Why investors are lining up to venture into space

Every week it seems a new space start-up emerges, with grand plans to launch a fleet of nano-satellites offering a unique space-based solution promising to disrupt traditional markets and create entirely new ones.

And backing these start-ups are a host of venture capital funds aiming to tap into what they hope will be the next big growth market. It is easy to see why. The potential downstream applications of some of these ventures could become hugely lucrative, particularly when you consider the relative
data poverty in verticals such as agriculture, natural resources and disaster management.

In addition, the low cap ex profile of these companies, in comparison to traditional space projects, makes them a viable business for VCs to assess and invest in. As Mark Boggett, managing partner at Seraphim Capital, remarked: “As a venture capitalist I can now evaluate a space technology business in exactly the same way I’d evaluate a medical devices business, an internet business or a software business. It has created a much leveller playing field for space companies to access growth capital through venture capitalists.

“I think that is only going to accelerate over the next few years. There is still a limited number of pure space technology businesses but they are growing significantly year on year and that leads to more interest from the investment community.”

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The new darlings of Silicon Valley

That investment community is of course predominantly based around Silicon Valley, which has become the de facto home of the new space sector. And the deal flow there is rapidly gaining momentum.

According to venture capital database CB Insights, space startups raised $1.76bn in the first half of 2015. While this is dominated by the likes of SpaceX and OneWeb, its report ‘The Future of Frontier Technology’ points out that a large number of smaller startups have also successfully secured venture funding.

The report states that Lux Capital, RRE Ventures and Bessemer Venture Partners have been the three most active VCs in space start-ups since 2012. Both Bessemer and RRE invested in Spire, while Bessemer also invested in Skybox Imaging, which was subsequently acquired for $500m by Google in 2014. Lux Capital has invested in among others Kymeta, Planet Labs and Orbital Insight.

One of the earliest investors in the private space sector has been Draper Fisher Jurvetson. Founding partner Steve Jurvetson has long been interested in space but had never found a project he thought justified investment until SpaceX came along. Jurvetson has spoken about how he saw
reducing the cost of access to space a game changer that could open up the industry to a host of new entrepreneurs. He now feels that there are enormous investment opportunities in the sector.

“Compared to other industries, I have never seen such an enormous margin for improvement. There’s this canonical thing about a start-up needing to pitch a 10 times improvement to be a worthwhile investment. You rarely see an entrepreneur pitch a 100 times improvement. But in space
we’ve seen 1,000 times, and really we’ve seen 10,000 times.”

Europe gets in on the act

It is not just the West Coast of the United States that is experiencing a rapid rise in venture funding for space projects. Europe is catching up fast with a pronounced increase in funding and support mechanisms for small space start-ups.

While the investment in the US is led by tech-focused VCs, there is a strong strategic element to European venture funding. UK-based Seraphim Capital is to launch a space-focused venture fund in October. The £83m ($128m) fund is being backed by Airbus Defence and Space, Thales
Alenia Space, Telespazio, Com Dev, Avanti Communications and the European Space Agency.

Seraphim intends to engage privately with each of its corporate investors to determine what their long term growth and technology targets are. It will then aggregate that information and develop a number of themes that the fund will then go out and identify technologies in.

Boggett said: “The idea is that we get the broadest number of space related corporates to engage with the fund because the fund itself is taking a broad approach to identifying space technology and space-enabling technology. So the broader the group of strategic investors that engage the better the fund will ultimately be in our view.”

In France, the Starburst Accelerator currently acts as an incubator for new projects in the aerospace sector. Its latest partner is satellite operator Eutelsat, which said that it saw the partnership as another step in its open innovation strategy that aims to work closely with new technology ventures.

And this strategic interest in investing in disruptive start-ups is expected to grow and grow. Simon Drake of the Germany based Space Venture Investors argued: “I think they have to. Not because their own technical staff lack the skills but if you are a big aerospace company like Airbus it is much more difficult to foster an environment of entrepreneurship and technology, so it is easier for them to acquire it.”

There may be trouble ahead

However, for all the excitement and expectation, some in the industry feel we are starting to see a potential bubble, akin to the dot-com collapse at the beginning of the century.

Tony Previte, CEO of California-based small satellite specialist Terran Orbital, said: “I went through the dot com period in multiple aspects. The nano-satellite space fills me with comparisons to the dot com space. I find some of the comparisons just frightening.

“When people announce ‘I am going to build 300 satellites to offer x,y,z services’, do you really need that many satellites or are you just saying that because most venture capital firms really like the big numbers? It excites them and gets them interested. This harks back to the dot com bubble, when the number of web servers that you had was a metric in every single funding prospectus, irrelevant of whether or not they needed that many servers to deliver content to people.”

The unprecedented number of companies that have announced plans to build satellite imaging constellations is the most obvious example of a relatively immature sector that may struggle to accommodate so many similar businesses.

As Raymond James analyst Chris Quilty points out: “While each of these companies is targeting a unique capability/customer niche, all will face a similar problem of kick-starting their revenue model once their constellations are launched.”

And this sums up the concern of many in the industry. Are these projects more field of dreams or viable business plans? Will investors remain patient while the market develops or will they panic if there are notable failures?

The satellite sector has seen plenty of spectacular failures in the past. Scores of investors have had their fingers burned and even recently the dramatic decline of NewSat highlighted how quickly things can go downhill.

But NewSat’s travails are more a reflection of the dangers facing new satellite projects in the traditional space economy. The huge upfront costs and long wait before revenues begin to flow has always been a tough sell to investors. In comparison, the sheer speed and cost that a smallsat company can build and launch its system means that an investor can take a risk knowing that another potential prize winner lies around the corner.

The venture capital industry was built around the expectation that a portion of their investments fail and this is the case with space start-ups. Some will fail. But the fact that there is a burgeoning venture market out there to fund them can only be to the industry’s benefit.

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This article first appeared on Satellite Finance

Author: Ed Ansell, Editor, Satellite Finance

Image: The Russian Progress-M spacecraft is ready to be lifted on its launch pad at Baikonur cosmodrome, Kazakhstan, July 1, 2015. REUTERS/Stringer

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