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Future of

Frontier Tech Report

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A data-driven look at investment trends, top investors and performance within U.S. drones, space, augmented reality, 

and virtual reality.

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NUMBER OF VCS WITH MULTIPLE DRONE BETS IS STILL  FAIRLY LOW

THE MOST WELL FUNDED VC-BACKED AR/VR STARTUPS

UPDATE: Analyst Mike Dempsey is hosting a free webinar based on his research around space, drones, AR/VR tech. Sign up here. Below is a summary of the CB Insights Future of Frontier Tech Report by analyst Michael Dempsey.

FAA SECTION 333 EXEMPTIONS FOR DRONES

WHAT IS FRONTIER TECH?

INDUSTRY ANALYSIS: AR/VR GAMING

Technology related to drones, space, augmented reality, and virtual reality.

HARDWARE, SOFTWARE & SERVICES DOMINATE  INFRASTRUCTURE DRONE STARTUPS

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INDUSTRY ANALYSIS: DRONE DELIVERY

Hey, I'm Mike Dempsey. I'm here with CB Insights. We're going to run through the future of frontier tech report. In this report, we're going to analyze trends in drones, space startups, and augmented reality, and virtual reality technology.





 

So first, let's start, what is frontier tech? We define frontier tech as technology related to drones, space, augmented reality, and virtual reality. Space companies can include those that are working on problems related to space, so tackling more traditional space technology, such as space travel and rocket propulsion, as well as more contemporary technology, such as satellite imagery, asteroid mining, space debris cleanup, and much more.

 

Moving to drones. Drones includes all unmanned aerial vehicles or UAVs, as well as the manufacturers of the drones themselves, technology related to the operations of drones, and the supporting infrastructure technology companies of drones.

 

Augmented reality and virtual reality, that relates to all companies related to the usage or support of these platforms. This can include AR/VR advertising platforms, software and hardware, as well as companies that utilize AR/VR for other commercial purposes.

MAJORITY OF FUNDED AR/VR COMPANIES FOCUSED ON  HARDWARE & COMMERCIAL APPLICATIONS

FRONTIER TECH STARTUPS RAISE $3.2B SINCE 2014,

$2.2B IN FIRST HALF OF 2015

DRONE INVESTMENT ACTIVITY PEAKS IN Q2’15

For a brief overview of frontier tech, frontier tech startups have raised a combined $3.2 billion across 183 deals. Funding has topped $500 million in 30 deals for 3 straight quarters, and Q1 '15 saw the largest total funding with $1.34 billion, largely due to SpaceX's $1 billion Series D financing, which featured Fidelity and Google as the main investors.

 

As these industries develop, there have been more larger financings, including 9 $50 million-plus financing since 2014. These rounds include large companies like Magic Leap and Oneweb, as well as Mapbox, who raised $50 million in Series B financing from DFJ Growth, Foundry Group, Promus Ventures, and Planet Labs, and 3D Robotics.

THE MOST WELL FUNDED VC-BACKED DRONE STARTUPS

ROTHENBERG VENTURES AND GOOGLE VENTURES LEAD MOST ACTIVE VC INVESTORS SINCE 2012

SELECT DRONE COMPANIES BY APPLICATION

When looking at the most active VCs in frontier tech, we see a bunch of the same players across all the different industries. Rothenberg Ventures, Google Ventures are the top two, having made the most investments since 2012. Rothenberg has made multiple early-stage bets, including AltspaceVR, Matterport, and Dronebase. A variety of other VC firms, including Andreessen Horowitz, Qualcomm Ventures, Lux Capital, and Intel Capital rounded up the top three.

INDUSTRY ANALYSIS: PRECISION AGRICULTURE

NOTABLE INVESTOR-BACKED FRONTIER TECH EXITS SINCE 2012

AR/VR DEALS REACH NEW HIGH IN Q1’15, ABOVE 10  DEALS 6 OF LAST 7 QUARTERS

As we move to overall exits within the space, there haven't been a ton. But for the investor-backed exits, we've seen Oculus VR, which is probably the splashiest, which is the maker of the Oculus Rift virtual reality headset, with use cases that range from gaming to media and much more. They were acquired by Facebook in March 2014 for $2 billion.

 

Skybox Imaging was another large acquisition which was acquired by Google for $500 million in June 2014. Skybox utilizes satellites to provide analysis around what's happening on Earth. A lot of people view this as a pretty important acquisition for Google as they try to get away from DigitalGlobe as the main satellite imagery provider for Google Maps, and then also potentially in other projects, perhaps like their Project Sunroof which they just launched, which tracks sunlight and lets homeowners determine how much money they can save by installing solar panels.

 

BlackBridge was also recently acquired by Planet Labs in July of 2015. BlackBridge has five years of global imagery covering six billion kilometers of land via its five RapidEye satellites. The acquisition also proved very strong and strategic from a customer perspective, as BlackBridge's customers are mainly in Europe and South America, versus Planet Labs, which are more so focused in North America and Asia.

 

We also have Urthecast, which went public via a reverse merger. And what Urthecast is doing is providing near-live streaming HD video from the international space station in its attempt to analyze Earth images in a different way via video.


ROTHENBERG VENTURES IS MOST ACTIVE VC IN AR/VR

CORPORATE INVESTMENTS AND ACQUISITIONS

AR/VR MOVING FORWARD: NEWS HEADLINES

As we move on to slide nine, we look at corporate and strategic investors as well as their acquisitions. Google has been very active in the space. Google Ventures has made multiple investments, as well as Google, across drones, which include Airware and Skycatch; VR, which includes AltspaceVR and Magic Leap; and space startups, including Orbital Insight and SpaceX. Qualcomm has also been very interested and active within the space. They have expressed interest in adapting their Snapdragon processor for drones and have made a concentrated push into this space by making investments in 3D Robotics and Skycatch.

