Time to Raise Money for a Space Startup?

Lately, I have been getting questions from space entrepreneurs about a thawing Angel/Venture market and what that means for New Space firms seeking investment capital. Mark Suster over at Both Sides of the Table wrote a great post on:

8 Questions to Help Decide if You Should be Raising Money Now.

 Below are Mark’s eight questions with my commentary intermixed. Note, Mark is a Silicon Valley investor so many of his examples are focused in that area – still a lot to glean for New Space.


1. Are you in the “lean” phase?

Are you trying to figure out if your idea is an incremental improvement or a game-changer – if so, keep your capital needs small. Once you have proven (even if just to yourself) the world-changing worthiness of your idea than gather some investment money and ramp up capital use. When seeking seed funding – usually look for $500K to $1M initially from outside investors.

2. How much capital do I need to run my business effectively right now?

A good rule of thumb: an entrepreneur needs capital for 18 months of operations. I appreciated this nugget. As an entrepreneur, eighteen months feels like an eternity, but I should be striving for this!

3. How much dilution am I going to have to take now?

Expect 25-33% dilution per round. What does this mean? Each round your percentage ownership will be “diluted” as investors take a share of the value of the company. Here is a quick example:

An investor offers The founder of Acme Rockets a pre-money valuation of $2M for a $1M investment in Acme Rockets. Should Acme Rockets agree? Before the investment Acme Rockets owned 100% of company. If they accept the investment terms, the Acme Rockets founder’s ownership percentage will be diluted to 67%, a 33 percentage point reduction. Worth it? Maybe.

How about a $2M investment at $2M pre-money? 50% dilution in a single round. Probably not.

4. How many more rounds of capital will I need & what is my expected total future dilution?

Here is the spreadsheet (containing the table above) where I provide an interactive example of Founder Dilution with each Round of additional Investment (overly simplistic to make the point).  Fun to play with.

5. What things could I do with capital today that might improve my market positioning?

I hear the argument which goes – wait to raise capital until you can get a more favorable valuation. For New Space companies like Acme Rockets, this means winning government contracts, building demos, increasing customers for an NLV upper stage which is not yet built – anything to mature their technology.

But there is an opportunity cost in waiting. What could Acme Rockets do now with $1M dollars to grow their company? This is “make-the-pie-bigger-and-don’t-care-so-much-about-your-slice-of-it” argument.

6. What things might competitors do if I don’t raise capital that might impact me in the interim period?

The biggest nugget in this section was the psychological effect investors feel if another firm in an industry announces a large funding round. Who wants to invest in NLV upper stages from Acme Rockets after its competitor just took the oxygen out of the room by announcing a $10M investment to build a similar NLV upper stage? Raise capital so your competitor can’t – I agree with this in the short term, but I would rather focus on wowing customers than fearing competitors.

7. What might future markets hold in terms of valuations?

Try raising money right after September 11, 2001. When is the next market dip?

8. What might future markets hold in terms of ability to raise capital?

Mark ends by reminding us that 8 Questions to ask are nice, but don’t over think this, sometimes you take the deal because the money is available…and might not be tomorrow.

Thanks Mark for a great 8-Question post. Worth reading it in Mark's words over at Both Sides of the Table.  Space Entrepreneurs, I hope it helps.

New Venture Capital for New Space?

Last week the White House began a push aimed at assisting entrepreneurs in high-growth industries. The Startup America Partnership seeks to connect entrepreneurs with the capital and expertise of large corporate/non-profit organizations - taking what works and doing more of it.

“Our nation once again looks to these creative risk-takers to unleash the next wave of American innovation.”

