And in Conclusion – Part 7 of An Entrepreneurial Space Series

And in conclusion - Entrepreneurial Space Series. Credit: SpaceQ/Shutterstock.

This is part 7 of my 6 part series on An Entrepreneurial Space.  Yes, you read that right.  I started this series with six parts in mind talking about the various “players” in the world of Entrepreneurial Space.  By the end of the last part, though, I felt like a bit more was needed to bring the whole summarizes together.  And since the last article was already longer than I had wanted it to be, I decided to ask my long-suffering editor and publisher if he we would accept one more article on the topic.  Marc agreed, so here we are.

The underlying idea that generated this series was that the difference between Entrepreneurial Space companies and traditional or legacy space companies is actually in their fundamental business model.  This is important because it means that there is less overlap, and competition, between the two types of businesses than you might think.

When I originally made that argument a few years ago, I felt sure that it was true.  But I also lacked the experience with the Entrepreneurial side of the business to explain why it was true and where the differences lay.  I have spent much of the last three years working much more closely with the founders of space companies and with their investors and advisors.  So, this series of articles was a way that I could go back and look at that argument in more detail.  

Before circling back to summarize that argument again let me first pause to talk briefly about who, I think, might be interested in these articles and why.  In then end the articles probably ended up being more than an hour of reading time – if they automated word count bots are to be believed – so it’s probably worth summarizing why you might want to go back and look at them if you have not yet because you have been waiting for the Too Long – Didn’t Read version.

First of all, if it was not already obvious, I wrote the articles with founders in mind.  There are actually two types of founders that might be interested in the difference between entrepreneurial and traditional space companies.  The first group would be those founders that are starting their own company after having spent a significant part of their career in the traditional space industry either working directly for a space company or doing research in academia and interacting principally with traditional space companies.  Founders in this category need to understand the forces that shape their new enterprise may differ significantly from the ones that they have become used to over the course of their career.

The second group would be founders that never have worked in the space industry.  This group should be interested in the difference between the two types of space company for essentially exactly opposite reason as the first group.  The experience of founders in this group will mainly be shaped by Entrepreneurial culture through interactions with investors, other founders and often with start-up incubators and other support programs.  It is important for founders in this category to understand how that entrepreneurial culture differs, in some fundamental ways, from the traditional space business culture.  This, by the way, is also a good reason why some investors who are new to space might be interested in the series as well.

After all, since “it’s all space,” founders of entrepreneurial space businesses will be in constant contact with players from the other side of the divide.  Their customers may very well come for the traditional space industry – particularly if their customers are in government.  Their suppliers may very well come from that industry as well. So, although their approach to business will differ in fundamental ways from the traditional industry, they will be immersed in that culture to some extent and will want to understand how it thinks.

The second group that I was thinking about when I was working on these articles were my friends in government.  While Part 6 was the article that spoke most directly to those in government who are trying to support the Entrepreneurial Space, the whole series was intended to provide at least a brief overview of the constraints and imperatives that such companies experience and why those conditions can be quite different than those in the traditional space industry.  I also hoped that it would be clear that those constraints and imperatives are pretty much impossible to understand unless you consider the role played by investors and “The Market” which really have a much smaller role in the traditional industry and with which most government policy makers are far less familiar.

So having engaged in that act of justification for the work we have done so far, let’s revisit the argument about the differences between the traditional space and entrepreneurial space business models.

As I have described it before, traditional space companies are Customer- Focused and Technology-Driven.  In general, they succeed in business by being able to do business with large, mostly institutional, customers.  These customers tend to be risk averse.  They will be particularly sensitive to reputational risk since they will often be spending someone else’s money and they will want to ensure that they are seen as good stewards of that funding.  This reputational risk aversion will tend to make them demanding customers.  They will expect that their problems are their supplier’s priorities.  It will also tend to make them low margin customers as the will be sensitive to public media claims that the money, they spend is generating large profits for their suppliers.

Traditional space companies may do business directly with the end-customer or they may work as a subcontractor to a prime contractor.  Either way, they will succeed because they are able to prove that they are reliable contributors to making high-value, advanced technology solutions work in a demanding environment.  They will most often do this by demonstrating mastery of certain core technologies which are proprietary to them, and which cannot be obtained elsewhere.  It is through access to this unique technology that they will be able to charge a premium for their services.

