I’ve decided to write this blog post about one of the more interesting business stories that has never really been told accurately. The story started for me when I was hired in 1994 to join a company that would become known as Teledesic as the fourth employee. This startup’s mission was to provide communications to the world regardless of location. Early in the process of designing the system it become evident that the nature of the available spectrum when combined with the greatest market need meant that it should be focused on providing broadband communication and not just telephony services. I had been involved in the mobile industry since the 1980s and knew the power of communications to make people’s lives better. So the mission of the startup was very appealing to me.
Craig McCaw and Bill Gates were the founding shareholders of the company, but were not involved in the day-to-day business of the company. My friend Russ Daggatt was the second employee to join the company and Elaine Ferguson was our co-conspirator. We started Teledesic in a couple of furniture cubes in the offices of what was then McCaw Cellular (it was sold to AT&T two years later). We had nothing really at the start but a modest amount of cash, our chutzpah and the reputations of our founding shareholders. Teledesic’s plan was audacious: build and operate more active satellites than any other previous satellite constellation – originally the plan was for 840 active satellites (reduced to 288 satellites in 1997). The original estimate of the system cost before any service could be provided was $9 billion. The idea for Teledesic was a spinoff of a military system called “brilliant pebbles.” Ed Tuck originated the idea for Teledesic, but it had been shepherded by the first employee, an engineer named Dave Patterson. There were many other very talented people involved in Teledesic that I could name but this is a short blog post not a book (which I may write some day). Some people involved Teledesic may disagree with aspects of this post since experiences like this are a bit like the famous Japanese movie Rashomon by Akira Kurosawa. If you have seen that movie you know it is about different people recalling contradictory versions of the same intense collective experience.
I turned down an offer of a very attractive job Microsoft the day I joined Teledesic in 1994. That day I told Bill Gates that I felt a need to do an ambitious startup sometime in my life and that I was passionate about making Teledesic happen. He said he understood why I turned down the Microsoft job, but he probably thought I was nuts. Not too nuts though, since he was an founding investor in what I was about to do. I have written before on this blog that the ideal venture investment is “half nuts” so it has the requisite convexity to create the potential for a 50-1,000x financial return. I also have written many times on this blog that missionaries act differently and are willing to do more things to make a startup successful than mercenaries. From 1994 until 1999 I threw my life into making Teledesic’s business a reality. You probably have heard the story about the chicken being involved in breakfast because she laid an egg but that the pig was committed to breakfast since he supplied the bacon. Investors are like the chicken, but startup up employees are like the pig. I flew over 500,000 air miles a year for five straight years to help retire Teledesic’s financial, regulatory and technical risk. I worked constantly. Other Teledesic employees where working just as hard accomplishing impressive things on the technical, business and regulatory aspects of the business. An amazing multi-disciplinary team was assembled in Kirkland, which is a suburb of Seattle. If I name one more of these people I would feel compelled to name them all.
Based on the incredibly positive reputation of our founding shareholders we were able to meet with just about anyone on earth in developing Teledesic. People I met with around the world inevitably would look at me dumbfounded as I told them about a constellation of hundreds of satellite circling the Earth providing broadband service. The New York Times once called the number of satellites involved in the Teledesic system design “mind boggling.” But since Craig McCaw and Bill Gates were involved most of these people not only listened but decided to get involved. The arc of the startup’s existence coincided with the Internet bubble so we had a tailwind that enabled us to plan to make fantastic things happen. The business climate for new ventures like Teledesic started to get even more positive when the Mosiac browser was released on November of 1993. After Netscape went public in August of 1995 the business and investing climate in the technology world started to get euphoric. Raising the $9 billion needed to build the system seemed more possible every day.
Like any startup that is worthy of venture capital Teledesic had all the elements of “the struggle” for the team trying to make it happen. Sleepless nights. Worries. Things going right and wrong. When I talk to a founder, my experiences at Teledesic color my world view and advice. Ben Horowitz describes the struggle involved in a startup beautifully:
“Your product has issues that will be very hard to fix. The market isn’t quite where it was supposed to be. Your employees are losing confidence and some of them have quit. Some of the ones that quit were quite smart and have the remaining ones wondering if staying makes sense. You are running low on cash and your venture capitalist tells you that it will be difficult to raise money given the impending European catastrophe. You lose a competitive battle. You lose a loyal customer. You lose a great employee. The walls start closing in. Where did you go wrong? Why didn’t your company perform as envisioned? Are you good enough to do this? As your dreams turn into nightmares, you find yourself in The Struggle.”
