Top Deal: A Startup That Is Out Of This World

Key Stats:

Summary

At time of publication, November 2, 2018, Tesseract had raised $636.2K

The Tesseract team has been selected as a “Top Deal” by KingsCrowd. This distinction is reserved for deals selected into the top 10% of our deal diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Understanding the Landscape

Although many of us have never set foot beyond Earth, we often wonder what inhabits the places beyond this planet, the opportunities in outer space, and whether or not we are alone in this universe. Satellites are what inhabit the unknown. In fact, there are currently over 1,800 in orbit.

It wasn’t too long ago when we were racing each other to the moon. 1957 marked the beginning of the first Space Race in addition to the launch of the first satellite. Over 50 years later, many believe the second Space Race has begun.

There are over 23,000 satellites planned to launch in the next eight years. SpaceX, Space Systems Loral, Open Cosmos, and other launch companies are at the forefront of a massive satellite market.

Unlike the first wave of satellites that were defined by large and expensive machinery used only for planetary imaging, this next wave will consist of small, inexpensive, and multi-faceted systems that will bring Internet access to every corner of the world while improving upon old-state capabilities.

In addition, these new satellites will contribute to humanity in ways we haven’t even imagined yet.

The companies mentioned above have lowered the cost of launch by 40% through the use of thousands of small satellites, thus growing the space industry rapidly. In turn, the old propulsion technology introduced in the 1950s is far too expensive to sustain.

Big and Unique Opportunities  

As this industry emerges and is reshaped, Tesseract is a company that recognizes this opportunity. Tesseract is a provider of proprietary and cost-effective propulsion components and systems for in-space applications spanning commercial Earth-orbiting satellites, robotic exploration missions, and human spaceflight.

 All satellites need propulsion to get into orbit and to stay there. Tesseract is trying to take advantage of this $4.23 billion rocket propulsion market, which is growing at a CAGR of 8.5% from 2018 to 2023.

As alluded to in the previous section, most satellites currently in space are large and cost upwards of $300 million each. These satellites rely heavily on toxic fuels and require expensive material. Fueling these machines costs $500 thousand in addition to the cost of the propulsion system itself.

For this reason in addition to the growing demand for high-speed internet access worldwide and for satellite-sourced data in nearly every industry, the growth of small, inexpensive, and new communications satellites is validated.  All in all, the current propulsion options are outdated and either utilize toxic fuels or perform poorly (not to mention how expensive they are). Tesseract believes they have created an alternative solution that can service new-age smaller satellites for a cheaper price than their closest competitor while maintaining competitive performance.

Competition

“Our system performs twice as well for half the price” is the statement the team is using to market the company. The company recognizes the early players in this space and has stated that their “moat” against them is pursuing a chemical solution before an electric one.

The Tesseract team has a clear understanding of the competitive landscape of this fruitful market and has listed three categories in which competitors can enter through. 

1. Electric Propulsion: Tesseract believes most startups are playing in this category. The team believes this category has high fuel efficiency but 100 to 1000 times lower thrust than chemical propulsion. This significantly delays getting to a revenue-generating orbit. Electric propulsion also requires substantial inert mass that does not scale down well, bringing costs back up.

Accion Systems is a startup based in Boston, offering a new kind of electric thruster. They have flown a prototype of their thruster on a demo flight but still have a long development path before being ready for operational flight.

Phase Four is another startup company offering an electric thruster variant. They have successfully tested their thruster in a vacuum, but issues with scale down have resulted in much lower fuel efficiency than theoretical. Their solution is currently no better than chemical propulsion while offering 1/1000th of the thrust.

2. Green Chemical Propulsion: Tesseract believes the following company is their primary competitor. Tesseract states that although the company has been able to eliminate the $500 thousand fueling cost, they have sacrificed performance and hardware cost to do so.

Bradford ECAPS  is a European company that made a few sales to Planet Labs. They are using a monopropellant. Their performance is fairly low, and their combustion products are very corrosive, so the thrusters must be made using platinum. As a result, systems using this technology cost as much or more than flight heritage hardware using toxic propellants.

3. Toxic Chemical Propulsion: Tesseract believes the industry is trying to move away from using toxic chemical propulsion. It is unsustainable, dangerous, and the EU is banning toxic propellants in 2020.

 Aerojet Rocketdyne is the dominant incumbent player in spacecraft and satellite propulsion. Their product lines are mostly focused on thrusters using hydrazine either alone or in combination with nitrogen tetroxide — both of which are extremely hazardous and toxic — and drive substantial ground handling costs and complexity.

They have some electric propulsion products as well, but these are focused on the large geosynchronous satellite market. They are also working on a product line similar to Bradford ECAPS, using a salt solution monopropellant.

 They have similar issues with performance and expensive, exotic materials. Their cost structure and responsiveness do not align well with the new LEO satellite companies.

 Moog Inc is a competitor entirely limited to old-state products using toxic propellants and does not have a green chemical or electric propulsion option.

The Team

Tesseract’s three co-founders are Erik Franks (CEO), Jacob Teufert (CTO), and Jeff Gibson (COO). The three graduated from Y Combinator accelerator in 2017. Franks has experience operating his own company prior to Tesseract and has multiple years of experience working in the outer space and airplane industries. 

Teufert worked on the Space Shuttle and worked at Aerojet, one of Tesseract’s biggest competitors. Gibson built guided missiles at United Technologies and developed guidance systems for reusable rockets. 

These three have years of combined experience in the industry that they are currently playing in, which is why we think this company’s product can win in this market. 

In an area such as this one, we think it is most important to have founders that are experts. These men are definitely experts despite not having a traditional entrepreneurial background. Working with Y Combinator makes up for this, so we see this team going far.

Key Risks and Final Observations

The main risks we see in this company all have to do with uncertainty. Although the company states that they have secured letters of intent worth over $150 million in annual revenue, the letters are non-binding and all the customers expect successful hot-fire testing before proceeding.

In order to complete testing, Tesseract stated in April that they needed another $500,000. It looks like that have exceeded that amount in their equity crowdfunding round, so it’s safe to assume that they are currently in this testing process. 

To get cash flow neutral, the company would need a production contract which requires new hires and purchase of new equipment. This would require a series A of $5-7 million, which will trigger the SAFE. Completing contracting can take longer than expected, so the firm needs significant runway to reach initial payment. 

The company must not burn through all their capital before reaching space qualification — or in other words, working through design, manufacture, and test of the propulsion system. 

The company also stated at the end of April, “we anticipate having initial sales within a 12-18 month timeframe. The smallest constellation we’ve spoken with would be a contract value of $4.5 million. The largest single constellation would be a contract value of $50 million.”

Other general concerns include their ability to secure government grants and the rising market share of electric propulsion. 

Lastly, although Tesseract believes they have the superior product, incumbents could figure out a way to lower their prices before Tesseract can break-even with their initial product build. 

Rating

Tesseract is positioning itself to take on the fruitful market that is rocket propulsion. Although this company has yet to make their first sale, their letters of intent are more than enough to convince investors of their progress.

This deal recommendation comes down to the fact that competitors are pricing their systems at $1 million, while Tesseract is offering one that performs twice as well for half the price. The team is capital efficient with 70% profit margin and are reducing traditional production costs by 90%.

The space industry has been known to be risk-averse, but Tesseract’s target market is getting tired of the status quo. Change is inevitable, and this is the company that we believe will bring it. If Tesseract can meet their deadlines we think they have a chance to win out in this large market opportunity. For these reasons this is a Top Deal. Be sure to invest HERE.