Need for Speed
Another side of vertical integration
In Vertically Integrating Space, we discussed one reason why vertical integration contributed to SpaceX’s early success: the compression (or “accordioning”) of costs thanks to the elimination of stacked profit margins from every component manufacturer.
Upon deeper inspection, I realize that touting this as the main reason companies should vertically integrate is a little like putting the cart before the horse. The most important thing is delivering a revered product to customers that are desperate for it. That desperation will 1) ensure you can capture outsized value, and 2) tell you what aspect of the value proposition matters the most. In some cases, cost is the chief concern. In other cases, it's providing the most value relative to your competitors. But sometimes, the most important thing is speed.
The customer and the end market you're operating in should be able to inform your prioritization. Consumers will usually want the cheapest solution. Enterprises often seek feature rich products. But if we turn to SpaceX's first customer, the US Government, we find a unique buyer that can effectively write whatever check it needs. It's main requirement is procuring an effective, viable solution. Cost is often an afterthought.
In the case of space, the Air Force, and eventually NASA, desperately needed more satellites, and faster than what legacy primes were forecasting. SpaceX stepped up and offered speed as their primary product.
This may feel a bit reductive, and fly in the face of what I just wrote about the other day, but I've changed my mind in large part because I was able to talk to decision makers in various branches of the military that are familiar with SpaceX's history. They were the early decision makers involved in the programs that SpaceX won; the feedback was explicit — they didn't care about the cost (or savings). They wanted SpaceX and their speed.
The resounding takeaway was that speed most differentiated SpaceX. One of these people went so far to claim that other competitors had superior performance and functionality. But they couldn't get it done in time.
3 Sisters of Speed
There's three benefits of speed. The first is time to delivery — how quickly can you delivery the end product. The next is the trust it confers to your customers. The last and most important is a heightened pace of iteration which results in a faster and steeper learning curve.
These are listed in reverse chronological order. You need to fail fast to iterate and build a better product. If done well, it increases your customers’ trust, because they see how quickly you're fixing flaws in the product. And that trust ideally will help allocate more resources which will further accelerate your cadence, and propel you to a more robust final product, in a much faster overall time frame.
Building a product requires lots of iterations, and it's more important to be able to quickly get to a higher version number than to slowly attempt to reach perfection on the first version of something. V10 always beats V3.
Cost is one component of that. But usually if you're competing against large incumbents, then they usually have the deep pockets available to subsidize potential losses via different product lines. What large incumbents cannot do though, is do it fast.
Vertical integration delivers speed because you 1) have larger control over the raw inputs for a product, 2) you learn more about the overall architecture of the product and the system to build the product when you touch more of it directly (which provides an accelerated learning curve) and 3) you’re incentivized to evaluate Build vs Buy decisions on a speed-to-cost basis.
Elon ruthlessly focused on speed as a proxy for burn:
“He would say that everything we did was a function of our burn rate and that we were burning through a hundred thousand dollars per day. It was this very entrepreneurial, Silicon Valley way of thinking that none of the aerospace engineers in Los Angeles were dialed into.
Sometimes he wouldn’t let you buy a part for two thousand dollars because he expected you to find it cheaper or invent something cheaper. Other times, he wouldn’t flinch at renting a plane for ninety thousand dollars to get something to Kwaj because it saved an entire workday, so it was worth it.
He would place this urgency that he expected the revenue in ten years to be ten million dollars a day and that every day we were slower to achieve our goals was a day of missing out on that money.”
– Kevin Brogan, an early SpaceX employee; Elon Musk
SpaceX and Anduril customers have frequently commented on the fact that they’ve quickly built trust with those companies because they saw how hard they worked to get the product(s) where they needed to be (often “in the field” with the customer).
It’s a mentality. One early Tesla employee shared it succinctly:
“If we haven’t finished something yet, and we have 24 hours until a demo, we're still on time.”
Embracing speed allows you to fail fast, fix problems, iterate, and get closer to a better solution. Much sooner than someone else would. We see this replicated in soccer (futsal), lacrosse (box lacrosse), and even pottery. More reps means more proficiency.
And higher proficiency yields better products. Simply put, vertical integration gives you more control over more of the product, which expands your aura of influence over a system which lets the overall product velocity increase. Instead of just 1 component of a rocket being built with a high cadence, all of it is.
No one is close to matching Falcon 9, Starship, or Starlink. There’s no amount of capital that can catapult SpaceX's competitors to parity. What they need, is speed.
And the only way they’ll get that is to do it themselves.
