VLAB: Drones – the commercial era takes off, but breaking the law is going to blow-up in our faces

Last Tuesday, I had the pleasure of attending VLAB: Drones – The Commercial Era Takes Off at Stanford GSB.   The event was truly fantastic and the panel was amazing.  The moderator was Chris Anderson, former editor at Wired and CEO of 3D robotics.  I’m really struck by how much he has become the face of the commercial drone industry.  From his appearances on NPR and print media, he’s probably the most recognized drone advocate.  He makes some very powerful points.  Fueled by Moore’s Law and the cellphone industry supply chain, unmanned aircraft technology is coming and we’ve got to prepare for it.  Like it or not, the drone/robotic era is coming–it doesn’t have to be scary–all kinds of things are possible.

VLAB Drones Panel at Stanford GSB March 19th, 2013

VLAB Drones Panel from left to right: Chris Anderson, 3D Robotics; Helen Greiner, Cyphy Works; Zach Schildhorn, Lux Capital; Jonathan Downey, Airware; Matthew Pobloske, BAE

The one theme that deserves the attention of our industry at large, promoted by Chris Anderson, was that many people in our industry are operating in a “legal gray area” (read: violating regulations because they think the regulations are stupid and won’t be enforced) and that operating in the “gray area” is a good thing that will force regulatory movement.  Anderson gave two examples of this “gray area.” He talked about how ridiculous it was to be violating export controls by turning Lego Mindstorms into what could be considered a cruise missile guidance system.  Later he talked about flying drones in contravention to the FAA regulations governing the use of unmanned aircraft.

The FAA regulations are pretty clear, and let’s stipulate that they are stupid.  However they are the rules, and they have worked pretty well for the FAA’s primary goal of keeping people from getting killed by aircraft.  Technologists in general and Silicon Valley in particular take a dim view of regulations promulgated under the old order (e.g. Lyft, Uber, AirBnB).  I’m not completely outraged when technologists facilitate contract formation between consenting adults, even if local regulation contravene some of the particulars of the contracts.  However, let’s be clear that is absolutely not what we’re talking about when it comes to aircraft.

When it comes to aircraft–manned or unmanned–one of the main beneficiaries of regulation is the people on the ground.  This isn’t renting your room to some strangers who choose to be there; it is hurtling a heavy object over the heads of people who haven’t consented to be part of an experiment.  Our society rightly asks the government to ensure that activities that impose risk on others, especially those that did not consent, be minimized.  We need to update our regulations, but aircraft operators need to respect the letter and spirit of the law as it stands.  What standards do we have if not the law?   If we follow the path of breaking all the rules, someone is going to accidentally kill a  sympathetic bystander.  Beyond the personal tragedy that will create, that accident will set back our industry and the benefits we can provide to society by a decade.

In Afghanistan, one of my planes almost smacked into a helicopter–but it was the helicopter, not the drone–who had come, without clearance or radio calls, into an active artillery firing ROZ (restricted operating zone–an airspace control measure to make sure that aircraft don’t run into artillery fire).  Similarly, the first full sized drone and manned aircraft collision had the C-130 violating airspace control measures around the airfield.  Pilots are not infallible and often break the rules.   The best drone operators have a different safety culture.  Military drone safety culture is one where there is proper approval for everything, because every move will be recorded and second guessed.  I hope this culture will permeate the civilian unmanned aircraft community as well.

Although breaking the rules might move us toward our unmanned enabled future a little bit faster, this is an incredibly dangerous path for our industry and our bystanders.  The closing thought of VLAB Drones was that unmanned aircraft will eventually make the airspace safer for all users.  The panel wondered if this was hyperbole, but it is inevitable when drones have a strong safety culture.  Conversely, as long as we are the irresponsible jerks of the air, safety conscious regulators–like the FAA –will be unsupportive of us flying.    When we, as a civilian unmanned aircraft industry, can be counted on as strong safety partner, and when general aviation and commercial aviation are learning safety lessons from us, there will be no more foot dragging.  We will get our airspace and the drone revolution will finally be here.

In the meantime, seriously, don’t do anything that could kill anyone, please–especially if it is illegal.  You will ruin it for the rest of us.

Is anyone surprised the FAA is delaying UAS test site selection indefinitely?

I have to agree completely with the sentiments of Congressman Austria on this issue. The FAA is just dragging its feet.  The point of the test sites is to solve the issues of safety and privacy.  If these issues were completely worked out, we wouldn’t need test sites–do not pass go, do not collect more appropriations, proceed directly to airspace integration.

