New Space Liquidity
Implications from the recent unprecedented number of venture-backed exits in the space industry (…or the name of a new hard seltzer.)
Quick glossary before we dive in:
New Space: Meaning not Old Space. New Space comprises the edge-seeking companies exploiting business needs in the marketplace not being answered by stalwart traditional players like Lockheed Martin, Boeing, Northrup Grumman, etc. These companies are saddled with bureaucracy, structure, regulatory issues, and myriad other structural elements that make it difficult for them to move quickly when market opportunities come calling.
Liquidity: This is a kitschy “VC” term for getting money out of an investment — an illiquid investment in a private company generally becomes liquid when it goes public or gets acquired.
2021 was a remarkable year for New Space. Some $17.1B of VC capital was invested in space startups, SpaceX’s valuation crossed $100B, a record number of objects were launched into space and three commercial companies transported civilians to space. However, the focus for this post is on something that historically has been even rarer than getting humans in orbit — liquidity. Last year, nine New Space companies went public — all via SPACs. Much discussion has been had regarding the immediate, short-term results from these exits, but what has grabbed my attention has been the long-term implications of this burst of liquidity. I believe that these exits will prove to be an accelerant on the development of New Space by attracting meaningful new capital and creating even more favorable environments for company formation.
Context: VC-backed space startups are a relatively new phenomena. Historically, the barriers to entry were just too high for small companies to thrive (e.g. difficult government customers, high capital constraints, regulatory friction, etc.). SpaceX, founded in 2002, was the harbinger of the New Space age. Elon brought a First Principles approach to rethinking how rockets could be built. His team ultimately created the biggest enabler in the ecosystem by rapidly dropping launch costs (covered in great depth here). This is the crux or driver of the megatrend we are living in now: cheap transport of kilograms into orbit. Over the following two decades, tremendous progress was made in lowering the aforementioned barriers to entry of building a space startup and an ever-increasing number of intrepid space founders and investors entered the marketplace.
However, one thing that didn’t follow at the same pace was exits, i.e. IPOs, big flashy sales for big prices, or other strategic alignments that paid founders and funders handsomely. Through 2018, there were only 2 VC-backed startups with meaningful exits: Virgin Galactic (which interestingly enough kicked off this current round of SPACs) and Skybox, an earth observation company that was acquired by Google for $500M.
The dearth of liquidity from 2002 to 2018 became a major inhibitor in the development of New Space in a way that I didn’t truly appreciate until I became a venture capitalist. Any healthy startup ecosystem relies on liquidity to maintain a virtuous cycle of capital investments and company formation.
Liquidity and Attracting Capital
Thriving startup ecosystems rely on risk capital (venture capital, angel investors, venture debt, etc.) to fund startups when no one else will. And risk capital follows liquidity in a number of ways that flow in waves into a healthy ecosystem.
The first wave comes in the form of recycled capital from existing investors. When a company exits, investors often reinvest their winnings back into that sector. (Notably, this is how Silicon Valley software companies have existed for decades; and their hardware/semiconductor brethren before then.)
The second wave comes as a result of the liquidity attracting new investors who are driven by FOMO. That is, Fear Of Missing Out. A subset of investors outside the sector learn about these exits and want in. They begin to seek out opportunities proactively, find founders they like, and write a check.
Without liquidity, it becomes difficult for investors to justify to themselves or their limited partners (investors in a private fund) why they should be deploying more risk capital into a sector. The latter case has been the de facto state of play for New Space until last year. These nine exits should act as a massive jumpstart to the flywheel pictured above and you can already see it in action by the number of new space-dedicated funds that are starting (e.g. Alpine Space Ventures, Embedded Ventures, Space.VC, etc.)
The third wave of capital inflows comes from the increased amount of merger and acquisition activity that occurs when there are more public companies in a sector. All things equal, public companies have more leverage to acquire private companies because of their relatively easy access to capital and their sheer highly resourced size. We’ve already seen this shift start to happen in New Space; Rocket Lab has acquired 3 companies since becoming public last year. Many of these newly public New Space companies are still small-cap companies themselves so the acquisitions will be modest (typically sub-$100M purchase prices), however, I predict these acquisitions will have an outsized impact on attracting more capital because they provide a new level of down-side protection for space investors. Overly simply, investors invest in a startup hoping it will be the next SpaceX, but if they stumble along the way, there’s a much greater chance the investor will at least get their money back in an ecosystem with a lot of potential acquirers.
Liquidity and New Founders
If capital is the oxygen to the flame of an ecosystem, founders are the fuel and liquidity plays a critical role in creating new founders. Startups generally provide equity to their early employees, and as such, liquidity can generate meaningful wealth for many team members. These employees now have enough money to not need a steady income and have the unique first-hand experience of what it takes to build and scale a startup. As a result, you often end up with a diaspora of former employees turned founders post-exit (e.g. the Paypal Mafia). I would expect many dozens of new companies to be born out of these nine exits.
Why None of This Will Matter
The optimistic takeaway, which I believe to be the case, is that these nine exits will act as a catalyst to speed up the development of New Space. And for those of us that are actively investing in and advising space startups, we need to understand these short and medium-term dynamics. However, I also believe that if you zoom out the time horizon far enough, 25+ years, everything discussed here will just be noise. The development of a massive space industry with multiple trillion-dollar companies is inevitable. All you need to do to understand why is look at the chart of launch costs over time. We are in the midst of a 100x cost decrease in launch costs. A transportation layer becoming 100x cheaper is a once-a-century or longer event. It is the equivalent of living in the US in the 1860s and one day people are heading out west by horse and the next day it’s via the transcontinental railroad. Railroads allowed us to transport goods, settle new areas, and industrialize in a way that was never before possible. Space will have the same scale of impact by changing how we interact with the Earth, how we make things for Earth, and eventually how we live beyond Earth. Ultimately, it is this inevitable, secular trend that is the reason why we choose to invest in New Space.
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.
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