Investments in the space industry may be down but that doesn’t mean the money’s going away

Investments in the U.S. space industry dropped 53% to $2.2 billion in the first three months of 2023. That’s according to recent analysis from Space Capital, a venture capital firm that invests in the space economy. To find out what that means for firms like his and the current financial state of the industry itself, I talked with Chad Anderson who is founder and managing partner of Space Capital.

Chad Anderson So Space Capital, we’re a seed stage, venture capital firm based out of New York, investing in the space economy. For us, that means a lot more than just rockets and satellite hardware and sort of the space infrastructure that people normally think of. We’re very interested in the data that’s coming off of space based assets. And so we’re primarily focused on three key space technology stacks, GPS, geospatial intelligence and satellite communications, which all play a very important role in our global economy. As you may or may not know, a lot of it in the background. We’re investing out of our fourth fund now, have about 150 million under management. We’re seed stage investor, so we’re normally the first institutional money into a company. We’re usually the first check in making investments based on teams and early sort of product prototypes are getting involved very early. And we’ve built our firm to be really good at finding and and diligence and supporting companies at that stage. What sets us apart is that our partners have built and sold multiple space businesses. We have built rockets and satellites and operating systems and have not in companies and built systems that are currently in orbit. So a lot of operational and technical experience. We’ve also been investing in this category for over a decade. So I’ve been at this for quite a while.

Eric White It’s the epitome of venture capitalism, isn’t it? It’s a lot of new technologies and new ideas. What is unique in the investment landscape when it comes to space infrastructure and space technology?

Chad Anderson Well, it is a very broad category. So like I kind of alluded to in the intro, is that the way that we view space is unique. We see it as the invisible backbone that’s powering our global economy. So, for example, the GPS signal. Most people think about the dot on your map that tells you where to go, but it’s also the timing piece. The timing piece is essential and critical to enabling our global financial markets, for example. It’s what enables us to do business over the horizon. So GPS is, first and foremost, the most successful space technology in existence. But there’s still a lot of opportunity there. Even though it’s generated trillions of dollars in economic value in some of the largest venture outcomes that we’ve ever seen for investors, there’s still opportunity to enhance that signal, remove errors and help it become more precise. And we’re actively looking at opportunities there that are helping to power the future of autonomous systems, enabling precision AR, for example, advertising technology and and ensure tech. And so there’s still a lot happening on the positioning side, even when it comes to the GPS signal converging with computer vision. We’re also investing in geospatial intelligence.

Chad Anderson So you’ve probably seen a lot of this with events over the last couple of years with the Russian invasion of Ukraine has really put a spotlight on the growing capabilities of commercial space companies and earth imaging companies in particular, which give us a ground truth of what’s actually happening there. So propaganda machines can say whatever they want, but you’ve got images to sort of tell the actual story. And likewise, satellite communications is a key area of focus for us. Where SpaceX’s StarLink system is the most advanced and the most capable and is starting to connect to the remote places of the planet. Also in Ukraine kept the Ukrainians connected throughout this conflict and enabled them to stay connected and combat misinformation. So those are the three key facts that we’re looking at. It sort of depends on where you’re investing. The framework that we like to use as infrastructure distribution and applications, meaning that at the infrastructure layer, you’re talking about the satellites themselves, right? The companies that manufacture and operate the GPS satellites like Lockheed Martin, distribution companies like Trimble, Magellan and Garmin that harness the signal and make it accessible, and then the applications that are built on top. A lot of value accrues at the application layer. And so, there’s a lot more attention going into this category, a lot more bank coverage, a lot more investor interest, that sort of thing. Most people focus on the infrastructure alone, but that’s really CapEx heavy, very risky long development cycles. There is opportunity there for sure, but we’re looking across the spectrum and we’re also looking at the companies that are leveraging that infrastructure and derive value from it.

Eric White Yeah, it’s that analysis, which is the reason why I wanted to talk to you guys just because this is a comprehensive look at where exactly the money is going, and you are breaking it down kind of by technologies there. What are some other trends that you’ve seen over the past decade regarding investment in space?

Chad Anderson Yeah, I mean, well, so the current market environment is helping to sort of draw a line between the winners and the rest. We’re seeing that particularly in launch at the moment. So we’re tracking 100 plus launch companies that have raised over $27 billion collectively over the last decade. But there are only two that are operational Space X and Rocket Lab. So in this quarter in particular, several aspirational launch companies had set back. Others made some steps forward. And from what’s really interesting, from my perspective, is seeing how far in the lead Space X is versus everyone else. You’ve got Boeing who is still trying to gear up for their first crew missions and sending NASA astronauts to the space station, and they’re years late and way over what they thought they were going to spend. Meanwhile Space X is operational. They launched Crew-6 last quarter and they’re going to continue. So that’s interesting. And also at the same time, [United Launch Alliance (ULA)], the incumbent Lockheed Boeing joint venture, is reportedly up for sale, while Space X is rolling out new products and new vehicles and that sort of thing. So over the last ten years we’ve seen, well, a little over ten years we’ve seen it the market has gone from a handful of defense contractors on one end, the government on the other being this really limited market to Space X coming in and removing the barriers to entry by reducing the cost by a lot to get to orbit, and also polishing their pricing and bringing transparency to the market, which removes those barriers for new entrants. And we’ve seen a flood of entrepreneurs and investment capital come in over the last decade plus. And it’s really interesting to see how quickly it has shifted from those incumbents to the new entrants that we’re seeing today.

