Balderton

A primer on Drones and UAVs (Part 1)

This post was written by Balderton Capital Summer Associate Animish Sivaramakrishnan, and was originally published on his Medium.

Drone startups have been attracting a lot of investment in the last couple of years and here at Balderton we thought it would be good to discuss some of the key trends. There’s so much going on, in so many different parts of the drone ecosystem, it can be hard for a newcomer to know where to begin (I know it was for me). I hope this guide proves a useful introduction.

In Part 1 I’ll talk about how best to segment the drone market, the size of the market and regulation

In Part 2 I’ll dive into investment trends, discuss the various market segments in more detail and tell you where I think the investment opportunities lie.

Let’s get into it!

Introduction

To whet your appetite, here’s a video example of some of the cool stuff you can do with a drone:

Don’t ask me how they managed to keep their drone clear of the fireworks…

So what actually is a drone? A drone, also known as an Unmanned Aerial Vehicle (UAV), is an aircraft with no pilot on board. There are two key types of UAV: fixed-wing and rotary-wing. You’ve probably seen pictures of military drones: those are usually fixed wing drones. Meanwhile, 90% of consumer drones out there are rotary-wing drones.

How do you segment the market?

The biggest source of confusion for any newcomer to the drone industry is the sheer breadth and variety of companies in the market. There are companies doing everything from making multispectral sensors for drones, to offering drone training for pilots, to building software for drone design simulations — not to mention companies that make the drones themselves!

You’ll probably also have come across (and been confused by) cloudscapes like these [1]:

Unfortunately, these tend to conflate customer type (e.g., consumer / commercial / military), product type (e.g., drone services / drone components) and application sector (e.g., insurance / oil & gas). Somehow, there are simultaneously too many segments and too few — some of these segments are unnecessary and others are just way too broad.

Having spent a lot of time now looking at this space, I think the best way of thinking about the key product categories in the drone ecosystem is as “Hardware”, “Software” and “Supporting systems”. Each of these broad categories then has a few subdivisions:

“Hardware” — is composed of (i) individual drone hardware components; (ii) the drone platform itself

“Software” — consists of (i) the software to control a drone in order to capture the necessary aerial data; (ii) software to process the aerial data that is captured; (iii) analysis of the captured data

“Supporting systems” — refers to the various supporting systems in the drone ecosystem, from airspace regulation to drone bookings to drone training

Spanning across almost all of this is a fourth category of “Drones as a service”. A typical way in which this might work is: a drone is booked through the service provider, which then flies a drone on behalf of a client, then collects data and feeds back the results of the analysis (if any) to the client. We’ll come back to this model later in Part 2.

The diagram below illustrates this segmentation (also note that some companies span multiple categories):

We’ve talked about the product categories — let’s now talk about the customer types. There are 4 types of customer:

“Consumer” — People like you and me, e.g., general hobbyists looking to do a bit of photography and filming. Drone racing would come under here too. The consumer market is the largest non-military market today and still in its infancy, relative to other high-end discretionary consumer electronics

“Commercial” — People using drones in for-profit activities. End uses range from precision agriculture to oil rig inspection to package delivery. These users need greater autonomy, range, and support systems than consumers. It’s more immature than the consumer market right now

“Government” — Non-military public agencies like police or fire/rescue services. This market is smaller than the commercial sector, but expected to develop sooner

“Military” — by far the largest customer in terms of spend on UAVs. The military market is expected to remain the largest end user of UAVs as they become an increasingly important focus of global military strategies over the long term

For an investor like Balderton, the most interesting customers are those in the Consumer and Commercial sectors — and this post will really be focused on those two areas.

How big is the drone market?

One of the problems with most market sizings is that they only look at the hardware side of the drone ecosystem. The typical methodology is to forecast the number of units that will be sold and multiply this by the average unit cost. More sophisticated methodologies account for variation in customer type and end use (e.g., a drone used for O&G inspection will probably be more expensive than one for real estate photography, but this will be offset to an extent by volume).

Anecdotally though, people believe that the software market will eventually be at least as large as the hardware market and is probably currently around half the size.

Focusing on the hardware market, here’s a forecast of the combined consumer and commercial global market, interpolated from a few different sources [2]:

As you can see, we’re looking at a market of nearly $13bn p.a. by 2020. It’s important to note that this is an estimate based on platform sales alone. You could conceivably double that 2020 figure for an overall drone ecosystem market size. It’s also interesting to see that most of the growth is expected to come from commercial drones — even though there is ample room for growth on the consumer front.

In terms of both volume and sales, the consumer drones space today is still at a nascent stage of development. Relative to other discretionary consumer electronics in a similar price range, drones have only a tiny share of wallet. The action camera market (dominated by GoPro) is 5 times bigger than the retail drone market, and consumer drone market is only 6% the size of the video games console market.