There were many things to worry about at Teledesic. We faced technology risk, financial risk and market risk. The experience was exhilarating and frightening at the same time. Teledesic did not have the support of everyone in the orbit of the founders in the early days. At one point when the startup had only had seven employees an executive named Wayne Perry who had worked with Craig McCaw for many years in the mobile and cable businesses said: “The problem with Teledesic is Russ and Tren – they just won’t let it fail.” Wayne was not a fan Teledesic in its early days, but many other people were fans. People in general love space-based businesses. Who doesn’t marvel as they look up at the sky on a clear dark night?
Through sheer force of will, the reputation of the founding shareholders and a lot of work, the small but growing team at Teledesic took the business forward clearing regulatory and other hurdles that others thought would certainly kill us. The peak of achieving the impossible was in 1995 when we achieved a regulatory win thought unwinnable at a World Radio Conference in Geneva. What we did in about six weeks in Geneva was simply unheard of in regulatory circles. Wired magazine wrote at the time: “It was a giant party, complete with favors,’ said an executive at wireless phone company Qualcomm, who, like seven other attendees of the 1995 conference interviewed by Wired News, talked about the conference on the condition of anonymity. These seven echoed the accounting of events at the WRC ’95. Other delegates remembered it differently – as a lobbying effort never before seen at a World Radio Conference. ‘What was unprecedented, I believe, was the scale and systematic aspect of this lobbying effort,’ noted a French delegate.” We were pirates with an entertainment budget and modern communications tools like the Internet and mobile phones. I loved being a pirate. It is about as much fun as you can have with your clothes still on.
By the fall of 1998 other opportunities were proliferating in the business world and I was asked by Craig McCaw to become more involved in other aspects of his communications and software businesses. By 1999 I was only involved in Teledesic as an advisor. By then the Internet bubble was in near full swing with lots of interesting and challenging things to do in private equity and venture capital. A talented team was in place at Teledesic to take it forward so I felt relatively good about moving on. I did have one major nagging concern. Giant companies like Boeing and Motorola were getting involved as Teledesic contractors and that meant space and other systems for Teledesic which kept growing both in terms of size and cost. The involvement of the huge contractors also made being involved in Teledesic less fun. The days of being a pirate in a startup known as Teledesic seemed to be ending, and were being replaced by traditional processes and thinking typical in giant defense and space companies. One brilliant thing that founders like Elon Musk and Jeff Bezos are doing today with their involvement in space-based businesses is not creating dependencies on these traditional high cost contractors. To do so would create wholesale transfer pricing problems that would kill their efforts to reduce cost, as I will explain below.
At the time I ceased being a Teledesic employee in 1999 people still believed in the dream especially since by then valuations were skyrocketing daily as people suspended disbelief about many aspects of financing a business. Anything seemed possible during those years, even the idea of raising the needed $9 billion for building the proposed Teledesic satellite system. But about two years later the business climate changed for the worse rather abruptly. People who did not live through the internet bubble simply don’t understand how quickly things changed. One day you could raise billions of dollars to build something like a massive fiber based national or global telecommunications network and the next you could literally not raise 3 cents. Just reading about this shift in the ability of a business to raise new funds is not sufficient to convey how swift the change from internet bubble to internet bust really was. If you went through the internet bubble and its collapse you were forever changed. Your muscle memory is just different than other people who did not have the same experience.
In the end the financial, technical and business risks associated with Teledesic could not be retired. A non-geostationary system must serve everywhere to serve anywhere so the constellation was an all or nothing effort. The ground antennas given technology at the time would have been too expensive and complex given the frequency band (Ka) and the satellite system costs were just not low enough since a cubesat approach was not being adopted. Non mechanical inexpensive antennas at that frequency are still a year away from being available even today. When Teledesic was trying to purchase launch services in 2001 entrepreneurs like Elon Musk and Jeff Bezos were not driving down launch costs and cubesat-style satellite systems were not being built yet since Moore’s law was not quite far enough along. The traditional manufacturers like Boeing and Motorola did not want to enable cubesat-style systems, so cost estimates skyrocketed and satellite size ballooned. The traditional manufacturers wanted to re-use the massive satellites they had already developed so the number of satellites in the proposed system needed to be reduced. These traditional manufacturers did not want cheap satellites since their military and government customers would want them too. They liked the idea of PhDs assembling massive satellites in clean rooms out of custom parts since it created a barrier to entry. I wrote about this price elasticity problem of a legacy manufacturer in my blog post on Elon Musk. Sometimes people will say that the Teledesic system shrunk in size since Boeing or Motorola had a better design. That is bullshit. The proposed Teledesic system shrunk because the legacy satellite manufacturers had huge satellites they already manufactured and they did not want to make small satellites since that would require new engineering and a new business model. Most importantly, the legacy satellite manufacturers did not believe they would sell many more satellites if they were cheaper.
