Collapsing facilities, canceling trips and keeping staff helps startups stretch every dollar they raise.
If it were easier to raise money, Plasmos could have a dedicated rocket engine testing facility. Instead, the startup leased a speedboat restoration shop east of Los Angeles.
There, “we managed to do some testing and it was successful,” said Plasmos CEO Ali Bagchehsara. “We were able to create a plasma in the engine and get high ionization with air.”
After years of sky-high valuations and investor competition for shares of promising space startups, high interest rates and the threat of a recession have made investors wary. In response to a lack of new sources of funding, space startups are cutting back on hiring, cutting back on travel and giving up leased office space.
“Entrepreneurship is always a little bit about survival of the fittest,” said Jason Chen, founder and CEO of VentureScope, a McLean, Va.-based consulting and venture capital firm that works with entrepreneurs. “That economy is definitely tightening the belts a little bit, making the teams more frugal.”
DELIVERY TIME
In 2022, the Ukrainian startup “Promin Aerospace” reduced its staff and doubled its engineering activities.
“Now we have 13 full-time employees. Ten of them are part of the engineering team in Dnipro, and three are part of the administrative team,” said Misha Rudominskyi, general director of Promin. “We had 16 employees before the war. We had an office manager and a communicator. We were building a team for future growth.”
Instead of gearing up for scale-up, a popular approach in 2020 and 2021, startups are now focused on increasing their burn rates, which means slowing their spending pace.
Investors, meanwhile, encourage founders to “focus on their core competencies, regardless of their unique value proposition,” said Chen, who has founded four startups.
For Lunargistics, a Woodland, Texas-based startup that offers mission management, launch integration and other space services, the economic downturn has meant fewer trips to conferences.
“Meeting everyone in an industry that @lunargistics and I are new to is rewarding and informative, but now is the time to do it,” Lunargistics founder, chairman and CEO Logan Ryan Golem wrote in November.
STATE HELP LINE
For some early-stage companies, government contracts or funding programs serve as a lifeline.
Matt Kozlov, managing director of the TechStars accelerator in Los Angeles, said the most important advice he has for startups right now is to “relentlessly track, apply and win government contracts 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, non-dilution financing opportunities,” as well as “phenomenal early validation of both the technical viability of the company and the potential interest” of government customers, Kozlov said by email. .
After winning the government contract, one of the founders said, “It means we don’t have to lay people off and we can keep building the new things we want to build.”
Entrepreneurs who enthusiastically share news about technological advances and fundraising successes are much less willing to discuss financial troubles and layoffs. On the condition of anonymity, they speak openly about the stark differences between 2021, a landmark year for space investment, and 2022.
“There’s no question that the financial environment is tight right now,” said the startup’s founder. “We’re seeing it across the industry.”
Another founder said, “Entrepreneurs who were raising money just three or four months before us raised crazy amounts of money at crazy valuations all at once.”
REDUCTION OF CAPITAL COSTS
The decline in angel, corporate and venture capital dollars flowing into the space sector makes it especially difficult to persist for startups that need significant funding before generating revenue.
SpaceLink was forced to fold after its parent company, Australia’s Electro Optic Systems Holdings Ltd., came up empty in its search for outside investors willing to provide $70 million in the near term and $250 million in total for SpaceLink’s planned data relay system in mid Earth orbit.
While medium-Earth orbit is a great vantage point for communicating with low-Earth orbit satellites, “moving the equipment, satellites and launch capabilities to MEO does lead to some capital-intensive costs before revenue,” said SpaceLink CEO Dave Bettinger.
Other entrepreneurial companies continued to work, curtailing capital-intensive projects.
In December, British cybersecurity software developer Arqit scrapped plans for a space-based quantum encryption network, citing cost and risk compared to building a ground-based network.
In October, Terran Orbital, which specializes in small satellites, scrapped plans to build its own synthetic aperture radar group, opting instead to build SAR satellites and sell them directly to commercial and government customers.
WORKAROUNDS
It is impossible to predict how long the current investment climate will last.
In its third-quarter report released in October, Space Capital noted nearly $300 billion in dry powder, with investment dollars lagging behind.
“We’re still waiting for the floodgates to open,” Space Capital said, as venture capitalists shift from pure momentum investing to a greater focus on diligence and price controls.
Until the floodgates open, founders of early-stage startups like Los Angeles-based Plasmos are finding low-cost workarounds.
“Given the fundraising constraints of the market, we made things small and cheap,” Bagchehsara said.
Plasmos has few employees, and the startup’s technology, which combines elements of chemical and electric propulsion, is not suitable for conventional test rigs.
To accommodate this, Bagchehsara found a welder to build a missile test stand by posting an ad on Craigslist. One of the responders introduced Bagchesara to GT Performance Engineering, a marine services specialist in Upland, California.
One day off, I started using their expensive cars carefully, Bagchehsara said. “That same weekend we started the engine because these people were extremely knowledgeable about mechanical engineering.”
Even though GT Performance Engineering had never worked on rocket engines, they were willing to help Plasmos with the tests.
“They call me a boom boy,” Bagchehsara said. “Everybody comes up and helps me.”
This article was first published in the January 2023 issue of SpaceNews