Successful traditional space companies will also develop their relationships with their important customers by demonstrating that they are capable of adhering to disciplined processes and procedures so that their work can be trusted by the prime and the end customer.  In this reputational-risk averse environment being a trusted supplier will be a significant asset.  This trusted status will often be the key to expanding the business by winning repeat business from customers who are wary about giving business to suppliers that they do not know.  In fact, the key to growth for many companies in this sector is not only to do more of the work the same work – but also to be offered expanded opportunities to do new kinds of work.  Often trusted companies will be invited to do work that replaces another contractor that has failed to make the grade in terms of reliability.

This, by the way, is a business model that is not limited to the traditional space sector it also entirely typical in the defense and aerospace sectors as well.  In this kind of environment growth is often a question of deepening relationships with a relatively small number of customers rather than widening the number of customers that the company serves.

Entrepreneurial space companies, on the other hand, will be focussed on raising capital from private investment to fund their vision for how to turn their technology into a product.  Because those investors expect high growth these companies will be driven by the need to find ways to deliver enough of that product to enough customers to generate a high rate of growth of first revenue and then profits.  Often, they will do this by shifting their focus away from their original technology, towards the needs of their customers.  By this I mean that companies in this space derive competitive advantage from offering a product that solves the most problems for the most customers rather than by investing in a bespoke technology that is tuned to the needs of a limited set of customers.  

In order to scale and grow entrepreneurial companies will be focused on expanding the number of customers they serve rather than on forming deep relationships with a few customers.  This, in turn, will mean that they need to focus on efficient delivery of their product or service to many customers rather than on having customized processes designed to delight a few demanding customers.  

This will be necessary not only to deliver profits but also to ensure that capital is used efficiently to generate growth.  This is one of the primary differences that comes with the entrepreneurial model.  Because these companies are funded by private capital and not by public business, they, per force, are worried about the efficient use of that capital.  In the same way that traditional space companies need to develop a reputation with their customers as trusted suppliers, entrepreneurial companies need to develop a reputation in the investment community as efficient users of capital.  The most important key to growth for an entrepreneurial company is to be seen as a “good bet” by investors.  Here “good bet” means having a reputation for generating effective high rates of return on invested capital.

It is not hard to see based on these descriptions that these different business models will result in dramatically different business priorities.  They will also generate different management styles and frankly different company cultures.  It is also easy to see why these different business styles can result in confusion and distrust across the divide.  For the entrepreneurial community the traditional space model can be seen as hopelessly inefficient and wasteful. With it’s focus on reliability and on lowering reputational risk to end customers is easy to see it as lacking innovation and tradition bound.  Because the traditional industry values trusted suppliers it can be seen as a closed club where incumbents are protected even though they may not be the most efficient or innovative suppliers.

To the traditional industry the entrepreneurial ethos is also confusing.  The focus on width of markets rather than depth of relationship gives the impression that entrepreneurial companies are more focussed on short-term gains than on developing long-term relationships and trust.  The ability of entrepreneurial companies to pivot to new technologies and solutions in response to the needs of a wide customer base is seen can be seen by traditional space companies as revealing a lack of discipline and a readiness to look for the “next big thing.”  To traditional space companies who tend to have deep and fairly secure relationships with large customers, and for whom growth is a very much a matter of building consistently on those relationships to generate stable but not explosive growth. The expectations of the investment community that demands “10x” returns in 7 years seem overly aggressive and unreasonable.

The interesting thing, though, is that while the two parts of the space sector are very different business environments, they share more than the just the physical environment in which they operate.  They also share resources in terms of both suppliers and talent.  They also, as we have discussed, very much share the same attention-space of government policy makers and budget appropriators. So, while they are distinct.  They are not really separate, or separable.

The impact of that co-existence has been playing out for a few years now.  The results are interesting.  And sometimes surprising.

Now that we have the basics out of the way I am hoping that time and circumstances will allow me to look at some of the impacts this Shared Space on the sector.  I would love to hear your thoughts on the topic.  Please feel free to contact me directly through LinkedIn or at Sidekick65@gmail.com if you have ideas of where this conversation should go next.

About Iain Christie

Founder and CEO at SideKickSixtyFive Consulting and host of the Terranauts podcast. Iain is a seasoned business executive with deep understanding of the space business and government procurement policy. Iain worked for 22 years at Neptec including as CEO. He was a VP at the Aerospace Industries Association of Canada, is a mentor at the Creative Destruction Lab and a visiting professor at the University of Ottawa's Telfer School of Management.

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