What to look for when investing in a space start-up

You can’t overlook the role venture capitalists have played in the rise of the commercial space industry. In an industry that relies on failed tests, there needs to be those sponsors who are alright with not seeing a quick return on investment. So what does it take to make those smart investments and what goes into the decision-making process? For answers to those questions, I spoke to Ethan Batraski who is a partner with the firm Venrock.

Interview transcript: 

Ethan Batraski
I think in order to predict the future, you have to get a sense of where have we come from and where are we today. And so the way I think about it is, space has experienced multiple waves. We’ve started with private launch with SpaceX. We moved to this CubeSat era, then a modern space era, then we’re getting into an in space economy, and then eventually a lunar economy, and then eventually deep space and Mars. And so I think it’s important to understand what has happened and then led to where we are today. And so if I think about that first wave, the space economy really just begun with the emergence of private companies trying to embark on launch. This was primarily dominated by NASA and most Commons, and eventually Orbital Sciences and the SpaceX really disrupted the model to SpaceX prove that a private company could actually get into orbit, and could actually operate without being necessarily a defense prime only. I think, that then opened up the aperture for the world to think about, how do we take advantage of this access to space. And so that, I think, led to the CubeSat revolution, the idea of small standardized satellites that were cheap to get up and lower the barrier of entry to get into orbit. I think that proliferation was really interesting, because it led to a bunch of interesting concepts, like planet and others around constellations. And now what we’re seeing with Starlink and one web and others, I think the challenge there was then they realized, well, these spacecraft are too small, incapable of really heavy workloads.

And so that led to a third wave of the modern space services era. Like these are growth companies leveraging the infrastructure capabilities developed in the previous phases, but now starting to go and disaggregate some of the large players that exist today, like the viasats of the world and global eagle and others. And so you have companies with broadband satellite and Capella with imagery and black sky with geospatial. And so you start to see these slightly larger spacecraft go and build real businesses. And I think we’re in that third phase today, where these companies are still in this world of vertical integration and still making their way into orbit. Improving that being a aerospace company can be a highly profitable business that the market would value at some high multiples. I think we’re like in the middle of that phase, because those companies are just getting into orbit, just making their way into the public markets, and creating more opportunity for investors to come in with growth capital and potentially even a venture risk capital. I think from there, then we get into the interface economy. This is where we think about, well, what are the things that we need to do in order to enable a true space economy, everything from manufacturing and assembly and space habitats. And how do we leverage resource utilization? How do we continue to make commercialization of orbit feasible, whether it’s around traffic management and continued access? And then once that happens, we stop looking towards the Earth, and we start looking the other way. Now we start thinking about the lunar economy and Mars.

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And so I think there’s a bunch of things today as we think about going from the third wave to the fourth wave, where there’s interesting opportunities. I think one is around just the manufacturability and standardization of spacecraft and Space assets. I think that we’re in the phase where still every spacecraft is still bespoke, and from the bus to the endpoints you’re using, to the configuration of a your software defined radio, to how you think about propulsion and where you need to lane keep. And we need to get to a point where those can be off the shelf, and so you can start to proliferate the access to the hardware and start to typically reduce down the price instead having to buy lots. And so I think we need to move to the place where servers have gone today, where their standard motherboards and their standard pieces that are plug and play, and that work interoperable with each other. I think that’s one big area that we’re interested in. Second is around areas that you can leverage the physics of space itself. So in space, you have unlimited cooling, and you have, to an extent, unlimited power, thanks to solar. And so what are the industries that you could take advantage of those things to provide an unfair economic advantage if you could do that thing in space? So one idea that we’re excited about is being able to move the data center into orbit, where you can have lots of GPUs running very close together without any cooling, and you have, again, a woman power. If you could harness that power in the right way, you could enable a much smaller or lower capex per watt of GPU power. And you can allow this ability to almost create trains of them as they orbit, particularly for types of workloads that don’t require real time insurance, but are more batch type processing. So particularly like for AI training.

