The year of CEO departures - extract from the 2023 space investment report
High-profile CEO departures were one of the overlooked topics of the 2023 space investment dynamics. Why is it happening, it is getting more common and what are the implications?
This is an extract from the 2023 space investment report, which I have been for the last 9 months saying will be finished next week.
What are the analysts missing? The typical coverage on space investments uses some proprietary data and then a macro commentary looking at global private markets, interest rates and defence spending. I like to go a bit below the abstract level - some high-profile C-level departures were one of the overlooked qualitative topics of the 2023 space funding environments.
Context
The core of understanding of the CEO departure situation is that the majority of new space companies are venture capital-backed and via board seats and voting powers, those VCs have a say in who is and isn’t a CEO. I would say there are about four major inputs into the potential founder replacement.
Positive signalling (pro founder): the best entrepreneurs have the power to choose which VCs they will want to work with as venture capital arguably becomes increasingly commoditized. When VCs signal they are willing to support the side of the founder, they are increasing the chances the best ones will allow them to invest.
Board members can do surprisingly little (against founder): this article “Your board of directors is probably going to fire you” is still the best thing ever written on startup governance. The blog post basically says that because performing assigned board functions in practice is very difficult, the board generally resorts to casting their vote of confidence in the form of retaining or firing the CEO.
There is also a good legal reason for it (don’t trust me on this, I’m not a lawyer). In order not to be liable for their actions as board members, they need to stay visibly away from actually operating the company. One of the best ways to show this one-step distance is to stay on the level of firing or retaining the CEO.
Founder-led companies tend to perform better (pro founder): founder-led companies perform better because the founders are in founder mode, as has been proven over and over again. In particular, Pitchbook says that: “In each of the past five years, VC-backed companies led by a founder grew in value significantly faster than companies led by non-founders, our analysis shows.” (see link here, pretty interesting read).
VCs have a fiduciary duty (against founder): this pretty much says that VCs are responsible to their LPs (entities entrusting them with cash), rather than founders. If founders are underperforming or no longer fit for the position, VCs with relevant power pretty much need to replace them.
So this is the set of forces coming into play when determining the CEO position. But different VCs tend to assume very different general positions with all the above in mind.
“Some firms, like Sequoia Capital, even trumpet their propensity to fire CEOs.” (source)
“Founders Fund has never removed a single founder – we invest in teams we believe in, rather than in companies we’d like to run – and our data suggest that finding good founding teams and leaving them in place tends to produce higher returns overall. Indeed, we have often tried to ensure that founders can continue to run their businesses through voting control mechanisms, as Peter Thiel did with Mark Zuckerberg and Facebook.” (says Founders Fund manifesto)
Also, to add another piece of context - investment documentation has always two major parts - economic and governance. Usually, media reporting focuses on the economic part (amount invested and sometimes valuation). But there is arguably equally important governance part which directs how the company will be run. Another important part of the economic portion is “structure” - usually not reported and neither sexy, but majorly determines who gets paid, how much and when, at the expense of who.
Is it happening?
What I find very curious about space journalism - we all see something is going on, but nobody bothers to put the puzzle together instead of just showing single pieces. In 2023, we saw some high-profile departures.
Steve Collar has been at SES in various forms since 1999 and is one of the most respected satcom executives. Stepped down unexpectedly following the SES/Intelsat failed merger attempt.
Chris Larmour who has been at Orbex since founding in 2015, left the company.
Melanie Stricklan, the co-founder and CEO of Slingshot Aerospace resigned from the position in August 2023.
Bob Smith, the CEO at Blue Origin was replaced by Dave Limp.
Payam Banazadeh, the founder of Capella Space stepped down in September 2023.
I should also make abundantly clear I respect the hell out of all the people above. There is a world of difference between writing about stuff , investing other people’s money and actually building companies. The people above are the real heroes of our industry.
Is it happening at an increased frequency?
Whenever there is an occurrence of something - the relevant questions to ask are: is it real (it is), is it important (it is), is it happening increasingly more? is it a bubble or is it a trend - for the last ones I’m not sure.
I didn’t really follow leadership transitions in aerospace till about mid-2022. In 2021 Kokorich left Momentus, in 2022 Edgybees brought in a new CEO. I don’t know what the statistics would say (would be really curious to know), but CEO changes in space companies were most certainly happening pre-2023.
