10/10/02

L. A. SECTION ENTERPRISE CHAPTER

STARTING AND BUILDING A SMALL AEROSPACE BUSINESS

Starting and Building a Small Aerospace Business was the topic of the October 8, 2002 meeting of the Los Angeles Section Enterprise Chapter. Dr. James R. Wertz and his wife Alice treated 40 rapt attendees to numerous pearls of wisdom on starting a business and making it grow. Jim and Alice started Microcosm as a 1.5 person company in 1984. Microcosm is well known for its expertise in space mission engineering and space architecture, and in combined orbit and attitude control systems, and has enjoyed success in producing widely-referenced publications addressing these technical areas. Building on this expertise primarily through scores of SBIR contracts, the company began developing space hardware in 1998, and is currently developing a low-cost family of launch vehicles. It is now about a 50-person company and growing.

Jim described the aerospace business in five categories according to company size, varying from the one-person consultant to major contractors exceeding 1,000 employees. He outlined the advantages and problem areas for each size in areas dealing with issues such as marketing, competitiveness, cost characteristics, decision-making, hiring and layoff cycles, and encouraging creativity and responsiveness.

Interesting legal maneuvers abound when dealing with government, whether federal or state. In Microcosm's experience, it has been necessary to spin off certain parts of the company in order to permit profitable operations. Inclusion of a book-selling operation as part of a government contractor doesn't make sense because government accounting rules would have mandated overhead and G&A rates leading to costs exceeding any reasonable price that a book purchaser would be willing to pay. Some states charge a tax on gross sales by a corporation doing business in the state. To avoid serious profit erosion by such a tax, a business is almost forced to spin off that portion of the company operating in the state. Thus the state receives taxes only on the sales within that state rather than on the sales in all 50 states. It is evident that good legal advice is necessary to navigate these treacherous waters.

Jim outlined 10 suggestions for starting and building a small aerospace business, covering attitudes and behavior toward the customer, marketing, financial planning, forecasting, and cost accounting, the roles of key people, and the importance of doing something that makes a difference. He finished with a challenge to those assembled to discern the needs of the astronautics community and to help rebuild the space program.

Alice followed with some words of wisdom on the attributes that the entrepreneur should have. One of these is the possession of entrepreneurial "genes". She reiterated Jim's comment that it is vital for the entrepreneur to offer the customer something unique, whether it is a service or a product. She also covered some important family considerations in being in your own business, the need to keep personal and business funding segregated, and the need to surround yourself with good consultants, CPA's, and lawyers to help you through several unfamiliar territories you will encounter. Working capital is the major financial need of the small business, and personal credit worthiness is crucial to getting loans, since many banks do not regard payment due under a government contract as security for a loan. The search for a bank that understands government contracting can consume considerable time. The Wertz's aren't fans of venture capital for a small aerospace business, arguing that venture capitalists require quick returns on capital to compensate for failure of their other risky ventures, and aerospace business does not typically result in rapid returns. In addition, venture capitalists perform a watchdog role that could sooner or later constrain the flexibility and creativity of the business manager.

Following these remarks, the group then toured the Microcosm facility, and viewed production facilities, ground support equipment, shipping containers, and test articles associated with a low-cost launch vehicle. A small area was devoted to support AIAA in building components of the Wright Flyer intended for the 100^th Anniversary Flight next year.

At the conclusion of the walk-around, the group reassembled for a question and answer session. Technical questions focussed primarily on product characteristics contributing to low launch costs. Business issues covered a wider range. Legal problems that a small company might face in getting patents for its products, and the types of legal expertise needed for patents, as separate from legal help in understanding government contracting or company organization, were discussed. The need for special accounting expertise when dealing with government contracts was emphasized. Issues in transitioning, from a single product to a broader product line to stabilize sales volume, were also discussed.

As in previous presentations, you can view the briefing charts for this session by clicking on the Archives of Speaker Presentations etc. button on our web site www.aiaaeenterprise.org., Consultants and businesses wishing to make potential customers aware of their services are invited to register by clicking on the Input Directory button. It's easy to do and it's free!

The next meeting of the L. A. Section Enterprise Chapter is scheduled for November 5. The subjects are Strategies for Winning Government Contracts and Marketing for Small Business. The speaker is entrepreneur Ron Oglevie. We'll see you then.