For this week’s SpaceDotBiz newsletter, I interviewed entrepreneur and aerospace engineer Payam Banazadeh. Payam co-founded Capella Space in 2016 and led the company for nearly eight years until only recently stepping back from the CEO role this past October. Capella is a leading commercial provider of Synthetic Aperture Radar imagery, primarily servicing the US government and allied nations in their need for persistent remote sensing. While Capella’s current valuation is not public, they most recently raised $60M in growth equity financing in January of this year, and the company has raised a total of $250M in its history. Payam remains a board member of the company.

Payam received his BS in Aerospace Engineering from the University of Texas at Austin before spending two year’s at NASA’s Jet Propulsion Laboratory in Pasadena, California. As a Project Systems Engineer at JPL, he led early mission formulations for two interplanetary deep space missions, Lunar Flashlight and NEA Scout. He then went back to school to pursue an MS in Business & Management at Stanford, where he also conducted research in the Aerospace Department’s Space Rendezvous Lab.

At Stanford, while taking a course titled “Hacking for Defense”, which tasks students to uncover defense needs while interviewing military stakeholders, he started Capella Space and raised the company’s first capital before graduating.

In this interview, we chatted about a ton of topics including:

• The role Capella has played in the Russian invasion of Ukraine

• What he would do differently if he started Capella today

• How they’re innovating on remote sensing distribution

• What customers they’ve decided to focus on and why

• SAR price elasticity and how demand changes with price

• How changes in launch have impacted Capella

• His thoughts on partnerships and sub-contracting in space industry

• His opinion on how public markets are pricing remote sensing companies

How is Capella differentiated from other major SAR providers, such as ICEYE or Umbra?

So first of all, I am no longer the CEO of Capella, and I'm doing this interview in my capacity as an entrepreneur, and therefore my answers should be sort of treated as a view of Payam as an individual and not of Capella's position on these topics. Having said that, Capella is the Rolls Royce of commercial SAR. The services that Capella provides are premium and tailored to high-end and sophisticated customers that require the finest service. I would say unlike others, Capella is not trying to be everything to everyone. And we made that decision to be laser focused on the government customers a long time ago, and it's worked out for us really well.

One of the major themes in remote sensing over the last year has been in the role that companies played in bringing transparency to the Russian invasion of Ukraine. Capella has been one of the major organizations in that discussion. Can you talk about Capella’s impact there?

Capella was one of the first Earth Observation companies that stood up a dedicated team to work on this mission before the invasion. We took a pretty intentional decision to release imagery publicly of that region, and our imagery was actually used to predict an imminent invasion. Since then our imagery has been used by the US government, Ukrainian allies, and partners to literally save lives and fight for preserving democracy.

In a lot of ways, commercial SAR really got lucky to have been at a point of maturity where its applicability could be demonstrated in a very public way. The weather in Ukraine, when the invasion happened, was bad, it was really cloudy. It was wintertime and since SAR can see through clouds, it was pretty much one of the most effective ways of monitoring the situation from space. Nothing else was really available. Specifically commercial SAR was particularly impactful because it could be released publicly without any of the government’s classifications and restrictions. We had a significant impact and continue to have that impact. I'm immensely proud of what we've done and accomplished there, and we're doing, not just in Ukraine, but in other places around the world we can't really talk about.

Unfortunately, I think those instances are only going to increase in frequency and I'm really happy we have this tool in our toolkit called “commercial SAR” that we can utilize to solve critical problems.

You’ve recently stepped away from your role as CEO of Capella and are now a board member but not involved in the day-to-day operations. Looking back on your time at Capella, what would you tell your younger self if you were starting Capella today?

Building Capella has been a very humbling experience. Those who met me during the first two, or three years of Capella between 2016 to 2018 will probably remember me as someone with a big head and an even bigger ego. And even though my conviction was extremely beneficial in getting Capella off the ground, I think I could have done it without being as cocky as I was. And I think that's just maturity.

What would you do differently?

I don't want to sound cliche, but I think there are literally too many things to count that I would do differently. In fact, I've written extensively in my personal journal on all I would do differently for my next company, but I'll share one that I think is very applicable these days to founders starting new companies. I think raising venture capital is extremely delicate. It needs to be treated with a lot of thoughtfulness from day one, especially the amount you raise and the timing of your very first raise. I don't think you'll find many entrepreneurs who have perfectly timed their fundraising as it's really, really difficult to do that. I personally have lots of bruises and cuts that are going to remind me of all the mistakes I've made for the next one. Don't raise until you truly are ready, raise small amounts, but enough to achieve a significant milestone and raise at valuations that set you up for success. It's easier said than done, but it's such a huge factor in the success of you as an entrepreneur and therefore the company.

