The next wave of space investors

Space is once again the industry that everyone loves to love. When I became involved as a NewSpace investor roughly six years ago, the industry was still reeling from false starts earlier in the millennium. The industry had blocks of capital, but essentially these belonged to ultra-high-net-worth individuals that were self-funding their ventures (most notably Jeff Bezos, Elon Musk, Paul Allen and Robert Bigelow).

In discussing with several industry-leading investors at that time how best to attract new capital to the space industry, we concluded that what was really missing was a successful and robust angel investor segment.

Without angel capital and a healthy hatchery for space start-ups, venture capital would continue to sit on the sidelines. Therefore we turned our attention to building  out this important component and attracting new angel investors to space. By all accounts, whether it was due to these direct efforts or some other force, angel capital investment in space has increased dramatically over the past few years.

life-cycleThis angel capital has allowed the industry to build many companies to a stage where venture capital is now more interested in investing. As a consequence, the number of venture capital entrants has dramatically increased. This additional capital has helped multiple companies further advance to the stage of dramatic revenue increases; several are now on the cusp of profitability.

Even though the NewSpace industry has a long way to go before it sees venture capital interest on par with software and other hot technology sectors, the groundwork has been laid that will lead to another wave of investors likely entering the industry in the next few years. Namely, private equity sources.

Traditional private equity firms typically invest only in companies that are generating positive cash flow and have demonstrated significant operating margin (typically referred to as EBITDA, or earnings before interest, taxes, depreciation and amortization).

Most private equity firms specialize in moving profitable companies from one stage of growth to another. For example companies with EBITDA of $2 million to $3 million (which may typically have a valuation of five times EBITDA) to companies of $5 million to $10 million in EBITDA (which may have valuations of seven times EBITDA). They then pass the baton to a private equity firm focused on that next stage of growth and are rewarded for both the growth in EBITDA and the arbitrage in the multiple increase that drives valuation.

Ultimately, as the companies become much larger, a strategic sale or an initial public offering becomes both necessary and practical.

Dylan Taylor

Dylan Taylor

What is different about private equity is that there is vastly more of it floating around in the U.S. financial system than traditional venture capital available.

Once the NewSpace industry begins attracting significant private equity, this will literally be the rocket fuel that propels the future growth of the industry. There is still much work to do and many companies must be case study examples before private equity will be attracted in large numbers, but this is likely in our industry’s future.

 Dylan Taylor is a space industry angel investor with investments in more than 40 space companies.