Mangement homework




Toby Stuart Chris Anderson

This case study focuses on 3D Robotics, a drone company with UAV platforms. It examines what 3DR should pursue at the critical inflection point within its history and highlights what is unique about 3DR, particularly when compared to a more traditional non-open, non-Maker company. (Keywords: Entrepreneurship, Corporate Strategy, Market Entry, Open Source, Innovation, Crowdsourcing)

“Ultimately, the way society best figures out how to think about a powerful new tech- nology is to set it free and watch where it flies.”—Chris Anderson, 3D Robotics CEO1

“Chris Anderson is incredibly special because he is not just creating a product, he is creating a movement.”—Jon Callaghan, True Ventures2

O n a sunny, brisk spring day in 2014, Chris Anderson, CEO of 3D Robotics (3DR), a developer of drones, was squinting as he looked towards the sky at a small flying black and blue object with four spinning propellers. He was in the grassy patch outside their office

testing the IRIS, a small drone that flew autonomously3 via an Android tablet, phone, or laptop. Remarkably, it could be programmed to takeoff and fly from precise point A to B, avoid obstacles through sensors, and land on its own.

While the word “drone” (or Unmanned Aerial Vehicles—“UAVs”) conjured up images of stealthy military crafts zipping around in secret unmanned missions, Anderson, former Wired Magazine Editor-in-Chief,4 was changing that perception through 3DR, the company he had co-founded in 2009. 3DR was an example of

Several quotations, as noted, are taken from Chris Anderson, Makers: The New Industrial Revolution (Crown Business, 2012), by permission of Penguin Random House.

The full case study version of this article is available through the Berkeley-Haas Case Series at <http://>.


the manufacturer of the future—a modern-day hardware designer that coordinated a large com- munity of open source software developers who supported its devices. Anderson described the com- pany as “using the software of today to build the hardware of tomorrow.”5

The company, which initially targeted hobby- ists, was exploring commercial uses in market segments that did not require FAA6 approval. At the time of this case, drones were only permitted for personal use in the U.S. and were restricted to heights of 400 feet, to be within visual line of sight, and

remain away from populated areas and airports. However, the FAA did offer special permits for commercial use (since 2009, the FAA has issued 1,387 of these Certifications of Authorization for limited UAV flights to government, educational, and research enti- ties, and as of December 2013, there were 545 active permits).7 The FAA was consider- ing commercial use of drones to begin in 2015, but was cautious due to safety concerns.

3DR’s UAV platforms captured breathtaking aerial imagery for consumer enjoyment and data analysis, enabling mapping, surveying, 3D modeling, and more for possible commercial applications such as agriculture, photography, surveillance, search and rescue, construction, and ecological study. The worldwide drone industry was estimated by some to be $6 billion in 2013 and expected to grow to more than $11 billion over the next decade.8 Some estimated market figures were much higher (see below). Amazon’s release on December 1, 2013 of an 80-second video and a 60- Minutes interview highlighting what drone package deliveries might look like (Prime Air program) undoubtedly contributed some hype to market assessments.9

By 2014, 3DR had 200 employees in North America with a research and development office in Berkeley, California, and a manufacturing facility in Tijuana, Mexico (that manufactured ready-to-use drones that sold for as little as $400). The company had sales of $10 million on 30,000 orders in 2012,10 and over $20 million in 2013 by charging for the hardware and “giving away the bits [design files, soft- ware, etc.]”11 to its 28,000 customers worldwide who also bought motors, batteries, cables, and propellers from 3DR. 3DR’s product line included a single plane-style drone, four copter drones, and IRIS, its new consumer drone (Exhibits 1 and 2).

EXHIBIT 1. 3DR Financials

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Toby Stuart is the Leo Helzel Professor of Entrepreneurship and Innovation and the faculty director of the Lester Center for Entrepreneurship at the Haas School of Business at the University of California, Berkeley. <[email protected]>

Chris Anderson is the CEO of 3D Robotics and founder of DIY Drones. From 2001 through 2012 he was the Editor in Chief of Wired Magazine. He is the author of the New York Times bestselling books The Long Tail and Free as well as Makers: The New Industrial Revolution.

Rudimentary, fictional income statement (in thousands $US)

Year 2013 2012 2011 Total Revenue 20,000 10,000 5,000 Cost of Revenue 11,000 6,000 2,900

Gross Profit* 9,000 4,000 2,100 Operating Expenses Research/Development 10,000 3,000 1,700

3D Robotics: Disrupting the Drone Market


EXHIBIT 2. Funding History and Cap Table

Fake Cap Table: 1,000,000 shares total

Chris Anderson: 200,000 Jordi Muñoz: 200,000 True: 180,000 OATV: 90,000 Foundry: 80,000 Mayfield: 50,000 Other investors: 100,000 Options pool: 100,000 Source: 3DR.

