It’s belt-cinching time for space startups

It’s belt-cinching time for space startups

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Scaling back facilities, canceling travel and keeping staff lean helps startups stretch every dollar raised

Credit: SpaceNews Midjourney illustration

If it was easier to raise money, Plasmos might have a dedicated facility for testing rocket engines. Instead, the propulsion startup rented a speedboat restoration shop east of Los Angeles.

There, “we managed to test something, and it was successful,” said Plasmos CEO Ali Baghchehsara. “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 of promising space startups, high interest rates and the threat of recession have made investors cautious. In response to a lack of new funding sources, space startups are cutting back on hiring, reducing travel and giving up leased office space.

“Entrepreneurship is always a little bit of survival of the fittest,” said Jason Chen, founder and CEO of VentureScope, a McLean, Virginia, consulting and venture investment firm that works with entrepreneurs. “This economy definitely tightens the belt a little bit, making teams operate more lean.”

TIME TO DELIVER

Ukrainian startup Promin Aerospace trimmed its staff and doubled down on engineering in 2022.

“We currently have 13 full-time employees. Ten of those are on the engineering team in Dnipro, and three are 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 building a dedicated facility, Plasmos tested engine technology at GT Performance Engineering in Upland, California. At one point, Plasmos CEO Ali Baghchehera drove a forklift to move concrete blocks around the test stand. Credit: Plasmos

Instead of preparing for expansion, a popular approach in 2020 and 2021, startups now focus on extending their burn rate, meaning slowing down the pace of spending.

Investors, meanwhile, are encouraging founders to “zero in and focus on their core competencies, whatever is their unique value proposition,” said Chen, a founder of four startups.

For Lunargistics, a Woodland, Texas startup that offers mission guidance, launch integration and other space services, the economic downturn has meant fewer trips to conferences.

“It’s successful and enlightening to meet everyone in an industry in which I and @lunargistics are newcomers, but now’s the time to deliver,” Logan Ryan Golema, Lunargistics founder, chairman and CEO, tweeted in November.

GOVERNMENT LIFELINE

For some early-stage companies, government contracts or financing programs serve as lifelines.

Matt Kozlov, manager director of the TechStars Los Angeles accelerator, said the most important advice he’s giving startups right now is “to relentlessly track, apply for, and win government contracts and grants whenever possible.”

The Defense Department, Energy Department, National Science Foundation, NASA and other government agencies are “a great source of capital, non-dilutive funding opportunities” plus “phenomenal early validations of both a company’s technical viability and the potential interest” of government customers, Kozlov said by email.

After winning a government contract, a founder said, “It means we don’t have to lay people off, and we can keep building the new things that we want to build.”

Entrepreneurs, who enthusiastically share news of technological achievements and fundraising success, are far less eager to discuss financial woes and layoffs. When promised they would not be quoted by name, though, they speak freely about the stark differences between 2021, a banner year for space investment, and 2022.

“There’s no question that the funding environment is tight 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 on crazy valuations right off the bat.”

CAPITAL EXPENSE CUTBACKS

The reduction in angel, corporate and venture capital dollars flowing into the space sector is making perseverance particularly difficult for startups needing significant funding before generating revenue.

SpaceLink was forced to wind 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 in the near term and $250 million overall for SpaceLink’s planned data-relay constellation in medium-Earth orbit.

While medium-Earth orbit is a great vantage point for communicating with satellites in low-Earth orbit, “getting equipment, satellites and launch capability to MEO does lead to some capital-intensive pre-revenue spending,” said SpaceLink CEO Dave Bettinger.

Other entrepreneurial companies have continued to operate while scaling back 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 with establishing a terrestrial 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.

WORKAROUNDS

It’s impossible to predict how long the current investment climate will last.

Credit: SpaceNews Midjourney illustration

Space Capital noted nearly $300 billion of dry powder, investment dollars remaining on the sidelines, in its third quarter report released in October.

“We are still waiting for the floodgates to open,” Space Capital said, as VCs 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 workarounds.

“Given the constraints of fundraising in the market, we have done things scrappy and low cost,” Baghchehsara said.

Plasmos has few employees, and the startup’s technology, which combines elements of chemical and electric propulsion, doesn’t fit common propulsion testing facilities.

To make do, Baghchehsara found a welder to build a rocket test stand by advertising on Craigslist. One of the people who responded 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 fired the engine because these people were extremely knowledgeable in machining.”

Even though 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 around and helps me out.”

This article originally appeared in the January 2023 issue of SpaceNews magazine

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