Venture capital funding for the drone industry reached record levels in the first half of 2019 as bets become more concentrated on nearer-term payoffs.
Over the period from 2012 to June 2019, venture capitalists have invested $2.6 billion in drone companies to take advantage of the large consumer drone market and the rapidly growing commercial drone market. Teal Group projects that the world civil drone market will triple over the next decade while the commercial segment will increase six-fold to $9.5 billion in annual sales by 2028. Major commercial sectors expected to increase drone use significantly include agriculture, construction, insurance, energy, communications, and delivery.
The annual volume of VC funding has ranged from $450 million to $550 million over the past four years, but in the first half of 2019 surged to $350 million. As market trends have become clearer investors have focused their bets on fewer companies in areas such as drone delivery, security, and mining. These figures are based on the one hundred largest drone venture capital investment targets worldwide compiled by Teal Group.
Final issuance of the rule for the operation of small UAS in U.S. airspace helped spur a wave of new investment by venture capital as the regulatory environment became more favorable. Some U.S. firms held off on seeking outside investors until the rule was issued in 2016.
As they seek to take advantage of drone market growth potential, venture capitalists are applying lessons from recent investments that have proved disappointing. 3D Robotics, a Berkeley, Calif.-based company that’s the second-largest venture capital bet in the sector, tried to compete against Chinese consumer drones, lost big and exited the market. It scaled back its operations in favor of focusing on software to enable drone infrastructure inspections.
In addition to generally focusing on companies in niches less threatened by cheap Chinese drones, investors are shying away from business plans that will take too long to pay off. Airware, an early darling of venture capital investors, turned out to be a spectacular failure, laying off approximately 120 employees in September 2018 as its assets were sold. Airware had raised $118 million from 2013 to 2018 with an additional undisclosed 2017 investment from Caterpillar Ventures. At the time it ranked as the third-largest venture capital-funded startup worldwide behind only 3D Robotics and China’s DJI Innovations. Management attributed the company’s failure to insufficient cash to allow the commercial drone market to develop. CyPhy Works of Danvers, Mass., another drone company that attracted funding from leading venture capital firms, shut down in March 2019 after trying to relaunch itself as Aria Insights.
With the lessons of these recent failures, venture capitalists are concentrating on funding fewer companies that avoid these pitfalls.
Zipline, based in Half Moon Bay, California, became the best-financed venture capital startup in the drone industry with $190 million in additional funding completed in 2019. In all the company has raised $229 million over three rounds of financing.
Zipline is the worldwide leader in drone healthcare logistics. It operates networks in Rwanda and Ghana. It seeks to use drones to deliver blood, vaccines and other medicines in less than 30 minutes once it receives an order from health care works. By operating centralized distribution facilities it can reduce wastage of medical supplies and speed deliveries of urgently needed medicine. Ultimately Zipline is seeking to expand into the United States through a pilot program in North Carolina.
Zipline’s strategy is shrewd. By focusing on life-saving and time-sensitive drone deliveries it taps into a higher-value segment of the market than simply delivery. The developing world is an ideal area to prove its capabilities because of poor infrastructure that can hinder road deliveries and airspace is less crowded. Even in developed countries, regulators will be more sympathetic to opening airspace for potential lifesaving applications rather than food or other deliveries.
Otherwise, U.S. companies receiving the largest investments offer mostly a combination of hardware, software, and services such as PrecisionHawk, SkyCatch and Kespry. These companies pride themselves on offering data analytics rather than hardware that could be commoditized over the long run. Companies with data analytics and clear leadership in providing new services are seen as being in more promising long-term niches. Enabling technologies for drone operations also promise to be a growing area with less intense competition than simply manufacturing aircraft.
Venture capital investors are also looking beyond the drones and software into the data that these companies will collect. There is a growing recognition that the data collected by industry could be potentially quite valuable in areas such as mapping or prediction of crops.
The startup raising the largest venture capital funding outside of the United States is now in Israel. Airobotics raised an additional $50.3 million in 2018, bringing its total funding to $111.3 million, third-most among the world’s drone companies. Its appeal comes from its autonomous drones that promise to have applications in mining, construction, and security. The drones can be set to take off on their own, perform their mission, return to the box that serves as their base and change their batteries. That makes them appealing for security and operations in remote areas.
Airobotics became the first company in the world to get authorization to fly fully automated drones without a pilot. The certification, which was provided by the Civil Aviation Authority of Israel, allows for beyond visual line of sight commercial drone operations.
Other companies operating within that same market niche of highly capable, autonomous drones have also been raising funding over the past two years. France’s Azur Drones, Singapore’s H3 Dynamics Holdings, and Israel’s Percepto all raised funds for autonomous drones.
While the companies that attract funding from venture capital are changing, they remain overwhelmingly American. Since 2012, U.S. companies received 67% of the total $2.6 billion investment while Chinese firms followed with 15%. European companies languished with only 9% of the total. With the ease of financing, some European companies have moved their headquarters to the United States.
The largest planned financing ahead may be DJI Innovations, the Chinese company whose drones have three-quarters of the consumer market and most of the commercial market. The company was planning a blockbuster financing deal in 2018 as a prelude to a possible initial public offering. DJI was in discussions with investors about the possible investment of $500 million to $1 billion in preparation for the company’s first public stock offering planned for 2019, according to press reports from China at the time.
Yet in the end, DJI has not yet moved ahead with its planned financing. That may reflect weak results in 2018, including the loss of $150 million from alleged corruption within the company.
DJI’s outlook also has become considerably more uncertain because of the growing trade conflict between China and the United States. Until the market becomes more predictable DJI is unlikely to come forward for additional financing.
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