How to Raise Money for Space Ventures, and What it Means for the Future of Fundraising

06/27

TOPICS

#ARTIFICIAL INTELLIGENCE #DIVERSIFIED INVESTMENTS #PORTFOLIO MANAGEMENT #VENTURECAPITAL #INDDUSTRY

The “New Space” era has been dominated by private companies like SpaceX, which have raised billions of dollars to create launch vehicles. Launch is part of commercial space’s emerging orbital infrastructure, which also includes earth-observation satellite constellations, optical communication systems, and a host of other technology infrastructures: the foundations upon which the NewSpace economy is being built.

In recent years, we’ve started seeing smaller startups get in on the launch market by building rockets specifically designed to deliver dedicated payloads into Low Earth Orbit. The point remains, however, that building and flying rockets will always be really, really hard and highly capital intensive.

The good news is that VC investment in space is accelerating. According to Space Angels, 114 (25%) of the 455 investment rounds VC firms have participated in since 2009, occurred in 2018 alone.

In 2018 satellite and launch sectors continued to dominate investment, and we should expect this to be the case for the next five to ten years. Over time, orbital infrastructures will support a growing number of enabling technologies and services, further accelerating space-based innovation, and we’re likely to see a gradual increase in the percentage of capital being invested in other sectors (planetary markets, logistics, industrials, biospheres, etc.).

For the time being, however, entrepreneurs raising capital for a space-based venture – as opposed to a general-technology startup – need to be particularly cognizant of dominant investing trends. They also need to be more willing to adapt to investors’ current expectations in this particular capital market.

In sum, here are the three things every space entrepreneur should be considering when it comes to fundraising.

The Trend Toward Larger, Longer-term Bets, Earlier on

As Mark Boggett, managing director of Seraphim Capital, has observed, the average seed round for a space company is $2 million, double that of a general tech company. Space Angels reports that the average raise for each successive round is also higher for space companies.

Venture Capital Activity: Space vs General Technology Graph
Source: Space Angels, Space Investment Quarterly Q1 2018

The takeaway here isn’t that space startups are disproportionately overvalued. The fact that investors in this market are making larger, longer-term bets, earlier means that having a very strong business model is the only way to compete. Entrepreneurs competing for space VC need to demonstrate that their solid short-term plans for generating revenue can seamlessly segue into long-term strategies for large-scale growth.

Startups with big visions – those angling for a piece of the infrastructure pie – need to be able to demonstrate they can generate revenue in the near term while building out their orbital infrastructure or network. A company with plans to develop a 100+ satellite constellation for earth-observation analytics, for example, needs to be able to convince investors that they can develop and sell solutions once their first handful of satellites is in orbit while simultaneously building out the constellation over the next 3-5 years.

An Increasingly Regulated Market

Regulatory matters are another concern. To compete for space VC, your business plan should demonstrate that your company will be able to adroitly navigate an increasingly regulated market. While this market is nowhere near as regulated as fintech or healthcare, it’s also incipient by comparison.

Any space entrepreneur should be cultivating relationships with people who understand the current state of regulation and are in a position to accurately anticipate or even help to shape the regulatory landscape. If you don’t have these people on your founding team, you should be looking to add them to your advisory board.

Good Capital is Patient Capital

The smart money in this market understands that traditional VC timelines won’t cut it. Startups developing “applications” or enabling technologies that will “run” on the orbital infrastructure others are developing will be less capital intensive, but they will still need longer-term capital than general-technology startups.

On the other hand, time-to-revenue still matters.

To compete for space VC dollars, startups will have to prove both that they can deliver near term orbital or terrestrial solutions, and that they will be well positioned to capitalize on high-growth opportunities once the larger technological ecosystem matures.

Up next: A Model For the Future

More and more, we are seeing start-ups take on challenges that recreate our society at the infrastructure level. Innovations in transportation, manufacturing, food systems, and a growing number of industries are being driven by hard-science startups. In other words, more and more R&D is moving downstream, not only to private companies but also to early stage startups.

To be successful, these startups are going to need access to (more) patient capital. Most will also have to have the will and the tolerance required to operate in highly regulated markets.

Entrepreneurs in any industry with longer-gestating big visions, should take a close look at the space VC ecosystem. In an increasing number of industries, entrepreneurs are going to have to similarly adjust their expectations and relationships with VC.

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