Startups promising to usher in the age of air taxis and cargo drones started popping up at the end of the 2000s. For most of their existence, they were underfunded and relegated to niche applications like delivering blood in rural Rwanda or publicity stunts like the Taco Bell-backed “tacocopter.” The pandemic changed all that overnight.
This year, startups building autonomous drones to carry passengers and packages have raised at least $3.8 billion, up from $1.1 billion in 2020. That compares to just $438 million in venture capital funding for the entire decade between 2009 and 2019, according to data from the investment tracking firm Pitchbook. Most of the recent wave of funding has gone to a few startup winners, including Joby Aviation ($1.6 billion raised), Lilium ($842 million), and Archer Aviation ($656 million).
Nearly all of the money pumped into drone startups this year has come through so-called “alternative public offerings,” in which a startup merges with a shell company that’s already listed on the stock market (a reverse merger) and then sells stock to a small group of private equity investors (a private investment of public equity, or PIPE, deal).
With huge cash reserves, these companies can now fund long-term research and development for autonomous, electric drones that promise to slash delivery times and accelerate urban mobility.
The technology is in its early days. Electric engines aren’t yet powerful enough to fly heavy loads over large distances and AI systems aren’t reliable enough to pilot human passengers or valuable cargo on their own. Freight companies like DHL are still in the testing stages. Of the 129 companies developing air taxis and cargo drones, only 13 are actually selling final products, according to an analysis from emerging tech investment firm Phystech Ventures.
But with the recent wave of funding, the sector could bring a viable product to market within five years, predicts Matt Trotter of Silicon Valley Bank (SVB). “Companies that had a very hard time raising a Series A five to seven years ago are now raising billions of dollars in capital to take something that seemed very far-fetched to be more of a reality these days,” says Trotter, who heads SVB’s emerging tech division. They can thank the pandemic for jamming up supply chains.
Investments in air taxis and cargo drones takes off
Two short-term trends pushed investors to take a serious look at air taxi and cargo drone startups since the start of the pandemic. First, factory shutdowns, port closures, and whipsawing consumer demand scrambled supply chains, revealing serious vulnerabilities in the way businesses move goods through the global economy. With ports jammed, rail yards in disarray, and trucking facing a shortage of personnel and equipment, the idea of using long-range cargo drones to transport boxes no longer seemed so far-fetched. Plus, moving goods (or commuters) through the air could ease traffic in increasingly crowded cities.
Second, governments cut stimulus checks and lowered interest rates to jumpstart their economies. Flush with cheap cash, investors have pumped record-breaking amounts of funding into startups in both 2020 and 2021. And after seeing Tesla’s breakout success, investors have gotten excited about electric vehicles and autonomous driving. “It was, ‘Hey, we’re doing this with cars. We’re starting to do this with trucks. Let’s bring some of that same kind of technology to aviation,’” said Trotter.
Technological hurdles in the age of drones
Before any of these futuristic visions can come true, says Asad Hussain, a senior analyst at Pitchbook, many pieces have to fall into place from the cost of certifying new aircraft to regulatory approvals and infrastructure development. Investors may “underestimate the complexity” of the task, he wrote in an April 8 research note.
Now that startups have filled their bank accounts, Trotter says, they’ll likely put their heads down for the next five or so years and focus on development. In that time, they may be able to overcome challenges like scaling up electric motors to give their drones a useful flight range and securing approval from aviation regulators—but if not, they’ll be back on the market for venture funding again around 2025.
In that case, the drone startups would face a similar risk as the first wave of clean tech startups that raised big funding rounds in the early 2000s but failed when they couldn’t secure funding to keep the lights on after the 2008 financial crisis.
“They didn’t have the capital to follow through and finish the technology they were working on, so a lot of really interesting companies went out of business,” Trotter said. But in Trotter’s estimation, the drone startups’ eye-popping fundraising rounds should be enough to tide them over: “They have enough money to fully deliver and get into market,” he said. “A lot of the capital risk has already been taken.”