2023 Will Be the Year That the New Space Bubble Pops
The end of New Space 1.0 and the opportunities that lie ahead.
The New Space era began in 2002 with the founding of SpaceX. It was the first space startup to have meaningful success in an industry historically dominated by legacy players like Lockheed Martin, Raytheon, Northrup Grumman, etc. SpaceX’s ability to drive down launch costs¹ has been the biggest enabler in the development of New Space: the ecosystem of hundreds of space startups founded over the past 20 years. I’m a big believer in the long-term New Space economy and I’ve made select investments in the sector over the past few years. However, my view on the immediate opportunity set has evolved dramatically over the past 18 months as record-breaking levels of capital have flowed into New Space.
The glut of inbound capital has exacerbated the core systemic risk within New Space — the overfunding of startups with highly speculative business models at unsustainable valuations. The upcoming financial winter will not sustain a meaningful portion of New Space startups that are pursuing nascent markets and selling primarily to other New Space startups. I predict that we will see this dynamic come to a head next year once runways diminish and startups are unable to raise new rounds. And while there’s nothing particularly brave about predicting a correction a quarter into a likely recession, the goal here is to tease apart how we got to this point so that we can better understand the next generation of New Space opportunities that will emerge from the rubble — New Space 2.0.
My thinking here is heavily influenced by a story I heard back in 2013 from the founder of Y-Combinator, Paul Graham, about how he foresaw the pending dot-com collapse while working at Yahoo. Graham had recently sold his startup, Viaweb, to Yahoo and was working there in 1998 and 1999 when Yahoo was “the internet company” of the day, peaking at a $125 billion market cap. Yahoo’s burgeoning ad revenue and stock price appreciation was validation for venture capitalists to fund new tech startups at record-breaking levels. What Graham realized one day was that Yahoo was at the center of a House of Cards. Here’s how he describes it in a blog post from 2004:
Investors looked at Yahoo’s earnings and said to themselves, here is proof that Internet companies can make money. So they invested in new startups that promised to be the next Yahoo. And as soon as these startups got the money, what did they do with it? Buy millions of dollars worth of advertising on Yahoo to promote their brand. Result: a capital investment in a startup this quarter shows up as Yahoo earnings next quarter — stimulating another round of investments in startups. -Paul Graham
As Mark Twain said, “History doesn’t repeat itself, but it often rhymes,” and I think there are parallels to draw here about the systemic risk of a new sector driven by new entrants selling primarily to other new entrants (as opposed to established companies outside of that sector). Before applying this to New Space, it’s important to understand that not all New Space companies are made equal from a customer perspective. The simple system we use internally buckets New Space startups into three categories based on the market they are pursuing: Space for Earth, Space for Space, and Beyond Earth.
Space for Earth companies offer space-based solutions to Earth-based customers. This segment represents the largest existing portion of the space market such as satellite communications, Earth observation, and launch. This segment tends to sell primarily to non-New Space startups. In 2021, $12.7B or 81% of total New Space investments were attributable to this category.²
Space for Space companies sell to space-based customers and provide services such as in-orbit logistics, propulsion, and edge computing. These companies are born out of the first-order effect of cheap launch, which is the exponential growth in satellites orbiting Earth (as shown in the chart below). Many of these companies sell primarily to other New Space startups. In 2021, Space for Space startups raised $1.1B or 7% of total New space investments.²
Beyond Earth is a catch-all category to track companies pursuing markets outside of Earth and its immediate orbits. The majority of activity today is around the moon driven by geopolitical motivations. Most of these companies are reliant on government/defense customers in the short term and New Space companies in the long run.
