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GSV A2Apple: Eye in the Sky

GSV A2Apple: Eye in the Sky

The excerpt below originally appeared in A2Apple, GSV’s weekly perspective on growth, innovation and investing. It was written by Michael Moe, Luben PampoulovLi JiangNick Franco and Suzee Han of GSV Asset Management. To read the entire piece, click here.

The telephone has too many shortcomings to be seriously considered as a means of communication.

— Western Union Internal Memo, 1976

In the last 12 months, remote controlled drones bought from retailers like Best Buyand Apple have grabbed headlines for turning up where they shouldn’t.

A drone operated by a high school teacher smashed into the stands of the U.S. Open in New York City last September. Police later learned that the operator was just looking for a sunset photo of the stadium before losing control. A few months before that, another drone dropped onto the White House lawn, causing a lockdown in the Capitol. The culprit this time? A scientist at the National Geospatial Intelligence Agency who flew a friend’s drone out of range… and into history.

In 2010, the Federal Aviation Authority (FAA) estimated that by 2020, there would be 15,000 consumer drones in the country. Today, that’s fewer than the number of drones sold per month. The Consumer Electronics Association (CEA) estimates that 700,000 drones were sold last year alone and 3 million units are due to ship to retailers in 2016. The FAA has some catching up to do. Reports of unmanned aerial vehicles (UAVs) interfering with regular air traffic have been running at over 100 per month, a number that will accelerate as millions of new drones take flight.

STATE OF PLAY

In the not so distant past, the market for drones, like tanks, was effectively limited to government purchases. The U.S. Department of Defense budget for fiscal year 2016 set aside $2.9 billion to acquire more than 50 new drones for combat and surveillance — accounting for nearly half of the $6.4 billion of projected global government spend on drones.

What changed? The same improvements that have transformed smartphones — low-cost, high-quality GPS units, accelerometers, and and advanced sensors — have have ushered in the age of the consumer drone.

DJI Phantom: Consumer Drones Take Flight
Consumer Drones Take Flight with the Launch for the DJI Phantom in 2013

Source: TheDroneInfo

 

Future historians may peg January 7, 2013, as the date that civilian drones went mainstream. That’s when DJI, a Chinese company, released the Phantom, which retailed for $679. A sleek, four-pronged helicopter that fit inside a backpack, you didn’t need to go to TOPGUN to fly it. The Phantom flew where you told it to fly. And capitalizing on theGoPro craze, you could strap a camera to it and record your flight.

Today, the global drone market is estimated to be worth $8 billion, growing to over $11.5 billion by 2020. Consumer drone spending is projected to grow at a steady 10% CAGR for the next five years, from $1.6 billion today to $2.6 billion.

Global Drone Market Size, 2015-2020 ($M)

Source: Business Insider, IHS Jane’s Intelligence Review, GSV Asset Management

 

Looking forward, the most compelling category is just beginning to emerge. Commercial drone services were estimated to be less than $100 million in 2015. But the market is growing at a 43% CAGR — expected to top $500 million in 2020 — and will accelerate faster still as drone technology and regulations evolve.

Fundamentally, drones create low-cost eyes from the sky, enabling real-time monitoring over wide distances. This capability is applicable across a wide range of industries that involve assets dispersed over large areas, including construction, energy, and agriculture. Low cost access to aerial images and rapid data gathering will benefit organizations gathering “intelligence”, from security to science.

While drones may not transform the world like the personal computer, their evolution will be similar. In the 1980s, when Apple launched the Macintosh and IBM released the PS/2, these devices rapidly evolved from premium consumer “nice to haves” to being business essentials. PwC recently estimated that that the near-term addressable market for drone-enabled business services is over $127 billion.

