To Lead the Money, Learn from the Leaders

Over the last month, big news shook NewSpace and advanced the narrative of the industry. The stories’ main characters are not NewSpace companies with climactic reveals of technological breakthroughs. Instead, the protagonists are investors who support their investments and embrace new ones. With Moon Express raising $500,000 in private funding and Draper Fisher Jurvetson (DFJ) investing $30Mln into SpaceX, the message is becoming clear. (Please see “NewSpace Timeline” in this issue of Thruster.) At the same time, SpaceX’s estimated valuation has risen to $2.4–$4Bln. (Please see “LargeCap Review” in this issue of Thruster.) This shows that investors believe it is not only possible to build billion-dollar companies in this industry, but also acknowledge the formation of new businesses from modest seed or early stage capital. Moreover, later this summer the Space Frontier Foundation will be holding a $100,000 Business Plan Competition at its annual NewSpace conference in Silicon Valley. (Please see “Space Scalable” in the April 2012 issue of Thruster.)

Of course, issues with respect to launch vehicles, concerns about demand not matching over-supply in satellites, and questions revolving around the capabilities and needs of smallsats remain unanswered. From market risks to technical risks, the 1st Vertical (like all sub-markets of NewSpace) is rife with uncertainty. However, when investors like DFJ, Khosla Ventures, Founders Fund and credible angel investors dip their toes (and sometimes feet) into the capital waters of NewSpace, further analysis is warranted. It is time then to take a step back to analyze how to transition from observers to influencers in the 3rd Screen. (Please see “LargeCap Review” in the July / August 2012 issue of Thruster.)

Step One: Who to observe?

The first step in this transition process is recognizing that the number of notable investors is currently small, and DFJ, Khosla Ventures, and Founders Fund remain the biggest players. These funds espouse philosophies to look where other investors are not looking and strategically take on technology risks. Of course, not all progressive investments produce “multi-bagger” returns on investments (ROI); but one successful investment can produce ROIs that more than make up for the rest.

Vinod Khosla, investor in Skybox

NSG spoke recently with Scott Nolan, a former Senior Engineer at SpaceX and now Principal at Founders Fund in San Francisco. Nolan explained two of the key reasons why he and his colleagues have been comfortable investing in NewSpace companies like SpaceX. First, they assess technology risk independently and don’t necessarily view a long path to profitability, liquidity, or IPO as a disadvantage. As Nolan puts it, a path that can approach ten years is “difficult for many investors, but is often a symptom of reinvestment in growth and the creation of huge barriers to entry.” Second, Founders Fund looks to build businesses around their core technologies (i.e. the 4th Screen) in viable markets (i.e. the 2nd Screen) through strong, complete teams (i.e. the 1st Screen). Nolan notes that as the NewSpace industry grows, emerging companies appear to be trending to more well-rounded executive leadership rather than skewed toward a mainly technical background. (Please see “Exit Strategy / Escape Velocity” in the June 2012 issue of Thruster.)

Step Two: What to observe?

The next step is to realize that looking at NewSpace targets is not entirely different than looking at other investment opportunities. As Nolan explains, if you see an A+ team with a breakthrough technology addressing a billion-dollar need, it is worth digging in to learn more, as having an anti-sector dogma can be a big mistake. Elaborating, Vinod Khosla, a legend of Silicon Valley and current head of Khosla Ventures, told NSG that he defines himself in NewSpace as “open, but not focused,” agreeing that the same set of questions will typically apply in evaluating the quality of the opportunity.

This does not mean that there are opportunities at every turn: a lot of the early companies such as SpaceX and XCOR Aerospace are targeting some of the largest unmet needs. This will allow for other opportunities by NSG 100s or NSG OTBs to become more feasible for the entrepreneur and attractive for the investor. As Nolan puts it, “We see the commercial space ecosystem beginning to form – when successful startups are built in a sector, their services can make other new businesses possible and demonstrate how innovation can be done.” The NSG “8-Verticals of NewSpace” breaks down these emerging opportunities as sub-markets of the industry. The Spacecraft Vertical (i.e. satellites) is the most immediately promising. (Please see “LargeCap Review” in the March 2013 issue of Thruster.)

                                Esther Dyson, an investor in XCOR

NSG-tracked SmallCaps in this sub-sector are innovating everything from satellite design (Cosmogia) to research applications (Nanoracks), imaging (Skybox), and even open-source experimentation (NanoSatisfi). (Please see “Publicly Traded Companies” in the March 2013 issue of Thruster.) Reflecting on the decision to invest in Skybox, Khosla mentions that the team presented “a big opportunity, a big idea” in reducing the cost of building a satellite by 100x. While only the future knows how these companies will fare, it is clear that a paradigm is indeed shifting in the investment world.

Step Three: Where to observe?

In the final step, we can advance the narrative of the ecosystem for these businesses by increasing the number of its supporters. Investors can now look at the “8-Verticals” beyond launch, while those looking for early ROIs can explore current innovations in satellites. Especially as construction times and launch costs for satellites decrease, the resulting economics of the satellites’ data and availability as a platform can facilitate this next wave of evolution.

Much about NewSpace ventures is still unfamiliar to many investors. NSG spoke with Steve Jurvetson of DFJ who expanded on this by comparing NewSpace to software in its early days. (Please see “Letter from the Editor” in this issue of Thruster.) Software-focused venture capitalists used to be rare and, as Jurvetson told NSG, “once people started making money, a lot of that fear went away.” Failure remains highly visible and phrases such as “failure to launch” apply literally when it comes to sending products into outer space. Skybox delaying its launch and Intelsat losing a satellite on Sea Launch as well as decreasing the amount sought in its IPO by more than half remind us that there are definitely real risks involved. (Please see “Index Review” in the March 2013 and April 2013issues of Thruster.)

Next Step: How do we move forward?

Even in an industry fraught with risks, leading investors in NewSpace like those discussed in this article continue to commit more capital. These leaders do not see a NewSpace opportunity that happens to be well-managed and well-planned; they see a multi-billion-dollar technology industry in the making with a fantastic team that happens to be in NewSpace. The next part of the NewSpace story therefore relies on greater investor immersion, because the opportunities are already there in waiting.

          Jurvetson believes that recent returns have quelled investors’ fears

The leaders and events of this month tell us that the story is headed in a clear direction: there are reasons to be diligent when evaluating NewSpace opportunities but there are a lot of reasons (millions and perhaps billions, in fact) to be excited. Excited even beyond what Jurvetson believes to be critical when looking at NewSpace opportunities: they “spark the imagination… [they are] deeply viscerally inspiring.”

Petr Johanes is a graduate student at Stanford University and a frequent contributor to Thruster.