Venture Investment - Early Stage Company Analysis

3DRobotics is a Company started in San Diego in 2009, by Chris Anderson, a well known influencer in the Tech industry and Jordi Munoz, a self-taught electronics technical guru with a passion for what used to be called “remote controlled airplanes”. 3DRobotics’ vision is to drive the creation and adoption of “self-driving planes” technology (Exhibit 1), similar to what Google, Mercedes and other companies are pursuing in the car industry, delivering low cost and game-changing value to a number of industries, from agriculture and logistics to public safety and defense sectors. The Company shipped its first product in mid 2010 and became profitable in mid 2011. It has since grown to 100 people and three offices (San Diego, Berkeley and Tijuana), and today it ships several products in the $400 to $1000 price range online, mostly to hobbyists. 3DRobotics has received a total of $35M of funding in two rounds to date.

PeopleLike several Venture backed companies, 3D Robotics was started based on a shared “grand-vision” for a market that does not exist yet. The impetus to build a successful business, hence, is driven mostly by passion rather than by experience, and the Founding team seems to have quite a bit of it. Yet, creating and growing a new market is far more challenging than penetrating an existing one, thus the skill set required to succeed are different and harder to find.The CEO, Chris Anderson (Exhibit 2), is a very successful writer and a world class technology editor, and according to his biography, his early attempts to start and build new companies were not very successful. Therefore one would be inclined to assume that his business management and leadership skills would not excel. Yet, his long and successful tenure as Editor in Chief of Wired Magazine certainly brings an incredible knowledge of the dynamics and trends developing in the technology industry, as well as an invaluable network of connections for the company. For these reasons he was named one of the Top 40 most influential minds in the technology industry by Time Magazine this year. Moreover, Chris was not recruited by VCs to be the “adult supervisor” of a promising and talented young team. Rather, he started the company himself, driven by his own passion for drones, and left his position at Wired Magazine to dedicate himself full time to his new venture. His passion and personal commitment, combined with the incredible depth of knowledge of the technology industry and his network of contacts, make him a perfect “rain-maker”, and one that investors will cheer, given the green-field nature of the company. Lastly, he probably learned a lot from his prior startup failures, making his a less risky leader on which to invest on.Chris’ co-founder and CTO, Jordi Muñoz (Exhibit 2) has a background stereotypical of many Silicon Valley success stories. A self-taught, brilliant technical mind scorned by the upper technology minds in Mexico, where he was born, he pursued his passion and vision of inexpensive un-manned aerial vehicles independently, with no money. He established himself as the “person to go to” in the hobbyist community that shared his passions until, a wealthy member of this community, Chris Anderson, noticed him. Chris realized they shared a vision and together they could make it come true. Needless to say, the skill set of Jordi is fundamental to the company, particularly at this stage of development.A third, more recent addition to the Management team is Lorenzo Lopez, Operation Manager of the Company . 26 years old, son of a printed circuit board assembler that worked for large

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multinational companies in Tijuana, MX, and close friend of Jordi with whom he shared is passion for drones since they were young (Le Temps - Switzerland). Lorenzo runs 3DRobotics’ assembly factory in Tijuana, while his wife manages logistics. Two critical leadership positions on which the company’s product quality and revenues depend in full. Certainly Lorenzo’s experience can’t be very deep, given his age. Yet, his close relationship with Jordi and his ability to leverage his father’s experience and contacts in this field are very valuable. One would wonder if the company shouldn’t have recruited a more experienced team to run manufacturing and logistics, as traditional sound business judgement would suggest. As stated earlier, though, passion and vision are key to the success of early stage companies like 3DRobotics, and the intangible value of the relationship and passion Jordi and Lorenzo share far outweighs the operational value that a well-rounded experienced manufacturing manager hired from outside could bring. Additionally, experienced managers bring both a value and a cost to startups, as their experience is built in larger, well structured and resourced companies. It is not guaranteed that a manager who is successful in a large company will achieve the same degree of success in a very lean, unstructured environment, where everyone is expected to roll up their sleeves when needed, and respond to all hands on deck calls with no delay. The cohesiveness and alignment of the team is far more important at this stage and the 3DRobotics team seems to be solid and well aligned. It should be noted also that the team has an important relationship with Lorenz Meier, head of the Autonomous Flight research project at one of the top Swiss Universities, the ETHZ, better known as the Polytechnic of Zurich. This certainly adds to the team’s ability to keep pushing the envelope of innovation.There seems to be no sales or marketing team, which is not (yet) a concern, given the fact that the Company sells consumer priced products only online, to a community of hobbyists that remain engaged through the company blog - DIYdrones.com. Cost of Sales is one of the traps of early stage startups, and 3DRobotics seems to be addressing this investor concern well.According to the most recent Form D filed by the company, the Board is composed by Chris Anderson, Jordi Munoz and three representatives of the Investors: Bryce Roberts (O’Reilly AlphaTech Ventures), Jon Callaghan (True Ventures) and Chris Michel (Nautilus Ventures).As a seed-stage company Board, it is comforting and not surprising to notice from the Partners’s profiles that every Director shares a passion with the leadership team: flying planes. Chris Michel served as a Naval Flight Officer in the United States Navy, was the Founder of Affinity Labs and Military.com, and is a life member of the Council of Foreign relationship, a well-rounded experience that surely will help the company find the entry point in the Defense marketplace. Jon Callaghan loves airplanes, was the Founder of Mountain Bike Outfitters, NexPrise (NASDAQ: NXPS), and has more than 20 years of VC experience in famous VC funds, like Summit Partners, CMGi and Globespan. Jon will surely be instrumental in helping the company raise additional rounds of financing, in addition to contributing his valuable business experience to the team.

