Space Investment Drops Down to Earth in 2022, With a Focus on the Fundamentals
After a string of record-setting years that saw space investment rocket to new heights, interest rates rose sharply in 2022 and investment slowed down. The tighter capital environment is putting more of an emphasis on strong business plans.
January 25, 2023
Rationalization. It’s the word that venture capitalists and analysts use when describing space investment in 2022. After a string of record-setting years that saw space invest rocket to new heights, interest rates rose sharply in 2022 and both private and public equity investors pulled back.
While there were still a number of high-profile space funding rounds and seed funding for smaller companies, there was a noticeable dip from 2021, which many say was a bubble. At the same time, the space companies that went public in the wave of special purpose acquisition companies (SPACs) in 2021 saw their stock value plunge amid the larger public market decline.
Leading investment firm Space Capital backs this up. The firm released its fourth quarter 2022 report on Jan. 19, reporting total space investment was down by 58 percent in 2022. Overall, there was $20.1 billion in private market equity investment in space in 2022, compared to $47.4 billion in 2021.
Space Capital’s assessment includes a broad swath of companies, including GPS-enabled companies that do location-based services. Narrowing that focus to space infrastructure — companies that manufacture, operate, and launch satellites and spacecraft — the same trend is shown. Private equity investment in space infrastructure in 2022 was $6.3 billion — a 57 percent decline from $14.5 billion in 2021.
“The market downturn has resulted in increased investor scrutiny. I don't think it's a bad thing. We had this year, two-year period of more free-flowing capital that allowed for a lot of ideas to originate, get some traction, and get off the ground. Now we're getting to the place where investors are sorting out the concepts that will survive from those that won’t. That will result in helping ultimately to get toward a set of scalable technologies,” said Brooke Stokes, a partner in McKinsey’s Aerospace & Defense practice.
Across the board, investors are taking a more critical look at where they stake their money.
“In the past decade or so, VC has been known for this ‘growth at all cost’ type of model. My personal opinion [is] that you're going to see a pullback in that. People are thinking much more strategically about where to deploy capital, when to deploy capital, and what they really need in order to grow,” says Dr. Alison Perez, portfolio manager of Lockheed Martin Ventures.
Lockheed Martin Ventures is the corporate venture capital arm of the defense prime contractor, and it was part of a number of major space rounding rounds in 2022 — Terran Orbital, Xona Space Systems, and Slingshot Aerospace, to name a few.
Lockheed Martin is not slowing down on its investment into emerging technologies, even doubling the fund in 2022. The firm does more than investing in its portfolio companies, it also gives the companies access to Lockheed Martin experts in their field and internal business development.
Perez says the tighter capital environment is more difficult for both new and current portfolio companies, but it puts more of an emphasis on a strong business plan.
“We expect not only the companies that we plan to invest in in the future, but our current portfolio, to really take a rational pause and develop appropriate business plans that can move ahead in this new environment to responsibly build technology with the resources at hand,” Perez says. “At the end of the day, it comes down to good companies, good plans are going to get funded. Not only by us, but by VC in general. In times like this, it becomes very obvious who's leading in their market.”
Chris Daehnick, who leads Radar, McKinsey’s aerospace and defense market analytics platform, cites Terran Orbital as an example of the rationalization of 2022. When the smallsat manufacturer received a $100 million investment and a strategic agreement from Lockheed Martin Ventures in October, it honed its focus on manufacturing and canceled plans to operate its own synthetic aperture radar (SAR) constellation and open a new facility in Florida.
“I think ‘22 was the beginning of some rationalizations of the approaches,” Daehnick said. “An example I use is Terran Orbital. They pulled back a bit from a ‘do it all yourself' approach. They canceled PredaSAR, and got $100 million from Lockheed, particularly with a focus on the SDA proliferated LEO [Low-Earth Orbit] constellation. You're seeing a little bit of focus there.”
Government demand is strong across the board, experts all agree, and this is keeping the investment environment going. The U.S. and allied governments are increasing focus on innovative space capabilities, fueled by the war in Ukraine and competition with China’s space program.
The Space Development Agency’s contracts for the National Defense Space Architecture, for example, is funneling investment throughout the industry. Terran Orbital’s deal with LM Ventures, for example, involves a subcontract for SDA satellites, and also in 2022, AE Industrial Partners (AEI) acquired a majority share of York Space Systems, which has a prime contracting role for the SDA.
How much government traction a startup has is key to piquing investor interest, says Matt Patterson, managing director of new space VC firm Stellar Ventures.
“In a down market, the U.S. government, generally speaking, or a European government, is your best purchaser. If you can get them to put up money for your project, they typically pay in advance while you build it. We look a lot more at the runway on the business and how much government revenue or government grants, government contracts can they bring in along the way as they get to commercial revenue,” Patterson says.
Stellar Ventures is a new space-focused venture capital firm co-founded by Patterson and Celeste Ford, the founder of engineering firm Stellar Solutions. The VC invested in Xona Space Systems and Skyloom in 2022 in addition to other companies, and plans to make five to 10 more investments in 2023.
