Op-ed | Space startups, Darwin and the coronavirus

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Survival of the fittest?

COVID-19 is a global Darwinian event for businesses around the world, including space development. Just as a revolution was underway in the space field that was destined to transform all aspects of our relationship to the heavens, the hand of nature has knocked down many of the very dreamers making it happen.

Up and down the supply chain, every aspect of the space business has been affected. Stay at home orders, sickness, shifts in investment priorities — all will contribute to the contraction. Even those companies deemed strategic are feeling the impact, and for many months to come, all will be playing catch-up. Of course the billionaires will be fine, and most large companies and government contractors will weather the storm based on their substantial reserves, contractual relationships and insider status. In fact, given their ability to lobby and work the Washington machine, some may actually thrive as trillions in bailouts flow — much of it to those with political influence.

 Unfortunately, for many smaller space startups and entrepreneurial enterprises, COVID-19 is a potential deathblow. As in many other industries, the hard fact is that many space startups are simply going to go away in the next few months. While in some overly lush sectors such as launch companies this weeding of the garden is a good thing, in others we may be losing potentially important technologies or services.

Certainly, congressionally backed Small Business Administration (SBA) loans and financial assistance will help some. Yet legislative nuances and legal hurdles may block others. One example is the issue of VC funding levels and control. While still in flux, the current rules essentially pit venture capital companies investing in startups against the startups themselves. For example, if a VC owns above a certain percentage of a startup, it is counted as part of the investing firm and cannot apply for itself. Another issue is permissible levels of foreign investment. While U.S. security regulators like to see ownership of a company by a single non-US investor at less than 25 percent, the recent SBA loan forms explicitly declare that if a non-US citizen owns more than 20 percent of the company, they are out of luck.

Also, given its Byzantine nature and the overall slowness of almost any government interaction — especially when it comes to giving out money — it is quite possible that a small space business owner could find herself waiting for months for the promised relief, or even an answer to their application. 

Thus, on top of the normal questions faced by startups, COVID-19 adds a crushing weight of uncertainty — even as the government tries to help. What relief do they apply for? Will they qualify? If so, what can they get and for what purpose? And most important, how long will it take? Keep in mind that most startups have very little if any reserves, and what little they have is usually pre-allocated to technology and product development. So what should they do? Lay off their workers so they are at least drawing unemployment funds in case it doesn’t work out? If they do, how will that affect their chances of getting support? And what if the support isn’t in time or enough to hire back their team?

Speaking of their teams, keep in mind that most space tech startups are composed of young teams, many of whom are already buried in creativity-choking student debt, often with young families. The company’s runway is one thing, their team’s personal runway is another. Even if a company navigates through this period, by the time they emerge, they may quite possibly have lost some of their best people to other, more certain employment.

As engineer-dominated as they are, these tiny shops have neither the staff, available time nor in many cases in-house understanding of the complicated processes needed to file the paperwork to find the right money. Unlike larger companies, day-to-day financial work in many startups is often carried out by the founders or another non-specialized team member. While they may list a CFO on their website, many are either fractional (working part-time) or called in only on high-end issues due to their high cost per hour.

 Given the nature of startups, most exist to introduce a new product or “disrupt” an existing business or way of doing things. Ironically, in a disaster like COVID-19 a tiny few ingenious companies with relevant technology or the ability to refocus or retool may actually be able to dive into the breach and do great things. However, it is far more likely that in uncertain times like these most potential customers are not interested in an opportunity to reinvent themselves or try the unknown.

 

The Problem with Short Runways

In startup land the “runway” is everything. This is how much money is in the bank or believed to be on the way to fund the company’s operations until they reach profitability. Many startups have at most one or two months of runway, and usually executives and founders are in a constant state of frenetic fundraising to stay ahead of the company’s forward motion, lest they run off the end of the pavement before they take off. Even in normal times, this constant foraging and pitching to investors is the number one cause of sleeplessness for founders.

 Then there is the Catch-22 relationship between entrepreneurs and investors. Contrary to their image as risk takers, most investors are conservative. Investors like sure things, which most startups decidedly are not. They prefer to invest when things are stable, when they are confident, when they feel good, and when everyone else is investing. In uncertain times, they hold their money, building their own reserves and liquidity to weather whatever perceived storms are ahead. Obviously, one does not take risks in a risky environment, and COVID-19 has created the poster child of maximum risk in every conceivable area of finance and business. Just look at the non-space markets and business news.

Thus, like the rest of the planet, by the end of this year the space field will be a different place. From the outside it will look the same, with the accomplishments of governments, aerospace giants and billionaires filling the pages of journals such as this one. But many of the little players will be gone. Our ecosystem will have been decimated at the ground level, and what emerges next is unknown. Those that do survive will be leaner, meaner, and eventually stronger, but all will be set back and slowed in their progress. 

 

What Can We Do?

I wish I could offer a simple remedy or vaccine that might save some of these great companies right now. But to badly paraphrase the noted Dr. Anthony Fauci: the virus determines what will happen here — not us.

Yet there are some things that can be done, by the government, investors and customers. If you run programs at NASA or DoD or are on the right congressional staff, try to look past the D.C.-based aerospace lobbyists in your waiting room to understand and work from the perspective of these embryonic companies who can’t fly in to make their case.

There are already many innovation-oriented programs out there that can be expanded. Other long discussed, pro-enterprise ideas should be reconsidered. First, begin now to enable targeted space technology grants and loans, simplify paperwork requirements, or even create post — virus support packages to assist those firms with provable good ideas to survive and thrive. Create service or data purchase opportunities, simplify requirements below traditional aerospace levels while keeping standards high to reduce paperwork. Try grants, prizes, debt relief, investment incentives — just get creative. But move fast, as those not already dead on the vine will soon be gone.

 Importantly, don’t delay or stretch current programs initially designed to enable smaller players, knowing their coffers are empty now. This was happening already in some cases, and while big companies can afford the time and ink, the very entrepreneurial companies these programs might most enable cannot simply bide their time while Congress, the White House, and NASA shift this way and that. Again, you’re killing the garden you hoped to grow. 

If you are an investor, use this time to discover areas that are underinvested. As I mentioned, COVID-19 will certainly cull the heavily overpopulated space launch field, which has been sucking investment from other areas. Many other sectors that are needed to create a space industrial infrastructure are underfunded, or under populated with providers, as can be seen in online listings such as the SpaceFund Reality Ratings. And frankly, as harsh as it may be to mention, there are excellent deals to be had with hungry entrepreneurs by those with vision and boldness. It is time to buy!

If you are an entrepreneur or dream of starting your own space company, don’t give up. It is inevitable that this will pass, and things will not just improve, but in many cases far surpass where they were headed before. Often it is exactly in such times as these, when life and cultural courses are forced to change that great ideas are born. For my part, I am convinced coming through a world-threatening event such as COVID-19 will create a hunger in people to look upward for rainbows, and we who offer the stars can provide that hope.

If you have survived, if your tenacity and stubbornness is still strong, then you will rise again. After all, the fall is not as important as the ability to get up afterward. We need you. Earth needs you. Rise.

Rick Tumlinson is a founding board member of the X Prize who led the commercial takeover of the Russian MIR space station. He has testified before the U.S. Congress six times, and won the World Technology Award in 2015. His company Spacefund is a VC firm investing in space startups. Follow him on Twitter: @rocketrick