The drone industry is going to see significant changes in the upcoming years. The newest trends firsthand were presented during the Aviation Expo Conference - the biggest aviation & drone conference in Poland. Together with industry experts, we have discussed the future of the drone industry, ways of fundraising, and what trends and innovations of drones are waiting in Industry 4.0.
Our guests and host:
Vadym Melnyk - CEO Dronehub Group.
Lukasz Chacinski - Member of the Supervisory Board at Dronehub Group.
Dawid Smolka - CEO of Nanovision VC Fund
Wlodzimierz Kuc - Director of the R&D Investment Department at the National Center for Research and Development.
Karolina Leszek - Consultant in Development, Innovation Grants and Incentives Practice, Dentons
Vadym Melnyk: A moment ago, drones were seen as toys for photography or filmmaking. Today we observe that large industries are starting to use them for monitoring infrastructure, critical data collection, or cargo deliveries. What is the future of drones in the industry? What are the trends and market prospects?
Vadym Melnyk: What are the trends in the financing of UAV companies?
Karolina Leszek: Talking about funding and existing trends in fundraising of drone projects, I can say that this is a great example of what kind of projects are trending now in fundraising. In the beginning, UAV companies were trying to get help from public institutions only for drones' model development or construction improvements. Over the years, we see that these aspects are expanded by building more advanced solutions, with a focus on particular industries (e.g. medical or aviation industry). Many projects are becoming more professional and innovative than it was in 2014/2015.
Vadym Melnyk: In the last five years, drone projects have become powerful tools for demanding industries, and we see a growing need for research and development work for drone projects. It is happening in the whole world. Drones are a hot topic, and currently, there are many investments around this industry. Recently Airobotics, the Israeli-based drone company, has closed an investment round for $30M. On Friday, Easy Aerial, the US-based drone company, has closed an investment round for $6M so my question is: How fundraising is functioning in Poland for the drone sector?
Dawid Smolka: To be honest - this is not an easy venture and industry segment. We see the drone companies are getting professionalized over the years. Within 2014-2015, drone companies were seen as "student science clubs" or teams of "models building's passionate." Today these people are serious entrepreneurs cooperating with key industry players and large international institutions. In the beginning, drones have brought a smile to faces, but today, when looking at what is happening in this market, we can say that drones are responsible for the huge transformation of Industry 4.0. UAVs are going to automate, robotize, and digitalize all of the industry segments. The word "drone" is just a keyword, including the whole drone infrastructure (drones, operators, ground infrastructure, software, etc.). The drone market is divided into two categories: cheaper drones (toys) and expensive (dedicated to advanced tasks with the whole spectrum of sensors).
Drone solutions with full infrastructure allow for regular and constant drone operations and submitting business processes. This is how Dronehub - drone in a box solution works. This market segment is growing very fast and dynamically. True to say that robots were come out from the box and make a real transformation.
Under the term "drone company" still there is a mix of drone sales companies, drone service companies, and just a few drone hardware companies with groud infrastructure, dedicated software integrated with PANSA UTM. Drones used in Industry 4.0 as flying robots/coworkers are beneficial for the drone market. On the other hand, we have drone law regulations that will change from January and create a new reality in our country and the whole of Europe.
Drone projects, from the private investor's perspective, are not easy for funding because this is a complex environment. There is a team of qualified engineers, electrical engineers, and programmers who need to have an equipped space for work and tools. There are plenty of machines you have to purchase (like CNC machine), so this kind of investment is expensive, and Dronehub's example showed that you need at least 3-5 years for proper verification of the business model. We hope that in Poland, there will be investment rounds similar to Airobotics and Easy Aerial very soon.
Karolina Leszek: Looking at the Polish drone projects already funded, we can say that this trend is not as high as we can expect. If we look at a drone market from a private perspective, we can see that this is a very dynamic market. Companies are growing, exploring their ideas, and expanding on non-domestic markets. If we will look solely on funding, this is a small number of projects funded. From 2007 till now, there are about 20-30 projects funded in Poland within the drone market. However, to receive funding, each project needs to be well constructed, which is complex and time-consuming.
