124. Space Tech Investing, Part 1 (David Cowan)

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David Cowan of Bessemer Venture Partners joins Nick to cover Space Tech Investing, Part 1. We will address questions including:

  • First off, David what was the thought process that led you to invest in this area?
  • You’ve written in the past about the roadmap approach toward investing.  Was it this approach that led you to space tech?
  • What are the major categories or sub-groups within space tech?
  • It seems that there has been a recent surge in space tech investing. Was there a catalyst or a series of factors that has driven the opportunity for VC investing in space technology?
  • Are the risk/return profile and capital intensity of investing in this area fundamentally different than that of other tech sectors? Why or why not?

Guest Links:

*Please excuse any errors in the below transcript

Nick: #David Cowan joins us today from Menlo Park, California. #David, of course, is a partner at #Bessemer Venture Partners and launched the firm’s practices in cloud infrastructure, consumer tech, cyber security, and space tech. His historical portfolio includes a who’s who of IPOs and large acquisitions. Maybe we can discuss a few of those today. And during his tenure at #Bessemer, he’s even founded three cyber security companies, incubated in the #BVP offices. Forbes ranks #David as number 6 on the Midas List and tied for 4th in the Midas List Hall of Fame. He’s a trustee of the #Richard Dawkins Foundation for Reason and Science; and he actively shares great perspective at his blog, ‘Who Has Time For This’. #David, it’s a big pleasure to have you on. Thanks so much for joining me.

David: Sure, #Nick. Happy to be here.

Nick: Yeah. Can you start us off with a little bit on your background and how you became involved in venture?

David: Yeah, sure, okay. My background is in math and computer science. And I came out to Silicon Valley to work for #Oracle. And while I was working for #Oracle, somebody told me that the venture capitalists were all at 3000 Sand Hill Road. I had heard about venture capitalists. My, my father had mentioned to me that it might be something I’d be interested in since I was always thinking about business ideas when I was younger. But I didn’t know anything about it. There was no #TechCrunch back then. I didn’t know the names of any firms or the name of, names of any individuals. I just thought it sounded like a pretty interesting job. And so, without knowing anything else, I got a, a map book, because of course we didn’t have Google Maps, and, and I found 3000 Sand Hill Road on the map. And I got in my car and I drove, drove over there. And honestly, that’s actually how I got into venture. It was just by driving over to 3000 Sand Hill Road.

Nick: Wow

David: I parked my car. Yeah, I parked my car, I got out, saw all these names on the doors that I didn’t recognize, picked one at random, walked in. And knowing that I had applied to business school and I was going to go in a few months, I thought maybe I’ll get a summer job at one of these places. So I asked the receptionist, hey, does this venture capital capital company hire summer people? She said no. I said, well do any of these venture capital companies hire summer people? She said yes. And I said, well, which ones? And she pulled out a, a Western Association of Venture Capital directory, she circled 5 names on it. And, and I said thank you very much. Pulled out my PC and my WordStar program, and I sent out 5 letter to 5 firms without really knowing anything about them. And one of them happened to be #Bessemer Venture Partners. #Bessemer interviewed me but didn’t hire me. One of them was #TA Associates, and they did hire me for the summer. But I, I realized that after working at #TA, what I, what I really liked was the earlier stage kinds of investing. And so I stayed in touch with the #Bessemer folks. And they took pity on me and after business school, they, they hired me.

Nick: Wow, incredible. Can you talk about how your experience at #Bessemer has progressed and also what your focus areas are?

