How Space Startups Survived and Investors Thrived in a Year of Unknowns

When the coronavirus pandemic put much of the world in lockdown last spring, the space startup community feared that venture capital would dry up. In an April 2020 report, Quilty Analytics outlined a timeline of grim scenarios over a two- to three-year period spanning the pandemic and subsequent recovery.

The research firm predicted that less than half of top venture space companies would survive the fallout. “We were bracing for a long winter,” says Quilty Analytics Founding Partner Chris Quilty.

Despite the grim forecast, and much to Quilty’s surprise, the venture, private equity, and public markets all rebounded much quicker than expected. While many investors did hit the pause button for a few months to focus on their existing portfolio companies, the U.S. federal government’s efforts to supply subsidies and cash to the industry boosted investor confidence. In short, “not much happened,” says Quilty.

The long winter never came. Full year numbers are not yet available, but 2020 has shaped up to be another one of the largest years on record for space investment. By the end of the third quarter of 2020, for example, investors had poured a record $5.5 billion of capital into space infrastructure companies that build rockets and large satellites, according to space investment firm Space Capital. This includes SpaceX’s oversubscribed $1.9 billion Series N funding round in the third quarter.

Seraphim Capital CEO Mark Boggett wasn’t always confident that space startups would survive the COVID shutdown. Early on in 2020, he worried that generalist tech investors would flee the sector and retreat to more familiar sectors during a market downturn.

To protect Seraphim’s investments from any potential COVID fallout, Boggett spent the second quarter of 2020 encouraging portfolio companies to cut costs and plan carefully for 2021. Seraphim’s investments raised enough money to sustain themselves for a year or more, if necessary. Some of the portfolio’s companies even moved up plans for 2021 into 2020.

Once things seemed to be in good shape, Seraphim increased, and then doubled its pace of investment. The company hasn’t published all of its investments yet, but it participated in portfolio company Iceye’s $87 million Series C funding round in September — the biggest ever VC funding round for a European space technology company.

Boggett was surprised by how well things turned out for Seraphim in 2020 and by the fact that other investors, too, seemed prepared to back space companies despite COVID-19.

“Investors at both ends of the spectrum — early stage and late stage — are making record amounts of new investment into this market. They’re making very long-term, considered investments into the market at a time of global crisis,” Bogget says. “That suggests to us that there is a long-term trend of investment appetite in this sector and it's not driven by hype, and it's not being turned down as a result of the pandemic and the economic fallout elsewhere.”

Boggett says all of the investment rounds Seraphim invested into this year have also been highly oversubscribed, and companies have either raised more money than planned, or were very selective about the investors brought into the rounds. Like Quilty’s long winter, the retreat Boggett expected never happened.

Ethan Batraski, a partner at VC firm Venrock, leads the firm's emerging tech portfolio focusing on space and quantum technologies. He describes space investors’ 2020 experience as a parabola.

“Early on, when COVID hit, we didn’t really know how things were going to shake out. In aerospace, deals are done in person, so that was definitely a hard and painful shift. Everyone kind of paused,” he says. “Then coming out of it, I think the ones that are strong are coming out even stronger.”

Venrock’s portfolio includes California-based space startups such as Astranis, a San Francisco-based communications satellite operator that plans to launch a digital divide-bridging constellation in Geostationary Orbit (GEO), and ABL Space Systems, a small satellite launch company. In 2020, Venrock led Astranis’ $90 million Series B round, and ABL Space Systems’ $49 million venture round.

Batraski says historically low interest rates in 2020 brought multi-stage investors into the fold. “[For] multi-stage, or multi-strategy investors, the way for them to get their target returns is to invest into slightly riskier industries and segments. When capital is cheaper to invest, you can invest more of it at that risk profile. I think most investors don't have a lot of exposure into space but they’re seeing an inflection point happening,” he explains.

Carissa Christensen, founder of Bryce Space and Technology is an astute financial trend-spotter. Her annual Bryce Startup Space report tracks record-setting investment in startup space companies. The report on 2019 activity details how investors tend to pour large amounts of capital into a handful of the industry heavyweights like SpaceX, Blue Origin, and OneWeb. Christensen says that storyline continued in 2020, but there has still been activity supporting small companies.

The report also tracks increased activity from both new startups and investors outside of the United States. In 2019, the majority of investors were located outside of the United States for the first time. Christensen says that trend has continued in 2020, with growth in Europe, particularly the United Kingdom, Japan, Australia, not to mention China.

“There are countries that are looking at space to drive economic growth as a matter of policy. That's a different perspective than the U.S., which typically has a national goals perspective, [encompassing] national defense, science and technology, and exploration,” Christensen says. “The U.S. has a policy of being supportive of commercial space companies, but that's a bit different from having an economic growth policy that [explicitly] targets space activities. That kind of government interest in and support of a particular sector for economic growth increases investor confidence. It increases opportunities, and it increases government funding.”

Looking ahead to 2021, Boggett of Seraphim Capital is seeing signs of a strong year ahead for space investment activity. He points to a recent report that Sequoia Capital led SpaceX’s latest funding round with a $500 million investment. “What does that say that the most experienced venture investor in the world believes that SpaceX is not overvalued at $43 billion, and they're prepared to do the biggest bet they've ever done?” he asks.

Boggett forecasts more companies going public through initial public offerings (IPO) and special purpose acquisition companies (SPAC). He cites Virgin Galactic’s SPAC in 2019 and a recent SPAC announcement from space infrastructure company Momentus as evidence of a massive appetite for space companies from public investors. Positive receptions in the public market, he says, will breed more activity and conviction in private investment.

Quilty looks to 2021 as a proving ground for early stage space startups. He describes the industry investment as taking a barbell curve — with LEO broadband mega-constellations from SpaceX and Amazon consuming high amounts of capital sitting on one end, and more than 800 seed and/or Series A startups sitting on the other.

“I think 2021 will be the year where we will find out if and how many companies are able to raise larger rounds. And that will be dependent on both company level performance and the broader economic and investment climate,” Quilty says.

Batraski agrees, pointing in particular to the inevitable shakeout among the launch companies attempting to reach orbit, and the number of satellite bus startups as well. As venture capitalists wait to see which companies can prove their worth, there may be less interest in new early stage businesses.

“There’s a current cohort of companies past [critical design review] that are going to be in orbit in 2021. Those are going to lead to some pretty significant valuations. I think there's an appetite in the growth market for those kinds of companies, and probably less of an appetite in the venture market for early stage, because there's a ‘wait and see' approach,” Batraski says.

The new year does not come without uncertainty. A major wild card for investors in 2021 is the incoming administration of U.S. President-elect Joe Biden.

Batraski says the new administration’s priorities, how the Department of Defense streamlines the procurement process, and if and how NASA realigns its goals could mean the difference between two to three times growth and 15 times growth in the commercial industry.

When the U.S. government invested the equivalent of $156 billion in the Apollo program, it had wider repercussions, he says. “What was huge from that was the large number of innovations that we use today, the massive amount of innovation that came as a result of the force function. I hope that we see that again because it will be better for new companies to emerge and provide more interesting capabilities to customers.”

In the post-COVID world, Christensen believes that it will quickly become very obvious just how much of an impact government budgets have on commercial space companies and startups — especially those who depend on the governments as investors, customers, and providers of policy frameworks.

“For nations that respond to the post-COVID environment with fiscal austerity, we may see some consequences,” says Christensen. “If you look at the lessons of 2008 — fiscal austerity as a response to economic disruption — I don't think there's a view that it worked very well in Europe, for example. Maybe we will see a different policy response now.” VS