Bureaucracy tends to favor the large (I hate the phrase, “too big to fail”).  So it is nice to see this focus on the entrepreneur.  Over 24 firms have joined the President in committing dollars or expertise to the Startup America Partnership:

• Intel contributed $200M (over which period of time?)
• IBM contributed $150M for 2011
• HP contributed $4M for 2011 (come on HP, you can do better!)
• Facebook is sponsoring gatherings for startups (part VC pitch/part mentorship)
• The Kauffman Foundation and AOL’s founder, Steve Case, have joined forces to help lead the Startup America Partnership (in college I worked closely with the Kauffman Foundation through an organization called SIFE – they are good people doing good things)

I know Fred Wilson and other Tech Venture Capitalists are excited about this initiative from the President, but New Space should push to access these funds and expertise as well.  Maybe I missed it, but I have not seen much New Space blog traffic about the President's announcment.  Yesterday, Chuck Black spoke about the growth of the Venture Capital within NewSpace. Capital does not fix all problems within New Space, but access to more capital will surely help the industry grow faster.

Through the Startup America Partnership, the President is targeting high growth businesses/industries. The Futron Corporation reported last week, commercial space is growing at 10% per year – 10% is high growth for an industry!

The Startup Partnership is focusing on:

• Acceleration of Scale: turning small companies and products into big
• Education: C Suite experience for free or at a discount
• Commercialization: working with universities to turn their innovations into products

I hope to see New Space firms in need of capital/expertise taking advantage of the opportunity. New Space is definitely a part of the Nation’s “solution for the future”.

Here is a one minute video from Steve Case introducing the Startup America Partnership:

14 Years Later…NEAP 2.0?

In late Oct-2010, I attended The Space Studies Institute’s Space Manufacturing Conference 14. Session Two was on Extraterrestrial Prospecting. Here is the video of the presentations.


The session included presentations by:

• Prof. Michael A’Hearn, University of Maryland
• Brad Blair, Space Studies Institute
• Prof. Leslie Gertsch, University of Missouri-Rolla
• Mark Sonter, Asteroid Enterprises Pty Ltd
• Dr. Faith Vilas, University of Arizona

A question was raised during panel discussions that went something like this:

“If a private venture was to launch a survey mission to nearby NEO’s, what scientific equipment would you recommend be included? What asteroid data would you find most valuable?”

I confirmed with Dr. Vilas this week over email, at the top of her list would be:

1. Spectroscopic UV
2. A device to determine object mass
3. A device to learn more about the object’s internal structure – perhaps ground penetrating radar

When thinking about mass and power budgets, maybe these are the right scientific instruments, maybe not. But this question got me thinking about SpaceDev’s never-launched NEAP Prospector mission.

How have the economics of the mission changed over the last 14 years?

NEAP was the brain child of the late Jim Benson at SpaceDev (now Sierra Nevada). This project, first announced in 1997, was going to launch a commercial smallsat mission to an Near Earth Object:

• Cost: Under $40M
• Mass: 200kg
• Destination: 1982 DB Nereus – could be reached from LEO for a delta-v of 4,979m/s
• Launch: Secondary Payload on an Atlas V.
• Instruments: alpha proton X-ray spectrometer to determine the elemental composition of the asteroid surface, leaving three canisters available to carry customer experiments or nano-rovers.  Another source described the instruments as: a multi-band camera for navigation and asteroid imaging, a neutron spectrometer to search for water vapor, and an x-ray proton spectrometer to map the elemental abundance of the surface.
• Benson intended to land a probe on the asteroid and claim 1982 DB Nereus as a SpaceDev asset. I am not sure if he ever intended SpaceDev to mine Nereus. I personally feel he was more interested in pushing the issue of space property rights.
• SpaceDev announced Nereus was worth approximately $1 Trillion.
• Benson intended to sell the mission data on a subscription basis to scientists on earth and sell surplus instrumentation space on the NEAP spacecraft to a few lucky scientists.

NEAP 2.0?

Could a superior NEAP mission be put together today…a NEAP Prospector 2.0? If so what would it look like and what has changed since 1997?

