Smallsat Constellations Spark Investor Interest, Regulator Concerns

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WASHINGTON — A new wave of small-satellite constellations for communications and remote sensing applications is attracting growing amounts of venture capital funding, but regulators worry they will struggle to keep up with the licenses these systems require.

During one panel at the Satellite 2015 conference here March 18, investors and entrepreneurs said the business cases for smallsat systems, coupled with some early success stories, have made space attractive to venture capital (VC) firms that previously shied away from the industry.

“More business cases are closing now than they have in the past, and getting further into the due diligence process of VCs,” said Hoyt Davidson, managing partner of Near Earth LLC.

A main reason for that, he said, is the lower cost and faster development cycle of smallsat systems, which allow them to generate revenue faster than earlier, larger systems. “Until recently, you had to spend $200–300 million and wait two or three years just to start generating revenue, and have a single-point launch failure possibility,” he said.

Venture capital firms are also encouraged by the exits that investors have made in other space companies through mergers and acquisitions. Such exits were rare in the past in space ventures, argued Richard David, chief executive of financial information provider NewSpace Global, making investments less attractive. “This is why VCs in Silicon Valley were not interested,” he said.

Credit: Skybox Imaging
Credit: Skybox Imaging

That is changing now, he said, citing Google’s 2014 acquisition of Skybox Imaging and Monsanto’s 2013 purchase of the Climate Corp., a company that used satellite imagery and other data sources in agricultural applications. He also cited a strong secondary market for shares of privately held SpaceX, allowing investors to sell their holdings even though the company is not publicly traded.

Some smallsat startups have also found success raising money by avoiding being labeled as space companies. “I don’t think there’s any investment in space going on, actually,” said Peter Platzer, chief executive of Spire. “I think there is investment in data companies, there is investment in applications, and that is no different than what it has been before.”

San Francisco-based Spire, which has raised $29 million to date from several investors, is developing a constellation of cubesat-class spacecraft to collect weather data, with up to 20 planned for launch by the end of the year. The growth of systems like Spire’s, though, is causing headaches for regulators like the U.S. Federal Communications Commission (FCC).

“Small satellites have already been constituting a significant part of the FCC’s workload on the licensing side,” said Diane Cornell, special counsel in the office of FCC Chairman Tom Wheeler, during a separate Satellite 2015 panel session March 18. “There has been every indication that this workload is going to continue to increase.”

Adding to the challenge, Cornell said, is that smallsat developers often operate on shorter schedules than those of larger satellites. “From our perspective, we’ve done our best to respond,” she said. “This has required some adjustments in terms of the normal satellite licensing process, to say the least.”

The National Oceanic and Atmospheric Administration, which licenses commercial remote sensing systems, is also struggling to keep up with the growth in smallsat systems. “We have seen an absolute explosion of new license applications in the last two or three years,” said Glenn Tallia, head of the weather, satellites and research section of NOAA’s office of general counsel.

According to Tallia, NOAA issued 26 commercial remote sensing licenses from 1996 through 2009. From 2010 to January 2015, NOAA issued 41 licenses, with five additional license applications being processed. In addition, NOAA has identified 15 more systems that will require licenses but have not started the licensing process. Tallia said a large number of the new licenses are for constellations, rather than individual satellites.

Both Cornell and Tallia said that changes to current licensing regulations may be needed to cope with the demand from smallsat developers. “So far, we have been able to process these small satellite licensing requests under the existing regulations,” Cornell said. “We recognize that adjustments may be necessary as things mature.”

“Changes in technology and the marketplace for remote sensing imagery strongly suggest we need to make changes to our regulatory regime,” Tallia said. Those changes could be implemented in current regulations or in an update to national commercial remote sensing policy, he said, but may require legislation.

For the time being, though, those regulatory concerns do not appear to be a major issue for investors, who did not highlight them versus other technical and financial risks space ventures face. “I’m very optimistic that there are more business models worth financing,” said Davidson. “But, it is still hard.”