“Why We Love Investing in Space”

Investors speaking at SATELLITE 2019 will undoubtedly share their thoughts on the future of the satellite industry, and the state of their appetites for space-based startup opportunities. In all-star lineup of investors, Via Satellite sat down and spoke with Promus Ventures Managing Partner Mike Collett; Mubadala Investment Company Information and Communications Technology Unit (ICT) Executive Director Mounir Taysir Barakat; Bessemer Venture Partners Investor Tess Hatch; Seraphim Partner Matt O’Connell; and RRE Ventures Founder Will Porteous.

The roundtable outlined trends that are driving investments in the satellite industry, and shared important anecdotes and lessons learned from engagements with space entrepreneurs.

VIA SATELLITE: As investors, what recent trends have made space investments more attractive?

Collett: The worse the pain in a sector, the more we get intrigued. Space was an area that was, and still is, a very difficult industry in which to successfully start and grow a data business. The recent emergence of small satellite technology was a key variable change that we believed would unlock the industry in new and exciting ways. No longer did a large expensive satellite need to stay up in geosynchronous orbit for 20 years with outdated technology. While small satellites offered a much shorter life, a company could launch them cheaper and more frequently, as well as continually upgrade these constellations in the sky whenever needed. We are seeing these important shifts clearly play out in the industry today.

Barakat: We believe that space-based communications will continue to grow at an even faster rate. We see new and potential uses for it, especially with the dawn of 5G networks. Mubadala has further interests in space, firstly via its investment in Softbank’s Vision Fund, which has in turn invested in OneWeb and through our Virgin Galactic investment. Overall, it is a very exciting area for us.

O’Connell: We are in the formative years of a new space industry. We’re on the cusp of multi-decade growth driven by a nexus of factors: competition in launch; acceptance of off-the-shelf components; realization that shorter-lived satellites make more sense when technology is advancing so fast; software-defined-space hardware; AI/machine learning adoption; and rapid improvement to computation ability driven by quantum. We envisage the scenario where a broad number of billion-dollar companies emerge to lead the change. Space has some unique characteristics. It’s a harsh environment and after launch it’s harder to fix things. Having said that, there are a lot of similarities with other venture backed sectors: initial capital is high, but there’s a big payoff over a sustained period — like oil wells or pharma/biotech drugs that benefit from a 15-year patent.

VIA SATELLITE: Can you tell us about some of the more interesting or memorable ideas that you have been pitched this past year?

Collett: Lunar colonies, in-orbit gas stations and pharmacies, space TV, reusable space tugs, and lunar farming. All kinds of extraction technologies, as well as numerous types of manufacturing factories in space. Robots galore, doing everything people are trying to build terrestrially, but now in space. Basically, if a startup has dreamed up something in space, we’ve seen their pitch.

Hatch: Space tourism, colonizing the Moon, and manufacturing in space have been the most memorable Moonshot (pardon the pun) ideas I’ve been pitched.

O’Connell: We believe in small satellite constellations and we’ve invested in three of them. We like companies that sell “picks and shovels to the miners.” We recently invested in a startup called QuadSat that uses drones to simulate satellites so that operators can calibrate the communications with a ground station and thus save time when a satellite comes on line. We checked with SES, one of our Limited Partners. Their reaction was, great! This will really solve a recurring problem. We love it when we discover a new technology in the course of due diligence on a prospective portfolio company. We invested in a company called Nightingale Securities that uses autonomous drones for security monitoring. In the course of due diligence, we discovered that they ran their collision avoidance by using a wifi chip modified to be, effectively, a small digital radar. We can see a lot of applications for the modified chip. We think Quantum encryption is going to have a massive effect on the market. So, we invested in a satellite company that will use quantum encryption for ultra-secure communications.

VIA SATELLITE: What do you feel are the biggest risks associated with investing in new space/satellite companies?

Hatch: The major risk remains that space hardware is expensive and has a long feedback cycle. Eventually, especially with more frequent launches, this won’t be as significant a hurdle. There have also not been many liquidation events, either in the form of acquisitions or IPOs, in the space industry. With the increasing number of companies entering the market, this is likely to change and improve over time. Notwithstanding these risks, however, I believe that investors are rewarded for these risks by the competitive moat any space company creates once it has assets in orbit, which are extremely valuable and can be used for a variety of applications. In fact, the potential uses of cubesats in Low Earth Orbit (LEO) are limited only by one’s imagination.

Porteous: It is very tempting to suggest the major risk is around the technology, but that is not really the case in my experience. There is quite a lot of innovation happening in the sector. There is quite a lot of progress technically that we see happening within the companies. The agile development models that are possible with constellations, for example, mean that we iterate very rapidly.

The major risk is really on the financing side of things. I think we have a great crop of emerging companies, across the sector right now. We are right at the point where a lot of strategic partners are going to engage to make strategic investments. We are seeing revenues begin to scale. They are turning into businesses. We need the layer stage financing markets which have traditionally supported satellite to be a participant. Top of mind when it comes to risks, is the overall financing of the sector.

VIA SATELLITE: Do you think space- and satellite-based infrastructure can have a more important role in the future IoT communications ecosystem?