Then the third one is around continuing miniaturization and disaggregation of current large space assets. So that’s everything from comms, the large viasat and geospace assets that cost $500 million or a billion dollars and take five years to build. Can’t be the future. We need resilient systems that we can build quickly and deploy quickly. So companies are building micro satellites and geo are doing that exact thing, providing that capability for individual countries or regions to get capacity, instead of the entire content having to pool capital together in order to get capacity. And then the same thing is true for GPS. The same thing is true for a lot of EO that we rely on. Certainly on the defense side, there’s lots of juicy assets out there that, with one surface to space missile, we’ve lost a key capability, and so we need to miniaturize, we need to disaggregate. And then the fourth one that I’m excited about is not in space, but to support space. Is all the infrastructure for space. So launch infrastructure, ground stations, testing facilities, like today, we’ve got four launch sites that we as a country, rely on. Kodiak, Vandenberg, Wallops and the Cape. Four is very a fragile system. So in order to build resiliency, to how we think about space, we need to have a lot more launch capacity, a lot more launch pads, like, if a fire breaks out at one of those launch pads, like it’s out for potentially for months. And then now you’ve basically choked up their ability to launch. To set up a new site at the Cape it takes years to get access to mendenberg, it takes years. And so things of that nature, or like testing facilities, instead of a testing facility in Mojave Desert is an expensive endeavor, and it’s complicated endeavor, and there’s not a lot of access. And so it’s really about being able to streamline all the adjacent pieces that are critical, and being able to unlock and unthrottle the space economy. I know there’s a long answer, but that’s kind of the way we think about it.

Eric White
Yeah, I was gonna say we could spend probably the next 40 minutes unpacking each one of those ideas and topics that you brought up. I’ll hone in, though, on just for the business sense of things. You mentioned the defense aspect and kind of it’s almost, in the background now. A lot of companies seem to be treating it that way, whereas it’s almost as if they can’t ignore the defensive capabilities that advancements in space that their companies bring forward could bring. Do you see a lot of the major players, especially keeping an even split between creating an economy like you just mentioned, and exploring those other opportunities, but also maintaining the defense sector that is always going to be there. The US government is probably the most stable customer that they all have. What do you see as where those companies decide which way they want to go, or a lot of them just going to try to keep playing both sides?

Ethan Batraski
It’s an important question that I think every early stage space company and founder asks themselves. Space, obviously, is one of the most important domains for the Defense Department, especially over the last five years. I think we’ve gone through a once in a century migration and transformation from a defense standpoint, away from bombs, bullets and boats, to AI, space and cybersecurity. And so space is becoming a new primary domain of war, where now there’s much more access from our peers and adversaries. There’s lots of, let’s call it less than above board behaviors around following and situational awareness, and so there’s a lot of risk there. So defense will continue to be the biggest buyer space services and hardware. But the Defense Department has very bespoke needs. They don’t buy off the shelf. It’s very difficult to depend on a contract award as Predictable Revenue, especially in early stage company. And so companies have to decide, are they defense first, or are they dual use? Defense first means you’re effectively becoming or attempting to become a prime. Dual use means you’re a commercial company that can also offer your services to the DoD. But I think they need to stay separate, and they will continue to stay separate. There is a commercial market that is critical for communications, for internet, for GPS, for weather, for EO, for fire prediction, for one day maybe unique type of material manufacturing, and the list goes on. Defense has their needs, but it is critical to go build a durable business with a real customer base solving a real problem, and then be able to see if you can leverage that to support our national security needs, and be able to then leverage the scale that gives you. But again, I don’t think that they become over. They don’t become intertwined because they’re dramatically different buyers needs and sales cycles.

Eric White
So let’s talk overall, the industry itself tyou mentioned a lot of the big players. SpaceX, obviously, is the king of it all at the moment, and riding high. But you got the other bigger or not as big, but other players in the system as well. Do you foresee the space industry becoming a lot like the tech industry, where those bigger players end up absorbing anybody that has a good idea with the mountains of cash that they have. Or could we see a falling down and one more person is crowned, and then the next one moves on. It seems as if SpaceX came almost out of nowhere. It was like we said earlier, it was almost like a side gig for Tesla, but that remains to be seen. Where do you see this all going?

Ethan Batraski
It’s a great question. I think that the space industry will most likely follow the same boom and bust cycle as all other industries in the same expansion of contraction, both from new players emerging, but also consolidation happening. There are multiple drivers that lead to that. I think that there will continue to be technology unlocks that will create new ability for entrance to come in to offer new capabilities and services that weren’t possible before. Then go after a market with a better, faster, cheaper solution. I think from a launch standpoint, for example, SpaceX is the dominant player there, and it is hard to compete unless you provide bespoke capabilities that their scale can’t offer. They have the choice to either ignore that segment, acquire that company, or go try to build themselves. But at some point, companies become so bloated, because they try to do so many things that they actually collapse on themselves. And so that is always a risk, and that is the reason why, If you look at the largest 10 companies today, that’s very different the largest 10 companies 30 years ago, and 30 years before that, companies tend to have a life cycle of about 40 years total. Space X is a 20 something years interest journey, if not more. And so we’ll see how that continues, and if they continue to be an expensive or contractive mode. I do think that from a venture capital standpoint, you hope to see consolidation. You hope to see lots of M and A, you hope to see that drive more dollars into the innovation economy around space. And that’s important, because you need risk capital available for these companies at the early stages. But I do think that we’re in a interesting point right now where we’ve been in a little bit of a lull, just given the receding tide of risk capital. But I think that tide will come back as the market starts to come back and interest rates start to stabilize where there is more interest in higher risk yield, and space becomes kind of a more important part of every investor’s portfolio. And so I think a lot of it stems from the source of capital.