 

Other notable strategic investments include Verizon, which invested in Skyward, which is a Drone as a Service tool, via Verizon Ventures, as well as NetMobile, which is an AR platform for image recognition via mobile phones. Airbus also invested in Oneweb.

 

And Legendary made an investment into Magic Leap, the AR platform. Thomas Tull, the CEO of Legendary Entertainment, was quoted as saying, "It's one of the few things I've ever experienced in my life where I came out and said, 'This changes everything. This is a marker of the future.'" It's very clear that Legendary saw a lot of opportunity in Magic Leap and augmented reality more broadly within the entertainment scope, and that's something that we'll look at a little more later on into the presentation.

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SPACEX BUOYS SPACE INVESTMENT ACTIVITY, DEALS  REACH MULTI-YEAR HIGH IN Q1’15

As we move to drones, drone companies have raised $285 million since 2014 in equity financing. And that investment activity has really picked up in the past three quarters and recently reached an all-time high in Q2 2015 with $109 million invested across 16 deals. The funding was mostly buoyed by a $75 million Series B financing to DJI Innovations, and DJI is the largest consumer drone manufacturer in the world.


As we move forward, we get into space investments, and space companies have raised more than $1.8 billion since 2014. In the first half of 2015, space startups raised $1.76 billion, as both funding and deal activity increased drastically. Making the rounds are SpaceX, which was $1 billion, and Oneweb, which is a $500 million corporate minority investment, buoyed funding totals overall. Other notable financings in 2015 include Planet Labs' $70 million Series C, which valued the company at $500 million, Mapbox's $50 million Series B, and Spire's $40 million Series B.

A few other deals that were notable include 3D Robotics - second tranche of their Series C, which was $14 million - and Squadrone System's $5 million Series A. As of right now, not many VCs have multiple bets in the drone space, but there are nine who have from 2012 to Q2 2015, and those are Promus Ventures, Google Ventures, Andreessen Horowitz, Felicis Ventures, Accel Partners, the Commercial Drone Fund, Qualcomm Ventures, Draper Associates, and Intel Capital.

 

And notably five of the nine VCs have all invested in Airware, which is the developer of an operating system for drones. And that's a16z Andreessen Horowitz, Intel capital, Google Ventures, Felicis Ventures, and Promus ventures, all are investors in those.

LUX CAPITAL, RRE VENTURES, BESSEMER ARE MOST  ACTIVE VCs IN SPACE STARTUPS

As we move to the most well-funded VC-backed drone startups, a lot of bigger drone companies are listed here. So you have 3D Robotics, which does autonomous drone and UAV manufacturing. They definitely have a little bit more of an enterprise focus, they've raised $99 million, versus DJI, who's a consumer and semi-pro drone manufacturer. And they are the largest manufacturer in the world, they've raised $75 million. 

 

Airware is third. They developed an autopilot and operating system for drones and UAVs, and they are seen as the leader in drone infrastructure space, which we're going to talk a little bit more about. They've raised $40.2 million.

 

Skycatch focuses on enterprise services for capturing data at scale with autonomous drones. So whether that's industrial monitoring or precision agriculture, they're also trying to work out a drone on-demand type function. And they have raised $21.4 million as of Q2, but they just recently announced an additional $22.1 million Series B. So that'll bring it up to $43.5 million, putting them ahead of Airware.

 

Xaircraft is the fifth, and they manufacture multirotors and various hardware parts for drones. They've raised $20 million. And CyPhy Works, they develop a tethered drone technology for persistent flight and secure streaming. They've raised $14.9 million. And I know the idea of a tethered drone sounds interesting and almost bizarre because the whole idea of drones is they're like many airplanes you can fly around for long distances, but the way CyPhy has worked is they focus on one quick deployment of a drone.


The example that's been given a few times is if you're in a crime scene and someone's' being held hostage, you could throw a CyPhy drone up in the sky, and it's tethered, but you have a pretty small area you need to cover, and it can fly around continuously and give you a continuous video feed. In addition to that, you could tether a CyPhy drone on top of a tractor and, say, have it do a consistent long-term analysis, as the tractor roves of all the land that it's going over and imaging that land.

 

In addition to that, whether it's for defense purposes or government purposes, the tether allows for security that's really unprecedented in other drones. And if for whatever reason you're monitoring or using a drone to do something and you're the government, you want to make sure that nobody can hack into your feed, and that's one of the pros of having a tethered drone and that general technology.

 

One of the interesting things we've heard a lot about is just how bullish most investors are about the drone space. And one of the quotes that we had seen was from a Bloomberg piece from John Frankel, who's the partner of ff Venture Capital. And his quote was, "It's blindingly obvious to us that this is going to be a big space. It's tough to know how big it will be, but where I stand here on the foothills, I can see the mountains in the distance and they're pretty high." Interestingly enough, we've heard similar sentiment echoed from many different VCs. And ff VC is one of the earliest investors in Skycatch, who, we mentioned before, is one of the most well-funded drone companies.

The most active VCs in the space sector are topped by three companies, Lux Capital, RRE Ventures, and Bessemer Venture Partners, who've all made the same number of investments into space startups on a unique company basis. Both Bessemer and RRE invested in Spire, a company that is hoping to put over 50 small satellites, called nanosatellites, into space over the next few years to achieve daily imaging of Earth. We'll talk more about nanosatellites later. Bessemer also invested in Skybox Imaging, which was later acquired by Google for $500 million, as we previously highlighted.

As we're looking through the breakout of drones by focus, we found that hardware, software, and services companies really dominate over the infrastructure place. And so as of right now, 42% of all funded drone companies since 2012 have been focused on software or services related to drones. So this includes Uber for drone startups, such as DroneBase, as well as the more industrial-focused companies, like Skycatch that we mentioned.

