What Space Investors Are Saying Behind Closed Doors

What Space Investors are Saying Behind Closed Doors

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As a member of several corporate boards, I often work closely with private equity and venture investors, and the bankers and advisors who work around the clock to ensure the financial needs are met at a fair price. The conversations can get heated at times when differences in opinions are wide. But often the most informative part of these meetings, much like hallway banter in the Pentagon, is the small talk at dinners or behind closed doors.

Money, of course, is an essential ingredient for the entrepreneur—it’s difficult to get much further than the idea stage without it. As such, the investors and bankers who organize the necessary funding for a new venture are second only to that company’s customers and have comparable power to validate or invalidate its business ideas.

Excellence in this line of work demands complete discretion, and it can be difficult (understandably) to know what is on an investor’s mind. Through two years of shockwaves induced by COVID, changing power dynamics in Washington, and even the current FTX collapse, we continue to meet and put deals together successfully. But in those private settings, the small talk often seems to be on two main topics: government acquisition policies and budgets, and what to make of the next-gen space companies that are clamoring for a piece of this new economic frontier.

Government Acquisition Policies & Budgets

While there is a very real and growing commercial use case for space systems, in the near-term the US government will continue to be the largest customer. The eagerly anticipated defense budgets and upcoming government acquisition program announcements will be formally revealed in February, and what they will signal to the private capital marketplace is exactly what the government’s true preferences are. The politicians can bloviate all they want about the critical nature of “Space Power” for America’s future, but investors know that the figure in the President’s Budget is the sine qua non of government policy.

A strong signal that the Pentagon intends to continue its pivot to leveraging commercial small satellite products and services will ensure investor confidence remains high. Industry leaders and investors are hoping to see budget documents that support a continued shift in acquisition strategies as well, ones that encourage partnering with private capital (just as NASA has been doing for over a decade) and discourage Pentagon competition against America’s private industry, such as the design and production of their own redundant and less capable products. In a government sector led by world class technical talent, this will be a difficult but essential pivot. Without substantial steps by the government to embrace our burgeoning commercial space industry, investment capital will start to look elsewhere for a return.

Another signal from the government that the space community and its investors are looking for is the often talked about, yet always elusive pivot to the Pacific, a move that was first identified during the Obama administration as essential to addressing the rising Chinese threat. Since then, China has become a formidable economic and military adversary, in direct competition to US interests in free and open space domain. While the Space Force is creating new supporting commands in the Pacific, a clear message in the form of responsive space funding to bolster our presence with commercial capabilities would dissuade Chinese aggression in the South China Sea – the top concern of miral Aquilino, the four star commander of Indo-Pacific Command and both parties in Congress.

Sink or Swim: Commercial Space Companies

Another hot topic among investor circles is what to make of the new generation of space companies that are now fully operational. Many have developed eye-watering capabilities over the last several years and are supporting the US and its allies in efforts to resist Russian aggression in Ukraine. With that said, just as many routinely miss revenue targets, leaving investors wondering if they might be disconnected from their customers. No one seems to have an answer, but it’s high on investors’ list of concerns.

Many are wondering if it’s because so many next-gen space companies followed the Silicon Valley “growth first” VC model instead of focusing on earnings. Regardless, some are faltering, likely past the point of recovery. Some investors in the first SPAC companies are now looking at their investments being de-listed because of precipitous drops in share price, forcing them to think deeply about their moves in 2023.

Beyond the media attention to some of the failing SPACs, investors also highlight the significance of early stage, mid-size integrators and small suppliers that have championed a more traditional business model, with little media fanfare. By pursuing that model and aligning with their customers’ actual needs, they are showing respectable earnings and today find themselves attractive targets for M&A growth opportunities.

Ultimately, how the government spends its money reveals its true preferences. Investment firms from Menlo Park to New York City will be watching closely as the government and commercial space industry make their next moves. Well-articulated budget requests that match the acquisition policy changes recently announced by the Pentagon will ensure we do not repeat the mistakes of the 1990’s consolidation or the dysfunctional 2010’s era of mistrust and sequestration. Our economic and defense security in space depends on it.