Cover Story: November-December Unmanned Systems magazine

COVER STORY

FROM SATURATION TO CONSOLIDATION: DRONE INDUSTRY EXPANSION LEADS TO ACQUISITIONS, PARTNERSHIPS

By Jessica Reyes Sondgeroth The commercial unmanned aircraft systems industry has been expanding for some years, with investments for the first time exceeding $1 billion in 2017, enabling deployment of experimental concepts in various sectors of the economy and military.

However, this rapid investment of capital is shifting the industry from saturation into consolidation.

Consolidation in the drone sector so far doesn’t mirror the traditional model built on mergers and acquisitions.

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Rather, it looks like a flurry of venture capital investments from financial firms and large corporations, building on the startup model that brought Silicon Valley to its heights. These large injections of cash enable the cream to rise to the top, at which point the Boeings and Amazons of the world begin absorbing the top performers.

That also means a number of small unmanned aircraft system companies will fall through the cracks. To weather the storm and better leverage their products, some UAS companies

are joining forces with other UAS companies to offer a more complete package of end-to-end solutions and expand their access to customers and financing.

Annual investment in drone technology surged to more than $1 billion in 2017, compared with $170.9 million in 2014, $554.2 million in 2015 and $858 million in 2016, according to Pitchbook.

Van Espahbodi, managing partner of consulting firm and venture fund Starburst Accelerator, tracks these

An artist’s rendition of the passenger air vehicle concept from Aurora Flight Sciences, now part of Boeing. Image: Boeing

“The venture capital mindset is, it’s one out of 10 deals succeed and, and most of the time they flop and so they’re taking a gamble, but when it succeeds then it’s a five times or 10 times return on investment,” he says.

The beauty of small UAS companies and startups is that they are able to move ideas into production and deployment faster than a larger corporation could, in large part because they typically focus exclusively on a singular novel technology, be it software or hardware.

As long as the startup is able to attract frequent and large injections of venture capital and put it to good use, there’s a chance a large corporation will make a more meaningful investment with the potential for longterm growth through either a partnership or acquisition, typically later in the game.

“This whole tech wave of Airbnb, Uber and Amazon and all these things has really jolted that old guard, or the old boys’ club of the industry,” Espahbodi says.

Shaping the ecosystem Boeing is one of several large companies positioning itself to take advantage of this new model, helping shape the next-generation UAS ecosystem with investments and acquisitions. Boeing’s HorizonX Ventures most recently made a $16 million early stage investment in June in California-based Matternet which specializes in drone delivery in urban environments. While the investment will help Matternet expand operations in the U.S. and globally, it fits in nicely with HorizonX’s portfolio of strategic investments in UAS. investments to observe which UAS companies mature and thrive and which might pique the interest of larger corporations looking to innovate.

“Realistically, there are over 3,000 drone startups in the world today, of which I’d estimate 200 are cutting edge and relevant to the existing industry, of which I’d argue 10-15 are valued above $10 million,” Espahbodi says.

Starburst represents large corporations like Boeing, Raytheon and General Atomics, and through a selection process, narrows their search for potential investments into and acquisitions of UAS companies that can offer some synergy with their portfolios.

“Think of it as an externalization of research and product development for large corporations and a bootcamp for how to pressure cook small companies into hyper growth,” Espahbodi says.

Of course this comes with some risk, but Espahbodi posits that the reward is greater.

Earlier in June, Boeing announced it participated in a seed funding round led by another venture capital investment firm to invest in Kittyhawk, which is developing a UAS traffic management system that uses software and mobile-based apps to integrate real-time UAS flight operations and management solutions into one platform. And in October last year, Boeing acquired Aurora Flight Sciences, a company that has developed autonomous vertical takeoff and landing craft that had previously received military support and funding, and complementing Boeing’s efforts to advance self-flying vehicles both in the commercial sector as well as the military.

“Boeing anticipates unmanned aerial vehicles and autonomous aircraft playing a role in our second century — building on the technologies and capabilities we’ve developed over the last few decades,” says Pete Kunz, chief technologist at Boeing HorizonX and Boeing NeXt. “Our investments in autonomous systems technologies through Boeing HorizonX Ventures support our goal of enhancing transportation with safe, reliable and efficient mobility solutions to move goods and people.”

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The ALIAS automated flight system from Aurora Flight Sciences, now part of Boeing. Photo: Aurora Flight Sciences

Investing from within But it’s not just large corporations entering the drone sector; some investment comes from within. The world’s largest commercial drone manufacturer, DJI, started off as a small Chinese company in 2006, but with a strong product and three successful rounds of funding, has seen its valuation rise to $15 billion.

