This is part 6 of my series on An Entrepreneurial Space. If you have not read the previous parts, I would suggest that you might want to do so before starting on this one as they will provide some much-needed context.
In the previous articles we have talked about The Journey that the Founders of space companies make and some of the characters they encounter along the way including the investors and ultimately customers. We also talked about how, in order to achieve the scale that investors normally want, there need to be enough customers with similar needs to form a large and attractive Market that companies can aim to satisfy.
The one player in the drama that we have mentioned only in passing is The Government. Now, for some sectors it is probably reasonable to see government programs and procurement as being incidental to the founder’s journey. But, in the space sector I think it is important to spend a bit more time talking about The Government for two reasons. The first reason is that even with the influx of private capital into the space sector, the public sector is still a dominant source of funding for space projects. In fact, in many countries, the majority share of funding for space activity still originates with the government one way or another. This is because government not only funds projects directly, but it also provides significant support in the form of loans, loan guarantees, export assistance, research and development funding, Space Act agreements and a myriad of other programs.
In short, in space, The Government may not always be on stage in the drama, but it’s almost always waiting in the wings.
The other reason for talking about how the role that government can play in An Entrepreneurial Space is for the simple reason that governments around the globe have stated, effectively, that they want in. For proof of this, just note that if you look you will note that embedded in the mandate, mission statement or latest long-term space policy of almost every national space agency is the desire and stated intent to support the growth of entrepreneurial space activity.
So, The Government wants to be a player. The trick is finding a part for them to play where they aren’t trying to rewrite the script to turn our little play back into a Traditional Space Production.
By this, I mean that finding ways for the government to be truly supportive of Entrepreneurial Space companies is actually not as easy as you might think because while government is used to being involved in space activity, it is not always comfortable playing a role where it is a supporting actor and not the star of the show. This is a natural outgrowth of the way the government has and continues to support the traditional space sector.
The tool that the government most often uses to support an industry or industrial sector is simple. The government buys things. In most countries the single largest customer in the space sector is the government. This is just a reflection of the fact that the traditional space sector has traditionally – and still largely is – very much based around large projects for large customers many of whom are either government departments or which are supported by government funding.
In fact, it is not uncommon to find that, when asked, traditional space companies will say that the most important support they can receive from the government is for it to be their “Anchor Customer.” By this, companies mean that they want the government to provide a foundational level of business upon which they can build. Because traditional space companies typically deal with large customers, such as other governments, it is of great value to them to be able to state that their product has already been procured and validated by their own government. This provides a vote of confidence not only in their products, but also in their ability to satisfy the demands that large, reputationally risk averse customers make on their suppliers.
The issue arises, however, because the word “anchor” can in fact have other meanings. While anchor can mean the thing that grounds you and stabilizes you, it can also mean the thing that prevents you from moving with the current. Now if you are a boat, not moving with the current can be a good thing. But if you are running an entrepreneurial company, not being able to move with the tide of the market is not a good thing at all.
I touched on this in the last article when I briefly reviewed the ways that companies can have their growth strategies sidetracked by the “wrong” kinds of customers. These are customers that, while they provide significant short-term benefit to a growing company, can get in the way of the company’s ability to address the wider market that will be the source of the growth that they and their investors expect.
As I mentioned in the last article, it is all too common for governments to fit the mold or one – or more – of these “wrong” kinds of customer.
You will remember that the first way that a customer might interfere with an entrepreneurial company’s growth trajectory is to become A Distraction. Normally this happens when the company discovers an opportunity to make money doing something that is not core to its growth plans but through which it can generate much needed cash. There is then a risk that the company gradually becomes distracted by this “non-core” business at the expense of the business it was supposed to be in.
It is easier than you might think for good and well-intentioned government programs to fall into this category. To be fair, when such programs do, it is often as much to do with choices made by the company as it is due to the nature of the government programs. Still, it can and does happen. The issue arises, in a sense, specifically because such government programs are often very effective. They are effective when they provide “non-dilutive funding” to companies that are not in a position to raise capital from investors or sell finished products to customers. By filling this void in funding these support programs can literally be the difference between life and death for start-up companies.
Unfortunately, such funding can also become addictive. If care is not taken, company business plans may begin to inherently depend on such sources of funding. Founders begin to assume that another round of funding will appear at the expected time and that the requirements for accessing the program will remain consistent over time.
But the nature of government programs is that they respond to government priorities. And these priorities evolve due to factors beyond the company’s control and even beyond their notice. Programs are often delayed, deferred, or even cancelled due to factors beyond the company’s control and without any prior notice. Terms and conditions for qualifying for funding also change from one funding cycle to the next. All of this takes time to track and to track down. The net result is that pursuit of such support funding can take up significant time and attention which are two quantities that are always in short supply in an entrepreneurial company. Very soon, founders may find that they are spending more time attempting to make themselves fit into ever evolving government funding priorities than they are trying to find ways to become the solution that their end customers need.
