Satellite Services: Land of Opportunity for Some, Valley of Death for Many
The largest segment of the global space sector, at around $123bn revenues, satellite services are not for the faint-hearted founders. Considered by many financial and strategic investors as an attractive market, with significant opportunities for value creation, the deployment and monetization of a satellite constellation come with several risks.
A Large and Growing Sector Vital to the Modern Economy
Satellite services are the largest segment of the global space sector, generating around $123bn in revenues — about one-third of the overall space market according to Bryce. Satellite services include the provision of connectivity on earth, as well as the collection of earth data from space. Lowering costs of design, manufacturing, and deployment have led to several emerging New Space companies building and deploying their satellites into orbit over the past few years. They are now in the early stages of monetizing the data acquired by these satellites, with governments and private customers using it in a broad range of verticals, such as transportation and logistics, energy, financial services, ESG, and security.
Some of the high-profile initiatives include SpaceX’s Starlink and OneWeb on the connectivity side and planet, and Spire or ICEYE on the remote sensing and Earth observation side. Established companies and start-ups are working hard to build the space infrastructure enabling ubiquitous connectivity and the ability to collect large amounts of data covering the earth’s surface. This infrastructure is the main driver taking the space economy from a $363bn industry today, to $1T over the next 10 years, with thousands of satellites launched into orbit in the next decade.
It’s hard to overstate the impacts that this new space infrastructure has back on earth. We believe that the pace of change is set to accelerate, as costs continue to come down, use cases proliferate, and large amounts of capital keep flowing in the sector.
A Treacherous Investment Landscape
All the above considered, the satellite services sector shows all the characteristics of an attractive market for financial and strategic investors, with significant opportunities for value creation. However, the deployment and monetization of a constellation come with many risks and pitfalls that still make it hard to generate good returns.
At the early stage these risks include:
- Technology risk: As the sector, use-cases, and needs mature, start-ups work on building ever-more sophisticated payloads that can take years to develop without any guarantee of success once deployed in orbit.
- Market risk: There’s a large level of uncertainty as to what the market opportunity and use-cases are when developing a new type of sensor/payload. Start-ups focus on specific use-cases and sectors they think will generate the biggest bang for their buck. Traditional and conservative sectors like agriculture, utilities or energy are notoriously hard to crack and many a start-up have struggled to find a product-market fit
- Execution risk: Deploying a constellation is complicated, as it involves many stakeholders and the reliance on launch and other services providers.
- Capital formation risk: This is a very capital intensive business where start-ups have to finance a multi-year business plan, with little in the way of revenue until they start deploying and monetizing their constellation. Many start-ups tend to fall at this hurdle and while some of them manage to muddle through, their capital formation effort is often sub-optimal and detrimental to their medium-term prospects.
As we look at these risks, we can’t help but draw parallels with other deep tech sectors where start-ups have to move technology from the lab to the factory floor to the field while figuring out how they will finance it, who will buy it, and at what price. The main difference, though, is that unlike other sectors, such as EVs, volumes tend to be much lower, making industrialization somewhat less complex.
Opportunity awaits the long-term visionaries
Once the initial hurdles have been cleared and the company has deployed a few satellites and contracted capacity, it tends to exhibit the characteristics of an infrastructure asset:
- Physical asset base with a multi-year shelf life
- Multi-year contracts with customers providing decent visibility on revenue generation, which helps attract less dilutive forms of financing.
This is one of the main reasons why we are increasingly seeing deep-pocketed, long-term investors getting involved at a relatively early stage, with a view to deploying large amounts of capital as the company matures.
At Promus Ventures, we’ve been backing satellite constellation start-ups since 2014 and have had the opportunity to be involved in category-defining companies such as Spire and ICEYE. When assessing start-ups seeking to launch a constellation, we always consider the risks mentioned above. Ultimately, and as with every start-up, we’re looking to back passionate and resilient founders who can articulate and execute their vision.
So, if you’re planning to launch an innovative payload into orbit, you know where to find us!
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