 

Drone hardware startups were a close second in terms of the funded company share at 40%. And hardware startups have also garnered the vast majority of investment dollars as two of the most well-funded companies, 3D Robotics and DJI, are focused largely on hardware.

 

Drone startups focused on infrastructure made up just 18% of funded companies since 2012. I personally think that that is something that will change over time. I think that infrastructure is something that we'll see a lot more investment within the drone space because as a lot of these companies, specifically the services and software companies, want to operate in the scale at which they want to operate, they're going to need the infrastructure to support that.

 

And if you don't have good fleet management technology, if you don't have good awareness technology, and you don't have other types of infrastructure around how drones operate, I think that's going to be very difficult. So very interesting to see how that plays out over the next year or two as some of these companies will really need that technology to advance in order for their technology to advance.

 

So I think a lot of the investors, if you're betting on the software and services side, you're betting on almost a manual or a lower tech play for now, and then hope that the technology surrounding the actual drones, so the infrastructure technology, comes up to speed and will enable some of the bigger visions that some of these companies have.


THE MOST WELL-FUNDED VC-BACKED SPACE STARTUPS

And just for further examples, when we're looking at drone companies by application, so on the hardware side, you have DJI and 3D Robotics, and Ghost, and HEXO+, all different drone manufacturers of some sort. Matternet as well, which is supposed to have some of that autonomous drone delivery type of things.

 

On the services and software side, you have DroneBase, which is kind of that Uber for a drone company that Union Square Ventures invested in. Skycatch, we've talked about. PrecisionHawk, which focuses a lot on precision agriculture. And Redbird as well, which also focuses on a lot of the imagery that the drones are around for. Flirtey is another. They just came out of Y Combinator, and they were one of the first companies to do to a pilot test of a delivery within the U.S. They delivered medical devices or healthcare-related products about, I think it was 3 miles or something.

 

And again, the technology around that isn't totally clear if it's fully autonomous and how that works, so I think that that's something that's going to need more investment. And we already see some of the infrastructure play is Airware, which is that operating system.

 

But you're also seeing infrastructure plays on the other side, so defending against drones or recognizing drone detection and response. So two companies specifically, Dedrone, which is a European company, and DroneShield as well, both focusing on that drone detection. As drones become more either accessible from a price point or just more commonplace, or smarter, or even, as some people said, smaller and undetectable to the human eye, there's a lot of rising security risks.

 

So some of the security risks that these companies talk about, which has happened already, is a drone flying over and dropping something into a prison. And then you also have other examples that may have not happened yet, but drones flying outside of houses trying to get pictures of celebrities through their windows and things like that. Or flying into a house with a mini drone, and then subsequently invading people's private lives.

 

So I think all sorts of infrastructure will need to be taken care of around drones. And part of that is for government entities to decide, but part of it is going to have to come from private companies that are just developing technology to make sure that however this industry evolves, it evolves in a positive way.

 

And part of that evolving is something that we've seen in news headlines as well. Previously, we've seen multiple companies have developed partnerships or experimental trials within the drone space, especially in the U.S., it's very difficult because commercial drone use is relatively restricted thus far.

 

And that's been from CyPhy Works, who's landed a military deal for a pocket drone, to DroneDeploy, which their app has made farming more efficient, to Skycatch's WORKMODE, which is trying to do the Uber-like drone service. And then also Amazon, who wants to have a special air zone dedicated for their delivery drones, as they believe delivery is really the next big use case for their drones, which we'll dig into more.

 

On the concern side, it's something we've definitely talked about already. But there's been lagging legislation, and have people called this a Wild West for drones. So there's a lot of gray areas right now: Can you fly it in the city? Can you fly in this part of the city? How legal is it? How illegal is it, etc.? And that's something that a lot of people feel the FAA hasn't done a very good job in, setting clear boundaries.

 

Also defending against drones, as we talked about. And there's also been multiple cases of drones in commercial air traffic. So two different airliners had a hundred foot near misses with drones above New York in the past year, and that's something that has definitely become a negative for the drone industry and people who are trying to really see adoption of drones increase.

 

We saw a drone land on the front yard of the White House. And then subsequently DJI, who is a manufacturer of that drone, their Vision 2 drone at the time, they issued a software update to the drones that made that area around the White House a no-fly zone. So with the GPS technology in the drones, the drone won't even fly into that area.

 

And we're starting to see that more, but a lot of these UAVs and drones are made by the users or these homebrew kits. There'll just have to be a tighter leash and tighter monitoring on and some sort of technological innovation that can really hopefully stop that, or just laws put into place that are crystal clear for everyone to understand, like any other illegal/legal gray areas that we have today.


As we move to the most well-funded VC-backed space startups, we look at SpaceX, which by far and away has the most with $1.19 billion. SpaceX designs, manufactures, and launches advanced rockets and spacecraft. And what SpaceX is trying to do is build a reusable rocket because a lot of the major costs that come from general space travel comes in the manufacturing of those rockets. So if you can build a rocket that can launch and then subsequently land and be used again, that will drastically decrease prices overall and costs overall within the space industry.

 

Oneweb is the second. They plan to put more than 600 satellites in space to enable global Internet access. They've raised a total of $500 million. Planet Labs is third. Planet Labs also uses a collection of satellites - nanosatellites and cube satellites - to collect and analyze data about the earth. So they do massive constellations via satellites that can image the Earth in a very rapid way. And again, we'll talk about this more. They've raised $196.1 million.

 

Kymeta is fourth. They've developed a new form of satellite antenna to connect to mobile networks and communication satellites, and they've raised $82 million. Spire is fifth. They collect and analyze data via satellite constellations and they focus on global trade, weather, and other geo-specific, geospatial imagery capabilities. They've raised $69.4 million total. And sixth is Mapbox, which is map data, design, and publishing as a platform, and they've raised $60.6 million.


