What to Know About Space Investing

Chad Anderson, Space X Investor & Managing Partner of Space Capital, shares why he thinks the next two years will be an “attractive time” to start investing in the space industry, and what investors should keep in mind before investing. Anderson also shares who the top players are and the outlook for space investment.  

What is the outlook for investment in the space market for 2023? 

We expect that 2023 will be a difficult year for startups. While the capital markets of the past year have been painful for most and devastating for many, we believe the shift away from momentum investing and a greater focus on fundamentals is an overwhelmingly positive development for the Space Economy. 

Quality companies with product market fit, positive unit economics and strong leadership will continue to get funded, although valuations will be more in line with historical averages. We believe that less speculation will result in fewer competitors, and a larger talent pool that will make the next two years an attractive time to start and invest in space tech companies. 

It’s never been more relevant: space technologies are the invisible backbone of the world’s largest industries and they are playing an increasingly critical role in the global economy. The Space Economy experienced significant growth over the past decade – solidifying its role as supranational infrastructure – and there is no putting that genie back in the bottle. Despite the challenges caused by macro market headwinds, we’ve never been more bullish on space as an investment thesis.

What are the top trends shaping the space industry today?

The Space Economy is much more than just rockets and satellite hardware. In fact, space technologies are the “invisible backbone” that power our global economy. GPS, Geospatial Intelligence and Satellite Communications are playing an increasingly important role in the global economy. Record revenues during 2022, despite the market downturn, are demonstrating how some segments of the Space Economy are countercyclical and recession-proof.  

A big part of that is government and defense spending, which will be crucial to sustaining growth in this market during a tougher period for private investment. As such, geopolitics will also be important in influencing that type of spending.

Government spending has always been important to the Space Economy as a whole, but over the next year, it will become even more critical to ensuring the success of commercial companies. It is our view that space companies with government and defense applications will be best positioned to weather the tougher economic climate. National Security Space is now one of the fastest growing areas of the DoD budget and the 2023 Space Force budget of $26B ($1.7B more than requested) is now larger than that of NASA’s ($25B), for the first time.  

Geopolitics play a vital role in the Space Economy since they are a key driver for U.S. government spending. We anticipate continued or elevated U.S. spending in several sectors as the U.S. adapts to mounting risks posed by Russia and China, ranging from the war in Ukraine to LEO and lunar competition.

Strategic competition with China will be a significant driver of U.S. government spending in multiple areas of the Space Economy, from Launch and Satellites to LEO Logistics. However, one area where it will have an outsized influence is in the Lunar industry. These commercial operations are high-cost, high-risk and have long timelines to revenue, so without government support they would not be viable. 

One of the reasons why the U.S. government has prioritized and fast tracked the Artemis program is because of concerns that China will get there first and establish a foothold in key regions where critical resources are located (like water ice deposits and sunlight) that will be necessary to support long-term development and habitation. For this reason, while Lunar might otherwise be a riskier category with the potential for wavering government support, we see this as a promising nascent industry with reliable growth prospects this year and the foreseeable future, due to the China factor.

Space also plays a foundational role in enabling climate markets. In fact, we wouldn’t know about climate change if it weren’t for space. That’s because over half of essential climate variables fundamental to Earth science today can only be measured from space and over 99% of accurate weather forecasts come from space. Climate tech companies were mostly spared the carnage in the markets that hit the other areas of tech – valuations have been heating up, in part in response to the Inflation Reduction Act, which committed $370 billion to combat climate change over the next decade.  

According to Pitchbook, deals in this vertical fetched a median valuation 41% higher than in 2021. Blackrock/Temasek launched a $B climate fund (Decarbonization Partners) and many leading VC firms have dedicated climate funds now and we see huge amounts of capital available for climate startups with strong teams and novel approaches. This is definitely an area we expect to see big things from in 2023.

What should investors keep in mind before investing in space? 

Focus on the fundamentals. Over the past few years, the Space Economy, like other technology areas, has been caught up in the general market euphoria which led to poor investment decisions by venture capital firms and retail investors. 

We saw many outsized company valuations that failed to take into account real revenue, business models and product development timelines. In the private markets, GPs have so far been reluctant to mark down their portfolios, but that will happen throughout 2023, starting most aggressively in the first half, driven by the audit process. There is some carnage coming. When the tide goes out, you see who’s been swimming naked. Tourist investors are going to get slammed – many have already left. Companies with all vision and no execution will suffer in this market. Some startups have already failed, particularly those with upside-down unit economics or with a lack of product market fit – we believe that we have just seen the start of this trend.  