Patterson agrees there is rationality coming back into the space investment market after a period of hype. Startup valuations are coming down, making it a good time for the firm to invest. An investor can take a larger stake in a company with the same amount of money when the valuation is not as large.
Despite a tighter investment market, a number of space companies still had strong funding rounds in 2022. Among the companies that were funded, more are based internationally, outside the U.S. than in the past, McKinsey partner Stokes observes.
For example, two global SAR companies — Iceye, based in Finland, and Synspective, based in Japan, secured rounds of $100 million or larger. Another global Earth observation company, Pixxel, based in India, raised $25 million. Other European startups that were funded in 2022 include OroraTech, Aerospacelab, LiveEO, and Satellite Vu.
Stokes also sees diversification in the types of companies that are getting funded. “There's been increased diversification in 2021, continuing into 2022, in what space technologies capital is going towards,” she says. “There's more interest in things like infrastructure, spacecraft, lunar activity, mission software, software services.”
Of course, industry giant SpaceX raises more capital than any other space company. In 2022 alone, SpaceX raised about $2 billion before closing another $750 million early this year. Investors may be eager to invest in potential competitors to Starlink, because they have a fear of missing out, or FOMO, Stokes’ colleague Daehnick says.
“The things that people really want to invest in — Starlink, SpaceX, Amazon’s Project Kuiper and so forth — that have major finance backing on their own, are not available for investment. So, people will pursue things that look sort of like that,” he says.
Independent analyst Case Taylor thinks investors still have trouble understanding the space industry. It’s easy to understand a rocket shooting up to space, and more difficult to conceptualize how Earth observation data might impact a customer’s business case.
As companies like Planet, Rocket Lab, and AST SpaceMobile were going public in 2020 and 2021, Taylor, who has a background in equity research, realized there was a void for space market research geared toward investors, and started his own independent analysis distributed via Substack. He also recently started to work for a new venture capital firm, the U.S Innovative Technology Fund, which has space as a key vertical.
Taylor tracks the performance of space SPACs, most of which saw their stock decline in value in excess of 60 to 70 percent over the year. “We were in a bubble in ‘21 when a lot of these guys went public,” he says. “The market was rewarding giant growth stories.”
But space SPACs, categorized as growth stocks, suffered alongside other growth stocks in 2022 as interest rates rose, and they did not meet the ambitious growth targets they originally projected. Planet is one notable exception, with fiscal year 2023 revenue in line with its original SPAC projections, Taylor points out, but Planet’s stock still fell in 2022.
“When you're going public, you want to tell a good story to get investors excited, and you want to get a good valuation. But it's a really fine line between telling a realistic but optimistic story, versus something that's over the top,” Taylor says of what happened with the SPACs in 2021. “With the space industry, I think we can all agree there's a lot of growth ahead. But the timing, pace, and path for how we realize that growth is unknown.”
The number of new SPACs strongly dipped in 2022 and a few that were in the works canceled their deals. No one expects that to pick back up in 2023.
Taylor is closely tracking the companies’ cash on hand and cash burn rate, and predicts a number of space SPACs could go bankrupt in 2023 if they aren’t able to raise additional capital. This could also lead to consolidation instead of bankruptcies.
“Earth observation seems pretty promising in terms of being able to survive really tough capital market conditions and become profitable,” he notes, referring to Planet, Spire, BlackSky, and Satellogic, which are all improving their margins on the path to profitability.
Looking to 2023, every company needs to carefully manage cash to stay afloat in the more austere financial environment. A new World Economic Forum survey of private and public sector chief economists found that two-thirds expect a global recession this year and 18 percent consider it "extremely likely.”
Space Capital’s report predicts the coming year will be difficult for startups, but the firm found a bright spot as well.
“The shift away from momentum investing and a greater focus on fundamentals is an overwhelmingly positive development for the space economy. Quality companies with product market fit, positive unit economics, and strong leadership will continue to get funded, although valuations will be more in line with historical averages,” the new report says.
Stokes said she will be watching for further consolidation in 2023.
“As we see this pressure on companies and more limited capital markets, I do think we'll see some consolidation. That could be large established companies buying disruptors, that could be some of the more successful disruptors doing roll up plays. It could just be some shake out in the market from the 100-plus concepts in any given segment not making it to the next level of development,” Stokes says.
The experts interviewed for this story all point to strong interest in national security that will continue keeping the government as an anchor customer for space, and influence investment in the coming year. Governments around the world from the U.S., United Kingdom, and others have explicit plans to invest in space in the coming years.
The questions and uncertainty of 2022 will likely continue in 2023.
“Many investors take a wait and see approach,” Daehnick says. “At a macro level, everybody is dealing with a lot of uncertainty right now. What's going to happen with inflation? Will we go into a recession or not? Space is caught up in that too, just like almost every other sector.” VS