So, what’s causing this massive growth in commercial drones? Here are the expected use cases [3]:

The growth is really driven by construction and agriculture. In construction, drones are expected to be used to survey land for building sites, measure building progress, facilitate comparison with plans, produce 3D renderings of sites etc. In agriculture, the name of the game is “precision agriculture” — helping farmers optimise their processes. For example, drones can be used to count crops or measure crop densities so farmers know exactly when and where to apply fertilizer, or when to move their cattle to new pastures.

Drone delivery

The natural question at this point is: what about is drone delivery? Isn’t that meant to be one of the biggest uses of drones? Well, yes and no. Yes — I do believe in the long term there’s a lot of potential here. But I think we’re still several years away from it becoming a viable possibility, which is why I’m not including it in any market sizing.

There are four key obstructions to its widespread adoption in the near term:

• Technology — There are still a bunch of tech improvements that are needed, and extending battery life beyond the typical 10–15 minutes is chief among them. Also paramount is safety: if the drone fails while flying over a heavily populated area, how can you ensure it doesn’t hurt anyone? We then need improvements in autonomous flight to ensure the drone doesn’t fly into anyone or anything and can accurately reach its destination.

• Infrastructure — The drone needs to be trackable by air traffic control, and there needs to be variously legal and insurance changes to allow unmanned drones in civilian airspace. But beyond that, we need the infrastructure to actually enable unmanned delivery — i.e., what happens when the drone reaches its destination? Where and how does it drop off the package? Who is responsible for collecting it?

• Restructuring logistics — Amazon claims that something like 80% of its packages are suitable for drone delivery: they’re less than 5lbs and within 5–10 miles of the customer. But this is not the case for most e-commerce retailers. For drone delivery to be a legitimate proposition, retailers would need to move their warehouses and delivery hubs from cheaper out-of-town locations to more expensive city-centre areas

• Regulation — This is probably the biggest issue in the near term. For drone delivery to really work, governments need to allow the operation of drones beyond “visual line of sight” (BVLOS). In the US and most of Europe it’s not clear when this will be allowed. Additionally, drones are still not usually allowed anywhere near people. Both of these are serious impediments to drone delivery taking off (sorry for the terrible pun).

On that note, let’s talk a little more about regulation.

Regulation

Regulation, as you might suspect, is extremely relevant when talking about drones. It’s also worth noting that I’ve mainly been looking at this from a European / US perspective, as is aligned with Balderton’s investment interests.

So far, regulation has been more favourable in UK/Europe compared to US, although things have been changing there. Let’s use the UK as a benchmark and see how some the regulation of some other countries stacks up.

• Consumers: Anyone is free to fly a drone that weighs less than 20kg without special permission. However, there are various distance restrictions. For example, drones can’t be flown within 150m metres of a congested area, or within 50 metres of a person/structure not under the control of the pilot. They aren’t allowed to be flown near airports or other aircraft. The drone also has to remain within Visual Line of Sight (VLOS) at all times, less than 400ft altitude and less than 500m away from the pilot at all times. There are a few other restrictions beyond these, but these are the most important ones

• Commercial: Anyone using a drone for commercial use is also required to seek permission from the CAA to get a licence. The other restrictions are broadly the same as the consumer case

People are hoping the UK regulation opens up a bit with the Modern Transport Bill. For one, there is no prospect of BVLOS flight in the UK right now and people are hoping this will change.

France and Germany have pretty similar rules to the UK, with some differences. For example, in France a VLOS autopilot is allowed under certain conditions. Meanwhile Germany has some of the most progressive drone rules in Europe — state authorities can permit BVLOS flights when the operator is able to verify a safe flight record. Notably, DHL have been granted exemptions to test BVLOS drones in Germany.

Things are not too different in the US either although consumers have to register their drone with the FAA, and there’s a 25kg limit. Commercial users used to have a harder time but on June 21st this changed with the Part 107 legislation. Getting a commercial drone licence is now a straightforward process with restrictions similar to the UK. The FAA is also working with PrecisionHawk and BNSF Railway (owned by Berkshire Hathaway) to test commercial BVLOS drones — but under very controlled conditions far away from other people. In any case, these examples raise hope that widespread BVLOS technology will ultimately be accepted by the FAA.

That’s it for now! In my next installment I’ll talk about the different market segmentations in a bit more detail and where I think the investment opportunities lie. Thanks to the whole team at Balderton and specifically James Wise and Sam Myers for their advice through this. Stay tuned!

References

[1] sUAS news; Drone Industry Insights

[2] Goldman Sachs Investment Research; FAA Aerospace forecast

[3] Goldman Sachs Investment Research

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