Quality companies with product market fit, positive unit economics and strong leadership will continue to get funded, although valuations will be more in line with historical averages. We believe that less frothy valuations, less competition and more available talent will make the next two years a good time to start and invest in technology companies - particularly space tech companies in satcom and Earth imaging that are providing essential data and insights to enterprises and governments. 

Who are the biggest players in the space market? 

Humanity has been operating in space for decades, but it has only recently become a category for investment thanks to SpaceX, which removed the barriers to entry and increased access to orbit with their first commercial launch in 2009. Given the early nature of this market, most of the action is still in private markets.  

The biggest player by far is SpaceX. SpaceX raised $2.0B of fresh capital in 2022, the company’s second largest annual raise. This equates to 32% of the total investment made in space Infrastructure last year. Without SpaceX, you wouldn’t really have a viable Infrastructure layer to speak of. SpaceX is largely responsible for creating the Space Economy as we know it today and it clearly dominates the Launch industry.  

We can’t talk about Infrastructure without considering SpaceX and this is not going to change anytime soon. In fact, it’s only going to become more integral to the Space Economy once Starship comes online. Starship promises to revolutionize launch, but it will also create massive opportunity - and disruption - across many other industries including Stations, Lunar, on-orbit Manufacturing and Debris clean-up.  

That said, there are several new launch vehicles expected to come online this year that would give SpaceX’s current vehicle, Falcon 9, some much needed competition – which is welcome news for the Space Economy at large because competition provides options, reduces costs, and spurs innovation.  

These include Astra, Virgin Orbit, ABL, Relativity and Firefly. One to watch out for is Rocket Lab; we believe 2023 could be the breakout year for them due to the growing demand for launch services and the limited supply of reliable launch vehicles. 

It’s our view that space technologies – particularly satcom and Earth imaging – have already reached a significant turning point in terms of their demonstrated capabilities, resiliency and customer demand. These satellite providers are now able to deliver essential information and insights at record speeds and with great reliability. The war in Ukraine has been a critical proving ground for these capabilities. Enterprise and government customers are willing to pay for these services. Despite the economic downturn, these customers want more information, not less, when the world becomes more dynamic and uncertain. 

Chad Anderson, Space X Investor & Managing Partner of Space Capital, shares why he thinks the next two years will be an “attractive time” to start investing in the space industry, and what investors should keep in mind before investing. Anderson also shares who the top players are and the outlook for space investment.  

What is the outlook for investment in the space market for 2023? 

We expect that 2023 will be a difficult year for startups. While the capital markets of the past year have been painful for most and devastating for many, we believe the shift away from momentum investing and a greater focus on fundamentals is an overwhelmingly positive development for the Space Economy. 

Quality companies with product market fit, positive unit economics and strong leadership will continue to get funded, although valuations will be more in line with historical averages. We believe that less speculation will result in fewer competitors, and a larger talent pool that will make the next two years an attractive time to start and invest in space tech companies. 

It’s never been more relevant: space technologies are the invisible backbone of the world’s largest industries and they are playing an increasingly critical role in the global economy. The Space Economy experienced significant growth over the past decade – solidifying its role as supranational infrastructure – and there is no putting that genie back in the bottle. Despite the challenges caused by macro market headwinds, we’ve never been more bullish on space as an investment thesis.

What are the top trends shaping the space industry today?

The Space Economy is much more than just rockets and satellite hardware. In fact, space technologies are the “invisible backbone” that power our global economy. GPS, Geospatial Intelligence and Satellite Communications are playing an increasingly important role in the global economy. Record revenues during 2022, despite the market downturn, are demonstrating how some segments of the Space Economy are countercyclical and recession-proof.  

A big part of that is government and defense spending, which will be crucial to sustaining growth in this market during a tougher period for private investment. As such, geopolitics will also be important in influencing that type of spending.

Government spending has always been important to the Space Economy as a whole, but over the next year, it will become even more critical to ensuring the success of commercial companies. It is our view that space companies with government and defense applications will be best positioned to weather the tougher economic climate. National Security Space is now one of the fastest growing areas of the DoD budget and the 2023 Space Force budget of $26B ($1.7B more than requested) is now larger than that of NASA’s ($25B), for the first time.  

Geopolitics play a vital role in the Space Economy since they are a key driver for U.S. government spending. We anticipate continued or elevated U.S. spending in several sectors as the U.S. adapts to mounting risks posed by Russia and China, ranging from the war in Ukraine to LEO and lunar competition.

