Is another Sputnik Moment on the horizon? Can the privatization of spaceflight become self-sustaining? And profitable? These are underlying, unstated questions being ruminated by venture capitalists (VCs) poised to enter the next space race. The growth arena is hybrid communications across multiple, cost-effective platforms. On-demand content delivery is the mantra. Futurists proclaim that the era of personal satellites is just over the horizon. And for good reason. Your smart-phone. It has voice, data, camera, GPS, celestial navigation, solar, aurora, and scores of apps monitoring weather, glaciations, sea temperatures, real-time location of endangered specieswhatever your interest and its affordable. Add solar panels and you essentially have a small, hand-held satellite platform ready for innovationand funding.
According to NASA, the processing power in your cellular phone exceeds that of the current generation of smaller spacecraft. More importantly, cellular innovations portend new, disruptive technologies (patents) and apps in next-gen satellites. This is a convergent opportunity for inventors who have not explored the cosmos as a platform for funding. Plug-and-play design has enormous potential for space, as design costs plummet.
VCs compete to be ahead of the adoption curve, positioned for the next big thing, the next Sputnik Moment. Old Economy investment is staid. Nature abhors a vacuum. New, hip, technology-savvy money is flowing in to fill the void. The 2010 Innovation Report: Twelve Key Technology Areas and Their States of Innovation tracked patent activity in crucial high-technology arenas between 2009 and 2010. Of the 12 industry segments, aerospace technology posted the largest overall increase in patent activity, with a 25 percent increase. Key was the 108 percent increase of the space vehicles and satellite technology sub-sector.
Todays buzz is hosted payloads, a direct outgrowth of the 2010 U.S. National Space Policy white paper, which focuses on innovative, non-traditional means for space access and share-the-ride costs for government payloads aboard commercial spacecraft. Separately, the sometimes maligned Soyuz platform is perfectly positioned for the smaller satellites destined for the next generation of missions.
These three factorspatent activity, hosted payloads/reasonable cost for space access, and the availability of a proven, cost-effective launch platformbode well for VC firms interested in a technology play in the low-digit ($) millions range.
Yet venture is conflicted with the implications on global policy dialogue and debate, re: the convergence among radio-communication services, satellite orbits, and band use debated at WRC-12 and beyond. Legitimate VC questions revolve around the definition of bringing into use a satellite and whether satellite technology can keep pace with fast-moving terrestrial innovation. This confounds ventures ability to define your patent (or break-through nano-satellite design), market, cash need, and Exit Strategy in one long sentence. The answer, as we shall see below, is to define it for them.
While they may not be conversant with ITU recommendations on broader access to orbital slots and satellite frequencies, they do understand satellite broadband access services are the revenue engine within the satellite sector. VC firms are anxious to tap the estimated $9 billion in revenues by 2020, if analyst firm Northern Sky Research (NSR) is accurate in its assessment (satellite broadband Internet and VSAT networking to enterprises). But smaller, more focused investment avoids competition and presents the opportunity for capturing a niche, exploiting it, and exiting on a reasonable timetable.
Small is Beautiful
By definition, we mean low-mass (less than 1,000 kilos) satellites. Projections call for spacecraft in the 300-kilo range that can be deployed from design to detectors-on in less than two years. Lets examine factors that should interest VCs on the prowl:
– Risk-sharing: Euroconsult estimates some 75 percent of the roughly 350 small satellites launched or scheduled are penned by civilian and military agencies91 percent when academe is included. According to an aging study by Coopers & Lybrand, LLP, only 40 percent of growth companies have relationships with U.S. universities and only half of these functions properly. A poorly understood and rarely used entrepreneurial approach with VCs involves a college partnership and the qualification for jobs-creation and other State incentives where satellites are designed or manufactured. Risk-reduction and in-kind and actual cost sharing raises any projects visibility with venture.
Cutting-edge approaches to bleeding-edge global problems: Key advantages of small satellites are apparent when one factors in Earth observation, technology demonstration, and space science. These dominate roughly 80 percent of the application environment andheres the bait for venture moneythey often use off-the-shelf technologies with consumer ties. This is a bullet point for small satellite companies with fresh patents in their elevator pitches to investors. Access to new global markets: Micro-, nano-, and cubesats lower the bar-to-space access for developing nations. For venture firms interested in Asian or African markets, for a small investment they get access to decision leaders and the intelligencia, plus any lucrative national incentives. Essentially, they are buying a platform for other investments, with low risk and potential for high rewards.
