Venture capital slowdown a concern for military space programs, analysts warn

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Quilty Analytics' Justin Cadman: “Most of the investment in the last three years has been from newer investors to the sector, some of whom will lack the stomach to continue.”

WASHINGTON — The U.S. military has come to rely on commercial companies and investors to develop next-generation space systems. The top official from the U.S. Space Force procurement arm, Lt. Gen. John Thompson, said in February that only 20 percent of the R&D investment in space now comes from the DoD and 80 percent from commercial investors.

A new report by the market research firm Quilty Analytics estimated that over the last five years approximately $11 billion of private funding went into space startups.

Venture financing will recede during the coronavirus economic recession, so one of the issues for the Pentagon is that investments it was counting on may no longer be there, said Justin Cadman, analyst at Quilty Analytics.

“We absolutely expect there to be continued investment in space. But the character of the investment will evolve,” Cadman told SpaceNews. The future is likely to bring a “reversal of that expansionary trend as we enter this COVID-19 induced recession.”

Of concern to national security space programs that rely on commercial technology is that “only a subset of space investors are battle-hardened veterans,” the Quilty Analytics report said. “Most of the investment in the last three years has been from newer investors to the sector, some of whom will lack the stomach to continue.”

Cadman said there are “some very high-quality companies that run the risk of disappearing for no other  reason other than bad luck and timing.” Some of these companies are in the midst of developing innovative technologies with national security applications and suddenly “find themselves on the wrong side of the fundraising cycle as a result of this economic recession,” said Cadman.

Among some lucrative opportunities for space startups in the national security market, the report says, are the National Reconnaissance Office’s commercial imagery program, the Defense Advanced Research Projects Agency’s Blackjack program and the Space Development Agency’s planned constellations in low Earth orbit.

Government contracts could provide a lifeline to some space companies but not all will make it through the crisis, said Cadman.

“We are cautiously optimistic about the prospects for venture space,” he said. “But undoubtedly there will be some shakeout.”

Todd Harrison, defense budget analyst and senior fellow at the Center for Strategic and International Studies, suggested that the Pentagon should identify “crown jewels’ they want to protect from economic calamity.

“Smaller space companies are really vulnerable, especially the space companies that the military expected to be there,” Harrison said last week during a SpaceNews online forum.

“For commercially oriented space companies, this economic downturn could not have hit at a worst time,” he said. Startups need capital in the early stages before they get revenue, Harrison said. “As a nation if we want to be competitive we don’t want to lose this vital part of the space industrial base.”