Inside the Cosmos: 3 VC Experts Share Insights on Space Investing

Welcome to the captivating universe of space—a burgeoning frontier bursting with untold possibilities! In this extraordinary realm, an ambitious startup has the chance to not just thrive but to become a cornerstone of the future space economy for generations. The potential is limitless, yet it comes with its share of challenges. The journey is one of high stakes, demanding capital, and a dash of that irresistible allure we like to call “space is cool™️.” But beware! Investing in this sector could mean risking millions on a venture that may fizzle out after a single launch party—complete with snacks and a view of a Falcon 9 rocket soaring into the cosmos.

Deep tech investing isn’t for the faint-hearted; it’s an exhilarating ride of high-risk, all-or-nothing thrills. It requires substantial upfront investments with no guarantees of hitting the bullseye in product-market fit or even basic functionality. Yet, when a company strikes gold, those initial investments can carve out an impressive moat that keeps competitors at bay for years. Let’s face it: finding that kind of edge is a tall order in the world of SaaS.

I recall a wise remark from a savvy co-founder at the SAR provider Umbra: “We’re nine years in the game; can you imagine a newbie trying to challenge us? Who in their right mind would want to raise $300 million?”

The never-ending horizon: To truly grasp the landscape of ROI in this industry, consider SpaceX, which is now in its 22nd year and just starting to see profits. The company’s sheer dominance has elevated it to the status of the most valuable privately-held entity on the planet.

• And it’s not just SpaceX: Other trailblazers like Rocket Lab, AST SpaceMobile, Intuitive Machines, Firefly, Planet, and Axiom have also soared to billion-dollar valuations.

Of course, these figures are largely theoretical. We’ve witnessed a handful of substantial exits while also grappling with down rounds, mergers, bankruptcies, and SPAC misadventures.

That’s the rollercoaster ride of space investing as we dive into 2024. To gain insights into how venture capitalists perceive this dynamic market, we chatted with three investors under the veil of anonymity, fostering an open and honest dialogue.

Here’s a quick look at our trio of investors:

• General Partner at a VC with less than $500M AUM
• General Partner at a VC with $4B+ AUM
• Principal at a VC with $5B+ AUM

Let’s delve into the 2024 landscape of space investing through their eyes.

On a scale of 1-10?

We kicked things off by asking: “On a scale of 1-10, how excited are you to invest in space?” The responses were electric: 6, 10, and another enthusiastic 10!

But when we followed up with, “How easy is it to find a lucrative investment opportunity in this sector?” the enthusiasm took a nosedive, landing at 3, 1, and another disheartening 1.

“Excitement is one thing; actually discovering a solid investment is another matter entirely,” one investor candidly shared.

Red flags: These astute investors have crossed paths with a slew of startups led by inexperienced founders, initiatives that fail to address real-world problems, oversaturated markets, fickle demand, and commoditized services.

“Many space ventures operate like utilities: payload costs ($/kg), data transmission ($/MB), energy ($/kW-hr), and imagery ($/pixel). Building a monopolistic utility business in this landscape is exceedingly tough,” noted one investor.

So, what are investors hunting for?

In the realm of venture capital, it’s all about the power law—where one or two stellar investments can account for the lion’s share of returns. In short, aim high!

Investors are on the lookout for groundbreaking companies with the potential to disrupt the status quo and emerge as market leaders. As Clayton Christensen outlined in his seminal book, Innovator’s Dilemma, disruptive technologies can topple established players by catering to niche markets with innovative, cost-effective solutions that ultimately broaden market demand.

This trend is palpable in the space sector, where traditional Aerospace & Defense giants chase high-margin contracts while nimble startups focus on affordable, proliferated systems.

Here’s what these investors are specifically scouting for:

• A clearly defined Total Addressable Market (TAM) aligned with a 15-20 year roadmap of the space economy
• A product envisioned as a platform rather than just a tool or component
• A business model that prioritizes national security programs before branching into commercial markets
• A founder with robust industry expertise, engineering credentials, and a knack for navigating complex government procurement

+ Competing against SpaceX? Two investors expressed reluctance to compete in SpaceX’s core domains like launch and satellite communications. However, one investor took a more optimistic view, asserting, “Considerable shareholder value can be generated by snagging even a small slice of SpaceX’s market.”

SPAC implosions, bankruptcies, and cash burn

While some segments of the space economy are skyrocketing, others are faced with consolidation, dismal stock performances, and a relentless cash burn challenge. Yet, these investors remain undeterred.

“That’s the nature of deep tech investing,” one investor explained. “It’s riskier, more binary. It demands substantial capital to transition from market entry to commercial viability and ultimately profitability. But when it succeeds, it transforms industries.” This reflects the power law mentality!

All three investors indicated that their interest in space has intensified over the past four years. This optimism is mirrored in a strong year for venture capital investments in space, especially in early-stage funding, which has withstood the pressures that later-stage investing often faces.

Each investor highlighted unique factors fueling their enthusiasm:

• One investor praised the influx of new talent into the industry.
• Another pointed to declining launch costs as a key enabler.
• The third focused on space becoming a national security priority, with governments favoring cost-effective, fixed contracts—thanks in part to the success of SpaceX and its rapid iteration model, which encourages a more affordable and proliferated approach despite the inherent risks.

With clearer insights into where opportunities lie—and where they don’t—investors are sharpening their focus.

Where do we go from here?

Investors are betting that next-gen launch vehicles will slash costs to orbit, paving the way for further innovation. The mantra is clear: as affordability rises, access expands, leading both industry insiders and newcomers to uncover inventive ways to monetize these opportunities. This pattern has repeated itself with nearly every transformative technology—from personal computers to telecommunications, chip manufacturing, railroads, and commercial aviation.

Core infrastructure and platform companies—think Apple in mobile, AT&T in telecom, TSMC in chip-making, and Boeing in aircraft—are set to secure positions that allow them to fend off competition for years to come.

Take Boeing, for example. It seems ripe for disruption, yet no startup has the audacity to invest the billions required to launch a new commercial airplane manufacturing venture. The moat it has built is simply too formidable.