Drone investment set to soar despite regulation threat

Published on RedHerring.com

Drones have hit the headlines again this month, as proposed FAA regulations threaten to make package delivery via unmanned aircraft unfeasible. But while lobbyists from some of technology’s biggest names battle to have the regulation rewritten, investment in the drone sector is likely to continue growing.

The Teal Group, an aerospace and defense analyst, estimates that the industry will be worth $91 billion by 2024, from the $6.4 billion invested annually today. Next year Deloitte says the number of drones valued at $200 or more will top a million this year. Amazon Prime Air, whose drones can travel at 50mph and can carry loads of up to five pounds – accounting for 80% of the firm’s vast inventory – has shown that drones can be a viable commercial logistics option, as well as the DHL project explored in last week’s Red Herring drone piece.

Investors are taking note. Dedicated drone angels and VCs have begun to appear. And while the money put into drone startups is small by Silicon Valley standards, the aforementioned numbers – and some top share picks listed below – will ensure those figures rise quickly.Investment in drone startups exceeded $108 million over 29 deals in 2014, a 104% increase in backing year-on-year, according to CB Insights data. VC giants such as Lightspeed Venture Partners, GGV Capital, Kleiner Perkins Caufield & Byers and other made big bets in the drone market.

Drone.VC is an online syndicate of 106 backers, who have combined to pour $295,600 into drone technology. Its minimum investment is $5,000, and the total carry per deal is 20%. 2014’s deals include PreNav and Mavrx, and the group expects to see five deals a year.

This trend has been happening for a couple of years. In 2013 14 drone tech firms closed their first rounds of funding, and last year total industry venture hit $65m, with Airware and PrecisionHawk securing some of the more headline-grabbing rounds.

The FAA, and the question of regulation hangs heavy in the air for drone tech firms. But PrecisionHawk’s Lia Reich sees regulation more as “an enabler rather than deterrent. Today everyone is simply restricted from flying for commercial purposes.

“Any changes point forward, at this point, would be upside,” Reich claims, on behalf of a company which has adopted a data-first approach to the market. “I think we will still see the consumer hobbyist market and the filming market surge in 2015, but that can easily change depending on how and when the FAA’s policy shapes up and shifts across markets like agriculture and insurance.”

So, who to invest in? PrecisionHawk and Airware would be good starts. But beyond them there are plenty of firms making the parts essential to the development of drones for emerging markets such as logistics, agriculture and defense. IXYS Corp, for example, makes chipsets all drone companies will need. Its earnings growth could soon explode due to demand, and valuation may double.

Ambarella makes chipsets for uploading and transmitting HD video. IvenSense, which manufactures leading-edge gyroscopes for motion-tracking devices, is set to perform well, as is Textron. Other picks have included Northrop Grumman Corporation, AeroVironment and aerospace giant Lockheed Martin.

Reich admits that there are little hard data points for domestic U.S. drone growth. But Keven Gambold, of Unmanned Experts, feels that infrastructure inspection – particularly oil, electricity and building management – will see widespread use of drones in the next 12 months. However it is GIS mapping which he believes will be “the big win in the coming months. This allows every industry to get a bird’s eye view of their workspace without hiring a helicopter crew. When they see the uses, they will all want one!”

The numbers may be small for now, but they will not be for long. Drone investment, as the technology behind it, will be soaring higher than most in 2015.