Space IQ: Q1 2024 Review

“And in Q1 for the first time, the 10-year total of investment shifted to satellites. So for me, that feels pretty significant in that we've spent the last 10 years getting access to orbit and now we have access to it now more investor interest and more investment activities happening on what do we do once now that we're there?"

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Welcome to the Space Capital Podcast. I'm your host, Chad Anderson, founder and managing partner at Space Capital, a seed-stage venture capital firm, investing in the space economy. We're actively investing out of our third fund with a hundred million under management. You can find us on social media @SpaceCapital. In this podcast, we explore what's happening at the cutting edge of the entrepreneurial space age, and speak to the founders and innovators at the forefront.

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Chad Anderson:

Okay, so the first quarter of 2024 is behind us and Justice and I and the team here at Space Capital are chewing through all the data and trying to make sense of what's happened this quarter. And also thinking through all the great milestones and all the amazing things that happened this quarter, which there were many of them. I think a good place to start these conversations is always with talking about the macro market environments, venture generally, tech generally, and then sort of sticking through how that is impacting the Space Capital markets. So Justice, anything that caught your eye this quarter?

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Justus Kilian:

I'm just catching up on a couple of reports that have come out from Crunch Base and PitchBook, and I think the consensus is that deal activity volumes flows is the lowest since 2020... 2018 actually. So it's kind of surprising when I reflect on our activity for the quarter, it actually feels like a wild quarter. There was a lot of activity, deals were moving very quickly, investors coming in, taking whole rounds. It was different than I was expecting. Is there anything you noticed?

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Chad Anderson:

Yeah, I mean, well, the biggest thing that sticks out to me is it sort of depends on which outlet you're reading, but you get mixed messages from everywhere, which I think sort of speaks to this period of uncertainty that we are in. We've had a couple of years of really tough times in the financial markets and investing generally. There's been a lot of dry powder that's sitting on the sidelines, we now know and what we've known, and now it's starting to show in the data that the money was actually being deployed. It just wasn't going to net new additions that people were investing in their existing portfolio companies at the expense of adding net new names to their portfolio. So the money has been going out the door, but into their existing portfolio companies to help them survive this long winter. So it's been an interesting dynamic in the market.

And then now we're at this period where, boy, I mean if you look at where we ended 2023, it was pretty tough. I mean, inflation was still pretty high. Interest rates were high. The IPO market was absolutely frozen solid. And here we are in Q1 and you've got the public markets are having are at all-time highs. The feds are talking about reducing interest rates on the heels of some great inflation. Inflation is near their targets. They're talking about cutting interest rates.

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Justus Kilian:

Record employment.

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Chad Anderson:

Yeah. And so all of these positive signals, you've got a non-space company, Reddit, rejuvenating the IPO market potentially. And so you've got a lot of reasons to be optimistic about this market, but at the same time it's like what's actually going on? There's still a lot of companies that are struggling to raise. And from our perspective, it sort of feels like to me that it's still difficult to get a deal done if you're a founder that's fundraising in this market. Either you're having a hard time getting the attention of investors and the fundraiser is dragging out or you've got five term sheets and you're massively oversubscribed. It's very binary in this market, right?

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Justus Kilian:

Yeah. And I think that sentiment translates into our data for the quarter and looking at infrastructure, which we've seen a lot of interest from more generalist investors in these companies. Deal activity has picked up there, so we saw it sort of bottom out in 2022. It's increased 50% through this quarter. When you look at the annual flows, it's actually been pretty consistent. So people have been deploying capital, it was into fewer companies, but now we are seeing new crossover investors, new generalist investors getting excited about it, because it's deep tech and it's defense tech and that's sort of in favor right now.

So infrastructure is holding up quite well. Then you look at applications and we've seen a steady decline in both total capital flows and deal activity from 2018, bottoming out in late 2022. And the last four or five quarters in a row, we've seen a steady increase in terms of deal flow and capital flow back into applications. And so it is almost that tale of two sort of outcomes. Yeah.

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Chad Anderson:

It's important. It can't just be all about the infrastructure. You need to build applications that leverage that infrastructure and create value from the assets that you have. So this was a massive quarter for the space economy and for me, and I think for you, I mean, in our conversations leading up to this point, as we've been chewing through the data, it sort of feels like there's a pretty momentous quarter. A ton of stuff happened and we're going to get into all that.

But one thing that really stood out to me is like you said, infrastructure investment still remains strong. There's a lot of government funding that's propping that up, a lot of government interest. But if you sort of step back and you look at total investment over the last 10 years, which is normally the timeframe of our report, in infrastructure, launch has always been king.

