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Big opportunities in drone software: $565 million and climbing
Jul. 25, 2017
By Valery Komissarov, Skolkovo Foundation
This year drones have turned from buzzword to a mature technology, bringing value across many industries and representing an interesting investment opportunity. A number of VC firms have already jumped in, putting $454 million into 100 deals in 2016 alone, and both the amount of funding and the number of deals are on the rise, according to CB Insights.
However, the hardware side of the drone ecosystem is becoming oversaturated. China’s DJI clearly dominates the market, and other Chinese manufacturers, Yuneec and Ehang, have raised significant funding ($60 million and $42 million respectively), while new incumbents have failed to deliver their products to the market.
So the big opportunities for investors at the moment are in drone-related software.
There are two basic categories of drone software startups: vertical and horizontal. Vertical-focused startups target one particular industry, such as construction or agriculture; horizontal companies aim to build a platform for customers across industries.
The companies
I’ve identified the 30 startups I believe are the most promising ones — see the image at the top of this post. From this group we see the following statistics:
• Drone software companies have raised $565 million from VCs to date. $349 million of that has gone to vertical-focused companies, with the other $216 million going to horizontal companies. (note that some of the companies I’ve counted here under the “software” label are actually full-stack firms that develop both software and hardware, such as Precision Hawk, 3D Robotics, and Kespry.)
• The vertical-focused segment is also more crowded than the horizontal segment, with 20 vertical-focused companies compared to 10 horizontal ones.
• Among vertical-focused companies, those targeting construction and mining (which is the hottest drone-related market at the moment) face the most competition, with eight startups, ranging from cash-loaded heavyweights 3D Robotics, Skycatch, Kespry, and Redbird (which have pulled in $178.78 million, $41.67 million, $28.35 million, and $3.19 million respectively) to ambitious new entrants TraceAir, Datumate, Unearth, and Dronomy.
• Agriculture was supposed to be a hot segment for drones but is progressing more slowly than other verticals. Still it features some notable companies, specifically Precision Hawk, Slantrange, and Gamaya. This segment has raised just $55.4 million compared to the $260.4 million raised by startups targeting construction and mining.
• The most notable horizontal companies are Airware and DroneDeploy. They were founded at the beginning of the drone era (2011 and 2013) and have raised significant funding ($31 million and $109.55 million to date). Both companies have taken a full-stack approach and adjusted for the needs of various industries. For instance, Airware acquired Redbird, a construction-focused company previously funded by Airware’s VC arm, Commercial Drone Fund, and DroneDeploy launched App Market, an app store where the company can expand its initial platform with industry-tailored solutions from third-party developers, including Autodesk and John Deere. It’s also worth mentioning that new incumbents Hangar and Propeller Aero are backed by prominent investors, including Lux Capital and Accel Partners.
The investors
Drone software startups have drawn the attention of both top-tier VC funds, such as Andreessen Horowitz, GV, KPCB, Accel Partners, First Round, and Lux Capital, and corporate investors, such as Intel Capital, Qualcomm Ventures, Microsoft Ventures, Sony, and Airbus Ventures.
Moreover, along with investments, we’ve already seen M&As in the market, such as Verizon’s acquisition of Skyward and Airware’s purchase of Redbird mentioned above.
Vertical-focused companies appear to be more attractive than horizontal companies to investors at the moment, and here is why:
First, vertical-focused companies take less time to validate product-market fit in their target geographies and industries (or to decline one hypothesis and move on to testing another one) as each industry has its own specific use cases and requirements. Ivan Lvov, go-to-market lead at TraceAir told me, “Deep understanding of customers’ needs is what makes a great product and ultimately helps achieve product-market fit. Even if this understanding is manifested in small nuances, they make a great difference. That’s why I believe it’s extremely hard to create a successful horizontal solution, and a startup is better off by going vertical.”
Shahin Farshchi, partner at Lux Capital, which has invested in five drone companies, including AirMap and Hangar, also supports this view. Now that the foundation has been built for “cheap, abundant, and inter-connected drones,” he said, it is up to “amazing founders to identify nascent applications … These founders will choose verticals that can be worth billions annually, where they have an unfair advantage and have built a deep relationship with customers in those verticals.”
Meanwhile, the horizontal platform approach requires significant marketing efforts to educate customers in each industry on potential benefits, which involves extra costs. And given that new platform players will be facing off against cash-loaded incumbents like Airware and DroneDeploy, the challenge of claiming a piece of the market is especially difficult.
Second, there are more viable exit opportunities for vertical-focused companies. One option is an acquisition by a large corporate in the vertical the startup targets. Vertical-focused companies, after all, have industry-specific competencies and know-how, making them much more attractive than horizontal ones. Verizon’s acquisition of Skyward is a good example here.
Another option is consolidation. Platform companies are acquiring vertical-focused ones to bring more capabilities to their portfolio. Airware’s acquisition of Redbird is an example of this.
We are also seeing vertical-focused companies eyeing expansion into other verticals. Kespry CEO George Mathew told me his company was focused on the “multi-billion dollar market opportunity across mining, aggregates, construction, insurance, and energy sectors,” for example.
I expect competition between platform and vertical-focused companies to increase going forward.
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