David: So I was very fortunate to join #Bessemer as the technology investor in the early 90s. I, I can’t imagine a luckier time and place to be as a technology investor. Today, of course, VCs specialize in technology down to very, very narrow segments. But back then, technology itself was a specialty. There was, there was an investor who focused on retail and one on finance and one on biotech. And so, I guess technology was, was kind of my turf. And so since that time, over the last 25 years, I’ve been investing in different sectors of technology. Generally I, I create an investment hypothesis around one area, and I’ll focus in on that. And so in the 90s I invested in the emergence of the internet and email and security; in Wavelength-Division Multiplexing, and ATM, which were some communications protocols that were important. And I also started investing in cloud computing. We didn’t call it cloud computing, but I was very intrigued by this notion that we could develop and, and sell software that we run ourselves and deliver it through the internet. So over the years, I’ve invested in, in various sectors. I’ve pretty much invested consistently in cyber security. And, more recently, over the last few years, I’ve focused on space technology as well.

Nick: Excellent. So that is the topic for today’s episode. We are talking about Space Tech Investing. You know, first off here, #David, what was your thought process and what led you to invest in this area?

David: Well, at a high level, as an investor, I’m looking for startups that solve really important problems, and also startups that frankly interest me intellectually. And, you know, I can say nothing in the, in the long term, nothing is more important or interesting than space colonization.

Nick: Great. So was that your, was that your entire reason for going after this? Or, you know, did you go through, I know you’ve written a lot about road mapping and investing and developing a roadmap, did you use that process as well for sort of scoping out space tech as a sector that was, was interesting and had the right sort of external drivers and, and factors that were converging to make this a good investment category at this time?

