Space IQ: Q2 2024 Review

“So, thinking about the space capital markets in particular. There are signs that things are improving. There was more deals done in Q2, in the space economy than there were in the last nine quarters.”

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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

Welcome, everyone, to our office here in New York City. Justus and I are here after another quarter chewing through the numbers for Q2 2024. And there is, quite a bit to discuss. So we've got, you know, we're halfway through, the year now. It's a good time to sort of check in and, look at our predictions for 2024. Where did we think we were going to be? Where are we actually? So we want to get into all of that. I think always it's a good idea at the beginning of these to sort of, start, at the macro level and, you know, we've been saying this, it's been continued to be every quarter, you know, VC makes up the majority of capital that's going into space companies.

So what's happening in the VC markets is really important to understand important context. And, there is a slowdown, there's no doubt about it. You know, we're two years into a venture ecosystem slow down. And at the heart of that is, a lack of liquidity producing exits, meaning exits that are generating returns and giving that capital back to investors, who then, you know, put that money back into startup companies and VC funds, right?

So there haven't been any exits and because of that, there's no, you know, there's a dearth of capital. So that is certainly impacting things. We expected, at the end of last year, you know, we were expecting, along with a lot of other folks, that there was going to be several rate cuts this year. The fed was going to, cut interest rates. And in doing so, you know, that would help, you know, sort of spur on a recovery. And we'd see, and that would hopefully help loosen things up and to help unfreeze the exit environment. That has not happened, actually, amid sticky inflation. It looks like the Fed's going to cut rates just once this year. So you know, all of this is leading to a prolonged, market correction, you know, a difficult fundraising environment.

And so, yeah, I mean, so that's kind of like the backdrop here. Anything else to add to the macro scenario?

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Justus Kilian

I mean, as long as you're able to get, you know, 5% rate of return on your cash for taking zero risk, investors are not, you know, diving into very high risks, opportunities. So, you know, hopefully we'll see some movement on interest rates. And that will bode well for venture capital.

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Chad Anderson

Yeah for sure. Okay. So, thinking about the space capital markets in particular. There are signs that things are improving. There was more deals done in Q2, in the space economy than there were in the last nine quarters. So things are ticking up consistently over the last couple of years, right? If you look at applications, applications makes up three fourths of all investment into the space economy, right?

This is the software that is leveraging data from orbit, that, is developing, you know, products and solutions for end customers. These applications, have really had a hard time over the last couple of years, right? They've really struggled to generate, revenue from enterprise customers who have overspent. We've seen mass layoffs you know, over the last couple of years, we've seen some more happening this year.

Applications have had a pretty hard time. but already in Q2, halfway through this year, we've seen there's been more investment into applications, this year than there was in all of 2023. So it sort of feels like we're through the trough. We'll have to see how the rest of the year plays out but another sign that things are improving.

Growth stage investments, right? Companies go out and they raise an early, you know, seed stage capital. They go on to raise series A and B. It's been we haven't seen a lot of companies in space graduate from B to C and D and get to the sort of the pre IPO phase. There was a record high amount of investment into growth stage and infrastructure companies, and space. And so, look all of these things are really sort of combining to say like, look, things are pretty tough in the venture markets, but in the space capital markets in particular, they seem to be improving. You see the same thing.

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Justus Kilian

Yeah, I think the most important thing that stood out to me in this quarter, you know, for a couple of years now, there has been a lack of growth capital. Seed stayed pretty active. Series A we saw capital coming back in and there was good, good activity there and total flows. But series B and series C there had been a real gap in growth capital.

This quarter in particular, when you look across infrastructure and applications, meaningful rounds, you know, most of the top ten rounds were B and C round. So, you know, there is a lot of activity in that area. It could show sort of an inflection point that drives, you know, continue capital and hopefully continue growth across these two layers and stack. So the single most important thing I saw from a financial perspective.

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Chad Anderson

Great. And then so I want to get into the predictions as well, right at our recent Space Capital summit here, in New York, we, revisited our predictions for 2024 and took a look at how they're playing out. So there were four of them. All of these, I think, are really, key to understanding the space economy and growth going forward.

The first was AI, and that AI is going to continue to accelerate innovation in the space economy. I think that we are, continuing to see that. So a few so at the at our summit, we had, a really great conversation with the head of AI for, the National Geospatial Intelligence Agency, who joined our portfolio company, Rendered.AI, who has built a synthetic data platform, which has really become an essential tool for, deriving value from, geospatial data sets, right?

