The space sector is seeing a shift in funding. Five years ago, private sector funding was on the rise. Government spending was decreasing and appeared set to continue. There were some predictions this “reversal” of capital was going to remake the industry.
It didn’t.
Instead, over the past few years we have seen a “retreat” of private capital from the space sector and a strengthening of many national space programs – or at least the strengthening of public sector commitments to fund space activities.
Why? What happened?
Well, lots of things. Some obvious. Some less so.
The explanations range from general economic and market conditions to government policy and just politics in general. In effect, what has been happening in space is part of larger trends that affect investment globally.
But there are also some things about the Space sector that have amplified these wider effects. These effects are not temporary, they are permanent features that should be discussed by anyone looking to invest in space – and by anyone who is trying to attract that investment.
In fact, I would argue that the features I want to highlight are important specifically because they are permanent, structural features of the business and economics of working in and from Space.
This is important, because I think it was partly under-appreciation of these factors which to some extent enabled the initial infusion of capital into New Space. Then the realization of their existence contributed to the retreat of some of that new interest.
So, let’s talk about why space is different and why those unique characteristics may not have been fully appreciated by many first-time investors in the sector.
The first point to realize is that the revolution in both launch cost and in the cost and size of spacecraft did not change some fundamental realities. To put it bluntly, the cost of launching a large satellite was not, and is not, the main barrier to being successful in business in space. The trade and popular media are full of stories and analysis, including some by well-respected economists, that seem to assume that lowering launch costs would, in and of itself, transform the space sector into just another “deep tech” sector and thus encourage those kinds of technology investors to include it in their portfolios.
Reality has turned out to be a bit more complicated. While reduction in launch costs and the size and complexity of spacecraft have made space accessible with much less capital than it once required, those changes have not changed the fundamental nature of the way business is conducted – including the way that returns on that capital are generated.
Space is not Deep Tech. I don’t think it ever will be. I have only come to this realization because of the time I have spent with founders and the investors who have been supporting them over the last few years. What I discovered is that many investors with deep experience supporting tech founders have a particular model of how a business will operate, grow, and ultimately scale up.
In this model investors expect that a successful business will start with the development of a technology around which a new product will be designed. The process of developing this technology and transforming it into a product will be capital intensive. In fact, availability of capital will likely be the pacing item in its development.
Once the product is ready – in at least its “minimum viable” form, the business is expected to transition to the “go to market” phase.
In this phase the emphasis will be on speed. Speed of introduction of the product, speed of penetration of the market, and speed with which revenue and profit are generated in order to begin generating a return on the invested capital.
Competitive advantage in such a model is largely conferred by this speed of execution. When you have a market disrupting idea your primary defense is to get your product into as many hands as possible and to establish a gap that will be hard for your competitors to close. While they are trying to close it, you will be focused on extending it by introducing new generations of technology, or by designing new products around it.
This is a workable model. Many fortunes and many massive companies have been built with it. But it really isn’t the way space works. This is mainly because the space “market” is not at all like most markets that Deep Tech investors are familiar with.
In fact, the space market is not really a market in the traditional sense at all. The word “market” usually refers to a large collection of customers. It assumes that those customers are numerous enough, and their needs are similar enough that they can be treated as a collective entity. It assumes that there is “an average” customer and that you can design a product, and a marketing strategy, and a whole business model around that average customer.
To know how big your business can get you then figure out how many of those “average customers” there are and multiply by the price you expect to charge them for the product they will want. That gives you your “Total Addressable Market” – which is a common metric that investors use to measure the growth potential of a company.
It is assumed that the whole market can be served with a single – or very few – version(s) of the product. This means that each customer will require little engineering support. This also means that the company will be able to sell stock from inventory – if demand can be predicted. All of this means that the sales cycle times can be rapid and that the delay between the sale and the collection of payment will also be short.
Finally, there is an inherent assumption that market penetration will be a self-reinforcing cycle. Satisfied customers will lead to interested customers – who will become satisfied customers.
All of this leads to the expectation on the investor’s part that the go to market phase will feature rapid growth and that any additional capital that is required and then acquired will used principally to fuel this growth.
These are reasonable and well tested assumptions. On the ground.
Almost none of them are true of the space market. For reasons that really do have to do with it being the space market.
In my next column I’ll spend some time talking about why the space market is different. And why that actually provides some real opportunities for founders and funders who want to find them.
- Read more Advice to Founders columns.