David: Well, I was first approached by #Dan Berkenstock, an aerospace grad student at Stanford, after, right after he started #Skybox Imaging. And he turned me on to the really important changes that are going on in the space industry, and really the, the major technology pivot. I know it’s a little bit cliche to use the term 2.0, but really we’re seeing Space 2.0 emerge in the last few years. Everything that was done in space by both governments and businesses for the first 50 years of space colonization, really built on the original Apollo program technology. And while the rest of the technology sector was building computers that were smaller and smaller, the space industry was actually building satellites that were getting bigger and bigger. It’s so hard to put things into space that there was a mentality that if we’re going to put something up there, we want it to last longer. So we needed to have more radiation hardening. We needed to have more redundant systems. Well, that makes it even more expensive and bigger, and more expensive to launch. So therefore we want it to last even longer, and we want to militarize it. And this, this vicious cycle continued to the point where by the turn of the century, the satellites that were being deployed on orbit weighed multiple tons and cost billions of dollars, and took over 10 years to design and build. So these massive satellites were, were going up around the turn of the, the century. And their primary mission was to, was to handle communications, move around, television signals or phone calls. And yet, back on earth, the communications industry saw costs dropping down to zero because of the internet. And so the business case for these huge enormous satellites collapsed. These satellites that had taken decades to build and, and were up there for 20 years, they were no longer really viable economically. And the companies that put them up like #Globalstar, #Iridium, #Teledesic, #Terrestar, they all went bankrupt. And so you had the industry, it was a very dark time for commercial space colonization. And at the same time, NASA had been continually defunded over those previous 10 years, even though at one time NASA was actually responsible for the majority of space activity. And by the fiscal crisis in 2008, Congress altogether defunded the successor to the shuttle program. And then just to make it a, a perfect storm, in addition to the lack of a business case and the lack of government funding, there was also a problem that in geosynchronous orbit, which is the ring 36,000 km above the equator where you can park a satellite and it orbits above the earth over a single spot, that, all the parking spaces in geosynchronous orbit over inhabited lands were, were taken. And you can’t put these too close, you can’t put these satellites too close together without interfering with each other. And so there really wasn’t even any place useful to put a satellite if you wanted to have it in position over a point of service. And so, about 10 years ago, there was a feeling that the whole space industry was dead, and anybody who was in it was actually feeling quite discouraged. And it was in this dark time, if you will, that this new approach to space emerged. Think of it like a forest fire that clears the way for the saplings. You saw hobbyists or internet entrepreneurs who now had maybe a billion dollars deciding that they wanted to put things into space. You had students doing this. And they were doing whatever they could, finding whatever scrappy way they could to put things into space. And so you have #Robert Bigelow from #Bigelow Aerospace, #Charles Simonyi from #Microsoft, and #Elon Musk from #Paypal starting #SpaceX. And you have, you may recall the, the father and son in, in Brooklyn who sent an iPhone up on a weather balloon. This, this was all happening and, and getting headlines and attracting attention because really there wasn’t any other activity in space. But of all these hobbyist activities, there was one in particular that really changed everything. And that was there, there were students at Cal Poly and Stanford who wanted to put their scientific sensors up into space. And, and they figured, hey we, you know, we can’t afford to, to build a satellite or, or launch a big satellite. But, by the year 2000, they noticed that these cell phones were getting really, really cheap and the components in the cell phones were the same component that you put into a satellite. You’ve got power management and a battery, you’ve got an antenna and a radio, an accelerometer, a camera, all these elements that, you know, that make a satellite function. And so they said maybe we can make a satellite out of these really cheap cell phone components. And of course, they’re not going to withstand radiation, they’re not going to last very long, but it’s so cheap and so small that it’ll last for a year or two years. And maybe we can’t get it up to geosynchronous orbit but we could put it at a low Earth orbit, which is, which is the area call it 400 to 800 kms above the earth. And not just in a single ring but anywhere over the earth, where, where you orbit at about a 90 minute period. And we could put our little satellite there. And so in order to kind of bring the hobbyist world together, they created a physical spec called a CubeSat, which is really just a physical specification of 10x10x10 cm. And by creating this physical specification, everybody could collaborate by building modules that were 10×10 cms and slide into this thing. And this became as important as the motherboard spec that IBM came up with in the 80s that caused MS-DOS and, and PCs to be the standard for computing for so many years. Everyone started building these little CubeSat modules. And by the end of that decade, 10 years after the students came up with this, you could easily just point and collect around the web, get the modules that you need, the solar panels, the radios, whatever you want. And you could build a little CubeSat that would a functioning satellite. And now instead of launching a, a, a multi-ton billion dollar behemoth, you just had to get this little cube into space, which, which you did mostly by, well, only by doing something called ridesharing, where you’d find some larger payload that’s going up and saying hey can I tuck my little cube in the corner and go up wherever you’re going, whenever you’re going, I’ll go with you. And so what started off as this hobbyist movement actually became the basis for disrupting the entire space infrastructure. All of a sudden, Moore’s law came rushing in to the space industry and completely changed to how people think about it. Instead of spending a billion dollars to put a satellite in geo, instead of spending 12 years to build and design it and then buy a multi hundred million dollar rocket to get it there, and have a mission that’s going to last for 30 years, for a tiny, tiny fraction of that cost, you could build these little CubeSats out of cell phone components and you can put up 10 or a 100 or a 1000 of them in low Earth orbit and just replenish them. They get better and better as the chips and software get better and the sensors get better. And it turns out that you could take a, a billion dollars single satellite and you could replace it with a 100 cubes for a tenth of the cost, and have global coverage of whatever you’re doing instead of being over only one spot. And, and it’s so compelling that, that now anyone that’s doing anything in space has pretty much shelved the old model and everybody is moving to the new one. #Skybox Imaging was really the first company that legitimized this. Because they weren’t doing CubeSats, they were doing MicroSats, which is a little bit bigger than CubeSats. But when #Skybox said we’re going to put up a, a high definition imager into space just like the digital globe ones that cost a billion dollars and we’re going to do it for a few million dollars, people said that’s crazy, it’s stupid. When I looked at investing in #Skybox, I tried to get some space consultants to help me because I, I of course, was new to the area. And they told me listen, this is a ridiculous idea, space is hard, leave it to the big boys, go, go back, go back to doing your fluffy internet deals, right. And you should like, you know, leave this, leave this to us. And I said yeah, yeah, I know, you’re right, but just, just go check it out for me anyway, I’ll pay you, go do it. And they did it and they came back and said wow, you know, we actually think this is going to work. But nobody believed it until we put up our first satellite in, in December ’13. And when that first picture came down, and I’m looking at it right now because I’ve got a big beautiful picture of it in my office, when that first picture came down and it was a beautiful high resolution color image, everyone’s jaw dropped and everyone realized oh my god, these, these students in Silicon Valley just changed everything. It makes no more sense for us to build a billion dollar satellite when they just showed that with commodity hardware and open source software and do it yourself hobbyist modules, that you could, you know, achieve the same functionality and you could do it for such a low cost that we could, you know, surround the planet with these things and get faster, better coverage. So it was, you know, that really changed everything. And since then, all the space infrastructure that’s out there is being disrupted by, by these new, these new CubeSat constellations.