Eric White
Yeah, I want to zero in on the word risk there, because it is crazy that a lot of company’s success, especially in the space sector, are riding on just one particular project going right. If you ask any other top 100 company CEO, hey, if you put all your eggs into one basket and have it all riding on this one particular project, they would call you insane. But for some reason, it seems to be the standard practice in the commercial space industry. Is the risk always going to be worth the reward, I guess is the question I’m asking is, are we going to see people that are still willing to put it all on the line, just for that one idea that does actually come to fruition?

Ethan Batraski
I think the answer has to be yes, because, because what they’re doing is incredibly hard, and if they can pull it off, it unlocks an incredible capability that allows them to go either disaggregate an existing market or move dollars over. If you think about space, space the inverse of building a SaaS or software company. SaaS software company is very easy to start, but as you scale it becomes very expensive, because the sales and marketing costs have to linearly grow with your revenue in order to continue to drive capacity. Space is the opposite. It’s very expensive up front, high capex, often high OpEx. But once you’re actually in market, the market is likely to buy as much as you can produce, and the sales and marketing costs are very low. And so you could actually see space companies generate software like margins in the long run because of how much market demand and predictability there is. And you can see these companies potentially be high multiple companies and high growth companies because of the amount of demand and low cost it is to go acquire that demand. And so I think there’s a lot of interesting dynamics that allow for long term, durable businesses. But, yeah it is akin to putting all your eggs in a single movie premiere and hope that it doesn’t bomb. And that is really tough, but frankly, it takes a very particular type of grit for a founder to go build a space company. And those founders are some of the most impressive and industrial people I know. I hope they continue to do so.

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Eric White
And much like the movie industry, it is hard to know what is going to work and what is not going to work. What sort of metrics do you take into consideration? Any one of the founders of those companies that you just mentioned could probably talk me into putting my life savings into, but I’m not in the venture capital business, and that’s what makes a venture capitalist successful. What do you take into consideration when trying to look for new investment opportunities?

Ethan Batraski
It tends to be for us a very simple lens. And getting to simple is hard. We look for, one, is this one of the top 10 teams in the world to go solve this particular problem? Do they have the gravity to compel the customer base to want to follow them and commit to them before they’ve even proven that their product or service can do with what they’ve promised it can do? And can they recruit the top people in the world around them to go do this thing. Because ultimately, companies are only as good as the people that comprise them. Two, from a market standpoint, is, are they going after a market problem that is not only large, but the customer feels like this problem is a hard wire, top three problem for them? And so whether it’s even a launch company. It is a segment of the market that is painfully underserved, that needs some capability that don’t get access today, whether it’s rapid launch capability or rapid deployment, or a certain capacity size, or into a certain orbit or certain ISP in order to get into deep space. Is there a unique value prop that the market doesn’t have today? And then third, are they able to offer this at a with a set of economics that are just unfair to the market where they now have deep pricing power. And without the three of those together, you often are going against a market either is too small, not ready to buy, or buy a team that can’t fully capture it.

When we think about one of the investments we made early on was astronos, and I mentioned them earlier they build Microsoft in geo. And everyone’s very clear list that providing internet communication was one of the most important human rights that need to be served, and that there were 3 billion online users at that moment, and that 4 billion new users were going to join the internet over the next 10 years, and those are going to be from remote destinations from emerging markets, where they didn’t have that core infrastructure that exists today in the US and in developed nations. And so they relied on satellite. But that’s satellite capacity was based on large geo satellites that didn’t have a lot of flexibility that were very expensive. Yet, the demand, was outstripping capacity by a logarithm amount. And so how can we go capture that in a way that provides economic pricing power? Well, being able to bring it down by 25, and being able to bring the cost down, you could rapidly deploy, and in any given country can go deploy their own satellite in order to enable connectivity or dedicate internet without any infrastructure change. That was a very interesting value prop, because that enabled an entire market that the starlinks of the world were going were were not supporting, because they were pricing them out. And then this was founded by one of the best teams that you could imagine to go do this thing. And so for us that was a no brainer. So those are the kind of the dynamics that we think about.

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