• Since Nereus was chosen in 1997 as the destination of the original NEAP mission, 287 NEO’s have been discovered which require less delta-v to reach than Nereus did. Although Nereus was chosen for reasons beyond just low delta-v requirements, surely one of the 287 new NEO’s would make an enticing target. For example, Asteroid Provisional Designation: 2006 RH120 can be reached from LEO for a delta-v of only 3,820m/s (23% less delta-v than 1982 DB Nereus)
• Falcon 1e could dual manifest a NEAP 2.0 mission for about $5M. I am not sure what the cost is to launch 200kg as a secondary payload on an Atlas V, but even if it were free or comparably priced to a Falcon 1e, the timing is key for such a mission to work (NEO’s won’t wait as they pass by). So being able to launch on a vehicle (like the Falcon 1e) where you have much more say in the launch window would enhance the chance of mission success and reduce the need to spend extended time in LEO (which is how you would avoid this risk if launching on an Atlas V as a secondary payload).
• NASA’s ILDD announcement to purchase lunar data from GLXP teams provides an intriguing precedent. Would NASA be interested in a similar arrangement on such an Asteroid mission.
• Since 1997, smallsats and CubeSats have gained traction, acceptance, and increased capability.
• NBC paid $600M for the US broadcast rights to the 2010 Winter Olympics with billions more committed for the coming years. I know that a private asteroid landing is not the Olympics. But there may be serious money available for the media/advertising rights for such a commercial mission. Here is one fun advertising idea I cannot take credit for (but I can’t remember who I should give credit to). Would Nike pay for an image from the surface of an asteroid of a footprint (similar to the Apollo footprint) with a Nike Swish embedded in it? I could easily see that image on the front page of the USA Today announcing commercial exploration has arrived. If Lebron is worth $90M to Nike, surely such an image is worth a good chunk of $40M?!
• SpaceDev (Now Sierra Nevada) is not the startup it was in 1997. They can deliver more capable products than they could fourteen years ago. After a series of acquisitions and a ridiculously successful track record, I would love to see SpaceDev/Sierra Nevada involved in any NEAP 2.0 mission, even if only as a subcontractor…for poetic and Benson-honoring reasons if for nothing else.

A few Business thoughts about NEAP 2.0:

• For you philanthrocapitalists out there, a NEAP 2.0 mission would offer some significant bragging rights among your billionaire buddies. Even if you didn’t pay for all of the mission's $40M price tag (to keep with the 1997 estimate for mission cost), $5-10M invested and a few key press releases to get the momentum going could make such a mission viable.
• For the mission, you may want to consider a “multi-asteroid” focus (unlike NEAP 1) to increase the value of any data purchase/subscription scheme – but I will let the engineers debate that point. More asteroid…more fuel…bigger tanks…more initial mass…more cost…
• I still like the “land-on-it-and-claim-it" strategy for media reasons alone. And it would definitely force the issue of space property rights.
• I need to do more research into subscription models and how well they work when selling scientific data. If any of you have thoughts/links on this point…
• I still like the idea of opening up the payload manifest to include data gathering equipment provided by other Space Agencies or universities. This is a cheap way to get others to pay for equipment that you would otherwise have to develop yourself. The sticky issue, however, would be the data rights to the information generated by a particular agency or university's onboard equipment. Who owns that data? Can you still sell that data? Would they be allowed to write their paper announcing discoveries found as a result of their on-board instrument? Again subscription issues.

A commercial asteroid mission could be performed today. No new technology is needed. We have the smallsat buses. Many (all?) of these instruments have been used for missions in the past (well, maybe not ground penetrating radar). Cheap launch opportunities are available. By the time you read this, even more NEOs may have been found. Philanthrocapitalists have already invested in suborbital and GLXP, why not NEAP 2.0?

What do you think? How is today’s environment either more or less friendly to a NEAP Prospector 2.0 mission? Fourteen years goes by quickly. Let’s not wait another fourteen.

NanoSat Launch Vehicles: Vertical vs.Horizontal Integration

I have been talking a lot about NanoSat Launch Vehicles lately.

We spoke about the last mile problem: how to use an NLV to deliver “just in time” supplies to orbital stations.  We spoke of a variable pricing model that would charge NLV customers commensurate to what they could pay (and increase launch demand in the process).