The second way that government contracting can end up impeding growth in a small company is the tendency for the government to be a “Demanding Customer.” As I described in the last article, these are customers who provide good business to the startup, but who have requirements either in terms of product features or in terms of company processes, that are not applicable to the wider market that the company is seeking to address.
The effect is reinforced when the government is also a “Low Margin Customer.” Which it often is. The net result is that companies can become increasingly adept at serving their government customer – and increasingly less able to grow their business beyond their government customers because the work done for the government does not generate the profits that are necessary to invest in scaling up, growing, and developing a marketable product.
This happens because the fact of the matter is that the government procurement system is actually designed to make the government into a demanding and low margin customer. The reasons for this are many, varied, and frankly often subtle. This is probably not a good place to explore them in detail. Suffice to say, though, that there are good reasons behind both of these propensities. But the fact of the matter is that by its rules, regulations and culture government procurement is designed to expect that the government should be treated as a priority by its suppliers. Similarly, a significant body of government procurement regulation and a significant amount of procurement officials’ time and effort are devoted to limiting the profit that companies make in their dealings with the government.
The point I want to make is not that these priorities are misplaced. But they do make government procurement a very blunt instrument for supporting entrepreneurial, high growth, venture backed companies. As the saying goes, “when all you have is a hammer, everything looks like a nail.” Unfortunately, the effect of applying the government procurement hammer to an Entrepreneurial Space company is that it tends to drive the company away from its intended market driven growth plans and toward dependence on high value, but low margin government work.
In effect, since government procurement policy has been developed to run traditional space programs, it has the tendency to turn suppliers into traditional space companies that are good at supplying the government, rather than preparing them to supply wider markets.
The final way in which government contracts can end up adding friction to company growth is the treatment of intellectual property. For very good reason the government procurement system is designed to ensure that the government is able to have reasonably unfettered access to intellectual property which they have funded. This is not unreasonable. But it can become a serious issue for companies that are seeking investment in the venture community. This is because the value of the intellectual property possessed by a company is often at the core of an investors view of the value of the company. The ability to exploit that intellectual property not only in planned applications but also in future unplanned, and potentially even more lucrative, applications is almost always part of the discussion between founders and investors.
And investors simply don’t like restrictions on a company’s ability to reuse its intellectual property. They also don’t like the idea that someone else has access to that intellectual property and that the IP might someday be transmitted to potential competitors. Standard government treatment of intellectual property can (and does) result in both of these conditions. For that reason, there are some investors who will actually counsel start up companies to avoid government contracts entirely in order to avoid entanglement of their intellectual property.
Again, my point here is not to be critical of government procurement policy or to enter into the debate about whether or how it should be changed. My point here is to recognize that when the government chooses to support the entrepreneurial space sector by becoming a customer, its normal rules for doing business can have unintended consequences. The net effect of these consequences is often to influence companies to be less attractive to investors, less entrepreneurial and ultimately to move toward a more traditional model of working in space. This ends up being the exact opposite of the effect that the government wanted to have.
So, what can be done? If being an “anchor customer” is not the answer to supporting space entrepreneurs what is?
Well, I am afraid if you have been reading this series waiting for a detailed proposal to solve that problem, I am about to disappoint you. The plain fact of the matter is that I do not know. At least not in detail.
I say that without apology, though, because one thing that I have learnt through hard experience is that the right people to come up with detailed government policy solutions are the ones that already work in government. I know that without the detailed knowledge of the daily reality of working with the constraints and imperatives imposed by government, any solutions that I propose will almost certainly be wrong in detail. Years of experience have convinced me that giving in to the temptation to make detailed proposals to solve general problems tends to mean that the discussion rapidly turns to a discussion of the detailed shortcomings of those proposals. At the same time, the discussion turns away from the merits of solving the problem and the general features of possible solutions.
I want to avoid that trap here. So, I am not going to propose detailed solutions to the problem. I do, however, want to talk a bit more about the general nature of the solution and some pitfalls it will probably have to avoid.
The most basic feature of any approach to providing effective support for Entrepreneurial Space is that such support needs to stand on its own. For the reasons discussed above such support needs to be divided from traditional procurement programs. Furthermore, it needs to be a full “program” in its own right. In government-speak this means that it will need to be the responsibility of a senior official. In Canada that would mean at least a Senior Director or preferably a Director General. This is because the success of such a program is almost certainly going to require some innovations in government practice. Non-standard processes may be required. Exemptions to standing regulations may have to be requested. Such measures are not for the faint-of-heart. They are also not the province of working level civil servants.
In short, to solve this problem it will need to be a priority. It will need to be overseen by an experienced government executive and it will need to be supported from above (often referred to in government-speak as having “policy cover”).