And so, at the end of last year, there was a partnership announced, where Rendered is working with Planet Labs, to, help them simulate data they're going to get from their new satellites, which is enabling them to then have early customer conversations to show their customers the type of data they're going to get from these satellites, and help, you know, bridge that, the capital gap where, you know, if you're gonna launch satellites, you need to put capital up front, before you can start getting the data down and generating revenue. So synthetic data is really important there. Planet, this quarter, announced that they're going to be flying, Nvidia GPUs to help, derive better insights, and make better use of onboard computing onboard their, their new satellites. And so we're continuing to see AI, do what we knew it was going to do, which is drive innovation in this space, right?

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Justus Kilian

Yeah, I mean, I'd say a couple more proof points from the quarter. So Scale AI raised $1 billion round. You know, they've been instrumental in improving data labeling and enhancing LLM’s. So big transaction, important transaction making that infrastructure, the Earth, the geospatial Earth observation data sets more accessible to many different industries. And then the roll out of Chat GPT 4.0, you're now able to bring in raw satellite imagery and get, you know, an assessment of what's happening and interpretation of what's happening in that imagery. It's only going to accelerate from here. But those are two really important, I think milestones that show, you know, how AI is helping, particularly within geospatial.

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Chad Anderson

You know, PlanetLabs talked about this, idea that's not necessarily like a novel idea, other people have talked about as well, but I really like the way that they put it forward of a queryable Earth, basically, you know, Google search for information about the surface of our planet. Right. The only way we're going to get there, the only way we're going to able to sort through and sift through and search, and, and derive useful insights from these massive data sets is by leveraging AI, right? So.

Okay, so second prediction was that government funding is going to continue to be, a key driver of growth in the space economy going forward. I think, you've got a lot of thoughts on this. This is definitely proving to be true. You know, in the last couple of quarters, we've come out and said that, enterprise dollars are difficult in, again, in this market correction, but that governments are continuing to spend regardless of market cycles. This government funding is a key reason why, certain segments of the space economy are countercyclical, and resilient to these macro market pressures and a lot of reasons why we're seeing you know, companies in our portfolio and beyond, see record revenues over the last two years of, of, you know, tough financial markets. So, and the quest for revenue, more companies are chasing government dollars, more investors are willing to fund them.

There's a lot of emphasis on on defense tech right now. And at our summit, we highlighted, the shifting, global power dynamics in space. So we really, you know, we had a panel that was, focused on, China and a peek over the wall. Right. Which is we don't really the US and China are the leaders here. They're driving, you know, most of the innovation and growth in the space economy. And yet we don't really know that much about each other. So that's what we tried to do there is to get a sense for what was going on behind the wall. And according to the data for Q2, you know, China has led year to date space infrastructure investment. They accounted for 37% of growth stage and 63% of early stage funding, both of which surpassed the US.

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Justus Kilian

Yeah, and that's true across launch. It's true across satellite manufacturing. And I think also satcom. So you know across key segments they you know really driving innovation. And one of the important transactions this quarter was Space Pioneer, a Beijing based launch company bringing in a couple hundred million dollars. And you know, highlighting the, you know, reliance and continued growth of the commercial space, you know, launch capability within China.

I did want to go back to that point on the government side and funding. So, you know, we cover equity flows into, you know, the space economy. That can't be confused with government funding. Government funding is absolutely essential for all of the critical segments within the space economy. You know, they've been anchor customers on the launch side, you know, on the satellite manufacturing communication side, it will continue to be the case across these existing industry segments.

And then as we push farther out into space and we actually, did some really great research with, JPL on this specific topic, looking at the role that NASA has played and actually helping incubate some of these emerging industries through their SBIR programs and some of their grant programs. And, you know, and then we do actually a very deep dive on the funding and contracts and support that NASA provided for SpaceX early on, and how there was almost, at that time, an equal match in terms of public funding and private funding that went into this company.

So I think that sometimes it can get a little bit convoluted that the equity financing going into the space economy is sufficient and, able to drive the growth of the economy going forward. But that is a result of government's continued anchoring and participation across these key industry segments. And so I just want to make sure that, you know, that point doesn't get lost. I hear sometimes, you know, that it can get a little bit confused.

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Chad Anderson

And I think also that this is not new. This is like this is the same thing happens in many other industries and it's happened throughout history. Right. Like space is, it's following a similar sort of of path that many other industries have where government dollars are essential for, helping to, stimulate the growth in some of these new areas.

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Justus Kilian

Develop, mature, and grow for sure. Yeah.

Chad Anderson

Cool. So, you want to touch on the defense, report as well, which we've just published.