Well, I think the other added factor of this is when you were starting Capella in 2016, what was an appropriate early funding round size? I think that question remains even now, but it was more unclear at the time. What is an appropriate valuation and timing between rounds too? So I think it is just very hard for a founder. Especially if the market dynamics are changing in real-time, which they always are, but especially now.

They’re especially changing in the last two years. I started Capella in 2016 and in a lot of ways, because there weren't enough space companies out there, the valuation discussion was a lot more wishy-washy. Now there are public comp multiples and there are other companies where you can look at their history. And so I think maybe it's a little easier now to project forward, and to think through different rounds because there's just a lot more data points than what we had back in 2016.

A frequently emphasized topic in the remote sensing world is the split between government and commercial markets and how companies choose to navigate those customers. What has been Capella’s path and why have you chosen that path?

So when I first started Capella, I wanted Capella to be a commercially focused company. In fact, it was incredibly difficult to get interest from investors when I presented Capella as a defense tech company back then. That was 2016, American Dynamism was not a thing like how it is today, but a couple years after I started it, I realized that governments have substantial demand for solutions with existential problems that require urgency and frankly, a perfect product-market fit for what we have. So we decided to have that laser-sharp focus on the government market. I think it's really, really difficult to split your focus between government and commercial. There's this term that people use dual-use technology, and I think as much as people love talking about it, the reality is that you can't really half-ass your productization and go to market and be truly successful in the government market.

Government can't be an afterthought as a customer. You need to pick one and focus on it. We picked government as our initial market. I think that's the right answer for Earth Observation in the short term. It doesn't mean that Capella is not interested in commercial. This is simply an order of business and a strategy to help get Capella to profitability faster with less capital than if we had either split our focus between government and commercial, or worse if we put more focus on commercial as a strategy. And the nice thing now is that we're sort of outsourcing the market development on the commercial side to our competitors because they seem to be very eager to go after commercial. So our competitors can use their very expensive equity dollars to chase new markets, develop use cases, try risky business models, and guess what? All of their success and failures will be played out in public, and we'll just learn from that and do the right thing. So I am a strong believer of focusing on the market as opposed to splitting your focus between two very difficult and very different markets.

With regards to focusing on the defense market, given that historically pretty much all Earth Observation companies have ultimately focused on the defense market, it sounds like it’s more contrarian to target a commercial market. Even a company like Planet that initially focused on commercial eventually seems to have moved primarily to defense. So in that way I see where you’re coming from.

I think Planet is a good example. They started the company wanting to focus on commercial and then they realized later on that that was the wrong strategy and they pivoted back to focusing on defense. And I did a little bit of that myself too. For the first couple years, we wanted to be more focused on commercial, but when you realize the reality is different than what you hope, you must adjust and do what the market wishes you to do.

When I talked with Dan Berkenstock of Skybox, he discussed about how they had wanted to innovate not only the imagery they could generate, but in how that imagery is “piped” or distributed. Has Capella focused on changes to the distribution of data as well, or primarily on innovation around the data generation in the form of your satellites and sensor technology?

Yeah, I would say half of our focus actually was put on distribution of data and building the right pipeline for it. We developed and released many firsts in the industry in that segment, our entire pipeline from ordering to delivery was fully automated and has been automated since 2019 with full API integration. Even to this day, Capella wins on contracts because ordering from others is still slow and painful, often ordering over email, and it's not fully automated. We've had that sort of simple ordering system. We pioneered real-time tasking by partnering with Inmarsat in 2018, and we've been providing that service since then.

We've practically laid the groundwork for what is now becoming a gold standard for what a 21st-century satellite tasking delivery needs to look like, and customers now have that expectation. And so I smile when I see others in 2023 and 2024 release a limited version of what has been an operation for Capella since 2019 and claim first in the market.

It's not to be underestimated, by the way, how much time it takes to build everything except the satellite. The satellite is hard, but everything else is, I would say, equally as hard and important as the satellite.

That's interesting to hear you say, since I also see discussion around integrations with APIs, and I was not aware that that's something that Capella had fully automated, I guess four years ago at this point.

Yeah, it's been fully operational since the first launch of our satellite in 2019. Part of the reason, and I'm a little biased here, that everyone else has accelerated their plans to build APIs and exaggerated their capabilities is because they lose contracts once customers get to see our platform and how easy it is. Customers expect and demand Capella-level of service from our competition.

