WASHINGTON — Space startups seeking funding should stay away from increasingly overcrowded parts of the market and instead seek more novel approaches that could offer much bigger returns.

A panel of investors, speaking at the Satellite 2019 conference here May 6, said too many startups are pursuing businesses like small launch vehicles and Earth observation systems that offer little advantage over the competition.

“There are a lot of people that are doing version 1.1 of the same business plan,” said Chris Boshuizen, entrepreneur in residence at venture capital firm Data Collective. That’s particularly the case in the small launch vehicle market, where by some estimates more than 100 such vehicles are in various stages of development. “We don’t need another two-stage nanosat launch vehicle, to be honest.”

The large number of companies pursuing such vehicles makes other investors less willing to invest in similar new ventures now. “I kind of wish we had gotten into some of the small launch earlier,” said Matt O’Connell, managing partner of space-focused VC firm Seraphim Capital. “That is an area that we are not looking at as new investments now.”

The situation is similar in Earth observation companies, where startups are trying to duplicate the success of Planet and its constellation of small Earth imaging satellites. Those startups “are much more technology-driven than business model-driven,” said Brian Schettler, managing partner of Boeing HorizonX Ventures. The pitches he’s seen from companies in that field have focused on improvements in resolution, or the addition of hyperspectral capabilities, “as opposed to what are the new insights I’ll be able to get, what’s the new business model behind this.”

Broadband satellite constellations is another area where there are too many companies pursuing systems, putting late entrants at a disadvantage. “We continue to meet with connectivity plays, but there’s a lot of money in it right now, and you’re competing with SpaceX and OneWeb and now [Jeff] Bezos,” said O’Connell, referring to Amazon’s recent announcement of its Project Kuiper system. “I think that’s an area that’s going to get tough.”

Boshuizen said startups should focus on “disruptive” business ideas that are dramatically different from competitors. “Find something new and disruptive that gives you a massive advantage,” he said.

He cited his experience as a co-founder of Planet, whose initial cubesats were, on a dollar-per-pixel basis, “a thousand times cheaper than any platform in space at that time,” giving the company a huge advantage. New startups in the Earth observation sector, he said, are offering only modest improvements by comparison. “That multiple orders of magnitude difference makes them really different companies than the ‘Hey, we’re Planet Labs but we’re hyperspectral.’”

Yet, despite the apparent oversupply of small launch vehicle startups, investors think the companies that emerge on top of that market will do well. Asked what companies are most likely to either go public or have a “good exit” in terms of an acquisition, panelists primarily said it would a small launch vehicle company.

Some specifically mentioned Rocket Lab, a company that has a valuation, based on its latest funding round last November, in excess of $1 billion, making it a “unicorn” in Silicon Valley parlance. “I think small launch is the right sector to be a unicorn first,” said Schettler.

Latecomers can also still be successful if they’re powerful enough to shape the market. “Bezos doesn’t have to make money selling connectivity,” O’Connell said, given the profits Amazon generates from its retail and cloud computing businesses. “I believe he’s a force and going to be a strong contender.”

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