“Max-Q” is the moment in the launch sequence where a rocket experiences maximum dynamic pressure. After this point, the force on the rocket decreases quickly and the entire mission control room can rest a little easier. The space industry with its myriad of new startups has now successfully gone through its own Max-Q. Over the last decade, these startups have grinded, innovated, and withstood the drag of naysayers and limited amounts of early capital to blaze ahead into higher altitudes.
Recent private and public investing activity in space has been extraordinary, as record amounts of capital have flowed into the sector each of the last three years. A long duration bull market further fueled by easy government monetary policy has been the backdrop for many leading private space companies to come public (and more in the pipeline). So, is this a “release the hounds” or “show me the money” market for investors looking for exposure to space?
New Institutional Love for Space
Rest assured, once a sector starts generating outsized returns one will find plenty of people quickly jumping on the proverbial bandwagon. It was only several years ago that most venture capital firms doubted the space thesis and constantly passed on space startup rounds. Although the cubesat and launch revolutions were already in full bloom, skepticism around capital needs and business models ran rampant.
Today, many venture capital firms are now believers and are making plays in startups up and down the space stack. Bryce Tech reports that 117 venture capital firms made their first space startup investment in 2020. The annual Consumer Electronic Show (CES) recently announced “space tech” as a new category for their 2022 conference. Hedge fund portfolio managers are scrambling to build exposure to the newly public space companies. All the bulge bracket Wall Street firms are now covering the sector and sending bankers to conferences. It has been a quick change in behavior, but one that is expected in an industry growing as rapidly as space.
Lions and Tigers and SPACs Oh My!
Large institutional capital players are doing deep dives into which space assets have competitive moats and can grow into very large businesses. Last week, SpaceX was valued at $100 billion in a secondary transaction, a fourfold increase from their valuation in April 2018 which sat at $25 billion. Most of the recently minted public space companies are less than $5 billion in enterprise value and came through the SPAC door, not the traditional IPO or less popular direct listing door.
The overall SPAC frenzy has been questioned by many. According to SPAC Insider, there are 469 SPACs still searching for an acquisition as their stopwatches continue to tick down. $131 billion of gross proceeds have been raised to date in 2021 versus $83 billion in 2020, although the average size per deal is down to $285 million in 2021 versus $336 million (which was a record high) in 2020. This isn’t rocket science – while pools of PIPE capital are still participating in deals, these growth investors are much more discerning now and the exuberance around SPACs that we saw in 2020 is in the rear-view mirror.
But over the long term, it doesn’t matter how a company floats its stock. Every public company is judged each day by its revenue growth, margins, cash flow, and guidance, so each company must ultimately execute. Revenue has to grow according to what the team has promised the market, and if they miss the mark the share price will suffer. Cash will be generated from excellent margin businesses, or secondaries will float aplenty from subpar teams scrambling to raise capital and dilute shareholders in the process. The wheat will be separated from the chaff, and the leaders will run.
A Rising Tide Lifts All Boats
Many private market valuations for space startups have become astronomical. While seed stage valuations remain somewhat reasonable (but still elevated), as soon as a space startup picks up significant contracts and validation, their valuation trajectory picks up dramatically. Growth and hedge funds get swept up in the FOMO (fear of missing out) and bid Series B and C rounds higher to even richer valuations. Series A companies point to these later stage valuations to argue why their insane valuation ask is actually quite reasonable. Smart investors maintain their discipline while overly bullish investors price to perfection and hope their new portfolio space investment can grow into the valuation sooner than later.
It is encouraging to see the number of space startups that have embraced the maturation into adulthood and taken the next step in becoming a public company. How many of these new publicly traded space companies will match SpaceX and reach the $100 billion bar and beyond? There will be large sums of money made in some of the new breed of space startups and public companies, as well as pain for others who literally promised the moon but could not deliver. Experience and execution will matter, as it always does, and this will be the North Star for investors.
Space investing is having its day after some long years of promise. As in other hot technology areas, there are now enough successful space companies in the market today to warrant the significant level of activity and exposure. Expect to see space become a much larger sector as the leaders increase the scope of their platform and use their public stock to acquire a host of different companies. There will be more and more new space startups anchored by hungry founders that will continue the industry’s incredible innovation. The momentum in space continues to gain speed, and all signs today point to an industry that will continue to see new heights in the years ahead. VS
Mike Collett is the founder and managing partner of Promus Ventures.