Collett: Many research groups wax poetic about the size of communications applications connecting things on Earth and in space. The forecasts are huge, estimating 75 billion things are to be connected by 2025. Who knows? What we do know is we see the need for reliable global connectivity in many of our current non-space startups, and this can only be done from space. Many of these products, such as those seen in agriculture, oil and gas, operate outside cellular range as well as wide area networks. These teams are running into issues to make sure these products are always connected and hacking their way around solutions to maintain their connected data streams.

Barakat: Mobile telecom operators will largely provide the base infrastructure for Internet of Things (IoT) via 5G networks supported by end-to-end fiber connectivity. However, satellite-based connectivity and backhaul will play a very important role for non-latency sensitive transfers. In addition, satellites provide connectivity in remote areas, roads and sea but also provide resiliency in bad weather and natural disasters.

Hatch: The communications vertical is a very large market, potentially dwarfing the Earth observation market, and therefore it has exciting potential. There are already applications for latent tolerant Machine-to-Machine (M2M) tweet like (bit sized) data. For example, cargo vessels in the middle of an ocean or farms in remote areas that currently don’t have any way to communicate could use and benefit from a space-based system. Use of such a system would allow the cargo vessel to make sure it is always in the right location — which would save a great deal of fuel — and the farmer to much better anticipate and adapt to weather conditions. These capabilities would significantly increase yield and revenue. Imagine taking this a step further and providing space-based internet connectivity so that every single person in every part of the world can ubiquitously be able to connect!

O’Connell: The IoT opportunity is going to have fierce competition from the telco industry, so the constellation plays must favor markets where space brings a unique advantage such as low density areas. In high-density areas, terrestrial usually has a cost advantage. Despite seeing more than 50 new space opportunities in the area, we are still waiting to be convinced on a killer market opportunity. However, that said we remain confident that a number will emerge.

VIA SATELLITE: What lasting impact do you think new space/satellite sector entrepreneurs will make on our industry?

Porteous: I think this generation of entrepreneurs has fundamentally re-defined the economics of creating a space-based capability. That, alone, has dramatic implications for companies that have built these capabilities historically. You can no longer expect to get the massive contract awards for an original design of a long life resilient asset. They will still be built, but there will be much fewer of them. There will be tremendous pressure placed on the innovation cycle and the opportunity to build on the great work being done outside of the satellite sector. The satellite sector is opening up to powerful influences from other parts of the technology industry including in the way it builds capabilities and that is the lasting effect. It is embodied in these new companies coming forth, and it will be adopted by the major players as well.

VIA SATELLITE: What types of space industry investments will you be looking to make during the next year?

O’Connell: We are only half-way through our investment period of the current Seraphim Space Fund, so the portfolio will double over the next couple of years. We don’t do PR on all companies in which we invest because some are in stealth mode. Through the Space Fund, we broadly undertake three types of investment: a Series A ‘lead or follow’ in the $1 million to $3 million range; a Series B follow-on in the $3 million range; or earlier, seed stage investment between $250,00 and $500,000. The earlier stage investments are typically into companies graduating from the Seraphim Space Camp Accelerator, where we take a $250,000 option to invest in all companies coming through the program. We are in the advanced stages of raising a Seraphim Space Global Fund, targeting $150 million, with a broad number of new space corporate limited partners joining us to build out our network in the U.S. and in Asia.

Porteous: We will continue to look hard for new things in this sector, as well look for distinct capabilities. We are in the mode of prospecting and looking for new deals. I believe the sector on a whole is approaching a tipping point. There is a lot of operational capability on orbit that is now tipping into revenue. As they tip into revenue, and they need less financing, we can look to turn our attention to the next generation of investments that come behind them. That is something we will see happen in 2019 for most of our companies.

VIA SATELLITE: What advice would you give to space start-ups seeking investors?

Collett: Being lean in this sector is important. Do not attempt to solve every one of the world’s problems or every vertical at one time. I would also recommend allocating time with both financial and strategic investors, as we continue to see strategic investors putting capital to work early in space startups and are often quite helpful in other areas as well to the founding team.

Barakat: Apart from genuinely wishing them good luck as they enter a very exciting industry, I would say to any new entrant in any new field — Get good advisors!

Hatch: Don’t forget your customer! Even though you are operating in space, your customers are here on Earth.

O’Connell: Entrepreneurs need to have an X-factor. Those made of the right stuff make their mark from the very first meeting. They set an initial benchmark that we expect them to meet or exceed in all future meetings. We can normally get a good sense within the first 30 minutes of an initial meeting if a team is back-able - so first impressions really do count. As investors, our job is to narrow down to the top 1percent and then invest in the best of the options we have within that top 1percent.

Porteous: There are a couple of key things. The market is awash with innovation. Don’t believe you have something technically unique. There are very few of those. The converse to that is that very few people have thought about the pace of which the market will absorb their innovation and why it is going to happen fast and why there should be a high sense of urgency for customers to but that capability. Secondly, you need to understand how to manage your company through the cycle of financing and how to be very lean in growing your business, so you are not locked into a capital intensive model before you have the resources to support it. That is good prudent planning and scaling that we love to see. VS