The trend is their friend: The breadth of satellite missions will narrow from the mega- to the micro- as technology expands. DARPA is rethinking satellite size, cost, and design time, with an eye to smaller fractional spacecraft that are single-capability focused (imaging, communications, etc.) and capable of flying in formation with shared resources. Risk is reduced, as if one in the flock fails, others share the workload. Thisand the fact that most of these satellites are targeted for LEO slotsmean costs and technology access and competition are assured. Investors seek that Sputnik Moment, with reduced risk, cost controls, and an investment within the realm of three to seven years, rather than the current 15-year lifespan of bigger, more robust, complicated, and expensive satellite platforms. The current penalty for smaller satelliteslaunch costs per kilogramis a side issue when one considers bundling payloads and spreading the risk among several newer, smaller, more nimble players. Universities understand this and have developed consortial approaches. So must inventors and investors through bundling resources to acquire critical financial mass for launch. For those who remember the OSCAR 1 (Orbiting Satellite Carrying Amateur Radio) launch in 1961, the spring used to eject OSCAR from its host spacecraft cost an astounding $1.29 (yes, one dollar and twenty-nine cents). And that satellite was powered by three 18-volt mercury batteries. Occams Razor applies here: the simplest solution is the most plausible and the one that resonates with investors.
NASA is scheduled to demonstrate a new optical communications system (via laser) in 2016 which will allow the streaming of high-definition video from Mars in just minutes rather than the 90 minutes currently required for high-resolution images. One of the test modems apparently is ideal for communicating with small, low-powered satellites in LEO.
Its Not The Principle Of The Thing...Its The Money...
An advantage of a VC model for small satellite projects and apps is a lack of gross dependence upon governmental subsidies. These distort markets and act as bars-to-entry to all but the big players in the space sector. For entities already in the industry, with positive cash flow, accessing debt capital with highly-attractive rates is a real possibility. Equity capital for seed money and start-ups is scarce, using current approach models. Big deals, say, in the satellite broadband and TV capacity, are logical VC targets, particularly in the $100 million+ range as they provide investors flexibility in the Exit Strategy. But two things kill deals for the start-up: starvation strategies by venture investors which tie cash infusions (tranches) to do-or-die metrics and the small deal mentality that a few $ million invested cannot squeeze a reasonable profit for time and expertise required for due diligence and oversight. Plus, VCs realize that new market entrants face the dilemma of low-hanging fruit. Early-adopters in some of the key satellite service sectors (broadband, HD) have already been picked and devoured. This pushes new, disruptive technologies in these and allied fields into competition within a maturing (if not mature) strategic marketing environment. In terms of VC, these cash cows become sacred cows and a bar-to-entry to new competitors in their own right. Now new entrants are forced to present a profit profile rather than some more prosaic growth model. Its a game-changer in the dialogue with money, as the potential investor has to think dividends and a shorter timeline for Exit (IPO, buy-out, merger, etc.).
Open Innovation As The New and Improved Funding Paradigm
The path to securing capital should embrace a strategy known as open innovation, which changes the value proposition. Essentially, the hybrid model proposed here takes the disruptive technology of new, small satellite innovations and enters it into the mix of embracing external and internal ideas and market paths. One + 1 no longer equals 2. It equals at least 3 and likely some multiple of 3, depending upon the market force of the idea (e.g., email or social media). Iridium essentially has followed an open innovation model, with its creation of an ecosystem where different companies can work outside Iridiums ideation sphere. One potential outcome for an invention without a clear channel for funding might be licensing either independently or through a joint venture. A paradigm shift occurs from an R&D reduction to practice to a first-in marketing approach. More importantly, such projects no longer are seed or start-ups. The dialogue with venture capital changes to Early Stage, which is less hurdle-ridden. It also means that a satellite company can focus upon core competencies, leaving open the door to Eureka moments by developers within and without the palace walls.Cost-shifting to the private sector is key, as it re-structures the dialogue from Big Government to the Small Entrepreneur for the exploration and exploitation of space and removes the impediments of cost + and the Big Brother mentality.