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Bryce Roberts defines himself as “drinker of portfolio company Kool-Aid”. A former enterprise software engineer-turned Open Source Entrepreneur-turned seed VC as affiliate of Draper, Fisher Jurvetson, that seeded several successful start-ups like Bit.ly and Foursquare. Bryce adds technology expertise depth to the Board, and is an outside thinker that can certainly add further peripheral vision to the team in their quest for success.As the company succeeds and grows, additional skill sets and experience will surely be needed, and will be brought on board, but the current leadership and Board teams seem to have the right mix of passion, experience, reputation, and thought leadership to drive the creation of this new market and build the company successfully.

Opportunity3DRobotics builds and sells sub-$1000 programmable, autonomous Unmanned Aerial Vehicles (UAV), based on Open-Source software technology. A quick look at UAV industry reports from IBISWorld (Exhibit 7) and other market research sources (Exhibits 3,4,5 and 6), reveals that that the current UAV market is driven 91% by defense contractors and 9% by large, mostly climate-related scientific institutions, who spend millions of dollars for each drone they buy. The defense funding is shrinking by $100B over the next five year, and the projected fastest growing product segment is the “low altitude UAVs”, smaller and cheaper devices representing 13.8% of all sales. The leading supplier of these smaller military devices is AeroVinronment, which today controls 4.5% of the total $4.8B UAV market, with revenues of $218M. AeroVironment products don’t have autonomous or programmable flying capabilities and cost in the range of $40,000. Several other competitors, like CLMax Technologies and Draganflyer have similarly priced non-autonomous drones designed for military use.Therefore 3DRobotics has an opportunity to aggressively compete and succeed in this space, addressing a growing $650M “small UAV” Defense segment, with products that are extremley competitive in price and functionality. Moreover, this will create an exit opportunity tied to a sale of the Company to existing Defense suppliers who are in fact looking at reducing the cost of their products.As stated before, the Civilian market for drones is limited today, mostly due to their high cost. Many observers though, believe that the availability of low cost drones will unleash a multi-Billion dollars market opportunity (Teal Group, WSJ and FT). This is attracting several new VC-backed players in addition to the those focusing on the Defense industry above, such as Skycatch, Airware, DeltaDrones, Hex Airbot and others (Exhibit 8). Like 3DRobotics, most of these companies are positioning their products to address the “Makers” market first, i.e. the hobbyist and the education community of people who love to make things, while eyeing new commercial/industrial applications, such as agricultural, mapping, security, public safety surveillance and video production. But this potentially very large commercial market opportunity will be curtailed until a more favorable regulatory environment will be created, allowing the commercial use of drones. As a result, the AUVSI (Association for Unmanned Vehicle Systems International) predicts that

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annual sales of drones for commercial use will reach 160,000 units by 2025, which would represent a market size of $150M to $200M assuming an average unit price of $1000.The only unregulated market for drones today is the leisure market, known as the radio-controlled vehicle segment of the toy industry. Newly defined now as “personal drones” market, it could provide a very attractive opportunity for growth to 3DRobotics. Its size is very large, with annual sales of $1.65B in 2011 and it is one of the few segments of the Toy Industry that is growing (Exhibit 5). Furthermore, this market segment is a natural evolution of the “Hobbyist” market, and as a consumer market, it is a cash business that would not require any complex compliance, certification or approval effort prior to the sale of its products, thus minimizing costs and TTM. Assuming that the $500 to $1000 dollars price point of personal drones will be able to capture the top 10% of this market, 3DRobotics could find an immediate opportunity of $160-$200M for its products.Therefore, 3DRobotics has a significant market opportunity ahead, with a total existing addressable market of approximately $900M by 2018 (Exhibit 6), in three segments, Defense, Commercial and Leisure, and a leadership with extensive knowledge and experience in each segment.