One of the more interesting quotes we've seen about the space sector comes from Steve Jurvetson, a partner at Draper Fisher Jurvetson. In a Fortune article, he said, "Compared to other industries, I've never seen such an enormous margin for improvement. There's this canonical thing about a startup needing to pitch a 10X improvement to be a worthwhile investment. You rarely see an entrepreneur pitch 100X improvement. But in space, we've seen 1,000X. And really, we've seen 10,000X."

With that, we look at FAA Section 333, Exemptions. And basically what this did, this was a process put into place to allow drone operators to legally utilize their drones for commercial purposes. And a lot of people have complained that the FAA has been very slow in terms of issuing these exemptions. And it's definitely ramped up recently, but we managed, via Drone Analyst, to come across the categorization of the drone exemptions based on a use case. 

 

So as of July 2015, 44% of all the Section 333 exemptions have gone to film, photo, or video use cases, and this includes companies that are utilizing the drones for movies and TV shows and things like that. A lot of times you'll see shots that are flying through the air, and that often is a drone. But also things like real estate agents who are trying to map a property that may be an estate or something, get a good video for it. Or artists even, who are trying to get drone photography of sorts.

 

The second highest use case was in inspection and monitoring, which is definitely something that has been talked about for a while. So whether you could walk or drive across an entire pipeline, and you know something is wrong with the pipeline, but you don't know where it is, or you can fly a drone over it for the next 3 miles in a fast way and take video, and then analyze the video quickly after, all from one spot, drones have revolutionized what that process is like. And because of that and because of just the general use case efficiency, it's definitely at the top of the list for commercial use.

 

Third is also mapping and surveying, which we've talked about in terms of understanding construction zones or understanding how a city planning is set up or general land and commercial construction things. And fourth was precision agriculture at 9%. So we're going to dig into precision agriculture a little bit more now, but it's definitely probably one of the most talked about use cases outside of film and video.

SATELLITES AND ROCKET TECH ARE LEADING  CATEGORIES

So when we're looking at precision agriculture, we see that drones have been combined with a lot of other industrial Internet of Things products and this new wave of precision agriculture. And what precision agriculture is is really just farming or any type of agricultural practice that is done in a data-driven way in order to increase efficiency of whether it's crop yields, mitigate a variety of crop risks, and all of it subsequently to lower the cost of key agricultural inputs, and that includes water and fertilizer, among other things. 

 

And so how a lot of this has been done in the past was via planes, as well as just walking through fields and driving through fields. So the drone's ability to get closer to the land than planes is really quite a big bonus, and it's also significantly cheaper to fly a drone.

 

Why we're seeing precision agriculture adoption come so quickly and has been talked about so much is because there's a pretty low regulatory barrier due to the fact that all of the agriculture is private land. And if you're going for a "noncommercial use," which many farm owners have just used drones without permission from the FAAm whether or not that's noncommercial or not is a different debate, but because it's private land and because their visual line of sight restrictions don't really apply because you can always see the drone, it's led to a fast adoption of the drone technology in relation to precision agriculture. And so we've seen many of those exemptions already come across, so I think we're going to see that more.

 

Some of the key use cases which we've briefly talked about was analysis, it's split into analysis and deployment and operations. And analysis is anything related to terrain feature detection, estimation of the crop it yields, general farm surveying and monitoring, making sure that whether that's hardware within the farm is functioning properly or understanding what areas might be under-watered, what areas might be over-watered, how are things growing in certain areas over time, that is just overall analysis and having a bird's-eye view and a rapid iteration or revisit rate, in the words of the satellites, allow drones to be a fairly high upgrade from walking through the field's and manually looking at stuff.

 

On the other side of the deployment and operation side, you have cost-efficient deployment of fertilizers. Obviously, you see the huge planes, but you might be able to, since you're getting closer, you don't have to spray as much because you're hitting your crops from a much closer space, and there's less wind that can take things and things like that.

 

The alternative of that is the payload is lower. So obviously, a small drone can't carry nearly the same amount of fertilizer as an airplane, but that's just one of the tradeoffs that you focus on as drones potentially get bigger on the commercial side. And as their ability to carry larger payloads increases, that might be something that is mitigated even more and becomes eventually a nonfactor.

 

In addition to the deployment of fertilizers, you also have precise agricultural machinery routing. So being able to take a bird's-eye view of your farm, understand how each of your machines should go through your farm. So how your tractor should move, and how different equipment should be routed throughout it, as well as I was talking about before, the irrigation equipment monitoring, so making sure that operationally, everything is running smoothly.


In terms of market sizing, as of today, there are $2.1 million farms in the U.S., and U.S. crops annual receipts account for $198 billion. And people target the agricultural monitoring market at $2 billion as of today. Corporates that might be interested or related to the precision agricultural movement include Monsanto, which is a diversified agriculture and genetically engineered seeds company. So their market cap is $48.2 billion, and they're obviously very focused on increasing efficiencies within agriculture. 

 

John Deere, who is an agriculture machinery and software company manufacturer with a $28.8 billion market cap, they obviously have a large interest in understanding how drones will affect their businesses, whether that's how it will cut into their equipment sales, or how they can build software or work with software better with drones to create maybe a more cohesive unit working with drones and agricultural machinery. And then AGCO, same kind of thing, agricultural equipment manufacturer, $4.8 billion market cap.

 

In addition, you have DuPont, who has multiple industrial-related manufacturing groups, but they have a field management software development platform that they do through a company called DuPont Pioneer. And that's something that precision agriculture specifically related to drones, and the type of the data they can get will be very interesting to them.