The point of the test sites is to work on these issues and give the general, civil, and commercial aviation community time to come to grips that some new craft are going to be joining their previously exclusive community.  Delaying the test site selection is the complete wrong approach.  The right approach is to begin testing–as most other developed countries already have.

How is privacy even the FAA’s jurisdiction?  In all seriousness, I hope that whatever regulations apply to UAS apply to cellphones.  I’m a lot more likely to have my privacy invaded through cell phone than through unmanned aircraft.

Which VCs are investing in robotics? Here is the list.

the instrument of venture investment

source: SEC.gov

My overview of the Firms Behind the Hizook 2011 VC in Robotic List has graciously been published at Hizook.

Bottom line:  We don’t have a cadre of dedicated robotics investors, but we can get investment from the industries that serve as our customers.

I wish you all luck in getting some of that VC Cash.  …on second thought, no, actually, I don’t–I  wish you all luck in signing up major partners who will give you progress payments to complete your product without diluting your investment.

But whatever your situation I hope that you use the appropriate capital structure to make lots of robots, lots money, and lots of good in the world.

Robotics capital intensive?! What are you smoking? Don’t believe it.

Robotic manufacturing is not capital intensive, contrary to the popular wisdom.  (Looking at you HBS.)

Unless someone can bring data to the contrary, we should treat this issue as thoroughly decided against the  conventional wisdom.  As we saw previously, robotics companies do not need a lot of fixed assets.  Now, we will see why people who blithely repeat the conventional wisdom that robotics companies are capital intensive are wrong–even if they claim robotics companies are hiding their true use of capital.

First off, robotics companies’ balance sheets look like technology companies’–the internet kind, not the aerospace/industrial kind.  Robotics companies have lots of cash and relatively little else.

Second, robotics companies have gross margins that even companies that don’t make stuff would envy.  The robotics gross margin would probably be even higher if iRobot and Aerovironment were not defense contractors.   There is a lot of pressure to bury as much expense as allowed into the cost of goods due to defense contract rules.   Intuitive and Cognex’s margins are around 75%.  They are even beating Google on gross margin!

Although, it does appear that robotics companies have a bit longer cash conversion cycle than the basket chosen for comparison here, their cash cycle appears to be in line with other complex manufacturers.  Plus, the robotics companies are holding so much cash their management may just not really care to push the conversion cycle down.

Look at the cash required to sell aircraft though!  Manned or unmanned it looks like it takes forever to get paid for making planes.

Although robotics companies have physical products, the value of a robot is in the knowledge and information used to create it and operate it.  The materials are nothing special.  Consequently, these companies look like part of the knowledge economy–few real assets, lots of cash, and huge attention to their workforce.   Next time someone tells you robotics companies are capital intensive, ask them to share what they’re smoking–it’s probably the good stuff–because they aren’t using data.

One thing that a venture capitalist may mean when he says that robotics is capital intensive is that it generally takes a long time and lots of money to develop a viable product in robotics.  This may be true, but it is not really the same thing as being capital intensive.   This observation should cause a lot of soul-searching within our industry.  What the venture capitalist is telling us is that we–as an industry–cannot reliably manage our engineering, product development, and business structures to produce financial results.

This is why the conventional wisdom is dangerous.  It suggests that the lack of investors, money, and talent flowing into our industry isn’t our fault and there’s not much we can do about it.  That is what needs to change in robotics.  We need to get better at management.  We need to start building companies quicker and producing returns for our investors.  If we do that the money, talent, and creativity will start pouring into industry.  Then robotics can change the world.

Notes on Data and Method
Data Source: Last 10-k

Method:

Accounts Receivable = All balance sheet accounts that seem to be related to a past sale and future cash, so accounts receivable plus things like LinkedIn’s deferred commissions.

Cash + Investments = All balance sheets I could identify as being financial investments not required to operate.   Assume all companies require zero cash to operate.

Did not account for advances in cash conversion cycle.

Where are the Ops Companies?

Really where are they?  Given how many companies are  building some form of robot it seems like there should be some proportionally greater number of companies out there forming to implement, service, and operate these robots.  Where are they?

Frank Tobe isn’t finding a lot of them forming in his start-up list.  Even the RIA seems to have fewer integrators than suppliers.  AUVSI has many more Lockheeds and Insitus than VT Services.  One could make a case that this is characteristic of the peculiar industries that we’re looking at.  The robotic counter example is perhaps the ROV industry which routinely provides the ROV as a packaged service to the off-shore oil and gas industry.  But most consumer robotics are still selling to early adopters.  Our consumer customers are all people who want tech for tech’s sake, not to mainstream customers that are just looking to solve a problem.

