WASHINGTON — Entrepreneurial U.S. space ventures will for the foreseeable future remain dependent on government customers and deep-pocketed angel investors with an appetite for risk and a long investment horizon, financial experts said here.
“It has to take rich entrepreneurs,” said Linda Maxwell, of the Aerospace, Defense, Government group at Los Angeles-based investment bank Houlihan Lokey. “Basically, these venture funds, they’re looking for a return on investment. The timeline is critical for their investment portfolios, and space really does not fall into those categories.”
The exception, owing to the predictable, long-term revenue they generate, are telecommunications satellite operators. These are “always a good place to put your money because the cash flow is definable,” Maxwell said during a panel discussion here at the Free Enterprise and the Final Frontier event sponsored by the U.S. Chamber of Commerce. The regular pace and payout of these companies offers aerospace and defense investors a hedge against even the increasingly likely U.S. budget sequester, which would cut $85 billion in federal spending in 2013 alone.
“Investors can model the risk associated with those cash flows,” Maxwell said.
On the other hand, startups in space-based imaging, transportation or scientific-data services require large amounts of up-front capital, offer a return-on-investment in decades rather than years, and are likely to attract only government customers, Maxwell said. As an example, she pointed to the commercial remote sensing industry, which has seen steady consolidation despite being relatively new.
Most recently, Longmont, Colo.-based DigitalGlobe bought rival GeoEye, which itself was created by the combination of Orbimage and Space Imaging. DigitalGlobe reached a deal to acquire its rival last year, after the U.S. National Geospatial-Intelligence Agency, the anchor customer for both companies, said it would sharply curtail imagery purchases from GeoEye.
Maxwell said NASA’s industry partners in efforts to develop commercially operated crew and cargo transportation services to and from the international space station might find themselves in a similar situation of government dependence, with little to no nongovernment business.
Hoyt Davidson, founder and managing partner of New York-based Near Earth LLC, an investment firm specializing in space, agreed. He suggested that private capital might be leveraged to greater effect for space ventures if investors pooled their money.
“You have so many billionaires who have made their money elsewhere who have decided to risk that capital and start these new types of companies, because they know how hard it is to do it through the normal funding channels,” Davidson said. “It’d be nice to have some venture funds created from lots of small investors, or from some of the big guys pooling some of their capital to create larger pools of capital.”
Ideally, Davidson said, such a capital pool would reach into the “hundreds of millions of dollars, certainly, but maybe even billions of dollars, because this is a very capital-intensive industry.”
Davidson did cite one recent example of a single-customer, government space program that was able to attract interest from investors who ordinarily would not even consider bankrolling such a venture: NASA’s Commercial Orbital Transportation Services (COTS) program. COTS, which funded development work on new cargo-delivery systems to serve the space station, is “one of the most brilliant things NASA’s done in the last 10 years,” Davidson said.
When the COTS program was still in the competition phase, Near Earth was working with a company called Transformational Space Corp. of Reston, Va. The company was one of the six COTS finalists NASA identified before it signed co-funding agreements with Space Exploration Technologies Corp. (SpaceX) of Hawthorne, Calif., and Rocketplane Kistler of Kirkland, Wash., in 2006.
Before NASA picked the winners, Near Earth representatives approached “a private equity fund that would never dream of investing in something like that,” Davidson said. “They wrote us a letter saying they’d put $50 million in if [Transformational Space] got chosen.”
What won these investors over — Davidson would not identify them — was that NASA, through COTS, had essentially pledged a financial contribution without demanding an ownership stake or a seat on the board. Moreover, the agency was effectively performing technical due diligence as part of COTS, successful completion of which would result in the award of more lucrative Commercial Resupply Services contracts.
SpaceX and Dulles, Va.-based Orbital Sciences Corp., which replaced Rocketplane Kistler on the effort, now both have COTS follow-on contracts, worth $1.6 billion and $1.9 billion, respectively, to make regular supply runs to the international space station. SpaceX started contracted deliveries in October, and Orbital is expected to follow suit this year after it wraps up its obligations under its COTS contract with a demonstration cargo run this summer.