As Anderson’s eyes were riveted by each subtle movement of the IRIS, he was excited about the future of 3DR and amazed at the drone boom he and 3DR helped to create. In his head, he replayed a scenario that he’d been frequently mulling over: “We need to be the future of x.” One of his critical tasks over the next few months was to figure out, what is x going to be?—big data (e.g., agriculture, climate, search and rescue), personal aerial cinematography, or something else? Moreover, there was additional urgency in this decision because the competition had come on strong. In particular, the Chinese company DJI’s Phantom 2 personal drone had snuck up to dominate the market, which con- cerned Anderson and his team. DJI had raced to nearly 20 times the size of 3DR with 1,600 employees, 400 engineers, and over $500 million in revenue

Round Date Amount Investors

Self-Financed $50,000 Series A 11/5/12 $5.1 million True Ventures, O’Reilly AlphaTech

Ventures, and others Series B 9/12/13 $31 million Mayfield Fund ($6 million), Foundry

Group, True Ventures, O’Reilly AlphaTech Ventures, and others

Selling General and Administrative 4,000 1,000 300 Non Recurring − − − Total Operating Expenses − − −

Operating Income or Loss −5,000 0 100

Source: 3DR. *3DR estimated that industry gross profits were around 35%.

3D Robotics: Disrupting the Drone Market


and focused entirely on drones for commercial and consumer markets. “At first, investors thought drones were not a market,” he said. “Then around nine months ago, they realized they were one. Now the question is, will we be the leader?”12

The Maker Movement

The internet democratized the tools both of “invention and of production,” according to Anderson. Now anyone could use software and new production tools to design and manufacture a physical product and “ship it” to people around the world. In essence, the internet liberated this world of “bits.”

The internet’s model of innovation spurred entrepreneurship and economic growth, democratizing publishing, broadcasting, and communications that led to an increase in participation in everything digital—the Long Tail of bits, according to Anderson. Consumers’ wants could now be met in ways that physical stores could not. Anderson cited Amazon, which could list many more products than any physical retailer could carry, as an example. He argued that products no longer needed to sell in large quantities and instead, companies could use the internet to reach the increasingly discriminating consumer who follows social media and word of mouth to buy specialty products online.

And the Web revolution went beyond just the ability to buy more things with greater choice. It allowed people to “make our own stuff” that others could consume, such as videos on YouTube, words (blogging), and pictures. “If you had talent and drive, you could find an audience, even if you didn’t work for the right company or have the right degree.”13

Beyond the world of bits lay an entire massive world of “atoms,” or the real world of products and things. “Just imagine what a similar model could do in the larger economy of Real Stuff…the Long Tail of things...the shift in culture toward niche goods.”14 This new world was what Anderson called “The New Industrial Revolution.”

“The past 10 years have been about discovering new ways to create, invent, and work together on the Web. The next 10 years will be about applying those lessons to the real world,” he said.15 By real world, Anderson was referring to physical products that—because of expertise, equipment, and costs of production on a large scale—had been closed to the pursuits of hobbyists and even entrepre- neurs. He said: “Physical products are increasingly just digital information put in physical form by robotic devices…hardware is mostly software these days, with products becoming little more than intellectual property embodied in commodity materials….In short, the reason atoms are the new bits is that they can increas- ingly be made to act like bits.”16

In this new world, anyone could invent or design something, upload files to a service to have the product made, or even make it themselves on a 3-D printer (an industrial robot that could make three-dimensional solid objects of virtually any shape from a digital model). Any designer now has the ability to quickly experiment with new product designs using such 3-D printers.

3D Robotics: Disrupting the Drone Market


These changes drove a new social movement aptly called the “Maker Movement” where participants could make things ranging from crafts to advanced electronics (Exhibit 3). Makers used digital desktop tools to create designs for new products. The “making” part of the Maker Movement could start with a 3-D printer like MakerBot, a Brooklyn-based company that for six years has been building inexpensive 3-D printers in an open source development model, much like 3DR. Its latest products had an easy to use system, driven by a simple desktop application that allowed users to turn CAD files into physical things just like printing a photo.

