Ok, as you all are aware, I’ve been following the new Space Cynic blog for a bit, seeing what I could learn in the process. One of the things I’ve noticed about their blog (particularly in Shubber’s posts) is their over-focus on Venture Capital financing. For instance, in a recent post, and in some of the discussion in the comments thread for that post, Shubber made it quite clear that he felt that any investment that didn’t meet the requirements of a VC fund were a bad investment.
Now, if Shubber was just referring to meeting the quality requirements of a VC fund, I’d wholeheartedly agree. Even if you’re not going after VC funding, you should definitely be striving for a business that can stand up well to that level of scrutiny. That said, I think that one of the commenters (Michael Mealling) also had a valid point:
No one is saying any alt.space company is or should be expected to meet the metrics required by a VC. There is a place for private equity (i.e. angel) investors who have different requirements for metrics than a VC. It doesn’t mean the quality of due diligence is lower, it just means that the amounts of money are smaller, tranches are performance based, the management team’s background is much more important, and by and large the company is pre-revenue which means the investor is doing due dilegence on market analysis and projections, not existing sales.
When Michael says a company is still good that doesn’t meet VC requirements, he’s not talking about companies that don’t meet the quality standard that’s expected by VCs, but that they don’t meet the metrics (to be fair to Shubber, some of Michael’s earlier comments in the thread could be easily misinterpretted).
One example of a common VC fund investment metric that many otherwise high-quality business may not meet is market size. Alan Marty of JP Morgan pointed out at the ACES conference last October that VCs are mostly interested in billion dollar markets (or bigger). For JP Morgan, any market much smaller than that doesn’t meet their metrics. Now, I’m sure that if there were a $100M market sized business that was in all other regards a slam-dunk, they might go for it, but that’s an example of a metric that has absolutely nothing to do with the fundamental quality of the investment.
Another metric that Michael mentioned is how far down the revenue stream the company is. Just because a company is pre-revenue doesn’t mean they are a bunch of “Kool-aid drinkers”. Almost every company that has ever been succesful has had a point at which it has been “pre-revenue”. More particularly, most companies that have a technical product that required any sort of R&D has probably had a point at which they had proven the concept, but didn’t yet have a marketable product. That doesn’t neccessarily mean that they are a crappy investment, or vaporware, or anything else. They might be a crappy investment, or it may just mean that they’re a quality investment that’s earlier along the development path.
If my distinction between metrics and quality aren’t being clear, maybe an analogy is in order. Consider suborbital vs orbital vehicles. One of the biggest technical benefits of doing a suborbital vehicle before an orbital vehicle is that the performance requirements for a suborbital vehicle are a lot lower. The amount of delta-V required, the efficiency of the engines and structures, and the demands on analysis for weight reduction are all much easier. A suborbital vehicle however still has to have almost as high if not just as high of quality as an orbital vehicle, or it will likely fail. In fact, a suborbital vehicle will likely have most of the major subsystems needed for an orbital vehicle. They have to function just as reliably in most cases, or you’ll lose vehicles just as quickly as you would for an orbital vehicle. It’s not so much that suborbital trajectories are more forgiving than orbital ones (because for high altitude suborbital trajectories the “reentry” environment can actually be more brutal than orbital ones), but merely that the performance requirements are much lower and that you can more incrementally try out the system in a much quicker, lower overhead manner.
Now, I don’t want to push the analogy any further, but I hope it made my point. It is quite possible to have a really high quality investment that just isn’t a good match for VC funding, just as it’s possible to have a really robust and reliable suborbital vehicle that wouldn’t have the performance needed to make orbit.