Wlodzimierz Kuc: Let's go back on the past and talk about the first drone flight. In 1918 there was the first flight of the unmanned aerial vehicles conducted and monitored by the US Navy. There were some problems with connection and lack of correctness, and in 1925 the US Navy finally decided to deny the development of this project. The conclusion is that searching for new technologies - breaking technologies, are based on searching for something completely new and unfounded. Here, after disruptive moments we have a comeback on the solution which in the past had happened. Then there was no idea that drones can be used in a civilian way.
Lukasz Chacinski: Over five years ago, in Dronehub Group, we have an investment round done by Nanovision VC. I can say it was a high-risk investment, not only because it was a pre-seed round. In Dronehub, we are making and creating the ground infrastructure for drones (drone garages) to become autonomous tools. This investment was at high risk because this time, there was no similar product like Dronehub on the world. There were such companies which started to build a similar product, but in Poland, we are a single company making such a product. Dronehub allows the drone to land on it, fly 30km, then land it on the next garage, change the batteries, and fly further on a previously programmed path.
Our next funding stage we have received by the National Center for Research and Development. Recently we have closed the next investment round (the private one), and in the future, when the company will be well developed, we want to stay as a Polish capital, but we see on our board CVC funds, PFR, and ARP to strengthen our power in case of cooperation with strong state companies.
Vadym Melnyk: The main target group of drone projects is companies with large infrastructures like PZU, PKN Orlen, PGZ. The point is that many Polish drone companies are small size companies. My question is: how small companies should work to sign key contracts with industry players, and how investors or public institutions like the National Centre for Research and Development can help to sign such a contract?
Lukasz Chacinski: When it comes to the investor - Polish VCs have a great database of relevant contacts so they can help and share it to start the conversations with such companies. Also, the Ministry of Infrastructure can help startups to authenticate the work of the company. The key thing is if the company already tested and proved its solution, whether is functional and works properly.
Dawid Smolka: From the practical perspective - cooperation between a startup and a large company can bring more benefits than projects inside the corporation. Within some time, we were wondering if it is worth investing in drone production in Europe as we have to deal with competitors from Asia. Looking at DJI growing stage, we had doubts, but what has happened last time shows us one thing: DJI, as the drone leader, has scared other countries because of its superiority. Recently I have talked with one of the American companies, and they said there is no such drone company giant in the US, and their country has "slept" this drone growing moment. Now a lot of countries realize that they need to support their local drone market and domestic companies.
Security - this is a keyword when it comes to a drone service. Drones are equipped with numerous sensors, advanced processors so they can grab a lot of information very quickly. Companies like PKN Orlen cannot use a random drone with default software as there is no guarantee that data is collected by the right people. DJI has grown very fast and educate the market but also goes a step too far. So use cases are the first, but security is a must. If there is a good project made by a small team, it is verified by huge companies like Honeywell or General Electric for the security processes.
Lukasz Chacinski: I want to mention about the beginning of the cooperation and the first high-level talks with large companies. Dawid said that 6-12 months for implementation of the projects are more or less typical. In my opinion, this is a short time because here in Dronehub, we are talking now with few companies for more than a year, and now we are finally getting into it. Our cooperation with PKN Orlen lasts about 12 months, from idea to signing the contract. The second thing worth mentioning is the flights over critical infrastructure related to country security. We can't agree that DJI can fly over such infrastructures, and here we need Polish solutions. Polish Prime Minister Mateusz Morawiecki said that Polish state-owned companies should get support from Polish drone companies, and this is a key value in case of security of the country.
Wlodzimierz Kuc: In the National Center for Research and Development there were over 60 drone projects funded for an amount of 2M PLN. Corporate venture for large, Polish corporations is a chance for innovative solutions, and we have already had some examples of such fusions with high benefits.
Vadym Melnyk: I have a question because here we have two representatives from private and public capitals. The drone market looks now like 99 percent of Polish companies are drone service companies, and they earn good money, but product companies reach 5-10. What is your motivation to invest in such high-risk companies instead of a drone service company that already earned money?
