The uncertain state of space-industry investment
The entrepreneurial space industry appeared to be booming at the end of 2015. Investment in companies hit record highs, buoyed by OneWeb’s $500 million funding round, and SpaceX raising $1 billion from Google and Fidelity. In addition, a variety of startups struck dozens of smaller deals during the year.
This year has been a different story. There haven’t been any of the huge deals like OneWeb and SpaceX. Instead, there have been several high-profile setbacks. Escape Dynamics, a startup pursuing advanced propulsion technologies, shut down at the beginning of the year because it could not attract enough investment to continue its work. In May, XCOR Aerospace suspended work on its Lynx suborbital spaceplane and laid off a large fraction of its workforce to focus on engine development.
The biggest sign of problems in the industry came in September, when Firefly Space Systems furloughed its entire staff of more than 150 people. The company said an unnamed investor backed out of plans to fund the small-launch-vehicle developer’s latest round, effectively putting the company on life support.
Are those isolated incidents, or signs of a bigger problem with space industry investment? Data collected by CB Insights, a New York-based financial analysis company, suggests the latter. In August, it reported that space companies had raised just $201 million so far in 2016 in 20 deals, putting the industry on track to raise $329 million for the full year.
By comparison, CB Insights found there were 45 deals valued at $2.3 billion in 2015. That total does include the SpaceX and OneWeb deals, but even when those are removed, 2015 is still well ahead of 2016 in total funding.
Updated data provided to SpaceNews by CB Insights shows that trend deepening. Space companies raised only $211 million this year through October, putting the industry on pace for $253 million for the full year. CB Insights found only $8 million in space-company investments in the third quarter of 2016, the lowest quarterly total since the first quarter of 2014.
Marcelo Ballve, research director at CB Insights, said the space industry is partly a victim of broader financial trends. “First, one should note the tightening in all of venture capital,” he said, referring to overall declines in venture-capital funding in the last year, regardless of industry.
He added that the industry is also skewed by a few ventures that are run (and, in some cases, primarily funded) by billionaires. “There’s still relatively few players, and those that dominated the dollar funding picture in years prior were the vehicles of entrepreneurs with great access to capital such as [Elon] Musk and [Jeff] Bezos,” he said.
One problem the industry faces is that of perception. The giant deals like those OneWeb and SpaceX received in 2015 are unlikely to be duplicated anytime soon. “I don’t think we’ll see a year like 2015 this year,” said Kirsten Armstrong of the Tauri Group, which also tracks space investment, in a presentation at the AIAA Space 2016 conference in September. “There’s not going to be a billion-dollar SpaceX deal this year.”
She suggested that one reason for a decline this year may be that investors want to see how well previous investments in various space companies pan out. “There might be a little bit of a wait-and-see outlook for the next two to three years,” she said. “We’ll see some of the business models and companies really come to market and be proven.”
But some investors, both in venture-capital and angel investing, are more optimistic about state of space investment. Sunil Nagaraj, vice president of Bessemer Venture Partners, has participated in that VC firm’s investments in companies such as Rocket Lab and Spire, and argues his firm and others remain interested in the industry.
Speaking at the International Symposium for Personal and Commercial Spaceflight in October, he said the ability of space companies to develop and field systems relatively quickly has made them more attractive to venture capitalists who have short-time horizons. “It’s brought a sector with less well-predictable risk and longer timeframes and larger costs down into this ‘cone of interest’ for VCs with regard to timing and capital,” he said.
That interest remains. “Qualitatively, I have seen the pace of mainstream VC investing in space startups continue to be strong,” he said after his talk. “I also know of many great space companies, including some of mine, that are continuing to raise rounds without too much trouble.”
Chad Anderson, managing director of the Space Angels Network, a group of angel investors who pool their funds to invest in space companies, is also seeing plenty of activity. The group has been involved in eight deals through the first nine months of the year, ranging from spacecraft-propulsion company Accion Systems to asteroid-mining company Planetary Resources. Those deals ranged in value from $500,000 to $21 million.
Anderson believes the CB Insights data is missing much of the investment going on. In October, he said his group’s own data found $1.5 billion in investment in space companies in the first three quarters of 2016, far more than the $211 million tracked by CB Insights.
“There is still a very strong trend upward in the amount of equity investment going to this sector,” he said. As for CB Insights’ data, he said, “I’m not sure where their number came from, but it could be that was all the VC investments they were able to find.”
That mismatch may also stem from different definitions of investment and what constitutes a space industry company. Anderson said Space Angels Network is tracking more than 170 companies that have received equity funding of some kind, 85 percent of which were established since 2009. By contrast, the Tauri Group, in a report published in early 2016, identified “over 80” space companies backed by angel investors or VCs since 2000.
Anderson is also critical of studies that categorize the OneWeb and SpaceX investments as venture capital deals, arguing that they should instead be categorized as private equity or strategic investments by corporations. “Comparing the buying power of VCs to corporations like Google will of course lead to disparities,” he said.
“While it is true that VC investment spiked in 2015 and that 2016 will likely be lower,” he acknowledged, “the amount of VC investment into the space sector in 2016 is still already higher than any other previous year on record as of September.”
And what about those high-profile setbacks, like Firefly and XCOR?
“That happens all the time in the tech sector,” said Nagaraj, noting that, in a typical VC fund, a few investments are typically responsible for most of the fund’s overall gains. Many other VC-funded companies don’t provide any return at all.
He said any failures are a reminder that investors should not get captivated by innovative technologies. Instead, he said, they should make sure those startups have a strong business case. “It just means you need to do really strong due diligence.”