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As Drones Take Off, San Francisco a New Hub for Unmanned-Flight Startups

Dena Levitz Headshot

Dena Levitz

Challenge Cup Reporting Fellow, 1776

The possibility and wonder around flight has always enthralled Bryan Galusha. He considered becoming a pilot to satisfy this passion—and then had a realization.

“There’s always that risk of crashing,” he said.

Instead, he found a way to combine a safer form of flying with his avid interest in video game technology: the field of drones. Three years ago, Galusha, who has lived in and around San Francisco since 2008, launched a startup focused on unmanned flight called Fighting Walrus. Its hardware, iDroneLink, allows users to connect their smartphones or iPads to a personal drone and control it at distances of up to a half mile.

The hardware, along with the associated iOS app, went live in December 2014, and is serving customers that range from roofers doing inspections to fishermen seeking to catch the best tuna in the area. Every day, Galusha says, he’s surprised and delighted to learn of a different, unanticipated sector with interest in the product.

As Galusha ran an Indiegogo campaign related to his new company, he also got the idea to bring together other like-minded drone enthusiasts, especially those creating businesses around the cutting-edge technology. The SF Drones Startup Meetup was the result.

Now 1,300 members strong, the meetup is one of the largest such groups in the country.The fact that such a large assemblage of drone makers and operators is gathering in the San Francisco Bay Area is not coincidental. Silicon Valley is well positioned to seize on opportunities in new startup markets—and right now, one of the hottest new markets is drones.

As a result, there’s an ecosystem within an ecosystem coalescing around drones in the San Francisco area. Though there aren’t yet incubators, accelerators or VC firms exclusively dedicated to drone-based solutions, there has been a noticeable uptick in interest from all of these players, says Galusha. That’s why, compared to drone meetup groups and communities in places like San Diego or D.C., he says the activity in San Francisco is “more business oriented,” serious and concentrated.

Gretchen West, vice president of business development and regulatory affairs for Drone Deploy, a startup based in San Francisco’s SoMa neighborhood, agrees that what’s happening in her city around drones is unique.

“There’s not a lot of concentrated hubs [for drones] quite like there is in the Bay Area,” she says. “Resources here are developing. It’s a pretty robust community that’s very much collegial and collaborative. I don’t know that you’d find that in most other places.”

Community collaboration around drone regulations

What has really changed in the past few years is awareness and interest in drones, according to Galusha. Amazon, in particular, changed the public consciousness and made people realize robots have the capability to do things like deliver packages.

Everyone took notice—especially Silicon Valley’s players, says Bilal Zuberi, a partner at Menlo Park, Calif.-based venture firm Lux Capital.

“The startup ecosystem is excited because Amazon talked about drones. Facebook talked about drones. Google talked about drones,” Zuberi says.

The other major, recent development is regulations. In mid-February, the Federal Aviation Administration released it proposed guidelines around commercial use of small unmanned aircraft. There was some sense of satisfaction and glee within the drone ecosystem: The guidelines fundamentally made flying drones legal.

Michael Blades, Frost & Sullivan’s lead industry analyst, says with the framework out, “some investors who have been waiting in the wings will dive in now.”

The proposed regulations are widely considered less strict than expected. Among the rules, drones have to fly within an operator’s eyesight and can’t climb above 500 feet or fly over people. The FAA also clarified that the license required for commercial small drone operations doesn’t have to be a commercial pilot license, but a special “UAS operator certificate,” which will be easier to obtain.

Now, especially in the Bay Area, there’s unity around regulatory and policy considerations. Groups—such the UAS Coalition that Amazon launched—have sprung up or merged to lobby in a more organized fashion.

Drone solutions are such a new area that, generally-speaking, “nobody wants to share their secret sauce,” Galusha says. But when it comes to regulations and ensuring that drone businesses can legally operate, there’s great collaboration in the ecosystem.

West says Drone Deploy was not expecting two of the restrictions: the visual line of sight requirement for where drones may go, and the requirement of one person per drone.

“Our software can manage fleets of drones…so there are positives and negatives to the framework,” she says. “There’s really a long way to go to enable this industry.”

For the most part, West says, the contingent of Bay Area drone startups agree with the general rules, yet would like to see limits on flying over people lifted.

Zuberi sees the FAA’s actions as key, making drone flying legal and setting some needed parameters. In a blog post last month, he called the FAA regulation framework a “watershed moment.”

