Startups’ Post-Pandemic Survival Depends on Timing and Investor Quality

In a recent interview with Via Satellite, Airspace Internet Exchange Chairman Tom Choi claimed that the coronavirus pandemic should cast into doubt the future of any company dependent upon venture or debt financing. Large, established corporations will gobble up what liquidity is left in the arid desert. Choi, a former operator CEO and Satellite Executive of the Year winner, is known for acknowledging the elephants in the room with a bullhorn. He believes startups will be the first to starve in the COVID-19 era, and that a new wave of thrifty, mission-focused “Smart Space” companies will emerge.

“I boldly predict a new era will emerge, where smart ideas for space will be more successful: projects that are not rehash of old bad ideas, but new ones that are brilliant not requiring billions of dollars from billionaires, but support from customers who want the services,” says Choi.

Most of the space investors and startups we spoke to for this story disagree with Choi’s forecast — but not entirely. They agree with his vision of an emerging “Smart Space” movement, but think the startups that survive COVID-19 will be existing entities that evolve into those “Smart Space” companies. And those startups, they say, are in a much better position to make that transition than most people think.

The satellite industry has ruminated on the pace of change and innovation for decades, building up to what was an incredible acceleration during the 2010s thanks to a massive influx of startups with smaller, cheaper, and more agile space technologies. As a space startup, survival in the previous decade was almost always decided by your ability to produce instantaneous results – find a market, raise capital, build a prototype, and generate business while keeping your toes curled around the bleeding edge.

Now, at the start of a new decade, comes an unexpected force of change in the form of a global pandemic. Nothing has toppled billion-dollar business models (or provided a more convenient exit ramp) faster than COVID-19. It has single handedly changed the definition of “long-term” for everyone – including startups, for which time may be the deciding factor between success and failure, but in a completely new way.

“If your runway is three months long right now, you’re in trouble,” says Rafferty Jackson, an angel investor with Jack Industries and frequent collaborator with SATELLITE’s Startup Space competition. Jackson’s version of a runway leads to a startup’s next big milestone – the start of a new round of financing, or a product launch.

Jackson explains that shorter runways were always considered riskier for investors, but were often overlooked if investors believed in the entrepreneur’s ability to meet deadlines. “With COVID-19, nothing is happening in the next six months, at least. So, you’ve got to extend your runway,” she says. “Ideally, you want your runway to be 12 to 18 months, and you’ve got to be able to make that adjustment and sustain yourself at the same time. And, being able to sustain yourself will be a lot easier if you have high-quality investors.”

Troy McCann, founder of Moonshot, an accelerator based in Australia, agrees with Jackson, and defines high-quality investors as those who can continue to provide financial stability and guidance even in a worst-case scenario. “High-quality investors aren’t just checkbooks,” he says. “They maintain a critical line of communication with the company. They care about everyone’s health and safety. They help startups navigate through this crisis and make the necessary adjustments.”

Like Jackson, McCann does not consider the entrepreneurs themselves, or their friends and family, to qualify as high-quality investors at this time. Self-funding in this environment, they say, is just too risky, considering that we could be in for a long wait for a COVID-19 vaccine.

Another investor, who asked not to be named for this story, but whose portfolio includes several notable companies in the small satellite sector, added that the recent bankruptcy situation with constellation operator OneWeb makes it more difficult to define a quality investor.

“If you told me two years ago that [Japanese holding company and OneWeb’s primary investor] SoftBank was essentially going to fold on OneWeb, I would have told you that you were wrong,” the investor said, with a chuckle. “At the time, I probably would have reminded you that SoftBank just dumped another $3 billion into WeWork and you wouldn’t be coming back to me for advice any time soon. The point is that high-dollar investments don’t make high-quality investors. The money alone doesn’t make you invincible. Success and stability ultimately defines a quality investor.”

How many existing space startups will be able to adapt and survive? According to Quilty Analytics’ Justin Cadman, the answer is a little less than half – roughly the same number of startups that are currently generating actual revenue.