In 2024, the occurrence continues, so far we have seen transitions at Ursa Major, Spinlaunch, All Space, Kymeta, Axiom, LeoLabs, Scout Space, Firefly, Exolaunch (and others I might have missed). Any serious attempt to quantify this would have to include some weighting for the importance of the company, a weighting to the size of the change and the reason for the change.
I was trying to come up with a good argument for why the founder transition should be more or less common coming forward. No good answer on my end. There are obviously more and more space companies out there so more transitions will occur, but as for relative measure, I don’t have a good answer.
Why is it happening
The crucial fact to highlight is that the new space industry is just coming up to 10 years. Basically, before 2015 there was virtually no venture capital flow toward the space industry. 2015 was a breakthrough year with about 2.5B money flow in the space industry, of which at least 1B represents the Google-led investment in SpaceX. I also loosely track the founding years of space companies and 2015-2017 were indeed very fertile years.
So, now we know that the VC backed space industry is about 10 years old and most of you also know that ~10 years is both the typical fund length for VC firms and a time when companies start looking for an IPO (this has recently prolonged, but 10 years is still a media age at an IPO).
Some possible reasons for the leadership transitions
Change in required skills: as companies grow larger and more complex, the skills required to run them change. Especially as companies approach exit, boards sometimes prefer to bring in more “professional” CEOs to master the investor communications, corporate development and ideally have done something like this before. There are both tech and space industry examples of where this backfired in an ugly way, but continues to be a popular reason.
Founders get tired: I suggested this reason at a dinner with two space company founders and both of them said that I couldn’t be more wrong. My suggestion is that running a company is an extremely demanding activity and it is quite plausible to imagine that after 8+ years of such tempo, founders get need rest or to respond to new life priorities
Need for fresh energy: we see quite a few space companies around which are doing decently well but nowhere on track to a strong IPO. And so about a year 5-7, the board can suggest that a fresh energy could push the company to a successful exit.
Reflection of business performance: As suggested in the beginning, boards have relatively little room for manipulation. And sometimes, due to a technology failure of changing market conditions, companies might struggle without it being necessary a reflection of founders’ actions. Yet, the boards must act to respond to the signal and sometimes the only tool in the toolbox is a CEO replacement. If your only tool is a hammer…
National security grounds: this is always a difficult topic, especially in the space industry. Generally, immigrants* and or persons of foreign descent show relatively larger propensity to entrepreneurship. Simultaneously, it is a business driven by national security interests/spending. Sometimes, authorities bluntly state on record one person or another must step down or divest their shares, sometimes it gets discussed behind the scenes. As sad as this is, foreign ownership/national security grounds do drive C-level transitions. *Technically, I have been an immigrant for the last ~4 years of my life.
What does it mean?
Paradoxically, CEO departures are in some form a proof of the industry maturity. With Golem, I have invested in 4 companies, 3 of them still exist, but if I were to depart any of those CEOs, the companies would immediately implode. Bringing in a CEO replacement means that the companies are sufficiently structured/mature they don’t depend just on one person, that board care enough to extend the effort to find and replace the CEO and a somewhat intelligent persona of the new CEO is willing to risk their time and reputation for a salary, option package and a title in this new company.
As I shared in the beginning, the space industry CEO departures did not start in 2023. But, I think this is the first time that several major companies on a growing trajectory are no longer founder-led. Historically - many struggling space companies tried to replace their CEOs in hopes that could save the day - it usually didn’t and many of those companies are no longer around. But Capella and Slingshot are around for the long run - so it will be really interesting to watch how they perform under the whelm of professional CEOs.
This also might serve as a reference point to other space company boards - Planet has had a difficult last year, yet remarkably continues to be led by two people who co-founded the company 13 years earlier (Chris Boshuizen left in 2015). Would Planet be better served by a new leadership? This is always a difficult question. Founders are special, they embody the culture, and they tell the story better than anybody else can. But sometimes companies can be better served by a new skill set and a new energy.
Talent is the most important resource in the business - one that designs and executes a strategy. Departing CEOs means that a) the company, investors and the board should watch for potential new CEO candidates and always have a few on the list b) departing CEOs establish an extremely valuable suite of new advisory, board members and entrepreneurial talent.
As the VC-backed space industry approaches its 10th birthday, leadership transitions are in progress and preparing companies for trade exits and M&As. This will be really interesting to watch.
Thanks for reading! I the coming weeks I will be in Paris, Milan for IAC, Bangkok for APSCC and trying to pencil in a date for my trip to India as well. Reach out if you would like to meet up.
Insightful