Investors don’t see Virgin Galactic deal as model for space industry

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RENTON, Wash. — Virgin Galactic’s merger with a publicly-traded investment company is likely a one-off event based on the company and people involved, and not a sign of more fundamental changes in the industry, investors argue.

Virgin Galactic announced July 9 it would merge with Social Capital Hedosophia (SCH), a special purpose acquisition company, with SCH taking a 49 percent stake in the combined entity. The deal would provide $800 million in capital for Virgin Galactic and allow the company to be publicly traded once the deal closes.

The deal is a rare example of a major exit for an entrepreneurial space company. While there have been a number of smaller deals involving the merger and acquisition of space startups, there have been few large deals, like Google’s acquisition of Skybox Imaging, renamed Terra Bella, in 2014 for an estimated $500 million.

However, a panel of investors at the Space Frontier Foundation’s NewSpace 2019 conference here July 17 were doubtful the deal was a harbinger of either other large deals involving space startups, or the use of special purpose acquisition companies — which raise money on the public markets for the sole intent of acquiring another company — as an alternative to a more conventional initial public offering (IPO) of stock.

“From a financing perspective, you raise money when you can, how you can,” said Sunil Nagaraj, managing partner and founder of Ubiquity Ventures. “I think it’s great that they’ll have an injection of capital.”

However, the use of what he called a “reverse IPO” approach was not compelling to him. In addition, he called out the role played by the founder of SCH, venture capitalist Chamath Palihapitiya, who is investing $100 million of his money into Virgin Galactic and will serve as chairman of the company.

“The Chamath piece makes it completely one-off,” Nagaraj concluded, calling Palihapitiya a “failed venture capitalist” when his VC firm, Social Capital, decided to stop accepting outside capital, followed by the departures of most of its staff.

“I don’t view Chamath’s involvement or the reverse IPO structure as one that is particularly attractive to a lot of startups,” he said. “I don’t predict it will be repeated through his organization or through others very often.”

Others on the panel predicted that the growth of entrepreneurial space companies will be followed by a consolidation phase marked by mergers and acquisitions, a path seen in many other fields.

“Any time you see an industry go through a growth phase, you’re going to see a consolidation and shakeout phase,” said Peter McCullagh, founder and managing partner of TenX Ventures. “As people run out of money and customers don’t show up as much as they they would, or the market wasn’t what they thought it was in the first place, there’s going to be mergers, there’s going to be more consolidation.”

In an earlier presentation at the conference, McCullagh placed various sectors of the space industry on the so-called “hype cycle,” which charts expectations as a function of time for a new industry. The hype cycle, popularized by the consulting firm Gartner, shows an initial sharp peak in expectations, followed by an equally sharp decline before a more gradual increase over the long term.

McCullagh put those space industry sectors near that initial peak in the chart, suggesting that a decline was coming in the near future. Once that happens, “you’ve probably got three to five years of really tough times ahead of you, and we see that coming for a couple players here over the next couple of years.”

One of the first sectors headed for consolidation is the small launch vehicle market. By some estimates, more than 100 vehicles are in development worldwide, but most in the industry believe there is demand for only a few such vehicles.

“We think that, when the dust settles, there’ll be room for a handful of successful companies,” said Grant Bonin, chief engineer for space systems at Rocket Lab, during another conference panel. “I do think it’s a bubble that’s going to pop, and might poison the risk capital for new launch for some time.”

“There is going to be some amount of contraction and consolidation of the industry,” said JR Francis, director of business development and sales at Relativity Space.

That gives an advantage, panelists said, for companies that get to market early. “The people that get their first, like Rocket Lab, start to capture market share that’s going to be very hard to wrest,” said Eric Salwan, director of commercial business development at Firefly Aerospace. “That’s why we’re driving very hard to get to space this year, so that we can go out there and start capturing market, and once we do that we feel like we’re going to be successful.”

Bonin was skeptical there would be much consolidation in the form of mergers of small launch vehicle developers, because of the wide differences in technologies and designs. “A lot of these companies are oil and water compared to each other,” he said. “They have such fundamentally different technologies, fundamentally different people and personalities and investor types. Unfortunately, a lot of them are not going to make it.”

McCullagh expected that, in each sector of the industry, there will ultimately be a consolidation into a few companies. “You’re either a consolidator, preparing to be consolidated or roadkill,” he concluded.