 

Trimble Navigation is another one, so they develop autonomous farm equipment and connected farm software. Obviously drones, as they become more autonomous, or as you can set with a software like DroneDeploy, drones will autonomously fly and land and survey land quickly, connecting to that will be important. So it would definitely make sense for Trimble to pay attention to this kind of wave.

 

And Raven Industries, which is a smaller company based in South Dakota, they have a $700 million market cap, and they do precision agriculture deployment and analytics technology. So with the imagery, there's still an analysis component that needs to be done. And for them, this will probably be a big market that they see moving forward.

When we look at the breakdown of the percentage of all funded companies since 2012 by focus, we broke them out into satellite operation and tech, space services/rocket tech, and imagery, of all the space companies funded since 2012, 46% have been focused on space services or rocket tech. This includes companies like SpaceX, which we talked about previously, who's focusing on reusable rocket technology; as well as ranging to space debris startups like Astroscale, who is dealing with a lot of the residual effects of increased launch numbers in satellites.

 

Moving that way, satellite startups accounted for 35% of all funded companies. This includes multiple startups that are aiming to image the Earth on a daily basis or even more frequently, two of which we've talked about, Planet Labs and Spire; and imagery startups like Orbital Insight and Windward, which uses satellite imagery. So they buy the imagery and then provide deep learning on top of it, and drive unique insights about the Earth, accounted for just 19%.

 

The interesting thing about that breakdown is as the cost of imagery comes down, we wonder how many satellite startups will be focused on geospatial analysis and subsequently the imagery, as huge constellations take a lot of time and funding to build out and resources in general, so even with falling costs, the launch costs of getting satellites in the air can be very prohibitive for a startup.

 

So it might become where there are a few major providers, such as Planet Labs or such as Skybox Imaging - or DigitalGlobe now, who's a large public company - who will provide those satellites and the real land for opportunity maybe the exhaust from the data, as they say, or the imagery analysis that goes on top of that.

 

We broke out the space startups by segment just to provide a few more examples. So in satellites, you have Oneweb, and Planet Labs, and Spire, and Spaceflight Services, which does a lot related to satellite launches. In the space services/rocket tech, you have SpaceX, as we talked about, but also Planetary Resources, they mine asteroids or hope to mine asteroids one day.

 

Astroscale, which does the debris cleanup. Bagaveev, out of Y Combinator, they are working on a 3D printing rocket technology. And then Action Systems as well, which is doing a type of rocket propulsion for small satellites, which is something that could make the lifespan of these nanosatellites increase drastically, and also allow for even more coordination once up in space.

 

Now, on the imagery side, we've mentioned the major players, Orbital Insight and Windward. There's also Mapbox, as we talked about, in global service intelligence, among others.


Moving into the next industry that we're looking at for drones is drone delivery, and this is something that everyone thinks about when they hear drones and that thought process, and that image of drones flying through the skies is interesting. However, there has not yet been much widespread adoption despite all the advantages being very clear. With current technology, drones would allow businesses to deliver products to customers without utilizing a driver, and they'll be able to do it in a near instantaneous fashion.

 

And that's something that the consumer behavior has definitely shifted towards. So everyone's looking for the on-demand consumer and they want something quickly. And it's only really going to accelerate as a bunch of different startups and large corporations are trying to lower fulfillment times and build more efficient supply chains and really get timing down to a day or two or same day or sooner. And drones are really going to come into play in that same day or sooner area.

 

And with that, the drones currently of today have the ability to carry smaller payloads of up to 5 pounds, which is what Amazon claims covers about 86% of all packages it ships. So there's definitely a market opportunity there. And they can do that for over distances of 5 to 10 miles. And with this comes what we we're talking about before with the infrastructure technology. So a lot of these drones will utilize GPS and general awareness sensors to navigate between different waypoints.

 

But once you have a lot of different drones moving in a high-speed, there's going to need to be serious investment into fleet management companies, better awareness sensors, better sensory in terms of wind and things like that, and balancing, especially if the payloads that the drones are carrying are very high value.

 

And so multiple corporates have started thinking about this. The most famous one is Amazon, who has applied with the FAA, and they've been rejected. They've talked about doing pilots in Canada and overseas, but we've seen all of them running different pilots. So it's Amazon and Domino's and even Google. And then most notably, on the startup side, aside from Flirtey, is also Matternet, who has run multiple pilots overseas in Switzerland, I believe, with different pilot tests in the logistics space.

 

And moving outside the U.S., a lot of the developing nations' difficult infrastructure and general lower government restrictions on this type of thing make for an even more readily available opportunity. And so when you think about some of these developing nations, their infrastructure is not as good and traffic can be a very big problem. And so those two main factors for supply chain management and general fulfillment times are essentially removed with drones.

 

And one of the places we've seen this is in China. S.F. Express, which is one of the largest logistics and package delivering companies in China presently, today, delivers between 500 and 1,000 packages per day via drone, and they have expressed interest in increasing that.

 

I think as drone technology advances, we're going to hear more rumblings about drone-based delivery. It's just going to be a matter of government regulation catching up to the idea and the concept of drones flying throughout the sky. And there definitely are different approaches that people have taken to this, but I think it's more so, at least outside of major cities, a when, not an if. And that's something that will be a big boon for, one, infrastructure companies that we keep talking about, and two, some corporates who are really on the early end of this drone delivery technology, I guess, R&D.

 

When we're looking at the market sizing for this, as I said before, there have been the zero FAA approvals for commercial drone delivery industry. However, the U.S. courier and local delivery market is $97 billion a year market. And when you look at costs, the drone delivery cost is 7.5% of the traditional ground transportation delivery costs, and that's because of the ability to deliver packages more often, to deliver them for a longer period of time throughout the day, the general cost of operating a drone versus a car with gas and all that stuff, and then also the human capital of multiple drivers and things like that.

