Solutions over products: What do aerospace investors care about this year?

Deep Dive

What do investors and teenagers have in common? They go through phases. The difference is an investor is moved by the market, who knows what moves my niece and nephew.

So what is top of the agenda in 2024 for a future flight investor? With capital markets a little less cold than they were in the first quarter of last year, investors are more bullish, money is moving again and some startups are still going public.

Brian Flynn, MD at investment firm DiamondStream Partners, says as future-focused aerospace segments are maturing, his firm now invests in both products and solutions. “‘Solutions’ require multiple ‘products’ and/or ‘services’ to be integrated. This means that each of the products and services themselves must be completed first before they can be integrated.

“Secondly (and related), it takes time – and usually a fair amount of trial and error – to figure out how to meet the customers’ needs so as to maximise the value to them.

Until recently solutions weren’t initially available because they had to be developed over time as products and services were improved, he says. Also, customers and vendors needed time to work together to figure out how to create the most value. Last year, DiamondStream invested in two companies which each spent more than 10 years evolving to create a solution that both “resonated with customers” and “generated decent profit margins”.

Finding companies that have solutions was essentially impossible early on, but it’s getting easier as the industry matures due to improvements in products and services and the work between the vendors and the customers,” says Flynn.

Finding a solution

Is finding a solution for a product a problem investors face? Yes, according to Flynn. The former CEO says many companies come with a “check this out” presentation. “Sometimes, there is a belief that there will be a need for what they’re developing without actual proof before creating the product,” he explains.

“And sometimes, companies will create a product in hopes that the customers can figure out a way to make it economic even if they can get it approved. For example, an unnamed company in the local drone delivery space spent over $1b trying solve that challenge, thus far without success.” Others have created delivery programmes to consumers, such as hospitals and grocery chains. These can be proven to work technically. However, they do not make economic sense since the fully loaded cost per delivery, while coming down, has been too high to replace existing approaches, says Flynn.

Looking at the case for eVTOLs, Flynn uses the example of Volaris, the mid-sized airline DiamondStream played a central role in creating. The firm is less “pollyannish” that most investors about the sector’s prospects.

Recall that we started, built and continue to sit on the board of a commercial airline that transports more than 30 million passengers per year with 550 daily flights. If the average occupancy of an eVTOL is three, that would mean that to become Volaris’ size, you’d be flying 10 million missions a year. That’s more than 25,000 flights per day,” he says.

“Through year end 2022, Joby’s Annual report indicated that it had flown somewhat over 1,000 flights in total since it started flying 10 years ago. Its first test flight with a pilot on board was in October last year. We’re excited to watch them grow rapidly once they obtain certification. Even as the reported industry leader, it will take quite some time to get to 25,000 flights per day to transport the same number of passengers as a mid-sized airline.”

Both software and hardware are expensive

Over the past 20 years there has been an explosion of software companies across a diverse range of markets. As a result, the sheer number of incumbents makes it harder than ever to scale, Benjamin Zeitoun, an investor at Starburst Ventures, notes from his discussions with numerous returning entrepreneurs.

“Startups have also become more capital intensive from this competition,” Zeitoun tells us. “We think the sales/value playbook of the past 10 years is not going to work as well today. So for software companies we are always more excited by the ones that have a clever approach to distribution.

“We also value companies that are creating hardware or software products where hardware and its integration are your differentiator. Done correctly, it helps startups create much more value for the customers than simply yet more software.” For instance, Starbust invested in startup Picogrid that builds military integration infrastructure. “Their products include software APIs and hardware platforms for rugged edge computing and connectivity. These run applications like ISR and Command and control that would be more difficult to sell and to deploy on their own for the customers they are addressing,” he says.

Ultimately, whatever is under the hood, Zeitoun says he is interested in founders that are able to find the customers who will be buying entirely new capabilities, whether more or less expensive than the current solution. “If you can do that, this is where we are looking.”

Two ways to invest in ‘hardtech’

He says investors are all looking for the same thing: value creation by bundling or unbundling, but take different approaches. “For us, we principally invest in people that are having a promising start and can multiply organic growth with additional capital,” says Zeitoun.

“You can also stack capital to create a temporary category leader on a given topic ex-nihilo, expecting it takes roots – that is why you are seeing early-stage rounds that are thirty to fifty million dollars – you can take that path if you are comfortable compounding the risks, the pressure on the (usually returning) founders… and if you have less flexibility in your check sizes, but that’s another topic.

“We’ve done that too on a few occasions, in partnership with deeper-pocketed investors.

“You want the category to be exciting, you want to know there is an opportunity to bring innovation to a category. We prefer focusing on customer value more than on a detailed business plan in early-stage investments,” he says. “The business plan will change — it has to from when you begin to delve into a subject to when you are becoming part of the world experts in that field. Often what a startup does and sells over time changes.”

As engineers, companies claiming to build the best technology are always intellectually attractive, but for Zeitoun the focus of the decision making at the earliest stage is largely on the team.

Growth of investors

US venture capital deals have been rising almost exponentially since 2000, reaching a high of over 18,500 in 2021. It also becoming easier (if you have the money) to become a VC with platforms like Altvia, Fundly and Allocations digitising the fund creation and investment process. The latter was founded in 2019 and has since helped more than 20,000 investors across 1,400 funds invest a combined $2bn-plus in firms like SpaceX and Klarna.

The platform came about as a solution to the problem that it was expensive and therefore restrictive to many to establish an investment. Luis Brecci director of Solutions at Allocations explains: “As well as the cost, service was not what we expected as investors in tech who have expectations that technology should be applied to everything. When we looked at the market at that time we saw there was no technology incorporated into our industry, and that is really how we started. 

“Honestly, finding the solution is the hard part. It was hard for us because we work in a field that is extremely complex and our role is to try and break each process down into pieces. Then we need to be able to present in a straightforward way to both the fund manager and their partners,” says Brecci.

Are you an investor or raising funds? Feel free to reach out and tell us what you’re looking for this year.

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