VCs Start To Swarm On Drone Deals

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Editor’s Note: Christine Magee is an analyst for CrunchBase.

It’s not big money yet, but drone technology has investors looking to the sky for pennies from heaven.

Venture investments last quarter hit an all-time high of $65 million as Airware and PrecisionHawk raised some of the first significant follow-on rounds to date. Seed rounds shot up in 2013 as 14 new drone tech companies closed their first rounds of funding.

Drone innovation is moving at light speed as entrepreneurs leverage the technology behind military combat UAVs to solve civilian problems, from commercial data capture to on-demand burrito delivery.

As drone tech stages a full-scale invasion of the commercial sector, venture investors like Andreessen Horowitz, First Round, and Google Ventures are among those placing early bets.

“Many transformational technologies seem like they come out of nowhere, but really the U.S. military has been spending many years and tens of billions of dollars on drone technology,” says Jeremy Conrad, former U.S. Air Force Officer and founding partner of seed stage hardware firm Lemnos Labs.  “You just don’t see them in the civilian sector until the price points go down.”

Now the cost is low enough, but drone tech companies in the U.S. are currently facing another blocker in the form of legal restrictions from the Federal Aviation Agency.

While recreational use of drones is legal, the FAA prohibits commercial use of drones without prior approval. The agency has yet to release a final draft of rules governing commercial drone use, which has created a legal grey area for entrepreneurs as they continue building technology that, for the most part, hasn’t yet secured legal approval.

At first glance it’s surprising that investors have been so eager to back drone companies in the past two years with such a high degree of uncertainty in the space. The top funded drone tech startup, Airware, is an aerial information platform for developing and operating commercial drones.

“I think some investors are waiting around for some clarity from the FAA, but we’ve always viewed this as an area that will get resolved because it has to,”says Eric Norlin of SK Ventures, “it’s never scared us off from making a drone investment.”

One of the most frequent investors in the space, SK Ventures has backed companies like open-source drone tech and hardware manufacturer 3D Robotics and aerial robotics platform Skycatch.

Some investors may be hesitant to back drone companies until the legal landscape becomes more clear, but those working closely with drone tech understand the difficulties behind regulating it.

“I’ve been really pleasantly surprised by how quick the FAA has started to move on this, designating test zones and giving special licenses, and we really care about working with the existing regulatory framework,” says Conrad.

Conrad’s Lemnos Labs, along with a list of investors including Google Ventures and First Round, contributed to a seed round for top-funded drone company Airware in 2013 when regulatory standards were even less clear.

Airware is hoping to avoid any surprises by working closely with the FAA as it begins to establish a legal framework.

“You can think of Airware like Windows, it’s an operating system for drones,” explains Airware investor and board member Chris Dixon of a16z. “There are two layers – one is a closed layer that’s approved by the FAA. So when the drone is operating over a certain area, Airware transmits that data to the FAA, and if it goes outside of that geofenced area, it automatically grounds itself and the person directing it cannot override that.”

Granted, the geofenced area Dixon refers to is not going to be in the middle of New York City. In the near-term, Airware’s technology will be used to facilitate drone use in very low-population areas where safety and privacy issues are very clear, such as in the agricultural industry to measure water levels and crop fertility.

“Drone delivery – that’s one of the more dangerous things,” Conrad points out, referring to the handful of drone-related incidents in cities over the past year. “That’s where I think the regulatory framework is going to be very strict, as it should be, because safety is paramount.”

This is the problem Skyspecs, a current R/GA Connected Devices company, is aiming to solve with software that enables drones to get up close and personal to objects and people without crashing.

“Drones have an ability to do a lot of cool things in the world when they’re close to things, and we want to enable people to fly these things up close and personal to these things of interest – in cities, in homes, in schools,” says Skyspecs founder and CTO Ryan Morton. “We’re tackling a major piece of that pie for these things to be legal and safe.”

The FAA is expected to make an announcement regarding commercial drone legislation very soon, which will provide some clarity for entrepreneurs, investors, and consumers.

In the meantime, investors already active in the drone tech space are eager to stay ahead of the curve.

“I think we see most of the high quality stuff that’s out there via our deal flow, but it’s not nearly the volume of startups that I wish were in the space,” says Norlin. “There’s just a ton of ‘open field’ room for innovation here, especially as it relates to high altitude drones (that border on satellites) and data-driven services.”

While the futuristic Amazon city drone delivery model may not be something we should expect to be seeing anytime soon, the possibilities for commercial drone use are vast once the operational ban is lifted. From helping firefighters survey dangerous buildings to allowing civil engineers to closely inspect bridges from the ground, drones have the ability to prevent unnecessary risk in a variety of commercial use cases.

“We’re pretty bullish on the future of drones,” Conrad affirms. “If you think about what the military has done with it and how it’s changed day-to-day activities, I think there are a lot of parallels to that and a lot of possibilities in terms of how we use these drones to build really great businesses.”

Dixon says a16z is actively investing in drone tech as well, looking for the next level of technology to be built on top of Airware’s operating platform.

“I hope what you’ll see is the regulations get cleared very soon and you’ll see a whole bunch more activity,” says Dixon, “and my hope is that 2015 will be the year of the drone.”

Image via Flickr user BLM Oregon/Washington.

Featured Image: Bureau of Land Management Oregon/Washington/Flickr UNDER A CC BY 2.0 LICENSE