A grounded approach to investing in space technology
When you think about investors in space, the first thing to come to mind might be hedge fund billionaires buying tickets for a trip into orbit. But there's more to this new frontier than that. How are professional investors thinking about assets that are literally out of this world?
Nearly 10,000 active satellites currently orbit the Earth, supporting several vital functions: communications; navigation; geographical mapping, and weather and environmental monitoring and forecasting. Systems in space touch on an ever-expanding range of industries – for example, international finance now relies on the constellation of satellites making up the global positioning system (GPS) to time-stamp transactions. Given their growing importance to economic activity, experts are calling for these systems to be designated as critical infrastructure.
The private sector is piling into the new space race in the hope of landing an attractive return here on Earth. Since 2015, the number of spacecraft launched annually has doubled every two years – drawing comparisons to the doubling of computing power every two years known as Moore's Law (see Figure 1).
Space will touch everything
The space technology sector attracted USD6.8 billion from venture capital investors in 2023 (See Figure 2), bucking a challenging global environment that saw a 42% plunge in overall VC funding. Backers include many of the world’s best-known investors, including Intel Capital, Goldman Sachs, Sequoia Capital and Lightspeed Venture Partners.
A big part of the investment appeal is the exponential growth in data collected and transmitted by satellites, which could drive a step change in insight-generation, efficiency and innovation in finance and virtually all other industries.
“Almost every non-space industry on Earth can somehow benefit from space, whether it's insurance, pharma, banking, investing or tourism,” said Raphael Roettgen, Founder of E2MC Ventures, a space-focused early-stage venture capital (VC) firm.
Roettgen likens the growing interest in space infrastructure to the early days of the internet in the 1990s or where artificial intelligence (AI) was 10 years ago. Few realized at the time how pervasive these technologies would become or how far they would transform the global economy.
“When I started learning about AI and ultimately pursued a Master’s degree in it 10 years ago, I remember some of my very smart friends would say ‘OK, it’s intellectually interesting, but it can’t be used for anything practical.’ Now, it’s everywhere,” said Roettgen.
Maureen Haverty, a nuclear engineer turned rocket scientist who now serves as a Principal at specialist VC firm Seraphim Space, argues that the importance of space technology is often underplayed or misunderstood.
“Data from space is going to be so seamlessly integrated into so many products and services that most people will not realize that it is coming from space,” she added.
Categorizing spacetech
Seraphim Space, which has been investing in the sector since 2006, classifies spacetech firms into seven main categories:
- Building and selling satellites, autonomous system
- Component, sub-systems, complete systems
- Hardware (sensors), software (i.e. control systems), hybrid (i.e. machine vision)
- Building & launching rockets
- Launch-related services
- Any data collection / space platform (i.e. smallsat, HAPs)
- Multi-modal: look, listen, communicate
- Facilitate transmission of data from space / aerial platform back down to earth
- Satcoms & terrestrial comms network
- Data storage, processing, security
- Analysis of data from space / aerial platform
- AI / machine learning enabled analytics
- Packaging of different data streams (space & non space)
- Tailored to specific use cases in specific verticals
- Location, monitoring, insight, mapping
- In-space infrastructure (i.e. space stations)
- In-space services (i.e. satellite refueling, servicing and repair)
- Utilizing the microgravity environment for R&D and manufacturing
These categories can, in turn, be split more broadly into upstream and downstream segments. Upstream covers manufacturers of spacecraft, satellites, ground receiving and transmitting stations, and other space-related infrastructure. Downstream companies use space infrastructure for various use cases, such as for mapping or monitoring activities on Earth, or for research and development in a microgravity environment.
The upstream category consists mainly of what early-stage investors call “deep tech,” referring to startups whose business models are based on cutting-edge innovation in engineering or significant scientific advances.
Investing in deep tech involves significant risk. “When you’re investing in something like a launch company, there are lots of technology risks. The rocket might not even work, or if it does, it might not work every time. And it could take a long time to generate a single bit of revenue,” said Haverty.
There may also be substantial commercial risk. “You might build a product no one will buy. That to me is what differentiates a successful business from an unsuccessful one – making sure they're building the right product for customers.”
The reason early-stage investors take those risks is that successful deep tech companies can have higher margins and capture more of the market by solving a technology problem before their competitors.
