The COVID-19 pandemic might have upended the global economy, but according to Meagan Crawford at Spacefund and Chris Moran with Lockheed Martin Ventures, it didn’t dampen investment in space startups.
Spacefund research conducted earlier this year found that there is almost no correlation between the global economy and the space industry, said Crawford, a managing partner at the VC firm, last Thursday at TC Sessions: Space 2020. Crawford and Moran both agreed that interest and investment in space will increase as more startups have successful exits.
“We looked back historically over the last decade and a little bit more, and it turns out that even during the 2008-2009 economic downturn, the space industry continued to grow at 7% per year,” Crawford said, adding that they saw almost no correlation between the performance of the Global S&P 1200 and the space industry.
“I think a lot of this has to do with a big portion of the industry coming from government budgets, which provides a lot of stability even in economically rough times, as well as the industry being in such high demand and going through such a high-growth phase right now that even the pandemic couldn’t really slow it down,” she said.
Early-stage investments did suffer at the beginning of the year, Moran noted after the event, but added that it appeared to be temporary.
“Firms were circling the wagons on their portfolios, in-person incubator programs went on hiatus, so there were fewer early-stage companies out there and less money for those companies,” he said, adding that Pitchbook data confirmed LMVC’s suspicions and showed a 25% to 27% drop in new company formation over that time.
Since September, LMVC has seen a spike in new companies. Meanwhile, incubators and accelerators have adapted to COVID-19 restrictions, Zoom made face-to-face meetings easy and life “as usual” started back up again, Moran added.
Exits are driving investments
The space industry has enjoyed a honeymoon period with hundreds of startups popping up in the past five to seven years following SpaceX’s success. Moran said this unabashed growth period will continue for a few years before narrowing.
“So like any any industry in VC, you see a lot of people jump in and then as business models collide and the need to generate some sustainable business happens there’s a lot of winnowing and narrowing of the field,” Moran said. “We’re probably still in that growth period, but I imagine over the next few years, we’ll start seeing this winnowing and really focus on the folks who have a technology and a business model that will be successful long term.”
Right now, the entire industry is funded on private capital, said Moran, who predicted investing is going to grow for some time as long as people see the excitement and promise of the industry. He added that easy access to public markets — notably the rise in mergers with special purpose acquisition companies — could drive even more money into space.
Successful exits are helping drive more private capital into space, with Spacefund tracking more than 50 new space startup exits. The number of exits is also increasing annually, with the average exit at about seven years.
“That fits very neatly inside of a venture portfolio,” Crawford said. “You weren’t seeing those exits two, three, four or five years ago.”
These successes are encouraging venture firms to add space as one of their investment sectors; it’s also spurring more dedicated space venture firms like Spacefund to form, Crawford noted.
“As they get more and more capital under management, I think you’re going to continue to see a lot of early-stage capital to really boost this industry,” Crawford said.
Spacefund’s approach to investing
The venture firm, which is dedicated to investing in the space industry, has a 10-year timeline on its funds. Spacefund is looking to make what Crawford describes as “far-out bets” the firm thinks will mature within that 10-year timeline.
“We don’t shy away from taking risks,” she said.
Spacefund is not focused on investing in launch startups, Crawford said, noting that the launch industry has received 47% of the industry’s venture capital even though it’s less than 2% of the global space economy.
“We really feel like [launch is] a problem that’s been solved,” Crawford said. “What we want to know is what is enabled by launch? What are the new things that can happen now, the new business models that close today that didn’t close three years ago when launch was not as frequent, reliable and low cost?”
Spacefund is more interested in the so-called “picks and shovel” startups of the space economy that will provide the services for the industry. Orbit Fab, a company focused on creating “gas stations in space,” is one of Spacefund’s portfolio companies and an example of the VC firm’s investment strategies.
Spacefund is also interested in satellite-servicing startups. Approximately 3,000 satellites are in orbit today and Crawford said there could be as many as 50,000 that will launch in the next five to seven years. “That’s a really large market and a new market,” she added.
The firm also sees opportunities around orbit processing.
“Right now more data is being collected on orbit than can be processed or downlinked and so anything that’s going to help with that process, whether that’s orbit processing or whether that’s better downlink capabilities, more ground stations, there are kind of any number or combination of solutions there,” Crawford said.
Axiom is another Spacefund portfolio company that exemplifies the firm’s approach. Crawford describes the company as the app development platform for the universe. Axiom landed a contract last January to build the first commercial habitat module for the International Space Station, which will be used as a destination for future commercial spaceflight missions, potentially housing experiments and technology development performed by commercial space travelers.
Where Lockheed Martin puts its capital
Lockheed Martin Ventures likes to write its first check when the startup’s valuation is below $100 million, Moran said after the virtual event had ended. In other words, the corporate venture firm prefers earlier-stage companies and generally participates in seed, Series A and B rounds. LMVC’s first investments are typically between $1 million and $5 million.
“We are likely to do our pro-rata if the company is still making technical and business progress,” Moran said, adding that LMVC mostly does equity financings, but have done convertible notes as well.
The corporate VC firm doesn’t have a specific timeline for when it needs to see financial returns on its investments. That doesn’t mean the firm will wait forever.
“We do want a financial return because if there isn’t a business model that generates profit over time, then it becomes very difficult to realize the tech as well,” he said, noting that LMVC is most interested in the base technology.
Unlike Spacefund, LMVC has invested in launch companies, including companies focused on small and mid-sized launches like ABL Space Systems and Rocket Lab. LMVC is also interested in “all the things that go with small satellites,” such as earth observation, space servicing, space situational awareness and new communications technology, Moran said.
What Spacefund and LMVC look for in a startup team
Both firms look for more than just a great team of engineers and scientists in the space startups that they evaluate and potentially invest in. The founding team needs to be “well-rounded,” said Crawford, noting that Spacefund wants to see companies that have thought about the business side. She also looks for a record of previous entrepreneurial success — and not necessarily in space.
“Previous entrepreneurial success is the best thing that you can bring to the table,” Crawford said. “I welcome seeing diverse teams that come from all kinds of different industries and backgrounds. If you’ve sold a company before in the internet space or in the consumer-product space, it doesn’t really matter. You’ve had that experience of building and selling a company and you can learn the technical aspects from your great engineering team.”
Moran said he also looks for a founding team that balances tech and business savvy. More importantly, he wants entrepreneurs who have a passion for the tech, a strong vision and a team that has shown it can work through the small problems and keep progressing.
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