Industry dynamics are one of the key elements that financial institutions, venture capitalists and investment bankers study when looking at the health of an industry and where it is likely headed. In the current space, industry people often delineate between “old space” and “new space.” This is largely due to the fact that the company sizes and capital structures are dramatically different but also, and perhaps most importantly, the industry dynamics are very different. What do we mean when we say industry dynamics? Well, essentially it is both the competitive landscape (markets, clients, pricing) as well as the interplay between the different players within an industry. The chart shows typical industry dynamics overtime.
One of the key features is that once an industry is born there are many, many, many startups at the beginning stage. After the period of rapid company formation there is a settling out period where the cream rises to the top and the most successful companies outperform the least successful companies (I would argue this is the phase that NewSpace is in today). From there you enter consolidation face which further delineates the winners from the losers but also builds more scale. Ultimately, what you’re left with is something similar to what we have today in old space whereby we have a stable set of very large and capable competitors that control 80-90 percent of the market and their suppliers (think of the Big 4 in global accounting or the large global auto manufacturers for example). So in this context where is NewSpace headed? In viewing NewSpace via the perspective of industry dynamics, one of the things that becomes apparent is that in all successful industries when you enter the consolidation phase, you need a consolidator. This consolidator could be a large company from another industry looking to expand into a new market, or it could be an industry leader that attracts sufficient capital to leverage themselves into a consolidator role, or it could be a large financial instruction such as a private equity firm that provides the capital for a “roll up.” In the parlance of financial services, you will sometimes hear the terms Diners and Dinners. Very simply, the smaller companies ripe for consolidation are the dinners that the diner is looking for. This dynamic is very important because the only way for an industry to evolve and ultimately successfully create and service large amounts of market share is to have sufficient scale and capital to do so. Without a classic industry Diner, it is likely that the NewSpace industry will continue to be limited both in its growth and influence compared to the traditional space sector. Given the opportunities in NewSpace to create large areas that could be monetized such as the
Earth observation data set, I believe the industry consolidator will likely be a data analytics platform but it could also potentially be a traditional space prime (armed with new capital for expansion) or a large financial institution who sees the opportunity to create a large emergent space company that is the amalgamation of all the products and services new space has to offer. In order for NewSpace to move to its next step of industry evolution, a “Diner” will need to emerge and the amount of merger and acquisition activity will need to rapidly increase. When will this happen? This is a hard thing to handicap but I would expect this to happen in the next 2 to 4 years.
Dylan Taylor is a leading angel investor. He has several investments within the smallsat and Earth observation sector, including OmniEarth, Cape Analytics, Planet, RBC Signals, Ardusat, York Space Systems, and LeoLabs.