In all of the excitement over SpaceX’s Tremendous achievement yesterday, it was easy to miss Altius Space Machine’s announcement about their recent contract to develop NanoSat Launch Vehicle tanks. Quoting from ASM’s announcement,

“I’ll be using this tank to validate some of the low-cost, lightweight manufacturing techniques that could be used for other low-pressure tanks, like pump-fed propellant tanks for suborbital vehicles or nanosat launchers. Once the development of this system is completed, it should provide a low-cost, highly capable propulsion system for high-end nanosats and microsats.”

SpaceX is vertically integrated and associates much their success to this approach – developing all aspects of their product in-house (or limiting external component suppliers).

As NASA’s NLV Challenge heats up, NLV Challenge teams are going to be faced with the same decision: do they develop all components of their NanoSat Launch Vehicle in-house or utilize suppliers like Altius Space Machines, Team Phoenicia, and others to create a vehicle capable of winning the prize.

Over the coming months I expect to see NLV Challenge teams fall into two groups:

1. Vertically Integrated Teams: Some will follow the SpaceX model – building every component internally, controlling the supply chain. Advantages of this approach are ease of integration and schedule control. Disadvantages of this approach: Cost growth with low production volumes (perhaps cost savings with high volumes, but this would case specific), and the opportunity cost of developing components that could be purchased by others. Opportunity Cost is what you could have done with your time or money if you weren’t vertically integrated (and in such a competition, “first to market” may win it all).
2. Horizontally Integrated Teams: Others will see an advantage of utilizing hardware developed by others. Since I expect the NLV Challenge winner will utilize several vehicle stages (Paul Breed is considering a three stage nanosat launcher), this group of competitors will outsource some stages (or components of stages) and build other stages in-house. With Horizontal Integration, the Advantages and Disadvantages are reversed. Advantages: Using components built by suppliers may get you to market faster/cheaper, and may help you raise angel funding if you can leverage pre-existing supplier hardware when pitching to investors.  Disadvantages: Integration and Schedule risk (which could be a HUGE risk for any NLV Challenge competitor)!

Jon Goff, founder of Altius Space Machines, will be on the Space Show on Monday, Dec 13. I will be listening for hints of what lightweight systems Altius may be considering that could help those considering the horizontal integration approach.

Disclaimer: I have become friends with Jon Goff from his blog, Selenian Boondocks. I have re-read this post and think the content is free of too much bias, but you be the judge.  Regardless, it should be a good Space Show interview.  Check out the Space Show's archives after Dec 13 if you can't listen live.

When It’s Darkest Men See the Stars

"When It’s Darkest Men See the Stars."  ~Ralph Waldo Emerson

Steve Blank is optimistic entrepreneurs have created the, "dawn of a new era for a new American economy built on entrepreneurship and innovation."  His excellent post focuses on why startups have fundamentally changed and are changing the business landscape by serving as the process incubator for the business world. 

Although Steve uses Silicon Valley for his examples, New Space can learn from and be encouraged by his perspective.  Read Steve's post for some rational optimism and insight on the coming decade of the entrepreneur.  I especially like this (long) quote from Steve (emphasis mine):

When James Watt started the industrial revolution with the steam engine in 1775 no one said, “This is the day everything changes.” When Karl Benz drove around Mannheim in 1885, no one said, “There will be 500 million of these driving around in a century.” And certainly in 1958 when Noyce and Kilby invented the integrated circuit, the idea of a quintillion (10 to the 18th) transistors being produced each year seemed ludicrous. 

Yet it’s possible that we’ll look back to this decade as the beginning of our own revolution. We may remember this as the time when scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before. When the speed of how businesses operated changed forever. As the time when we reinvented the American economy and our Gross Domestic Product began to take off and the U.S. and the world reached a level of wealth never seen before.

It may be the dawn of a new era for a new American economy built on entrepreneurship and innovation.  One that our children will look back on and marvel that when it was the darkest, we saw the stars.

Altius Space Machines

I see today, Jonathan Goff announced the creation of the latest new space company, Altius Space Machines. Jon was one of the founding members of Masten Space Systems, winner of NASA’s Lunar Lander Challenge and Masten’s lead propulsion engineer. Now Mr. Goff is leaving Masten to start his own aerospace company.  Masten’s blog highlights their new talent they hired both to replace recent departures and arm the company with the talent to climb to 100KM and beyond.