Think about other complex goods in our economy.  Computers have a vast cottage industry associated with servicing and maintaining them which is probably as big or bigger than the software industry proper.  All vehicle industries whether air, ground, or sea have vastly more businesses in the business of selling the services than engaged in construction of the vehicles–even if constructors do manage to capture a large share of the total revenues of the industry.

I think our industry has a problem.  I’ve talked to people at the oil and gas majors and heard straight out that robotics companies are producing robots which have a business case to be used several applications, but they will never be used until a credible organization to is there to provide the robot as a service.   It is a bit of chicken and egg, but I think this applies as you go down the chain, not just in large capital projects.

When doing sampling or reconnaissance, customers want actionable data not a fleet of robots or new employees.  I know from experience that infantry brigade commanders love having drone imagery of the battlefield, but don’t want to worry about having to support the drone unit, they just want to see the battle.  This is equally true in forestry, agriculture, infrastructure, and minerals.

Do I really want to own a cleaning robot? No, I would much rather have a business that comes to my house every week and keeps the place clean whether that business uses humans, robots, or both.

Even in medicine, if I were a hospital operator I’d love to be able to push the risk of owning the robot back onto someone else.  If I can pay per procedure and not worry about utilization, maintenance, or obsolescence–I’m much more game to adopt something new.

To date, our industry has done a relatively poor job of making robotics accessible to people and organizations who aren’t willing to organize around robotics and develop organizational competence in robotics.  Providing robotics as a service could greatly expand the number of potential customers.  I think when we see these businesses start cropping up, we will know that our industry is no longer in its infancy.

How many will die before we fix this?

Four airmen died this weekend fighting wildfires.  They died needlessly, compounding the tragedy of their sacrifice.  There is nothing technological stopping drones from taking over the retardant dropping mission.  The hold-up comes down to bureaucratic inertia and a lack of political leadership and attention to this issue.

http://www.charlotteobserver.com/2012/07/03/3358931/at-least-2-dead-in-crash-of-c.html#storylink=misearch

There have been at least six aircrewmen killed just this fire season!  How many does it take before we collectively figure out how to do this mission with autonomous or remotely piloted aircraft?

_______

(My criticism of a lack of political leadership is not a partisan criticism.  The technology to remotely pilot fire-retardant tankers has been around for at least two administrations and neither party in congress–which is the body that will really have to act–has shown much leadership on this issue.  But seriously, our guys are getting killed.  The robotics industry knows how to fix this problem, let’s get everyone at the same table and get the barriers cleared so we quit making widows and orphans every fire season.)

Pittsburgh has a robotics meet-up!

Time to update the cluster comparison statistics, Pittsburgh has a robotics meet-up!  Join the AUVSI crew for some whiskey tasting.  I’ll be disappointed to be out in the Valley on Monday night.

http://www.meetup.com/Pittsburgh-Robotics/

East Coast Chauvinism in Robotics: Time to Face Facts, Silicon Valley is Kicking Our Ass

A cleaned-up version of this article became my first post on Hizook.  http://www.hizook.com/blog/2012/06/25/east-coast-chauvinism-robotics-time-face-facts-silicon-valley-kicking-our-butt#comment-971

_______

I have lots of love for Pittsburgh in particular, but it really pisses me off when people on the East Coast repeat a bunch of falsehoods (See #8) about how Boston and Pittsburgh compare to Silicon Valley and the rest of the world.  Many people in Pittsburgh and Boston—including people I call friends and mentors—smugly think that the MIT and CMU centered robotics clusters are leading the world in robotics.  This is demonstrably false.

If leadership in robotics means forming companies, making money, or employing people, then Silicon Valley is crushing everyone—no matter what the Wall Street Journal editorial page says about their business climate.  I’ve previously published an analysis of the Hizook 2011 VC Funding in Robotics data that shows that the Valley gets 49% of total VC robotics investment worldwide.

I’d now like to add an analysis of U.S. public companies (see bottom of the page).  Basically, the ‘Pittsburgh and Boston are the center of the robotics world’ story is even more ridiculous if you look at where public robotics companies are located.  Silicon Valley is crushing the other clusters in the U.S. at creating value in robotics and in building a robotics workforce in public companies.  (A forthcoming analysis will show that this true worldwide and if you include robotics divisions of public companies not principally engaged in robotics such as Boeing and Textron.)