Do you think that suppliers of remote sensing data can take action that can effectively mature or grow the addressable market for commercial EO imagery or do you generally see that as outside of their control?

Data providers have some impact in growing the market but not as much as they think they do. There is no single factor that can grow the market. It’s a complex multivariable problem with dependencies that are outside of a single data provider’s domain. As an example, there is a lot of talk about pricing being a significant variable in expanding the SAR market. Pricing is a single factor that sometimes is important but not always. I do not believe the SAR market grows linearly with reduction in price. In fact, I believe the SAR market of today shrinks at some multiple of price, meaning that if you drop the price of SAR by half, the consumption, in total dollars, by those who represent the largest share of the market today wouldn't double, but rather actually goes down with some proportion to the pricing. I hope over time that changes, where when you drop the price by half, the consumption would quadruple so that the market would double in size. But that's just simply not the case today. It's an unpopular opinion to have publicly but one that I am not afraid to vocalize.

Why do you think Capella has succeeded when others failed. For example, Terran Orbital discontinued their SAR mission, Orbital Effect closed, Alpha Insight closed, Urthcast failed.

For each of those companies you mentioned, there's been something specific and unique, but I think executing despite all odds that were against us is probably the biggest factor for us to have been able to get to where we are today. There were just too many times that we were faced with lots of existential threats and decisions, but we really never considered giving up as an option. It wasn't in the trade space, and there's been too many to count, frankly. And so I think that's the main reason. You’ve got to make the right decisions at the end of the day, but not giving up is really important when you're trying to do something really hard.

What do customers of SAR care most about?

What our target customers in the DoD care about most are really trust, confidentiality, quality, speed, accessibility, stability and assurance.

How do you think about owning the relationship directly with the end user of your data? Particularly as new aggregators or marketplaces for remote sensing data enter the market. Do you have a preference of selling directly to users or are you agnostic to how your data reaches the final user?

It depends. It's important to maintain some form of relationship with your end customers so that you can continue to understand their pain points, evolve your product set, and build the right solution for them. What you end up building in space, especially these days, is not static. You're not building something that's just going to be there for 20 years to come up with the requirements and forget it. So it's hard to solely rely on the middle markets and sort of those aggregators as your only way of getting inputs on what people want and what's working and what's not working.

I think this is especially true for government customers. Oftentimes they have very sophisticated problems that require some level of white glove service and some level of customization that often only the satellite operator can build around because it's about the concept of operations. It's about fine-tuning the latency and delivering it in a very specific way. So I think it's really important to have a relationship with the end customers. I think it's equally important to work with partners of all sorts in the industry, and I've got a lot of thoughts on that as well. So it's not either/or. You have got to do both.

Over the course of Capella’s seven year history, the launch market has evolved significantly. What changes in launch have led to the biggest impact for Capella, such as rideshare, small launch, orbital transfer vehicles, or anything else?

I think the mass and volume of satellites have become less relevant relative to when we started the company in 2016. What is important today is to deliver the performance that customers need. And so optimizing performance per satellite is a lot more important than kilogram per satellite. You can even see this trend with mega-constellations. The demo satellite is typically small, but then the production satellite gets bigger. And Starlink is a good example of this. If you look at what Capella is launching now, we had the same trends. Our demo satellite that we launched was 48 kilograms. Our first operational satellite was about a hundred kilograms. And then our latest generation that we recently launched a few months ago was 150 kilograms. It turns out the price of building these larger satellites has grown marginally, but the capability we're able to provide to our customers grows asymmetrically and much, much more than the marginal cost of going from 50 kilograms to 100, to 150. The customer ends up winning, they get more performance for less.

On the topic of partners, a question that constantly exists in my mind is on the dynamic of leveraging partners in the form of sub-contracting with a prime vs being the prime yourself. What are your thoughts on that?

Sometimes it makes sense to be the prime and sometimes it makes sense to be the sub. Either way, partnerships are a must to solve complex problems and expand the market size for Earth Observation data. More often customers’ problems need data from a variety of different sensors, sometimes even from non-space sources that need to be fused with their own internal data that no one has access to. Sometimes even the data collection needs to be orchestrated in a very unique way to solve very specific problems. Earth Observation companies need to realize that they're a single piece of a very complicated puzzle, and often they're not the most valuable or important piece. And that's okay. So partnerships are critical in expanding the market. 

