Space is a nascent market with vast, unbounded potential, where an early-stage startup can become a dominant business integral to the very infrastructure of the space economy for decades to come.
It is also a capital-intensive, high-risk, and emotional (space is cool™️) market, where an investor can end up donating $20M to an unserious science project that burns through all of its cash with just one Falcon 9 launch watch party to show for it.
That is the nature of deep tech investing. It is all-or-nothing on steroids. It requires a dizzying amount of upfront development spending with no guarantees of product market fit or that the technology will even work. Nonetheless, if a company can execute, those upfront development dollars can create a deep moat that wards off competitors for years. Hard to do that in SaaS investing.
I often think back to something Gabe Dominocielo, cofounder at SAR provider Umbra, once told me. “We’re in our ninth year; imagine a newcomer having to compete with that. Do you really want to go out and raise $300M?”
Neverending horizon: To get a sense of ROI horizons in this industry, SpaceX is in year 22 and has just begun turning a profit. But SpaceX’s moat and dominant position has turned the business into the most valuable privately-held company in the world.
- And it’s not just SpaceX: Other space startups, like Rocket Lab, AST SpaceMobile, Intuitive Machines, Firefly, Planet, and Axiom, have also garnered billion-dollar valuations.
This is all on paper, of course. We’ve seen just a few significant exits but a fair number of down rounds, consolidation, bankruptcy, and SPAC implosions.
That is the complicated and up-and-down nature of space investing in 2024. To get a finger on the pulse of how venture capital investors view the market, Payload spoke with three VC investors, offering them anonymity to encourage a candid conversation.
The three investors we spoke to:
- General Partner at a VC with less than $500M AUM
- General Partner at a VC with $4B+ AUM
- Principal at a VC with $5B+ AUM
Here is the 2024 state of space investing through the eyes of these three investors.
On a scale of 1-10?
The first question posed to the investors was: ‘On a scale of 1-10, how excited are you about investing in space?’: Responses were enthusiastic: 6, 10, and 10.
This question was followed up by asking: ‘How easy is it to find an attractive investment opportunity in the sector?’: Responses plummeted to 3, 1, and 1, respectively.
“Being eager is one thing, but actually being able to find a good investment is another,” one of the investors told Payload.
Red flags: The investors have seen a fair share of startups with inexperienced founders, projects that don’t solve a problem, saturated markets, highly uncertain demand, and commoditized business.
“Many space-related businesses resemble utilities: payloads to space ($/kg), bits to, from, or within space ($/MB), energy from space ($/kW-hr), imagery ($/pixel), and it is very, very hard to build a monopolistic business as a utility,” said an investor.
So, what are investors looking for?
Venture capital is a power law industry, where one or two investments in the portfolio generate the majority of portfolio returns. In short, swing for the damn fences.
The type of businesses that a VC generally looks for are disruptive and dominant businesses that are fundamentally unique and have a path to becoming dominant.
In his 1997 book Innovator’s Dilemma, Clayton Christensen wrote about disruptive technologies that can upend established players by serving niche customer applications with an innovative and cost-effective new product that can grow market demand and then move upstream over time.
You can see this play out in the space industry, with A&D primes preferring higher-margin contracts to build exquisite satellites, whereas space startups are focused on lower-cost proliferated systems.
More specifically, the investors highlighted the following characteristics they look for when evaluating a deal:
- A well-thought-out TAM that fits into the 15-20-year space economy roadmap
- A product that is a platform, not a tool/component
- A business that focuses on national security programs before growing into commercial markets
- An experienced founder with an intricate understanding of the industry, engineering, and navigating complex government procurement strategies
+ As for competing against SpaceX: Two of the investors were not interested in competing in SpaceX’s core markets of launch and satcom. But one investor was less cynical and said, “A giant amount of shareholder value can be created just by taking a single-digit percentage of SpaceX’s business.”
SPAC implosion, bankruptcy, cash burn, consolidation
While some sectors of the space economy have taken off, other pockets have deflated into consolidation, sorry-looking stock charts, and a mighty cash burn struggle.
The investors said they were not deterred.
“That’s kind of a thing with deep tech investing,” said one investor. “It’s higher risk, more binary. It takes a lot of capital to get to market, then to commercial viability, and then to profitability. But if it hits, it’s a transformational business.” That’s the power law mindset talkin’.
The investors all said their interest in space investing has only increased over the past four years. This positive sentiment is backed up by another strong year of venture investment in space, particularly in early-stage rounds, which have held up better than later-stage investing.
The investors provided different reasons for their increased enthusiasm.
- One investor singled out the huge influx of talent entering the industry.
- Another investor saw falling launch costs as the key unlock.
- The third investor pointed to space becoming an important national security priority, with governments moving to less expensive and fixed-cost contracts.
- Seeing the success of SpaceX and rapid iteration (aka the blow sh*t up and learn fast approach), the DoD and NASA are shifting their procurement strategy, increasingly favoring fixed-cost, affordable products and a proliferated approach—despite higher risks of failure. This should benefit startups.
Investors have greater conviction as to where the opportunity lies…and where it doesn’t.
Where do we go from here?
Investors are wagering that next-gen launchers will drive down costs to orbit, which in turn will spur further innovation. The idea is that as affordability improves, access inevitably expands, and people (including non-technical folks) will find creative ways to monetize the opportunity. It is a pattern seen with just about every other transformative technology, including personal computers, telecom, chip manufacturing, the railroad, and commercial air travel.
Core infrastructure and platform companies—think Apple with mobile, AT&T with telecom, TSMC with chip manufacturing, and Boeing for aircraft—can position themselves in a market-dominant role that can isolate them from competition for years.
Boeing is a particularly good example. By all accounts, it seems like an obvious candidate for disruption, but no startup is crazy enough to spend the tens of billions needed to build a new commercial airplane manufacturing business. The moat it has created is just too deep.
