7 Questions on Growth-stage Investments in Space

We’re having a chat with Bogdan Gogulan, CEO & Managing Partner at NewSpace Capital, private equity’s first firm dedicated to growth investing in the rapidly expanding space economy. We interviewed him on the market outlook, common misconceptions, and how they approach this investment opportunity.Bogdan Gogulan has 20 years of experience in finance, product and business development and brings together at NewSpace a leading team of experts and advisors who worked together for many years in all facets of the space industry. Before initiating NewSpace Capital he served as VP of international operations and business development for AT Communication, a global integrated solutions provider and manufacturer of products and systems for the commercial, defence and security markets and worked at American Express and Deutsche Bank. Throughout his career, Bogdan has been actively involved with the UN Alliance of Civilizations (UNAOC) participating as an OYW Ambassador in the UN Sustainable Development Goals’ initiative.

Q1: What is the market outlook for commercial space investments?

Let us first define what is “space” and “commercial space” from the investor’s point of view.

It is important to understand that while people usually refer to space as a “market” or an “industry”, it is neither. A “market” presumes the presence of customers, but there is a maximum of a dozen people in space at any given time, so space is not a “market”. The market is in fact on Earth with its seven billion consumers and seventy-trillion-euros economy.

Space is also not an “industry” in a way that communications, robotics or electronics are. Space is just a place where these industries operate, so it is a “geography”, a sort of the seventh continent to which we outsource certain operations that are cheaper and more efficiently performed there than down below.

“Commercial space” for an investor is the entire ecosystem that includes the outer space, but also Earth, where all that is required for in-space operations is produced and space services are consumed.

This commercial space ecosystem is currently $350 billion, which is seven times bigger than AI and robotics industries combined. And as the global economy is going through a structural transformation becoming more dependent on space-based products and services the commercial space ecosystem is set out to grow to $2,5 trillion by mid-century. For comparison, the global commercial banking industry is just over $2 trillion. So, space is a huge opportunity that no investor can afford to ignore.

Q2: What are the common misconceptions of commercial space investments?

There is a lingering perception of space as “the final investment frontier”. However, space is infinite, so lumping it all together, either as a single opportunity or a single challenge is misleading. Instead, space is a number of investment frontiers. The most imminent of them is the Earth and its orbit where over 90% of the current commercial activities take place.

The second misconception is that it is all about the future, when in fact the space ecosystem started 60 years ago and already matured commercially since then to become the invisible back-office of the global economy. Just in the last decade, 4,000 satellites were launched in space. They provide positioning, mapping, tracking, imaging and communication that is critical to modern society and our way of life. Remove these satellites and most of what we are used to, from TV to smartphone apps will stop working – no more Uber, tracking food delivery or finding singles in your area.

Another misconception is that space is all about government funding. In fact, the commercial space is larger and growing faster than the government segment, which is now more focussed on deep space exploration. Even after recent ground-breaking growth in public space budgets they amount to less than 25% of the overall spending.

Many investors still think that space is all about rockets and satellites. However, this is just one, although extremely important part of the ecosystem – the in-space infrastructure. You can compare its role to the role of the retransmission towers for the mobile network. It is critical, but you don’t put them just for the sake of it, or to improve the rural landscape. It is about generating, collecting and communicating data. The infrastructure part is just 1/4 of the overall ecosystem, the rest is supply chain (like electronics and materials) and applications (like Earth Observation and broadband connectivity).

Finally, there is a view that space is too risky as an investment area. However, as technology became more reliable, the risk has been significantly reduced both in terms of the occurrences of the risk factors and in terms of the cost – losing a satellite in the past was a multimillion-dollar write-off, but the cost of satellites has since decreased from hundreds of millions to hundreds of thousands. In fact, for many space companies outside of the mega-constellations segment, the cost of the satellite infrastructure is not greater than the cost of the ground IT infrastructure required for storing, processing and delivering analytics of the data collected in space.

Q3: Where will the commercial space industry be in 10-20 years?

In the last decade the launch prices went from $54,500 to about $2,700 per kg of payload. This is more than a 95% reduction that was driven by technical innovation and increased competition. On the one hand, the falling prices squeezed launch providers’ margins, but on the other hand it significantly reduced the cost and time of accessing space.

At the same time the invention and proliferation of small satellite platforms allowed to utilize the Low Earth Orbit (LEO). Since this orbit is below 2,000 km (approximately one-third of the radius of Earth), satellites here are within the magnetic field of our planet, which offers more protection for them from the Sun’s and galactic radiation. Therefore, there is no need for very expensive radiation hardened electronics and electrical components. One can use standard commercial-off-the-shelf equipment after subjecting it to well-established radiation testing protocols. This brought the price of satellites down, significantly reduced the lead time of satellite production and time to market.

