Why drone investments have been failing to take off
Anyone following the drone industry will have noticed a spate of high-profile investments collapse, and you might be wondering what’s going on. There has been a great deal of hype around the sector and, much like olive groves and emu oil, money has poured in to non-profitable and ill-conceived ventures.
It seems success is no longer judged on business fundamentals, but on how much external investment can be attracted. Investors have been buying into the hype and seeking out high-risk and high-return opportunities without examining the ability of those companies to actually bring value to their clients and turn a profit.
Reports by the large consulting firms predicting the drone market will be worth billions of dollars are stoking this investment gold rush. The big money seems to be flowing into software and hardware without considering that there also needs to be a healthy ecosystem of service providers as customers for such solutions.
Our own drone service business has attracted a bit of interest from investors who then baulked at our very respectable, but in their eyes moderate annual growth. They are seeking ‘Unicorn’ companies with the possibility of infinite scale in the digital realm, even if there is nothing more than an exciting idea behind it. It seems distasteful to them that we are reliant on staff and physically doing things in the real world, as that is much harder and takes longer to grow.
There is no shortage of media releases trumpeting the success of a business in gaining further investment, even if they haven’t managed to show a profit from earlier rounds. In only a few short years at least several hundred million dollars has been lost as these companies go under before delivering on the dream. From our vantage point we can see a few obvious examples careering towards the same destination.
A cursory look at the drone companies that have listed on various stock exchanges around the world also paints a pretty bleak picture, with some now having lost over 99% of their value within just a few years. AUAV has had multiple approaches from investment companies wanting to help us go public, but in our opinion it is too soon for that, the demand-side of the market is growing but isn’t ready yet.
So what is going wrong?
In many cases it is money pouring in before the market demand was ready to expand. In a few notable cases the investment has gone towards something that the market didn’t ask for or is priced too high compared to the current method of doing work. Customer discovery and ROI assessment seems absent in many cases.
For example, if you’re going to develop drone-in-a-box systems to cut out the pesky human drone operator on site, you might want to first look into whether the regulations will allow that to be used (not to mention, it shouldn’t be orders of magnitude more expensive than having a person on site!).
Likewise, drone delivery is going to be a massive industry in itself some day, but that is likely a long way off. So unless you have incredibly deep pockets to compete with the likes of Google and Amazon over the next decade or so, you had better pick a shorter term goal where you can get some real traction in a specialist high-value delivery service (hint: that isn’t delivering fast food or convenience items to people in the cities).
A good example of this shift to nearer-term thinking is Volodrone, who are one of the leaders in passenger drone development. Recognising the regulations allowing that are a long way off, and there’s not much they can do to accelerate that, they went looking for what they can achieve in the mean time, and compared to existing solutions the idea of spraying 200kg of product rather than the usual 16 is a game-changer for large agribusiness, and something they can monetise right away.
The drone services industry is now starting to show signs of professional maturity, with the successful companies focusing on different areas and a secondary layer emerging for things like drone legal services and expert consultation. Although the market is mostly still made up of small operators, the impetus for a consolidation roll-up is gathering momentum, as the scale of clients and contracts ramp up.
Overseas there are a few notable companies that are investing in service delivery expansion, with investors playing the long game for a ‘sub-unicorn’ return, and we have started seeing some M+A activity.
There is no denying it, growing a drone service business is hard work. You have to demonstrate to clients that this new approach is now mature enough to rely on, and also invest in new equipment and training to keep up with a fast-moving landscape, while dodging angry birds and fixing flat tyres in remote project locations. That challenge also presents an opportunity though, because not everyone is up to it, and those who can reliably meet the challenge will find themselves in a dominant position as the market matures.
Although we’re not specifically chasing investment, AUAV is certainly open to the discussion if the above sentiment resonates.
In the mean time though, we’ll continue to focus on growing a sustainable business and bringing the best people in the industry together to do amazing things. In our experience this is going to be a marathon not a sprint, but having a staff of skilled and dedicated experts delivering valuable results to clients is hard to beat over the long run, and we’re in it for the long run.
Dec 18th 2019