The Space Reviewin association with SpaceNews

Spire satellte
A Spire cubesat being prepared for launch. Spire is one of a growing number of companies that’s raised money from VC firms and other investors in recent years. (credit: Spire)

How long will the money keep flowing?

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In the last few years, space startups have benefitted from a flow of private investment that has grown from a trickle to at least a steady stream. Venture capitalists and other institutional investors once reticent to invest in space companies, because of market or other uncertainties, have opened their pocketbooks to fund a variety of companies. Firms like Planet and Spire have raised large sums of money to deploy their constellations of cubesats to collect imagery and other data, OneWeb has raised more than $1.5 billion for its broadband satellite constellation, and even launch vehicle companies, like Rocket Lab and Relativity, have raised money for vehicle development.

Whether the funding total is $2.5 billion or $3.9 billion or somewhere in between, it’s clear that investors are putting significant amounts of capital into space companies.

How much money the industry has raised depends on who does the counting. Space Angels, a group of individual “angel” investors focused on the space sector, said in a report last month that there was $3.9 billion of “non-government, equity investment flow” into space companies in 2017. A separate analysis by Seraphim Capital, a British fund that bills itself as the world’s first venture fund devoted to companies “operating in the space ecosystem,” calculated about $2.5 billion in investment in 2017.

Part of that difference is varying definitions of what constitutes a “space” company. Chad Anderson, CEO of Space Angels, said in an email last month that the Seraphim uses “a very broad definition of space which includes a number of frontier technologies, whether or not they have applications in space.” Such technologies, which range from the Internet of Things to artificial intelligence, could have space applications, and include investments in companies that Space Angels would not consider to be in the space field.

The biggest difference between the two figures is that Space Angels includes more than $1.9 billion in funding provided to Blue Origin in 2017 from its founder, Jeff Bezos, based on his sales of stock. While Bezos said last year that he sold $1 billion a year in Amazon stock to fund Blue Origin (see “Blue Origin’s status update”, The Space Review, April 10, 2017), there was no explicit link between the stock sales and Blue Origin based on regulatory filings or other public documents. Anderson said that “public statements, public filings, confidential conversations, and an internal estimate of development to-date and known development in progress” led Space Angels to include the figures in their annual report.

Mark Boggett, CEO of Seraphim Capital, said that his fund didn’t include any Bezos funding of Blue Origin in their statistics because, strictly speaking, it was not venture capital funding, the focus of their statistics. “Perhaps we should have at least noted it given its magnitude,” he said.

Bubble trouble

However, whether the funding total is $2.5 billion or $3.9 billion or somewhere in between, it’s clear that investors are putting significant amounts of capital into space companies, particularly when compared to the paucity of investment just a few years ago. The question many industry observers ask, though, is whether this pace of investment can be sustained. Or, in other words, is the space startup ecosystem a bubble in danger of bursting?

At the first Space Tech Summit, a conference held last month in San Mateo, California, that gathered space industry executives, startup founders, and investors, one of the speakers was Adam Draper, the founder and managing partner of Boost VC, a startup accelerator. The title of his talk was “Bubbles in Space,” which suggested he would tackle those concerns.

Not exactly. “I’ve taken probably 40 to 50 space-related tech pitches in the last three years. I’ve met these crazy-smart people,” he said. “I ask them all one question, and I say, ‘Can there be bubbles in space?’”

“Logically, this is an idiotic question,” he continued on stage, dressed in the Silicon Valley uniform of t-shirt and hoodie, complemented by pants in the same hue of orange as his company’s logo. “I get the best conversations out of this question, and we go on tangents that go for hours. And I’ve learned a lot about space.”

Later, when asked about bubbles of the financial kind, he took a contrarian view. Rather than being worried about too much money being invested in space companies, leading to an inevitable shakeout, he was worried that there was too little.

“I don’t think space can have a financial bubble right now. I don’t think enough money is going into space,” Draper said.

“The space industry is actually going to run into a problem right now for the earlier stage” of investment, he said. The technology that has attracted the most attention of late in Silicon Valley involves cryptocurrencies and blockchain. “Suddenly, all the money is pouring into crypto-related projects, so the space industry is trying to evolve.”

“I actually think money is moving away from everything in early stage and moving into crypto right now, so startups are trying to follow the money, and that’s the wrong way to go,” he advised. “I don’t think space can have a financial bubble right now. I don’t think enough money is going into space.”

It’s not clear that space companies are pivoting towards blockchain or cryptocurrencies, as Draper suggested. (There was a presentation at the two-day conference by SpaceChain, a venture that is working on those technologies, including placing a blockchain node in space on a Chinese smallsat launched last week.) Nonetheless, companies and investors are trying to figure out what is the next step for space companies.