The Truth About Venture Capital
The problem is not a lack of potential venture capital, but rather a lack of high-quality, viable deals in which to invest. The deals that VCs salivate over are not start-ups with disruptive technologies, but the three-to-five-year-old firm with profits that is poised for market dominance or a leveraged buyout. Even boutique venture firms are rarely interested in equity plays of less than $10 million. Start-ups and some cash-starved Early-stage companies see $1 million deals as windfalls no matter how much stock or patent rights they have to sacrifice. And contrary to conventional wisdom, most venture capital firms are not interested in controlling their portfolio of companies. They, unlike angel investors, bring more than cashthey bring expertise and a fresh perspective, known in the trade as smart money.
The Seven Deadly Sins of Pursuing Venture Capital
As the author pointed out in Funding Exploration, scientists and entrepreneurs often fall short in the quest for cash for relatively simple reasons:
1. Focus upon end results: successful requests for venture funding should center upon how the project helps a VC firm meet core aspects of its Mission, marketing goals. In other words, how does the project fit into a VCs portfolio of companies. This is the flaw of unenlightened self interest. Its not about you. Its about the investor, market dominance, and strong profits.
2. Creation of a concept for which no funding source is in sight (the mirage). People invest in people, not ideas. As you develop your patent, killer app, or business model solution for the small satellite arena, always keep in mind who your target funders might be.
3. Development of a project done better, elsewhere, for less money (reinventing the wheel). Before you get too excited, do a comprehensive patent search and read outside your field of design to see what is on the shelf or being marketed. R&D Magazine and NASA Briefs, as well as the medical device and automotive trades, are must-reads. With the move toward converging technologies, knowing the strategic competitive landscape globally is crucial.
4. Lack of appreciation for marketing concepts of new, improved, or free (Corporate Culture 101). Read Advertising Age, BrandWeek, and invest in a relatively new college textbook on marketing that addresses social media and the ever-decreasing product spiral, competition, and time-to-market. And know your competitors, intimately.
5. Misjudging the financial requirements (exploring the cosmos on a dollar-a-day). There is a difference between value and cost and you need to understand how to value your nascent company (and, no, valuation is not solely based on your financial statement).
6. A project too good to be passed up by funders (insidious narcissism). The Next Big Thing in your mind may be Yesterdays News. VCs still have wounds from the dot-com debacle.
7. A corporate Board comprised of experts and inventors rather than money-men and marketers (The Trojan Horse). Remember: if you had the money, you would make the rules and not look for an infusion (life vest or game-changer, depending upon your perspective) of cash. If you are an inventor, youll likely end up chief scientist, with a Board seat, stock, and part of the Exit Strategy. (Note: if you think youll buy-back the company or get venture to stay in beyond the agreed-upon time-frame, think again. Space Assets are edgy enough for VCs; their private view will probably be a buy-out by one of the Big Players, not an IPO.)
This Aint Rocket Science
It has been said that General Ike Eisenhower and the boys invaded Europe based upon a one-page summary. In the film industry, the cardinal rule is the reduction of a film synopsis to one sentence which provides plot, genre (High Noon meets 2001: A Space Odyssey), whos attached (meaning an actor signed), distribution deal (hopefully), and budget. If you cannibalize the above, you have a one-page document with a 25-word or so Executive Summary (the elevator pitchso named for the time it takes for the average elevator ride and a conversation with a busy investor), the absolute tightest of narratives that addresses SWOT (strengths, weaknesses, opportunities, threats) and how your small satellite project will deliver a return-on-investment (ROI) in x years at y rate, plusand this is crucialhow your deal fits within the broader VC portfolio of companies and a perfect fit in terms of investment size and risk. And remember this, if nothing else: VCs read the Executive Summary first, followed by your one-page attached briefest of financial statements, then the narrative. What is being described here is the top-line analysis of the bottom-line for investors. If they like this document, youll likely get the opportunity to provide the full-blown Business Plan for the ritualized due diligence by the VCs experts and the evisceration of your numbers and market assumptions by the meanest bastards on the planet (whose memories will survive in the names of your grandchildren, if you get the green light).
Having a salable Mission Statement is critical: Charles A. Rarick and John Vitton have linked a simple and cohesive Mission Statement with a 16.1 percent average return on stockholder equity for companies utilizing them. Cash is, to borrow a phrase, The Final Frontier. And in these economic times, cash is important and leveraging to the hilt can be suicidal.
Branding is key: establish with a simple, easy-to-recognize and remember name and logotype. Entrench it and create a bar-to-entrynamely make it difficult to poach, confuse, or ambush. Expand it into new territories and customer bases as part of a consistent, robust global strategy. Envision it as preeminent, pervasive, persuasive, and protectable. Your widget and company name need to be memorable to a VC team. It has to be tip-of-the-tongue. First impression may be the final impression.
