How Aeryon Labs intends to keep its industrial drone business aloft

The maker of rugged military-grade drones faces new competition from an unexpected source: toy makers

Aeryon Labs CEO Dave Kroetsch

Aeryon Labs CEO Dave Kroetsch is betting the SkyRanger’s rugged design will help it standout in a crowded market for drones. (Portrait by Daniel Ehrenworth)

Most young companies struggle to get noticed. That has never been a problem for drone manufacturer Aeryon Labs. The media love drone heroics, and Aeryon’s flying robots have starred in a number of high-profile nail-biters: guiding a rescue mission to frozen Alaska; assisting in a drug bust in Central America; helping natural disaster victims in the Philippines and Nepal. Take what happened after the 2010 Deepwater Horizon spill in the Gulf of Mexico: “The BP guy who was running the cleanup in Alabama saw a segment about us on Discovery Channel on Monday night, called us on Tuesday, we were there on Wednesday and had a purchase order by Friday,” recalls Dave Kroetsch, Aeryon co-founder and CEO. The TV police drama Flashpoint even wrote an episode around the Scout, an Aeryon drone. It contained the infomercial-ready line, “We don’t need a helicopter—we’ve got the Scout!”

It seems not a day goes by without news of another way drones will make our jobs easier, safer or obsolete. Equipped with computing power, powerful cameras and GPS, drones are emerging as the Swiss Army knives of commercial applications. Drones—or unmanned aerial vehicles (UAVs), in the industry’s preferred parlance—are inspecting smoke stacks and monitoring seal populations, and will soon explore the insides of active volcanoes. A restaurant in Singapore plans to replace wait staff with drones. While Amazon squabbles with U.S. aviation bureaucrats, the Swiss postal service is already delivering packages to Alpine villages by UAV. For Kroetsch, perhaps the most surprising application so far came from a government agency hoping use an Aeryon UAV to look for “hot garbage”: The drone would fly over a vast landfill, scanning for spots where fires could break out. “I didn’t see that one coming,” he says.

The commercial drone market is nascent today—roughly a billion dollars in sales globally—but it’s growing like mad, with many companies, Aeryon included, increasing sales by 100% each year. Drone makers brag that they’ve cut Geoffrey Moore’s law in half, doubling power every 12 months rather than the 24 Moore predicted. “When you look at where aviation came from, UAVs will travel that same path in 15 years,” says Robert Kendall, the former executive director of industry association Unmanned Systems Canada. The reason? Drone makers can borrow and miniaturize existing technology from the aerospace, electronics and photography industries.

But while the potential is sky-high, broad adoption by corporations and public agencies has been hampered by both slow-moving regulators and buyers’ reluctance to make big investments in what remains a technological Wild West, where new partnerships and platforms regularly threaten to reshape the landscape. This very speed of innovation now imperils drone pioneers like Aeryon. The company is starting to gain traction with police agencies, power line inspectors and other commercial buyers. But large manufacturers—ones that until now have focused on the broad consumer market with low-quality, high-novelty products—are rapidly moving upmarket with upgraded models. Aeryon, an 80-person firm that has staked its business on serving the exacting needs of professionals with products that sell for up to $200,000, could end up being side-swiped by producers of the type of flying toy you bought at Best Buy for your kids for Christmas.

Dave Kroetsch is a visual guy. “Whenever I come into this room, I always have to sit on this side,” he says, meaning the side next to the whiteboard in the company’s conference room. He needs to be able to graph his ideas, which tend to come in bursts. Sitting still appears to require effort for the compact, energetic 36-year-old. On this day, Aeryon’s office on the outskirts of Waterloo, Ont., is a quiet place where about two dozen people toil in cubicles separated by glass walls scrawled with engineering formulas. Kroetsch, in contrast, seems to be juggling a dozen things. As he walks into the conference room, his mind is still on a discussion he just finished, and it takes him a moment to recall why he’s here. Right, interview—and off he launches into the company story, well-practised by now, occasionally barely containing impatience when the listener seems slow on the uptake.

Kroetsch is typical of those involved in the early drone community, a mechanically inclined kid who liked to tinker with electronics. He was a member of the first high school team to enter the International Aerial Robotics Competition, the longest-running event of its kind, and he continued on the circuit while studying engineering at the University of Waterloo. He met Mike Peasgood and Steffen Lindner, both U of W alumni, during early work stints at local technology companies, and they decided to start a robotics business. “From the outside, it didn’t seem that hard,” Kroetsch laughs. They began in Peasgood’s garage and then moved into Lindner’s basement when it got cold. An early prototype comprised a Pringles can and some electronics held together with duct tape and rubber bands. By early 2007, they decided to get serious, incorporated and moved into Kroetsch’s living room.