Elon Musk and others like Greg Wyler’s OneWeb satellite system have revived the original Teledesic idea of constellations of hundreds and even thousands of satellites. I am optimistic these systems will get built and become operational. What is different now and what might make it happen? First, Moore’s law has had a couple of turns since then and more is possible at substantially less expensive price points. But more importantly a new group of people have been making very small “cubesats” in ways that some more traditional people involved in space would consider “a toy” These cubesats are tiny and simple by traditional standards and manufactured from off the shelf parts in many cases in a relatively normal manufacturing facility at far lower cost. These cubesats are getting better and better and can be up-sized to bigger dimensions (for example 250 kilograms) to make them powerful enough to do communications and not just imaging. The biggest question I have actually is not whether these system can be built and financed but rather: what is the total addressable market (TAM) for these communications systems given the cost of the services and the the necessary antennas? Is there enough demand and the prices that will be charged to make the business case work financially? The radio frequency bands (Ka and Ku) and distances involved most likely mean the communications systems will be used for communications backhaul. Low frequency LTE on the satellite does make not make much sense (channel bandwidth and structure are completely different). Greg Wyler’s OneWeb is planned for Ku/Ka frequencies and therefore is likely to be a system that will be used as backhaul for mobile cell towers and by big customers like the military. I am skeptical that the pictures of small villages using the system to create direct links to the satellites depict a realistic market scenario, but they do help with regulatory approvals. More communications backhaul in hard to reach areas is good for the world, but these systems are not likely to be an affordable scalable broadband communications end-user solution for ordinary users. Having said that, providing emergency broadband communications capability in areas with problems like epidemics and natural disasters is important. Will backhaul be nearly all fiber and terrestrial microwave or will some satellite satisfy some of the demand? What role can drones play in all of this? Is there enough other demand from other markets like ships, airplanes, NGOs and the military to make the systems financially successful? I have opinions on that market demand and approaches like drones, but writing about that topic is not right for a short blog post like this. There is already a risk that you may be getting a little bored with parts of this story. In any event, we will find out about the size of market demand for space-based communications systems soon enough.
During its life, the Teledesic team raised over a billion dollars at a valuation that was as high as a $3 billion. Teledesic was a triple Unicorn in its time. But when it was determined by the Teledesic board of directors that the business could not retire enough of the financial, technical and business risks to proceed, a decision was made to liquidate and hundreds of millions of dollars were distributed back to shareholders. This distribution of cash back to shareholders was and still is relatively unprecedented since most companies in a similar situation just pivot again and again to new businesses ideas until the cash is all gone. The math of corporate finance meant that early Teledesic investors received a significant multiple as a financial return on their investments even though it was a liquidation. One early investor to this day marvels that he received many times his original investment in a company that never provided service. Shareholders who invested at a higher valuation like $3 billion were not so fortunate.
Winding up any startup is never a happy time, but Teledesic was a valiant effort undertaken by a very talented team that paved the way for other similar systems to be built someday. It was also great fun and a wonderful life experience to be involved in the startup, especially in the early days. As Jeff Bezos wrote recently, “failure and invention are inseparable twins.” Negative results provide knowledge to everyone about what will not be a success. That makes it easier to determine what can be successful. Failures enable us to not only make new mistakes but to create genuine and lasting innovation. If you are not occasionally failing in what you do, you are unlikely to achieve great things.
A Dozen Things I Learned at Teledesic:
- It is more fun to be a pirate than join the navy. Pirates know how to break the eggs needed to make the necessary omelet. We broke a lot of eggs.
- Most people are not cut out for the startup life. It is not for everyone.
- Certain periods in your life are right for being involved in an audacious startup, and other periods are not.
- Flying 500,000 air miles a year for five years takes a big physical toll on your body. I still pay a physical price for that time in my life.
- Almost everything in life that is technically interesting and important involves trade-offs. This is especially true in space.
- The more great people you hire, the easier it is to hire great people. Positive feedback can be powerful.
- The better the quality of your existing shareholders, the easier it is to attract new high quality shareholders.
- Having smart, talented and accomplished lead investors is invaluable in raising funds.
- Space is very big. The distance to a non-geostationary orbit around the Earth is not so big, but launching any mass into that orbit is still relatively expensive.
- There are no electrical outlets or power cords in space. This creates hard problems for systems that need power.
- Since power density of an electromagnetic wave is proportional to the inverse of the square of the distance from a point source, space-based communications isn’t easy.
- Billionaires love space and rockets. A rocket launch is like a big very controlled explosion. Explosions that are very controlled and hurt no one can be great fun. Billionaires like to have fun.
Wired on Teledesic: http://archive.wired.com/science/discoveries/news/1997/10/7655
The Teledesic System: http://3csysco.com/Pubs/Teledesic%20Satellite%20System%20Overview.pdf
The Struggle by Ben Horowitz http://www.bhorowitz.com/the_struggle