Reference no: EM133441624

Zach Manolakis' grandparents immigrated from Greece in 1976 and through hard work and perseverance built a successful chain of family-style restaurants in south-western Ontario. Spread between London and Windsor, the restaurants are now managed on a day-to-day basis by Zach`s relatives, including both his parents, two uncles, an aunt, and two cousins. While his grandfather is always suggesting Zach should also join the family business, his parents encouraged him to go to university and keep his options open. Now, two months from finishing up his BCom degree, Zach has set his sights on an entrepreneurial career and the financial gains it might provide. However, knowing how hard his family has had to work, he wants to stay as far away from the restaurant industry as possible.

The idea Zach is focusing on came about by accident. A gamer at heart, Zach had gained plenty of experience with flight simulators long before Amazon brought drones to the public`s attention in 2013 when they announced plans to use them for delivery (one of Zach`s first games was Microsoft's Flight Simulator X). In 2017, after drones had become more readily available, Zach took $750 earned by busing tables at his family`s restaurants and bought a slightly used DJI Phantom 3 Advanced (Exhibit 1). That drone featured a range of 2 km and more than 20 minutes of flight time with a 2.7k 12-megapixel camera. Other drones followed. Zach has also discovered drone racing, which occurs on outdoor racetracks as long as 2 kms in length. To practice, Zach and his friends head to industrial areas that are quiet on weekends where they plot out a course along the streets and around buildings. It was after one such practice session that Zach's idea came to light.

Late one Sunday afternoon Zach had stayed behind to test out his new DJI Matrice 210, which is a commercial-grade drone with a 7 km range (Exhibit 2). He had equipped it with a camera that combines a radiometric thermal sensor with a 4k visual camera and stabilization technology. This enables him to capture thermal and visual aerial data simultaneously and it was on the second flight of the new drone that it happened; Zach picked up thermal images at the rear of an industrial building nearly a kilometre away. A closer check of the video showed three people, with one of them using a crowbar to pry open a door. Zach didn't hesitate to call 911 and when he piloted the drone back to hover above the building, the three looked up and then hurried away. The idea for a drone-based security company was born.

Eight months have passed since that Sunday and Zach's idea is closer to becoming a reality. The first step in his process was to do research on three industries: drone manufacturing, drone-based services, and the security industry. In terms of manufacturing the types of drones Zach envisions (i.e., under 5 kg in weight), global industry revenues approximate $4 billion (about 1/3 from China), with annual average growth rates projected at 3.5% through to 2027. These are known as 'prosumer' drones because they are suitable for commercial applications but available through consumer channels. The average price with a 4K camera, an obstacle sensing system, a flight range of up to 8 kilometers and 30 minutes of flight time is $1,500. Adding thermal imaging and an automated GPS control system costs $500. Because of this, Zach is assuming a cost of $2,000 per drone but he is aware that prices are trending down due to lower production costs. He also knows that drone hardware is becoming commoditized to the point where manufacturing and the hardware itself will not drive the industry going forward. Instead, services that operate and manage drones for other companies will be where value is generated.

There is no doubt that drones are revolutionizing business operations. PwC estimates commercial drone applications could result in a global market of as much as $127 billion across industries as varied as insurance, agriculture, and journalism. To date, it is also estimated that venture capitalists have invested more than $6.5 billion in U.S. drone-based startups. The commercial use these ventures focus upon typically falls into one of five categories: mapping, delivery, inspections, data transmission, and video collection. There are only a few security- focused start-ups on the list, most of their applications fit into the last category where drones are less expensive, more flexible, and take less time to install than an infrastructure of motion detectors and static camera positions. Drones, also provide greater coverage, better support data analytics, and eliminate risks to humans in dangerous situations.

The Security Services industry in Canada is estimated at over $9 billion ($3.7 billion in Ontario) and provides investigation and detective services, guard and patrol services, as well as protected transport of valuables (e.g., money). While the industry has experienced solid growth over the past few years, it is likely to slow because much of the economic recovery from the COVID-19 pandemic is now complete. Although this is a fragmented industry, there are some major competitors; the three biggest being Securitas Security, Paragon Security, and GardaWorld. The industry employs over 120,000 people across approximately 2,750 security firms. Most employees are security guards paid at or slightly above minimum wage ($16.56/hr median income in 2021). This is where Zach sees the opportunity and he explains his value proposition this way; "the idea is for piloted drones to replace or augment manned security patrols of buildings and property. The main cost of security is labour, representing 63% of revenues. You can have a drone perform alll sorts of things at a fraction of the cost."

The business model Zach envisions is simple and scalable. His company will set up 'fixed base operations' in industrial areas from which they will fly drones and monitor the properties of client companies. The focus will be on the exterior of those properties, but drones can be used inside buildings as well. Technically, because the company will not provide security guards, it is not subject to provincial security-firm licensing requirements. Initially, the fixed base will be nothing more than a van (the pilot will operate out of the back of it) but if the number of clients reaches a certain minimum, then a small commercial space will be rented. The pilots themselves will be paid $25-$30/hour because of the skill and testing involved. Zach estimates that someone would need to have been flying prosumer drones for at least 100 hours to be hireable but of course, he could do it himself. Yet even at those wages the model is attractive because drones are between 7 to 30 times more efficient than your average security guard. It all depends on the size and configuration of the property involved: the larger the property, the more compelling the value proposition. Averaging things out, Zach envisions charging 50% of what it costs to pay a security firm using guards to either continuously or to periodically monitor a property. In the jargon of his BCom program, Zach sees this as a significant sustainable competitive advantage.

As Zach finishes explaining all this, he taps his phone to access a list of questions. The first one is about how to enter the market because he sees two possibilities: selling directly to companies in need of security monitoring or selling to security companies who then offer it to their clients as an additional or alternative service at a markup. Zach had initially favoured the latter but is meeting with some resistance: "So far, I have not been able to confirm demand because it is a different kind of service. A lot of the security companies are pushing back on it, saying 'what's wrong with our manned patrols? We're doing a great job. Why are you thinking drones?' They don't get it yet, but I think it is like anything that is new. I just need to find the early adopters and the rest will follow. I suppose that is true regardless of how I approach the market. I just wish I was more comfortable trying to sell the idea. It seems so obvious to me."

Zach's second question relates to financing the venture because numbers are not his strong point. To get started, all he needs is a van, two or three drones with appropriate docking stations, and a laptop. The van does not have to be anything fancy, so a used one will do. Zach estimates that the cost for one in reasonable condition will be $15,000. A suitable laptop will not cost more than $1,500. So, all in, $20,000 to $25,000 should do it. However, of that amount, Zach can only scrape together $3,500 and says "I am kind of wishing I had spent less time gaming and worked more at the restaurants when I was in my teens so I would have a little more money now. My parents did help with my education, but insisted I pay my share. That is why I am a little short on cash. Don't get me wrong, I appreciate what they have done, and I know they stretched themselves financially. That is why they can't help me now, but I would be closer to getting the business started if they could. It seems like I might have to go to the bank and borrow what I need."

Zach also wants to know whether it makes sense to join an entrepreneurial incubator. The university has one that provides both workspace and advice. As a student, he could join free of charge. Zach is leaning towards doing so because he has heard that firms starting up in incubators are more likely to survive: "quite frankly, the idea that 90% of start-ups fail in their first few years is a bit intimidating, but I suppose you have to gamble big to win big!"

Given everything you know now, what should you be telling Zach?