The trio chose to focus on the vast arena between hobbyists and soldiers: professionals who need to take pictures from the sky. “We saw that there were a lot of potential uses for UAVs, but we didn’t know which ones would engage with the market,” says Peasgood. So they cold-called land surveyors, farmers, cops. The only drones anyone had heard of were the type that dropped bombs in the Middle East. When the inventors tried to clarify, people thought they were talking about remote-controlled helicopter toys. Through a friend, they scored a meeting with some RCMP drug cops. “We’ve tried these flying things,” one told them, “but the chief can’t keep bringing his son out to a crime scene on a school night.” Another said, “Great idea, but we’re not that smart, we’ve got fat fingers, and we break things.” This produced a design epiphany: Existing drones were so hard to manoeuvre that only a kid weaned on video games could use them; Aeryon needed a design that would fly itself. No joysticks—just Google Maps and point-and-click. “If you’re a power line inspector, you can’t be paying attention to this thing and not looking around you,” says Kroetsch.

They scraped together some money from angel investors and government grants to buy computers and build prototypes, and came up with what Kroetsch calls a “creative compensation system”: How much money do you need to live on? Some early employees chose to draw on their RRSPs and get paid in equity; one guy quit his job and moved his family to Waterloo even though they couldn’t pay him. Within a year, they had eight people, largely acquaintances who believed in the idea and were willing to wait for future rewards.

In 2009, they launched the Aeryon Scout, built with off-the-shelf components and some custom technology. Roughly the weight and size of a seagull, it could fly for 20 minutes and was controlled via co-ordinates programmed on a digital map. The team was genuinely surprised when the first customer to knock on their door was the army. A former Canadian Forces intelligence officer the partners met at a trade show told them, “The military have no idea yet but this is what they need.” He landed the firm its first million-dollar contract, and soon Aeryon Scouts were helping Libyan rebels fight the Gadhafi government.

Another early Aeryon customer was the Ontario Provincial Police, which now uses two Scouts for search and rescue, and highway accident forensics. Last year, for example, a plane crashed in a remote reach of Algonquin Park. An OPP ground search team put a UAV above the treetops, and it spotted the crash site within minutes. Tom Laing, the OPP’s drone co-ordinator, estimates that Scout mission cost less than 5% of what it would have been to fly a helicopter or plane. A drone can also replace 90 minutes of manual measuring and photography at an accident site with a 15-minute flight that produces a 3D reconstruction. Laing envisions much broader uses, especially in crime investigations. “The cost difference is huge,” he says.

Kroetsch, who took the CEO reins largely because neither of his partners was keen on management, has learned how to run a company on the job. “Somebody at some point provided the advice that my job is to surround myself with people smarter than me,” he says. So Kroetsch created a board of directors to tell Aeryon “what we don’t know we don’t know.” Over the past few years, as the company’s growth accelerated, the business has required organizational and process changes, and each time, he says, “it feels like the wheels are about to fall off.”

Today, the military still accounts for about half of Aeryon’s revenues, but Kroetsch insists the company’s future is its professional users: industrial inspectors, farmers, law enforcement. So far, he finds they share similar requirements. “If I’m taking pictures of bad guys in a hostage situation or a traffic accident or a cornfield, it’s pretty much the same,” he says. “And there are lots of those applications.” Oil and gas companies are using drones to monitor pipelines and oil rigs; utilities use them to check wires. Engineers are beginning to inspect bridges and buildings for damage and to survey land using UAVs. Farmers, meanwhile, increasingly rely on drones to fertilize crops, eradicate pests and locate spots in need of irrigation.

The market is maturing, and Kroetsch jumps up to the whiteboard to sketch out Moore’s technology life cycle to explain his vision. Right now, early adopters are experimenting and adapting drones to their needs. But the next phase, where specialized solutions emerge for niche markets, has already started. “So you have a cinema drone, a police drone, a mapping drone,” Kroetsch explains, scribbling. Indeed, companies pop up almost daily, providing drone services to various industries, says Paul Bennett, co-founder of Aerobotika, a B.C. drone consulting and training firm. “Eighty percent of our clients are one-man shops trying to figure out how to turn this into a business.”

The evolution of the drone market won’t necessarily favour Aeryon. For years, Canadian UAV companies have had an edge over their American rivals because our regulators have been more permissive in allowing drone flights, and don’t require operators to have a pilot’s licence—an expensive hurdle. But aviation authorities everywhere are picking up the pace of regulatory change to accommodate drones. At the same time, costs to produce drones are coming down, and the technological capabilities are getting more sophisticated, pitting Aeryon against newer, nimble rivals. The competition will increasingly shift from who can fly and where to who offers the best solution for the money.