 

Some of the corporates that would be interested in this are, we've talked about and are also pretty obvious, so you have the main package delivery and logistics companies, whether that's UPS or FedEx, or Deutsche Post, or even Google, who has expressed interest in drone delivery tech with their Project Wing investments and Project Wing sphere. Amazon, obviously, who's very interested in this, and they have a product already called Prime Air that they want to test and they want to implement, but it's just a government regulation thing in the U.S.

 

And then Ali Baba as well. They have a heavy focus on delivery and logistic for e-commerce, specifically in China and in Asia overall. And so I think that they are another company that is thinking about this problem, and in the same boat as Amazon, would want to try and figure out a way to make this work in the nearer future versus farther off.


SPACE STARTUPS: LAUNCHES, AMBITIONS, AND  SETBACKS

Moving to augmented reality and virtual reality or AR/VR, since 2014, these companies have raised $1 billion in equity financing, and a lot of that is anchored from Magic Leap's $542 million financing, which drove Q4 '14 funding to $623 million across 12 deals. However, deal activity has been above 10 deals for 6 of the last 7 quarters. So it's definitely something that is isn't really like a going away or a fleeting trend just because of the huge funding. It's active. Q1 specifically reached a record high for AR/VR, and that saw 22 deals, which raised hundred $114 million. And while funding increased slightly in Q2, it was on 7 fewer deals, at 15. But the bulk of the financings generally remain at the early stage.

 

However, there were about over five $10-million plus financings, and that includes Blippar's $45 million Series A, Movidius' $40 million Series E, and Matterport's $30 million Series C, which featured AMD Ventures, DCM Ventures, Felicis, Greylock, Lux Capital, Qualcomm, Rothenberg, and others.

Moving forward, as we've looked at the space, we've looked at news headlines and tracked how we use our technology and tracked news classifications. And so a lot of startups are gathering and analyzing data from space that utilizes emerging satellite technology, which we're going to dive into in a little bit. And this has really ranged to a bunch of different use cases.

 

So some of the news headlines we've seen are that startups are mining market moving data from fields and parking lots and even shadows to understand how economies are changing. We've also seen some satellite imagery, long-term be tracking forest deforestation, so understanding how different places and different natural habitats are being affected over time via satellite imagery. And then also more accurate weather forecasts even, because the satellites also do imagery, but they also have sensors. And so once they're in low Earth orbit, they can utilize those sensors to track a lot of different indicators that can tell you how the weather could be affected.

 

And with this increased innovation, it hasn't been without its downfalls. The two launch failures just this past year, one from SpaceX as well as one from Orbital ATK, both of them negatively impacted many of the satellite startups because a lot of those companies utilize the SpaceX rockets, and to a lesser extent, the Orbital ATK rockets as launch vehicles to put those satellites into orbit.

 

This has led to Congress raising questions about how we're going to investigate this, and then also trying to understand what other negative side effects could we have from all this increased investment and increased, I guess, interest in space, such as Earth's orbit being a junkyard and needing a cleanup plan. But there's also some interesting things looking forward such as space mining, which people have talked about, how the amount of natural resources in a given asteroid could be in the billions or even trillions. So they're calling it about a potential hundred trillion dollar market.

When we're looking at the most well-funded VC-backed AR/VR startups, we see a lot of names doing many different things. And that's just the nature of AR/VR, there's a lot of different opportunities to play within the space. Magic Leap is by far the most well-funded. They developed kind of a stealthy augmented reality technology. We don't know too much about it, but we know the use cases could range to do a lot of different things. They've raised a total of $592 million.

 

Movidius is second with $86.5 million raised, and they do visual sensing for connected devices in augmented reality. Matterport is third. They've raised $58.3 million, and they develop a system for generating 3D digital models of physical spaces. So one of the use cases that they talk about is if you want to show a house from across the globe or across the country, with their technology, you can digitally build a model of what your home looks like. And theoretically, with VR, you could walk around that home and really understand what's going on and see how it feels and what it looks like and all that stuff with these high-quality 3D models.

 

Blippar is fourth. They do augmented reality visual browser for brands and publishers. Essentially you can pull out your phone and put it over maybe a Coke bottle and that Coke bottle will have some sort of overlay on your phone and kind of augment what that looks like, and it will be some sort of advertisement or who knows what, but total funding is $47.2 million.

 

Leap Motion is fifth. They do 3D motion control and sensing hardware and software. So they have something that you can almost get like a feel for your world and really use your hands in order to control and sense whatever role's you're in. And that's going to be potentially very big for augmented reality, as you have overlays and things like that that you want to use and interact with. Leap Motion could help aid that. They've raised $44.1 million. And then Jaunt, which is the cinematic VR experience, and they do proprietary camera for making movies for VR and then also software for editing that.

NANOSATELLITE/MICROSATELLITE IMAGERY RELATED  CORPORATES

As we move through, the most active VC in AR/VR is Rothenberg Ventures, and they've been most active since 2012. The early-stage funds investments include AltspaceVR, Matterport, and Emergent VR, among others. Google Ventures, Andreessen Horowitz, and Intel Capital all play second in activity, with both Google Ventures and a16z investing in MediaSpike, which is a VR-native advertising company.

 

In addition, it should be mentioned that Rothenberg Ventures has something called the River Program or River Accelerator, and essentially it's an accelerator for AR/VR startups. So they're definitely a fund that's committed to the space and has a definite thesis around how big this is going to be.

