In the last two columns I have talked about why space, as an investment sector, is not really like other “Deep Tech” sectors. At times, I may have made the sector sound like it was unattractive to investors. I don’t think it is. In fact, I think it has enormous potential specifically because its dynamics are not widely appreciated. The sector really is ready for some smart money that has the right vision.
Let’s start by reviewing the way the space market works.
The market is relatively small in terms of the number of customers, and it is dominated by a small number of large customers. Because space is a challenging environment and because those challenges are specific to that environment, “Space Heritage” is hard to come by notwithstanding the decrease in launch costs.
This means that having such heritage provides a significant reputational “moat” against rising competitors. This moat is much deeper than is typical for tech companies who usually depend on market velocity to defend their positions. This all means that in the space business it pays to develop deep relationships with a few customers rather than a broad relationship with the whole market. Such relationships will not only help build your reputational moat, but those customers will also generate new business because they will channel work to trusted suppliers.
The other factor which is very important is that the working capital needs for space companies can be significant. Success in the market consists of delivering a high quality, high value product on which customers critically depend. So, it will almost always require a significant investment in material and engineering before delivery. It can also be expected that customers will want to perform acceptance tests before sending payment.
On the other hand, on-going business tends to generate high unit margins and happy customers are repeat customers. So, it is possible to be profitable even on a small scale and the market can be penetrated without massive spending on marketing. As well, government provided non-dilutive funding opportunities continue to abound in the space. All of which means that growth in space companies can often be funded without the need for on-going successive funding raises which increase in size and which force founders and early investors to dilute their positions.
So, even though the market does not conform to the norms of a typical “deep tech” investor sector, those features which make it different are not necessarily limitations, but rather opportunities.
For one thing, in contrast to many “hot” tech sectors, once space ventures are out of the startup phase their competition tends to thin rapidly because flight heritage is so hard to come by. For another thing, success in the space business relies as much on having a solid team as it does on having a single great idea. This, again, tends to separate successful companies quickly from their competition, because the skills and expertise needed to become credible are still in short supply and having them, and having proved you have them, contributes to creating the moat between you and your competitors.
That is at least partly since some of the core “space-going” skills simply can’t be acquired in any way other than going to space. Practical experience in, for instance: RF engineering of spacecraft and payloads; thermal-mechanical design for vacuum and zero g; radiation tolerant electrical design; and familiarity with space operational realities such as on orbit lighting and thermal environment cycling simply cannot be learned in school. Further, innovations in these fields need to be tested in space before they become credible.
The issue of course, is that this expertise – and experience, is in limited supply.
Very limited.
So, it is expensive.
Expensive enough that it is hard to justify hiring that kind of experience in a small company. But that level of experience is still very valuable. It may even be an essential ingredient in success. This is because having an experienced team that inspires trust in your customers unlocks huge potential in the space market. Growth can be driven by loyal customers – some of whom are large. These customers will not only continue to go to trusted suppliers for established products, they may also bring new high value problems to those suppliers enabling growth in adjacent markets.
All of which is why the key to rapid scaling in the space sector may, in fact, be through consolidation. Let me explain.
The hard parts of going to space are still, in fact, hard – and because customers would often prefer to procure tried and tested solutions to problems that are not the focus of their own innovation. So, there are a lot of ventures trying to deploy innovative systems and solutions in which they have made significant investments. They expected that all the enabling technologies they would need would either be simple to develop or to be available as a commodity on the open market. These expectations are not being met. It turns out they need innovative solutions to problems they do not know how to solve. This means that the market for such innovative enabling technologies is wide, but full of deep niches. Customers are in the market for suppliers they can trust to provide the foundations upon which they build their innovations. These foundations simply have to work but they lack the means to develop them internally.
Each of these enabling technologies requires specific expertise and there are so many of these enabling technologies that very few companies have the breadth and depth to have command of them all.
Those that do are large and established and do not tend to be at the forefront of innovation.
This, then, is the real opportunity for “massive scalability.” It is the chance to build a company that has the breadth to tackle many of the problems, the depth to do it well, and the innovation needed to do it better than it has been done before.
The best way to create that enterprise will be to assemble it from parts that already have established themselves as the right solution but which lack the capacity to scale on their own.
Rapid growth will be achieved because putting those pieces together and creating an economy of scale will allow the consolidated enterprise to afford the technical and managerial experience needed to be credible and successful in space. The value of the combined entity will have the capacity to rapidly and massively exceed the value of the sum of the component parts. In space reputation matters. Reputation is built on experience. Experience is expensive. But if an organization can be built that has the economy of scale to afford it – it will be able to dominate this sector in a way that no supplier currently does.