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What’s next for space tech? 9 VCs look to the future

Darrell Etherington @etherington / 4 years

Space is a special category of VC investment in the best of times — and the COVID-19 pandemic is not the best of times.

Still, investors focused on and familiar with space see a lot of opportunity in the market, regardless of any prevailing global economic difficulties. One big reason why is that regardless of how tight pursestrings get tied, space still represents a significant — and growing — source of government and defense spending. It’s also the source of some of the most important technological development since the advent of the internet, including the satellite-based Global Positioning System (GPS), which has revolutionized any number of businesses and industries.

That’s unlikely to be an exception in terms of the potential commercial impact of space — more like a model for future innovation, according to our respondents, who include:

Chad Anderson, Space Capital

What are you looking for in your next investment?

The mass distribution of Earth Observation (EO) data has begun. Much the same way that Trimble, Magellan and Garmin distributed the GPS signal in the 1980s and ’90s and ultimately gave rise to Location-Based Services (LBS). Companies like Waterloo, Ontario-based SkyWatch are aggregating supply and making EO data easily accessible through an API, which will give rise to millions of new applications. We are just now beginning to see the first of those applications come online, focused on serving large markets like agriculture, insurance, energy and more. Once this unprecedented amount of new data gets into the hands of consumers, it will fundamentally change the way we interact with our planet. We believe the investment opportunity in this segment will be as big, if not bigger, than LBS.

With roughly a decade of exponential growth in GPS applications, this is only the beginning. Even while GPS infrastructure and distribution continues to improve, the next generation of applications are testing its technical limits, with the need for persistent coverage in dense urban areas, centimeter location accuracy for both indoor and outdoor environments, alternative solutions in GPS-denied environments, and protection against GPS spoofing attacks. Computer vision and GPS are combining to enable a new level of precise positioning and we are actively looking at these new use cases.

We are also very interested, and actively investing, in cybersecurity. Ten years ago, the number of actors in space was extremely limited, so security was clearly less of a concern. There is an old adage with regards to commercial sat comms — it’s not that their security is bad, it’s that they have no security (of course, military assets are a different story — e.g., GPS is very secure). With the sudden entrance of hundreds of new companies and dozens of new space agencies operating in space, cyber threats suddenly pose a very real risk to business continuity and government operations. Combine this with new technological advances being applied to the space domain and there is clearly a lot of catching up to do. Fortunately, companies like Singapore-based SpeQtral are leveraging quantum technologies to offer a secure, scalable solution for distributing symmetric encryption keys using satellites as trusted key exchanging nodes. We continue to look at this area.

What advice do you have for your portfolio companies in terms of new and emerging opportunities?

As mentioned, space has experienced something of a renaissance over the past 10-15 years. Previously, the incumbents were successful by building formidable barriers to entry and silos to capture all the value in the supply chain for themselves. Many of the pioneering entrepreneurial space companies of the early 2010s did this as well, but mostly out of necessity because there wasn’t an established supply chain. However, one of the great things about where we are today is that you don’t have to do everything yourself; there is a large and growing space supply chain. For instance, if you’re building a small satellite company focused on Earth observation today, you can be a successful DaaS business, focused on manufacturing and operating satellites, while working with channel partners to sell that data. There is now enough archived and new data to support a marketplace, focused solely on organizing that data and making it accessible to the tech community. Businesses who are intimately familiar with a certain customer segment can now focus on building applications tailored to those customers’ specific needs. The pie is growing so quickly that each one of these things is a venture-scale opportunity in its own right. One of the great benefits of our established portfolio is that we have investments across the value chain, so there is a lot of value for companies plugging in.

What will happen to space tech in the event of sustained economic distress, given the current global financial picture?

The space economy is broad. The current economic environment will affect infrastructure, distribution and applications companies differently. But speaking generally, early-stage entrepreneurship and investing is risky. So, saying that half of small launch companies (the vast majority of which are early stage) will fail, as many are doing right now, is not very insightful. Here are a few key market dynamics that will tip the scale in either direction:

  • SpaceX launched a ride-share program last year and basically put Spaceflight Inc. (launch brokerage) out of business. It is also eating into the market share of small launch vehicles, although small launch vehicles do provide benefits that some satellites will want.
  • The vast majority of satellites projected to launch in the next five years are megaconstellations by SpaceX, Amazon and OneWeb (assuming their assets are bought out of bankruptcy). These companies either operate their own launch vehicles or have arrangements with other large launch vehicles, which doesn’t leave a lot on the table for new, smaller launch companies.
  • Launch has high capex requirements and long development timelines before they get to revenue. These types of companies generally will be hardest hit by the pandemic-driven economic downturn.
  • Critical national infrastructure. The USG wants responsive launch capability and will likely fund at least 2-3 of these companies to help make that happen.
  • Countries around the world are developing domestic spaceports in order to have their own national launch capability (U.K., Japan, etc.).

