Drones are overhyped


I wrote this in May 2016 so some of the information may be a little out of date.


Executive Summary

Drone startups have garnered increasing investor attention over the past five years, with an all-time high investment of $450M across 74 deals in 2015. 67% of those deals were at the Seed/Series A stage, implying the industry is still nascent and could grow significantly as the market matures.



This is relatively small compared to the $2.65B[1] in funding a new category, such as Insurance Tech, has secured during the same period or the $30B Internet Software companies have raised. While drone investing lags more established players today, the release of FAA regulations could cause the sector to grow faster.

However, the market overall is fairly small at ~$3B with defense drones accounting for close to 100%. In addition, it’s hard to argue that drones are a 10x improvement over an existing service/product rather than a nice-to-have. The other frontier spaces such as space and virtual reality hold more promises for investors and investing in drones would certainly incur an opportunity cost.

If investors choose to invest, they should focus on energy density, security, and avionics sectors. There is a limited competitive set given the current absence of regulations and a previous focus on hardware, and it makes sense to invest before the space is crowded.

Brief Drone History

Nikola Tesla first introduced unmanned vehicles in 1898 at an exhibition in Madison Square Garden. Throughout the 1900s, and especially during World War I and II, drones have gained popularity amongst military minds. Whether it was using drones for training anti-aircraft gunners or forcing enemy forces to reveal their locations without sacrificing human pilots, applications tended to center around combat situations. The drone that most are familiar with, the Predator, entered service in 1995 and was used heavily in the post-9/11 era to fight terrorism. Its use became the subject of media and public scrutiny, eliciting fears of disassociation from mass human casualties.[2]

Improvements in the size and cost of battery technology, motors, transistors, and GPS over the past 20 years have enabled the hobbyist and consumer drone markets to emerge. It wasn’t until 2010 when Parrot unveiled its AR drone at the Consumer Electronics Show that consumers had access to unmanned areal vehicles (UAVs). Since then, companies like DJI, Parrot, and 3DR have capitalized on the confluence of technology improvement and consumer interest by developing a number of drone models priced in the sub-$2,000 range. Tech companies have also unveiled drone plans – in 2013 Amazon CEO Jeff Bezos indicated a future service called Prime Air, where drones would deliver customer purchases within 30 minutes.

Drone Market



The market for defense-focused drones, such as the Predator, remains active and significant. In 2015, it was $3.2B out of the $3.3B drone market in the U.S., with Northrop Grumman, General Atomics (Predator manufacturer), and Textron owning 83.5% of the market[3]. The defense market currently accounts for 96% of drone revenue.

Defense disruption was demonstrated by Elon Musk with SpaceX in the aerospace field: he showed that a startup can compete with established industry players and leverage drive, ambition, absence of a bureaucracy, and technology to hold its own. This is possible, and likely, in other defense fields such as drones, but the disruption is still 10+ years away (largely due to the challenges described below), which is more than the life of a typical venture fund.


The consumer market includes hobbyists and general consumers buying drones for personal use – whether it’s taking photos (e.g., Lily Robotics’ throwable drone camera), racing (e.g., The Drone Racing League; though this straddles consumer and enterprise with advertising), or purely for fun. The Consumer Electronics Association (CEA) projects this segment to reach $300M globally by 2018[4]. This is likely too small a market for venture funds to invest in due to the returns required to return their limited partners’ (LP’s) money. It is worth noting that products like Lily could take off similar to GoPro and be a worthwhile investment.

According to Gartner, the personal drone market is early in the hype cycle and consumers are only beginning to adopt the technology. This implies that as consumers gain an appreciation and educate themselves on drones, there are likely to be new drone manufacturers who take advantage of increased demand, as well as a further segmentation of the consumer market as manufacturers tailor their offerings to appeal to different demographics. 



The commercial segment is where investors should focus their attention if they choose to invest in this sector. The market size is expected to be $2.07B globally by 2022[5], growing faster than both the consumer and defense markets.

Similar to personal drones, Gartner predicts in its 2015 Smart Machines analysis, that commercial UAVs are approaching the top of the hype cycle but have more than 10 years before they plateau. It isn’t clear that venture investors could put in money and exit prior to the market correction associated with disillusionment.

Commercial drones currently target industries where drones can replace humans. There are several that have economic incentives to adopt drones in order to reduce headcount and improve efficiency, but drones are not necessarily the game-changer that will disrupt them.

  • Agriculture: drones could survey as well as treat acres of land in a matter of minutes rather than hours or days it would take a human. Another take on this is minimizing replanting costs, where companies such as Droneseed are installing pneumatic seed injectors on drones that enable nearly instantaneous planting of trees
  • Oil: examining miles of pipelines, providing supplies to oil rigs or tankers, surveying potential drill sites
  • Search and Rescue: whether it’s flying into a burning building or locating an earthquake survivor under a collapsed structure, drones could improve the speed of help
  • Real Estate: surveying potential and existing sites
  • Law enforcement: help police avoid risking their lives in hostage situations or locate wanted persons of interest; can equip drone with infrared/night vision for night operations. Another take on this is using drones to catch poachers
  • News: send in drones instead of helicopters and/or personnel to get coverage of a story
  • Medical: delivering vaccines or medication in situations where seconds are the difference between life and death
  • Delivery: imagine receiving your Loubotins or groceries from a drone outside your door or window


Challenges and Opportunities

The industry faces a number of challenges and therein lie potential investment areas. Astute investors in this market should look for scalable companies that can address one or more of these problems. Odds are, the hardware will become increasingly commoditized, so investing in software and services that enable future drone operations will be the key to generating returns.