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Justus Kilian

Yeah. So, we just put out, you know, a report called the, The Race for Space Superiority. And we've talked about, you know, there's a lot of conversation about the United States being in a new space race and what that means. And so in this report, we actually go in and define it, you know, it's very different than the first space race. It really is a race to maintain that edge that we've developed in terms of critical assets on orbit, transitioning from single points of failure, big, beautiful, exquisite assets in space that control and manage a lot of the activity that happens here on Earth from the defense perspective and, how we're now shifting and re-architecting not only the space borne assets, but all of the assets that are on the, on the, in the air and on the ground as well to a more distributed architecture that's more resilient and dynamic.

And so there's a massive shift underway. You know, the continued funding of that is really important. And that race not only extends from Leo, but extends all the way to the surface of the moon. So the Chinese space Agency recently came out and said that the United States is a major competitor, in the race to the surface of the moon.

And so all of these different orbital domains have critical strategic value, not only from, a military perspective, but also from an economic and a scientific perspective. And so it's a deep dive into all of these different histories and dynamics at play. And, it was great to be able to work alongside two very knowledgeable people that came and worked with us from the US Space Force and the US Marine Corps that have deep knowledge of this. So, if you haven't checked it out, please do. It's a it's a wealth of knowledge. And we like to make this, research, you know, publicly available to help, you know, you educate your decision making. So.

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Chad Anderson

So, government funding has, played a pivotal role in the development of the space economy to this point. And rising, geopolitical tensions, particularly with China, is going to continue to be, a driver of growth in the space economy going forward, no doubt. Okay. So, prediction number three, there was record launch activity in 2023. And we're going to continue to see record launch activity in 2024 and going forward really driven by SpaceX.

And so, they had another incredible quarter. Continued to push the boundaries of what is possible in space. They launched 67 times. They flew a booster for a record 20th time. They, oh, obviously the, the, the successful, you know, fourth test flight of Starship and, super heavy booster and the soft landings of both and the rapid progression of this test program that, you know, we expect to see they're gearing up to launch again, before the end of July.

And, we expect you know, that they're going to try and and catch the super heavy booster with their, mecha zilla chopsticks. And all of this is incredibly fascinating to watch. But you think about, you know, beyond just the, you know, sort of personal excitement there is a ton of business implications here. And, you know, we spent a lot of time thinking about this as investors in this category. And, there are a lot of people are failing to sort of, are having a failure of imagination to think beyond, like, what is it that Starship is going to enable? We know that it's going to change things just like the Falcon nine did, you know, a decade ago, Starship is going to fundamentally change things, how we operate, and interact with the environment in orbit.

But what does that mean? Right. And so at our summit, again, we, we, you know, had a panel to explore this and look at, you know, try to imagine, new use cases and new scenarios, you know, basically trying to get ready for, this coming change. What does it mean? What does this leapfrog technology mean for entrepreneurs and investors in this category?

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Chad Anderson

Because it is going to leapfrog and it is going to make a lot of existing infrastructure, and infrastructure that is currently funded and under development. It's going to make a lot of that obsolete. It's going to accelerate growth, an existing market that's going to create entirely new markets. Right? So, but in addition to that, right, so this is going to, for whatever records we're seeing in launch today, right? A fully and rapidly reusable vehicle is going to make those records of today look minuscule. But in addition to what SpaceX is doing, we've got another dozen launch vehicles that are coming online. We just had a couple, very recently. Arianespace got their, V6 to orbit, Firefly launched some more satellites, for the DoD.

And we've got, you know, there's ten or so more vehicles that are coming online. So all of this is going to contribute to increasing, you know, put more numbers on the board in terms of global launches. So, I don't know, what do we have to add to you know, SpaceX's incredible quarter?

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Justus Kilian

Well, I mean, Starship is great. We thought about putting that on the cover. But we expect to see some, you know, incredible, events coming up so we sort of held that off for now. But yeah, I mean, Starship, you know, the the failure to imagine really what's possible. I think, you know, until it becomes commercially available, people aren't going to really start building for that new capability. And so, it's going to be really exciting to dig into the details and, figure out what happens when you start to use lower cost, cheaper and more flexible commercial off the shelf capabilities, you know, lower cost materials, rapid iteration, rapid prototyping. Those are some of the changes that are coming. And, I don't think a lot of people are thinking about it.

So, it will be important to really dive into those details. Let's see, they won the ISS deorbit contract. That's a big contract. I don't think they were a clear winner for it. So, you know, that was a big announcement. And, the mini antenna rolled out for Starlink, you know, which was super cool to see and unlocking more access. So, I mean, just chalk those up to, you know, the additional accolades.

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Chad Anderson

Yeah. So, there were several, cover images that we were considering, for this quarter. But what we did put on the cover was Boeing's Starliner approaching the station. So that, I mean, huge news just in the backdrop and context of what's going on with Boeing as a company. But what do you say about that?

