Drone startups hoping to snag venture-capital Funding may have hit some turbulence.
Financing for drone Companies fell 59% year-over-year in the third quarter, and 48% from the previous quarter. The drone industry’s numbers were starker than for venture-capital funding overall, in which funding dollars fell 39% from the same quarter in 2015 and 14% sequentially.
That’s according to the latest Venture Pulse report, a quarterly global report on VC trends published jointly by KPMG International and CB Insights. The data tracks VC-backed deals and dollars for companies worldwide.
There was $55 million invested in eight VC deals for the drone industry in the third quarter, compared with almost $106 million invested in 13 deals in the second quarter. In the third quarter of 2015, $134 million was invested in 12 drone-related companies, part of a banner year for drone startups.
“In 2015, everyone was super-hyped about drones,” said Alex Niehenke, an investor at Scale Venture Partners. “We’re now starting to see the leaders emerge.”
This year has seen the drone industry establish winners and losers. 3D Robotics laid off more than 150 people and burned through almost $100 million in venture-capital funding, according to Forbes. Meanwhile, drone maker DJI is valued at $8 billion and controls 70% of the drone market, according to Forbes estimates.
Niehenke, whose firm funded DroneDeploy as part of a $20 million Series B funding round in August, said that since leaders have been established in drone hardware, venture capitalists are now looking to the software space. DroneDeploy creates mapping software used primarily on DJI drones
With reliable hardware from companies like DJI in place, Nienhenke said that many venture capitalists are now more attracted to software companies because they require less capital (and, therefore, less funding) to accomplish their goals, along with other changes in the drone industry.
“The reason we are now deploying our dollars is because of the combination of off-the-shelf hardware, the vast improvement in quality of drones and the recent regulation,” he said.
The FAA in August began regulating commercial drone use in the U.S. by allowing anyone who passes a written test to operate a drone for commercial use. Previously, commercial drone operation required businesses to go through a lengthy waiver process, with strict requirements including a manned aircraft license requirement.
“That’s where a lot of investors had concerns over the last couple years,” said Jesse Kallman, president of the Silicon Valley Chapter of the Association for Unmanned Vehicle Systems International and an employee of Airware, one of Silicon Valley’s most heavily backed drone companies. He said investor confidence is now rising given the new FAA regulations.
“The VCs, and more importantly the customers, now see that the barriers to entry are much lower.”
Ron Stearns, Business Development Director for Robotics and Unmanned Systems at the Velocity Group, predicts that the companies that will be most successful in nabbing VC funding in the future won’t be focused solely on drones.
“(Venture capitalists) want to see an established company that might not be wholly reliant on the drone for survival,” Stearns said. “The more patient money will likely look for established commercial providers of imagery and information who are making drones a part of their operation as opposed to saying, ’We have a drone and now we have to find a way for it to work.’”