Downsizing facilities, canceling trips and keeping staff down helps startups stretch every dollar raised
If it were easier to raise money, Plasmos could have a dedicated facility for testing rocket engines. Instead, the propulsion startup leased a speedboat restoration shop in East Los Angeles.
There, “we managed to test something and it was successful,” Plasmos CEO Ali Baghchehsara said. “We managed to create plasma in the engine and got high ionization using air.”
After years of sky-high valuations and investor competition for shares in promising space startups, high interest rates and the threat of recession have made investors wary. In response to the lack of new sources of funding, space startups are slashing hiring, reducing travel and giving up leased office space.
“Entrepreneurship is always a bit of survival of the fittest,” said Jason Chen, founder and CEO of VentureScope, a McLean, Va., venture investment and consulting firm that works with entrepreneurs. “This economy definitely tightens the belt a bit, making teams operate more efficiently.”
Ukrainian startup Promin Aerospace has cut staff and doubled down on engineering by 2022.
“We currently have 13 full-time employees. Ten of them are in the engineering team in Dnipro, and three are in the administrative team,” Promin CEO Misha Rudominski said. “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 popular approach in 2020 and 2021, startups are now focused on extending their rate of consumption, which means slowing the pace of spending.
Meanwhile, investors are encouraging founders to “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 provides mission guidance, launch integration and other space services, the economic downturn has meant less travel to conferences.
“It’s successful and enlightening to meet everyone in an industry @lunargistics and I are new to, but now is the time to deliver,” Logan Ryan Golema, Lunargistics founder, president and CEO, tweeted in November.
GOVERNMENT RESCUE LINE
For some early-stage businesses, government contracts or financing programs serve as a lifeline.
Matt Kozlov, managing director of the TechStars Los Angeles accelerator, said the most important advice he is giving start-ups right now is to “follow, apply for and win government contracts and grants relentlessly whenever possible.”
The Department of Defense, the Department of Energy, the National Science Foundation, NASA and other government agencies are “great sources of capital, non-dilutive funding opportunities” as well as “phenomenal early validations of both the technical feasibility of a company as of the potential interest” of government clients, Kozlov said by email.
After winning a government contract, one founder 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 eagerly share news about technological breakthroughs and fundraising successes, are much less eager to talk about financial woes and layoffs. Yet when promised not to be quoted by name, they speak freely about the stark differences between 2021, a banner year for space investment, and 2022.
“There is no question that the funding environment is tough right now,” said a startup founder. “We’ve been seeing that across the industry.”
Another founder said, “Entrepreneurs who raised money just three or four months before us, raised crazy amounts of money at crazy valuations from the start.”
Reduced angel, corporate and venture capital dollars flowing into the space sector makes persistence particularly difficult for startups that need significant funding before generating revenue.
SpaceLink was forced to shut down operations 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 near-term and $250 million overall for the constellation of SpaceLink planned data transmission in medium Earth orbit.
While medium-Earth orbit is a huge vantage point for communicating with satellites in low-Earth orbit, “getting equipment, satellites and launch capacity for MEO leads to capital-intensive pre-revenue spending,” SpaceLink’s chief executive said. , Dave Bettinger.
Other start-up companies have continued to operate while cutting 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 establishing a ground-based network.
In October, small-satellite specialist Terran Orbit canceled plans for its own synthetic aperture radar constellation, opting instead to build SAR satellites and sell them directly to commercial and government customers.
It is impossible to predict how long the current investment climate will last.
Space Capital noted nearly $300 billion in dry powder, investment dollars left on the sidelines, in its third-quarter report published in October.
“We are 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 control.
Until the floodgates open, founders of early-stage startups like Los Angeles-based Plasmos are finding inexpensive solutions.
“Given the fundraising limitations in the market, we have done things in a rudimentary and low-cost way,” Baghchehsara said.
Plasmos has few employees and the startup’s technology, which combines elements of chemical and electrical propulsion, does not fit into common propulsion test facilities.
To get by, Baghchehsara found a welder to build a rocket test stand by advertising on Craigslist. One respondent introduced Baghchehsara to GT Performance Engineering, a marine services specialist in Upland, California.
One weekend, “I started carefully using their expensive machines,” Baghchehsara said. “That same weekend, we started the engine because these people had a great knowledge in 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 guy,” Baghchehsara said. “Everyone comes and helps me.”
This article originally appeared in the January 2023 issue of SpaceNews Magazine