After a Year of Bust, Will Space Investment Rebound in 2024?

The failed debut launch of Virgin Orbit from British soil in January of last year was a bitter start to the U.K.’s spaceflight ambitions. It was also the beginning of a bitter year for the space sector in the western world. In a sense, Virgin Orbit, which filed for bankruptcy three months after the British fiasco, is a fitting symbol of the space sector’s recent plight.

According to Space Capital’s fourth quarter 2023 Space IQ report, total investment worldwide in the space economy hit a record low last year, reaching about $19 billion — down more than $30 billion from the record-high of 2021. Cool space tech on its own is no longer a draw, and space investment experts agree that from now on, aspiring space entrepreneurs must put their business plan first. All is not lost, however, as technologies applicable in defense and military operations will benefit from the current geopolitical turmoil and the renewed interest of the U.S. government to fund projects.

“2023 was a tough year for startups and investment across tech, and it was the same thing in the space economy,” Chad Anderson, founder and managing partner at Space Capital and a co-author of the Space IQ report, tells Via Satellite. “There was a lot of difficulty.”

The hike in interest rates by the U.S. Federal Reserve designed to curb inflation triggered the collapse of the Silicon Valley Bank in March last year, a major issuer of venture debt, Anderson explained. Stock market volatility, rising interest rates and disappointing performance of publicly traded companies then stifled the IPO market.

“Investors weren't getting any money back,” says Anderson. “It's usually circular — investors put money in, they get some money back, they reinvest. If there's no money coming back, then it makes it hard for them to invest.”

Technology companies across the board bore the brunt, and massive layoffs hit the workforce even of previously untouchable tech giants such as Amazon, Meta, Microsoft, and Google. But the space sector’s mire was a little deeper than that of the other tech field’s — and according to some experts, somewhat self-inflicted. As a result, space may rebound slower than the overall marketplace, and companies seeking funding will keep encountering challenges throughout 2024, experts say.

Doomed SPACs Gave Investors Cold Feet

“There were a few companies that did well last year, but the majority had a bad year,” Case Taylor, an investor at growth equity fund USIT and author of the Case Closed space finance newsletter, tells Via Satellite. “January is indicating another bad year going forward. There were almost no space stocks that had positive returns in January, and this is against the backdrop of a broader market that actually had a great start of the year.”

The ill-fated Virgin Orbit is part of the story behind the investors’ current lukewarm attitude to space. The company, a spin-off from Richard Branson’s space tourism venture Virgin Galactic, went public at the end of December 2021 when it merged with a special purpose acquisition company (SPAC). Going public brought in $228 million for Virgin Orbit, less than half of the $483 million the firm was seeking. The previous year, Virgin had conducted two successful missions and hoped to soon become profitable. Those hopes, however, didn’t materialize. By the time of the failed U.K. launch one year later, the cash had run out and no new investors were willing to prop up the business.

Virgin Orbit wasn’t the only space company that went public through the SPAC mechanism only to deliver disappointing results for its backers. Astra, also a micro-launcher company, and in-orbit servicing startup Momentus are among those fighting for survival.

“They overpromised and under-delivered,” says Josephine Millward, venture capital investor and partner at OpAmp Capital. “In some cases, they are delivering fairly robust growth, but it’s all relative to expectations. Some companies went out saying they were going to be a billion-dollar company in a few years, which I thought was a little aggressive.”

No More Geeky Tech

Matt O'Connell, operating partner at Data Collective Venture Capital (DCVC), however, thinks that it’s not all doom and gloom. Investors with deeper knowledge of the space sector are still looking for companies worth putting money into. In fact, the current geopolitical situation, with armed conflict brewing in Ukraine, the Middle East and elsewhere, space technologies useful in defense and military operations are in high demand. Earth observation companies such as Planet Labs, Spire, BlackSky, or Capella Space, which have proved their worth since the conflict in Ukraine began, are set to reach profitability, and likely attract more investment into the field.

“Most investors want to hear that the company has a clear path toward being either cashflow positive or even profitable,” O'Connell says. “They don’t want science projects. Something that has no short-term path to profitability. We are still coming out of the post-SPAC caution, so people want to hear you’re going to be cashflow positive within 12 or 18 months.”

Michael Mealling, general partner at Starbridge Venture Capital, agrees that the times of investors’ unbridled enthusiasm for cool space technology are once and for all over.

“The tech sector has always been plagued by startups run by engineers who want someone to just give them money so they can play with their technology toys,” Mealling says. “And in the past, there were a lot of investors who really didn’t understand the fundamental business of the space sector and wanted to get into a company just because of the hype. That’s no longer going to work. Unless you already have a deep pocket of money, then you really have to focus on the business model.”

The Right Business Plan

Mealling cites Rocket Lab as one of the few cases that nailed the SPAC process and even outpaced their initial projections. At the same time, he warns entrepreneurs against trying to emulate the success of the California-based rocket firm. As Virgin Orbit’s tale demonstrated, just being in the micro-launcher business doesn’t cut it. In fact, Mealling says, there is not much room in the market for small rocket companies.

