Drone Startups Grab Record Cash as Kleiner, FF Venture Seek Wins

Investing in Drones Takes Off

Startup drone makers are finding record amounts of funding as venture capitalists prowl for early winners in what may become an $82 billion industry.

From Silicon Valley to New York, firms including Kleiner Perkins Caufield & Byers, Lightspeed Venture Partners and ff Venture Capital are lining up behind unmanned aerial vehicle companies. Google Inc., General Electric Co. and Qualcomm Inc. also are jumping in with cash.

“Everybody wants to invest in drones because they’re seeing not only the potential but actual results right now,” said Jon Ollwerther, vice president of marketing and operations at drone builder AeroCine, which operates from a waterfront Brooklyn warehouse with a view of the Statue of Liberty. “We have said no to money.”

There’s more than ever to go around. Investors have pumped $210 million into businesses like SZ DJI Technology Co. and DroneDeploy so far in 2015, almost double the total for all of last year, according to data compiler CrunchBase. The pace has quickened as U.S. regulators grant more exemptions for limited commercial operations, reassuring financial backers that they’ll see a payoff from their support.

“It’s blindingly obvious to us that this is going to be a big space,” said John Frankel, founding partner of ff Venture Capital.

The U.S. Federal Aviation Administration told Congress on Wednesday that final regulations for business use of drones would be done by mid-2016. That promises to be a boon for unmanned aerial vehicles able to take video, make maps, monitor crops and inspect bridges.

“Everybody wants to invest in drones because they’re seeing not only the potential but actual results right now”
“Everybody wants to invest in drones because they’re seeing not only the potential but actual results right now”
Photographer: Nano Calvo/VWPics/Redux

70,000 Jobs

Within three years after the rules are set, the industry will create more than 70,000 U.S. jobs and have an economic impact of $13.6 billion, according to a 2013 report from the Association for Unmanned Vehicle Systems International trade group. In a decade, that total will soar more than sixfold.

Hurdles abound. Camera-toting UAVs stir concern that privacy will be at risk. Better batteries are needed to extend fly times. Long-distance trips require an air traffic management system and detect-and-avoid technology to dodge obstacles. The FAA may not go much beyond current limits: flights in an operator’s line of sight, below 400 feet (122 meters) and not near people.

Venture investors are willing to look past the challenges, because it’s important to get in now.

“Usually in these emerging industries there’s a lion,” Lightspeed Partner John Vrionis said. “It’s not that you can’t have a good return being the No. 2 player, but the vast majority of the money comes from being the leader.”

Kespry, Skycatch

Lightspeed led funding of $12 million for Kespry, which uses an autonomous quadcopter to capture and analyze aerial survey data. Skycatch, with similar concepts, got its first investment from ff Venture Capital.

DJI, the Chinese dronemaker that gained notoriety when one of its craft crashed on the White House lawn, raised $75 million in May from Accel Partners, giving it a valuation of about $8 billion. Airware, whose products include drone software, collected $40 million from investors that include GE Ventures, Google Ventures and Kleiner Perkins.

“If the market becomes as big as we think, there will be multiple investments that are done,” Kleiner Perkins General Partner Mike Abbott said. “I’m meeting companies all the time.”

Hurdles abound. Camera-toting UAVs stir concern that privacy will be at risk
Hurdles abound. Camera-toting UAVs stir concern that privacy will be at risk
Michael Nagle/Bloomberg/Jeff Brink

Private Solutions

Some investors are even trying to profit from the need to build the systems to manage free-flying drones, not just the UAVs themselves. UAS Americas Fund plans to provide $2.2 billion of financing for those innovations, said President Matthew Bieschke, who is also a managing partner with financial-advisory Nexa Capital Partners LLC.

“Regardless of the solution, it’s very unlikely that the FAA or Congress are going to fund a multi-billion infrastructure program for unmanned aircraft,” Bieschke said.

From Brooklyn, AeroCine is carving out a niche providing aerial movie and ad footage and wants to add newsgathering once the FAA eases rules on flights near people. With 12 electric motors, a 33-pound (15-kilogram) AeroCine drones capture aerial video at close ranges a helicopter could never attempt.

Backed by five angel investors, AeroCine is filming at a Louisiana plantation for a slavery drama series called “Underground” and documented NBC host Matt Lauer’s recent Boston-to-New York bike ride. It’s also building a larger drone for a foreign film production, said Ollwerther, the marketing chief.

“If we have another month like this one, we will be profitable,” Ollwerther said in May.

Remembering Roomba

Helen Greiner, a co-founder and former chairman of IRobot Inc., walked a much-tougher road in pitching the Roomba robot vacuum cleaner more than a decade ago. Investors only showed up after the device was on the market and selling well, she said.

“It’s a good time for drone investment,” Greiner said. “Every major industry is looking at their drone strategy and how drones can be used.”

Her closely held CyPhy Works is a beneficiary of the new era: It has raised about $880,000 via crowd funding, an option unavailable in the Roomba’s early days, for the LVL1 drone designed to end the need for bulky camera stabilizers.

Drone companies could escape a potential chill in Silicon Valley as interest rates increase, as projected, later this year. The easy money of low-cost borrowing has enabled more than 100 startups to reach valuations topping $1 billion. Money has already been raised for the drone industry, however, and those funds will be dispersed over the next five years, said ff Venture Capital’s Frankel. And the cost savings the industry offers makes it too attractive to pass up.

“We anticipate little impact on the investment cadence into drone-based businesses,” he said.

Even with the doubts about how the FAA ultimately will regulate the industry’s growth, the potential excites investors.

“It’s tough to know how big it will be,” Frankel said. “But where I stand here on the foothills, I can see the mountains in the distance and they’re pretty high.”

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