WASHINGTON — As space investors become more conservative during the current economic downturn, they are less inclined to fund long-shot ventures and more likely to support companies that have a government contract.
Even in today’s environment “there are still investors out there with capital that they’re looking to deploy toward great ideas,” said Josh Brost, vice president of business development and government affairs at Relativity Space.
But these investors are looking for more than just promising ideas. “What they want to see is if there is a government use case at the end of this,” Brost said April 30 on a webinar hosted by Aviation Week & Space Technology.
Relativity Space is a California-based startup that uses 3-D printing to manufacture small launch vehicles.
Pentagon officials have raised concerns about the economic impact of the pandemic on commercial suppliers, including space companies that depend on private investors and may not have enough cash to weather the crisis. The small space launch sector was identified as one of the most vulnerable.
Brost said government loans or direct aid can help bridge the gap for a few months but “the most impactful thing that government can do is actually go out and buy services from these startups,” he said.
With a signed government contract in hand, “then the startups can go back to their investors and say: ‘Now we know there is a use case for this and the government is going to be a big player in the future for us,’” said Brost. “We can raise capital off of that.”
Startups have trouble getting loans
The reality is that many startups in the space sector are struggling, said Eric Stallmer, president of the Commercial Spaceflight Federation. The group has been lobbying to have rules changed that currently disqualify many startups from coronavirus relief loan programs because of how the Small Business Administration defines “small business.”
Most startups are funded by venture capital firms that typically invest in a portfolio of companies. To be eligible for the SBA loan program a business has to have fewer than 500 employees. When defining a small business, the SBA applies an “affiliation rule,” requiring companies to include in their worker count all the employees of companies with which they are “affiliated.”
CSF and other industry groups have raised this issue and the “government just hasn’t been responsive despite us addressing it and highlighting that it’s a major problem,” Stallmer said on the webinar.
DoD has taken actions to help the industry, said Stallmer. But many companies won’t survive unless the government changes the rule that makes venture funded startups ineligible for stimulus loans, he said.
“When startup companies get started, are commercial banks going to lend to them based on this great idea that they have? No. Banks are conservative lenders, so that is why we have relied so heavily on the venture community, and they have delivered for us,” said Stallmer.
As venture funds pull back, access to loans is essential, he said.
Foreign investment worries
The pandemic has fueled concerns at the Pentagon that companies that develop critical national security technologies and are now in financial stress could become targets of Chinese investors.
That has been an issue for years, said Carissa Christensen, CEO of Bryce Space and Technology. But the current crisis has stirred new worries in the U.S. government about China taking advantage of fragile companies.
“China is very interested in space and its space sector is growing, it’s a national priority,” she said. But China’s own economy and space industry is under stress so the country will focus first on its own companies. “I think there is, has been and will continue to be Chinese interested in investing in space companies globally, as well as interest in investing in space companies in China.”
Christensen cautioned that the U.S. government should not move to completely shut out foreign investment because that could push companies to take technology developments offshore. “If you constrain investment into American companies, those companies then are incentivized or forced to either shut down or find investors elsewhere — and if they can’t do that as American companies, they will do it as European companies or as Japanese companies or as companies based in nations in the Middle East.”
A successful technology industrial policy “comes down to a focus on ensuring that we are retaining the U.S. advantage, which means more companies, more startups, more investment, a more robust venture ecosystem and a much more robust space startup ecosystem than any other country in the world.”