After reading of these developments, here are a few thoughts:

1. I can’t wait to read more details of what Jon Goff has planned for Altius Space Machines. Jon’s blog, Selenian Boondocks, has long been a source for innovative space commercialization ideas. I look forward to Jon implementing many of his innovative ideas at his new company.
2. I mentioned in a past post how much the new space industry, as a whole, gains by having an increase in the total number of firms. I have described how an increase in the number of new space firms should increase liquidity opportunities for new space investors. In Jon Goff and Altius Space Machines we see a second industry advantage for an increased number of firms – experience in the employee base for the industry. Those employees that were on Masten’s winning team – some are still with Masten (inspiring the next generation of engineers), some are now with Armadillo, and some are starting new firms - all have leveraged their LLC experience for the future benefit of the industry. I love it.

Good Luck Masten.  Good Luck ASM.

5 out of 100 - Deal with It!

If you invested in 100 start-up companies, how many would you expect to be “winners”?  A recent study by Right Side Capital Management consolidated seven recent Angel Investment reports to ask that very question. RSCM's consolidation shows interesting trends:

• Only 5-10% of a portfolio’s investments provided the majority of the returns (most of the remaining firms were a total loss) – 5% winners/95% losers.
• Average IRR (Internal Rate of Return) was 27% across the portfolios (in spite of the fact 95% of companies within the portfolio were losers)
• Portfolio size: at least 100 investments to mitigate risk.

What about space firms? So if you were managing a Space Angel Fund, could you find 100 quality space firms in which to invest? In an earlier post, I encouraged young space firms to develop their companies less like defense contractors and more like Silicon Valley startups by establishing separate companies for each product/service.

For example, New Space Ventures (NSV) invested $$ millions in their micro-launch vehicle system and a year ago also started work on low-cost TPS solutions. With the micro launcher now complete and flying successfully, NSV has attracted several interested buyers for the technology. NSV partitioned the firm into two separate companies, one continuing to pursue micro launch vehicles and one investing in TPS solutions. NSV eventually sold one company and used the proceeds to fund TPS research with additional cash in reserve.

This multi-company approach will grow investment/liquidity opportunities in the industry, but is such an approach really feasible for firms so heavily influenced by their contracting cousins?

Attractiveness:

• Liquidity events generate cash for the business selling allowing them to reinvest in future projects (providing an alternative to additional outside investments or loans).
• More frequent liquidity events are good for investors, and as such make the industry as a whole more attractive.
• More interest from investors encourages entrepreneurs to start companies within the industry further enhancing a virtuous cycle.

Challenges:

• This approach assumes firms have a second product/market they wish to pursue which they believe attractive enough to forfeit a cash payout to their investors and instead reinvest their funds in a subsequent effort (doubling down effectively)
• With many young space firms under-capitalized, they supplement their income through Government contracting. Such an income stream delays the development of even an initial product/service because through contracting you are largely developing the Government’s toys and not your own. 
• Do date, the value of young space companies is arguably the experience and knowledge base of its people and less in company products or IP. If this is true, buyers will want to keep the core team intact when making a purchase. Internet startups often begin this way. Many of Google’s acquisitions over the last few years are companies with an interesting technology demonstrator and a small core team of employees. Google bought the companies’ potential – the product potential and people potential. For example, if a suborbital provider like Masten or Armadillo were purchased right now by Boeing or Northrop Grumman, I assume these industry giants would want to purchase both the IP and the engineers behind the IP. Both firms have demonstrated interested technology, but their real value (since none has yet reached 100KM) is in the risk-taking innovators at both firms. I hope to see this “people-focus” change over the coming year as suborbital firms reach 100KM and begin the switch from R&D shop to operations. At this point, the IP becomes much more valuable as a stand-alone (and marketable) item.