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Justus Kilian

I mean, long delayed launch, right? It was super exciting to see that mission go. It's important to have competition, you know, with space acts and, you know, have multiple capabilities to bring humans to orbit. You know, it was, you know, a risky mission, and things didn't go according to plan. You know, we're still watching to see the return of, you know, that capability. But, you know, they've successfully docked with the ISS and, yeah, it was really important. This was long awaited and, needed to see this technology fly and the importance of competition in the market. So, you know, that's what really drew our attention to it.

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Chad Anderson

And an important consideration when we're thinking about cover images is what was the, you know, what was the most representative thing that happened this quarter. And, clearly a lot of people were paying attention to this, but this has actually been happening the entire quarter. So if you take so if you're if your mission takes up the entire quarter, then you end up on the cover.

Okay, so prediction number four, space traffic management will continue to be a key area of focus in the year ahead and going forward. and I think that it's clearly playing out. We had a great, panel conversation at our summit again, with, you know, leaders in this space in terms of space traffic, sorry, space situational awareness and space traffic management, which is basically knowing where things are in orbit and then, managing around that. Right? So, look, I mean, we've gone the growth here is crazy. We've gone from, you know, 800, satellites in orbit not too long ago. We've got 9000 approaching 10,000 today. We are, expecting hundreds, hundred plus thousand satellites, in the next few years, right? We're talking about, a crazy amount of growth.

And one of the things that came from, Ed Lu, who was speaking at our summit, is that he's tracking, you know, because he's working as the CTO of Leo Labs. And so he's thinking a lot about the number of objects that are going up in orbit. And he was saying, you know, what's going on in space right now is it's growing. It's been growing as fast as Moore's Law. Right. Which means that, it is like the number of assets in space is doubling every two years, but it's actually currently growing faster than Moore's Law because it's actually doubling every 18 months. So, infrastructure in orbit is growing at a rate that is faster than Moore's law if you are building capability platforms and systems for the world of today, it is going to be obsolete in a couple of years, right? In four years, it will be completely obsolete. So you need to be, you know, skating to where the puck is going to be. And, and things are happening really, really fast. So, it was great to have that conversation, to have the people, you know, the people at the forefront talking about the capabilities, abilities that they're building and for the world that they're building for, and clearly, this is going to be a key area of of, you know, to watch as the world wakes up to the fact that we've got critical infrastructure in orbit that powers the world's largest industries today and needs to be protected. And, we need this, to function as a modern global economy.

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Justus Kilian

Yeah. Yeah. I mean, there's two other sort of notable events, you know? So Leo Labs identified a debris generating event, with a low or within low-Earth orbit, of a spent Russian spacecraft and, you know, demonstrating risk, the need to monitor this and the, you know, ability to, actually clean things up. Astroscale provided, a very detailed image of a spent, upper stage booster. So. we're starting to see, you know, one risk, materialize with these, you know, debris generating events and also new tools to be able to monitor and, you know, potentially respond, you know, to what's happening. And so those are important steps forward.

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Chad Anderson

Okay. So, I want to touch on a couple of other things. One is, you know, kind of going back to the data and saying that, you know, with, the applications layer really falling off over the last couple of years, infrastructure, propelled by government funding, really, has been putting up, you know, record, quarters and record levels of investment. And that continued in Q2. infrastructure has, you know, been the largest, recipient of of capital over the last five quarters at least. if you look at the top ten deals that were done in infrastructure in Q2, Blue Origin is at the top, right? And so you got Jeff Bezos, who, we know that SpaceX is continuing to raise money at will regardless of market cycles, right?

There's a ton of demand for SpaceX. Blue Origin is continuing to, Bezos is continuing to inject a lot of capital into Blue Origin, right. He's just gone off and sold and, you know, he's he's planning to sell and it's starting to sell another $5 billion of his Amazon shares. And we know that he's, you know, involved in a lot of other things. He's doing a lot of things that are outside of space. But we have it on good authority that he's continuing to invest these amounts into Blue Origin. Right. As they gear up for, the inaugural launch of New Glenn later this year as they're supplying blue, V4 engines to, ULA, as they're, working on Blue Ring and their other programs.

Right? I mean, so they've got a lot of other ambitious programs, that are still happening primarily behind closed doors, but there's a lot of capital, and there's a lot of employees, 10,000 something employees working on these programs. Right. So all of this needs capital, and it's continuing, to invest significantly, into that company.

