Space Data: A Business Strategy

Space Data: A business strategy out of control?

The nature of entrepreneurial management

Space Data founders Eric Frische and Jerry Knoblach offered the advantages of two complementary yet contrasting methods of entrepreneurial management. Both were friends and roommates at MIT, technological 'geeks' interested in the economic potential of new communications. However, Frische was excited by hands-on customized technology, while Knoblach was more excited by the prospect of offering technology to a wide range of people (MacCormack 2002:2). The initial business model and services offered by the Space Data Corporation seemed to combine their respective strengths of thinking big but deploying the potential of small and relatively inexpensive and customized technology.

Recognizing and defining an opportunity

To these executives of the new Space Data Corporation, the fact that 20% of the United States did not have access to the full benefits of wireless communication systems, such as paging or voice technology, was a business opportunity ripe for the taking (MacCormack 2002:2).

Formulating a business concept

The friends' concept was to provide "fill-in" coverage to wireless service providers, by using cellular towers known as SkySites in the form of disposable weather balloons that were launched by the National Weather Service. By suspending Space Data's hardware for sending and receiving signals on the balloons, total national coverage could be achieved (MacCormack 2002:1).

Product line strategy

The initial focus was on services not currently available to such rural populations, including paging and wireless voice technology.

Economic model of the business

The model was a service-based model determined to exploit the cheap, inexpensive yet wide-ranging potential of SkySites weather balloon technology. Two launches a day everyday would cost $220,000 per year to run and the initial communications payload for the two-way paging technology was supposed to cost only $300 (MacCormack 2002:6).

Estimating market potential

Jerry rationalized that as 80% of the U.S. population was served with wireless coverage from towers located in 10% of America, mostly in and around urban areas this left more than 50 million Americans in areas where tower-based wireless services do not work (MacCormack 2002:3). The demand and rationale for the company seemed secure provided the balloons did not fall afoul of government regulation and the government use of such weather balloons (MacCormack 2002:5).

Buyer behavior and market segmentation

The initial business plan outlined three primary markets: paging and messaging for customers outside current reception areas and paging and messaging for people living in rural communities, with possible expansion into the emerging telemetry market later on (MacCormack 2002:6).

The concepts of objective, strategies and tactics/types of strategy

The balloons had to be efficient yet inexpensive and effective, so Eric and Jerry devoted all the resources at their disposal to perfecting the design, eventually accepting a greater financial outlay in the hopes of securing inexpensive operating costs.

Resource strategies and leveraging

One of the greatest resource challenges was acquiring a frequency spectrum. To capitalize upon a unique resource strategy and to leverage new capital, Jerry's father "created a holding company in cooperation with Space Data, set up solely to bid for the spectrum -Jerry's father contributed the money, and in return, this company would receive leasing fees from Space Data until his contribution had been repaid (MacCormack 2002: 10)

Finding money and raising capital

Jerry first drew upon family capital, $500,000 total from family members. Board members were sought for their engineering and legal expertise to deal with government regulations regarding the technology, as well as familial loyalty and belief in the project concept, which cold keep legal and employee costs down. Overtures were made to Motorola, the international communications company that was enthused by the concept (MacCormack 2002:7). The company continued to draw upon familial as well as corporate capital as the design was perspective, initiating "its first formal private placement of equity in November 2000, raising $1.5 million at a post-money valuation of just over $10 million, largely from Jerry's father and brother, but also with wide participation from employees, directors and advisors' (MacCormack 2002:10).

Pro forma financial statements

When viewing the financial statements of other, larger companies in the business, the demand for wireless technology seemed initially like an ever-expanding market, growing year after year (MacCormack 2002:28).

Valuation

However, it should be noted that many of these companies offering similar services were large corporations to begin with, like at&T, and thus had more financial capital to draw upon for research and development of new technology, thus making it easier to offer expanded services and increase their value as a company than Space Data.

Determining how much money is needed

Unfortunately, the need for new money always seemed around the corner for the Space Data Corporation. When more funds were required for regional testing, most capital venture funds were wary. The financial needs of Space Data coalesced with a market downturn and "the market for paging and messaging firms had collapsed over the past year, with most having plunged by more than 90% from their peaks (MacCormack 2002:11). Investment banks were not interested, except for one, provided the company's plan met with FCC approval, including "patent protection, a formal contract with the weather service, and a contract with a carrier"(MacCormack 2002:11).

Deal structure

Space Data was thus forced to relinquish some of its hands-on control over its administration because the technology it was using was growing increasingly expensive to use and the market was growing softer, in terms of available capital. As it accepted more capital from outside the family and the business, more entities gained input into the endeavor.

Marketing strategy and tactics for a new venture

The problem with the technology the two entrepreneurs selected was that it was moving extremely fast. Their original plan was to start small and relatively cheap, after the initial period of testing, and then expand. However, because the testing and funding took longer than expected, technology had grown more expensive. Paging was obsolete and rapidly being discontinued. Observed Jerry: "The bankers are pushing us straight into voice, which sounds great but scares the hell out of the engineering team. And out of the blue we now have telemetry as a new opportunity, but it's certainly not the business that we dreamed about when we founded Space Data nearly five years ago. One thing is for certain - nothing will ever turn out quite the way you imagine when you're building a technology venture"(MacCormack 2002:12).

Operations of the business

From a small venture, the company found itself required to offer increasingly more complex services to draw financial backers and justify its costs.