So, will a lot of small launch vehicles fail in the next year or two? Yes, but that was going to happen anyway. One or two will survive and ultimately thrive through the consolidation. And some will be propped up that probably should have failed.

Ethan Batraski, Venrock

What are you looking for in your next investment?

We look for space tech companies that are fully integrated, end-to-end solutions that are more responsive, performant and cheaper than the legacy options. Specifically, we look for:

  • Teams with the “special sauce” of deep technical capabilities and strong commercial instincts.
  • Demonstrable novel technical breakthrough.
  • Replacing legacy solutions with a 10x improvement on cost or capability, without compromising performance.
  • Proven they can be capitally efficient to get to market.
  • Retired core technical and product/market fit risks.
  • Within 24 months of delivering a scalable product or service to market.
  • Can show 60%+ gross margins at low volumes (e.g., launches, spacecraft, units, etc.).

Will Porteous, RRE Ventures

What are you looking for in your next investment?

The more commercial or customer proof points, the better!

What advice do you have for your portfolio companies in terms of new and emerging opportunities?

It always takes longer to develop new customers and that is even more true today, so focus first on existing customers.

What part of the space industry do you think is most apt to adopt emerging technology?

The satellite industry of course!

What will happen to space tech in the event of sustained economic distress, given the current global financial picture?

Most parts of the space tech industry represent essential capabilities in the eyes of government customers. We have brought a tremendous wave of innovation to market that has driven out a lot of cost and given those customers leverage and access to information they have wanted for years. I think they will do their best to help ensure that those capabilities survive this period.

Tess Hatch, Bessemer Venture Partners

Imagine a future where one travels to space with the frequency we currently travel in an aircraft. This will open many doors from manufacturing and testing pharmaceuticals in space to the discovery of new materials, medicines and technologies. We could mine asteroids with a plethora of precious metals like platinum or cobalt. In the more near-term future, I am looking forward to NASA’s Artemis program, which aims to land the first woman on the surface of the moon.

I believe we need to be a multiplanet species in order to survive. When I say this, I am not giving up on Earth but, rather, I believe that space exploration and development will help us fix many of our problems on Earth. For example, development of MRI and CT scanning technologies, which save lives every day, were an unintended side benefit of the Apollo program. I want to invest in technology and people who believe as strongly as I do that deep technology will help society in ways such as this.

Shahin Farshchi, Lux Capital

What are you looking for in your next investment?

We are looking for founders that have identified large, new needs and opportunities in this new normal. Founders that can attract the money and talent to build the products that fulfill those needs and close flagship customers that represent massive markets. We’re aiming to fund businesses that can build a dominant position and competitive advantage with unique technology.

Are there startups that you wish you would see in the industry but don’t?

Most of the talent in space tech has been cultivated in government, military and academia. Unlike software, where developers have served customers across the spectrum, space technologists have typically only served the government or a customer funded by the government. As a result, many business plans resemble projects. In fact, many were probably research proposals that were edited into business plans. Most space tech founders expect investors to link revenue with multiple on their investments; the former is nice, but it’s the latter investors are solving for. Coupled to a dearth of comparable space companies, underwriting space tech “projects” becomes difficult. We’d like to see startups that abstract away “space” and focus on customer needs. We want to get comfortable with a founder’s understanding of that customer and their conviction that this need can indeed scale and represent a billion-dollar opportunity.

What advice do you have for your portfolio companies in terms of new and emerging opportunities?

Customers and suppliers may fail or look elsewhere, while new customers may emerge as a result of this new normal. Reevaluate your pipeline and supply chain.

What part of the space industry do you think is most apt to adopt emerging technology?