77% of the workforce at public robotics pure plays is in Silicon Valley companies.  An astounding 93% of the market capitalization is headquartered in Silicon Valley and even if you exclude Intuitive Surgical (NASDAQ:ISRG) as an outlier, the Silicon Valley cluster still has twice as much market capitalization as Boston.

The public companies that I deemed to meet the criteria of being principally engaged in robotics, that they had to make and sell a robot, and not have substantial value creating revenues from businesses not related to robotics are listed in the table below.

The one company that I believe might be controversial for being excluded from this list is Cognex (NASDAQ:CGNX).  However, while trying to do decide on whether to include them, I found their list of locations.  They have three locations in California including two in Silicon Valley.  That means that this ‘Boston’ company has more offices in Silicon Valley than in Boston.  I’m not an advanced (or motivated) enough analyst to find out what the exact employee breakdown is, but combined with the fact that they make vision systems and supply components rather than robots, I elected to exclude them. I acknowledge that a similar case could be made about Adept (NASDAQ:ADEP) that just made a New Hampshire acquisition, but I have decided to include them and count them towards Silicon Valley.   I do not believe that either of these decisions, substantively impact my finding that Silicon Valley is the leading cluster when it comes to public company workforce and value creation.

I’m hoping the people who are spreading the misinformation that Silicon Valley has to catch-up to Boston and Pittsburgh will publish corrections.  I believe that this is important, particularly because I want to see Pittsburgh reclaim its early lead in robotics.  So many robotic inventions can trace their heritage back to Pittsburgh, it is a real shame that Pittsburgh has not used this strength to create the kind of robotics business ecosystem that one would hope.

It is impossible for communities to take appropriate action if they do not understand where they stand.  I hope that this new data will inspire the Pittsburgh community to come together and address the challenges of culture, customer access, and capital availability that have been inhibiting the growth of Pittsburgh’s robotic ecosystem before they lose too many more aspiring young entrepreneurs—such as me—to the siren song of California.

Company (1) Ticker Employees (2) Market Cap $M (3) % of Employees % of Market Cap Robotics Cluster
Accuray NASDAQ:ARAY

                   1,100

  463

20%

2%

SV
Adept NASDAQ:ADEP

                       183

43

3%

0%

SV
Aerovironment NASDAQ:AVAV

                       768

  577

14%

2%

SV
Hansen NASDAQ:HNSN

                       174

 135

3%

1%

SV
Intuitive Surgical NASDAQ:ISRG

                   1,924

  21,840

36%

88%

SV
iRobot NASDAQ:IRBT

                       619

  606

12%

2%

BOS
MAKO Surgical NASDAQ:MAKO

                       429

  1,110

8%

4%

Other
Stereotaxis Inc. NASDAQ:STXS

                       171

 13

3%

0%

Other
Total

                   5,368

24,787

100%

100%

(1) Companies are U.S. public companies that have been identified by Frank Tobe’s or my own research as principally engaged in robotics
(2) Employee Count as of Last 10-K Filing
(3) Market Capitalization as of 6/24/2012

Compared to what?

The Pakistani affiliate of the International Herald Tribune has a great summary run down of recent drone strikes under the Obama administration.  http://tribune.com.pk/story/391839/unmanned-war-on-terror-no-longer-a-covert-war/ It details strike after strike against militants that are operating freely in Waziristan and the tribal areas.  It also produces a summary statistic of civilian casualties which, even if taken at face value, seems to indicate that these strikes exhibit a very high degree of proportionality and discrimination.

I’m out here in San Francisco and I sometimes get some troubled reactions when I tell people that I led a drone unit when I was in the Army.  Eventually telling  these people that my drones were not armed quiets them down, but there is a fundamental misunderstanding about how drones are different and similar from other types of war.  Drones unfortunately have some misperceptions about how they compare to other types of military engagements.

I would like us each to sit in the chair of senior commander or official who has just received intelligence from multiple sources (as it seems these strikes are probably based on) that is really good, but not 100% certain.  There is a militant–who the Pakistanis allow to travel, train, and organize unmolested–who is intent on killing not only U.S. soldiers, but also our civilian allies and females who dare to leave the home to get an education.  He believes that it is his god-given moral imperative to kill all these people.  What would you do?

A)  Nothing

B)  Ask the Pakistanis who have been arming this guy to arrest him

C)  A drone strike

D)  A manned aircraft strike

E)  A commando or sniper raid

Okay, even Marines get this one: when in doubt, Charlie out.  Seriously though, C is the only ethical choice.