However, I think there is an unstable dynamic in the Earth Observation market regarding partnerships. A lot of the data companies don't have correct long-term incentives with their partners or worse have conflicting incentives for those partnerships to be successful. Unfortunately, there are too many companies in the Earth Observation ecosystem that have a zero-sum view on value creation. Until we realize that value creation is not a zero-sum game our ability to grow the market will be limited.  I think one of the reasons Earth Observation has not truly taken off for the commercial market is this unstable partnership dynamic that exists amongst the data providers and solution providers.

The DoD has introduced a number of programs over the last 10 years with the goal of improving its ability to acquire innovative services, technologies, and software from early-stage companies. The programs typically discussed are those like AFWERX, SPACEWERX, the Defense Innovation Unit, and most recently the Office of Strategic Capital. Have you seen such efforts move the needle towards a capacity for more innovative acquisitions over the last decade?

Look, I have experience with every single one of those programs, and I've generally found them helpful. They have their problems and challenges, and I have my share of frustrations on how they can be better. But if you're trying to build hard businesses that require significant capital, then these programs, as long as you navigate them thoughtfully, are a fantastic way of getting non-dilutive capital to build your tech without raising venture capital. I think the problem arises when entrepreneurs use these programs to define requirements for what they build, only to find out that the program manager behind the program was sort of treating it as a low-priority R&D project. So as long as you're not getting trapped in that problem, then they're fantastic. I think the government is still trying to figure out how to transition programs from R&D, to a pilot, to a fully operational capability. That’s where a lot of these programs fail, but if you use them strategically to get initial funding to go build the tech, I think they can be a game changer for you.

Knowing what you know now, would you do it again

Absolutely! I think there's no pleasure greater than building a team that accomplishes what many think is impossible.

What is your opinion on the way publicly traded satellite imagery companies (Planet, BlackSky, and Satellogic in particular) are being valued by the market?

It's simply brutal. There's no denying that what has happened to these SPAC space companies has had a negative impact on the space industry as a whole. I mean, not a single one of these companies have met their SPAC forecasts and as a result have on average lost 80% of their value since going public. And they've set a public comp for imagery companies and those multiples are ridiculously low. So I think that every entrepreneur that's starting a new company needs to be super keenly aware of the dynamic that creates in the market. The way to differentiate and sort of demand a higher multiple in the private market is by showing higher profit margins, higher growths, differentiated products, and a significant moat. Capella has all of those, but it's still really, really difficult because one is a liquid market, another one is not. So I think it has created a really difficult dynamic for a lot of space companies.

Do you think that startups should be structuring their fundraising rounds with those public comps in mind? Should they be thinking “I will be public and those will be my multiples, so I need to create a trajectory where I’m going up and to the right on every round.” Is that the right way to think about leveraging public comps as an early-stage company?

You can't avoid it, but I think you want to tell a story of your future multiple on valuation for why your company is going to be better than just a few players that are in a specific niche that you're in. The way bankers do this, and they're really good at building stories on why you should be worth more, is that you include the relevant Earth Observation market with comps like Black Sky and Planet, but you also end up adding a bunch of other areas where your company will be involved, so markets with companies like Palantir and Databricks. You build a story on why the product and the company you're building is going to be relevant and needs to be then comped accordingly to an area that's bigger than the niche that people think you should be fitting in.

I think if you're building a launch company or a communication company, your job is a little easier because people are looking at SpaceX and others. You still have to deal with Astra and other ones, but it's easy to differentiate yourself because they haven't been successful. They don't have a product, whereas in Earth imaging, Black Sky is successful, they do have products, they do have revenue, they are growing. And so I think in some ways you can't avoid it. You have to build a story around it and just be really thoughtful on the dynamics that investors both in the private market and the public market are looking at when they want to give you a dollar.

What are you most excited about for the future of the space industry?

When I graduated with my aerospace degree in 2012, there were very limited options to work in the space industry. You had the defense contractors, you had NASA, and then you had SpaceX. For the most part, when I started Capella in 2016, there were more startups, but it was still a very new and sort of unexpected and unaccepted path with maybe only a handful of space startups. When you look around now in 2024, there are so many startups, and more importantly, there are so many people who have gone through other startups, have an entrepreneurial spirit, and are so driven to build. I think that energy and talent density just weren’t there even five years ago. So that makes me so excited for the future of the industry because we have matured at least a little bit relative to what it was back when I graduated college in 2012.

That’s it for my interview with Payam, I hope you enjoyed it. Don’t forget to subscribe to SpaceDotBiz for more insights and interviews like these!