Commercial Drone Services: $127B+ Addressable Market
Estimated Near-Term Addressable Market for Commercial Drones Services by Key Industry

Source: PwC, GSV Asset Management

Last summer, in a proposal to the FAA, Amazon unveiled a vision for a network of superhighways crisscrossing the skies for drones to deliver packages. It contemplates three segmented bands of airspace. From the ground up to 200 feet would be reserved for hobbyists. From 200 feet to 400 feet would be for high-speed commercial drones operating autonomously. From 400 feet to 500 feet would be a no-fly zone to act as a buffer between manned and unmanned aircraft. (Disclosure: GSV owns shares in Amazon)

Swiss Postal Drones Take Flight in 2015

Source: The Guardian

The idea isn’t farfetched. In 2015, Switzerland’s postal service began testing delivery drones in conjunction with California-based Matternet, which develops unmanned aerial vehicles and automated logistics networks. Germany’s DHL has been trialling its very own “parcelcopter” on the island of Juist in the North Sea since 2013.

Amazon’s proposal is unlikely to get off the ground any time soon because FAA rules require drones to remain within line of sight, either of an operator on the ground or in a chase plane in the sky. This defeats the purpose of automated delivery vehicles, and the rule has broader constraints for commercial drone applications.

NASA, in collaboration with the FAA, is currently working with various universities and companies — including Google and Verizon — to design an air-traffic-control system for drones. It will have its own equivalent of roads, traffic lights, and “do not enter signs”. As regulation evolves, drone adoption will accelerate. (Disclosure: GSV owns shares in Alphabet)

Investment Activity

Drone startups raised over $450 million across 74 deals in 2015, up over 300% versus 2014 on a dollars basis and 111% on a deals basis. Investment hit an all-time high of $140 million in the third quarter. In total, there were 11 financings larger than $10 million for the year, compared to just eight in the previous three years combined. Companies raising over $50 million included Shenzhen, China-based consumer drone manufacturer DJI ($75 million), as well as California-based competitors YUNEEC ($60 million) and 3D Robotics($50 million).

VC Investment in Drone Companies, 2012-2015

Source: CB Insights, GSV Asset Management

The first quarter of 2016 marked several large deals to emerging drone startups, includingAirware ($30 million), Skydio ($25 million), and DelairTech ($14.5 million). Despite these notable rounds, however, the quarterly financing total was the lowest for drone funding since the first quarter of 2015. Activity remained robust, however, with 21 deals in the first three months of 2016, the third quarter in a row in where activity eclipsed the 20-deal mark.

Despite the continued increase in funding levels and deals, it still is early days for the booming drone industry. Of all the deals completed in 2015, over 67% were in the A round or earlier. Series C and later rounds accounted for just 4% of deal activity.

Drone Investment Activity by Stage, 2015
Percentage of Deals by Stage, 2015

Source: CB Insights

Beyond venture firms, corporate VCs, led by Intel and Qualcomm, have become increasingly active drone startup investors. In 2012, there was just one financing for a drone startup that involved a corporate VC. Last year, there were 17, totaling more than $209 million. That’s up from $17 million in 2014. Large deals involving corporates included rounds to Yuneec, 3D Robotics, and Skycatch ($22 million).

Corporate VC Investment in Drone Companies, 2012-2015

Source: CB Insights

 

More than two-thirds of corporate investments over the past five quarters were at the seed or Series A stages. While deal activity has dipped in early 2016 — there was just one financing the first quarter — we expect sustained longterm interest in the category from a variety of corporate VCs representing a wide range of industries.

There’s more to this post. To read about the pioneers shaping the drone industry and what’s next for drones, click here.

 

If drones are your thing, you’ll want to be at the GSV Pioneer Summit. It’s  is a two-day technology conference (September 14-15, 2016) in the heart of Silicon Valley that is focused on the people and companies building tomorrow’s industries. The Pioneer Summit convenes a global community of daring entrepreneurs and connects them with leading growth investors and global corporations who can help scale their efforts. GSVlabs in Redwood City, California will host the 2016 GSV Pioneer Summit. Buy tickets now to reserve your place.

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