Nick: Unbelievable how much the proliferation of mobile devices is fundamentally changing technology in so many different sectors. I know personally, you know, I focus on IoT and there’s a tremendous opportunity because of, of the reduction in costs and, and increase in capability of, of components. But,

David: Yeah

Nick: But, #David, can you, can you talk a little bit about, you know, we talked about satellites, we talked about sort of these, these micro satellites and, and rockets. Can you paint a picture of the major categories or sub groups within space tech?

David: Sure. So here are the basic sectors within space technology. You’ve got companies who are suppliers to NASA missions, the, the international space stations, their observatories, their exploration missions. And these are really contractors who do kind of one off types of stuff. And that’s obviously not relevant to the entrepreneurial or venture communities. You’ve got defense contractors who are supporting the mission of the United States national security or other governments national security. And again, these are very one off kinds of projects, jobs, and not really relevant to entrepreneurs and, and venture investors. You’ve got these commercial satellites and constellations that I’ve spoken about. This is probably the most active area for startups. There are hundreds of startups that have emerged in the last 3 years in this area. Many of the entrepreneurs who are starting these companies are not experienced airspace people. They are software engineers who are just interested and, and they are taking advantage of the fact that today you can use off the shelf components to build satellites. And that the real innovation that’s going on is not in the space materials or that kind of thing but really what you do with all the enormous amounts of data that you collect. And so it’s more data science than it is material science today. You’ve got, you’ve got a new sector emerging around mining operations, on the moon or on asteroids. And that’s, that’s, you know, it’s, that’s a, that’s a, a very slowly emerging sector. You’ve got the area of commercial tourism and exploration. So private companies who are trying to put people in space or trying to, to colonize other celestial bodies,  there are, that is attracting some, a little bit of venture capital. It’s attracting a lot of angel capital. And personally it’s not an area of interest for me. I don’t, I don’t really see a strong sustainable business case in that sector, in that area. You’ve got startups who are building subsystems for satellites. So they might be the antennas or the solar panels or the propulsion. There are a couple of really interesting startups building little modules that fit right onto a CubeSat that can provide them propulsion so they can maintain orbit even in low Earth orbit where normally the drag would cause you to de-orbit, or allow you to, to change orbits. And then you finally, I would say you’ve got the entire ecosystem of support services for space operators. So this includes companies who sell, who have ground stations, who’ll do tracking of your satellite and your, so that maybe warn you about collisions or tell you where your satellite is after deployment. And of course, the biggest one, which is launch. And launch is the hardest part of space. Getting to space is the hardest part of all this. And so the companies who do that are, are very important. And just as important is the CubeSat technology that I talked about. The change in launch technology is also very important. And that also explains why we’re seeing a renaissance of space today. I would say the single most important enabling technology around launch is 3D metal printing. 3D metal printing has allowed companies like #SpaceX to develop much better rockets and to do it much faster than anyone’s ever been able to develop them before. More durations, faster durations, and really therefore push the performance and efficiency to levels that we haven’t seen before. Those, those are the areas of space technology.

