Don’t Start a Launch Company: Other Space Sectors Need Innovation
By Meagan Crawford
SpaceFund has long lamented the saturation of the launch market, including a paper we published in 2019 about the coming oversupply in launch, even with the rising number of payloads using these launch vehicles. We’re carefully tracking the launch industry, with over 200 launch companies that have been added to our Launch Reality Rating database since its inception in 2018. Many of those companies have fallen off the list (bankruptcy, acquisition, ‘zombie’ status, etc.), but new ones continue to be added at a dizzying pace, with the current count at the time of this writing being 168 launch companies still alive, around the world. We believe no more than 30 of them will survive in the coming decade. This is the definition of a ‘Red Ocean’ industry where “companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, profits and growth are reduced. Products become commodities, leading to cutthroat or ‘bloody’ competition. Hence the term red oceans” (link to source). This is obviously a difficult strategy to implement and does not offer the high return on investment that venture investors are looking for.
Instead, if you’d like to start a space company, you should focus on ‘Blue Ocean’ strategies where “competition is irrelevant because the rules of the game are waiting to be set. A blue ocean is an analogy to describe the wider, deeper potential to be found in unexplored market space. A blue ocean is vast, deep, and powerful in terms of profitable growth” (link to source).
So what are the Blue Ocean strategies in space? Where are the biggest profits yet to be made? Where is the highest growth potential? What markets are being underserved? What emerging markets aren’t being served at all? These are the questions that will lead you to own your highly profitable Blue Ocean strategy.
As investors, with a focus on early stage investing, SpaceFund is always looking for these high growth opportunities. But we have a few very important restrictions. Most importantly is the ‘Tyranny of the VC Equation.’ Those of you who have been around the space industry for more than about five minutes will have heard of the ‘Tyranny of the Rocket Equation’ (excellently summarized here).
The VC Equation is a little different, but tyrannical in its own way. As VC’s we’re constantly looking for these Blue Ocean strategies, which can often take some time to mature as new markets are being established. However, we’re also beholden to the time value of money and the underlying economics of VC fund structures. VC funds have 10 year lifetimes, almost across the board. These funds typically have a 3 year investment window at the beginning of the fund, leaving only a 7 year time horizon for the investments to mature. This means we have to find companies that will grow from Seed stage to exit in 7 years, while building an entirely new market, developing technology, and scaling to profitability. This is no easy task. And these companies have to do all this with realistic funding needs that can be met by a volatile and fickle VC community. There is only so much money to go around, and most of it is not allocated to space. This is why no VCs have funded multi-trillion dollar off-world settlements – there isn’t enough VC funding in the world to make this happen, and no way to get this to profitability within 7 years. Less than 1% of American startups receive VC funding, because most do not conform to this framework. Many of these businesses become highly successful, and profitable – but without VCs on their cap table.
When it comes to space investing, the tyranny of the VC equation means that we can’t invest in the sexy things that most people think about when it comes to Blue Oceans in space. We’re not investing in asteroid mining, permanent off-world settlements, space elevators, space-based solar power, and all the other dreams of the lofty non-profits that our company founders are passionately involved with. These are investments for a future fund, when these technologies are affordable to create and the timelines are much nearer term.
However, there is a place where the Venn Diagram overlaps – space markets that are both Blue Ocean in nature but that also have the potential to spawn companies that can reach exit within 7 years with realistic funding requirements. This is the SpaceFund investment sweet spot.
Below are some of the space markets we’ve identified that fall into this sweet spot. Some we’ve already made investments in, others we are actively looking for new opportunities.
Satellite Products and Services
While the launch market is oversaturated, from our perspective, there has not been enough attention paid to the market that all of those launch companies are trying to capture – satellites. There are, by some estimates, over 100,000 satellites predicted to launch within the investment window of SpaceFund’s next fund. All of those satellites will need products and services to make their business plans successful. There is a long list of what those might be, but we’re particularly interested in the following:
- On-orbit data processing and storage
- Standardized, radiation hardened, light-weight satellite components that can help reduce build time and be mass produced
- On-orbit refueling
- De-orbiting and satellite servicing
- Constellation management and collision avoidance
Location, Location, Location
Low Earth Orbit (LEO) is getting crowded. The commercial space industry is beginning to push farther out into the solar system, and several startups are already targeting Medium Earth Orbit (MEO) and Geosyncronous Orbit (GEO) as these locations are becoming easier to access and as the miniaturization and resiliency of satellite components continues to improve. As NASA and other world governments reach for the Moon, more commercial companies are going with them, and we’re seeing the very beginnings of a cis-Lunar economy developing. There are an amazing number of possibilities for profitable, near-term business models in these realms, but we’re specifically looking into:
- Products and services that help lift the smallsat revolution beyond LEO
- In-space transportation services that can help satellites reach and maintain these unique orbits (including OTVs, propulsion, refueling, and orbital maintenance as a service)
- Guidance, navigation, and control (GNT) systems that can operate beyond LEO (and without access to GPS and other tools that are based there)
- New business models using GEO (the most profitable place in the solar system), to provide unique products and services to terrestrial customers
Space for Earth
One of the biggest challenges with the current Earth Observation (EO) market is that the promise of mass adoption has not yet been fulfilled. While EO companies have done a great job of developing the infrastructure to produce high resolution imagery of our entire planet every day, they are still having trouble creating the apps, user interfaces, data overlays, and value-added analysis to make this data valuable to end users outside of government and financial markets. We predict that consolidation will continue among these EO companies, which will further drive down prices, especially of days-to-weeks old imagery. Those who can develop end-user applications for this data stand to create new space businesses with customers in any number of terrestrial markets. Specifically, we’re looking for businesses commercializing EO imagery to make life better, easier, and more enjoyable here on Earth.
A Human Future
As commercial space stations and research facilities come online in the next few years, we expect a significant uptick in experimentation and commercialization of completely new biomedical advances. Space is a unique environment that allows for research and validation of treatment to keep astronauts healthy, while also benefiting the health of millions of people on Earth. Research on the International Space Station has led to numerous achievements, such as better treatments for cancer, COVID-19, asthma, and muscle and bone loss in the elderly, just to name a few. Further breakthroughs include more efficient and safer pacemakers through better material science, higher quality 3D printed tissues and organs, and remote medicine that has significantly improved human well-being. SpaceFund will back disruptive startups commercializing past, present, and future space-based research with a focus on increasing healthspan, lifespan, and quality of life for all humans – on Earth and in space.
If you’re thinking of starting a space company, don’t start a launch company! Consider instead how your skills, professional network, and vision could combine to create a solution to one of these problems. And please keep in mind, these are only a few of the possibilities that will develop in the coming years that fit within the investment sweet spot of being both ‘investable’ and ‘Blue Ocean.’ What others are there? What are we missing?
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