As SpaceX aims for Mars, entrepreneurs are partnering up with rocket scientists — many from SpaceX, Blue Origin, and Virgin — to put satellites into low-earth orbit (LEO). LEO is the orbit of choice for builders of small, cheap satellites that usually point back towards the earth. These satellites typically do earth sensing and observation, or beam down broadband. As the name implies, low-earth orbit is very close; hundreds of kilometers in contrast to the many thousands of kilometers where conventional communications and scientific satellites reside. LEO is attractive for weather, earth observation, and alternative telecom satellite operators because close proximity means no need for exotic radiation-hard sensors, radios, and optics, thereby making the spacecraft small, lightweight, and cheap. Linear reductions in size and weight imply exponential reductions in cost to build and launch the satellites, giving operators the opportunity to launch more satellites and special services to their customers.

Getting to LEO isn’t easy — most small satellite companies wait years to get their spacecraft into orbit. The reason for the long wait is that small satellites are typically launched as secondary payloads, which as the name implies, subjects them to the whims of the primary payload customer which may delay their launch or not make room for them. Would frequent, dedicated small satellite launches catalyze an explosion of business around earth observation and global broadband? Will new applications be developed as a result? Will launch companies benefit from this explosion and generate amazing returns for investors? Or, will they be evaluated solely on cost and embark toward a race to the bottom?

This experiment won’t be cheap, as evidenced by SpaceX. The capital investment needed to launch its very first payload was well into the double digits of millions. It took a bank account of Internet multimillionaire Elon Musk to propel SpaceX to the point where traditional VCs were willing to invest. Elon’s first customer was the U.S. Government, who had no trouble paying in advance after it saw a successful launch. Later customers were telecom companies who also paid in advance — as telecommunications satellites produce a very predictable income stream for many years. In fact, lenders are willing to put up some of the money while insurance companies step up to protect them against catastrophe. In contrast, the small weather, observation, and broadband satellites have not demonstrated any financial performance, leaving the small satellite launch companies and their investors holding the bag.

A major drawback to launching to LEO that could be advantageous to small satellite launch companies is orbital decay. Atmospheric drag slows down the satellites, bringing them closer to earth to the point where they are incinerated in the atmosphere. Therefore, there could be an opportunity for a launch company to not just deploy a constellation, but maintain it by continuously launching new satellites as needed for that customer. This model mimics that of SaaS companies where metrics are better understoodand venture capitalists have more experience investing.

Small-satellite launch companies should be ready to answer the following questions: How much in R&D and tooling is needed for the first successful launch? What does it cost to close a long-term launch/replenishment contract with a customer? How much of that is paid upfront and how much of the launch cost does that cover? Can the remainder be financed? What’s your unfair competitive advantage besides price?

Speaking of competitive advantage, is launch cost alone going to determine the winner? Rocketlab uses electric turbo pumps and 3D printed motors to reduce cost and weight, respectively. Firefly uses pressurized tanks to eliminate the need for complicated turbopumps. Others use a combination of 3D Printing and design choices around rocket size and payload to optimize for cost per kg payload. Basic physics, material science, and available manufacturing techniques keeps everyone honest. This begs the question: if all providers offer similar services at similar prices, what’s to prevent small satellite launch becoming analogous to trucking or airlines?

It is easy to become enamored with rockets — perhaps it’s the result of our primal magnetism toward bright lights, explosive sounds, towering objects, and exploration of the vast unknown. However, investors and entrepreneurs must resist temptation and focus on basic fundamentals: is small satellite launch an attractive business when the many millions of upfront investment is taken into account? What’s going to determine the winners and the losers? How can one launch provider provide a truly differentiated offering and lock in its customers for the long term as opposed to fighting on cost? There is no denying that humanity will be venturing into space. The trillion-dollar question is who, if anyone, will make money.