When we're diving into specific industries, one of the industries we decided to analyze more deeper was the nanosat industry and how that's enabling imagery via satellites. So nanosatellites are significantly smaller and affordable satellites that many of today's space tech companies utilize. So CubeSats, which kind of led to the nanosatellite movement, emerged in 1999 out of Cal Poly San Luis Obispo and Stanford in an effort to get aerospace companies to launch low-cost satellites for research. Since then, there have been multiple startups that have raised financing in order to deploy these constellations or groups of satellites into low Earth orbit.

 

And then in an effort to try to upend the existing players, such as Airbus and DigitalGlobe who use higher resolution satellites but have a revisit rate, which is basically the rate at which you can hit a single spot on Earth multiple times, to try and bring that down. So these companies like Planet Labs and Spire, whom we've talked about, are trying to image any spot on earth daily or even multiple times per day to really understand multiple use cases.

Moving through to the focus, AR/VR startups focus on a lot of different things. We categorize them by hardware focus, a commercial focus, gaming - social specifically - and then healthcare. The focus on commercial use cases accounted for 40% of all funding. And so this includes Blippar, whom we talked about, who's augmented reality for brands and publishers, as well as Augment, which utilizes AR for sales and e-commerce. Hardware was 34%, and gaming and social was third at 22%.

 

And then in addition to the gaming in social, which we've seen multiple companies on the social side like AltspaceVR and Emergent VR and things like that, in addition to that, we also have healthcare, which is 4%, and that's DeepStream VR and LENSAR, which are both focused on healthcare applications within the AR/VR realm.

 

Chris Dixon put it probably best when he was talking about AR/VR and the idea of VR being the last medium in one of his blog posts. Chris Dixon is a partner in Andreessen Horowitz. He said, "VR will be the ultimate input-output device. Some people call VR the last medium because any subsequent medium can be invented inside of VR using software alone. Looking back, the movie and TV screens we use today will be seen as intermediate steps between the invention of electricity and the invention of VR. Kids will think it's funny that their ancestors used to stare at glowing rectangles hoping to suspend disbelief."

 

And this is partially lending towards the idea of VR in entertainment and media and things like that, and gaming specifically, which we're going to dig into a little bit. But obviously, it just shows how once you can create a virtual platform and a reality, I guess, around that is digitally made, what is the next frontier? And that's something that obviously they're thinking about with multiple investments in the space, including Oculus, which was probably the biggest company, now that they're owned by Facebook, within the space.

NANOSATELLITE/MICROSATELLITE IMAGERY RELATED  CORPORATES

Moving forward and looking forward, we look at different news headlines. And so while AR/VR is still in its earliest stages in terms of commercial applications, there have been multiple partnerships and subsequently, experiments that have used this. And so that's ranged from astronauts, which have tested a VR headset for space on the ocean floor to try to get a better feeling of what it's like to be in space; to college football and NFL teams, which have used VR to train and also recruit; to Oculus, who debuted a VR film called "Henry"; and then VR's augmented reality stamps, which Singapore did, all the way to future trends and future implementations, such as virtual travel, and government implementations, and long-term health simulations, and things that could really fundamentally change human behavior.

 

So Jaunt VR talks about how they want to change the way we travel. And so maybe instead of getting on a plane, you put on a VR headset and you're fully immersed and you're in Paris or wherever you go. That can be the same thing with preventive care. So having a VR simulation of what your body could look like or the long-term effects of what things could look like if you continue to, say, smoke cigarettes and drink soda every day, things like that.

 

But there's also concerns on virtual reality headsets being bad for eyes, and the idea of it really having a negative effect on human behavior, and probably most famously portrayed in the Pixar movie, "WALL•E", just turning everyone into stagnant human beings that just are living their lives through their brains and not through their actual bodies.

When we're diving into specific industries, one of the industries we decided to analyze more deeper was the nanosat industry and how that's enabling imagery via satellites. So nanosatellites are significantly smaller and affordable satellites that many of today's space tech companies utilize. So CubeSats, which kind of led to the nanosatellite movement, emerged in 1999 out of Cal Poly San Luis Obispo and Stanford in an effort to get aerospace companies to launch low-cost satellites for research. Since then, there have been multiple startups that have raised financing in order to deploy these constellations or groups of satellites into low Earth orbit.

 

And then in an effort to try to upend the existing players, such as Airbus and DigitalGlobe who use higher resolution satellites but have a revisit rate, which is basically the rate at which you can hit a single spot on Earth multiple times, to try and bring that down. So these companies like Planet Labs and Spire, whom we've talked about, are trying to image any spot on earth daily or even multiple times per day to really understand multiple use cases.


And so the use cases that are borne out of this really unprecedented cost efficiency and also agile development of these satellites are abound. Imagery analysis often lay in the hands of other companies such as Orbital Insight and Windward, and these companies utilize deep learning to analyze large data sets, but the addressable markets really span both public and private sectors.

 

So this can include financial institutions that want to analyze construction in a city over time. So maybe daily construction of understanding how quickly a city in China is building and how quickly those shadows are growing from those buildings so you can really understand what the build out and what the investment into a given city is, to parking lot traffic.

 

So if you want to look at a Walmart parking lot or at 50 Walmart parking lots and see how many cars are in the parking lot at 2 p.m. every Sunday and then 7 p.m. every Sunday, and then do that on a daily basis, theoretically that's the goal. As well as crop health for commodity trading, so understanding the greenness of a given crop versus a year ago, and understanding how that might affect the futures market, and much more.

 

This also includes national weather services, which can utilize the sensors to get a better data, which we talked about, as well as governments who can analyze imagery to try and protect against environmental impact of areas over time, or try and detect deforestation early.

 

Just one note on the commodity side of things. One thing we're going to dig into shortly on the drone side is the idea of precision agriculture in utilizing drones instead of, say, satellite imagery. There are definitely pitfalls of both. One of the interesting things with satellites is you can obviously cover many different places at once and much larger spans of land. But drones have definitely proven to be a little bit of a more cost-effective way and might be a bit of a problem for that part of the industry. Having said that, the opportunities are very large, so it's not really a deal breaker.

