Q: How big is the space industry?
The potential market size for space is estimated to reach $1.25 trillion by 2030. Civilian or Department of Defense government funding remains the primary source of funding. This trend is true for other countries as well. But over the past eight years, private investment has become a significant factor. Emerging space companies attracted $15.4 billion in private funding in 2021, double the $7.7 billion in 2020 and more than 10 times the amount invested in 2014.
Q: What is attracting investor interest?
Elon Musk has made space exciting again, and with SpaceX he has transformed the economy by dramatically lowering the cost of payloads, opening up the market to thousands of companies.
“Space-focused venture capital and private equity funds are beginning to emerge. They see space as one of the disruptive sectors of the 2020s.”
This has made space very attractive to investors. Space-focused venture capital and private equity funds are starting to emerge, as they see space as one of the disruptive sectors of the 2020s. Even institutional investors are starting to want to invest in space.
However, there is no deep knowledge of the sector. Wall Street aerospace and defense analysts typically only cover the big three aerospace companies. And technology analysts don't cover rocket or space companies. Even venture capital and private equity rarely covered space because contractors and startups relied on government programs for funding. There is a real need to professionalize financial services coverage of the space economy.
Q: Why is payload cost so important?
Ideas and business models that didn't make sense five years ago now work because payload costs have become more affordable. We're seeing exciting things happening, like satellite constellations that can provide high-speed broadband internet in developing countries where there's no ground infrastructure, and imaging technology that can improve navigation at sea. Many applications were unthinkable until the cost of sending payloads into space came down, so innovation is just beginning.
These developments create the possibility of new coherent value networks. We witnessed it in the 1960s, when thousands of NASA contractors made everything from space suits and astronaut food to the means to monitor and communicate with the crew once they left Earth. NASA developed new organizational capabilities to oversee complex projects involving so many contractors and subcontractors. Whether directly or indirectly, the space race gave rise to a vast number of innovations. It also gave rise to the space-based technological infrastructure of our daily lives, from GPS to communications, banking, and national security.
In this new era, there are already companies that are a visible part of the commercialized universe. 60 Minutes StoryThere are many more unseen companies behind these high-profile ventures, and it's entirely possible that the lesser-known companies are more sustainable and have a greater chance of growth from a value perspective. As I've pointed out before, during the California Gold Rush, miners rarely got rich, but those who sold pickaxes, Levi's, and mules had a chance to make a fortune.
Q: Space is pretty big. Where do the commercial opportunities lie?
In exploration, that is, developing the technology to allow humans to go further and faster, private agencies, namely NASA and the European Space Agency, still play a central role. But there are also people trying to commercialize and develop markets all the way to the asteroid belt. There are also companies trying to commercialize the moon, for natural resource extraction, communication stations, and even tourism. These are all potential markets for the future.
Today, when we talk about space as an investment and business opportunity, the focus is on low-earth orbit applications. To give you an idea of how quickly it's growing, there are about 4,800 operational satellites in orbit today. By 2030, there could be 25,000.
Q: What does it take for a space startup to thrive?
Many of these companies are trying to do something incredibly difficult: It's hard to find advisors and investors who know which technologies are viable and in demand, and which companies have sustainable business models that can handle real risks.
Even for companies with knowledgeable advisors, cash flow and an economic model that banks can potentially lend against, raising capital can be difficult. Many traditional underwriters are risk averse and cautious about lending or approving credit for something they don't fully understand.
I think a good analogy is when private companies like the Dutch East India Company started to develop not just regional but global trade routes. Financial innovation was needed. How do you perfect a lien on a ship on the other side of the globe? What about the cargo?
In fact, many of the rules for what currently happens in space are based on the law of the sea, but that law itself is outdated and not up to date with a rapidly evolving field like commercial space. There are a number of issues to be resolved, including financing, legal frameworks, and insurance.
There are only a few insurers in this space. The ones that are in are used to launches. We've been launching commercial satellites for 30 years. But when you start talking about other types of business, that sense of security drops significantly. How do you insure a commercial space station? How do you insure it? Who owns it? How do you get it? Insurers need to think about these questions and come up with innovative solutions.
Q: These seem like big challenges.
To be clear, there are already many companies with great business plans that have successfully navigated the growth phase, but these challenges need to be overcome in order for the space industry to continue on its current trajectory and become a mature market.
Companies are solving problems they can control. They're building spaceplanes or developing software applications to manage satellites. They innovate under the assumption that they'll solve a broader problem. They believe that space-based commercial enterprise is inevitable. They understand that it's not the same as the information revolution, because building an app or starting a social media company doesn't involve solving the kinematics and specific engineering problems of launching advanced systems into space.
