Scaling back facilities, canceling travel and keeping staff thin helps startups stretch every dollar raised
If it were easier to raise money, Plasmos could have a facility dedicated to testing rocket engines. Instead, the driving startup rented a speedboat restoration shop east of Los Angeles.
Then, “we managed to test something, and it worked,” said Plasmos CEO Ali Baghchehsara. “We managed to create a plasma in the engine and we got high ionization using air.”
After years of sky-high valuations and investor competition for shares of promising space startups, high interest rates and the threat of recession have investors wary. In response to a lack of new funding sources, space startups are cutting back on hiring, reducing travel and leasing office space.
“Entrepreneurship is survival of the fittest,” said Jason Chen, founder and CEO of VentureScope, a McLean, Virginia-based venture investment and consulting firm that works with entrepreneurs. “This economy definitely tightens the belt a bit, which makes teams work leaner.”
TIME TO DELIVER
Ukrainian startup Promin Aerospace trimmed its staff and downsized engineering in 2022.
“We currently have 13 full-time employees. Ten of those are on the engineering team in Dnipro, and three on the administrative team,” said Promin CEO Misha Rudominski. “We had 16 employees before the war. We had an office manager and a communications person. We were building the team for future growth.”
Instead of preparing for expansion, a common approach in 2020 and 2021, startups now focus on expanding their burn rate, which means slowing the pace of spending.
Meanwhile, investors are encouraging founders to “zero in and focus on their core competencies, whatever their unique value proposition is,” said Chen, the founder of four startups.
For Lunargistics, a Woodland, Texas startup that offers mission guidance, launch integration and other space services, the economic downturn means fewer trips to conferences.
“It’s been successful and exciting to meet everyone in an industry where me and @lunargistics are newcomers, but now is the time to deliver,” Logan Ryan Golema, Lunargistics founder, chairman and CEO, tweeted in November.
For some early-stage companies, government contracts or funding programs act as lifelines.
Matt Kozlov, managing director of the TechStars Los Angeles accelerator, said the most important advice he’s giving startups right now is to “relentlessly track, apply and win government appointments and grants whenever possible.”
The Department of Defense, the Department of Energy, the National Science Foundation, NASA and other government agencies are a “great source of capital, undiluted funding opportunities” as well as “great early validations of a company’s technical viability and potential benefit” to government customers, Kozlov said. by email.
After winning a government contract, a founder said, “It means we don’t have to evacuate people, and we can keep building the new things we want to build.”
Entrepreneurs, who enthusiastically share news of technological breakthroughs and fundraising, are much less eager to discuss financial woes and financial layoffs. When promised not to be mentioned by name, however, they talk freely about the big differences between 2021, a boom year for space investment, and 2022.
“There’s no doubt that the funding environment is tight right now,” said a startup founder. “We’re seeing that across the industry.”
Another founder said, “Entrepreneurs who raised money just three or four months ago, raised crazy amounts of money at crazy valuations right off the bat.”
CAPITAL COST CUTTERS
The decline in angel, corporate and venture capital dollars flowing into the space sector is making persistence very difficult for startups that need significant funding before generating revenue.
SpaceLink was forced to wind down operations when its parent company, Australia-based Electro Optic Systems Holdings Ltd., came up empty in its search for outside investors willing to provide $70 million in the short term and $250 million in total for SpaceLink’s proposed data-delivery constellations in medium-Earth orbit.
While mid-Earth orbit is an ideal vantage point for communicating with satellites in low-Earth orbit, “getting equipment, satellites and launch capability to MEO has some capital-intensive pre-revenue expenditures,” he said. Dave Bettinger, CEO of SpaceLink.
Other enterprise companies are continuing to operate as they scale back on capital-intensive projects.
In December, British cybersecurity software developer Arqit scrapped plans for a space-based quantum encryption network, citing the cost and risk compared to setting up a terrestrial network.
In October, small satellite specialist Terran Orbit canceled plans for its own synthetic aperture radar constellation, choosing instead to build SAR satellites and sell them directly to commercial and government customers.
It is impossible to predict how long the current investment environment will last.
Space Capital noted nearly $300 billion of dry powder, investment dollars left on the sidelines, in its third-quarter report released in October.
“We’re still waiting for the floodgates to open,” Space Capital said, as VCs shift from pure investment to a greater focus on leverage and price control.
Until the floodgates open, founders of early-stage startups like Los Angeles-based Plasmos are finding inexpensive work solutions.
“Given the constraints of fundraising in the market, we’ve done things relentlessly and at low cost,” Baghchehsara said.
Plasmos has few employees, and the startup’s technology, which combines elements of chemical and electric propulsion, is not suited to common propulsion test facilities.
To do that, Baghchehsara found a welder to build a rocket test stand by advertising on Craigslist. One of the responders introduced Baghchehsara to GT Performance Engineering, a marine services specialist in Upland, California.
One weekend, “I started cautiously using their expensive machines,” Baghchehsara said. “That same weekend, we dropped the engine because these guys were very familiar with machining.”
Although GT Performance Engineering employees had never worked on rocket engines, they were eager to help Plasmos conduct tests.
“They call me the boom man,” Baghchehsara said. “Everybody comes around and helps me.”
This article originally appeared in the January 2023 issue of SpaceNews magazine