In addition to cost and time savings, utilization of LEO provides other advantages. By the virtue of closer proximity to the Earth, satellites on the LEO have shorter latency than those operating on the Geostationary Orbit (GEO) used for the traditional TV broadcasting. For example, when you place a WhatsApp call to Australia from Europe, the signal travels 16,000 km. The distance to GEO is 35,000 km, so you get a noticeable delay, about a quarter of a second. But from LEO the signal travels just few hundreds of kilometers and you get the benefit of near-real-time communication, which opens a completely new host of commercial opportunities.

In the next 20 years the launch prices are expected to fall further to few $100 per kg of payload. The performance of satellites will continue to improve, while their cost will continue to decline. This will present opportunities for consumer and industrial devices with direct satellite connectivity, real time analytics for agricultural and security applications, autonomous shipping and off-the-grid broadband connectivity for the half of the world’s population that does not have access to the internet at the moment.

These developments are the basis for the Morgan Stanley and Bank of America forecasting the growth of the space ecosystem from current $350 billion to $1.4 trillion by 2040.

Currently space is where internet was at the turn of the century or telecoms in 1990’s – technology is more available and reliable than ever before; it is now about the right applications and winning business models.

Q4: Why is now the right time to act on space investments?

Now is the time to invest, because investment in space is no longer a bet, but a process with many known factors and a huge quantifiable upside. The ecosystem matured – there have been over 350 exits in space companies.

Currently space is where internet was at the turn of the century or telecoms in 1990’s – technology is more available and reliable than ever before; it is now about the right applications and winning business models. And while the development of the space ecosystem is evolutionary, the speed at which it takes place is revolutionary. Similar to internet, space ecosystem crosses the boundaries of markets and industries and impacts every aspect of our life. This is why over $180 billion has been invested over the last decade. Over 50% of top 100 PE funds are now invested in space.

Space investment has turned from esoteric asset class to a mainstream prodigy, but whilst investors are rapidly waking up to the investment opportunities in space, and investing via the public market SPAC’s and ETF’s, it is the private markets where the value and opportunity really lies. There are still many underinvested segments and multiple lucrative opportunities for a knowledgeable investor. Some of these opportunities are the future Googles and Apples of the space ecosystem.

Q5: Have we seen more established corporations go into the commercial space segment?

Absolutely! As I mentioned before, space is the seventh continent to which companies and whole industries are increasingly outsourcing acquisition and communication of data because it is increasingly more efficient to do things in space than here on Earth. The companies that don’t embrace space are risking to face steep competition from those that do. And we can see that most global companies – from oil majors to tech giants – either already have a space strategy or are in the process of putting one in place. In a same way that 20 years ago, every company had to turn “tech”, now every company has to turn to “space tech”, because “who falls behind is left behind”.

There is a “space rush”, so it is the best time to invest into space “picks and shovels”. Therefore, we go into supply chain and applications – the technologies that enable space ecosystem and make it useful to the customers on Earth.

Q6: How can one get started investing in commercial space?

That’s the question that probably most, if not all, investors ask themselves.

It is indeed noteworthy that at the moment the demand for space-enabled products and services outpaces supply, so public markets command significant premiums on space stocks. There is for example a strong investor appetite for the recent space-related SPACs. Some companies trade at 50-70 times their revenues and whilst public markets might be an obvious and only choice for many, in our opinion they are “overpriced” and represent various levels of risk – some extremely high.

Then investors have an option of direct investments, but they require a certain level of industry knowledge that is hard to come by, similarly to other specialized areas of investment, like biotech.

Then, there are VC firms, that offer a lucrative way to get in. There are a dozen seed and early-stage funds that focus entirely on space and space-related companies, but it’s important to understand that when investing in early-stage companies, the investor is taking on a lot of technical and market risk.

This is where private equity offers an interesting alternative. Later stage investment bares lower risk and shorter payback. Companies we invest in have a history, customers and a solid track record of generating revenues. These companies require capital to scale in the face of the growing demand, rather than create a proof of concept or develop a new market. And as these companies and their investors come to exit, the choice is diverse and particularly when space stocks in the public markets can command very healthy premiums.

Q7: What is your approach to space investments?

There is a “space rush”, so it is the best time to invest into space “picks and shovels”. Therefore, we go into supply chain and applications – the technologies that enable space ecosystem and make it useful to the customers on Earth. Both these segments benefit from the unprecedented development of the entire space domain, but are underinvested and undervalued. These segments have been overshadowed by the big news and big personalities of the in-space segment of the ecosystem – launchers, satellite mega constellations and space travel. However, none of the in-space operations are possible without batteries, antennas, optical instruments or electronics. And none of the in-space operations make sense without the companies that analyze and sell the data collected in space to the end customers.

In the supply chain and applications’ segments we see companies with lower valuations, but better margins and faster returns. By entering into later funding rounds (typically C and above) we significantly reduce our exposure to technical and market risk and this way improve the overall risk-adjusted return profile. As you can see, a pretty straight forward strategy! However, it requires a specialized team that can execute what we call “Down-to-Earth Investments in Space”.