Strategic competition with China will be a significant driver of U.S. government spending in multiple areas of the Space Economy, from Launch and Satellites to LEO Logistics. However, one area where it will have an outsized influence is in the Lunar industry. These commercial operations are high-cost, high-risk and have long timelines to revenue, so without government support they would not be viable. 

One of the reasons why the U.S. government has prioritized and fast tracked the Artemis program is because of concerns that China will get there first and establish a foothold in key regions where critical resources are located (like water ice deposits and sunlight) that will be necessary to support long-term development and habitation. For this reason, while Lunar might otherwise be a riskier category with the potential for wavering government support, we see this as a promising nascent industry with reliable growth prospects this year and the foreseeable future, due to the China factor.

Space also plays a foundational role in enabling climate markets. In fact, we wouldn’t know about climate change if it weren’t for space. That’s because over half of essential climate variables fundamental to Earth science today can only be measured from space and over 99% of accurate weather forecasts come from space. Climate tech companies were mostly spared the carnage in the markets that hit the other areas of tech – valuations have been heating up, in part in response to the Inflation Reduction Act, which committed $370 billion to combat climate change over the next decade.  

According to Pitchbook, deals in this vertical fetched a median valuation 41% higher than in 2021. Blackrock/Temasek launched a $B climate fund (Decarbonization Partners) and many leading VC firms have dedicated climate funds now and we see huge amounts of capital available for climate startups with strong teams and novel approaches. This is definitely an area we expect to see big things from in 2023.

What should investors keep in mind before investing in space? 

Focus on the fundamentals. Over the past few years, the Space Economy, like other technology areas, has been caught up in the general market euphoria which led to poor investment decisions by venture capital firms and retail investors. 

We saw many outsized company valuations that failed to take into account real revenue, business models and product development timelines. In the private markets, GPs have so far been reluctant to mark down their portfolios, but that will happen throughout 2023, starting most aggressively in the first half, driven by the audit process. There is some carnage coming. When the tide goes out, you see who’s been swimming naked. Tourist investors are going to get slammed – many have already left. Companies with all vision and no execution will suffer in this market. Some startups have already failed, particularly those with upside-down unit economics or with a lack of product market fit – we believe that we have just seen the start of this trend.  

Quality companies with product market fit, positive unit economics and strong leadership will continue to get funded, although valuations will be more in line with historical averages. We believe that less frothy valuations, less competition and more available talent will make the next two years a good time to start and invest in technology companies - particularly space tech companies in satcom and Earth imaging that are providing essential data and insights to enterprises and governments. 

Who are the biggest players in the space market? 

Humanity has been operating in space for decades, but it has only recently become a category for investment thanks to SpaceX, which removed the barriers to entry and increased access to orbit with their first commercial launch in 2009. Given the early nature of this market, most of the action is still in private markets.  

The biggest player by far is SpaceX. SpaceX raised $2.0B of fresh capital in 2022, the company’s second largest annual raise. This equates to 32% of the total investment made in space Infrastructure last year. Without SpaceX, you wouldn’t really have a viable Infrastructure layer to speak of. SpaceX is largely responsible for creating the Space Economy as we know it today and it clearly dominates the Launch industry.  

We can’t talk about Infrastructure without considering SpaceX and this is not going to change anytime soon. In fact, it’s only going to become more integral to the Space Economy once Starship comes online. Starship promises to revolutionize launch, but it will also create massive opportunity - and disruption - across many other industries including Stations, Lunar, on-orbit Manufacturing and Debris clean-up.  

That said, there are several new launch vehicles expected to come online this year that would give SpaceX’s current vehicle, Falcon 9, some much needed competition – which is welcome news for the Space Economy at large because competition provides options, reduces costs, and spurs innovation.  

These include Astra, Virgin Orbit, ABL, Relativity and Firefly. One to watch out for is Rocket Lab; we believe 2023 could be the breakout year for them due to the growing demand for launch services and the limited supply of reliable launch vehicles. 

It’s our view that space technologies – particularly satcom and Earth imaging – have already reached a significant turning point in terms of their demonstrated capabilities, resiliency and customer demand. These satellite providers are now able to deliver essential information and insights at record speeds and with great reliability. The war in Ukraine has been a critical proving ground for these capabilities. Enterprise and government customers are willing to pay for these services. Despite the economic downturn, these customers want more information, not less, when the world becomes more dynamic and uncertain. 

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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