No exit

As shown by the figures above, plenty of money has been flowing into space startups. However, so far there’s been little in the way of exits: investors getting their money back through acquisitions or by the companies going public.

The one big exit took place nearly four years ago, when Google bought Skybox Imaging, a company developing a constellation of high-resolution imaging satellites. Google paid a reported $500 million for Skybox, subsequently renamed Terra Bella. The deal was hailed as a milestone for space startups, and likely encouraged increased investment in those companies.

“Skybox is the only company right now to have a liquidation event,” said Tess Hatch, an investor at Bessemer Venture Partners, who invested in Skybox prior to its acquisition by Google and has also invested in Rocket Lab and Spire. “We think it’s a fruitful industry and will have a wonderful return on investment. But what are those scenarios going to be? Are they going to be acquired? Are they going to go public? How are these space startups going to take the next step?”

Moreover, that acquisition didn’t work out in the long run for Google, who last year sold Terra Bella to Planet for an undisclosed sum. In another panel at the conference, Mark Matossian, a senior program manager at Google who previously led the company’s aerospace-related initiatives, said it represented part of a broader change in direction at the Internet giant.

“Google is a company that is changing over time. It’s a very, very different company than it was when I joined 11 years ago,” he said. “The management is very different. The types of projects that we take on is changing.”

“We think it’s a fruitful industry and will have a wonderful return on investment. But what are those scenarios going to be?” Hatch asked.

He suggested, though, that Skybox/Terra Bella might not have offered a return on investment (ROI) sufficient to satisfy company executives. “If you’re going to have a capital-intensive program, like deploying a satellite constellation, you need a very clear ROI that works within the business case of that company,” he said. “Skybox got VC funding because people believed in the business plan. When it came to Google, we couldn’t pursue that business plan, because that involved renting out the satellite to customers. That didn’t really work for Google.”

Others also raised questions about just how good a return space companies might offer. “There is certainly a lot of great technology, and there’s certainly a lot of great ideas,” said Shahin Farshchi, partner at Lux Capital. “What’s missing is a level of rigor that’s applied to the return on these investments as it relates to them being operating companies.”

Space companies, he noted, often require large amounts of capital to develop their technologies or systems, like deploying a large satellite constellation. “There isn’t enough rigor that goes into understanding the IRR [internal rate of return] associated with the capital investment.”

Such ventures will have to compete with companies in other fields for funding, including those that have far smaller capital requirements. “If you are a project financier, a bank, a late-stage private equity firm, you’ll be weighing these kinds of projects against building strip malls, or building a cellular network in Africa, or any other kind of capital deployment opportunity,” he said. “If those numbers don’t add up, that IRR isn’t there, then it doesn’t make any sense.”

“2018 could be a decision year: it could be the rubber hits the road, or it could be the car plows into the wall,” Quilty said.

Something similar, Farshchi said, happened with “cleantech” companies several years ago. “Those companies could not demonstrate economics, so even when the technology was proven and mature, and the founders and early engineering teams did their parts, the economics just weren’t attractive,” he said. “Companies weren’t able to attract the next stage, the next level of capital.”

Another option for investor exits, an initial public offering (IPO) of stock, is also unlikely. “Congress and regulators have made it really expensive to be a public company,” said Chris Quilty, president of Quilty Analytics. “I would like to see more companies going public.”

Some investors saw no urgency for companies to seek IPOs or other exits. “There’s plenty of capital out there. I don’t see the IPO window opening at all,” said Mike Collett, managing partner at Promus Ventures, which has invested in Rocket Lab and Spire. “These companies require a lot of cash, as long as you can continue to show revenue. And that’s the key part here: the market is looking for revenue, especially in the later stage.”

Investors at the conference said they’re seeing more VC firms make investments in space companies, and more people get involved in space startups in general, despite the uncertain exit strategies and returns. “That only is possible when complexity is abstracted away in many ways,” said Sunil Nagaraj, managing partner of Ubiquity Ventures and formerly with Bessemer, where he was involved in that firm’s space investments. “As more of that happens, I get happier.”

“The next massively successful space company probably won’t even be founded, or coined, as a space company, but will derive value by virtue of creating opportunity and capitalizing on the opportunities in space,” said Farshchi. “Someone will come up with a great business where space will be an important piece of that.”

For those startups that have already raised money and are developing their launch vehicles, satellites or other space-related products and services, this could be a key year. “I think 2018 is going to be kind of an interesting year,” said Quilty, citing the introduction of new small launch vehicles and satellite constellations. “2018 could be a decision year: it could be the rubber hits the road, or it could be the car plows into the wall.”