Doing nothing means that you have let an evil, violent man go about his plans to kill someone’s son or daughter because he or she believed in a world where everyone has the freedom to make something of themselves.  By the same token, B is even worse, because now you’ve not only let him go free, you’re endangering your sources and methods of finding him in the first place by telling the Pakistanis what you know.

On the other side of the spectrum, there is every probability that any method besides a drone attack would be worse when measured by the standard of proportionality and discrimination.  Drones usually strike using the smallest guided air to ground missile in the U.S. arsenal, meaning they tend not to cause more damage than is absolutely necessary to destroy valid military target.  Would a commando team be as precise?  What if the team itself was attacked by our Pakistani ‘allies?’  Could it or a manned plane follow the target and wait until this small missile was the appropriate munition to use to ensure the destruction of the target?  The answer is no, they could not.

Of most concern to all of us who treasure innocent life is the principle of discrimination which means that you are only attacking legitimate targets.  Although this is where drone are most criticized, this is where they beat all other methods of apply force.  Can you imagine any other weapon so precisely attacking only legitimate targets?  There is no other weapon system where every action of the user is recorded, second guessed, and subject to real time absolute supervision by higher authorities.  Once a pilot is over a target his judgment of the scene and need to protect himself while completing the mission takes precedence over a second guessing boss back at base–and rightly so.  Even more so with a commando team, the commander of that mission has complete autonomy and discretion once his forces are committed.

But let’s be clear, commandos and pilots make more mistakes, not less, by being on scene.  They are affected by all kinds of pressures, are in mortal danger, and are being asked to make snap judgments on their own.  They screw-up.  They drop bombs on the wrong house–or even the wrong army.  Snipers in over-watch shoot civilians all the time–they don’t mean to, they just do.  None of these things are war crimes, they are just mistakes–unacceptable tragedies–but still just mistakes not crimes.  I think that most of us, civilian or military accept this.

Drone operators on the other hand work in secure locations, can loiter over their target, and stalk him for days or weeks until they get a clean shot.  They even have lawyers looking over their video feed as they work!  These are carefully supervised, deliberate operations.  That said, this is still war, where even professionals make mortal mistakes with the best information available.  But even or especially in war, we must do our best to protect those principles we hold dear and every analysis says that drones are the most moral option.  To those who would say that drones are immoral, I would ask in comparison to what?

 

It is well that war is so terrible–otherwise we would grow too fond of it.  -Robert E. Lee

Needless Deaths

Fire season has just begun this year and already there have been two needless deaths that can be attributed to the FAA and Forest Service’s failure to embrace unmanned and robotic technology.  There is absolutely nothing about the fire reconnaissance mission or the tanker mission that cannot be done better, cheaper, and more safely by an unmanned aircraft.  These men did not need to be in that plane.

The crazy thing about it is that the Forest Service/BLM incident commanders are some of the few people in North America that can actually tell the FAA to go pound sand.  They get to put up a TFR (Temporary Flight Restriction) over their fire and they control all air traffic in the TFR.  Wildfire response crews do not do any night operations because it is considered too dangerous for them to fly at night.  Still, the powers that be have not allowed unmanned aircraft to play a substantial role in firefighting despite successful demonstrations in 2008.

My most sincere condolences to the families of these men.   They are exactly the kind of people that we need more of in society–people that will take risks to protect us all.  We–as a country and a society–are literally killing these people with our failure to embrace unmanned and robotic technologies.  I don’t want to be unsympathetic to the difficulties of change in government organizations and the good work that I’m sure the employees at Forest Service and BLM are doing, but when we’re making widows and orphans with our crappy policy, we all need to step up to the plate to take action to change it.

If I were the U.S. Congress I would:

1)   Call in the FAA, Forest Service, and BLM and tear them all a new one for their foot dragging on unmanned aircraft.

2)  Mandate the conversion of the whole tanker and most of the fire reconnaissance fleet to unmanned aircraft within 5 years.

3)  Direct the Forest Service and BLM to provide unmanned aircraft support at night in the TFRs to incident commanders this fire season.

4)  Give the BLM and the Forest Service some money to do this.  One of the main problems with wildfire firefighting is that there is a negligible advance procurement budget, but a nearly unlimited budget for reimbursement of labor to fight fires.  This is not a good deal for the country, spend a little bit in advance and lets save lives and money next fire season and every season thereafter.