Taking measured risk
“As early-stage space investors, it’s our job to take technology risk, but we have to make sure those risks are reasonable and smart,” said Roettgen. “What we cannot do is get duped by something that could never work due to the law of physics or is an outright fraud.
“Unfortunately, I think it’s only a matter of time until we get something like a Theranos in space,” he said, referring to the failed blood-testing startup whose founder was convicted of fraud in 2022 for misleading investors about the performance of its technology.
In contrast to upstream spacetech companies, downstream ones can be “revenue generating right away,” said Haverty.
Moreover, the economics of downstream spacetech companies could change dramatically over the coming years. SpaceX’s Falcon Heavy – a partially reusable rocket – brought down the cost to launch a kilogram of mass into orbit to about USD1,500 from close to USD10,000 for previous generations. With other companies such as Blue Origin, Rocket Lab and the United Launch Alliance developing reusable heavy-lift rockets to compete with SpaceX, that could come down even further.
A coming revolution in launch costs
But the real gamechanger will be the advent of “super heavy” reusable launch vehicles (see Figure 4) such as SpaceX’s Starship. When those commence commercial operation, the cost to launch could plunge to “hundreds of dollars,” said Roettgen.
Figure 4: Launch Vehicle Classes by Mass
Capacity |
|
|---|---|
Super heavy |
30,000+ |
Heavy |
11,341–30,000 |
Intermediate |
5,444–11,340 |
Medium |
2,269–5,443 |
Small |
501–2,268 |
Micro |
≤500 |
Source: BryceTech / CNBC
Although Starship is still very much in the testing phase, with three test flights having been conducted by May 2024, Roettgen is working on the assumption that space launches will become drastically cheaper in the next five to 10 years.
This will greatly expand the scope to build applications that run on data collected and transmitted by space infrastructure.
For instance, applications incorporating satellite data and artificial intelligence could be used to monitor and manage a range of climate and environmental, social and governance factors.
“From space you can get a global view but also a local view at the same time. That allows you to do things like carbon credit verification – for example, monitoring forestry projects that are being used for carbon credits,” said Haverty.
Satellite communication and data from space are also being applied to various socially beneficial ends. “It allows us to connect people everywhere, including in disaster areas or remote areas, providing things like remote education to kids that otherwise wouldn't have it,” said Roettgen.
“Insurers are using satellite data to make better wildfire models, allowing them to insure houses that other firms think are too high-risk,” said Haverty.
Or in Africa, which is rich in resources but lacking in data, space is spurring development by making it easier for multinationals to do business, added Haverty. “It allows them to monitor their supply chains, and in combination with ground source truthing and AI models, provides actionable insights.”
Brave new industries
The plummeting cost of space launches will also open the door to a host of more fantastic possibilities in the beyond earth category.
It will make feasible “things that are prohibitively expensive right now, like robotics in space and space-based solar power,” said Haverty. It will also enable in-orbit servicing and make it affordable to launch much larger satellites with greater capabilities.
“In general, a larger satellite can do more things. It can provide more bandwidth for communications, has greater imaging capabilities, and can move around. It will give us many more options,” said Haverty.
The beyond earth subsector witnessed a sharp increase in investment in 2023, according to Seraphim (See Figure 5).
One of the things researchers, scientists and deep tech entrepreneurs are especially excited about is the prospect of “microgravity on demand.”
Roettgen is also Co-founder of Prometheus Life Technologies, a space biotech startup looking to exploit the fact that cells grown in microgravity arrange themselves in a way that more closely resembles how they would grow and function in the body. This can be leveraged in producing organ tissue (so-called organoids) for drug discovery and development and for regenerative medicine, including eventually bioprinting entire organs.
Microgravity also allows the binding and mixing of materials that would not be possible on Earth, said Roettgen. “That may enable the creation of better semiconductors and optical fibers, which can be used to build more power-efficient data centers. Because data centers use so much power, this could have a meaningful impact on their carbon footprint.”
Watch this space
Despite the growing importance of spacetech to the global economy, Roettgen and Haverty say there is not enough awareness or education about its implications.
Last year, McKinsey published a report arguing that space is the missing element of most companies’ strategies.
As with other investment ideas, education and preparation are key to navigating the complexities of space investing. The overall space technology market is still maturing and highly volatile. Investors seeking exposure to it need to stay well informed about industry trends, manage risks, and seek professional or expert advice.
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