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T A Olson, P J Contursi & D M Livingston, 28 February 2005, "The "Signal-to-Noise Ratio" in Financing New Space Startups", First published in The Space Review, Monday, 28 February 2005.
Also downloadable from signal to noise ratio in financing new space startups.shtml

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The "Signal-to-Noise Ratio" in Financing New Space Startups
Thomas Andrew Olson, Paul J Contursi, and Dr. David Livingston
With the Ansari X Prize won and the recent passage of the first legislation aimed at regulating commercial suborbital space flight, more space entrepreneurs than ever seem to be making their mark on the media and the Internet. The new flood of innovation and enthusiasm is certainly a welcome sign of things to come. However, it can be so easy for the unwary to be blindsided by glossy pamphlets and lavishly illustrated web sites, that one can overlook key business fundamentalsor the lack thereof. Imagination and creativity are necessary ingredients, but by themselves are insufficient indicators of space business viability.

In recognition of this conundrum, we humbly offer the following list of "warning signs". The presence of one or more of these red flags doesn't necessarily identify a space enterprise as little more than wishful thinking, but it should warrant a very close look "under the hood" by potential angels or venture capitalists before climbing aboard the bandwagon. Some of these may seem like just plain common sense to the savvier investor. Nevertheless, we continue to be amazed at the number of ideas crossing our desks, of late, that suffer from one or more of the maladies listed below:

  1. Unwillingness or inability to identify the team - While there may be some space enterprises that can be carried out successfully by one or two people, the vast majority requires a team that offers a diverse set of skills and experiences. Most often, a serious space enterprise needs technical experts, managers, financial specialists, marketing people, and other skilled professionals to succeed. That team is essential, and any space entrepreneur who won~t discuss the identity of their team or the skills that its members bring to the table is suspect. We have often found that such people have good reason to be secretive since their alleged teams never really existed in the first place.

  2. Nebulous funding sources - In addition to a team, a space enterprise requires start-up capital. There is some flexibility (i.e., angel investment, 504-reg-D, etc.) but, at the end of the day, the number of options is finite. Be wary of space enterprises that rely on exotic sources of capital that they try to explain away with unintelligible legalese, or, even worse, refuse to specify their sources of capital or guidelines for obtaining it at all. Make sure their fundraising mechanisms are in line with federal and state securities regulations, when necessary, before going any further.

  3. Any combined mention of the words "billion" and "dollars" with a straight face - Startups looking for eight- or nine-figure capitalizations in the currently embryonic state of the commercial space sector are extremely questionable. Yet, somehow this often travels with warning number one above. They either need a billion dollars or more to start up, or else they claim that your "modest investment" will help create a multi-billion-dollar business empire in a very short length of time. The reality is that the total private capitalization in the "New Space" companies to date is probably somewhere close to $200-300 million. As this is a nascent industry with little to show so far in the way of an overall track record, it can be safely claimed that a string of successful, but modest, space startups will be needed to lay the groundwork enabling venture capitalists to feel more comfortable with larger risks. ("Aim small, miss small")

  4. Rampant cluelessness about the target market - No matter where one hopes to conduct business, knowledge of their market is essential. Constantly ask the questions, "Who are your customers? How much are they willing to pay for your product or service? How do you plan to attract and retain those customers? What are the opportunities for repeat business?" For example, we certainly look forward to the day when solar power satellites are a viable enterprise, but not while customers can easily today acquire electricity at a fourth of the kilowatt/hour rate suggested by the current promoters of space-based systems. The same problem reveals itself with hawkers of new, exotic launch systems that they claim can put thousands of tons of equipment into orbit on a daily basis - never mind that the market for orbital launch isn~t anywhere near that large and probably won~t be anytime soon. It is not coincidental that such plans offer few, if any, details about how the market for their services will grow. "Build it and they will come" are these people~s mantra.

  5. Large quantities of "unobtainium" infused into the business plan - Dependence upon technologies or exotic materials that do not yet exist is often a sign of trouble. The same is true for speculative propulsion claims that fly in the face of the laws of physics or "get around" the rocket equation.

  6. Dismissal or denial of regulatory considerations - If the entrepreneurs dodge the question of how they will deal with the constraints of federal and/or state regulatory requirements they are at best naive, and at worst might have something serious to hide. It might be a good idea to give folks who claim to have a plan to "go around these requirements" a wide berth, like the prospective RLV maker who claims he won~t need a launch license from AST.

  7. Playing the conspiracy card - Be wary of people who claim that their business plans have been impeded in the past by a grand conspiracy on the part of Big Business, Big Government, or - and this is from an actual example - "white supremacists". "Evil forces" working in the background are far too convenient scapegoats, as opposed to poor planning, unachievable goals, and lack of research.

  8. A tendency for monomania - This is a corollary to the previous suggestion. Be very cautious of anyone who tries to convince you that his or her proposed product or service is "the only way" to solve a particular space business or technology problem. Common sense alone suggests that is a false premise. Either they haven~t thought it through, or have invested so much emotional energy into the project that they can~t allow themselves to visualize alternatives.

Unfortunately, some of the most poorly-conceived space enterprises have a tendency to draw the most publicity. This only serves to make it even more difficult for more worthwhile space ventures to attract sufficient serious interest that ultimately leads to funding. Although empirical evidence is lacking, our combined experience in the community leads us to believe that this "signal-to-noise ratio" is unusually poor, compared to other sectors of the economy, and, of late, things appear to be worsening.

Unless the alternative space business community becomes more honest with itself in weeding out these "glorious visions" that, more often than not, come up short on substance and achievable objectives, it will be a long time before legitimacy is established for space commerce in the financial markets.

T A Olson, P J Contursi & D M Livingston, 28 February 2005, "The "Signal-to-Noise Ratio" in Financing New Space Startups", First published in The Space Review, Monday, 28 February 2005.
Also downloadable from signal to noise ratio in financing new space startups.shtml

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