Why Would Titan Aerospace Sell To Facebook? Because Investors Weren’t Biting

One question we had concerning Facebook’s interest in buying drone aircraft maker Titan Aerospace is why would Titan, a young company founded in just 2012, want to sell? Facebook’s interest in the business, after all, makes sense: It wants to use the drones to help spread Internet access to developing nations, via the Internet.org initiative, which is focused on connecting the “next 5 billion” people to the web.

But Titan, led by CEO Vern Raburn, who previously founded Eclipse Aviation, seemed to have developed some very innovative aircraft, or “atmosats” as the company liked to call them. The company’s Solara 50 and 60 models, for example, could be launched into the skies using battery power, then ascend to 20KM (65,000 ft.) above sea level where they could remain for five years without needing to land or refuel, using just solar power.

Unfortunately, innovation alone doesn’t keep the lights on, it seems.

Titan had previously raised an undisclosed amount of funding in seed, Series A, and A-1 rounds, and was planning to open a B round this year. However, the company was struggling to get investors to commit, TechCrunch learned from sources who had unauthorized access to internal information.

Apparently, VCs were interested in the direction the company was headed, but most felt that Titan was at too early a stage to be worth investing in, as it was still two years or so away from seeing revenues. (Social+Capital, for example, passed). Plus, they were hesitant to invest until Titan would be able to prove that its aircraft could do what it was promising. The Solara 60 aircraft, for example, could supposedly fly at 65,000 feet, it’s been reported, and could remain there for years. Titan itself hasn’t even been around long enough to prove that’s the case.

Some investors were also worried about the forthcoming FAA regulations. As Fortune had recently explained, rules governing the integration of unmanned aerial systems (UAS) into the national airspace in the U.S. are pending – a regulatory framework is due in 2015. But the rules regarding larger aircraft, like Titan’s Solara models, are expected to be much stricter.

Combined with the possible risk that the aircraft couldn’t sustain flight at 65,000 feet — which would be above the Class A airspace that ends at 60,000 feet — the risk may have been more than many VCs would want to take on.

One of the very few investors that remained interested was In-Q-Tel, the independent, nonprofit organization that invests in venture-backed startups that support the needs of the CIA and broader U.S. Intelligence Community. And In-Q-Tel was only sticking around because Titan was nearing a deal with Sandia National Labs. But it would not lead a round.

That meant Titan had to close other VCs, or turn to other funding sources, like high-net-worth individuals, perhaps. That could have taken some time.

With this uncertainty on the horizon for the company, a Facebook deal may have begun to look like the better option for the company and its employees. It meant that Titan would have the funds to continue operations, and become a strategic part of Facebook’s mission going forward. If Facebook is able to deploy Internet access to the rest of the world that lacks it, as Internet.org intends, then Facebook itself could become a significantly more valuable company than it is today.

Titan could also continue to operate more independently than other Facebook acquisitions. They wouldn’t necessarily need to relocate to Facebook’s HQ in Menlo Park, like a software-based startup might have to, for instance. And yet they would still have the benefits of working within a larger company, including the usual accoutrement of divisions like HR, Accounting, etc., which could help Titan focus more on its product, rather than the headaches of running its own company.

Finally, for Titan staff who would be joining Facebook, the Facebook deal is also potentially lucrative in the longer term. In addition to the buyout offer (reportedly $60 million), Facebook would issue $25 million in restricted stock units to Titan employees. Facebook valued the company at $75 million at the time of its offer to Titan.