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October 30, 2013

Pizza via drone? Venture capital funding doubles in anticipation of multiple uses

Commercial drones will soon populate U.S. airspace, and venture capitalists like Tim Draper are placing their bets.

Draper, an early investor in Hotmail, Skype and Baidu, is now backing DroneDeploy, a startup that's building software to direct unmanned aircraft on land mapping and the surveillance of agricultural fields. Draper even expects drones to one day bring him dinner.

"Drones hold the promise of companies anticipating our every need and delivering without human involvement," Draper, 55, wrote in an e-mail. "Everything from pizza delivery to personal shopping can be handled by drones."

Venture investors in the U.S. poured $40.9 million into drone-related startups in the first nine months of this year, more than double the amount for all of 2012, according to data provided to Bloomberg News by PricewaterhouseCoopers and the National Venture Capital Association. Drones are moving from the military, where they've been used to spy on and kill suspected terrorists, to a range of civilian activities.

Congress has directed the Federal Aviation Administration to develop a plan to integrate drones into U.S. airspace by 2015 and to move faster on standards for drones weighing less than 55 pounds.

It's not just startups that are anticipating the changes. ConocoPhillips says that drones could be used to monitor ice floes and marine mammals in the Arctic. Entrants could also include established drone makers AeroVironment Inc., Boeing Co.'s Insitu unit and Israel Aerospace Industries Ltd. in Tel Aviv, according to Bloomberg Government.

Sales of civilian unmanned aerial vehicles, or UAVs, will reach $8.2 billion within the decade, up from nothing today, according to Phil Finnegan, director of corporate analysis at researcher Teal Group, which tracks aerospace and defense.

"There's going to be a lot of growth in this market," Finnegan said.

While the capital invested in drone-related startups has surged, it's still concentrated in just a few companies. Three startups account for all of the money raised in the first nine months of this year, compared with five in all of 2012.

Draper backed DroneDeploy through his Menlo Park, Calif.-based firm, Draper Fisher Jurvetson. Airware, a startup in Newport Beach, Calif., raised $13.3 million earlier this year from investors including Andreessen Horowitz, Google Ventures and First Round Capital to develop customizable autopilots for UAVs that cost about $4,500 to $7,500, according to the company's website.

Airware found it much easier to attract the attention of venture capitalists this year after testing the product with customers, said Chief Executive Officer Jonathan Downey.

"We'd looked at raising money last year, and it was very different," said Downey, who plans to move the company to San Francisco in January.

The business of drones still carries plenty of risks. UAVs will have to occupy parts of the airspace not used by airplanes, and investors don't yet know what the rules will be. Concerns over privacy are most notable given the history of drones as tools used by the government and military.

The American Civil Liberties Union has warned of the possibility of a "surveillance society" spurred by drones. "The only way to avoid this dystopian future and prevent mass, suspicionless searches of the general population is to ensure that information collected by drones for one purpose cannot be used for another purpose," Allie Bohm, a strategist for the ACLU, wrote in an August blog post.

Andy Wheeler, a partner at Google Ventures, said drones are moving into the mainstream because of the steep drop in the cost of sensors, which have been mass produced for smartphones. The plunge in costs helped convince Google Ventures to invest in Airware as well as another drone-related startup, Wheeler said, declining to say which one.

"We are talking orders of magnitude lower than military technology," Wheeler said, referring to the prices for commercial equipment.

While DroneDeploy is building software and Airware is developing systems, some startups are focusing on services. Matternet Inc., funded by Andreessen Horowitz, aims to use drones for delivery of items such as mail and medical supplies.

Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

Firefighters and law enforcement officials are likely to be some of the early beneficiaries of the drop in costs, said Kent Goldman, a partner at First Round Capital in San Francisco.

"I see a bright future for non-military applications," he said.

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