New technology will likely be adopted across the spectrum. Vehicle and spacecraft companies will leverage advances in electronics, optics, materials and advanced manufacturing to make them lighter and more efficient. Higher fidelity sensors and radios will empower satellites to beam a wider bandwidth of signals to earth. Analytics companies will make use of the latest machine learning tools to get more insights from those sensors.

What will happen to space tech in the event of sustained economic distress, given the current global financial picture?

It will be feast or famine for space tech. Companies building a high-margin business with strong barriers selling into what is expected to be massive markets will attract the majority of investor dollars, talent and customer mindshare away from their peers. I expect many fantastic space companies to emerge from this crisis.

Matt Kozlov, Techstars

What are you looking for in your next investment?

As always, we’re looking for exceptional, coachable, resilient and passionate teams solving big problems. Given our structure, where we’re partnering with the U.S. Air Force, JPL/NASA, Lockheed Martin, SAIC, Maxar and IAI, we want to see solutions for our partners’ problems.

What advice do you have for your portfolio companies in terms of new and emerging opportunities?

  • Learn how to operate effectively as a remote organization. Realize efficiencies that you never realized. Do you really need an office after all?
  • Look for COVID-related opportunities (lots of Air Force funding right now) without straying too far from your core product and vision.
  • Be kind and compassionate — how you behave now will be your greatest test of leadership. Now is a time to step up and be an example for your company and the industry at large.
  • Don’t take PPP loans if it’s not necessary and feels opportunistic. Are you doing the right thing?

What part of the space industry do you think is most apt to adopt emerging technology?

I think this has forced every organization, not just the space industry, to question core beliefs about how they work and how technology can transform their organization. Forcing everyone into a distributed, virtual workforce has changed how everyone works and many of these learnings will probably be permanent.

What will happen to space tech in the event of sustained economic distress, given the current global financial picture?

I remain hopeful that in the event of sustained economic distress, U.S. government funding (especially military) will still continue to deem the aerospace and defense industry as essential to national security. The best companies will continue to win contracts and be able to either bootstrap or attract capital.

Rayfe Gaspar-Asaoka, Canaan Partners

What part of the space industry do you think is most apt to adopt emerging technology?

Within the existing space industry, we are most excited to see the space industry push the envelope and invest in the next generation of software design tools, material science and manufacturing techniques. Space programs have historically been multiyear, multibillion dollar projects, and they leveraged space-tested materials and older, more defined development processes. As the industry moves toward more rapid deployments of satellites with shorter timelines and small budgets, we’re beginning to see the adoption of processes like additive manufacturing and new materials in space tech. If there is prolonged economic distress due to COVID-19, we expect this trend to accelerate even more.

Rob Coneybeer, Shasta Ventures

What advice do you have for your portfolio companies in terms of new and emerging opportunities?

When I think about opportunities in the space industry, I break them down into the following categories:

  1. Remote sensing — taking “pictures” of the ground using different techniques, including cameras, radar and a wide variety of wavelengths to look through clouds or underground.
  2. Communications — moving information from one place to another, whether replacing point-to-point terrestrial links, or “backhaul” from satellites to the ground.
  3. Transportation — moving physical items into space and around space, as well as moving people into and out of space (scientific studies and tourism).
  4. Manufacturing — building things that can’t be built on earth, as well as building larger structures in space.

The first three categories are quite crowded with intense competition. I’m watching for interesting niche applications in each category, where there is less competition and those niches could be bigger or more interesting than expected. One example is SpeQtral (where Shasta is an investor), which is developing a system of cubesats with onboard quantum sources and optical communications to securely distribute encryption keys anywhere in the world.

In the last category, manufacturing, there are a few companies like Made In Space that are working to develop capabilities to build high-value items in low-Earth orbit. The challenge is that no one has found proven specific examples of items that benefit from being manufactured in zero gravity. It’s a chicken-and-egg situation, because it’s been too expensive to do a lot of commercial experimentation in space yet. Once those applications are found, I expect it to drive another big wave of space investment.

Dylan Taylor, Voyager Space Holdings

What are you looking for in your next investment?

Stable, contract-based revenue.

What advice do you have for your portfolio companies in terms of new and emerging opportunities?

Be bold, be aggressive.

What part of the space industry do you think is most apt to adopt emerging technology?

Data and analytics.

What will happen to space tech in the event of sustained economic distress, given the current global financial picture?

Weaker players will go bankrupt and strong will survive. 20-30% reduction in companies.