Nick: Awesome. I’m reading this book, Seveneves by Neil Stephenson, and like all these categories that you’re mentioning here, I, I feel like they all come up in the book in, in one form or another and, and really give, give the reader a window into what the array of applications can be and, and will be, you know, in space exploration. I’m not sure if you’ve, you’ve come across the book.

David: I will have to read it.

Nick: Yeah, it’s a good one. Alright. We’ve talked about the categories and subgroups. You know, #David, it seems that there’s been a recent surge in space tech investing. Was there a particular catalyst? I mean you talked about that CubeSats, was that the catalyst or are there sort of a series of factors that have driven the opportunity for venture capital investing in space technology?

David: So I truly believe that the most important enabling technology for the new space revolution is, is this CubeSat technology, this miniaturization, this harvesting of Moore’s law. However, coincidently, it’s, that’s not the technology that, that really brought the bulk of the capital in. It’s really the launch innovations that #SpaceX made. And #SpaceX had originally, originally had the mission of building a rocket that would be designed for the needs of these constellations as opposed to the needs of the individual payloads. And that’s originally what #Elon was building. But then NASA came along because they no longer had funding to build their own rockets, and said we want you to build us a rocket to support the space station. And it was such a juicy contract that #Elon said okay I’m going to, I’m going to scrap the Falcon 1 and I’m going to build the Falcon 9 to service NASA. And so that was such a, a successful contract for #SpaceX that #SpaceX, you know, has been doing very well and created a successful role model for people to invest in space. Now I, I don’t think that what they did is, is something that we want lots of other companies doing. The last thing we need is more huge rockets to be built. That, that’s really serving the needs of the old space industry not the new one. And so #SpaceX itself did a great job of, of cracking the ice on venture capital investment in space. But it’s not really leading the industry on where we need to go. Because they brought investment capital though to the sector just by saying you can make money doing this, that has been very good for all of the startups who are now trying to put these CubeSat constellations into space. If it weren’t for #SpaceX, a lot of investors would be scared of investing in the category. Traditionally, space is not area where investors were able to make money, largely because of the enormous capital requirements. What’s, what’s funny now though is that the space startups I see are so scrappy that many of them are able to put assets on orbit with under 10 million dollars of capital raised, which is less than what many software companies raise to put their products out today. And so, you know, we see space entrepreneurs who are more scrappy than software entrepreneurs. And that, and that’s really a switch from, from days past.

Nick: Yeah, and I wanted to, to touch on that. Do you feel like the risk and return profile and capital intensity of investing in this area is, is fundamentally different than other tech sectors? I guess you’ve already kind of explained some of your thoughts on that, but what are the major differences between some of the other sectors that you’re investing in?

David: Well, any space company that’s, unless you’re doing something in the support services area that’s terrestrial, such as analytics or ground station, but anybody who’s putting anything into space has to deal with the challenge of launch. And launch is always expensive. And not only expensive in terms of launch itself but also in terms of the risk that it creates for your payload. You may have to, you may blow up and you have to rebuild it. And also the delay that it takes to get a launch. It takes so long to actually get onto a rocket that the, that the, your startup is burning money while you’re waiting. And so that’s, that’s really the one thing that makes it difficult. However, as these satellites get smaller, as they figure out how to get ride shares, as we start to see new launch vehicles come into market that are specifically designed to deliver these small payloads, that will, that problem will be easier to manage. If you look at everything else about a space company, it’s really just mostly developing software. And you’re integrating off the shelf components of hardware to develop the system. So they’re really not that expensive. And, and it’s, it’s so much harder to raise money for a space startup than for a software company that, from what I see, space companies tend to be much scrappier, much leaner, much more efficient than, than software companies today. So even though they have to deal with the launch problem, they still often require less capital than, than software companies.

Nick: And you were, you were talking about how #SpaceX may not be moving the industry forward in the, in the best direction. What, why do you think it’s not moving the industry sort of in the, in the direction that, that you’d like? Is it because of the nature of sort of large installations and massive rockets as opposed to sort of more nimble and smaller installations?

David: That’s it