Context

As we continue living through a very slow recovery, the economic environment is not the most favorable for the launch of any new ventures. The markets in which 3DRobotics can play today are all negatively affected. Consumer confidence and disposable income are improving, but at snail pace. Furthermore, the markets where 3DRobotics product could be used commercially are all affected by slow growth and/or state/federal budget cuts, and Defense funding will shrink by $100B over the next five years. In the past, though, recessionary environments have produced some of the most transformative and successful companies in history, including Apple and Microsoft. Need induces creativity, and 3DRobotics has the opportunity to deliver “10 times the value for 10 times less price” to a market that needs just that. Fundraising will remain a risk. 3DRobotics has lined up excellent Venture groups committed to investing in game-changing, high risk seed stage initiatives. Whether expansion capital will be available to them later will depend as much on their ability to perform as on the state of the economy. A Government default, for example, would likely force all investors to retrench and reallocate their assets, affecting venture funds immediately, and hence reducing significantly the availability of growth capital. The Company seems to have chosen an organic growth posture though. As Chris Andersen recently disclosed in several interviews, 3DRobotics is profitable and has reached the Million dollars revenue mark this year. This certainly mitigates potential investor risks, and could be a very attractive investment opportunity should an economic downturn happen. The regulatory environment is, instead, unfavorable. The FAA regulates the use of drones, and does not currently allow commercial use except for leisure (non-for-profit). President Obama last March directed the FAA to “integrate” drones in the commercial aviation code, but the process is moving slowly due to safety and civil liberties concerns. The target date set by

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congress for the FAA to implement new rules is 2015, two years away, and a lifetime for a small company. Additionally, according to IBISWorld, drones are currently categorized as cruise missiles, under the Missile Control Technology Regime (a non-proliferation agreement between 24 countries regarding technologies that can deliver weapons of mass destruction) therefore 3DRobotics will have a very limited export market associated with a very costly approval process for commercial drone products that exceed the maximum performance authorized for leisure use.3DRobotics focus on Hobbyists seems therefore wise in this environment, until a clearer regulatory context is approved.

Deal3DRobotics has raised two rounds of funding since its inception, for a total of $33.08M, and announced raising $35M in the press. This discrepancy is likely due to the participation of Managment and/or undisclosed individual angel investors (likely Chris Michel, who sits on the Board of the Company) in the first round. The company’s filings also disclose the issuance of options and other securities at incorporation, which we interpret as an initial small Family and Friends round, though no amount or valuation is disclosed.Series “A”, the first round, for $3.08M (or $5M including undisclosed investors), was closed on November 2nd, 2012. The round was lead by True Ventures and syndicated with O’Reilly Alphatech Ventures.(Thomson ONE)With the second round, Series “B”, the Company raised $30M from four investors: True Ventures(lead) invested $10M, the Foundry Group (co-lead), SK Ventures and O’Reilly Alphatech Ventures each invested $6.67M.(Thomson ONE). The round closed on September 13, 2013.Both True Ventures and O’Reilly Alphatech Ventures invested in both rounds, and have one board seat each, while the Foundry Group and SKVentures don’t have any Board seats according to Thomson ONE.True Ventures, SK Ventures and O’Reilly Alphatech Ventures are Seed Stage funds, focused on early stage opportunities just like 3DRobotics. Foundry Group, instead, used to be a Seed Stage focused fund until march 2013 when they announced a shift in investment focus towards later stage/lower risk investments. In this new light the Foundry Group participation in the last round of 3DRobotics signifies that the Company presents substantially lower risks at this point than a early stage one. As seen before, the Company is shipping products, generating revenues in excess of $1M per year and it is profitable, according to recent interviews with the CEO. A $30M investment represents a substantial amount of money for a three year old company, and the fact that the Company was successful at raising it indicates that it could negotiate a significant valuation. While no valuation information was available on Thomson ONE or from other credible source, it can be assumed that a profitable company with a widely hyped market opportunity that can be estimated in the $1B plus range could fetch a high enough valuation to justify the raise of such a large amount of money for future expansion in exchange of reasonable dilution for its Founders.