A Venture Capital Cheat-Sheet
The author will have to go into a witness protection program once these get out, but here are the basics going through the minds of venture types about you and your small satellite project. Assumption: you have done your homework and your project falls within the VCs financial and portfolio goals and objectives.
1. Who are these people and what is their reputation within the scientific/engineering community? Who can we call within the satellite industry to vet these guys and see if this idea has any remote merit and possibility of success?
2. Do we know members of their Board? Any of our executives participating in their projects?
3. Is any of the science controversial? Are we prepared for robust debate?
4. Whos their bank? Financial situation? Audits? Annual Report?
5. Track record? Any problems on the financial or publicity side?
6. Whats the inventor, CEO like? Presentable? Not a Trekkie?
7. Who else is being solicited for investment? Friends or foes? Bank support?
8. How does this project meet our investment profile? Risk assessment? Market implications? Good fit for our portfolio of companies?
9. Do they understand our corporate culture? Whos their sponsor here?
10. Proposed project: innovative, positive, high profile? Core values?
11. How are we/they measuring success with this project? Are we on the same page?
12. How/when will outcomes be apparent? Will we have to micro-manage any of this? Are these guys financial adults? Are they prepared for us to inject a COO into their corporate structure?
13. Do we want to spread the risk around? Are there other venture companies who would help with this? Are there State incentives that they qualify for that we can tap to reduce our risk? Any free training of workforce available in-State? Will their team re-locate if necessary?
14. Patents. What does legal think on the risks/rewards of these intellectual properties? Are these guys litigious by nature?
A Cautionary Tale
Imagine your scientific endeavor in terms of a technology-driven S-curve. It generally takes a business initiative the same amount of time to develop and capture 10 percent of the market, as it does to move from that point to 90 percent on the continuum. Simply, a competitor enters with an equal product (or a superior one) and, in say, five years grabs 10 percent of the market and five years later your business finds itself out-flanked and out-of-business.
A Crib Sheet For The Small Satellite Inventor, Entrepreneur
Heres a Checklist of Key Questions for you to ask:
1. Who is the best person in your VC organization with whom to discuss our concept?
2. How many proposals in our sphere do you get annually and how many do you fund? (Try to find at least a one-in-five ratio.)
3. During the past three years, what was your average investment?
4. Are there any published/unpublished restrictions that we need to address?
5. Do you fund R&D or strictly implementation? (Trick question: usually VCs dont like to do both. R&D falls usually within the realm of Government, friends and family, or angel investors.)
6. Patents: who retains what and under what circumstances?
7. What is your perception of technology and funding trends in the satellite arena?
8. How does your peer review process work and timeline?
9. Will you fund a project that is also getting public or corporate $$$? Will you be there with cash for later round investments?
10. Is there a proposal in the pipeline that is similar to ours and under active consideration?
11. Exit strategy: your expectations and requirements. Are there exceptions?
12. Gut feeling: chance of investment?
Identifying a strategic source of funding is 70 percent of the battle. The Executive Summary, Business Plan, and Exit Strategy are 30 percent of the effort. The game-winners are in the numbers and the Executive Summary. On the numbers, best strategy is a best-medium-worst case approach, in columns. Show you understand the market and plan to dominate it. Monte Carlo Economic Theory says this: one-third of all projects make $, one-third break even, and one-third lose $.
Any SWOT analysis needs an edge-of-the-world vibe and hard-headed numbers for the near-Earth-orbit of cloistered boardrooms and investors for whom rocket science is a term of derision.
Satellites are on scrap heap of space exploration
Blaze-of-glory risk at launch
Terrestrial technologies move at speed-of-innovation; orbiting satellites age with proven technologies with costly redundancies
Long investment horizon
Threat of a million pieces of space junk lurking in the LEO environs
Geopolitical issues, access to space
Rules, regs, and restlessness of money
Communication wars of attritionwhich technology will the last man standing embrace?
Brand vs. wholesaler approachspecific brand attributes which lead to brand equity or wholesaler of access, etc.
You get the picture; then, theres this reality as shown in the accompanying chart:
If we apply 2010 VC investment across a host of industries (pharmaceuticals, automotive, etc.), this chart profiles a reasonable expectation of what small satellite companies might expect. Blue = percent Deals; Red = percent $. Source: chart created from PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report; DataThomson Reuters.
