Geographic Frontiers


Drone Watch

Will Drone Companies be more like Apple or Intel?

It’s exciting to think that we’re witnessing the beginning of an industry just as roughly 35 years ago some of us witnessed the beginnings of the personal computer industry. How will the drone industry shape itself? Will different companies work on and sell specific segments such as flight vehicles as opposed to sensors and analytical services? Will there be vertically integrated companies that build and fly the drones and analyze the data. Currently, the industry shows more of the former and will be horizontally integrated.

Over thirty years ago, companies like Intel and Microsoft changed the nature of the computer industry by being horizontally integrated. They focused on a specific aspect of digital computing—processors, and operating systems—while companies like IBM, Dell and their competitors built the personal computers. Other companies developed software applications. Throughout the personal computer revolution, Apple remained stubbornly, vertically integrated wanting to control all aspects of its customer experience down to the very stores in which their integrated software and hardware could be purchased. While going through some rough times, Apple’s model is currently showing big success which has the formerly horizontally integrated companies attempting to follow suit.

As we now watch the advent of the U.S. drone industry, let’s take a moment to contemplate how it will shape itself.

While recognizing it’s a small sample, lets look at the drone companies that are receiving the bulk of venture capital funding.

In a February 14, 2015 article, CB Insights reported that venture capital funding for drones topped $100 million in 2014. It lists the five most well funded drone start-up companies: Airware, 3DRobotics, Xaircraft, Skycatch and Cyphyworks.

While these by no means represent all of the angel and venture capital investment in the drone business, I believe this speaks volumes concerning what will be the structure of the emerging drone industry in the U.S. (By the way, Xaircraft is a Chinese company.)

Companies building technology are realizing the greatest capital investments. Four of the five most well funded drone start-ups build flight vehicles. The fifth, Airware, builds firmware, specifically an autopilot module for small, unmanned aircraft. Of the five, only Skycatch appears to have a vertical integration strategy by including piloting and data analysis as part of its business.

What we’re beginning to see is an industry horizontally rather than vertically integrated. Venture capital generally follows technology and is mostly funding companies that are building flight platforms and related technology.

Other companies will focus on applications and data analysis. In many cases, companies that are users of the data will have their own in-house analytical expertise and capabilities.

Another tier are the UAV operators. The recently proposed FAA regulations lowering the threshold for UAV pilots—they must pass a written test rather than be fully licensed pilots—points to there soon being a ready supply of prospective pilots.

Unless they have a unique technology angle, companies that focus on applications and data analysis—as well as those focusing on flight operations—usually will need to raise funds outside of angel and venture capital channels. While these companies can be successful, the return on investment will not reach the thresholds venture capitalist look for. This should come as no surprise. The aircraft business works this way now. Well-funded companies make and sell the flight platforms. Smaller companies fly the aircraft used for aerial survey work. (These aerial survey companies flying aircraft will find themselves losing business to competitors that fly drones). Other companies will fill the data analysis space in the drone industry. These later two categories more often will be pitching to banks for business loans rather than to angel or venture capital investors.

There may be some “Apples” that persist in the industry. Like the Apple of the smart phone world, there may be ones that focus on a consumer market providing individuals with an aerial version of their personal “GoPro” including a flight vehicle and integrated camera along with video viewing and editing software. However, current indications are the industry will be predominately horizontal in nature.

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