All the money has gone to launch. And why is that? Because it's a nascent market category. At first, you need to get to orbit, you need to get... So it makes sense that in the earlier years that all the money was in laying the railroad tracks. And in Q1 for the first time, the 10-year total of investment shifted to satellites. So for me, that feels pretty significant in that we've spent the last 10 years getting access to orbit and now we have access to it now more investor interest and more investment activities happening on what do we do once now that we're there?

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Justus Kilian:

I mean, we've seen that story directly. It takes a while for that ten-year number to catch up, but we see founders leaving launch companies to go start satellite companies. We see early-stage companies being formed and growing, but now it's great to see those big ships over a longer period of time. Yeah.

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Chad Anderson:

Okay. So another big one was in applications, SpaceX lowered the barriers to entry, made access affordable, accessible. We saw a whole lot of small satellite companies coming online and most of those were earth observation companies generating really valuable geospatial data, powering the world's largest industries. We have not seen a lot of applications being built on top of that infrastructure. Even though we've been launching a ton of new satellites, we've gotten this unprecedented amount of data that is coming down from orbit. We've invested in companies like Skywatch that are aggregating that data and making it more easily accessible for application developers to build end user applications on top of it, which has been great. It's now sort of seems like people are starting to build there. The investment dollars are going there, founders are starting to build there, and we're starting to see growth in geospatial applications. It overtook satellite communications, applications for the first time. So in the application side, still pretty low volumes over the last couple of years. It's starting to increase and we're starting to see more innovation happening on the geospatial side, which I thought was kind of interesting too.

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Justus Kilian:

Yeah, super exciting.

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Chad Anderson:

What are some of the other big milestones that you saw on this?

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Justus Kilian:

I mean, there was a laundry list of incredible milestones achieved in this quarter. So I mean, SpaceX far and above has been executing. I mean, that team there is absolutely incredible. We talked about it reflecting on 2023. I mean, just right out of the gate, Falcon 9 launched 32 times in the first quarter. That's more than everyone else in the world combined. I mean, just think about that. That's absolutely incredible. Next to that, they set a new record with reusability on a booster hitting 19 times.

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Chad Anderson:

That was a tie actually, but still. That was a tie still... I mean, 19 flights of the same booster is also pretty exceptional.

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Justus Kilian:

Okay. Starship, third attempt, reached orbital velocity. We could talk more about Starship. We've been given a lot of thought to that. We can touch on that separately. Starlink passes 2.6 million subscribers. Latency is improving significantly. So 33 milliseconds, getting much closer to their 20 millisecond target. They launched their direct to sell satellites. And in short order, next four or five days afterwards, did a text message through that network. The StarShield also announced that they're building spy satellites for the US government. I think they announced that they're selling their laser inter-satellite links. And then, I mean there's transporter 10, so that's SpaceX just in one quarter. It's mind-blowing.

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Chad Anderson:

And there's a ton of really interesting developments there that are really fun to talk about. And I mean, we could talk all day about how Starship is going to revolutionize the space economy and it's going to do as much here as Falcon 9 has done over the last 10 years. Starship promises to do even more, and that's all really fascinating stuff. I think the consensus here amongst the team is sort of the most interesting from a business and sort of investment perspective is that direct to sell, right? SATCOM is just such a huge piece of the overall space economy. It has been historically, it will continue to be. Most of the dollars and the revenue here are focused on SATCOM. We know SpaceX, when they were looking for business opportunities to help fund their plans to get to Mars, where did they go? They went to SATCOM and Starlink.

So this was huge. The fact that they are partnered with T-Mobile, that the FCC has approved the round rules and the framework for satellites, companies leveraging terrestrial networks and being able to send direct satellites from satellite to phone is huge. The framework's now in place, and as you like to say, we're now seeing the emergence of a ubiquitous network fabric. There is a redundant internet backbone in space that they're now selling to other people access to this because it's functioning so well. Such low latency, such great bandwidth, such great pricing. And just to put a final sort of pin on this, there was some great consulting work that was done this quarter that looked at like the prices of broadband and what Starlink and other next generation satellite constellations are doing on the comms front is just sort of structurally is completely changing the way in which we are going from wholesale purchasing of satellite communications to now more solutions and services for consumers and enterprise.

And so anyway, massive transformation, massive opportunity, a ton that was going on there. Not to even mention Elyria, the Google parent Alphabet spin out that also unveiled and demonstrated their mesh network using satellite internet satellite laser links. So massive quarter for direct to sell and for satellite communication.

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Justus Kilian:

I mean, that ubiquitous connectivity is super important, but also resilient communications. I mean, how many times we look at our phone and you have spotty connectivity or you can't rely on it. It changes the way you think about relying on service and how you make decisions and how you automate business operations if you get to a point where you have near 100% uptime and that's the world that we're moving to. And it is happening very quickly. So we're really excited about that, finding those unique applications that leverage that ubiquity or that resilient communications. I mean, they look a lot like traditional companies. They're digitizing our physical world. They're helping automate industrial processes. So we're excited and eagerly looking for opportunities in that area.

