Last week we had an opportunity to listen to the SmallSat Symposium 2021, which while held virtually this year, continued to deliver a copious flow of interesting data and opinions. There are clearly many areas of exciting progress in the industry, such as low Earth orbit (LEO) communications constellation deployments, smallsat launches, and expanded use cases for commercial space data. What stood out for us at this year’s event was the strong positive tone on the funding environment and near-term outlook. During last year’s SmallSat Symposium we continued to hear commentary on NewSpace companies’ needs to deliver a path to measurable financial performance and liquidity events validating return potential to justify further capital engagement. At this year’s event, we saw references to the current funding environment as the best that startups in this sector have ever seen, supported by recent data on a strong rebound in capital access, pickup in M&A activity (mergers and acquisitions), and more mentions of SPACs (special purpose acquisition companies) than one could count.
Source: Space Capital quarterly data
Space startup 2H20 capital raising metrics came in strong indeed. Per recently published Space Capital data, the infrastructure segment startups (primarily launch and satellite value chains) raised a record-breaking $8.9 billion in 2020, implying more than 50% year-over-year growth. While this total includes continued, sizable funding activity by SpaceX and Blue Origin—as well as multi-hundred-million-dollar rounds by some of the Chinese space ventures—we did see impressive raises (such as $500 million by Relativity Space) as well as a broad set of healthy $30+ million funding rounds. The strong activity levels have carried over well into 2021, evidenced by further capital raises by SpaceX, OneWeb, Axiom Space, Omnispace, Isotropic Systems, Umbra, and others.
M&A activity picked up over the last 12 months in the industry as well, including both strategic and private equity roll-up transactions, with continued momentum expected into 2021. At the same time, the easing in funding conditions appears to have delayed some of the previously expected rationalization in the industry. During several SmallSat Symposiums, investors have raised questions on excessive early-stage capital access to largely overlapping business models, and structural rationalization appeared more imminent in the immediate aftermath of the COVID-19-driven slow down; however, the related oversupply questions and associated pricing dynamics are yet to play out. In-fact, some of the assets have or are re-emerging with restructured balance sheets. It remains to be seen whether or not meaningful structural changes will emerge as 2021 progresses.
Gaining broad discussion at the symposium was the topic of special purpose acquisition companies or SPACs allowing access to capital from much larger pools of public equity funding. As a quick and highly simplified summary, a SPAC is typically supported by a marketable sponsor, looks to raise capital from public markets, and then uses this capital (as well as additional monies raised) to acquire and capitalize existing companies, hopefully creating shareholder value in the process. From a company’s perspective, this is one of several alternative paths to gain access to public markets and provide exits to earlier investors. SPACs have been around for some time; however, in their current incarnation and under current public market risk-return appetite conditions, they have gained rapid acceptance, with U.S.-listed SPACs raising more than $83 billion in 2020, up more than six-fold from 2019—and followed by another $47 billion raised just since the start of 2021. In the space sector, following the Virgin Galactic deal in 2019, we have seen several SPAC transactions announced, including a $1.2 billion combination between space transportation and service company Momentus Inc. and Stable Road Acquisition Corp., a $1.4 billion combination between space-based cellular communications service provider AST & Science LLC and New Providence Acquisition Corp., and a $2.1 billion combination between small launch vehicle developer and services provider Astra and Holicity Inc. In addition, on February 18, geospatial intelligence and data analytics company, BlackSky Holidings Inc. announced an agreement to merge with Osprey Technology Acquisition at a pro forma enterprise value of $1.1 billion.
Space sector SPAC interest looks strong near-term. Investor and banker commentary at the SmallSat Symposium pointed to SPAC discussions in numerous board rooms, and several yet to be disclosed processes in various stages of materialization, implying expectations of more deal announcements to come and related activity levels not slowing down in the near term. Given the challenges seen by space startups in recent years in raising later stage capital, there is clearly a favorable argument to be made for addressing company-specific funding needs and raising enough capital to reach profitability via just a sizable SPAC transaction. Furthermore, access to capital in a capital-intensive industry such as space is a strategic asset and can provide a competitive advantage, particularly on many of the fragmented and competitive markets. However, this funding approach is not for everyone, and there is clearly a tradeoff. From one side, financing and related time-to-market risks get addressed. However, access to capital requires taking on the very significant responsibilities of being a public company and committing to deliver rapidly improving operational and financial performance to underpin the acquisition valuation and future shareholder value creation potential.
Source: Company reports
Will SPACs be as topical at SmallSat Symposium 2022? From the broader space startup ecosystem perspective, where some of the segments are clearly capital intensive, the question is on the duration and magnitude of the SPAC funding window. Given the sheer breath, volume, and speed of issuance on the broader SPAC market, it is fair to assume that eventual performance outcomes here, from the investor return perspective, will be far from uniform. However, with immediate-term performance guidance likely more manageable for acquired companies, it will take time for public investors to separate the teams and companies that can (or cannot) deliver the compounding execution successes required to meet the initially communicated goals 4-5 years out. In addition, the current financial markets continue to be flush with liquidity that is looking for a return.
Eventually “the rubber will meet the road” on some of the earlier transactions, and this will have implications for market appetite for similar future opportunities. In addition to the deepening investor understanding, the relative attractiveness of SPAC risk-return value propositions will likely be affected by developments in the interest rate and hence cost of capital environment. Looking forward into 2021, we can point to a multitude of factors, including the pace of vaccinations and its impact on the pace of economic recovery, delivered versus perceived need and fiscal impact from further stimulus support, the pace of recovery-driven future capital investment cycles requiring funding beyond the current excess liquidity, and resulting productivity growth and inflation expectations, among others. Many of these metrics could look materially different from where they are now in the second half of 2021 and first half of 2022. Hence it is not surprising that some of the characterizations at the symposium for the current SPAC environment were “fear of missing out” and “rush to exit.”
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