Thursday, March 10, 2011

Time to Raise Money for a Space Startup?

Lately, I have been getting questions from space entrepreneurs about a thawing Angel/Venture market and what that means for New Space firms seeking investment capital. Mark Suster over at Both Sides of the Table wrote a great post on:

8 Questions to Help Decide if You Should be Raising Money Now.

 Below are Mark’s eight questions with my commentary intermixed. Note, Mark is a Silicon Valley investor so many of his examples are focused in that area – still a lot to glean for New Space.

1. Are you in the “lean” phase?

Are you trying to figure out if your idea is an incremental improvement or a game-changer – if so, keep your capital needs small. Once you have proven (even if just to yourself) the world-changing worthiness of your idea than gather some investment money and ramp up capital use. When seeking seed funding – usually look for $500K to $1M initially from outside investors.

2. How much capital do I need to run my business effectively right now?

A good rule of thumb: an entrepreneur needs capital for 18 months of operations. I appreciated this nugget. As an entrepreneur, eighteen months feels like an eternity, but I should be striving for this!

3. How much dilution am I going to have to take now?

Expect 25-33% dilution per round. What does this mean? Each round your percentage ownership will be “diluted” as investors take a share of the value of the company. Here is a quick example:

An investor offers The founder of Acme Rockets a pre-money valuation of $2M for a $1M investment in Acme Rockets. Should Acme Rockets agree? Before the investment Acme Rockets owned 100% of company. If they accept the investment terms, the Acme Rockets founder’s ownership percentage will be diluted to 67%, a 33 percentage point reduction. Worth it? Maybe.

How about a $2M investment at $2M pre-money? 50% dilution in a single round. Probably not.

4. How many more rounds of capital will I need & what is my expected total future dilution?

Here is the spreadsheet (containing the table above) where I provide an interactive example of Founder Dilution with each Round of additional Investment (overly simplistic to make the point).  Fun to play with.

5. What things could I do with capital today that might improve my market positioning?

I hear the argument which goes – wait to raise capital until you can get a more favorable valuation. For New Space companies like Acme Rockets, this means winning government contracts, building demos, increasing customers for an NLV upper stage which is not yet built – anything to mature their technology.

But there is an opportunity cost in waiting. What could Acme Rockets do now with $1M dollars to grow their company? This is “make-the-pie-bigger-and-don’t-care-so-much-about-your-slice-of-it” argument.

6. What things might competitors do if I don’t raise capital that might impact me in the interim period?

The biggest nugget in this section was the psychological effect investors feel if another firm in an industry announces a large funding round. Who wants to invest in NLV upper stages from Acme Rockets after its competitor just took the oxygen out of the room by announcing a $10M investment to build a similar NLV upper stage? Raise capital so your competitor can’t – I agree with this in the short term, but I would rather focus on wowing customers than fearing competitors.

7. What might future markets hold in terms of valuations?

Try raising money right after September 11, 2001. When is the next market dip?

8. What might future markets hold in terms of ability to raise capital?

Mark ends by reminding us that 8 Questions to ask are nice, but don’t over think this, sometimes you take the deal because the money is available…and might not be tomorrow.

Thanks Mark for a great 8-Question post. Worth reading it in Mark's words over at Both Sides of the Table.  Space Entrepreneurs, I hope it helps.

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