Aeryon’s SkyRanger—Scout’s newer, more powerful brother—won’t appeal to arachnophobes. With four propellers and four legs, plus a Cyclops head (containing the camera) beneath its belly, it looks like a cyborg spider hanging in the sky. But there’s little chance of this thing sneaking up on you. A unit being tested to simulate various wind conditions inside an enclosure at Aeryon’s headquarters sounds like a hive of very irate wasps. These types of tests ensure the SkyRanger’s ruggedness. Based on an analysis of yearly weather conditions, it can operate on twice as many days as competing UAVs, Kroetsch says. “It has to work in the wind, snow, dirt. This is all about the user experience.”

This hardiness is a key competitive advantage in an industry where hardware is quickly becoming commoditized. “Companies at the lower end can take the cheap technology for a toy and put it into a professional product at a price point I couldn’t match,” Kroetsch concedes. “They have economies of scale, and fantastic manufacturing and distribution.” This end of the market is dominated by DJI, a Chinese manufacturer expected to crack US$1 billion in revenues this year. A lot of commercial users already use DJI drones: Retailing for under $2,000, they make a $65,000 to $200,000 SkyRanger (depending on the payload) a tough sell, no matter how sophisticated and rugged it may be.

Some pioneers of the drone industry are finding the resources needed to compete today too high and the risk too great. Zenon Dragan, co-founder of Draganfly Innovations in Saskatoon (a drone company founded back in 1998), sold his business to a California video-camera maker this past summer. “The market changed around us,” Dragan says. “We saw the cheap Chinese drones coming in and a bunch of new companies like 3D Robotics starting up, and getting lots of traction and VC money. Innovation is happening so much faster now, and it will be difficult for small companies to compete.”

Even as hardware costs drop, customized solutions are being developing for each of the major commercial sectors. According to Colin Snow, a California-based independent industry analyst, the drone market is becoming increasingly specialized, with vendors focusing on applications such as mapping or industries like energy. “Eventually, each industry will consolidate around a particular solution,” he says. The race is on to become the platform of choice.

Indeed, the drone industry’s focus is increasingly turning to software: the equivalents of operating systems and applications for drones, and services to make the data UAVs capture usable. Drone makers such as DJI and 3D Robotics (based in Berkeley, Calif.) have welcomed third-party software and component developers, hoping an open architecture—think PC versus Macintosh—would appeal to buyers that want to customize their UAVs, thus broadening their platforms’ adoption. It may be the beginning of the development of drone ecosystems, as happened in the computer and smartphone industries, where a few platforms increasingly marginalized the rest. Andy Pan, a DJI vice-president, sees this as a potentially game-changing evolution. “We previously said the sky’s the limit, but now we believe the sky is no longer the limit,” he recently boasted at an industry conference. But uncertainty about who will emerge as the Android or iOS and who will end up as the Nokia Symbian is a worry for both hardware manufacturers and customers.

Aeryon’s playing field, says Kroetsch, will be in providing complete solutions—hardware, software, training, regulatory permissions—for specific vertical markets. He’s betting that as companies shift from hiring service providers to fly drones for them to bringing drones in-house, they will need help with managing their fleets, logistics and regulations. The model is similar to how the trucking business functions, where operators need to track the vehicles’ locations, keep drivers’ training up to date and optimize fleet use. “The more of those things we control, the more seamless the user experience,” Kroetsch says.

“For us to compete with China on hardware would be dumb,” he continues. “But Canada does enterprise-class stuff well. It’s important we don’t lose the platform aspect of this.” Indeed, Aeryon is finding services springing up around its products to serve various markets, such as Integrated Information Systems, a Nanaimo, B.C., aerial imaging business that uses Aeryon drones. Snow, for one, thinks Aeryon is particularly well-positioned for the inspection market because it has brought in a new camera and provides good top-to-bottom applications.

Aeryon’s strategy recently got a vote of confidence from Summit Partners, a Silicon Valley venture capital firm that injected $60 million to support its growth. Kroetsch hopes to use the cash to more than double staff and the rate of sales growth. Aeryon needs to move fast just to stay in the game, and if that requires a change of ownership, Kroetsch sounds open to the option. “I’m OK with whatever is the most efficient environment—as long as the technology goes somewhere,” he says. “If I have to go to war with 400 companies…” He leaves the sentence unfinished.

Kroetsch, who became CEO by default, doesn’t seem attached to being in charge. He observes that there are different kinds of CEOs—the engineer, the MBA, the operator—each with a different approach to problem solving. “I’m an engineer CEO, and I still look at things with that lens. I still tinker, and I always will, but now my tinkering is at a much higher level.” The term “entrepreneur” makes him uneasy; he claims to not really know what it means. “If you sell to Google in six months, you’re not an entrepreneur—you’re lucky.” His own description for himself is simpler: “I’m just a guy who likes to build robots.”