High Expectations

The evolution of unmanned aerial vehicles (UAVs), and the activity and markets associated with them, has been complex, and sometimes contradictory. Sophisticated technical products mass-produced and sold cheap; markets ripe for commercialisation but resistant to change; environmentally clean yet a perception of nuisance and hazard; facilitative of transparency while jeopardising privacy. A market with exciting economic prospects but which has largely failed to capture the commercial investment needed to realise its full potential.

There is a sense, however, that things may be about to change. After a decade of troubles and mixed fortunes – limited investment, failed start-ups, regulatory hurdles, headline-grabbing fraud – the industry had undoubtedly started to pick up, with a significant increase in both the use of drones and their application. Private recreational use increased dramatically, but so also did the use of UAVs in a growing number of commercial contexts. UAVs became commonplace in the construction, infrastructure, planning and agriculture industries, and they emerged as an increasingly valuable tool for inspection, rescue, border control and emergency services. Drones are now used in journalism, insurance, security and marketing and, in certain parts of the world, they are already a much-used delivery system of everything from medical supplies to food and small electronic goods. All of this in addition to the extensive use of UAVs within the military and defence industries.

So (pardon the pun) drones were already on the way up, with 628,000 jobs in the drone economy predicted by 2030 (PwC Report 2018 – "Skys Without Limits"). And then came the COVID-19 crisis. The need for remote connectivity had never been so great – some immediate examples being delivery without contact and remote visualisation.

"The crisis has highlighted the potential role that unmanned aircraft delivery systems can play in limiting human contact, keeping goods moving to our essential services like hospitals, and ensuring some of our hardest-to-reach communities remain connected." (Skyports, 2020)

The COVID-19 pandemic lit the touch paper – regulations were relaxed to enable immediate and extended use, political will swung behind the industry, and the imagined future of drones started to become a reality.

It is said that Venture Capital is investing in foresight and, if that is true, then the VC market in the UK hasn't much liked what it has seen to date. There has been relatively little venture capital (or private equity) investment in the UK drones market to date and, at first glance, this might seem odd, given the nature and potential of the offering: a technology-based sector, scalability of business, future-facing business environment, political support, green credentials, etc. The industry would seem to tick so many boxes. And yet, the lack of investment is perhaps not entirely surprising.

So what's the problem? Well, there are two principal issues:

Firstly, the truth is that the markets with the greatest potential to drive returns have been resistant to change. Drone companies, operating in a start-up environment and often with a start-up mentality, have not yet managed to challenge the markets which hold the key to their future success - those areas which would deliver the exponential growth required to trigger change (and serious investment) in the sector. Infrastructure projects (roads, electricity, telephone), the oil industry, offshore wind – sectors which for many years have relied on traditional methods of access to remote and inhospitable places, such as dangerous scaffolds (with harnessed humans) or manned helicopter inspection and delivery systems – these are the industries where drone technology must challenge and break through. By way of an illustration of the efficiencies which UAVs can deliver, it is estimated that it takes a drone only five days to carry out inspection work on an oil rig which, using scaffolds and rope access, would otherwise take eight weeks - that delivers massive efficiencies even before taking into account the health and safety advantages of unmanned inspection. With that change will come potentially huge economic, safety and environmental wins. The COVID-19 crisis served to accelerate some of that progress and this has pointed the way forward for the industry (an example being the NHS trials being run by Skyports in the north of Scotland). As these advantages become reality, and the timeframes to success reduce, so too will venture capital and private equity purse strings begin to loosen.

One company which has pointed the way forward in this respect is Cyberhawk. Founded in 2008, Cyberhawk is a world leader in visual data management using drones for aerial inspection and surveying and its innovative application in the offshore oil and wind sectors has attracted several rounds of private equity funding. Moreover, in an ever-changing market, it has continued to evolve its offering, diversifying both in terms of its technical offering, through next generation visualization software, and through expanding geographical reach, capturing a share of the lucrative US market (thereby addressing the practical challenge of the seasonal nature of drone flight in the UK). This dynamic model shines a light as to how the UK market can, and must, develop.

A second inhibitor of change to date has been the record of significant failures in the drones market over the past decade (most notably, 3D Robotics in 2015 and then Airware in 2018). Investee companies have been unable to compete with cheap manufacturing (mainly by Chinese market-leader, DJI), and their strategies have taken too long to deliver returns. However, this too is changing – a move away from trying to compete on the manufacturing front to more focussed strategies, such as UAV software (e.g. inspection software, GPS restrictors and geo-fencing, UAV traffic management systems) or tangential models for commercialisation (e.g. drone data collection) has broadened the potential of the sector, disrupting markets with innovative applications, and now the UAV sector is very much in vogue. California-based Zipline, the global leader in drone healthcare logistics, using drones to deliver blood, vaccines and other medicines to remote locations in Rwanda and Ghana, recently raised an impressive US$229 million over three funding rounds and the signs are that investors' appetite is back.

In their 2018 report, "Skys Without Limits", PwC gave the following bold prediction regarding the economic impact of drones:

"Drones are a game-changer for the UK economy. Companies that embrace the nascent drone technology can transform their business performance, unlock significant value and reduce risk. Our prediction for the impact drones can have by 2030 is a GDP uplift of £42bn against our baseline forecast, or more than 1.89% of GDP."

Over the past decade in the US, there had already been considerable private institutional investment. However, according to research carried out for Forbes, venture capital funding for the drone industry in the US reached record levels in the first half of 2019 as investor confidence in the offering grew. What were already sizeable sums of investment (US$2.6 billion of venture capital funding made into drone companies from 2012 to June 2019) are predicted to grow exponentially over the next several years, with US$9.5 billion of annual sales anticipated into the commercial sector by 2028.

While the nature of the UAV companies that attract funding from venture capital are changing, they remain overwhelmingly US-based. According to Forbes, since 2012, US companies received 67% of the total US$2.6 billion investment, Chinese entities followed with 15%, while European companies trailed with only 9% of the total. However, if the US model is a guide – and it usually is in relation to VC and PE market trends – we can perhaps be confident of seeing parallel investment activity in the UK/European sector over the next few years and beyond.

Read Blue Sky Thinking: Legal implications of the Commercialisation of Drones in the UK – Part 2/2 here