“Private investments in New Space companies hit a record of nearly $6 billion in 2019, but that’s going to change this year due to the inevitable COVID-19- recession,” says Cadman. “Marginal companies that recently raised substantial capital could survive. High vulnerability segments will see a higher level of business failures, but the survivors may be more handsomely rewarded due to less competition down the road.”

Cadman ranks the level of risk for different types of startups in a prolonged COVID-19 recession. Low-Earth Orbit (LEO) broadband systems are at the top of that list because they are the most capital intensive. With OneWeb and LeoSat already out of the game, “SpaceX’s Starlink, Amazon’s Project Kuiper, and Telesat LEO are the only viable solutions left and only one or two of these will succeed,” Cadman predicts.

Small satellite launch specialists – the ones tasked to launch these constellations at low cost – are second on Cadman’s list due to the immediate impact that COVID-19 has on their primary target markets combined with how saturated the market has become with launch options. Launch services, like constellations, are capital intensive and require long-term development. “There are more than 100 small launch companies and again, room for one or two winners,” he says.

Analysts may be at odds with investors when it comes to assessing the value of time and investor quality, but both sides do agree on one bit of advice for space startups – get into the public sector, if you can, as both government and military agencies are moving in the complete opposite direction and actually increasing their investments into their space startup partners.

Chad Anderson, managing partner of the recently rebranded Space Capital said as much in an April report. “Having the government as a lifeline is really important, particularly relevant for infrastructure companies that are launching satellites and hardware,” he says.

Anderson’s statement is backed by several startups who competed in the Startup Space Entrepreneur Pitch Contest at SATELLITE during the past few years. All of the startups we spoke to who had NASA as a major partner or customer said that they’ve received increased technical or financial support from the agency since COVID-19. None of the companies were willing to share details, but all confirmed that they’ve received reassurances.

The same is true for startups with major military partners or organizations serving as customers. Shortly after the U.S. Department of Defense’s Under Secretary of Defense Acquisition and Sustainment Ellen Lord announced in Mid-April that the military would accelerate and increase payments to technology partners, several space startups reported “immediate, positive” results. “I certainly feel fortunate that our [military] customers aren’t experiencing budget issues,” says the executive of a startup space-based analytics firm. “I’m still nervous about the long-term, but far from terrified. Coronavirus hasn’t been nearly as disruptive for us as it has been for some of our peers.”

There’s also the Moon. NASA and the U.S. Government still want to go there and are still investing in a decades-overdue return. A majority of the companies that are benefiting from those investments aren’t technically startups – Blue Origin and SpaceX are owned and managed by billionaires. But, there are hundreds of components and systems subcontractors that still see plenty of opportunity.

Unfortunately for those outside of the government business sector, the U.S. government’s COVID-19-driven support for space companies with mostly private sector business made little impact. The “small business” assistance provided in Congress’ recent Coronavirus Aid, Relief, and Economic Security (CARES) Act was structured in a way that disqualified most smaller space businesses, which had to include the employees of their “affiliates” toward their total headcounts. Few VC-backed startups were able to stay under the 500-employee threshold when including the teams of all the companies in their investors portfolios.

A final point of consensus among investors, analysts, and industry executives is that it’s still too early to make confident long-term predictions about the overall health of our startup community. COVID-19 is unprecedented. There are countless scenarios that could play out on the path to a vaccine, which in itself may not be the end of the COVID-19 story. “It will be hard to ignore the permanent scar that this is going to leave,” says one investor when asked how COVID-19 would change their firm’s approach to financing new startups. “It will change how we assess everything. It puts a big asterisk on every market research statistic. The year 2020 will be the lost year and the variable we learn to live with. Hopefully, it’s just one year.”

When asked how startups can prove themselves in this kind of scenario, the investor responds, “Just survive. And, be innovative in how you survive. If you can pull through this craziness, it tells me that you can pull through anything.” VS