Why Indian drone startups are lagging behind in the fund-raising race

Industry players say that investors tend to shy away when the govt is the largest customer for a small company. But that is just the tip of the iceberg

The Indian startup ecosystem has been on a roll–with different estimates suggesting a cumulative fundraise of $36 billion to $40 billion in calendar year 2021. Be it e-commerce, edtech, fintech, crypto or software as a service (SaaS), most of the segments of the technology startup ecosystem have been successful in attracting investor attention.

Why then has the drone start-up segment only managed to collect $15 million by way of investments among themselves in 2021? The 2021 number is still an improvement over the previous years–$7 million in 2020, $3 million in 2019 and $5 million in 2018, according to data from Tracxn.

“The drone ecosystem was working outside the scope of regulations till 2018. Then a policy came which effectively banned drone use as you needed to embed a conditionality in the software that sought permission from the government before every take off,” says Mrinal Pai, cofounder of Skylark Drones. 

This situation was undone last year in September which eased compliance processes and fees. For instance, the new drone rules remove security clearance before registration or licence issuance, reduce yellow zone ( areas where permission is still required) from 45 km to 12 km from the airport perimeter, and allow the use of micro drones (for non-commercial use) and nano drones without a remote pilot licence. Moreover, 80 per cent of the country now falls in the green zone, say experts, where no permission is required on a day-to-day basis to operate drones.

Yet, investors are biding their time before betting big on the sector. Siddarth Pai, managing partner of VC firm 3one4 Capital – which has invested in drone start-up AUS – says: “From a drone manufacturing perspective, India is yet to catch up with the world’s largest drone manufacturer, China. With the production-linked incentive scheme for drones - hiring has picked up pace as “Make in India” takes hold. Investors are closely monitoring the space and looking for start-ups with good intellectual property or a service layer that can drive revenues and even  compete in the global market.”

“Ever since the new regulations have come in, investors are waiting for a wider acceptance of drones by the industry. More money will flow into the sector as revenue increases and more IP is developed,” he adds.

One of the reasons for the low funding in the sector also is that it has been a largely business to government market till the new rules kicked in. While Prime Minister Modi said with great gusto last week that Rs 500 crore worth of orders have already been placed with drone companies by the armed forces, industry players say that investors tend to shy away when the government is the largest customer for a small company.

“When the pandemic started in 2020, a lot of drone start-ups faced trouble because state governments invoked the ‘Act of God’ provision to delay payments. That might happen anytime. So, if 70 per cent of the revenues of a drone start-up come from the government, it is a matter of concern for investors,” says Ankit Kumar, a drone sector management consultant.

Another problem is that the drone sector hardly has a B2C presence – while B2B applications have opened up over the last few months as steel, mining and petroleum firms have started approaching drone companies for mapping, inspection and surveying solutions.

In contrast, the B2C market’s primary use case is just aerial photography which does not have as much potential to scale up to attract VC firms, say experts. Moreover, most of the 244 drone start-ups in India are service providers – they import drones, purchase drone software and integrate with the equipment and sell to local customers at a premium.

One area that might act as a gamechanger for the drone industry is intra-city logistics. While various state governments have already been piloting programmes to deliver essentials using drones, there is a huge untapped market in e-commerce deliveries.

For instance, Google and Reliance-backed hyperlocal delivery start-up Dunzo has carried out over 160 hours of trial flights for delivering medicines and food. 

"We are evaluating on how we can conjoin two models of transportation i.e. surface and aerial to deliver the same experience to our customers under the Dunzo Daily program. Therefore, we are in the process of conducting feasibility studies in the cities where we are currently operational and identify delivery corridors where it makes commercial sense to deploy drones to ensure our delivery commitments are met," says a Dunzo spokesperson.

"We are a price sensitive market and delivery of essential items is no different. We are working on a pricing model that may be different from the current structure, since the operations need to make commercial sense for the long run", he adds.

Ankit Mehta, founder of drone start-up IdeaForge, is bullish on the drone manufacturing sector and says the market is still open to conquer in India from a B2B perspective. “Last year, India produced about Rs 80 crore worth of drones and that is estimated to rise to Rs 300 crore. Be it the private sector looking for drone solutions or government efforts to map land ownership in 660,000 villages, there will be a lot of demand for making drones.”

“So, investors will certainly be interested. But, I would say that we have to wait for another six months and see how the rules play out on the field,” he adds.

Mrinal Pai of Skylark drones, too, does not want to take anything for granted. “I think we cannot say with full confidence yet that the regulatory risk has gone to zero. It is still early days in the sector.” Also, he feels that it will be the players who make software for operating drones who have a better chance of coming out as winners in the sector, rather than the ones who build or assemble drones locally.