VSS Imagine
VSS Imagine is the first of the new SpaceShip III line of suborbital vehicles by Virgin Galactic, which look similar to SpaceShipTwo but with structural and manufacturing improvements. Credit: Virgin Galactic

The once high-flying space finance sector has come crashing back to Earth. Two years ago, startups were raising large rounds or going public through mergers with special purpose acquisition companies, or SPACs. There seemed to be no shortage of funding for companies working on capital-intensive efforts like launch vehicles or satellite constellations.

The outlook is now much grimmer. For example, on Aug. 1, Virgin Galactic reported quarterly losses of $134.4 million on just $2 million in revenue and cautioned that revenue would remain low even as its SpaceShipTwo spaceplane begins commercial suborbital flights. The same day, Earth imaging company Planet said it was laying off more than 100 employees, or 10% of its workforce, as the company struggled with “increased cost and complexity” linked to rapid growth after going public through a SPAC.

As Planet and Virgin Galactic made their announcements, a panel of investors discussed the state of financing space companies at the International Space Station Research and Development Conference in Seattle. The wave of investment the industry saw two years ago has come and gone, and likely won’t come back soon, they concluded.

“We saw a little bit of a fad developing around space in 2020 and 2021, where we had ‘tourist’ investors come in because it was cool,” said Mislav Tolusic, co-managing partner and chief investment officer of Marlinspike Partners. “Now AI is cooler than space.”

Lewis Jones, an investment associate with Generation Space, the U.S. arm of British venture firm Seraphim Space, noted higher interest rates played a role. “Generalist investors much prefer to invest and get 5% on Treasury bonds versus risky startups,” he said. “We’re seeing fewer generalist investors in this market.”

The industry is also dealing with the hangover from SPAC deals. “It played out in an unproductive way for the space sector in ’21 and ’22,” said Tom Gillespie, managing partner of In-Q-Tel. “It wasn’t the best vehicle for some of those companies to go public. We’ll see less of that going forward.”

Tolusic, though, saw one benefit of the SPAC deals. “It pruned a lot of the investors who, quite frankly, didn’t know how to invest in space. They didn’t understand how hard it is and what are the things to look for when you invest in those companies.”

The capital available to space companies is significantly less than a couple years ago, but there are still opportunities. Gillespie noted that early-stage investment remains strong, citing the example of an unnamed startup raising an oversubscribed Series A round that In-Q-Tel is participating in.

It’s more difficult, though, for later-stage companies seeking to raise more money, he said. “Even the best companies that are getting funded right now, a good outcome is a flat round” that keeps its valuation unchanged, he said.

The good news is that there are signs of an uptick in industry investment. Jon Lusczakoski, vice president at AE Industrial Partners, said a lot of venture capital is tied up in companies that have, on paper, generated a return for those funds, but still need an exit — a merger or acquisition, or going public — to secure those returns and reinvest the money.

“The rest of 2023 will be similar to what it has been so far this year, relatively flat,” he said. “Then in 2024 we’ll start to see more of a pickup as more capital gets out there and gets deployed.”

There’s likely to be more bad news in the near term, though, as companies struggle to raise money. Companies that went public through SPAC deals are, in some cases, running out of cash or face the risk of delisting from stock exchanges as their share prices plummet.

“There are some short-term challenges here,” said Gillespie, such as a lack of exits. “In the long term, I think this is a really interesting industry. It’s going to keep growing.”

It’s also, Tolusic said, arguably more important than the industries now considered cool by investors like AI. “We’re building something that is a lot bigger than figuring out how to spot a cat inside a picture.”

This article originally appeared in the August 2023 issue of SpaceNews magazine.

Jeff Foust writes about space policy, commercial space, and related topics for SpaceNews. He earned a Ph.D. in planetary sciences from the Massachusetts Institute of Technology and a bachelor’s degree with honors in geophysics and planetary science...