parrot released the AR.Drone, one of the first mass market drones which sold over half a million units within its first 3 years.

Success made in China

These drones were quickly mounted with a camera allowing hobbyists to take pictures and videos from the sky. In January 2013, the first Phantom from DJI was released which challenged the ‘Made in China’ stereotype with a distinctive design and a reliable product. Along the way, other companies started building quadcopters for the consumer market but most of them could not compete with DJI. Over the last 10 months, GoPro fired 270 employees after the difficult launch of its Karma drone, Lily robotics raised $34 million in pre-orders but went bankrupt as they overpromised on their technology, Yuneec received a $60 million investment from Intel but then laid off half of its employees because of sales setback, and Parrot had to fire 300 employees due to the €137 million loss of its consumer drone activity.

That said, consumer drone adoption has been limited by several factors; price point remains high, controls are not intuitive for a beginner, and regulations often prohibit flying within cities or over crowded areas. It would also be difficult for a new entrant to differentiate and live alongside the behemoth that is DJI with its 70% market share, 1500 employees working in R&D, and $1.5 billion revenue in 2016. Companies like SkyCatch or 3D Robotics (the most drone funded company with ~$180 million raised) that were once building drones have now partnered with DJI for the hardware to focus on the software.

Mapping high towers or killing insects

While personal drones can be used for commercial purposes like real estate photography, they are not designed for longer flight times or higher payload, and lack high-value functions such as mapping, delivery or inspection.

Commercial drones don’t sell because they look cool, they do because they improve efficiency and safety at a lower cost than traditional means. The two main sectors that seem the most promising for commercial drone operators are construction and agricultural, which are the least digitised industries given their relatively slow adoption of technology. Goldman Sachs estimates that the total addressable market for drones is $11 billion in the construction industry and $6 billion in the agricultural industry. Last mile delivery does attract lots of media attention but seems to be less of an opportunity in terms of investment — mostly due to regulatory constraints and limited payload capacity.

There are three main components that make drones a complete commercial solution: the drone itself, the sensors capturing the data and the software analysing and interpreting this data.

Flyability’s indoor inspection drone

Several companies innovate on the drone itself. Israeli drone-in-a-box Airobotics, French tethered drone Elistair, Swiss collision-proof drone Flyability, American delivery drone station Matternet, Canadian small and long endurance drone SkyX, Dutch drone converting wind into green energy Ampyx Power, and so many more. That said, DJI will very likely own a large share of that segment and leverage its scale effect to leave only small niches to other players. In order for hardware-centric firms to survive, they will need a strong IP, a clear go-to-market strategy and robust unit economics.

In terms of sensors, there is limited value in embedded sensors (accelerometers, inertial measurement, tilt sensors, etc) which improve the drone stability and autonomy. Additional sensor, or payload, are used to capture the data which will be analysed. While a simple camera is used for photogrammetry (3D mapping), other applications require specific data and therefore, specific sensors like image, light, heat, sound and magnetic. For example, hyperspectral cameras measure the light reflected by plants for agriculture purpose to detect crop health while thermal cameras are being used for search and rescue, surveillance or inspection purpose. The main challenges are making reliable use of a sensor on a small, unstable, fast moving device, and integrating a suite of sensors on a single device to provide a comprehensive and highly valuable view to the user.

Drones are powerful assets capable of gathering large amounts of data from above at a smaller cost than airplanes and more accurately than satellites. But they represent an economic opportunity only if they are combined with a software layer to transform this data into actionable insights. In the case of agriculture, the software can interpret hyperspectral data and provide information to the farmer to optimise fertiliser or pesticide distribution. Other software companies like Pix4D focus on image processing to create a precise digital 3D model from aerial pictures and their GPS information. SenSat enhances this 3D model for the construction industry by improving the end-user experience specific to this market, integrating click-to-measure toolkits, team collaboration, CAD integration, etc. Each industry has different requirements and, therefore, having a software capable of delivering relevant information will attract business’ interest.

SenSat’s Mapp software

Another key element to keep in mind is regulation. If we consider city-based applications, such as parcel delivery, the current regulatory framework is not designed to include drone activity. Therefore, the SESAR’s U-space project is working with partners to create a scalable Air Traffic Management (ATM) system for low-altitude drones in Europe and beyond. Some start-ups are providing their software expertise for traffic management and geofencing capabilities allowing drones to safely integrate into the existing airspace. A live demonstration occurred in September 2017 in Geneva to demonstrate that these first air navigation services are ready for immediate deployment. In the US, the Federal Aviation Administration, NASA and other partners are undertaking a similar project called UTM (acronym for Unmanned Aircraft System (UAS) Traffic Management).

The tip of the iceberg

The structure we followed above doesn’t translate into standard business models either. Already, we start to see companies offering to lease highly specialised drones, for example to farmers, leading to the emergence of a market for drone-as-a-service.

The drone revolution just started within the B2B market and there are still many untapped applications. Drones will become more autonomous and regulators will gradually allow the integration of these flying robots into our daily lives. On the other side, more companies will seize this technology while the social acceptance towards drones will increase.

As drones become more autonomous, stronger, smaller, faster or more accurate, drones’ use cases will multiply. We might see drone-in-a-box solutions that scan a crop or a construction site every few hours; high altitude drones providing fast access to the internet; flying taxis within cities; personal flying drones which will follow you anywhere. It does looks like, ironically, the sky is the limit!

Many thanks to Olivier Huez, Partner at C4 Ventures for helping me put this together!