To grow the industry, we need to help new space firms overcome these challenges:

• Guard against income streams too heavily polluted with Government contracting
• Cross-train to ensure the loss of a person to sale is not the loss of a company skill-set
• Develop more than one product line (perhaps not all at first) to prepare for the eventual sale of the company. 
• Start companies with the sale in mind (stop starting firms intending them to grow and prosper for a century!) – this is one of the top questions investors will ask: “where is my liquidity event?”

For the New Space Industry to grow, we need more firms in which to invest. Only 5-10% will be successful. Deal with it. And then start another company…

Angel Funding Better than VCs?

The Kauffman Foundation’s Paul Kedrosky reviewed the Inc. 500, a list of the fastest growing companies. Over the last ten years, 800 hundred firms made that list. 645 firms were either bootstrapped or angel-backed. Only 155 firms took VC money. 81% of the fastest growing companies on the planet did not take VC money! 

I spoke with Jay Turo, the CEO of Growthink, a investment banking firm located in Southern California.  He shared the matrix below (again from the Kauffman Foundation) on the danger of taking Venture Capital. A big take away from this matrix: a firm achieves the highest financial return by NOT taking VC money.

The data was self-reported (this may bias the data, although I am not sure which direction). Also, this data set includes a lot of deals done in the 1998-2000 period which may influence the data also.

But what does this mean for the Space Entrepreneur? Let’s look at the Suborbital industry as an example. Most of these young suborbital companies are bootstrapped or Angel-funded. But over the coming years, the profile of the industry will rise through mission success, the potential for increased NASA-funded projects, and increased speed to market of derivative products/services. As industry awareness grows, VC interest in the industry will undoubtedly increase. But do these young space firms want money from venture capital sources? But if not from the VC's, then from where?  With young software/Internet firms: a few hundred $K, a good idea, and frugal management can get you to market. As a general rule, Space entrepreneurs will need more capital to bring a product to market. I envision scenarios where these companies demonstrate a significant milestone like a flight to XX altitude. To go higher and faster, they need more capital for additional equipment and personnel. Will Angel funding be large enough for the needs of these growing firms? If angel funding is insufficient to reach the next major company milestone, the siren call of VCs will be alluring. If VC funding can taint a company (for reasons I am not going to get into today), what can be done to insulated the New Space industry from that siren call of VC funding while still promoting Industry growth?

Here are some potential solutions:

1. For a generic list of suggestions, see my overview post on the Seven Signs of a Growth Industry.  Read below for some specifics.
2. Increase Angel Activity. Again, let me recommend Angelsoft and its tools both for deal analyzing and its Angel groups to consolidate and focus funding toward worthy entrepreneurs. Growing the power of Angels will allow them to participate in larger subsequent funding rounds.  Although Angelsoft is not exclusively focused on the space industry, there are Angel groups using Angelsoft that are space focused.
3. Increase Mergers and Acquisitions. Between 2001 and April 2010, Google acquired 57 companies. These firms developed a technology that Google wanted and sold their company to the giant search engine. They started their companies with a sale in mind! They planned the liquidity event from the beginning. Aerospace firms built on winning Government contracts shy away from this model because their name recognition and Past Performance are key elements in them winning future business. But suborbital firms (and most of New Space in general) are a part of a new generation of aerospace startups leveraging more than Government research grants to close their business case. I do not hear Armadillo, Masten, or others positioning themselves for sale upon reaching 100KM. I would like to see more space firms abandon the assumption they are building a company that will last 100 years. Once you develop a successful product, sell the company or spin off the technology and then sell the spin-off company. The cash generated both bounds a firm’s need for outside capital (dampening the allure of VC-backed capital) and can serve as the seed funding for the entrepreneur’s next venture. And young space/defense companies ARE being acquired within the space industry. From 2001 through April 2010, General Dynamics acquired 31 firms, Northrop Grumman, 14 firms; Boeing, 13 firms; Raytheon, 13 firms. One of Northrop’s acquisitions was Scaled Composites.  Look for large aerospace firms to duplicate Northrop Grumman’s strategy over the coming years – buying the innovations of the young and risk tolerant.

Venture Capital is like fire, a very powerful tool allowing some firms to achieve the impossible and change the world. But it is fire...I just hate singed eyebrows.