Lost in Space: Due Diligence Failures Cost Big Time
By Tim Chrisman, Contributing Author/ April 21, 2023
Tim Chrisman is a space policy and geopolitics expert who writes extensively about the future of humanity in space. He leads the Foundation for the Future, a nonprofit based in Washington, D.C. which is leading the policy conversation around space infrastructure. Tim founded the Association for Space Finance, the industry association representing space investors, and whose membership ranges from small family offices to Barclays Investment Bank.
Tim is a former Army officer, who spent nearly a decade leading intelligence teams in combat and special operations units through five deployments to Iraq and Afghanistan. After his military service, Tim was selected to be a special advisor to the Chairman of the Joint Chiefs of Staff before joining the Central Intelligence Agency. He held multiple assignments at the Agency, including with the Directorate of Operations and Directorate of Analysis, culminating in a role supporting the National Space Council.
Tim studied at American University where he earned his Masters in International Relations and Affairs; the second of his two master’s degrees (the other is in Intelligence Studies). Tim is the author of the book Humanity in Space and is a prolific writer about the expanse of our civilization in space.
Due Diligence Delegated
I don’t know each of you personally, but I’d bet most of you value due diligence on big investments. But do you always do that diligence yourself? When you last bought a TV did you personally test a wide range of different models? How about when you bought a house? Did you personally crawl into the attic? I doubt that many of you make it a habit to personally conduct due diligence on everything. Instead, you likely outsource to experts when it makes sense.
How important is due diligence to you?
Investing in space, like buying a TV, is something that requires a lot of diligence. However, finding the experts to do that is harder than going to the Wirecutter. The space sector is booming with innovation and opportunity, and its challenges and risks abound in equal proportion. Investors who want to tap into this exciting frontier need to do their homework and conduct thorough due diligence on the space companies they are interested in.
Otherwise, they could end up losing their capital or facing legal troubles if these companies fail to deliver on their promises or violate any laws or regulations.
Due Diligence in the Space Sector
It is not enough to look at the financial statements or market projections of a space company. Investors also need to verify their technology readiness level (TRL), which measures how mature and reliable their products and services are.
They need to check their regulatory compliance (RC), which ensures that they follow the rules and standards of different jurisdictions and agencies. They need to assess their environmental impact (EIA), which evaluates how they minimize and mitigate the effects of space debris and pollution. They need to examine their ethical standards (ES), which reflect how they address the social responsibility and moral implications of space exploration and exploitation. And they need to identify their competitive advantage (CA), which shows how they truly differentiate themselves from other players in the industry.
Five Dimensions of Space Company Strength
Investors who conduct due diligence on these five dimensions will have a better understanding of the strengths and weaknesses of a space company, as well as the opportunities and threats they face. They will be able to make informed decisions based on facts and evidence, rather than hype and speculation. They will also be able to monitor their progress regularly and update their risk assessment accordingly.
Due diligence is not a one-time activity, but an ongoing process that requires constant vigilance and adaptation. The space sector is dynamic and evolving rapidly, so investors need to keep up with the latest developments and trends.
By doing so, they will be able to seize the potential rewards of investing in the next frontier of innovation.
Pitfalls and Challenges
However, due diligence is not always easy or straightforward. There are many pitfalls and challenges that investors may encounter along the way.
One example is what happened to crypto investors because of FTX, a crypto exchange that collapsed in November 2022 after a series of events that exposed its lack of due diligence and mismanagement. Many crypto investors lost their money or were left with uncertain claims on their assets. Some of them were also sued by creditors or faced tax liabilities for their unrealized gains.
Moreover, many crypto investors lost their trust in the industry and its regulation, leading to a drop in demand and a crash in prices for cryptocurrencies.
Due Diligence Failures
A similar scenario could happen to the space sector if there are high profile due diligence failures by investors. The space sector is also a fast-growing and highly innovative industry that attracts many venture capitalists and retail investors who want to participate in the next frontier of exploration and commerce. However, the space sector also faces many challenges and risks, such as technical difficulties, regulatory uncertainty, environmental impact, ethical concerns, and competitive pressure.
If investors do not conduct proper due diligence on the space companies they invest in or partner with, they could end up losing their capital or facing legal troubles if these companies fail to deliver on their promises or violate any laws or regulations.
Moreover, if there are high profile cases of fraud or mismanagement in the space sector, it could damage the reputation and credibility of the industry as a whole, leading to a loss of public support and interest.
This could hamper the growth potential and innovation opportunities for the space sector.
The Need for a Thorough Process
Therefore, it is important for investors to conduct thorough due diligence on any space company they want to invest in or work with. They should also monitor their progress regularly and update their risk assessment accordingly.
However, investors may not have the time, resources, or expertise to conduct due diligence on every aspect of a space company.
That’s why they would benefit from seeking out firms with expertise in the space sector to help vet their investments. These firms can provide valuable insights, analysis, advice, and guidance on how to evaluate a space company’s potential and performance. They can also help investors avoid common pitfalls, identify hidden opportunities, negotiate better deals, manage risks effectively, and optimize returns.
Specialized Firms for the Space Sector
By working with firms that specialize in the space sector, investors can leverage their knowledge and experience to make smarter and more informed decisions. They can also gain access to a network of contacts and partners that can help them achieve their goals and objectives in the space industry. They can also benefit from the reputation and credibility of these firms, which can enhance their trust and confidence in the space sector.
Therefore, investors who want to invest in the space sector should consider seeking out firms with expertise in this field to help them conduct due diligence and vet their investments. This way, they can increase their chances of success and reduce their risks of failure.
They can also contribute to the growth and innovation of the space sector, which is vital for humanity’s future.