LeoSat, absent investors, shuts down

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WASHINGTON — LeoSat, a company that was seeking to operate a constellation of 78 to 108 satellites for high-speed internet, has suspended operations due to a lack of investment. 

Mark Rigolle, CEO of LeoSat, told SpaceNews Nov. 13 that the company laid off all 13 employees — himself included — in August after its earlier investors decided not to fund the company any longer. 

LeoSat was anticipating that Spanish satellite operator Hispasat and Sky Perfect Jsat of Japan would complete LeoSat’s $50 million Series A after each made initial investments — Jsat in 2017, Hispasat in 2018 — but neither did. 

Rigolle said management changes at both companies this year prompted a reversal of their previous intent to invest further in the low-Earth-orbit broadband venture within months of each other, if not less. 

“I couldn’t have dreamt up a worse scenario,” Rigolle said. “This is like SoftBank suddenly saying to OneWeb ‘you’re not getting any more money,’ or Jeff Bezos saying in two years time, ‘no, bad idea, I’m not funding [Kuiper] anymore. It’s a 180-degree turn.”

In February, Jsat appointed a new chief executive, Eiichi Yonekura, and Spanish power company Red Eléctrica purchased Hispasat. LeoSat still exists as a legal entity, Rigolle said, and its founders continue to look for new funding, but otherwise the company has effectively ceased operations. 

Rigolle, who in 2010 became chief executive of O3b Networks, set the medium-Earth-orbit broadband startup on a trajectory where its valuation reached $1.43 billion and was later purchased by SES. 

While O3b was largely alone, LeoSat formed in 2013 at the start of a frenzy of constellation activity, with companies including OneWeb, Elon Musk’s SpaceX, Telesat and, as of this year, Jeff Bezos’ Amazon, all pursuing broadband business with plans for hundreds or thousands of satellites. 

LeoSat had lined up $2 billion in soft commitments from customers wanting to use its network once deployed, but those letters of intent didn’t translate to similar gains with investors. 

“The only one constellation that had its ear to the market, was talking to customers and had customer success, is now the one running out of money first,” Rigolle said. “It’s weird.”

LeoSat had worked to shave some $500 million off the roughly $3.5 billion projected cost of its cross-linked, Ka-band constellation as it sought funding to build and launch its system. 

Complicating matters, the Thales Alenia Space constellation spectrum filing LeoSat planned to use with the International Telecommunication Union expires in January 2021 unless the company launches a satellite to reserve the frequencies — and none have been built. 

Furthermore, the U.S. Federal Communications Commission voided LeoSat’s market access Sept. 28 after the company failed to pay requisite surety bond riders. 

LeoSat’s target market was high-end government and corporate customers willing to pay a premium for large quantities of broadband at fiber-like latencies. Connecting consumers was a market it would leave to other megaconstellations. 

SpaceNews spoke to Rigolle about LeoSat and the megaconstellation movement.

LeoSat had customers willing to collectively spend $2 billion buying satellite broadband. Why could you convince customers but not investors? 

The first reason is simply that three or more billion dollars is a hell of a lot of money. Even Silicon Valley gurus like Mr. Musk, they don’t just open a valve and a few billion come in. They have to go through conversations with investors. I suppose Mr. Bezos is the exception.

The specific thing I would point out in our case is that before I joined in September 2015, LeoSat’s founders had been pointed in the direction of Thales Alenia Space being the company that had at that point the most constellation building experience, with O3b and Iridium Next. There was a lot of trust that they were the best place to do business, and they are a good company. So, from those conversations, they made a [spectrum] filing on LeoSat’s behalf which then led the founders not to make a company filing themselves.

The problem with that is when I joined, there already were 40, 50, or 60 people who had filed. There was a flurry of activity in low-Earth-orbit filings during 2014 and 2015.  Making a filing with priority No. 70 wasn’t a prudent allocation of the scarce resources of a startup, so we had to rely on the Thales Alenia Space filing.

