The Buck in Buck Rodgers

This is a follow-up to our post earlier in the week about the new wave of Satellite and Spacetech companies. Here we will examine the funding dynamics these companies face.

Suppose a start-up has some technology that they think they can monetize if they put that it on a satellite – it could be a camera or other sensor, or it could be some incredible algorithm – there are dozens of angels that companies are taking.

In our previous post we published a chart showing the launch cost of for a satellite. That seems to show launch costs of $1,000 per kilogram, but that is a best case, aspirational number, which the launch companies target. In practice, the figure is still closer to $10,000/kg, but falling steadily.

When the government launches a satellite it can be close to the size of a public bus, thousands of kilograms. For everyone else, this is overkill. There are 1 and 2 kilo “cube sats” on the market now, offering generic, limited function. For most companies, somewhere between 25 kg and 50 kg is probably enough. This is includes the company’s technology plus propulsion, communications and power source. So that puts launch costs around $250,000 and $500,000. Which given that we are putting an object in space, is a surprisingly low amount.

Then we have to consider the cost of the satellite itself. Read the headlines and the launch companies get all the credit for putting space within reach of start-ups, but equally important has been the tremendous decline in the componentry for space electronics. Modern electronics are generally rugged enough to withstand the rigors of space, and while companies may have to pay a slight premium for radiation hardened parts, we are still able to build satellites with what are essentially off the shelf parts. The processors will look a lot like a high end servers, and the communications systems will have a lot of overlap with cellular base stations.

That 25 kg satellite we mentioned above probably costs $250,000 in parts. We can think of this as a bundle of high-end PCs, or a subset of rack of servers. Again, not free, but very manageable.

Companies will also likely have to pay a design house to do the physical manufacturing. Fortunately, there is an ecosystem of these companies, not dissimilar to the ODM model we see in consumer electronics. Factor in $100,000 for their services (but prices vary considerably).

We then have to factor in insurance. This is a requirement for most cases and probably costs 8%-10% of the cost of the whole launch, so roughly $75,000 (10% of $750,000).

Last but not least is that satellite has to be able to communicate with Earth. Depending on the intended use of the satellite this may require near real-time or daily communication. This means the company will need ground stations. This is an often-overlooked, oddly prosaic part of the system but is crucially important. As with any communications networks, companies can always build their own ground stations, stringing receiver dishes around the globe. If the satellite only has to download data once in a while, companies can probably just build their own ground station. However, most cases will require a wider network.

Fortunately, there are companies out there to provide this service. Having recently done a lot of work around cell towers, this business is oddly familiar to us. We think of these companies as providing Ground Stations as a Service or GraaS, because we always need more acronyms. These companies charge around $500 per pass of the satellite (a very rough estimate). So if the satellite is providing near real-time data this could mount quickly. We have seen systems where this is the largest potential cost. In practice, these bills tend to be much lower, let’s say $25,000 per month, or $300,000 per year. (There is a buy vs build decision here and once costs start exceeding this threshold it is probably cheaper for companies to network their own ground stations).

So the first year budget looks something like:
Satellite cost: $250,000
Launch cost: $500,000
Design services: $100,000
Insurance: $75,000
GraaS: $300,000
Total:$1,25 million

There are all kinds of moving parts here, but $1 million is a decent approximation for a basic satellite serving a single purpose. This is an easily achievable amount. Add in the costs of having a team build this for two years and we are talking about a company can put its first vehicle in space for $5 million in seed capital. And raising that amount of seed is not crazy in the current market. (Note: We did not say easy, just achievable.)

Now come the problems. First, one satellite is usually not enough. At the very least, we probably need to launch two vehicles for redundancy. However, there are very few applications for satellites where one vehicle is sufficient. Depending on its orbit this can mean the satellite passes any spot on the Earth a handful of times a day.

Much more likely is that companies will want to put a small constellation in orbit. Companies will want to have constellations of 10 or 50 or 100 vehicles. The more satellites the more robust their business. Ultimately we will need to raise $50 million to $100 million or more to reach commercial scale. This crosses the threshold into serious money.

To raise this kind of money companies will need to prove out their business model, find product market fit. That $5 million to first launch is likely just a milestone on the fundraising path. Launch the first vehicle to prove the technology works, and the go out and raise the rest to actually build a business. Despite the world being awash in capital, the number of firms willing to take this sort of long-term risk is fairly small.

Which leads to the second problem. Today, most companies who deal with satellites are large, aerospace companies. And while the customer pool is growing, it is still a small audience. One of the most common ‘traps’ we see Space start-ups fall into is becoming overly dependent on these traditional satellite players. This is the same problem all start-ups face when dancing with elephants. A big customer may provide resources but are equally demanding in how those resources are spent. They may alter the roadmap or demand so much attention that they suck up all engineering resources. It can take a year to get approved in the big companies’ accounting systems and another six months to get paid. To say nothing of the fact that the big company can change its mind at the last second, leaving the start-up high and dry.

So the dilemma Space start-ups face is go after the traditional players – with the ample resources and ample bureaucracy – or build out new customers which may take a long time on an unproven business model.

Unfortunately, one of the realities of the US venture ecosystem is its very near-term focus. There are few venture investors who are willing to sink tens or hundreds of millions of dollars in a company just to reach first revenue. With those kinds of numbers, they might as well invest in semiconductors, and we know how VCs feel about that.

That being said, few is not the same as none. There are investors out there who are willing to take a risk. And launching the first vehicle can serve as significant de-risking event. Space start-ups will need to thread this needle. Keep initial costs low, prove out that technology with the first vehicle and then raise more on the back of that success.

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