Chad Anderson And then the other one that’s really worth flagging is, geopolitical tensions have been a primary driver in growth in this category for several decades. And rising political, geopolitical tensions, particularly with China, are driving an increase in US government funding to meet the occasion. The lunar plans and the lunar timelines for Washington and Beijing to end up on the moon are sort of like right in line and in lockstep. And they’re essentially racing there to establish a foothold and build a permanently crewed outpost on the lunar surface in a race to get the ultimate high ground. And so we’re seeing a lot of funding going into this area, in both countries, and it’s fueling a lot of interesting technology development and what we call emerging industries. We talked a lot about satellites. That’s the majority of the activity in the space economy. But there’s also some interesting stuff happening in lunar transportation and lunar infrastructure and space manufacturing and space stations and that sort of thing. And it’s really geopolitical tensions and government dollars that are driving those initiatives forward.

Eric White Got it. And so overall, investments in space have been sort of on a downward trend just because, as you mentioned. Did it kind of reach a saturation point maybe where it could only go down or did something else occur that majorly affected it in your eyes?

Chad Anderson No. So it’s actually not unique to the space economy. What’s happening in the decline and the investment into the space economy is actually technology wide. It’s a macro market situation. And so, there’s no shying away from the fact that Q1 of 2023 was the lowest quarter for space investment since 2015. So like over the last nine years, this is a huge drop, but it’s a huge drop in tech investment generally. So the venture market is in a really tough place. For a macro market perspective. It was even before the banking crisis that we’ve seen over the last couple of quarters, which has only exacerbated things even further. So the venture market’s in a tough place right now, but VCs make up the majority of investment into the space economy. In Q1, they made up two-thirds of the investment capital and three-fourths of all the round. So, yes, I mean, when something happens that affects the venture market more broadly and then it definitely affects investment in the space economy. But what I would say is that it has been a tough year and a half for space stocks, but it’s been a huge year for innovation. There is space technologies are playing an increasingly important role in our global economy and will continue to play an outsized role in the decades to come. I mean, we talked about Earth imaging companies and satellite communications with regards to the Ukraine and the conflict in Ukraine. The truth is that enterprise and government customers want more information when the world becomes more dynamic and uncertain. They want to understand the risks and understand the challenges so they can develop strategies. That’s the type of data that space companies provide at a global scale. There is a ton of innovation happening here. There’s a ton of opportunity. I can tell you as an investor here, our pipeline has never been stronger. So the future is bright, but we’ve got to get through this difficult market environment for technology overall.

Eric White You may have already answered this one, but I am curious on what your thoughts are. Obviously, I ask this question to five people and we have five different opinions. But as far as the threshold of how much we can actually get out of space, realistically, from a dollars and cents standpoint, what do you see as the ceiling? You talk about the data that we can gather, but other than that, a return on your investment, what does that actually look like for somebody that’s just trying to get into the market itself?

Chad Anderson Oh, I mean, so investors have already made money. We’ve seen it in the several company exits. One of those SpaceX employees sell shares on a pretty regular basis as their investors in a secondary market. And so they’re getting liquidity there and making quite a bit of money. Skybox imaging is a small satellite company that my partner Tom Ingersoll, took through to exit and sold to Google for a half billion dollars. And those employees and those investors made quite a bit of money. So people are starting to make money, even on the infrastructure side of the space companies. But in terms of innovation and potential, I mean, we’re not even scratching the surface. We published the GPS Playbook, which is our seminal thesis paper, which again talks through a lot of stuff that we’ve talked about, where GPS has the most successful space technology, it generated trillions of dollars in economic value and some of the largest venture outcomes we’ve ever seen. But we’re now using that as a playbook for how investment opportunities will be created and other space technology stacks like geospatial intelligence and satellite communications. And these opportunities are as big, if not bigger than GPS. And the way that we view the opportunity here, is that there has not been anything bigger since the advent of the Internet itself. It’s like when you look back and you say, like in the late nineties, there was a handful of technology stocks that you could trade on the public markets, right? And you could diversify your investment portfolio into technology stocks. And that was a thing. But today, that moniker doesn’t make any sense. It’s lost all of its usefulness as a word, because every company has a technology company. Every company has technology ingrained into its business and into everything that they do. And that is the power of space technology, right? It’s not, it is already the invisible backbone of the world’s largest industries, and it is becoming increasingly critical part of our global economy and how the world’s largest industries operate. So our view on this is that in the same way that every company of today is a technology company, every company of tomorrow will be a space company, because just like with technology, space is going to be integrated into every product that we use at the consumer enterprise and government level someday, very soon. So this is massive, massive market opportunity and we’re just getting started. We’re only a decade into this.