And then, I'd also like to talk a little bit about the sort of the exit environment. Right. So this is kind of where we started the conversation is that, the VC ecosystem slow down is because there hasn't been, any real liquidity producing exits. Right. So what's going on in the exit, environment today? We've got, intensified consolidation among location based services companies.

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Chad Anderson

So applications, why they continue to struggle. A lot of companies went out and raised at very high valuations. They're struggling to, raise funds at those valuations. So some are taking capital in down rounds. Most are trying to avoid down rounds. And so they're exploring alternative financings. Which we're seeing a lot of debt financing happening right now as they sort of navigate this, growth stage through pre-IPO and, and actually getting to IPO when that, when that window opens up again.

So, we are seeing 2023 was we call that the year of consolidation. The most acquisitions in the space economies history. With, and so this year we are already, well, on our way to surpassing that number so there's going to be continued consolidation in 2024, although while there's a lot of like a high number of acquisitions, like they're very low value. Right. And so this is like a sign of difficult times. Companies are struggling to fundraise. They're looking for a home for their technology, for their people like finding some way to continue on in some other, new iteration of the company. Let's say there is an uptick in valuation step ups. So, while they are many and low value acquisitions going on, the valuation step up is happening.

And so it is starting to improve, in 2024, which is great to see. So people are paying more. And there's a couple of other points that I wanted to talk about. One is, you know, we've got this, chart that is the average funding raised prior to exit. And you'll see the applications raise a significantly larger amount of capital before they go, before they go public than, infrastructure companies. And I want to just spend a minute on this because it's an interesting point that most people think that hardware, space infrastructure companies are riskier, right? They take more capital and so, like, why don't we go and invest in, you know, software companies where they take less capital to, you know, but that's not true.

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Chad Anderson

And we highlighted this at our annual meeting as well, where, you know, based on our data, infrastructure companies need more capital upfront, but then over time, they have higher, they have more competitive barriers, technical barriers, IP barriers, because it was more difficult to build your company, it's more difficult for others to build their companies as well.

Right. So your competitive barriers to entry are higher and you need less capital later on to scale. Whereas with applications companies you need less capital to get up and running. But then once you once you're on to something, other people will pay attention other people will copy and start to, pile capital in. Right? So to actually you takes less capital upfront, but over time you need to raise more capital to scale and grow and maintain your competitive edge.

And then according, you know, back in our preliminary data, we were like, oh, it looks like these companies need actually the same amount of capital over their life from seed to exit. Right? But actually, if you look at our data from the Space IQ in Q2, it's way more than that. It's applications companies need to raise ten x the amount of capital the infrastructure companies need to before going public. And that's just for me is, a fascinating, data point because it is counter intuitive and, and it's super interesting and it kind of helps you as an investor. It helps us to understand where you should be placing your bets. Right. And we've always maintained that a diversified portfolio of infrastructure distribution applications companies, right, makes the most interesting diversified portfolio. The last point, revenue multiple at IPO, another chart in the path to exit section. There have been limited IPO so far in 2024. But we have seen a couple, one of which was Astro scale. And they went public on the Tokyo Stock Exchange. There was a very warm reception.

There was a lot of initial interest. They went public at a multiple that was 55 times revenue, you know, and this just kind of feels eerily similar to the SPAC days of yesteryear, where multiples were, completely disconnected from reality. I think that, that reality is starting to set in, and actually it's being more reflected in astro scales share price. But just wanted to, you know, kind of. Do you have any thoughts on the exit in IPO?

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Justus Kilian

Well, it's not the ideal IPO to sort of break, you know, the barrier for a lot of these space companies to go enlist, right? We need good quality revenue, good quality fundamentals. you know, to demonstrate, you know, and sort of lay the foundation for other companies to go. So this definitely feels more like sort of that Spac era. And, while notable, probably not the right type of foundation to enable other companies to follow suit.

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Chad Anderson

Yeah. And just like as the reference point, right, the the, average revenue multiple of space company IPOs over the last ten years was 17 x. So 55 is way out of whack. And yeah so, more robust revenues, more reasonable valuations, like, those are the types of companies that we're going to see kick open the door, and open the IPO market again. Right? So we're still expecting to see, Sierra Space later this year. So that's one to look forward to I think. Look, I mean kind of summing it all up, right? I mean there are some macro market headwinds still. Things do appear to be improving in the space capital markets, and we still have some time. You know, we're halfway through the year.

We've still got six months, for some of these things to come together and to see the exit, market open up again and start returning some capital to investors so that they can reinvest in some of these space companies. So, all at all, very optimistic outlook. Great Q2 data and, you know as always, it's good catching up on it all, digesting at all, and, chatting with you about it. So, stay tuned. We'll see you again in Q3. Thanks again for joining us.

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