The commercial drone industry is at a crossroads. Five years after capturing investor imagination with the promise that unmanned aircraft would become as ubiquitous as the smartphone, transforming countless multibillion-dollar industries, the commercial impact of drones has been muted.

The new technology has run aground against the protracted reality of aerospace regulations, cautious corporations, low-cost Chinese manufacturers and the absence of fundamental air-mobility infrastructure like traffic management systems and refueling platforms (imagine if cars were introduced without road signs, traffic lights and gas stations). These hurdles have upended many of the industry’s most heralded drone programs, from promising startups like Lily and Airware to corporate bellwethers like GoPro (Karma) and Amazon (Prime Air).

Unsurprisingly, investment in the commercial drone industry has slowed. After growing by nearly 90% annually between 2013 and 2016, investment has leveled off at less than 4% annual growth over the last two years.

The hype, in other words, has dissipated. In its absence is a proven technology with long-term promise whose immediate commercial viability requires careful industry management. For investors and enterprises alike, the question today is how to identify the value in the commercial drone landscape.

Israel may provide the answer. Not only is the Israeli drone ecosystem growing faster than the rest of the industry, but the technology, tactics and teams driving the Israel drone market have lessons for investors and enterprises considering how to engage commercial drones.

Start with the money. In contrast to global trends, Israel’s commercial drone market is attracting growing levels of venture capital. Investment into Israel’s drone industry increased by 40% annually in the last two years, 10 times the global pace. As a result, Israel’s share of global drone investment has increased every year, topping out at 18% in 2018.

Sources: Droneii, Crunchbase, industry research

Two-thirds of the investment into the Israeli drone industry in 2018 went to three companies – Airobotics, DAV and Taranis. But the remaining third (US$37 million) was spread around dozens of companies, most of them early-stage ventures. These startups – joined by established aerospace firms like IAI and Rafael – were responsible for some of the most significant commercial inroads by drones anywhere in the world in the last year. 

Airobotics and SkyX were selected to conduct among the first beyond-visual-line-of-sight (BVLOS) flights in North America, the critical regulatory hurdle to clear in order to unlock widespread enterprise adoption. Security giants Rafael (Drone Dome) and IAI (Elta Systems) made headlines when their jamming systems were employed to fend off drone incursions at the Group of Twenty Summit in Buenos Aires and at British airports. Most important, dozens of Israeli drone companies were deployed in a vast range of industries, including agriculture, insurance, mining, construction, energy, homeland security and entertainment.

The success of Israeli drone companies in securing capital and contracts reflects three pillars of Israeli startup culture that are especially salient to the drone community: technology, tactics and talent.

For the last few years the hottest drone technology was consumer hardware – aka the aircraft that is often misperceived as the entirety of the drone marketplace. But the industry has now matured, with DJI and other Chinese manufacturers so effectively consolidating the market that drones have become commoditized.

Another sign of the maturing drone market is industry specification – startups are no longer presenting themselves as industry-agnostic and instead are fine-tuning their technology to a specific use-case. Conversely, other drone startups have broadened their application, integrating their technology into industries with more accessible revenues like smart cars and digital factories.

The technologies driving these shifts in the drone marketplace are software and hardware accessories. These technologies include software capabilities like artificial intelligence, computer vision, data management and cybersecurity, as well as components like payloads, semiconductors and new power sources. Most startups in the Israeli drone landscape are based on these technologies. Since these technologies are complementary, startups in Israel are able to take advantage of the small size of the country to test their solutions with each other. And with few exceptions, these startups’ value-add is they can work with any drone and are laser-focused on solving a particular industrial pain point or integrating into a variety of revenue-ready industries.

Some Israeli drone startups remain wedded to aircraft development. But unlike the hardware startups that went head to head with DJI and were crushed, companies like Airobotics and SkyX provide enterprise customers with an end-to-end industry-specific solution, voiding the need for further vendors. The key is to provide customers with a comprehensive solution. This can also be achieved by software startups operating in industries as diverse as agriculture (SeeTree), delivery (FlyTrex) and video production (ClearVuze).

Whether a company chooses to offer its technology as a standalone or integrated solution, the overwhelming challenge facing drone startups today is how to establish a foothold in a market that often does not yet exist. Two tactics are common in the Israeli drone ecosystem. One is for startups to market their product initially to the security industry. Although these companies’ long-term strategy is non-military, nearly 90% of current global spending on drones is for military applications.

The second tactic is to target international markets zealously. Given Israel’s negligible market size, going global is part of the DNA of every Israeli entrepreneur. Israeli commercial drone companies are active today across Europe and the Americas, and in a variety of ways in the fast-growing economies of Asia – including India, which licensed commercial drone activity for the first time last December. Whether because of regulatory hurdles or market opportunities, drone companies in Israel waste little time in pursuing overseas opportunities. In many cases, these startups enter foreign markets on the coattails, reputationally or directly, of Israel’s dominant military drone industry.

Israel’s military drone industry is also responsible for the third essential ingredient of the local drone ecosystem – the talent. Since the 1970s, Israel’s military and aerospace firms have been at the cutting edge in drones. When a commercial industry emerged in the last half-decade, there was no shortage of skilled engineers eager to find benign applications of military drone technology.

Likewise, Israel is considered an artificial-intelligence and cybersecurity superpower, so those skillsets are accessible to the drone community. The startups that tapped all this talent have been equally beneficial to large aerospace security companies like IAI, Elbit and Rafael. Unlike their peers in other countries, Israel’s three major military drone companies have succeeded in developing non-military drone products, thanks to the mutually beneficial relationship they maintain with the startup ecosystem.

The lessons of Israel’s drone ecosystem cannot be easily replicated elsewhere. But they do demonstrate how to find value in a market like commercial drones that has matured past the hype into a complex interlude of gradual regulatory and industrial adoption. The key for investors, as well as entrepreneurs and their industrial customers, is to build drone companies around the technology, tactics and talent that in Israel are attracting capital and customers worldwide.

Dorian Barak is a fund manager focused on emerging markets. He is CEO of Indigo Global, which advises strategic investors on technology investments. Sam Chester is a veteran cross-border technology investment professional and a vice-president at Indigo Global. Aleck Zimbalist provided market industry research.