The Challenge of High-Capital Startups

August 17, 2022 • #

Geospatial analytics company Descartes Labs recently sold to private equity, in what former CEO Mark Johnson calls a “fire sale.” This post is his perspective on the nature of the business over time, their missteps along the way in both company identity and fundraising, and some of the shenanigans that can happen as stakeholders start to head for the exits.

Not knowing much about Descartes’ actual business, either the original vision of the product or its actual delivery over the years, I don’t have much specific perspective to offer. But this story is a recurring theme in the world of spatial, earth observation, and analytics startups that have come and gone over the past 10 years or so. These businesses are built on extremely capital-intensive investments in satellites, space-based sensors, and data, which are major hurdles that cause many of them to get sideways in their fundraising structures very early in their business journeys.

The early years of a startup are always extremely volatile, with pivots and adjustments happening along the way as the company navigates the idea maze, looking for product-market fit. I think the heavy capital required up front compels funders to expect too much too soon in the product development process. There’s a chicken-and-egg problem — the PMF search in these kinds of businesses costs many millions. If you’re building a SaaS project management tool, you can wander around looking for fit for years with only a few people and limited seed money. But in satellite startups, the runway you need to do product-market experimentation is enormously expensive. Large enough funding pools also saddle the business with aggressive expectations for customer counts, growth, and revenue. With revenue targets set but no repeatable PMF, many of these startups do whatever they can to find dollars, which often leads to doing what are effectively custom services deals for a single or few customers. That’s necessary to make money of course, and it’s not valueless for product validation. But it’s too narrow to function as true PMF. Stay in this awkward state too long and you end up stuck down the wrong hallways of the idea maze. You’ll never find the fitness you need to build a lasting business. Bill wrote a great post on this recently, about this identity struggle between being a solutions, services, or product company.

The best thinking on the topic of EO and satellite data companies is my friend Joe Morrison’s newsletter, “A Closer Look”. He leads product for Umbra, a startup specializing in SAR. He’s done a lot more thinking than me on this topic and has thoughtful takes on the satellite and geo market in general.