On April 26-28th an exceptionally interesting conference, called Space 2.0 was held at a hotel here in San Jose. This was a conference specifically targeted toward the commercial space sector, as this is an area of growing interest by the venture capital community. It was interesting to me because it was quite clear that there were a lot of players at the conference. A perusal of the conference website [link]will give interested folks deeper insights into exactly who was there but this graphic, pulled from the website, will give a flavor.
You could see that there was some serious Venture Capital (VC) people there that were just being quiet and taking in the presentations and hall discussions. You could see several traditional military industrial complex aerospace companies there (Lockheed Martin was a key sponsor). A very interesting subset were the corporate venture capital representatives from companies like Qualcomm, Airbus, Lockheed, Orbital ATK and others there. Then there were the NASA people and or contractors who were quasi there to help put it event together, or to wave the NASA flag. There were also several companies there looking for capital that were scattered through the event, most of them people I know. There was a small room where the food was where a few companies had set up to show off their wares of one form or another. What seemed to be missing were marquee names in VC outside of Venrock, at least any public presence, though they may have sent some of their people there.
Venture capital has not historically invested in commercial space. There is an entire culture of finance in the large GEO industry for example that has never been associated with VC. Some of the biggest space based technologies such as Direct TV and Sirius/XM radio were funded with corporate venture money (mostly General Motors!). Iridium was funded originally by Motorola then by other large corporate and financial partners. Global star was another that was invested in by large firms and large corporate partners. There were efforts like Teledesic in the 1990’s that sought to tap venture capital and even Bill Gates invested. However, the bulk of their funding came from corporate VC’s like Crag McCaw of McCaw cellular and Boeing. Some of these ventures succeeded and created entirely new multi billion dollar profitable markets (Direct TV, Sirius/XM), and some failed completely like Teledisc, and others only survived by bankruptcy (Iridium and Globalstar) which wiped out their startup costs. There have been other space companies that have grown up taking the route of government contracting to grow into moderate to large size enterprises in the last thirty years like Orbital Sciences (now Orbital-ATK), SpaceDev (now Sierra Nevada), and Spectrum Astro (acquired by General Dynamics), and Spacelab (now Astrotech and part acquired by Lockheed Martin).
There are many definitions for what is termed “NewSpace” but for myself I will use SpaceX and the early 2000’s as the pivot. SpaceX, founded by Paypal’s Elon Musk is the touchstone here because he is a silicon valley insider who cashed out when PayPal was sold to Ebay. Elon took his money and as everyone knows used it to found SpaceX, Solar City, and later Tesla. However, other money came in from what is known as the “PayPal Mafia” which includes Silicon Valley’s Peter Thiel. Peter was a co-founder and CEO of PayPal and his venture fund (The Founders Fund), was the first institutional investor in SpaceX. This was followed by investment from Steve Jurvetson of Draper Fisher Jurvetson (DFJ). This circle of people are all close to the same age and share the same vision regarding the future and came together to help Elon with SpaceX. The success of SpaceX (after some early mishaps) and a general interest in space piqued further interest in the sector by the Silicon Valley community. This is not the least for the reason that from the last 15 years SpaceX has joined the unicorn herd.
A few years ago the Climate Corporation, a small unknown data analytics company that took free Landsat data and vastly improved crop insurance loss management, was sold to Monsanto for almost a billion dollars. Since the Climate Corporation fit right into the existing ecosystem of most Silicon Valley investing (an office with a bunch of coders building a billion dollar company with very little capital), this started a an additional narrative about derived data products from space hardware. This narrative was picked up by some people who spun out of NASA Ames who began Planetlabs, eventually funded by many VC’s including a DFJ related fund. Planetlabs combines small satellite technology, remote sensing, and analytics and has reportedly reached unicorn status in investment valuation. SpaceX now holds the honor of the largest capitalization of any of the space investments at $10 billion from its last round from Google and institutional investors. This is twice the current valuation of Orbital-ATK, and almost half the value of the combined Sirius/XM Satellite Radio. Silicon Valley’s Venture Capital community is all about the next big thing and with clean tech (the butt of jokes at the Space 2.0 conference) a bust and with social media plateauing, there is a lot of interest in seeing if space is the next big thing (along with AI of course).
The event was a very serious Silicon Valley VC style event. I have been to many such events that were either industry (NewSpace) or angel oriented, but this one seemed to have people who are focused on the big money or the big industry picture. It just seemed to me to be more serious in nature, from all of the presenters. The discussions in the hall were interesting, focused, and informative. As one who has been around events like this in the space ecosystem, there were many people there that I know from companies that are seeking money. A very interesting aspect to this event is that a several big corporate VC’s were there from the largest corporations, including Lockheed Martin, Qualcomm, and Airbus. In the past I have seen folks from one or the other large corporations but not several of them. They were very earnest and they seem to be seeking to understand what this new phenomenon is all about.
There was one announcement at the conference regarding investment. A new company called Vector Space Systems [link], announced a $1m angel level investment into their new launch company for cubesats. One of the founders is an engineer that I have known for a long time and respect greatly, John Garvey, who has made Cheap Access to Space his life’s passion. This is an exceptionally tough market to be in but if anyone can make it work John can.
