TAMPA, Fla. — Space startups will need to step up their fundraising efforts if they want to raise money this year from increasingly meticulous investors, according to a panel of early-stage space investment firms.
A “dosage of reality” is trickling through the space industry, AE Industrial Partners vice president Tyler Letarte told the SmallSat Symposium Feb. 7 in Mountain View, California.
“For a number of months in 2021, people saw some home-run deals,” Letarte said, “people saw some early investors be very successful, and you started seeing some new money come into that market.
“You also had new entrants, people raising capital, bringing big promises to those new investors.”
However, despite investment giants such as Morgan Stanley forecasting stellar growth for the space economy on its way to a $1 trillion market in 2040, “a number of those businesses” ultimately did not hit near-term revenue projections.
Space industry investment plummeted from a $47 billion peak in 2021 to $20 billion in 2022, according to analysis from early-stage investor Space Capital.
Investment firms pulled back in 2021 after not realizing the upside they thought they had, Letarte said, and “you’re starting to see a smarter, more patient, more skeptical investor” in their wake.
Space companies are “having to really develop a business model” to secure funding deals in this environment and “show that they have customers, revenue” from commercial and government sources.
“People know what to look for, I think, a little bit better now,” he added, “and as a result, you’re going to see some companies really struggle to raise capital, and those that adjust and shift and have a true business model win in 2023.”
Mike Collett, managing partner at Promus Ventures, said the surge of different types of publicly traded space firms in recent years has also laid bare the metrics that investors use to value companies.
“And so you can actually go and see what an [Earth observation] company would look like,” Collett said, “you can see what a launch company looks like. You can see service businesses and what the market is valuing those at.”
Collett said these young companies are currently not valued as highly as non-space assets in adjacent markets because of worries about the lack of cash on their balance sheets.
To succeed in this environment, Collett said companies need to show a deep understanding of where their revenues will come from.
“Founders no longer can just get away with some crazy story,” he said, meaning venture capital funding rounds are taking “much longer” to finalize.
But while funding gets more challenging, all panelists expect plenty of opportunities for deal-making this year.
Xiaoming Yin, senior investment manager at Lockheed Martin Ventures, said her firm is seeking to deploy more capital after recently doubling the size of its fund to $400 million.
She said space startups are also becoming “a little bit more creative in raising money” outside the traditional venture capital route.
Many of the companies Lockheed has invested in are considering Small Business Innovation Research (SBIR) contracts from the U.S. government, she said, to give them more time to raise larger funding rounds.
A lot of them — especially in the U.K., Canada, and Australia — are also looking to take advantage of trade deals U.S. defense contractors have that oblige them “to give back to the local startup communities” for products sold to foreign governments.
And while overall investment was down in 2021, Seraphim Space managing partner James Bruegger said its research points to “record levels” of activity “in terms of volume of deals being done quarter on quarter throughout the year” at the earliest funding stage — depending on how a space company is defined.
There was “an absolute bifurcation in the market during 2022,” according to Bruegger, between later-stage businesses facing tougher conditions and younger companies.
“And, anecdotally, we see businesses that are raising in later stage almost exclusively being from existing syndicates, rather than new investors,” he said.
“Whereas in the earliest stages, a continued influx of both return investors and new venture funds that are looking for high-outcome, early-stage companies.”
While there is “a healthy dose of realism” in the industry, Seraphim remains “overall pretty optimistic about the prospects for high-quality, early-stage businesses.”
That does not mean “2023 is going to be a particularly joyous year,” Bruegger added.
But businesses that can come out the other side of any downturn are typically the ones that go on to achieve “the greatest successes.”
