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/