Finding Investment Opportunities in the Emerging NewSpace Market

Whether you call it Space 2.0, NewSpace or just commercial space, the next era of innovation in space business has arrived. Carolyn Belle, senior analyst at Northern Sky Research, moderated an informative session titled “Emerging Space and Satellite: Where to Invest Next?” during which a panel of industry financial experts took a moment to discuss where they’re looking for the biggest opportunities, what space companies need to do to attract investors’ interest, and how to manage the risk that comes along with investing in an emerging market.

According to Chris Quilty, president of Quilty Analytics, there are two factors really pushing NewSpace to the forefront of investors’ consciousness. The first is government involvement in the space industry. “Somewhere between 70 to 80 percent of revenue is generated from government-related activities. Governments are getting tight on budget and they’re looking for smarter ways to do things, such as NASA’s public-private partnerships,” he said. “We are also seeing technology change on the satellite side. There’s a barbell of activity: on one end you have High-Throughput Satellites (HTS) changing the cost of bits, and on the other end is the smallsat revolution which addresses launch availability and cost.”

Quilty also pointed out that the industry may be in the midst of a bubble due the proliferation of companies in the commercial space. “We’re sitting on the bow wave. A lot of companies got funded two to three years ago … Most of these constellations aren’t in orbit, most of the launch vehicles have not yet launched — so rubber hits the road in the next couple of years,” he said. “We’re going to sort out the winners from the losers.”

John Serafini, chief executive officer at Hawkeye 360, agreed that the industry has likely surpassed the “hype curve” and the next challenge will be securing Series B and Series C funding.

However, Mark Boggett, managing director at Seraphim Capital, warned that one of the issues holding back investments is the lack of exits that have occurred. “Raising Series B and C rounds in Europe is difficult across any sector, and it becomes more acute in space-related markets because of the lack of examples of large exits. So it’s going to be difficult for the first few, but as those companies mature they will make it easier for companies that come behind,” he said.

“There are two exits,” Quilty added. “Either the company you’re funding is going to get acquired or the company is going to go public … You’re not going to give Series B funding if there is no exit.”

Serafini highlighted one alternative way companies can pursue additional funding. “The market for raising Series A is fairly robust. So my focus for our Series B round is trying to break it up into smaller capital requirements,” he said. So rather than going out and raising $75 million to build out a full constellation, Serafini hopes to move more incrementally, raising $15 or $20 million in stages while proving both that the market works and that there is consumer interest.

Ryan Lewis, vice president and deputy director at In-Q-Tel CosmiQ Works, also explained that investors must grapple with the real financial requirements of a particular company, especially in the long term. “NewSpace offers new products and services but it also offers cost innovation. This has been the mantra. At the most macro level that is the most exciting sales pitch to an investor,” he said. “But the thing to consider is, what are the long term capital requirements for that company in terms of having to pay for launch? If systems fail, how long it takes to build real business applications? Those are a lot of ‘ifs.’ Where you run into danger is in certain investor discussions you see an unrealistic view of how quickly assets can be built.” As such, Quilty says “there’s probably a number of people who are going to lose money in the next five years.”

Still, Boggett underlined that investors must be prepared to see some of their backed projects sputter out. “We as a venture fund embrace risk. We expect to fail 50 percent of the time,” he said. “But the 50 percent that hasn’t failed has to become very successful.”

As far as where the panelists are looking for the biggest opportunities, the group generally agreed that satellite applications are the most promising, ranging from weather to the insurance market. “Most of the work that’s done is based on new data services. These present a lot of new opportunities that have not been explored much,” Lewis said. “If you look at some of the machine learning frameworks it’s still a nascent field, and for us, from the investment side, we want to see what some of the new approaches are.” He pointed out that because most compelling research from machine learning frameworks is open source, a lot of new firms have a strong starting point, which results in less risk pursuing market opportunities in that market.

The idea of a strong starting point is also relevant to the changing role of government in this new space environment. The panelists agreed that governments will provide an important foothold in the coming years. “I’m a big believer in the importance of the U.S. government as an early adopter of technology,” Serafini said. “The U.S. government is a fantastic springboard for space companies, and is going to seed just about all activity in LEO for the commercial sector.”

Lewis made a similar point: “Most sensing companies are looking to build markets in the commercial sector in general. Market generation takes time, so as a result they’re going to need an anchor customer that is remotely familiar with consuming the products and services we’re offering. The government serves as a strong anchor tenet for first year and second generation products,” he said.

“One of the biggest limited partnerships in my fund is the U.K. government,” Boggett added. VS