New regulations for commercial drones bring investment opportunities for PE and VC firms

Private equity and venture capital firms looking to invest in a fast-growing, innovative industry need to look no further than the drone or unmanned aircraft systems (UAS) market. 

New regulations for commercial drones bring investment opportunities for PE and VC firms

In fact, recent regulatory change is likely to make investment in commercial drone companies in particular, more attractive. Before, however, launching efforts to take advantage of these valuable investment opportunities private equity and venture capital firms need to understand the legal framework in which this industry operates. 

Growth in UAS expected to soar

The UAS sector is expected to grow significantly in the next four years. According to its Aerospace Forecast Report for fiscal years 2016 to 2036, the Federal Aviation Administration (FAA) estimates that sales of model aircraft UAS will grow from 1.9 million in 2016 to 4.3 million by 2020, and the sales of commercial UAS will grow from 600,000 in 2016 to 2.7 million in 2020.

Further, the FAA estimates that the total fleet of higher end and lower end UAS will increase from 32,800 in 2016 to 542,500 in 2020.

Corporate investments in drone companies have also significantly increased. According to a recent article released by CB Insights, investments in drones increased by 1113% from 2014 to 2015, with funding rising from $17M to $209M across that period. CB Insights also noted that deal volume almost tripled, from 6 deals in 2014 to 17 in 2015.

For those mid market funds attracted to emerging industries in growth markets, the world of UAS is worth a closer look.

Investment in commercial drones may take off

The FAA’s Part 107 Drone Regulations (Part 107), which became effective on August 29, 2016, have made it easier for companies looking to fly drones to enhance their business operations. 

The new regulations broadly authorize commercial small drone operations in the United States without a manned aviation pilot’s license; a stark contrast from the burdensome and costly “Section 333 Exemption” process that companies had to endure in order to fly commercial drones under the old regulatory regime.

The new regulations provide, among other things,  detailed instructions for obtaining a Remote Pilot certification to fly a commercial UAS and for seeking a certificate of waiver to authorize deviations from certain aspects of Part 107. A high-level overview of the rule can be found on Hogan Lovells' Focus on Regulation blog.

To help companies understand the true reach of Part 107 and what it means for their ability to operate commercial drones, Hogan Lovells has prepared a “Top 10 List” of questions that can be accessed here.

These new regulations may well fuel growth in the UAS sector across the US now that it is broadly authorized to fly commercial drones. The FAA estimates that there may be almost 600,000 commercial drone operations during the next year, which is a sharp increase from the 18,940 drones that were registered for commercial purposes as of August 26 of this year.

Given those numbers, private equity and venture capital firms may view start-ups producing drones or parts used in the manufacture of drones, drone service providers, or drone software developers as attractive targets for investment as the drone industry continues to take off. Of course a good understanding of the regulatory framework is essential – for more, contact our UAS regulatory team led by Lisa Ellman.

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