I basically blurred out the rest of the companies presenting and focused more on the VC’s, angels, and corporate VC’s during the conference. There was a lot of good information and investment philosophy presented, with the differences between the different type of investors detailed. I have detected a bit of difference in how this has been presented by the VC’s in their ten year fund lifetimes. There seems to be a bit more tolerance for a longer timeframe, 4-6 years for an investment rather than the quick wham bam invest, push and cash out mentality that was pre 2008.
Interesting Statements by the VC’s
It should be obvious to even the most casual observer and space advocate that VC’s are in the business to make money for their investors. A fund usually has a ten year lifetime these days and thus the investment comes into them, then over the first few years that money goes out to work. It is given as a statement of fact and faith that the majority of VC investments will either fail or underperform. As one VC put it, we expect some to fail, losing all more most of the funds invested, we expect most to come in and make little or no money, and then the vast majority of the return in a fund comes from a few outside performers, usually in the 10-40x range. Corporate VC’s spoke about their philosophy of investing in companies that are compatible with their markets, or who could be good customers. This is what drove Qualcomm to invest in One Web. As should be expected corporate VC’s look at their investments holistically, as something to broaden their markets and bring new ideas into their fold.
One of the VC’s talked about the J shaped curve. This curve is basically the ratio of invested funds to return. Graphically it is shown below.
The general statement is that the preferred form of investment is the curve to the left, as even if they have to put more money in, the higher return, hopefully in a shorter period of time, justifies the higher risk on the front end. You see this all the time in the Silicon Valley VC community in software as a service focused companies. The timeline here for return is on the order of four to six years to meet the requirements of the fund. This actually is not outside of the realm for a space investment as long as the cash required up is not too high relative to the overall size of the fund. The VC that put this curve out did not say this but it should be important for those seeking investment to understand the size of the fund that the VC that you are talking to has and to understand their risk spread. You have to research see if the amount of money that you need fits their risk spread (amount as a fraction of their fund), and is not too high of a fraction of their total fund dollars; i.e. don’t ask a VC for $150m dollars if their fund is only $500m dollars.
Something was said by one investor that prompted me to ask a question. The statement was “we don’t want to invest in metal”. After I questioned the statement he said that they have invested in metal (hardware) with one cubesat company though their investment interest was much more on the data analysis market side of the investment (what the company does with their satellite data) rather than the satellites themselves. I would posit that the VC community expand that horizon a bit and think about where the greatest potential for disruption is today. The vast majority of the potential at this time is in metal, or hardware, or a systems solution that requires new and unique hardware.
There are entire swaths of markets today that are open to exploitation, but they require investing in hardware to get there. On orbit servicing, on orbit assembly, large GEO platforms, ubiquitous real time weather are just a few that require hardware, have ongoing revenue, and have the potential for large returns. In the lawsuit between Orbital-ATK and U.S. Space LLC just the GEO on orbit servicing market in court pleadings is estimated to be as large as $10 billion dollars with half a billion a year in near term revenue. This is Orbital-STK’s largest new business sector, enabled by our IP that we licensed to them.
In researching this article I found support for my premise in focusing on hardware investments that have leverage into services. A brilliant woman named Riva-Melissa Tez makes the same argument in a Medium article [link] about her life and how her new company [Permutation AI] is applying the concepts of AI to provide investors with better due diligence and better insights into what makes a good investment. From the article:
I’m also trying to introduce investors to more hardware-based projects. People focus on top layer innovation- such as algorithms- without recognizing that the very thing that sets the parameters for improvement is the hardware.
Chatter in the Halls
It is quite clear that there are some changes afoot in the investment community for space. Cubesats are still considered to be interesting but the irrational exuberance of a couple of years ago has moderated substantially. Some of the companies that I know are looking for money, but with little indication that big checks are in the offing. Though I was not there at the event last September in San Francisco, it seems that the negative vibes that came out of that conference (with one prominent investor in this sector saying that the business plans were crap) a more measured and critical approach seems to be the order of the day. Many people are waiting to see what Alphabet/Google does after the Skybox satellites are launched. There is a lull as the big investment in One Web and the quasi-backtracking of SpaceX in their internet constellation is parsed by the investment community.
The corporate folks from Lockheed and others are just trying to see if there is any there, there. Some have made investments at arms length in companies, which may or may not be wise. Airbus, the giant European aerospace conglomerate has set up an “innovation” office in Silicon Valley and is talking to companies and the investment community to try and understand the new phenomenon.
My Take Aways
I loved the event. I was not there pitching anyone, just absorbing the atmosphere (for which I shelled out almost $800 bucks). I was able to get a feel for people’s mindsets in this area, and made a couple of new friends and contacts that may be beneficial to us. There are many of the big aerospace companies that fear that their decades long military industrial complex business model is headed for the dust heap of history and they are trying to understand the new world that is developing. They are right about this.
It seems that the investment community is interested but the hunt for the unicorn in the forest in this area has not borne fruit lately. These guys want to put money out but if other areas of investment that have not been fully mined pop up (the new AI craze comes to mind), they will go there. The VC’s are for the most part not particularly space fans but are going to go where the money is. IF there is money and unicorns to be found, they will go for it, but if not, off to the next sector. Understandable.
In my opinion what needs to happen is the marriage of a good investment in the tens of millions with an idea that does spawn, without taking decades, a space business that will be the next SpaceX. The ideas are out there to make this happen. There is no economic sector in the world more ripe for disruption than space. It requires a partnership between good capitalists and good teams that understand what can be done in this area and how to literally transform the industry. The potential is there right now for this to happen.
For the rest of the story…….