EXHIBIT 3. Open/Maker Example: MakerBot Industries

MakerBot Industries is a Brooklyn, New York-based company that made 3D printers. It was founded in January 2009 by Bre Pettis, Adam Mayer, and Zach Hoeken Smith (he was one of the founding members of the RepRap Research Foundation, a non-profit organization that advanced research in open-source 3D printers). Seed funding was provided by Jack Lodwick ($50,000) and Adrian and Christine Bowyer ($25,000). In August 2011, the Foundry Group invested $10 million and joined the board. As of March 2011, the company had sold 3,500 units and by 2012, more than 5,200 MakerBots had been sold. Revenue in 2013 was $75 million, and the company had sold more than 22,000 units. On June 19, 2013, Stratasys Inc. acquired MakerBot in a stock deal worth $403 million based on the share value of Stratasys, making MakerBot a subsidiary of Stratasys. Stra- tasys paid $403 million in exchange for 100 percent of MakerBot’s stock. The remaining two-thirds of the deal (a $604 million total deal) would be subject to MakerBot’s performance over the following two years.

Early on, MakerBot made the first mainstream $1,000 3D printers. Rather than using laser, the MakerBot Thing-O-Matic printer built up objects by squeezing out a 0.33-mm-thick thread of melted ABS plastic, which comes in multi-colored reels. MakerBots were personalized and decorated with Day-Glo letters.

MakerBot was designed by a community, built upon several previous open-source projects such as RepRap mentioned above, the Arduino microprocessor board, and a series of software packages that turned CAD files into instructions for the three motors that controlled a 3-D printer’s motors. Anderson said: “In this case, open source means open everything: electronics, software, physical design, documentation, even the logo….It is a shining example of how abandoning intellectual property protection can actually grant even more protection in the form of commu- nity support and goodwill.”**

By 2014, MakerBot had numerous products like the MakerBot Repli- cator Mini (compact 3D printer), MakerBot Replicator (desktop 3D

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3D Robotics: Disrupting the Drone Market


printer), MakerBot Replicator Z18 (3D printer), MakerBot Replicator 2 (desktop 3D printer), MakerBot Replicator 2X (experimental 3D printer), and the MakerBot Digitizer (desktop 3D scanner).

Source: Various. **Chris Anderson, Makers, 2012, p. 94.

Anderson added: “And what’s clear about these new producers is that they’re not going to be making the same one-size-fits-all products that defined the mass-production era. Instead, they’re going to be starting with one-size-fits- one and building from there, finding out how many other consumers share their interest, passions, and unique needs.”17

Makers could even share production spaces around the world called “mak- erspaces” like TechShop,18 “a vibrant, creative community that provides access to tools, software and space,” started by a former executive of Kinko’s printing and copying. The Maker Movement also encompassed Etsy, for example, a web mar- ketplace for Makers who sold arts and crafts and many other homemade things, as well as included the Maker Faire, “the Greatest Show (and Tell) on Earth—a family-friendly festival of invention, creativity and resourcefulness, and a celebra- tion of the Maker movement.”19 Many Maker companies started as hobbies and even raised money on crowdfunding sites like Kickstarter.

“Today, the Maker Movement is where the personal computer revolution was in 1985—a garage phenomenon bringing a bottom-up challenge to the ruling order of the time,” said Anderson. “The great opportunity in the new Maker Movement is the ability to be both small and global. Both artisanal and innovative. Both high-tech and low-cost. Starting small and getting big….The shape of the twenty-first century’s industrial structure will be very different from the twentieth century’s. Rather than top-down innovation by some of the biggest companies in the world, we’re seeing bottom-up innovation by countless individuals, including amateurs, entrepreneurs, and professionals. We’ve already seen it work before in bits….Now the conditions have arrived for it to work again, at an even greater, broader scale, in atoms.”20

Anderson emphasized that it was in the how prototypes could be made today that made all the difference: “As we’ve learned over the past few decades, digital is different.”21 The fact that digital files could not only be shared and cop- ied, but more importantly, modified, led to an open and collaborative culture.

New Open Source Culture

But Makers didn’t just make things. They could now share those designs and collaborate with others in online communities (an example was the rise of “open hardware” companies, like open source software and communities that launched Firefox or Linux) where makers launched companies like Arduino elec- tronics development board, Google with its Android mobile operating system, open source cars, watches like Pebble, toaster ovens, and 3DR itself.

