Even in 1918, the U.S. military had its first UAV, which acted as a “cruise missile” in combat. Nicknamed the Kettering Bug, it was essentially a flying bomb with 12-foot wings made of cardboard and paper mâché, running off a 40-horsepower Ford engine. As you might imagine, the military has been a catalyst over the years for the development of UAV technology, which has allowed commercial drones to become cheaper, lighter, and more sophisticated. Today, drones aren’t just for delivering military payloads in foreign lands – UAVs will also be delivering your packages, taking photos, providing wireless internet services, and monitoring conservation efforts in remote locations.
The Commercial Drones Market
The following infographic comes to us from IFLY, a Drone Economy Strategy ETF focusing on the “development, research, and utilization of drones”. It shows the history of military drone applications, and how that has led to today’s emerging market for commercial drones.
According to BI Intelligence, the total drone market today is close to $10 billion.
And despite the military market remaining the largest for now, it is worth noting that the commercial drone sector will grow at a compound annual growth rate (CAGR) of 19% between 2015 and 2020. Eventually, it will pass the military market in size, as that is only growing at a 5% clip.
The Emerging Opportunity for Commercial Drones
The growing market on the civilian side will impact a variety of industries, including private security, law enforcement, real estate, media, film, construction, mining, agriculture, and utilities. Hardware for commercial drones is important, especially in the early stages. However, as we see in other sectors, it will likely be the software that makes the difference in many applications. As it becomes cheaper to customize commercial drones, the door will be opened to allow new functionality in a wide array of niche spaces. Sophisticated drones could soon be doing everyday tasks like fertilizing crop fields on an automated basis, monitoring traffic incidents, surveying hard-to-reach places, or even delivering pizzas. At the end of the day, the impact of commercial drones could be $82 billion and a 100,000 job boost to the U.S. economy by 2025. on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