The meaning is simple: position your efforts to fall within the Early Stage portion of this graph. An open innovation approach, plus inclusion of a university partner, and qualification for State incentives is a paradigm shift from the inventor, hat-in-hand, begging for money. Its all about bringing cash or in-kind to the table through partnership and incentives, understanding the venture portfolio of companies, and having a patent/Killer app that performs well in terms of risk-reward and falls dead center within the VC firms available capital.
Preparing For The Raise
1. Get your patent(s) underway and reduce-to-practice, even if initially through virtual prototyping, as is done in the aerospace and automotive communities. This will probably be accomplished via cash infusions from friends and family or angel investors. Put up some of your own money. Sweat equity has no value; skin-in-the-game does. I cashed out my 401-K for this prototype has juice with potential investors.
2. Spend three days streamlining a three-page top-line analysis that encompasses financials, Executive Summary, and a tight narrative. Do the numbers first; Executive Summary that describes the small sat project, market dominance, cash needed, risk-reward, and Exit Strategy; then, finally, tight narrative with market, note on competitors, SWOT summary, use-of-funds, timeline for Exit, and bios for principals. Get it vetted by an attorney who knows the sector and your CPA. Use this to troll for VCs.
3. Simultaneously, create a sharp, crisp Business Plan. Maximum 20-page narrative, topped with Executive Summary, and five pages of financials. Key personnel bios: 250 words each, detailing stellar track records + professional photos. Remember, people invest in people, not ideas. A CEO with five successful start-ups that ended profitably is the real deal for venture. The mad scientist-inventor is fine, but not the photo with a Beer: its not just for breakfast anymore T-shirt.
4. Invest in a serious logotype and fine, tactile business stationery and business cards. Elegant, simple, professional. Success has its own feel.
4. Develop a plan of attack, assuming a target-rich environment of potential investors. Make the rounds at the Venture Capital Conferences, research Private Investor Networks (PINs), andif you choose to look to Deal Brokers, well, caveat emptor. Expect an up-front consulting fee (usually to revamp the Business Plan) + 5 percent of money raised (either on an exclusive or non-exclusive basis) paid at escrow of the first tranch + reasonable expenses and, say, 2 percent of the company non-dilutable until IPO, buy-out, merger, etc.
Finally, a word from the late Arthur C. Clarke, The Exploration of Space, 1951:
If we have learned one thing from the history of invention and discovery, it is that, in the long runand often in the short onethe most daring prophecies seem laughably conservative.
About the author
Wm. F. Vartorella, Ph.D., C.B.C., is Executive Vice-President of Craig and Vartorella International, Inc., a Camden, SC-based strategic research and marketing firm active globally in disruptive, emerging technologies and green, sustainable communications solutions. In 2010, he organized FlyVenusCom, a worldwide network of ham radio experimenteers, scientists, and CW operators working in close coordination with the Japanese CubeSat Venus communications probe, UNITEC-1, to try to receive and decode very weak and low bit-rate signals from the failing satellite.
The author of more than 100 scholarly and professional articles and papers, Bills research has ranged from the costs affiliated with small Mars probe missions and the private sector to satellite imaging of historic corridors, re: historic preservation, and the role of venture capital in the next generation of electric vehicles. He received grant funding to study satellite communications and transnational issues in developing countries and, separately, helped build-out a broadcast quality television studio with government surplus gear for less than $10,000. Bill holds both commercial and amateur FCC licenses. The co-author of Funding Explorationthe standard reference text on securing non-governmental support for science and engineering, Vartorellas work has appeared in The Journal of Human Performance in Extreme Environments, Advertising Age, Educational & Industrial Television, and QST, as well as professional and trade publications related to motorsports sponsorships, Hollywood film finance, and fundraising. Bills firm is an associate sponsor of an experimental, open-wheel electric racecar.
He belongs to the IEEE Vehicular Technology Society and is a Fellow of both the Royal Geographical Society and The Explorers Club. He is a frequent speaker at professional conferences, including those held at the University of Cambridge, The Smithsonian Institution, and in the rainforest of Guyana. Vartorella has trained more than 7,500 executives worldwide skills related to board development, securing funding from non-governmental and venture capital sources. He frequently pens or critiques Business Plans for Start-ups and Early Stage companies seeking venture capital. He can be reached at email@example.com.