3D Robotics: Disrupting the Drone Market


Anderson called this new culture, a “remix” culture where he said the abil- ity to easily “remix” digital files “is the engine that drives community….You don’t need to invent something from scratch or have an original idea. Instead, you can participate in a collaborative improvement of existing ideas or designs. The barrier to entry of participation is lower because it’s so easy to modify digital files rather than create them entirely yourself.”22 Anderson added: “When you share, com- munity forms. And what community does best is remixing—exploring variation in what a product can be, and in the process improving it and propagating it far faster than any individual or single company could.”23

This meant that anyone could join and contribute to the community, no matter where they were located or what their background was. “Amateurs have as much influence as professionals,” said Anderson. “The same is true in almost any open-innovation community: when you let anyone contribute and ideas are judged on their merits rather than on the résumé of the contributor, you invariably find that some of the best contributors are those who don’t actually do it in their day job….What this taps is the Long Tail of talent; in many fields, there are a lot more people with skills, ideas, and time to help than there are peo- ple who have professional degrees and are otherwise credentialed. Exposing this latent potential, both of professionals looking to follow their passions rather than their bosses’ priorities and of amateurs with something to offer, is the real power of open innovation.”24

And because such communities did not operate in the Coasian25 model where people worked for a firm, such organizations did not miss out on attracting the “cake maker, the graphics artist working for the Brazilian ad agency, the guy who runs the Italian ambulance radio company, the retired car-dealership owner, the Spaniard working for an energy company in the Canary Islands, and all the others who followed their passions even though their careers had taken them elsewhere.”26 With such a community, an organization could work with smarter people while minimizing transaction costs with technology, not proximity. “A social network is our common roof. Skype is the ‘next cubicle.’ Our shared purpose is really shared, not dictated.”27 In such an environment, the atoms are Coasian, but the bits are Joyian.28

Anderson said on the potential of open communities: “When you release your designs on the Web, licensed so that others can use them, you build trust, community, and potentially a source of free development advice and labor…. The result: hundreds of people [can] contribute code, bug fixes, and design ideas, and have made complementary products to enhance our own. The simple act of going open source…provides an essentially free R&D operation that would cost a great deal in closed-source development models.”29

New Manufacturing Model

Makers could produce their products much more easily in this new envi- ronment. They could use common design file standards that could be sent to web-based on-demand commercial manufacturing services to be produced in any number. In essence, given the ease of 3-D printing and desktop fabrication,

3D Robotics: Disrupting the Drone Market


along with easy access to manufacturing capacity, anyone could start a business making real things.

“The barriers against entry to entrepreneurship in physical goods are drop- ping like a stone,” said Anderson.30 Thus, would-be entrepreneurs and inventors were no longer at the mercy of large companies to manufacture their ideas. Anderson said: “Manufacturing has now become just another ‘cloud service’ that you can access from Web browsers, using a tiny amount of vast industrial infra- structure as and when you need it….All those niche products that either weren’t on the market at all because they didn’t pass the economic test of mass production or were ruinously expensive because they needed to be handmade are now within reach….With digital fabrication, it’s the reverse: the things that are expen- sive in traditional manufacturing become free (variety is free, complexity is free, and flexibility is free).”31 “All of this has given designers and engineers a fast- forward button advancing this technological flip-flop.”32

This new manufacturing model had “to incorporate all the skills and learn- ing of traditional manufacturing companies—tight quality control, efficient inven- tory management, and supply-chain management—so that it can compete with them on basic price and quality. But it also needs to incorporate many of the skills of Web companies in creating and harnessing a community around its products that allow it to design new goods faster, better, cheaper. In short, it must be like the best hardware companies and the best software companies. Atoms and bits.”33

On manufacturing and China, Anderson argued that at some scales, manufacturing in huge Chinese factories will continue to make sense. But at other scales, the advantages of making things close to home, with minimal delays and maximum flexibility, could be a better choice.34 He gave an example where a com- pany might outsource manufacturing to China at launch because they didn’t have manufacturing capacity. But when the product reached the hundreds, it would take months for a new supply to arrive and the manufacturer might require larger order quantities, tying up the company’s capital. This might lead to a shift back to local manufacturing to manage inventory and make more efficient product improve- ments. But when sales reached into the tens of thousands, the company might shift back to China since the 30 percent cost advantage might begin to become more attractive with larger volumes. “Companies can increasingly move manufacturing to wherever it makes most sense,” he said. “They can do so because the design files are digital, the tooling costs of setting up a new manufacturing operation are mini- mal, and they all use the same robotic machinery, which can be bought any- where.”35

Phase One: DIY and an Open Source Community

The “Aha Moment”

One day, Anderson, who has a degree in physics and has conducted research at the Los Alamos National Laboratory, brought home from the Wired offices a Lego Mindstorms robotics kit and a ready-to-fly radio-controlled airplane with the goal of working with his five kids on the projects over the weekend. Unfortunately, the kids weren’t impressed with the limited capabilities of the Lego kit. “Hollywood, it turns out, has ruined robotics for kids, who now expect laser-armed humanoid

3D Robotics: Disrupting the Drone Market


machines that also transform into trucks,” Anderson joked.36 Similarly, the kids were not impressed with Anderson’s airplane, which he crashed into a tree at a local park.