That growth has come with DJI’s own platform for investment in other UAS companies.

In May 2015, DJI received a $75 million injection from venture capitalist firm Accel Partner from Silicon Valley, helping make DJI the behemoth it is today. The investment and partnership led DJI to the launch SkyFund, an initiative to fund early stage development of drone technology across all applications.

SkyFund’s first investment was in DroneBase, which allows companies and individuals to rent UAS services, in the form of a drone and a pilot for data collection or video, and then makes the imagery and data available to the 32

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customer to view, download or share.

Also within the drone industry, investment in software has grown to match hardware development and meet the specialized needs of various industries with customized configurations. PrecisionHawk, for example, has partnered with software startups to improve their product offering to specific industries, digging in on its niche markets.

From fields of corn to miles of rail lines, PrecisionHawk has become a leader in UAS operations and services for inspection and data collection.

Just this September, the company announced that it acquired both Hazon Solutions and InspecTools, both of which “specialize in the delivery of inspection services and technology for the energy industry and bring demonstrated domain expertise to enable tighter integration between the collection and the analysis of drone data,” the company said in a statement.

Hazon has logged more than 13,000 inspections and 8,000 hours of flight

time with its fleet management software. It also offers consultant services for organizations that want to develop their own drone program.

InspecTools brings to the table its asset risk management systems and data analysis specifically designed for inspections of equipment and infrastructure in the renewable energy and utility industries.

PrecisionHawk also entered a partnership with EagleView, a provider of aerial imagery and data analytics for government, insurance and commercial sectors. In exchange for using PrecisionHawk’s network of certified and trained drone pilots to conduct inspections, EagleView participated in PrecisionHawk’s latest round of $75 million in funding. That came after PrecisionHawk earlier this year acquired Droners.io and AirVid, both of which staff thousands of drone pilots for commercial jobs. PrecisionHawk has planned to merge the companies into one company comprising more than 15,000 commercially licensed drone pilots.

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EagleView CEO Rishi Daga stated that combining EagleView OnSite Solutions’ and existing customer base with the expertise and scale of PrecisionHawk and Droners.io’s pilots, “both operationally and with financial investment,” helps equip its insurance customers “with all the tools necessary to settle claims without ever going into the field.”

Cautionary tales But strategic partnerships alone cannot ensure long-term viability. Founded in 2011, Airware, a commercial drone solutions provider for mining and construction industries, was initially quick to pivot when DJI swept up market share with its reliable, low-cost hardware.

“Jonathan Downey, the founder of Airware, turned a competitive threat into a competitive advantage,” Airware CEO Yvonne Wassenaar said in an April statement. “He divested the hardware side of the business and focused exclusively on the software side, allowing customers to leverage the best drones on the market for their use case.”

In that vein, Airware in 2016 acquired Francebased Redbird, which specialized in drone data analytics for mining, quarrying, and construction industries. And then, after 34

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Aurora Flight Sciences’ optionally manned Centaur aircraft.

Photo: Aurora Flight Sciences

THE RAPID INVESTMENT OF CAPITAL IN THE UNMANNED AIRCRAFT INDUSTRY IS SHIFTING MARKET FOCUS FROM SATURATION TO CONSOLIDATION, AS LARGE COMPANIES SEEK TO ABSORB SMALLER, MORE NIMBLE ONES AND SMALLER COMPANIES SEEK PARTNERSHIPS TO OFFER COMPELLING PRODUCTS.

raising $118 million from a group of investors including Google’s GV, Airware pivoted backwards to develop hardware that would compete with DJI. In September that effort dried up, as the company ran out of money and subsequently let go of 140 employees.

Starburst Acclerator’s Van Espahbodi speaks at AUVSI’s Startup Showdown at the 2018 Xponential conference and exhibition.

Photo: Becphotogrpahy

“They spent too much money on building a better mousetrap, they pivoted away from their software,” Mike Blades, Frost & Sullivan’s Aerospace and Defense research director, says of Airware’s downfall.

What happened to Airware spells a cautionary tale for small UAS companies that not all will survive consolidation. But in the meantime, for UAS companies focused on specific industries and applications, there’s safety in partnerships.

UAS partnerships that provide a complete package of customized equipment, software and analytics to very specific needs, like evaluating the progress of a construction site, inspecting rail or transmission lines, assisting in military operations, or monitoring the growth of millions of rows of crops, are more likely to maintain some market share, so long as they can keep the money rolling in.

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