 

As we look into the market sizing for these nanosats, SpaceWorks is projecting a thousand nanosats launched in the next five years. There are projections that over 2000 nano and microsats will be launched in the next 5 years, and that the global commercial satellite imagery market in 2019 will reach $5 billion. And also there's a prediction that 56% of the nanosats that are launched through 2016 will all be for commercial use.

 

So over half of satellites being launched for commercial use, it's obviously something that's trending up. 2000+ nanosats in the next five years is a huge number compared to where we're at now. And Planet Labs currently has the biggest constellation, I believe, with plans to put out over 90. And I believe they have somewhere around 70 right now.

 

If we're going to look at corporates that might be watching the space or servicing the space or gaining from the space, we can look at a few traditional industrial players as well as some more space-focused players. So Boeing obviously, a diversified aerospace and defense company, they have a small focus on larger commercial satellite development. So whether they are going to hop in and try and do more of the nanosat commercial imagery-type stuff, I don't know, but it's definitely something that's interesting to them. And at a $98.2 billion market cap as of August 2015, that's definitely interesting for them.

 

Lockheed Martin and Airbus also fall into this category, both diversified aerospace and defense companies. Lockheed Martin has delivered more than 300 observation satellites to space for commercial use, while Airbus was recently awarded to build OneWeb satellite constellation, which is going to include 900 different satellites to try and blanket the Earth for Internet coverage.

 

On the other side of things, we also have Orbital ATK, which provides the launch services to a lot of these largely smaller telecommunication satellites. Also DigitalGlobe, the incumbent, is being upended to a smaller company. The market cap's $1.8 billion, but they're a leading American provider of high-resolution satellite imagery. And while they can claim the resolution is higher with their satellites, they have fewer satellites, but the technology is better.

 

They're more expensive and their revisit rate is significantly lower and slower. And so because of that, that might be a partial reason why Google wanted to acquire someone who's working with a cheaper, more efficient satellite, even though the resolution isn't as high. For a lot of use cases, the type of resolution that DigitalGlobe offers just isn't necessary.

 

And so Google is the last company. Obviously, they acquired Skybox Imaging, and they're focusing on twice daily imaging of the Earth. And Google has a ton of different use cases they could talk about to relate to this. But we highlighted them before, whether it's just for Google Maps or for other projects that we don't know about, it's definitely an interesting player to lurk around.

With that in mind, we dug into the AR/VR gaming analysis industry and analyzed that a little bit. So augmented reality and virtual reality is anticipated to have a huge impact on the gaming sector over the next 5 to 10 years. And so we've seen Facebook, who had a $2 billion acquisition of probably the most famous hardware developer, Oculus VR, to Microsoft and Sony, who have made their own AR/VR headsets, to Samsung and Google who have had their low-cost cardboard headsets, which are designed to work with high-end mobile phones. And they're all positioning themselves slightly differently within the space, but it's definitely very clearly a big opportunity.

 

And on the flipside, alternatively, software providers including game studios, such as Crytek and Ubisoft are also looking to benefit from some of these new and more immersive gaming experiences, and also the surging adoption of this hardware. So some of the emerging use cases that are pretty obvious that come out are more of these adult-focused open world games and first-person shooters.

 

So whether that's like a Call of Duty-type game or a Grand Theft Auto-type open world thing, or Assassin's Creed, but also on the teen and young adult-focused social gaming where avatars and digital goods will become increasingly important. So whether you're living your life digitally as well as in real life, there's going to be some monetization there. And that's something that a lot of VR people are looking at for the emerging, the young adults who really have latched onto that digital goods, specifically overseas, but also a little bit in the U.S.

 

And we'll be looking at market sizing of the VR content and VR gaming. The overall gaming market currently is estimated around $74 billion per SuperData Research. And the VR gaming market is a small portion right now, but they're expecting that to grow. But right now, it's $225 million.

 

The interesting part of this is that of all the VR content that is being made, 76% of it is related to gaming. So it's very clear that while there could be other use cases, gaming is probably the one that is being thought of and actually acted upon the most. So if 76% of everything related to VR is going to gaming, it's very clear that that should be the next major frontier within the space.

 

And some of the companies that this might be interesting or important for include Electronic Arts, which they're the largest exclusive American developer and distributor of video games, the EA sports franchises, etc.; Activision, which does Call of Duty, and World of Warcraft, and, Destiny, and Diablo; Valve, which is responsible for Half-Life and Dota 2, which are two very large games within the e-sports area; as well as the digital distribution platform, Steam.

 

And then on a larger corporate side, Tencent, which is one of the largest gaming companies in the world. They do around $7.2 billion of gaming revenue. Their market cap's $171 billion. Sony, who owns Sony Computer Entertainment, and they produce PlayStation consoles, and they publish video games, and they also have their own VR headset that they've made, Project Morpheus. And their gaming revenue's projected around $6 billion. And then Microsoft, who owns Microsoft Studios. So they publish games for the Xbox and Windows and Steam. And one of their biggest platforms, at least, is Halo in terms of gaming. And their gaming revenue is estimated around $5 billion.

 

So it's very clear these are large companies and there's a lot of opportunity, but it's something that is the probably closest and the nearest of any of these frontier use cases, aside from precision agriculture and drones, because that's being done, but I don't think it's nearly the same size market over long-term. VR gaming really looks like it could be a very main part of the gaming industry within five years.


So with that said, that's everything from the frontier tech report. I really appreciate you listening. And if you have any questions, feel free to email me at mdempsey@cbinsights.com. Or you can find me on Twitter @mhdempsey. And I hope you guys enjoyed it. Thank you. 



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