The good news is that financial institutions want to make a profit, and if there is a market they can participate in, they will try to find solutions and innovations that allow them to participate, even if it means taking on risk.
Space finance solutions are slowly evolving. How can we think of space assets as collateral for loans? Perhaps instead of physical assets as collateral, we securitize contracts, as banks have always done.
Q: Are there any issues that require policy or government action?
We need a legal and regulatory framework for the governance of space. We have standards for airspace deconfliction for aircraft, and we need similar standards for space. We need them for safety, political and defense reasons. We also need them so that investors and financial institutions feel comfortable lending and insurance companies feel comfortable insuring. It would reduce the risk of participation, or at least create a parallel with other sectors.
There are technical problems to solve, too. The most pressing issue is orbital debris, or space junk. NASA tracks 23,000 pieces of debris larger than a softball. But there are about 500,000 pieces larger than a marble, some of which travel as fast as 17,500 miles per hour. A tiny bolt traveling that fast could be deadly to the International Space Station (ISS) or other assets in space.
The International Space Station and some satellites have the ability to steer to avoid collisions, but we're mostly counting on space being big enough that collisions don't happen — the more objects there are in low Earth orbit, the greater the chance of a collision.
When we first started going into space, no one thought about the junk we were leaving behind. We've gotten smarter about managing it than we used to, but space junk is an obstacle for the space industry. It's also an opportunity for companies that can solve the problem, either by cleaning up existing junk or by improving how we deorbit satellites at the end of their useful life to keep them from becoming space junk.
These are enormous problems that need to be addressed. There is no significant movement, no single body, agency or international organization that is clearly taking the lead. This highlights that this is a new era. These are problems that the 1960s space program did not have to deal with.
Q: In the beginning, the space race was driven by the Cold War. This was followed by a period of increased international cooperation. Where do you see things going in the future?
The ISS has been orbiting Earth for over 20 years and is a testament to international cooperation in space. In July, Russian space agency Roscosmos announced that it would end its participation in the ISS after 2024. Although Roscosmos has since backtracked somewhat, we may be entering a new era of polarization.
Commercial space business is also very globalized, because there is so much cooperation between nations. In the future, companies may have to choose a sphere of influence: do they want to cooperate with Russia, China, or Europe and the United States?
As a banker, I am very concerned about risk, and for space companies, the existential threat to the market from geopolitical and national security conflicts is something we need to be very careful about.
A typical company that I work with has 50 employees. They might have raised $50 million in Series A and B funding. These passionate and ambitious engineers and entrepreneurs are building something amazing. They might already have a launch date locked in with SpaceX. And then all of a sudden they're at the mercy of some other country's Ministry of Defense.
For example, in November 2021, Russia tested an anti-satellite missile by blowing up a defunct satellite, resulting in a huge chunk of debris. The ISS astronauts, including the Russian cosmonaut, had to be evacuated in their pressure suits and docked spacecraft until they were sure they wouldn't be hit by any debris.
The test was widely criticized, but it doesn't mean much to space startups. They are solving very difficult technical problems and have to deal with contingencies that even major companies in other fields don't think about. Would a country decide to test a weapons system and close a launch window? Or worse, lose all of its physical assets? It's necessarily different.
“For a business owner, there is no better feeling than the roar and rock of a successful rocket launch sending your company's assets hurtling into space.”
These issues are significant. But for a business owner, there is no better feeling than the roar and rock of a successful rocket launch as your company's assets blast off into space.
Q: Why did this become your area of focus?
I've always been a space geek. Growing up in Houston, I wanted to be an astronaut or a cowboy. My parents sacrificed a lot to come to America, and now that I had that opportunity, I wanted to do something to give back, so I joined the Navy.
What unites veterans is there is more to it than the job at hand. We are always mission-driven. Whether it's our team, our branch of the military, or our country. We are always working to serve something bigger. When I thought about business schools, I was drawn to SOM because of its similar focus on mission and service.
I agree with President Kennedy when he said it's important to do things “because they are hard, not because they are easy.” I believe the United States builds more fast and beautiful airplanes than any other country, and I love helping American companies push the boundaries of human capability.
“My background in naval aviation and intelligence allows me to understand the application of these new technologies and communicate the value proposition to underwriters and investors. Studying with Sharon Oster, Paul Bracken, and other incredible professors at Yale SOM has prepared me to help these companies navigate a complex and dynamic global marketplace.”