Furthermore, That support will need to be prepared to be patient. Patient because supporting Entrepreneurial Space is going to require someone with knowledge of how to solve the problem to become a lot more familiar with the nature of the problem. Time will need to be invested in developing this expertise by getting to know founders and their investors. Time will need to be spent understanding what motivates them and what doesn’t. Time will need to be spent understanding how those wants and needs can overlap with government priorities.
Finally, I think there are going to be two issues that any successful program is going to have to resolve, or rather reconcile, with current government practice, and current government preferences.
The first issue involves the issue of “fairness.” Actually, it is really about the definition of “fairness.” Government officials, with good reason, work very hard to ensure that government procurements are “Fair, Open, and Transparent.” These are laudable goals. But the definition of “fair” often gets interpreted very narrowly. Effectively, it gets interpreted as meaning that no one should have any inherent advantage in winning government business.
Now, the entrepreneurial community believes in fairness and fair competition as well. But in the entrepreneurial community it is seen as entirely fair that if you come up with an idea for how to do something, or do something better, before others do – then you should get a chance to profit.
It is also seen as entirely fair that those who take larger risks should have the chance to reap greater rewards.
These two definitions of fairness are not equivalent. In fact, in many cases they appear to be mutually exclusive. Take for instance the situation where an innovative company approaches the government with a novel idea and asks for support for their specific initiative or their product. It is not uncommon for such a company to convince the government of the worth of its idea only to find that the government’s response is to say: “That’s a great idea! We should offer that support to everyone,” or the government says, “We hadn’t thought of solving the problem that way, let’s have a competition to see who else can do it.”
The net result of either case is that the company’s first mover advantage is not only negated, but that their competitors – who did not take the risk of developing the idea or the product – are offered the chance to benefit to exactly the same extent as the company that did take the risk and brought the idea forward.
The point, again, is not to criticize government policy as a whole. Rather, I want to make the point that using the government’s usual definition of fair in this case will make it hard to craft a program that aligns with the priorities of the Entrepreneurial class and their investors. Resolving this disconnect will not be easy. But it will be important.
The second feature of any successful entrepreneurial space support program that will need to be resolved is the issue of who benefits from such support. That is because, in order to help space entrepreneurs, the government will also need to help their investors. Hopefully, after reading this series you will see that statement as self-evident. That does not mean that it will be a fact that is palatable to public policy makers.
To put it simply, government support for any group or sector stems from the political will of the government to help that group – and also to be seen to be helping that group. When such a political will is present it eventually flows from political decision makers down to the professional civil servants who design ways to make it reality. The effectiveness of these efforts will be judged not only by internal government metrics, but also by public response, reaction, and comment. This is, after all, the heart of accountability in our political system.
As I said before, support for the Entrepreneurial Space community currently enjoys a good deal of public and government support. For many reasons, in many countries, the values, and characteristics embodied by entrepreneurs are seen as positive. Entrepreneurs are seen variously as: innovative, dedicated, passionate, and hard-working. They are frequently seen as arising from non-traditional backgrounds, their stories are often connected to narratives regarding overcoming adversity, etc. All of these characteristics are ones that government is comfortable supporting and quite comfortable being seen to support.
On the other hand, to be blunt, the same publicly positive connotation cannot be said to be conjured up by the words, “financier” or “investor” and certainly not by “venture capitalist.” These groups do not readily fall in the category that the wider public feel needs more help from government. I would go so far as to say that support for such groups is unlikely to pass the standard “Front Page News” test.
And yet, for founders to be successful they must necessarily deliver results that benefit their investors. The two outcomes cannot be separated. I would say that this inconvenient truth, more than any other, has the potential to get in the way of effective government support for the Entrepreneurial Space. There will be a strong temptation to design funding programs and mechanisms that attempt to limit the ability of the supported companies to pass benefits directly along to investors. But any attempt to do this will necessarily compromise the effectiveness of the program.
The fundamental reality that government must confront is that one of the major motivations for supporting entrepreneurial space activity is that it is predominantly funded from private rather than public sources. In other words, the government wants to leverage that private investment to ALSO achieve public benefits, thus magnifying the effect of the government spending. This is a sensible goal. But achieving it means that government has to want the private investment to succeed, and it has to actively enable that success. Even when that success is measured by large financial gains for private investors.
Ultimately, I believe that this, rather than the financial cost of support programs, may actually be the price the government will find it most difficult to pay to be a significant actor on this stage.
Which, in some ways, brings us back to where we started this series. In that, we are once again talking about how the business model of entrepreneurial space companies is fundamentally different from that of the traditional space industry. It’s probably worth reviewing how we got here. But doing that is probably enough content for one more article.
So, I think I will add a bonus installment to this series. Tune in next time for part 7 of this 6-part series where we’ll bring it all together.
Editor’s note: This is the sixth article in a six part series focused on entrepreneurial space. ( Hint, there could be a bonus article)