New Space startup funding was initially focused on Space for Earth companies, particularly launch (100+ launch companies funded), data communications constellations, and Earth observation. However, as those sectors become more competitive and saturated, early-stage funding poured over into Space for Space and more recently, Beyond Earth startups (e.g. two asteroid mining startups that were recently funded). In our dataset of ~200 New Space startups that we’ve screened over the past two years, 46% were Space for Space and 7% were Beyond Earth. Startups in these two categories are most at risk as they are generally pursuing markets that don’t exist yet and their customers are primarily other New Space companies. The latter point creates a circular dependency between startups that makes them vulnerable to a chain reaction of failures, as seen in Graham’s dot-com parable.
One clear example of the fragility of New Space startups selling to other New Space startups has been the use of bookings (future revenue that is yet to be recognized) as a milestone to raise additional funds. On its face, the use of projected potential revenues seems reasonable as a proxy: many space companies require a lot of upfront capital expenditure to get to market and as a result, use booking as a way to demonstrate a demand signal. However, this arithmetic becomes perverted when the bookings come from other startups who themselves need to raise tens or hundreds of millions of dollars before they could fulfill their orders. In the most extreme cases, we’ve seen multiple layers of New Space customers selling to each other — stacked speculation. For example, you could imagine a radiation shielding company selling to a reentry capsule company, selling to a private space station company pursuing in-space manufacturing.
Why next year?
The long fuse that will ultimately “pop this bubble” was lit by the departure of many growth-stage investors (Series B and larger) who are licking their wounds from massive valuation write-downs of their public positions. Additionally, the seemingly sudden awareness of inflation by The Fed has led them to aggressively raise interest rates. This action sucks risk-seeking capital out of the marketplace and essentially means that investors are less and less willing to invest in companies that are many years away from free cash flow, let alone revenue. All of this will come together to create a Thermopylae-caliber choke point for early-stage New Space startups as they fight for the few growth dollars available. Investment criteria will become increasingly more stringent — investors will demand revenue over bookings where possible and heavily discount bookings from other New Space companies. This conjoined suite of friction creates a standard that many New Space startups won’t be able to meet.
And while I believe the “fuse has already been lit”, a lag exists in the private markets. A record $15.4 billion was invested in New Space startups in 2021, nearly double the investment raised in 2020. Most startups raise for at least 18 months of runway so I think it’ll take until next year before the first wave of early-stage New Space startups are forced to go out to market and fail to raise new capital. The proceeding shutdowns and acquihires will represent the end of the first era of space startups — the end of New Space 1.0.
I hope I’m wrong here and that there exists sufficient investor dry powder so that enough New Space companies can get to market, convert bookings into revenue, and prevent a widespread collapse but I think it’s unlikely. And while I take no schadenfreude in companies going out of business, I do believe this type of financial correction plays an important cleansing function in markets: the strongest businesses will survive and then thrive as a result of the decreased competition for capital and employees. Amazon stock went down some 90+% in the dot-com crash before becoming the behemoth it is today.
The future described here is not one of total destruction but one of bifurcated outcomes — the haves and the have-nots will diverge massively. And the winners that emerge will represent a new era — New Space 2.0. These companies will be defined by scrappy founders, pursuing capital-efficient business models, and credible paths to revenue. Undoubtedly the next SpaceX and PlanetLabs will be built in this upcoming period and we are excited to be their first check!
P.S. A big variable in underwriting customer risk for New Space companies comes from potential government/defense contracts which could bridge the gap to commercial orders in nascent industries. Unfortunately, the current state of defense procurement is optimized for legacy defense primes (Raytheon, Lockheed Martin, etc.) and our view is that there’s too much uncertainty around the timing of meaningful contracts to consider them a primary customer. SpaceX and NASA’s COTS program are the notable exception here. I would love for this to change as it would have a massive positive impact on the country and the viability of many New Space business models.
- Today, SpaceX’s Falcon 9 Heavy can transport an object to low Earth orbit (LEO) for ~$1,500/KG, 11x lower than the average launch costs from 1970 to 2010, and we expect another 10x decrease once Starship is in operation. Source: SPACE: The Dawn of a New Age by Citi.
- Source: BryceTech Startup Space Report 2022
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
Sign up here if you are not already subscribed to our blog.