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Drones and Venture Capital: 5 Things to Know

The rapid increase in drones may cause you to wonder who is making all the money. And they’re making. PWC expect the drone industry to have a worth of $127 billion by 2020. While the current market is just 1% that, use in logistics and other businesses is expected to drive it up. Current regulation has hamstrung the autonomous power of commercial and industrial drones in the US. Drone pilots must keep a line of sight with the UAV. Poland is leading the world in drone regulation beyond the visible line of sight (BVLOS), drafting laws covering dozens of commercial applications.

Much like AVs, drones are moving into the next stage of life. To fully harness their utility automated travel has to be safe and controlled. The novelty of drones has worn off and pragmatism remains. What is this doing to the development of drones?

#1 Start-up funding for drones has plummeted

$55 million in venture capital was invested across eight deals during Q3’16. 59% lower than in Q3 of 2015 and 50% lower than Q2’16. This makes sense, drone technology is simple to manufacture cheaply. The new developments in drones will not be in the consumer field. Hardware leaders, like DJI who control 70% of the consumer market, have been established. The focus is now software.

#2 Proxy investments are better

Companies with the most to gain from drones are those involved with logistics and transportation. Amazon’s Prime Air has hit legal snags due to BVLOS regulation in the US. Once the legalities are solved Amazon’s $5 billion in shipping costs are going to tumble. Automated drone deliveries and other AVs are seem the obvious path for logistics in the 21st century.

The annual spend on international freight is around $1 trillion. So while VC investment on drone hardware declines, companies with the potential to utilise drones (instead of workers) will come to the fore.

#3 AVs and drones are similar

Drones overlap in several areas with the another burgeoning area of technology. Driverless cars. These two technologies share similar requirements. Both need resilient wireless communication over long distances. Both require artificial intelligence capable of making predictions and taking quick decisions to minimise risks. This covers things like machine vision and machine learning. They also need to be as secure as possible. Hijacked drones could wreak havoc in urban environments. Venture capital funds looking to capitalise on drone software will need to take all these facets into account.

#4 When warehouses fly…

Venture capital funds are generally interested in projects with potential for big returns.  Basic drone hardware has been established. The quadcopter is king of the last mile. Software refinement is underway. Are there no new frontiers to cross in drones? No. Amazon, with its $339 billion market cap, has the wealth to develop moonshot technology tailored to its needs. Enter the flying warehouse.

Amazon filed patents for ‘airborne fulfilment centres’ (AFCs) in 2014. 45,000 square feet of storage space suspended beneath a blimp. Smaller drones would ferry goods to customers and bring employees to the skydeck.

#5 Military drones

Developing drones for consumers and businesses is one thing. Developing drones capable of carrying out military or intelligence community (IC) tasks is another. The US IC has its own venture capital arm called In-Q-Tel. Arsenal Venture Partners run the onPoint Fund on behalf of the Army. Developing hardware is unlikely to get traction with these funds, but innovative software for analysing the data collected using drones may attract attention.

VC is moving on

Drones aren’t going anywhere, but venture capital has served its purpose on much of the industry. Production of consumer drones is now widespread in the factories of China. Developing software for drones will likely take place in-house at major drone companies like DJi. Alternatively aspects of driverless car software may find a home in drones. Either way the economies of scale have a hold on drones and their future lays mostly with mega-corporations such as Amazon.