Monday, February 10, 2014

NewSpace, Software Incubator Culture and the Investor Landscape

          by Brian Orlotti

On February 7th, Canada’s Space Policy Framework was released to the public. One of its stated “key principles” is “positioning the private sector at the forefront of space activities.” So its a good thing that Canada is well-equipped to implement this principle by leveraging the strength of its growing tech start-up/incubator culture.

Over the past five years, changes in Canada’s business landscape and regulatory environment have given rise to a new era of innovation, nurturing promising software start-ups into established enterprises. As outlined in the February 2nd, 2014 Venture Beat post, "Why Canada is where smart VC money is going in 2014," several factors have helped sparked this new era. These have included:
  • The fall of Canadian tech titans like Nortel and Blackberry, which released a large pool of experienced executives and engineering talent into the market.
  • The removal of section 116 from the Federal tax code in 2009. As outlined in April 10th, 2010 Securities Law post "Section 116 relief for non-resident investors," this change made start-up investment much less complex and costly for US investors and encouraged foreign investment money to begin flowing into Canada.
  • The creation, in 2013, of the Federal government Start-up Visa Program, a campaign aimed at attracting foreign entrepreneurs to Canada by allowing them first to immigrate and then to assist with the building their start-up idea in Canada. The campaign has featured billboards in Silicon Valley enticing tech workers to “Pivot to Canada.”
  • The opening of branch offices of large US technology firms like Facebook, Amazon, Google, Twitter, and Square in cities such as Vancouver, Toronto, Waterloo and Montreal to take advantage of Canada’s abundant engineering talent and lower operating costs. Their presence has helped inject additional energy and expertise into the Canadian start-up sector.

Spurred by these conditions, a large amount of foreign, mostly US, technology venture capital is now flowing into Canada. According to the C100, a non-profit organization founded by Silicon Valley entrepreneurs to promote Canadian technology entrepreneurship and investment, over $700Mln USD of venture capital has been invested in Canadian companies over the past two years.

Canada’s incubator culture has seen many start-up successes like Vidyard (video hosting), FreshBooks (cloud-based accounting software), Kobo (an eBook reader recently acquired by Rakuten for $315Mln CDN) and Beyond the Rack (online fashion sales). Other examples include Desire2Learn (post-secondary web-portals) and Shopify (eCommerce platform for creating online stores). Software-enabled hardware startups like Bionym and Thalmic Labs are leveraging the talents of former Nortel and Blackberry employees to create innovative devices. Bionym has created a wristband that can read a person’s heartbeat and use it as a biometric signature, while Thalmic Labs markets an armband that lets you control devices via arm gestures.

But adapting the software-focused incubator culture to the needs of NewSpace, will require modifications to account for the differences between software and space-related hardware. These changes, as outlined in the December 13th, 2013 Space Business Blog article "14 Ideas to Make Newspace Accelerators Better," will likely include at least some of the following:
  • Makerspaces, composed of free tools, supplies, and office spaces, run by the incubator/ accelerator to bring start-ups to speed on current hardware and fabrication options. Chris Anderson, in his book, Makers: The New Industrial Revolution, illustrated how accessible and useful some of these new manufacturing technologies are to the average person and start-up. Makerspaces would also serve to "pool" office supplies and other administrative requirements.
  • The creation of mature mentor teams. Unlike software start-ups where a coder could be one of the world’s best before age 25, it takes time to develop as an aerospace engineer. Accelerators/ incubators could offer access to a team of semi-retired “greybeards” or engineers with expertise developed over decades at places like the Canadian Space Agency (CSA), NASA or elsewhere who could review/critique plans, serve on a firm’s advisory board or even maintain a more active role in especially interesting start-ups. 
  • Free ITAR lawyer services. Unlike most software start-ups, NewSpace need to be aware of International Traffic in Arms Regulations (ITAR) and develop strategies to not run afoul of either the US regulations or the Canadian Controlled Goods Program, which governs Canada's Implementation of the ITAR dual national rule. Accelerators and incubators can certainly help facilitate access to lawyers with expertise in this area. Lawyers would benefit by developing contracts with start-ups offering the potential for fast growth and lots of billable hours related to deal structuring and patent protection.
  • Partnerships with industry specific market analysis and business model development support organizations like Newspace Analytics and Newspace Global to help young start-ups develop a business model with profit potential. Software companies mentor software start-ups and NewSpace companies could certainly do the same to help grow their industry segment. Even more traditional firms like MacDonald Dettwiler (MDA), Telesat and COM DEV International could do the same in much the same way that Rogers Communications supports Canadian start-ups in the telecom and software application sectors. 
  • Partnerships with other industries which have faced similar challenges in the past. For example, NewSpace shares many of the same challenges as the Clean Tech industry and could learn much from accomplished C-Suite executives in this area and from successful second-time entrepreneurs in general. Convincing one of them to join a NewSpace start-up board of directors, could also help with the next round of funding.
  • Partnerships with local universities to provide a low cost graduate work force and start-up owners. This certainly isn't rocket science and is mostly the practice in Canada among hi-technology firms now. NewSpace start-ups should leverage these "best practices" where applicable.
  • A focus on small products and services, even in space. Small normally means less to develop which normally means reduced capital requirements, which brings products to market faster and normally also leads to a faster investor exit and more investor profit.
  • Longer "incubation" times for initial product development. Both California based digital focused YCombinator and Kentucky based Space Tango (which bills itself as "the nation’s first business accelerator specifically for space enterprises and entrepreneurs") offer an intense period of entrepreneur preparation before a new start-up is let out on the open market. But while YCombinator normally offers a three month preparatory period, Space Tango requires a six month cycle simply because hardware takes longer to create than software code. The six month batch also gives extra time to schedule external testing with zero-g and suborbital flights, or through local universities, large aerospace firms and government facilities like the the David Florida Laboratory. Of course, the requirement for hardware and longer lead times also implies a need for larger funding, which re-enforces the need to focus on small products and services as a cost reduction measure. 
Of course, there will certainly be areas where NewSpace incubators/ accelerators will outperform their software counterparts and one of these areas might be the traditional "end of batch" demo day, where a series of start-ups finishing up their incubation period are required to present developed products and ideas publicly to investors.
Brian Orlotti.
This may be one area where NewSpace actually has an advantage over Silicon Valley.

Watching a start-up team operate an welder, or a 3-D printer manufacturing parts or viewing real hardware being tested on a suborbital rocket flight is much more photogenic and satisfying than overseeing a twenty year-old writing code in his apartment while eating Raman noodles and drinking Red Bull.

Sounds like a great pitch for the next television reality show...

Brian Orlotti is a Toronto-based IT professional and the treasurer of the Canadian Space Commerce Association (CSCA).

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