There are currently no governing rules for operating drones commercially, which has potentially impeded an explosion of drone technology. The FAA has missed their 2015 deadline for releasing commercial drone guidelines, and the new expected date is June 2016. Recently, they received a recommendation from an internal committee to classify drones based on their proximity and length of flight over crowds. It remains to be seen whether they implement the recommendation in their official report.

The FAA has allowed certain drone companies to operate under a Section 333 exemption, which it currently grants on a case-by-case basis. By the end of 2015, the FAA has granted over 1,000 exemptions, with the majority going to real estate, photos/filming, and utilities/energy[6].

Recently, the three largest drone manufacturers, Parrot, 3DR, and DJI, along with GoPro have formed the Drone Manufacturer Coalition, leaving the likes of Google, Intel, and others in the Small UAVs group. If the first group focuses on consumer drone lobbying while the latter on commercial use, it could be what the market needs to hasten the FAA to release regulations.


The current top-of-the-line (rotor-based) drones have a flight time of less than 30 minutes. As consumers become increasingly untethered (mobile phones, wearables, drones), the technology will need to keep up. Facebook’s Aquila drone, which has fixed wings covered in solar panels, is one take on addressing this challenge. The drone intends to cruise at high altitude and user lasers to enable wireless connectivity in remote areas of the planet.

Companies to watch:

  • Pellion Technologies: magnesium ion battery technology development; funded by ARPA and Khosla Ventures
  • Enevate: has raised $60M+ to develop new high-density energy source


There has been somewhat negative portrayal by the media in the drone arena. Starting with scrutiny of the Predator drones wreaking havoc on foreign soil to arrests of drone operators due to flying one too close to the Empire State building. This can have the unintended side effect of turning public sentiment against drone technology, which in turn can slow the FAA ruling. In addition, drone companies have to spend a significant amount of time educating the industries they are approaching, such as oil, about drones and how they could be beneficial. While the millennial consumer will grasp the concept quickly, established large corporations may be slower to adopt.

Companies to watch:

  • Drone Racing League: the entertainment angle relating to drones could balance the negative media portrayal and prevent public sentiment from turning too negative; $8M raised
  • TravelByDrone: capture the world through drone photography; This can help consumers discover new places and drive tourism


As regulations get developed, it will be critical for drones to be aware of no-fly and restricted zones lest they impact consumer psychology as noted above. Technology should also enable authorities to take over or disable drones that “misbehave”.

Startups to watch:

  • SkySafe: disables or takes over drones remotely; $3M raised
  • AirMap: manages no-fly zones for drones; $17M raised


Once a drone is airborne, it must be able to adjust to unforeseen conditions, from weather to humans to planes. AI, not all too dissimilar from that used in self-driving cars, could be adapted to drones to enable intelligent self-navigation.

Startups to watch:

  • Skydio: develops drones that will fly autonomously; has a team of experts in computer vision, consumer electronics, and robotics. Raised $28M
  • Airware: operating system for commercial drones; has raised $70M+ from venture companies

Competitive Landscape

There are currently only 58 companies that have raised over $1M in funding, potentially due to investors awaiting official commercial regulations prior to committing serious capital to the technology[7].


Most of the focus in startups has been on Hardware, but for venture businesses, software-focused businesses will be more attractive. They require less capital and are more easily scalable.

In addition to these startups, companies like Tesla, Facebook, and Google play the role of potential purchasers as well as direct competitors.


Though drones have been around for decades, only recently have technology advancements in consumer electronics enabled consumer exposure. With drones ranging from $50-$2,000+, the consumer has plenty of options to choose from. To date, investor attention has focused on drone manufacturers, but as the FAA decision nears and hardware becomes commoditized, software and services enabling security/avionics along with developments in energy density technology should command the venture dollar. However, because investors have to choose the best companies, not simply good ones, their attention should focus on other sectors such as space and virtual reality where the business disruption factor is at least 10x. At this stage, the drone market is too small, business case not sufficiently robust or scalable to be a venture business, and the technology is feels more like an augmentation of existing businesses than a 10x improvement.

[1] CB Insights

[2] http://fortune.com/2014/10/09/a-brief-history-of-drones/

[3] IBISWorld

[4] https://www.cta.tech/News/News-Releases/Press-Releases/2014/Let-Them-Fly-CEA-Applauds-FAA%E2%80%99s-Ruling-on-Drones.aspx

[5] http://www.prnewswire.com/news-releases/commercial-uav-market-size-to-reach-207-billion-by-2022-grand-view-research-inc-540720371.html

[6] http://www.uasvision.com/2015/09/07/analysis-of-faa-section-333-exemptions/

[7] CB Insights

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