MOUNTAIN VIEW, Calif. — The aftermath of a “bubble” of investment in space startups in recent years could cause many companies to struggle to raise additional funding even as overall market conditions improve.

“This year, 2024, will be a year of reckoning, to a large extent, for venture,” said Timur Davis, investment director at Munich Re Ventures, during a panel discussion at the SmallSat Symposium here Feb. 6.

That situation is the aftermath of a surge of investment in space companies that peaked at $47 billion in 2021, including several companies going public through special purpose acquisition company (SPAC) mergers. A lot of that, he argued, was poorly invested.

“Companies that frankly probably should not have ever raised funds were able to raise funds, and even good companies were raising at valuations that were unsustainable,” he said. “Now, we’re reaping the fallout of that.”

“There were a bunch of investors that shouldn’t have been investing in space businesses, frankly,” added Lewis Jones, investment vice president at Generation Space. Those investors, he said, “hadn’t really learned about the asset class and weren’t doing as much diligence as they should have.”

“That capital does not exist any more in the space ecosystem,” he said, which he said benefits the industry in the longer term. “The healthier businesses are still getting funded.”

However, the retrenchment of capital since the 2021 peak, driven by both conditions specific to the space market as well as broader issues like higher interest rates, is making it more difficult for companies to raise larger rounds, Davis said.

“A lot of companies have been funded through bridge rounds, through insiders, through small, incremental financing rather than the real financings they need to achieve the next level of their development,” he said. “Those pools of capital are drying out.”

The challenges faced by many companies that went public via SPACs has also hurt space startups. “The experience of SPACs from 2021 really killed the pathway to [initial public offerings] for most technologically complex, capital-intensive startups, aka a large chunk of the space industry,” he said. “It’s taken a few years for public market investors to regain a little bit of confidence.”

Mike Collett, managing partner at Promus Ventures, put the blame of the SPAC deals, including their poor performance on the market since going public, on the companies. “The issue is that the companies haven’t hit their numbers,” he said, often falling far short of forecasts. “Until they are actually able to meet what they tell the market, the market is going to treat them like anyone else.”

Despite the near-term problems, investors saw signs of improvement, citing a rising stock market and expectations of declining interest rates. “The macro environment and the industry shakeup are probably healthy,” said Xiaoming Yin, senior investment manager at Lockheed Martin Ventures.

“I’m optimistic,” Davis said. “I think this year we’ll see the market come back to an extent. I think we’ll see some companies not make it, but the ones that do will be stronger.”

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...