The problem with that is we’ve never been able to run a competitive process between manufacturers because we were kind of a captive customer of Thales Alenia Space, and even when we asked them to transfer the filing because it was impeding our ability to raise funding, they said no.

Was abandoning the decision to build two demonstration satellites a mistake, since that would have allowed LeoSat to bring your spectrum into use and prevent the filing from expiring?

It still would not have been our spectrum. We would have been spending our shareholder’s money to create more value in somebody else’s filing.

And pre-[World Radiocommunication Conference 2019 (WRC-19)], a clock would have started ticking within which we need to start launching a full constellation within three years [of those demo satellites deorbiting]. History has proven that we would not have met that.

You would have had to launch more satellites in three years? 

Yes. That might change based on conversations happening [at WRC-19] as we speak, but those could lead to an even higher barrier to entry for new constellations. It might deter investment if the rule becomes you have to have 50% of your constellation up within a few years of your bring-into-use, then people are going to postpone their bring-into-use as much as possible. 

This ominous risk is that if you miss the deadline, you’re in trouble. I’m quite sure that the ITU’s Radiocommunication Bureau would apply the rule wisely. If you have a production problem or generic fault and have to rework your satellites, or if there’s a launch failure, and you’ve already invested a few billion dollars, I’m quite sure they wouldn’t shut you down, but for investors who are not from this sector, all of this feels risky.

At World Satellite Business Week in September, you mentioned an Internet-of-Things lead as a potential new investor. What happened there? 

It just didn’t crystalize in time for us to comfortably keep people on the payroll without having the cash in the bank to be able to pay them. This could still be one of the possible ways in which we are able to resurrect LeoSat.

If nothing works out by the end of the year, will LeoSat file for bankruptcy?

I know the founders are working on a resurrection scenario. What they will do at a future point in time I can’t promise.

Was there a time when LeoSat was materially bigger than about a dozen people?

No. Even in our business plan, the payroll when we were predicting revenue of $2 billion a year was only 150 to 160 max. I believe in lean organizations. Too many people on the payroll leads to people just talking to each other and not talking to customers or suppliers. And good people are stimulated by hard work, so all of that leads me to believe in lean teams, and in the context of a startup, you want to pay people well if you want good people, but that means you can’t afford a lot of them. You put those two things together and that’s why we had the team we had. 

OneWeb raised $3.4 billion, and they have many more critics than LeoSat.

Yes, and if there is any bitterness here, it’s that it was a business model we supported versus one we don’t, and the one that runs out of cash first is the one that we think makes sense. That’s intellectually not acceptable and emotionally hard to take, but OneWeb recently had to do a down round, so it’s not like everything is gung-ho there. I hope they make it and prove me wrong. 

Canada has agreed to spend a substantial amount on Telesat LEO. Should LeoSat have gone after a government anchor customer or investor to provide stability when the commercial market didn’t?

Who would we have gone to? We had great conversations with the U.S. Department of Defense and the scientific community, but they don’t underwrite things the way the Canadians have done for Telesat. They don’t commit to [buy capacity] before commercial launch, so I’m not quite sure who we could have gone to. 

You’ve mentioned ITU constellation milestones as necessary but something that should be done with caution. Do you have an opinion on the best set of milestones?

I understand that the rule has to have numbers, but I think more important is that the way it gets enforced needs to be reasonable. The risk is that you get different points of view in similar cases. 

It should definitely not be front loaded too much, because raising capital is always the most difficult thing. Go back 10 years ago, O3b was at least two years delayed from the initial deadline it had set itself before it accepted investment. Things just slip as your funding slips. Look at LeoSat and look at OneWeb. The dates people were talking about three to five years ago for OneWeb, they should have launched their full constellation by now. 

If you’re raising capital and people notice that there’s this regulatory risk that if you slip beyond a certain date you might lose everything, they are not going to invest and it becomes self-fulfilling that no new constellations get launched because of that. Except Amazon.