Miffed and puzzled, he went for a run and started thinking about the impressive range of sensors that the Lego Mindstorms robotics kit had, with its accelerometers (tilt sensors), electronic gyroscopes, a compass, and a Bluetooth link that could connect to a wireless GPS sensor. “It occurred to me that those were exactly the same sensors you’d need to make an airplane autopilot. We could solve both problems at once: build something cool with Mindstorms that had never been done before and get the robot to fly the plane!”37

When Anderson returned home, he prototyped a Lego autopilot on the dining room table and his 9-year-old helped to write the software. They posted some pictures on the internet and their project was on the front page of tech website, Slashdot that evening. “We put it in a plane—the world’s first Lego drone, I think—and took it out a few weekends later,” said Anderson. “It almost-kinda worked, staying aloft and steering on its own, albeit not always to the places we told it to go.”38

After a few more weeks of tinkering, Anderson developed a Lego autopilot that had most of the functionality of a professional device, if not the performance. But it became clear to him that Lego Mindstorms, for all of its charms, “was too big and expensive to serve as the ideal platform for homemade drones.”

DIY Drones and the Online Community Platform

In 2007, Anderson decided to post his work and questions online, not with a blog, but through an autonomous aircraft nonprofit social network he created for the purpose, called DIY Drones (—a place where hackers and makers could swap tips on how to build and fly unmanned aerial vehicles. “That distinction—a site created as a community, not a one-man news and information site like a blog—turned out to make all the difference,” he said.39

On the DIY Drones community, Anderson said: “I was blown away by what people in our community were doing with sensors from mobile phones and chips that cost less than a cup of coffee. Feature by feature, they were matching—or besting—aerospace electronics that had cost tens or hundreds of thousands of dollars just a decade earlier. It felt like the future of aviation.”40

“Initially, members would just post code and design files for their own proj- ects, showing off for each other in a form of nerd braggadocio,” said Anderson. “But over time, we set up more organized systems of collaboration, including version control systems and file repositories, wikis, mailing lists, and formal team assign- ments.”41 The DIY Drone community participants eventually had access to a full range of authoring tools, could comment, blog, start discussions, upload videos and pictures, create profile pages, and send messages. On structure within an open source community, Anderson joked: “The reality is that behind every great open source or open innovation project, there is a malevolent dictator.”

A few months after DIY Drones launched and had a few hundred members, Jordi Muñoz, a 20-year-old electrical engineer who was waiting for his green card

3D Robotics: Disrupting the Drone Market


in Riverside, California (after leaving Mexico to live with his wife, a U.S. citizen) signed up and posted a link to a “cool hack he’d done with a new open-source microprocessor board called Arduino,” said Anderson.42

“I was extremely bored,” Muñoz said. “I could only watch TV or program something, so I decided to program.”43 He had spliced motion sensors of a Nintendo Wii controller with a mini copter and worked on his project for eight months, the “most productive months” of his life where he was able to stabilize the helicopter’s flight using computer code. It was the perfect marriage between his obsession with computer technology and his childhood dream of becoming a pilot.

Anderson had become so impressed with Muñoz’s work that they began to collaborate virtually. He said on Muñoz: “He was able to quickly learn about very advanced technology. He did all that by teaching himself on the internet. He’s that generation of people who don’t know what they don’t know. He didn’t know he was supposed to have a Ph.D. to invent a drone. He just did it.”44 They worked on projects together such as an airplane autopilot and an autonomous blimp control- ler board. By March 2014, DIY Drones was the largest robotics community in the world with around 50,000 active members and two million page views per month with a comment every minute on the site.

Phase Two: Ready to Fly—Launching 3D Robotics

A Cottage Industry

As Anderson and Muñoz continued to work together, they realized that they needed to start offering kits with everything included. They started collecting parts to make an aerial robot kit, buying electronic parts in volume from around the world and sending the circuit-board design files off to be fabricated. Initially, Anderson hand- soldered a few dozen boards himself, then found a student on Craigslist to do a hun- dred more, and finally contracted with an assembly firm to do a few hundred more. He then loaded the software onto the boards and packed the kits with the help of his kids.

Their next product was an airplane autopilot board, where they partnered with Sparkfun (a designer and manufacturer of …