Allocortech is raising capital on a convertible note at an $18 million valuation cap with no discount. This price is reasonable for a company of allocortech’s type and traction. Allocortech is an established business, with more than $5 million in lifetime revenue and steady revenue growth in recent years. In 2021, allocortech boasted more than $1.6 million in revenue. Based on that figure, the company’s revenue-to-valuation multiple is just over 11x — very fair for a hardware company. This valuation is a good deal for investors.

Allocortech is serving a relatively narrow market, at least for now. The company’s components are meant to be sold to commercial flying vehicle manufacturers. There’s a limited number of such manufacturers in the world, much less the US. 

However, longer-term prospects for this market look very good. The North American market for commercial drones was valued at just $2.4 billion in 2021, but it is expected to grow at a whopping 28.6% annually from 2022 to 2029. Experts say that US spending on drones is going to soar in the future, with use cases ranging from delivery to defense. 

Allocortech’s success is intimately linked with the success of drone manufacturers. If manufacturers succeed as they are expected to, allocortech will likely also succeed by providing the parts for their vehicles. Allocortech could generate even more addressable market value by expanding to other vehicle industries, like boats or cars. The company has already made some progress toward that expansion, which is another good sign for its market prospects. Overall, allocortech’s addressable market is limited at present, but it seems likely to have a promising future.

Allocortech CEO and co-founder Brian Viele graduated from Cornell with a degree in electrical and computer engineering. He spent more than 15 years in the aerospace industry before launching allocortech. His aerospace experience includes almost five years at Rockwell Collins (a leading avionics company) as an electrical and firmware engineer and a brief stint at Google as a software engineer for vehicle systems. Allocortech is not his first entrepreneurial enterprise. Viele also spent four years as the head of his own technical consulting firm. 

While Viele has primarily focused on hardware and electrical engineering for most of his career, co-founder and Vice President of Engineering Matthew Walker provides a software complement. Walker also has a degree in electrical engineering and computer science from The University of Tulsa. He has more than a decade of experience as a software engineer, with more than half of that time spent in aerospace. He worked as a software engineer at Rockwell Collins as well as two other avionics companies, Kitty Hawk and Zee.Aero. 

Beyond Viele and Walker, the allocortech team includes at least seven other highly technical engineers. The team has combined experience from aerospace giants like Boeing, Northrop Grumman, and Lochkeed Martin. 

Allocortech’s team has impressive technical qualifications to build avionics hardware and software. However, the company lacks business, finance, sales, and marketing expertise. Although allocortech has the experience to make quality products, it may struggle financially if it’s unable to market itself and capture sales. Expanding the team to include more growth functions should be a priority with capital from this fundraise.

Allocortech’s goal is to provide a middle-ground avionics hardware and software solution for flying vehicle companies. There are currently two options for finding the devices to embed within a new drone project. The first is to use hobby-quality equipment. This option is quick and easy, but quality and reliability might not be high enough for commercial-grade vehicles. The other option is to use enterprise-level technology from major corporations, like Honeywell Aerospace. This equipment is high-functioning and reliable but also expensive and inflexible. 

Allocortech’s products and services fall somewhere in the middle. Companies can obtain reliable, high-quality equipment for their vehicles at an accessible price point. Allocortech’s solutions are also more flexible and easier to configure, particularly because the company can partner closely with its customers to customize technology for their unique products. 

While this business model is a differentiator from other companies offering similar technology, allocortech doesn’t have a rock-solid competitive advantage. The company acknowledges in the raise page comment section that its actual technical solutions aren’t differentiated, and that’s why it doesn’t hold patents on any of its devices. It’s the configuration and service model that makes allocortech stand apart. As a hardware company, that lack of defensibility and concrete differentiation opens allocortech up to a good deal of competitive risk. 

Allocortech was founded in 2018, and the company has grown steadily since then. Allocortech began generating revenue with its services — consulting for vehicle manufacturers and sharpening its understanding of market needs. Now, allocortech is focused on transitioning more of its revenue to product sales, and the company is seeing strong year-over-year growth as a result. 

Allocortech generated just under $1.2 million in 2020 revenue and posted $1.6 million in 2021 revenue. Growth this year also looks strong. The raise page states allocortech brought in $741,000 in the first quarter of 2022, putting it on track for $2 million or more in total income this year. Moreover, allocortech has been earning a net profit, with a $66,437 net income in 2021. The company is bootstrapped, which is a promising signal for investors. It means the company has been able to accomplish a great deal without a lot of capital.