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Exhibit 1: Company product - Unmanned Aerial Vehicle example

3DRobotics Programmable Autonomous Drone in flight over the San Francisco Bay Area

Exhibit 2: Founders’ Profiles

Chris Anderson:• Founder and CEO of 3D Robotics and founder of DIY Drones. • From 2001 through 2012 Editor in Chief of Wired Magazine. Before Wired I was with Editor at The

Economist for seven years in London, Hong Kong and New York• Author of several bestselling books (The Long Tail, Free, Makers: The New Industrial Revolution)• Recepient of several significant Awards including Time Magazine's Tech 40 -- The Most Influential

Minds In Technolgy (2013).• Founder of GeekDad, BookTour and a few other companies now lost in the mists of time.• Physics and Science academic background• Research experience at Los Alamos National Laboratory• Musician by passion• Lives in Berkeley, California with his wife and five children.Source: http://3drobotics.com/about-us/

Jordi Munoz• Co-founder and CTO of 3DRobotics• Denied admission to Instituto Politécnico Nacional, an MIT-like university in Mexico City. • Studies a year at the Centro de Enseñanza Técnica y Superior, in Ensenada, MX.• Moves to Riverside, CA, in 2007 with his newlywed Wife• Receives a radio-controlled helicopter as present while waiting for his Green Card and unable to

work • Builds his own advanced autopilot drone at a cost of a few hundred dollars• Crosses path with Anderson, who shares his passion for drones and admires his talent• Starts 3DRobotics with Anderson in 2009Source: http://www.utsandiego.com/news/2011/apr/09/jordi-munozs-scale-model-flying-circus/

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Exhibit 3: Projected non-military UAV Market Growth

Source: AUVSI - Daryl Jenkins UAV report 2013

Exhibit 4: DoD UAV historical spending

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Exhibit 5: “Personal Drones” Toy Market

Source: NextBigFuture.com

Exhibit 6: 3DRobotics Total Addressable Market Projections2013 2014 2015 2016 2017

(in $ Millions)

Defense - Small UAV

Commercial

Leisure

Total

$ 650 $ 650 $ 650 $ 650 $ 650

$ 5 $ 10 $ 35 $ 60 $ 100

$ 165 $ 168 $ 172 $ 175 $ 179

$ 820 $ 828 $ 857 $ 885 $ 929Sources: HBR Lego Case, AUVSI

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Defense - Small UAV

Commercial

Leisure

$0

$250

$500

$750

$1,000

2013 2014 2015 2016 2017

3DRobotics Total Addressable Market Projections ($Millions)

Exhibit 7: IBISworld UAV Industry forecast 2012 (IBISWorld Industry report OD4424)

• Revenues: ! ! $4.8B• Profit:!! ! $493B• Past five years growth: 11.7%• Next five years growth. 4.7%• Number of players:! 36

• Top players:• Northrop 20.8%• General Atomics 19.7%• Textron 10.4%• Lockheed 8.3%

• Drivers: • Federal and Homeland Funding (down)• Semiconductor and component price

(going down)• Technology change (very high)

• Regulatory: Categorized as cruise missiles, under Missile Control Technology Regime - limited export market and costly approval process

• Market Segments: Military 91.3%, Civilian (meteorologic research mostly) 8.7

• Fastest growing Product segment: Low altitude UAVs - 13.8% of total sales

Exhibit 8: Top Venture-backed 3DRobotics Competition-Snapshot

- Skycatch:Angel-backed company positioned in direct competition with 3DRobotics, except for using proprietary rather than open source software. (http://skycatch.com)

- Airware: Andresseen-Google Ventures backed software platform for development of unmanned aircraft targeting entrepreneurs, educators, and enthusiasts (http://www.airware.com )

- PrecisionHawk: Incubator-backed company positioned in direct competition with 3DRobotics targeting the agricultural market. ( http://precisionhawk.com )

- UVS Avia: Russian drone manufacturer that targets military and government clients. The company is producing software that would allow drones to communicate with each other autonomously. ( http://techcrunch.com/2013/05/28/uvs-avia/ )

- Delta Drone: Smallcap Market French company focusing in professional/commercial solutions using civilian drones. ( http://www.deltadrone.fr )

- Hex Airbot: China-based company creating, programmable open source hardware and software for autonomous UAVs. Users can define a flight path or set the drone to follow somebody using the mobile/desktop app.( http://hexairbot.com )

- DJI Innovations: Hong Kong Company backed by Creative Technologies that develops and manufactures drones specifically for commercial and recreational use in Cinematography.

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“I pledge my honor that I have neither received nor provided unauthorized assistance during thecompletion of this work.”

Alessandro Dal Canto

___________________

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