It is fair to say that year-to-date (YTD) economic growth has been better than feared, as consumer balance sheets and locked-in low mortgage rates have somewhat buffered the raising interest rate impact, and fiscal stimulus from areas such as the CHIPS Act and Inflation Reduction Act has been supportive to the economic activity levels. With the inflation readings trending lower, albeit with volatility on the energy markets, investor consensus is increasingly expecting the end to the Federal Reserve tightening cycle. The S&P 500 Index is up 16% YTD 2023, driven by expectations of the rate raising cycle ending without deep recession and given the strong impact of the AI-related growth outlook and speculation on the technology component of the index. YTD performance of the technology-rich NASDAQ is even stronger at +31% YTD 2023, largely on the back of AI-driven growth expectations.
Looking toward the end of 2023, there are many factors to consider. The cost of capital does remain elevated, and the impact of higher financing costs continues to ripple through the economy. There are headwinds such as the resumption of student debt loan repayments on top of already higher credit card payments, thereby testing consumer resilience. There are unknowns such as the extent of impact from the UAW strike affecting already wobbling industrial growth, as well as the federal government’s ability to avoid a shutdown. The geopolitical backdrop remains complex, with higher oil prices having differing levels of impact across economies.
Funding Environment for Space Startups
Higher interest rates and resulting higher return on equity requirements also imply higher hurdle rates for risk capital access, particularly for early-stage, capital-intensive, and delayed profitability stories. The broader venture capital industry’s investment activity slowed 46% year over year in in the first half of 2023, despite all the interest in ChatGPT and AI, and the very low pace of exits year-to-date (IPOs, M&A) has further constrained the ability to monetize returns and reinvest funds.
However, there is some good news. In recent weeks, the IPO market appears to be showing some early signs of reopening, even if valuations are well below the heights of 2021. With a broad set of companies that have varying risk and return profiles waiting for the opportunity, it will likely take some time before this market is likely to become broadly accessible for new space companies looking to go public.
As evidenced by 2Q23 data, the funding conditions for the space sector appear to be bottoming on the private markets following declines from 2021 levels. Deals are getting done, but the market is still very selective, with raised performance requirements and reduced valuations, particularly when it comes to the growth capital. In the International Space Station (ISS) National Laboratory ecosystem, we have seen successful funding rounds in recent months, such as Axiom Space, ConstellR, GITAI, Lynk Global, Orbit Fab, and several others. On the public markets, we have seen several follow-up financings by deSPAC’d space companies, implying some access to capital, albeit at steeply discounted valuations to the initial listing prices. The industry continues to innovate strongly but also adjusts to the capital access realities. Hiring levels are down from the 2022 peaks, and we have also seen reductions in workforce at several companies as well as revisions in resource allocation plans. Industry expectations are for more consolidation for both revenue base expansion as well as a path of survival.
Revisit the ISSRDC Investor Discussion for Further Insights
For further insight on fundamental investment perspectives as relevant for the space sector, including funding criteria in infrastructure, in-space applications, and services in low Earth orbit (LEO), revisit the International Space Station Research and Development Conference (ISSRDC) investor panel discussion (a recording of the session is available online). The panel was moderated by Carie Mullins from BryceTech, and panelists included Jon Lusczakoski from AE Industrial Partners, Lewis Jones from Seraphim Capital, Mislav Tolusic from Marlinspike Partners, and Thomas Gillespie from In-Q-Tel.