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Chad Anderson:

That John Deere deal with Starlink was so huge. And it feels like it's the first of many that's going to be coming on, that we're going to hear about in the near future. There's just such a huge opportunity for enterprises to, like you said, to build a resiliency, to use enhanced PNT services, enhanced communication services, and enhanced geospatial intelligence services for business operations, particularly remote areas. But that goes across the board.

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Justus Kilian:

Yeah, so SATCOM is big. I want to go back to some of those other big milestones though, and I'll just quickly move through because I think there's a key takeaway here. Intuitive Machine means they're near successful lunar landing, VARDA, successful reentry, super exciting. Impulse Space, and their successful orbital transfer demonstrations. Muon Space and their two successful demo missions. Methane Set, so philanthropically funded mission, first satellite up on orbit. Our partner Tom helped orchestrate that, Johnny as well. Incredible that that data is now going to be a foundation of truth to be able to understand and monitor what's happening in our climate. And so the reason I like to highlight those is showing execution beyond just SpaceX, that it's actually transferring broadly across the industry. I mean, a few years ago when we were seeing first satellites go up, the failure rate was something like 80%. It was actually even higher than that, but 80% is a good number.

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Chad Anderson:

Depends on the time period, but sometimes it was much higher which is crazy.

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Justus Kilian:

We're now getting to a point where these new satellites that are going up, more than 80% of them on their first missions are being successful. And that's an incredible threshold to be able to get passed. That execution on barrier to entry is becoming even lower across the industry.

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Chad Anderson:

SpaceX makes launch look easy. It is not easy. It's not easy. I mean, there's been $27 billion invested into 150 launch companies. There's two of them that are operational. That speaks to the difficulty. And satellites are not easy either. Muon makes it look easy, it's not easy.

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Justus Kilian:

But this rate of innovation is forcing behavior change and policy change at the government level. The way large scale organizations are being run. We're seeing launch and reentry authorizations changing. We're seeing spectrum utilization changing, space traffic management, all that shifting. So for me, this quarter felt like an inflection point, a real scaling up acceleration of what's possible.

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Chad Anderson:

Awesome. Okay, so we should probably talk about launch of the two new vehicles that came online. So ULA's Vulcan launch for the first time launched the first American spacecraft to the moon in the last 50 years. Orion Space is the most powerful private Chinese launch vehicle. So two new vehicles came online, which is great because we could use more of them. Competition is good in the market. By the way, that booster that flew the record-tying 19th time had previously flown the Intuitive Machine's lander, which did a soft-ish landing on the moon. Yeah, I mean look, just to sort of touch on Starship one more time is that was the biggest, most impressive display. Incredible what they are able to do and how fast this test program is progressing. I want to recap on all the great things that they did and all the reasons why it was a success.

So many other videos and conversations have done that already. But the thing for me that is so stunning is the rate of progress. The fact that they've got the first integrated test launch was 12 months ago only. And we've had three of them of this crazy super-capable, massive next-gen vehicle. They have Starlink terminals onboard, which is so fun that they take us along for the ride and let us see everything. But also those terminals are bringing back tons of really great data that are going to allow them to iterate faster and do this faster. And you have this massive event of this huge launch. And how amazing is that? And you don't have to wait a year, two years, not even six months. We're waiting six weeks, they've got other ships and other boosters lined up and ready to go, and we might see the fourth Starship launch before this report even goes out. It's so wild. So super exciting stuff on the launch front. Anything more there that you want to touch on?

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Justus Kilian:

Well, we've been given a lot of thought to Starship because it's gained a lot of attention and we're trying to unpack some of the dynamics at play here. A lot of people have talked about how big it is, how unique and what it's designed to achieve. But I think very few people... There's been a lot of talk about the price. There's a lot of expectations in the industry that price is going to dramatically come down. And I think we're starting to formulate, I guess maybe three ideas that are worth mentioning. So price reduction, particularly early on when this thing becomes commercially available, is going to be less than people are expecting. When Falcon 9 came online, initially out of the gate, you brought transparency and market pricing and it did bring pricing down. But when reusability came online, that price hasn't changed, right? There is such a backlog. There's so much demand. There's so much internal demand for it. It's unlikely we're going to see the reductions that a lot of people are expecting.

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Chad Anderson:

Without competition coming online.

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Justus Kilian:

As it will change the way things are built because it's changing the paradigm from mass efficiency to now having more volume and more capability. So the engineering constraints are just fundamentally different. So it is going to change the way things are built. And I think the last thing is no one's really ready for the changes that are coming. And I mean that at the academic level, what's being taught in schools is very... They're not even thinking about how these engineering constraints will change. A lot of founders are just now starting to think, I mean they're building systems for the launch architecture that we have now. So until we see it, the supply chains are not going to be able to adapt to the scaling up or the different types of components that are being used. So there's a lot of ripple effects here that are just starting to emerge. So we're giving a lot of thought to it and I think it's going to be a really interesting question.