“Rocket Lab really had a good plan [when they went public] what they were going to do with the proceeds,” Mealling says. “They started creating efficiencies inside the company that increased their profit margins. But other companies just used the SPAC as a last resort to raise money because they struggled to find professional investors. But if the fundamentals of the business weren’t good before the SPAC, they weren’t good after that either.”

O'Connell cites U.S.-based Astranis as an example of a company with a strong business case that does things differently and has potential of appealing to knowledgeable investors even in the cash-strapped climate. The company is offering a broadband satellite service from Geostationary Orbit (GEO), with smaller satellites on a targeted basis. “People with differentiated strategies will likely do well,” he says.

Millward, too, thinks that the right companies will find their backers.

“Getting funding is much tougher now because investors are more demanding and more cautious and it's a more risk averse environment,” she says. “The environment is not going to change overnight. But if you have the right story, the right proposition, you will get funded.”

The AI Question

Millward hopes that the AI boom that is underway will spill over into the space sector and help get things moving in the stagnant market. In particular, AI applications for satellite data processing, mapping, and visualizations that could help users make the most of the available space assets could unlock new business opportunities.

“I'm interested in companies that are solving problems — AI, data fusion, data analytics, data integration. Ultimately, no one wants to buy raw data.” she says. “We need platforms that bring data together and provide easy access, integrate them and make sense out of them.”

Taylor agrees that AI is set to be the big thing of 2024. He is, however, skeptical whether space will benefit from much of the investment expected to be heaped at the new hot thing.

“The broader market is really driven by this AI enthusiasm, but I don’t think space is benefitting from that,” Taylor says. “They are kind of getting left in the dust in terms of where investors are looking for growth prospects.”

In addition to Earth observation, Taylor cites satcom, especially the emerging direct-to-device services, as an area that might gain traction later in the year. A cut in interest rates could further reinvigorate the market and give hope to companies.

“The one elephant in the room is a Starlink IPO or a Starlink spin-off,” Taylor says. “If Starlink spins off, that could create a whole new hype cycle around space investing. But so far, the company management commentaries indicate that it’s not going to happen this year. Otherwise, I just don’t think public investors are very excited about space companies right now.”

Defense Salvation

Although venture and public investment has ground to a halt in the past two years, companies benefitting from U.S. government contracts have flourished. In fact, there has hardly been a better time to do space business with the U.S. government, suggests Mealling.

“One of the things that kept a lot of companies alive for the past year and a half is that the Department of Defense (DoD), and Space Force especially, have started to write real contracts,” Mealling says. “They are getting serious about many areas, including in-orbit servicing and refueling. Of course, DoD writes contracts for DoD reasons, so it's a different way of thinking. You have to think what the threats are, what the problems are that DOD has.”

Responsive, targeted Earth observation and satcom are likely to be in demand for the foreseeable future, Mealling adds.

Anderson says the DoD’s turn toward commercial space intelligence and service providers has inspired venture capital investors to, for the first time ever, consider defense technologies, a trend that is likely not only set to continue but grow in the foreseeable future.

“Defense tech is a huge area of interest right now for venture capital,” Anderson says. “If VCs are not talking about AI, they're talking about defense and they're probably talking about both. In this type of market environment, everyone’s looking for companies that are generating revenue, and those are the ones going after government dollars. So, the VCs who shied away from defense only nine months ago are now chasing it.”

Anderson says that while the war in Ukraine has driven up DoD’s interest in commercial Earth observation services, tensions with China are behind the U.S. government’s continued support for emerging technologies such as orbital space stations or lunar transportation.

“The geopolitical pressure has been a driver behind the growth in the space economy throughout the history of the space program in the U.S.,” Anderson says. “I think it will continue to play an important role and be an important driver of growth going forward. There are a lot of geopolitical reasons why the U.S. and China would both want to be the first on the moon and control the resources there.”

Just like with defense projects, government backing may inspire venture investors to chip into lunar projects too.

Going Forward

The experts agree that the space sector is nowhere near out of the woods, but there is hope that things might begin to turn around in 2024. While the past two years saw investors focused mostly on maintaining their existing portfolio of companies, this year, if the overall climate improves, they might begin to consider new investment. O’Connell thinks that most of the upcoming transactions will involve mergers and acquisitions rather than funding entirely new projects.

“I would say that there's room for consolidation in Earth observation,” O’Connell says. “It’s a little overcrowded, and you'll see some more consolidation. Either a few smaller guys to combine or someone bigger make some strategic acquisitions.”

Anderson thinks conditions will improve in 2024.

“I think that we will see the IPO window crack open and we're going to see a space company go public if not this year, then the next,” he says. “Certainly, any tech companies going public are going to help to stimulate investment into the private markets and space companies will benefit from that.” VS

Tereza Pultarova is a freelance space, science, and technology journalist