The sale of the assets of Airware, a leading drone software company, brings to an end one of the most promising venture-capital funded startups in the nascent drone industry, highlighting the looming consolidation ahead.
France’s Delair Tech announced on Tuesday that it would purchase the critical assets of Airware, including its Redbird analytics software and an installed base of customers and dealers worldwide. An auction house is selling other assets today. Airware’s approximately 120 employees were laid off in September.
It is a disappointing end for a company that emerged as an early darling of venture capital investors, raising $118 million from 2013 to 2018 with an additional undisclosed 2017 investment from Caterpillar Ventures. It ranks as the third-largest venture capital funded startup worldwide. Only China’s DJI Innovations and 3D Robotics of Berkeley, California, gained more funding.
Airware’s blue-chip investors included Caterpillar Ventures, GE Ventures, Google Ventures and Intel. The company won customers that included State Farm Insurance, the largest property and casualty insurer in the United States, and General Electric.
Despite this initial promise, Airware ran into problems that forced it to shift its strategy. Initially, the company planned to provide the operating system for drones. The goal was to become a Microsoft of drones, enabling greater commonality and utility for drones. Then the company shifted to providing more hardware. DJI, which has more than 70% of the market for drones worldwide, proved to be a formidable competitor. As DJI’s intense competition pushed Airware out of hardware sales, it moved more toward providing software for drone data collection and analysis. Even its new strategy was insufficient to provide enough cash flow to survive.
Airware faced other problems that are common to many venture capital startups. Airware is only the beginning of the consolidation of the industry, which will force a wave of mergers and bankruptcies. If the combination of financing, prestigious backers and blue-chip customers would not work for Airware, then most of the venture capital startups, which have much less, promise to face serious problems in coming months and years.
The flood of venture capital funding for drone startups has spawned a large number of companies competing for the limited business currently available. Venture capital funding over the past three has provided half a billion dollars annually to more than 90 companies, few of which will be profitable in the foreseeable future. If these companies cannot begin to show a path towards profitability, patience will run out, and the funding that keeps them alive will dry up.
The rise of DJI shifted the competitive drone landscape, creating some of the pressure. DJI began by providing consumer drones and then moved up the value chain into higher-value drones that can be used by hobbyists and by commercial drone firms. DJI’s ability to produce large volumes and rapidly introduce new products and improved versions of existing products has given it an unbeatable cost and technological advantage. The company’s sales have soared from $25 million in 2012 to approximately $2.7 billion in 2017. That has deprived many of the other drone startups of the oxygen they need to survive.
Venture capital is already shifting where it places its bets. The substantial investment in hardware has ended due to the commoditization of the sector with the dominance of DJI. Instead, the investment focus now is on drone services and analytics.
3D Robotics, the second-largest venture-capital-funded drone company, which raised $179 million from 2012 to 2017, also went through this transformation. Its efforts to compete against DJI with a consumer drone failed, forcing it from the field. The company recreated itself as a drone software provider for construction, engineering and mining firms.
The overall problems in the drone sector remain for services and analytics. The commercial market is developing more slowly than optimistic investors had hoped. Regulatory barriers are taking time to loosen. Without Federal Aviation Administration approval to fly beyond visual line of sight, the commercial viability of many operations in agriculture and industrial inspection is in doubt.
Companies are adopting drone technology cautiously. The large firms that could deploy large fleets of unmanned systems are still running proof of concepts to ensure that drones will meet their needs and provide cost savings.
Many drone companies keep shifting their strategy in search of revenue and ultimately profits. Many other companies are mirroring Airware’s journey from hardware to software and analytics. Some are even moving into services as another way of trying to broaden their revenue base.
Although drone startups zealously guard their financial results, many not only are unprofitable but generate very little in sales.
There is no doubt that there is a large, profitable market ahead in commercial Unmanned Aerial Systems (UAS) (not to mention civil government and consumer UAS). Teal Group forecasts a commercial market of almost $40 billion over the next decade, but revenues this year will be only $800 million. Companies need the staying power to allow the market to mature.
Airware’s demise is a cautionary tale about the time that will be needed to develop profits in the drone industry and the need to ensure long-term funding to get there. On this Halloween, it is a warning about zombies of the drone industry, kept alive for now only by short-term infusions of venture capital.