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Chad Anderson:

Awesome. Okay. Well, look, on the exit front. Pretty interesting stuff too. So this is for me, I always like to think about we've added a new path to exit section in our report. I think there's some really interesting data in there that you can't find anywhere else. One of the charts that we really like is the one that talks about the most valuable private companies. And if you look at that, you see SpaceX is the most valuable infrastructure company. They're downplaying a public offering of Starlink. Even you've got, Maxar was just recently taken private. The third most... Blue Origin is wholly owned by Jeff Bezos. So don't expect to see anything there, but Sierra Space is the fourth most valuable private company on the infrastructure side. They recently spun out the Sierra Space. They took a significant amount of capital into that company. And then in the quarter, the CEO was talking about how they're prepping for an IPO. AstroScale is getting ready to IPO on Japanese exchange.

And so you start to combine that with what we started with Reddit unfreezing, rejuvenating the IPO market, you start to see more companies in general tech, but also some space companies thinking about going public. That's pretty exciting stuff. And on the acquisition front, I mean there was a big BAE acquiring Ball Aerospace was a massive deal, not just in terms of dollars, but in terms of Ball Aerospace is some pretty interesting work and work on pretty interesting capability. So that transaction was really interesting to see and we've got a whole slew of them that are teed up, that are pending, that are going to happen in Q2 or later this year. So I think I'm really looking for, and I think the team's really interested in looking at the exit environment and seeing what happens and what plays out as this year progresses.

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Justus Kilian:

Yeah, I mean, there were a number of pipe transactions in the quarter that show public private market investor demand for these sort of newer space companies. So Rocket Lab, Intuitive Machines, AST, all brought in private capital. And I think it further reinforces your point.

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Chad Anderson:

What else did we know?

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Justus Kilian:

I always like looking at a couple of transactions in the quarter. There was two that stood out to me and sort of encapsulate the story of what we've been talking about. So the first one, K2 Space, massive $50 million series A round led by Altimeter. I think it shows the excitement around what Starship is creating. People are still trying to figure out what the use cases are, bigger satellites is a clear example of what that could be. I think that transaction also shows a multi-stage generalist that doesn't typically invest in deep tech getting sighted and coming in and leading around in deep tech. So more capital interested in these opportunities and willing to deploy capital. Here is net positive story for the space economy.

So series A 105 million round led by Greenfield Partners. I really like this one because we're starting to see these high value geospatial applications that are being developed. So in particular, this company is leveraging sensor fusion and AI to build precise maps to the underground. And it's a really interesting example of how we think about geospatial technology and how it complements satellite data and the importance of fusion and AI to actually unlock that value. So that was a very large round and an interesting company.

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Chad Anderson:

Again, kind of going back to where we started this conversation. We're in a strange time, we're kind of in unprecedented, uncharted territory with regards to markets. And given what's happened over the last few years and where we are currently, it sort of feels like the market could go in any number of directions. I'm really interested to see how some of this exit environment, some of this exit activity plays out. Excited to see what impact these Fed rate cuts have on the public markets to see if other companies can be successful going public and demonstrating significant strong performance to sort of shake off the sort of negative sentiment around the SPACs that happened a few years prior. There continues to be a number... The number of acquisitions continues to be pretty high, although they're pretty low value acquisitions. There are a few big standouts.

We talked about a couple of those already. But for the most part, deals are getting done. But at low values, what impact does the public market performance have on private market valuations? I expect to see some positive movement there. And then we start to see some more acquisitions that are the types that investors want. So for me, looking forward, those are the types of things that I'm going to be looking for this year to see how things shake out. I'm really curious to see where things go. I mean, what's on your watch list?

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Justus Kilian:

I mean, I'm most excited about the applications that are leveraging all of this infrastructure that are being built. There's been low investment in that area. There's an incredible amount of information that's available. Any company that's helping digitize our physical world, reach out to us. We want to know about you. We want to deploy capital in that area. We already talked about comms. Incredibly exciting. We didn't touch so much on AI, but AI is impacting the space economy across the value chain, and it is making things faster, better, easier, and seeing where that intersects on the geospatial side or on the hardware engineering side, we're very interested in looking for opportunity there. So there's a lot of great opportunity and we're just taking our time, digging into the details and sort of being patient and letting the market play out and just being consistent in our approach.

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Chad Anderson:

Yep. Okay. Well, I think that wraps it up for Q1, A big quarter, a lot of milestones, a lot of investment data, a lot of startup activity to chew through. Thanks for spending some time with us and talking through all that. We are looking forward to speaking to you again in Q2.

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