Beware of Investor Demands, Warn Smallsat Experts

Young smallsat companies seeking to build a successful business must be wary of the implications that come along with their investors’ capital, warned a panel of experts at the SmallSat 2017 Conference. During an Aug. 8 discussion on the finance surrounding the small satellite market, Tyvak Nanosatellite Systems President and Chief Operating Officer (COO) Marco Villa cautioned young entrepreneurs to “not get money for the sake of just getting money,” as investors are often pursuing their own agendas.

Businesses that are beholden to the whims of their investors can crash and burn, Villa said, because one can become more concerned with making a quick return than developing a lasting business strategy.

When a company is hard-pressed from the get-go to respond to an external entity about how it spends those funds, “it doesn’t give you a breathing room to make mistakes,” he said. “[Making mistakes], I believe, is a fundamental way to stay in business for a long time.”

Rather than accept a large sum of cash to rush a product to market, Villa recommended young companies take a more patient approach and spend time figuring out exactly the kind of business they want to be. This was Tyvak’s approach to entering the smallsat market, he said. “We were not going to be defined by who was giving us the money,” he said.

Still, that’s not to say a young company shouldn’t be concerned about revenue. Stig-Are Thrana, head of Kongsberg Satellite Services’ Silicon Valley Office, emphasized keeping the value proposition in mind at all times and finding other ways to produce income as the company finds its footing. He drew an analogy to whisky producers which, as they wait for their whisky to age, can sell gin to stay afloat. “Make sure the cash flow is there,” he said.

Tyvak adopted a similar strategy as the management team honed in on the best way to position the company in the market. “We started exploring everything,” Villa said. “We started selling smallsats and components … knowing very well that was not our business.”

Ultimately, Tyvak settled on a model that centers around enabling their customers’ own businesses, and specializes in creating custom satellite buses with unique capabilities based on the specific mission. But it took a couple of years for the company to reach that point, Villa said.

Randy Segal, a senior partner at multinational law firm Hogan and Lovells, echoed Villa’s sentiments, noting that all of the venture capital and private equity folks have a “certain Modus Operandi (MO)” that guides their investments. “Some want to invest where there is a government angle versus a commercial angle,” she said. “Some have a three-year horizon, whether it’s the sale of the company, a merger or an Initial Public Offering (IPO).”

All of these different factors carry implications for the businesses they invest in, which can be either a blessing or a curse depending on how closely their priorities align with the companies’ own goals, she said.

However, Segal also pointed out that the relatively low capital required to enter the small satellite market has opened the door to alternative investment opportunities. One example is “strategic investors,” which are generally larger companies in the food chain that invest in their smaller peers to get a toehold on the solutions they develop. “[Strategic investors] can be a huge step up because they have all the infrastructure, the knowledge, and the know-how,” she said.

Lockheed Martin, for one, has already pursued such a strategy since 2007 with its Lockheed Martin Ventures division, which seeks to invest in early-stage companies developing technology complementary to its own. Lockheed Martin recently invested in Terran Orbital, Tyvak’s parent company, as part of its effort to capitalize on more opportunities in the government vertical.

Segal said she has also observed more “creative teaming and joint venture arrangements” in the smallsat market, as companies with complementary products leverage each other’s strengths. She highlighted Alphabet’s sale of Terra Bella to Planet as one salient example, adding that “you can bet” there’s an agreement between Alphabet and Planet for access to the capacity.

Given the massive influx of smallsat startups, the panelists noted there will likely be much consolidation, while some businesses will ultimately fall short. But they all agreed that describing the small satellite market as being in a bubble is inaccurate. “Change is too quick to have 15-year satellites anymore,” Segal said. “I think smallsats are here to stay.”

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