Sep 29, 2015, 12:00pm CDT
James Mackler Guest Blogger
On May 29, 1908, Wilbur Wright traveled to France with the goal of carrying out demonstrations for French investors. He hoped to convince these investors to support his newly developed Wright Flyer, but faced an uphill battle. The public was clearly skeptical of the Wright brothers.
Investor skepticism at the time was perfectly understandable. The Wrights had conducted nearly all of their testing in remote locations. Unlike today, no one was posting videos on YouTube or live-tweeting the results of their experiments.
The general public believed that controlled flight was either a physical impossibility or was scared by the very idea of humans taking to the skies. The only use of airplanes that was being seriously considered was by the military. The French investors had no clear way to evaluate the technology, gauge potential public support or determine whether commercial flight would eventually be both safe and legal.
Today’s investors in Unmanned Aircraft Systems (or drones) businesses face a very similar situation. Current Federal Aviation Administration regulations make the development and testing of drones extremely difficult, if not impossible.
These same regulations place tight restrictions on commercial use. Individual states are passing new laws, nearly every day, governing the use of drones. The public is simultaneously intrigued by the potential of unmanned systems and frightened by their connection to the military, their potential privacy implications and threats to public safety. The UAS realm, therefore, remains highly speculative for investors.
Despite the uncertainties, more and more companies are investing in drone-based businesses. Between 2010 and 2012, there were fewer than five venture capital deals with drone companies according to CB Insights, a venture capital and angel investment database service. Now, there are at least 10 companies with Series A funding or more.
On August 11, HUVRData, a drone-based data analytics company, launched and announced $2 million in funding from angel investment organizations. In May 2015, the world’s largest consumer drone manufacturer, DJI, and venture-capital firm Accel Partners launched SkyFund, a $10 million investment vehicle geared toward drone startups.
The month prior, the German-based startup Dedrone announced it had secured $2.9 million in growth capital for its drone early-warning and detection system. Facebook, Google and most famously, Amazon, have all made significant investments in the future of unmanned aerial systems.
There remains vast room for investment within the UAS field. The most promising business models include manufacturing, flight services, data management, training and drone detection and denial systems.
The new and emerging nature of UAS businesses presents unique due diligence challenges for investors. The field is rampant with untested or outright false technological claims because the technology is changing and evolving at an extraordinary rate, and opportunities to conduct real- life tests of proposed technology are limited.
In addition, the legal field is constantly shifting. There is a confusing, overlapping and often contradictory web of federal and state law. The most basic due diligence requires determining whether a venture can legally conduct business.
Investors need to be acutely aware of the unique liability pitfalls associated with many drone businesses. It is only a matter of time until a drone accident results in a serious tragedy. The insurance market is trying to adjust, but coverage exclusions and limits remain untested. No investor wants to find himself involved with a company facing both a civil dispute with an injured plaintiff and a coverage dispute with its own insurer.
Finally, it is the rare venture that can succeed in the face of strong and sustained public opposition. Drones can be very unpopular. Investors, therefore, need to inquire into what measures drone entrepreneurs are taking to properly address legitimate public concerns. Skilled legal counsel can help identify and address these issues.
Despite the complexity and uncertainty, investors should not shy away from the UAS field. We are in an era not unlike the dawn of manned aviation or the advent of the internet. Drone-related businesses are going to continue to grow and promise tremendous investment potential.
In approached correctly, the uncertainties are opportunities. A trusted adviser, well versed in the UAS field, can help an investor evaluate the technological, legal and public relations challenges.
Only investors, in turn, can provide the fuel that allows these UAS ventures to truly take flight.
James Mackler is an attorney with Frost Brown Todd LLC. He specializes in federal criminal defense, unmanned systems (drone) law and defending military members against adverse actions.
http://www.bizjournals.com/nashville/blog/2015/09/want-to-invest-in-drones-do-your-homework-first.html