How Space Companies Lose Money
“Siri, file this under the ‘pretty obvious if you think about it’ column”
This week, we’re back to talking about space.
I’m writing this for anyone on the outside who wants to better understand the space industry. If you’ve seen the news and are thinking about getting into the game, as a founder or as an investor, read on because I’m talking to you. I hope you’re listening.
Everyone wants to get into space these days. IBM is launching CubeSats. Azure is supporting the cloud through satellites. And now, even Woz is throwing his hat in the ring with a space debris removal company.
Space today is where Machine Learning was in 2012, or Cryptocurrencies in 2017-18. There’s been a technological paradigm shift, interest is building, and the value of space as an industry is right on the cusp of exploding. Cheaper launch services have made it easier than ever to reach orbit, with costs having been slashed to less than 1/20th of what it used to be by everyone’s new darling, SpaceX.
So why is space still a risky business for anyone without substantial capital and the ability to take big financial hits? Because space companies don’t make money if they aren’t in space.
In a nutshell:
A lot of space companies have intrinsically tied their value propositions to space activity; and
Because of that, space companies are especially vulnerable to operational and logistical delays.
Space companies therefore necessitate a higher degree of risk tolerance. In other words, if you want to get into the space game, you gotta have The Right Stuff™.
Space is the most important industry that we have. It touches all aspects of our modern lives, and we are long past the point where we can afford to do without it. And yet, too few of us understand it as well as we should.
Get to Space or Go Bust
We’ll start with one of my favourite stories of a dumb question I was asked by an institutional investor for a government-backed venture firm. This person had never been in tech, had never founded a company, and didn’t even have any private sector VC experience. They were a civil servant through and through, and somehow finagled their way to the top of this quasi-government organisation which made investments with public funds.
At the time, I was pitching for a satellite thruster which only worked in microgravity. In fact, it relied on microgravity and the Earth’s magnetic field to function.
This investor (I hesitate to call them a VC) asked, “That’s great and all, but does it have any uses on Earth?”
This person actually asked me whether a SATELLITE THRUSTER had any uses on Earth, as if we could strap the damned thing to the back of a boat and use it to go on a little cruise.
That question is actually emblematic of a major issue with the viability of space companies. So many companies intrinsically tie their value propositions with their ability to deliver services which are only possible if they have assets in space.
In other words, space companies cannot make money unless they are in space.
Satellite data cannot be generated unless there are satellites in orbit to generate them, which is kind of a no-brainer when you say it out loud, but long lead times (discussed later) mean that it will take a while before there is cash flow of any sort.
You won’t get scrappy teams just pushing something within a couple of months and starting to gather paying users here. Much like with biotech, which is probably the most analogous deeptech industry, a ton of research goes into the tech well before the word ‘commercialisation’ floats around.
And then there’s the actual capital intensity of commercial space activity.
By far, the most lucrative sector of satellite services is telecommunications, which was valued in 2020 at US$123b. The issue with telecoms is that in order to maintain truly global connectivity, you need to have global satellite coverage, meaning you need enough satellites to cover all the important bits of Earth at any one time.
If you go to a higher altitude, you need fewer satellites but your connection gets worse. Go lower and vice versa, and even then there are technological and safety limits for how low you can go. It’s not enough to just send up one satellite (which is already pretty expensive by itself) - you need a constellation.
Just look at Starlink. Their initial batch was 12,000 sats, but now they’re looking at an expansion to a fleet of 30,000 more, distributed across various altitudes. At scale, Starlink might be able to bring the cost of building each satellite down to US$250k, although the current actual price-per-unit isn’t publicly available
So yeah, it’s expensive.
Okay, so maybe you don’t want to do telecommunications. The other big market is Earth observation and remote sensing. You can get away with a smaller constellation size, but at minimum you’ll still need a handful. Planet’s Pelican, the smallest operational constellation I’ve encountered comprises 4 satellites, is effectively experimental. And if you want to provide real-time data, you need enough satellites in space such that you can maintain coverage. In fact you might find that sending up several at one go nets you a better price on your rideshare per unit, so it’s going to be difficult to escape a hefty price tag either way.
The point is that space activity is expensive at scale, but without it, space companies won’t generate any revenue. Expenditure is therefore inelastic in that it is unavoidable.
Now, I know you’re thinking of velcro, teflon, and all the other great examples of technology transfer that came out of the Space Race. Those could be ways to generate revenue in the meantime. I have no doubt that the investor I spoke about above was thinking the same thing. But as my example shows, there are limits to technology transfer.
Truly revolutionary space technology, anything from nuclear-powered thrusters to enable deep-space missions to the 3D-printing of certain fragile organs is only possible in space. Only funding innovations that have an immediate possibility of tech transfer before the commercialisation of the space-based services for which they were designed in the first place is short-sighted and foolish. For entrepreneurs to only pursue those kinds of technologies is worse.
So the intrinsic connection between space activity and the ability of space companies to generate revenue isn’t going away. What else does that mean?
Planning (too) far into the future
The flip side of space companies only being able to make money in space is that for every day they aren’t in space, they lose money. For satellites, the average lead time for a commercial mission launch is anywhere between 18 to 36 months. Consider these three things:
How insane is it that, at the outset, you’ll have to wait potentially over a year and a half to launch your v1 product;
That is a variable period of 18 months; and
For that 18 to 36 months, the space company is constantly burning through money while not generating any revenue.