“Any industry can benefit from aerial robotics but up until now it’s technically been illegal in America,” he says. “The regulations aren’t draconian laws …They could have easily said that all drone operators would have to have a pilot’s license, but they didn’t. [The regulations] are the kinds of things that will have many more companies interested in drones.”

San Francisco Panorama 3Software, hardware and everything between

So who’s who in San Francisco’s drone startup scene, and what are they up to?

Drone Deploy is one of a handful of well-known companies. The startup, which has about $2 million in seed funding, does real-time aerial imagery and processes everything in the Cloud. West says its capabilities allow for automated drone flight. Drone Deploy is working with a number of different hardware companies and selling its software solution to companies in mining, construction and agriculture primarily.

The startup’s trio of cofounders are South Africans who grew up flying hobby planes. Their shared interest in these sorts of flying objects inspired their focus on drones. Locating the company in San Francisco put them close to big corporate partners like NASA, which only helps them scale, West says.

Other major drone startups in and around San Francisco include Airware, Skydio and Berkeley solution 3-D Robotics. Galusha calls these startups the “core group.” Each has serious financial backing, a growing count of team members and, most importantly, traction.

Skydio, for one, recently raised a $3-million seed round and uses sensors and processors to navigate drones more precisely with respect to their surroundings. 3-D Robotics, in its last funding round, reaped a whopping total of $50 million. The company is North America’s largest personal-drone manufacturer and plans to use the cash infusion to expand both its hardware and software operations.

Besides these heavy hitters, there are dozens of less visible startups, including Fighting Walrus. Galusha says these smaller guys are often two- or three-person teams that are taking on distinct niches of the drone sector, providing one very specific component or mastering one step in the flying process.

The drone ventures scoring the highest revenue at this point tend to be hardware ones, making very easy-to-fly aircraft for general consumers. That will change in the next few years, as analysts see the greatest potential in software solutions that treat drones as platforms for enhanced functionality.

“There are a few companies that make the control system and a few making the sensors and a lot more competition in platform manufacturers,” Blades says. “But that’s becoming played out.”

Blades predicts that 50 to 75 percent of the drone companies in existence will be gone within five years. Only the strongest, most transformational companies will survive.

The sophistication of today’s drones only scratches the surface of what’s possible and how amazing drone applications will be within the next decade, he says. Expect a wide swath of industries, from construction and energy, to photography to agriculture to rely on extremely mature robot networks, he says.

Zuberi urges thinking about drones as a platform to do exciting things, not as the end product. Unmanned aircraft began as tools for hobbyists but have game-changing potential, which is the pattern among a number of technology products over time.

“All interesting tech starts as toys in the beginning, whether you’re talking about computers or iPhones,” he says. “Then they turn into massive entities that we can’t live without.”

Soaring funding levels for some drone companies

As far as investments in drones, last year was an absolute banner year. VC funding topped $100 million—a 100 percent increase over 2013.

CB Insights, which breaks down this massive VC spend, shows that a substantial chunk of it is from the big-name, big-spending firms in and around the Valley, not new investors or specific drone investors. They’re simply making drone solutions part of their diverse portfolios.

Zuberi’s firm, Lux Capital, has started to back drone and robotics companies. Zuberi describes Lux as different from prototypical Silicon Valley ones, because the partners only invest in companies solving real-world problems. Some of their portfolio reflects a particular technology bend, with 3D printing and artificial intelligence represented along with data-driven medicine and energy startups.

“In the broadly defined world of robotics a lot of interesting things are happening,” he says, “and we want to be there.”

For 2015 Blades is expecting at least as much VC money going toward drones as last year. In his mind, any VC with a concentration on tech or even on oil and gas is going to want a piece of the enormous drone pie. Besides VCs, the other drone startup development expected for 2015 is the emergence of more deals between defense companies and startups or commercial companies with them.

“It’s not just VCs and angels. Corporate funding is starting to make its way [into this ecosystem.] Airware raised money from GE. And these large enterprise companies are starting to invest too,” West says. “Certainly a lot of money is flowing into this startup community.”

Dena Levitz Headshot

Dena Levitz

Challenge Cup Reporting Fellow, 1776

Dena Levitz is traveling to almost all of the Challenge Cup cities to cover the competition and analyze startup ecosystems around the globe. Dena joins 1776 after finishing the first…