Space startups risk a bursting investment bubble
WASHINGTON — Space startup companies seeking to raise money may face problems in the years ahead, particularly in satellite and launch markets where there are already a large number of ventures, investors and analysts warned.
In an investment panel during the Satellite 2017 conference here March 7, Chris Quilty, president of Quilty Analytics, warned that parts of the space industry may be in a “bubble” that will burst as too many companies seek additional rounds of funding.
“We’re probably in a bubble,” he said, citing as one example the dozens of companies trying to develop small launch vehicles. “A bunch of those are never going to make it over the line. There’s probably going to be some consolidation.”
Such consolidation, he noted, is already taking place in the Earth observation sector, with deals like Planet’s acquisition of Terra Bella from Google and MacDonald, Dettwiler and Associates’ acquisition of DigitalGlobe, both last month. “Some of that is just natural,” he said. “It’s going to happen in the market.”
What the industry needs to avoid, Quilty said, is what he called a “faceplant”: a large, well-funded venture running into financial problems. “Any time you get an industry where very high profile companies implode, it can sour the entire investment environment,” he said.
Will Porteous, general partner and chief operating officer of RRE Ventures, which has invested in several space companies, offered a similar warning about some space business sectors. “Certain applications are now very well funded, and windows for funding major companies in those sectors are closing,” such as Earth imaging at visible wavelengths, he said in a luncheon speech at the conference.
Porteous was also cautious about funding launch ventures. “The market is awash in new launch companies, but most are struggling to raise capital,” he said. “I think most venture investors struggle to see how the business case closes because of the level of risk involved, and it’s not clear they can get paid a premium in an acquisition.”
Others, though, offered a more optimistic view of industry investment. “I’m not so sure we are in a bubble,” said Mark Boggett, managing director of Seraphim Capital, a British venture capital firm that recently started a fund for space-related businesses.
“We’re at the beginning of a long-term growth journey. There’s naturally a whole host of companies that are queuing up to operate within this new market,” he said. “During the course of the next few years, there will be winners and losers.”
John Serafini, chief executive of HawkEye 360, which is developing smallsats for commercial signals intelligence, said he sees parallels with the cybersecurity industry five years ago, when there was a similar surge of business and investment. “Eventually you began to see a long-term uptake and growth,” he said.
A key test in the near future, Quilty said, will be as companies that raised initial Series A funding rounds in the last couple of years seek to raise additional funding. “I haven’t seen a lot of [Series] B and C rounds,” he said. “That bill is coming up to be paid in the next couple of years.”
Serafini, whose company recently raised a $13.75 million Series A round, said the market for initial funding rounds remains robust. “We didn’t have too much trouble raising capital,” he said. The company, he added, is planning to raise not a single large Series B round but instead a series of smaller, incremental investments as they demonstrate their technology and sign up customers.
Despite funding obstacles, investors and other remain optimistic about the prospects of the industry in general. “In 2017, we’ll see meaningful private small satellite companies generate significant revenue from operations,” Porteous predicted. “It’s an important milestone from the standpoint of investors.”
“The companies and their activities will continue on” even if there is an investment bubble that bursts, Quilty said. “On the financial side, there’s probably a number of people who are going to lose money in the next five years.”