Dawid Smolka: Institutional partners require to fill all of the documents. Such grants are funding, there are rules, and the whole process is time-consuming. I decided to invest in this industry because I don't have a typical horizon like Bridge Alpha Ventures. A private investor has an easier and faster way to make a decision. Five years ago, when I decided to invest in the drone market, I presume that within this time drone market will mature and receive specific parameters so I can get this startup on a podium and will be among the leaders. By investing, I didn't underestimate the scale of the support the company needs to build the machinery park and other aspects. Summing up, now I have a slightly different point of view, but still, as a private investor, I don't need to fulfill the monthly reports - this is comfortable. I decided to invest because I saw a growing trend in the robotization of the processes, and COVID also proves it and strengthens this idea. Today drone companies should focus on infrastructure construction to create the needs on the market. A private investor is a good option when nobody knows too much, there are no sufficient data for analysis, and when the entrepreneur's intuition should start to work to the market but mainly to the people who stand behind the project. If there are few new projects made by students or passionates there is always a dilemma whether this person became passionate forever or the founder becomes founder. Investing is not an easy thing because when investing in a startup at the very beginning of the existence, this is an HR work, not financial work. In my opinion, the National Center for Research and Development plays a significant role cause this kind of financing will educate a lot of investment managers, which will have the ability to evaluate, support, and scale startup ventures. Private investors are more comfortable because this is partner-centric cooperation on the growing market, and there is no need, like in public investment, to change some milestones or indicators. Changes are made spontaneously.
Vadym Melnyk: What is your perspective? Why it is better to choose Bridge Alfa investments?
Wlodzimierz Kuc: The money given by public institutions are enclosed by documents. The application generator is very extensive, detailed and all of the cost descriptions need to be written precisely and with proper explanation. When we are talking about the support programs for technology startups - we have 500 startups that have received support, and many of these startups got investment rounds from foreign investors on a later stage. The aim of this program is the support of the co-founders who are doing high-risk projects and also to support students, educate them about the business, give support in the first steps on the business role, and their ideas - this is the main point for public investment.
Karolina Leszek: Not all of the applicants should apply for public investment. Public investment is not to all companies, and at the moment, when someone is deciding for filling out the complex documents - it should be aware of what kind of costs needs to be covered bu the company. Each startup should decide on which form of investment choice and which one is the best.
Dawid Smolka: A very good job is done by documentation in public investment because it lets such founder and his team go through all of these questions and verify if this makes sense. On a competitor's stage, your project is always unique, and, you know, there are no other competitors, and everyone will kill for this product, but this not happened in fact. But if the startup will go through the completion of the documentation helps a private investor as they don't need to ask additional questions. Private investors are also asking if founders are participating in public funding and projects, so if the answer is "no because I have to fulfill plenty of documents" it makes you wonder if this investment is worth considering. Also, the friendship between founder and investor is not seasonal, it takes time, and not all of the investors fit for the particular founder. Not all investors can talk or cooperate, particularly with scientists cause we are talking about R&D programs. Such personalities are not easy in cooperation.
Apart from building financial capital, we are also paying attention to social capital. We are sharing our knowledge, contacts, and experience. It is important to know how to deal with a situation where there is no money, there is no decision on a client's side and many more unexpected situations. The ability to adapt to a new reality is key to
Private investors are starting to invest later, when the startup is after "all mistakes" and exists a while, so they are sure all youthful indiscretions were committed. In my opinion, today, there is plenty of ways to get funds for innovative ideas, so this is a great time to develop technology projects in Poland.
Vadym Melnyk: In the end, I would like to ask you to say just one important thought to contribute to our listeners. It can be some guiding principle for those who listen to us.
Lukasz Chacinski: I would like to highlight what our Prime Minister said that state-owned companies should start to test and use Polish drone solutions. I am not saying just about the Dronehub but there are few Polish drone companies which already tested their products.
Dawid Smolka: Looking at 12 startups under the Nanovision portfolio, I can say that this is not an 8 hours workday, and it's a really hard job to achieve something in the company. When it comes to a drone market, we have a very interesting moment, and this is showed f.e. by law regulations changes showed that many people see the huge potential in drone operations. Drone projects are approved and noticed by the European Commission, which means drones have high priority, and the industry can use it. It's a specific technology moment cause technology is going on a higher level.
Wlodzimierz Kuc: I think the success of the drone industry depends on the good cooperation of the business, science, and administrations. The aim of the projects constructed by the National Center for Research and Development is to make strong cooperation between scientists and entrepreneurs to develop the project.
Karolina: When it comes to drone companies, I think in this market should open for financing possibilities available in our country.