Beyond financial performance, allocortech seems poised to expand in coming years. The company’s success is highly dependent on its clients’ success. For now, allocortech provides avionics hardware and software for prototypes and other limited runs of vehicles, including a seaglider for REGENT and a boat for Navier. However, sales would immediately pop if a client moved its vehicles into mass production. Elroy Air, a cargo drone startup, is a client of allocortech’s. If that company scales according to its plans, allocortech could be providing hardware for hundreds or thousands of drones, as opposed to a small number of prototypes. 

Overall, allocortech has very healthy and encouraging financials. If it can maintain its profitability as it pivots into a stronger hardware focus, the company looks well-positioned to become a known name in the market.

Allocortech’s risk profile is a mixed bag. The company has successfully generated a good deal of revenue for several years and has clearly established itself within the avionics industry. Given that the company grew steadily even while offering more services than hardware, it seems to have good fallback options if product sales slow down. This past performance mitigates allocortech’s time risk somewhat, which is especially helpful because the company needs substantial time to produce and sell its devices.

However, allocortech hasn’t raised money before, so there’s no evidence that it could continue bringing in funding if performance declined. Plus, allocortech’s success is somewhat dependent on the success of the drone industry at large and specific startups within it. The economy as a whole is becoming more bearish, which means many startups are likely to fail in the coming months — particularly those that require huge capital expenditure. Because allocortech’s main customers are startups, it could also struggle with the ripple effects of a bear market. 

The team at allocortech has done an admirable job of building a bootstrapped, high-tech business with strong year-over-year growth and a net profit. However, there are still many questions about allocortech’s long-term prospects. First of all, it’s not encouraging that the team lacks seasoned business expertise. As allocortech begins to scale, functions like finance, sales, and operations will become all the more important. It will be critical for allocortech to diversify from a team of solely engineers into a more balanced set of personnel. 

In addition, allocortech hasn’t yet achieved its goal of providing scaled hardware and software to a company that is mass-producing vehicles. That future is one of the only ways that allocortech can achieve true growth, but it’s still a gamble as to whether the company will ever get there. Over the next few years, the performance of the economy at large — and particularly the drone market — could make or break allocortech.

Allocortech’s basic business model and differentiation thesis seem solid. In the past, vehicle builders had limited options: basic tech that was cheap but lacked sophistication or serious tech that was sophisticated but expensive. As the market for commercial drones explodes, buyers are increasing, and they need more options. A middle ground like allocortech — which provides commercially viable avionics with the price point and service of a smaller company — is a natural evolution of the drone market. 

This model has clearly shown promise over the last four years. Allocortech is bootstrapped (meaning it’s accomplished a lot using little capital) and smartly began with services to gradually develop more scalable product solutions. Now those products are gaining traction and could take off when an allocortech partner ramps up production. It’s also a good sign that allocortech has the potential to move into adjacent markets for vehicles, including boats. Any expansions reduce allocortech’s dependence on a small number of aerospace clients and help diversify its sources of revenue. If allocortech can maintain its current revenue growth and profitability, it is well-positioned to establish an even stronger foothold in this growing market. 

Allocortech is an avionics company providing both hardware and software solutions for drone makers and other aerospace clients. The company also has the potential to expand into adjacent industries, including marine vehicles, in the near future. Allocortech’s team may struggle with selling and marketing its products due to lack of business and marketing experience. The company is also dependent on the success of the drone industry at large. As the economy enters a bear market, allocortech could struggle if its startup customers fall to a recession. 

Allocortech’s differentiation lies more in price point, product flexibility, and service offerings than in patented technological innovation. However, this approach seems to be serving allocortech’s target market well so far, and that market is expected to expand rapidly as commercial drones become more popular. Allocortech’s team is highly qualified to build its software and hardware. The company’s financial performance has been strong over the last four years, with steady revenue growth and profitability in 2021. Finally, its current valuation is a fair deal for investors. Therefore, allocortech has been rated a Deal to Watch. 

For questions regarding the KingsCrowd analyst report or ratings for this company, please reach out to support@kingscrowd.com. 

Analysis written on May 19, 2022.