In my last column I spent some time looking at the investment environment in the space sector, including why I think that it may not be meeting the expectations of some investors who arrived in the last major surge of investment.
Without going into detail again, I think that the main issue is that the space market does not match the expectations of investors coming from commercially oriented “Deep Tech” environments.
These investors have calibrated their decisions and their expectations on the assumption that the products and companies they support will be aimed at a “market” of a large number of consumers that can be characterized by an “Average Customer.” Meaning that the demand is both broad and fairly uniform and that it can be satisfied with a single product or a small product family with minor variations.
This uniformity means production can lean on predicted demand, allowing for products to be readily available for quick sales. Finally, these characteristics will mean that growth hinges on expanding marketing and sales effectiveness to penetrate the market quickly. Thus, after product introduction future investments are expected to be aimed at scaling up rather than on providing working capital to complete booked business.
These features are not at all typical of the market that space investors find themselves in. There are a few reasons for this. First of all, the market is small. Space is still a “niche” space. The market still consists of a “countable” number of fairly major players. These major players are the customers that most new space companies are seeking to supply with innovative products and services. This customer group, though, are not a “canonical ensemble” – they cannot be represented easily by a representative “average customer.”
Secondly, space is still very hard to get to and work from. Even though the cost of launching a capable spacecraft has decreased dramatically it is still much more expensive than deploying similar technology terrestrially. It is also logistically much more challenging. There are limited places from which spacecraft can be launched. Transferring spacecraft across international boundaries can be complicated, costly and time-consuming. Launches must be scheduled well in advance and cannot be easily moved or rescheduled.
This, in turn, means that customers (the ones building those spacecraft) still need to get the most out of every launch opportunity. They cannot afford to treat new product rollouts by their suppliers in the same way that is typical in large commercial markets. There are no “soft launches,” no “trial markets.” While innovation still requires risk taking, trial and error is much more expensive in space than elsewhere. So, responsible innovators keep the risks focused on a limited number of innovations with every iteration.
Finally, it is important to remember that space craft size, weight and power are still critical design drivers. Even though the cost per unit mass has decreased dramatically, the weight of a spacecraft still factors in the cost to get it to orbit. Similarly, there are real and significant constraints on the overall size and form factor of spacecraft that must be respected. This is particularly true if the spacecraft designers want to make use of the inexpensive launch alternatives because those almost always specify a maximum volume that the spacecraft can occupy if it is to be launched as one of 10’s or 100’s of other spacecraft – which is, of course, the key to achieving those desirable price points.
Similarly, the power consumption of any spacecraft is also significantly constrained even with the advent of improvements in component miniaturization and battery technology. Add to that, a factor which is unique to space – which is the need to dispose of waste heat which is a much more complex problem in space in a vacuum than it is on the ground in an atmosphere.
All in all, this means that designing a spacecraft still requires significant trade-offs (and probably always will). Because the performance margins are so thin, it means that “off the shelf” solutions come with a cost that is not included in their price because they include features that are not needed but which take up size, weight, power and heat budgets that are needed elsewhere. So, customers will often (almost always) be willing to pay a premium for customization. In fact, in the space business customers will often expect and demand that they be able to customize any component so that it will fit better into their final design.
All these effects are endemic to space. I don’t believe that they will change any time soon, regardless of how low the barrier to access to space itself, in terms of financial cost, is set.
Taken together these factors create a “market” that has certain characteristics. It is small. It is made up of demanding customers whose requirements tend to be very specific to their product. Every company that is trying to innovate in space is doing it a way which is unique – this is how they establish their competitive differentiation. But this means that they all want something that matches their specific requirements. Even for very common components it is difficult to define an “average customer” whose needs will roughly correspond to the majority or even a large portion of the market.
The market also consists of customers who are sensitive to risk. They cannot afford not to be. here are always going to be limited opportunities to test innovative solutions in space. While spacecraft designers may wish to experiment with and optimize certain parts of their solution – they will want high quality, high reliability, customizable, components for the parts of the spacecraft that “just have to work.”
It also means that their customers will not want to buy those innovative solutions until both the solution and the company providing it have a track record of reliability. Further, those customers will not expect to pay for any component until it has been delivered and tested – often until it has actually passed through integrated testing.
This presents a huge opportunity to suppliers who can focus on those components and achieve the required standards for quality and responsiveness. But, to capitalize on that opportunity both they and their investors need a vision for the company that responds to the opportunity and not to the realities of a different market.
In summary – you have relatively few customers, demanding bespoke solutions, and expecting that those solutions will be designed, built, and tested in small quantities before they are paid for.
These characteristics require a very different business and investment model than the development of commercial terrestrial technologies – even very deep, and valuable technologies.
It means for instance that the working capital requirements of suppliers in the space business will be quite high because capital will constantly be required to design, build, test and deliver products before payment can be expected.
It means that any given version of a product will likely be produced in fairly low volumes – unless and until a large order from a single customer is obtained. This once again will impose significant requirements for day-to-day working capital and will tend to make rapid scaling a challenge.
On the other hand, because the products that are produced are of high quality and are of high value to customers, they will be able to attract much higher margins from those customers. It will also mean that competition purely based on price will be relatively rare and so those high margins will persist for an extended period of time.
These factors mean that the key to scaling may not be the width of customer demand across the market, but instead growth can easily be driven by the depth of demand by a few very large customers. Once those customers find a supplier whom they trust they will be likely to place more orders. Because they are sensitive to risk and because they know the value of flight heritage, they will often suggest new variations or even whole new product lines that they would be willing to invest in to ensure that they were supplied by a reliable source.
Thus, while scaling the operations of small space company may seem to be a slow process, the very act of scaling will create barriers to entry for competitors. This again will mean that competition based on price is relatively rare compared to a large commercial market. A small space company that can survive to become a trusted supplier will face far fewer headwinds in retaining that position than would be typical in a traditional “deep tech” market.
So, in fact, the key to scaling may not be to invest in expanding market reach as it is in more commercial technology sectors. Instead, the key to scaling may be to assemble and consolidate pockets of deep talent and expertise leveraging the reputational moats that successful space heritage provides. It’s a different recipe for massive growth than has been typical of tech-oriented sectors. But it has been very successful elsewhere in sectors like automotive, aerospace, defense, and even, I would argue, sectors like mining. So, in the next column let’s talk about consolidation, and why it may just be the secret sauce that the space sector needs.