Not to mention, this first mission (and subsequent few) will likely be part of your prototyping phase, since you have to flight qualify all of your tech before you can deploy it en masse as part of a commercial constellation.
So what’s causing that long lead time? Well, broadly speaking, it includes:
Designing and building the satellite platform and testing it if any components are novel (i.e. have no flight heritage)
Contracting with the launch provider and exchanging multiple rounds of info for safety verification and compliance
Engaging a ground station service provider so that you can maintain telemetry and control
(Optionally) engaging a space situational awareness provider to track your satellite
Getting launch and/or operating licenses from your government
Getting a separate license to use radio frequencies from your government, who then has to take your application and pass it on to the International Telecommunications Union, who can take anywhere between 1.5 to 4 months at minimum to approve it
Going back to your launch provider with all your paperwork sorted
By the way have I mentioned you’re supposed to be running your company while this is ongoing
If you’re sending your satellite to another country for launch, you also have to get an export license from your government
Oh also don’t forget you need funding so unless you have a fat bank account, time to go raise another round of venture capital
Okay 3 months left, time to begin your systems readiness review and ensure all your artefacts are qualified and prepped. If your core tech still isn’t ready, you’d better have an exact dummy replica of same dimension and weight ready to be integrated into the rocket because otherwise you’ll ruin the weight balance
Time to figure out your logistics and supply-chain because you’ll need to get your sat to the launch provider and have it integrated
You should probably figure out your customer by the way because who are you selling this data too? What’s that? This is just an orbital test? Oh well at least there’s more time to figure out your customer. Bad news is that you have to go through this thing again
And launch day! Congratulations, you have hardware in orbit. Holy shit, that’s incredible. But now you have to operate it, gather all necessary test data, and ensure that it’s safely disposed of in a reasonable timeframe
That’s a lot of steps, as you can tell, so delays at any stage have severe knock-on effects. The closer you get to the actual launch window, the tighter timelines become, and the margin of error shrinks proportionately. Oh, and this doesn’t include the possible years of R&D that probably preceded this entire process. No one just wakes up one day and has an idea for a revolutionary new ADCS (attitude determination and control system) module.
Problems obtaining appropriate licenses, launch vehicle delays, R&D failures, operations and supply-chain hiccups: these all hurt much worse because during the initial stages, the space company is effectively generating zero revenue.
A space pure-play company will only have one sustainable source of value: their assets in orbit. Satellite companies rely on the data generated. Launch providers generally gather passengers, governmental or private sector, with advance contracts, but they also need to actually launch rockets.
Component manufacturers might get away with one-off sales, but there’s very little value in that. As anyone will tell you, you have to have a positive LTV:CAC (lifetime value:customer acquisition cost) ratio, and one-off sales will not cut it (especially if you’ve sunk a ton of money into flight qualification).
So to minimise mistakes and oversights, you hire more people, which increases your day-to-day operating costs, which makes you more vulnerable to any delays which occur. Each person you hire won’t increase your revenue-generating capability at the early stage; instead, they’re just there to hedge against a steady bleed erupting into a hemorrhage.
Put another way, the value of hires at the early stages of a space company’s life isn’t measured in conventional financial terms. Instead, they offset operational and logistical risks.
It’s a completely different paradigm from your average tech company, wherein you might hire a 10x engineer because they’re able to propel your growth. In a space company, you hire a 10x mission operations specialist (how you’d even measure 10x is beyond me but let’s just say for argument’s sake) to prevent a fatal disruption to your timeline. But their contributions will not be as quantifiable as in the first example.
The long lead times I discussed above are manifestations of a host of operational and systemic inefficiencies endemic to the entire mission planning process. If you’re familiar with the go-to-market process for biotech, you’ll see some parallels. Where they differ however, or at least as far as I know, is the fact that once a biotech device is created and built, and has passed all regulatory checks, it can be deployed into the market.
For space hardware, the point at which it’s created and built kicks off the entire process above. In other words, the point in a biotech product’s life cycle where it can enter the market and play with all its friends is the equivalent to when a space product / service starts getting dressed in the morning and gets ready for school.
Suffice to say that it will generally take a while for revenue to be generated, let alone for ROI to be realised.
Grin and bear it
So how do space companies lose money exactly? It’s not just because space is expensive, which I hope by this point should be really obvious. It’s because their journeys are effectively naked ultramarathons, during which they don’t get breaks and if they trip, it could potentially end them.
I’m not advocating for one thing or another. I’m certainly not going to make terrible suggestions that space companies should focus on transferable technologies, or that safety standards should be compromised to hasten launches. However, I do think that a fair amount of structural change to the mission planning process is called for.
And who knows, I may or may not be working on building in stealth a company that’s doing exactly that, hint hint wink wink nudge nudge (also my DMs are open in the interest of either talking more about this or getting yelled at for messing up some details).
Anyway, I hope that this has helped to shed some light and help you understand the complex nature of space operations a little better. Like I said, space is important. If you want to get into it, I welcome you, and so does the rest of the New Space industry. We need more bright minds and daring constitutions.
This piece didn’t start out as a call to action, but perhaps there’s no better end to it. If you’re going to join us, just remember: space companies lose money, at least to start. But they also have the potential to make it all back and so much more, as long as you’re able to weather the journey.