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Space IQ - Q2 2023

PUBLISHED
July 17, 2023
BY SPACE CAPITAL
PUBLISHED
July 17, 2023
BY SPACE CAPITAL
Chad Anderson, Space Capital Founder and Managing Partner, provides a short review of Q2 2023 startup activity and investment trends in the space economy, current market dynamics, and deep dives into specific themes with industry leaders.

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Space IQ - Q2 2023

Chad Anderson:

Hello, everyone. Welcome to SpaceIQ, our quarterly webinar where we review the latest startup activity investment trends in the space economy. For those of you joining us for the first time today, by way of introduction, Space Capital is a New York-based venture capital firm investing in the space economy with over 100 million under management. Our partners have built rockets, satellites, and operating systems. We've founded companies with assets currently in orbit, and we've led multiple exits as operators. We've been pioneering investment in this category for over 10 years, and now we've literally written the book on the subject with the Space Economy available from Wiley.

Market education has been an integral part of our strategy at Space Capital for the last decade, and this call joins a wide array of research and thesis papers, blog posts, podcast episodes, and TV appearances, all of which are available on our website for free. Okay. So with that, let's get into it.

The venture market began to show signs of stabilization in Q2, despite sluggish deal activity and poor exit conditions. Broadly across tech, venture funding to startups was flat quarter over quarter globally as founders and investors balance a future where fundraising is more difficult and startup valuations are compressed. The space economy is showing signs of a bottom as investments rose 172% quarter over quarter. Hiring returns to 2022 levels, and companies demonstrated key business and technical achievements. Some aspects of the first half of the year were unsurprising in the midst of a market correction, rising interest rates, slower investment pace, and a lack of positive exits for investors. Others, such as Silicon Valley Banks collapsed, and subsequent acquisitions sent shockwaves throughout the markets.

Despite sharply higher interest rates, the NASDAQ recorded its best start to the year since 1983, which is a positive leading indicator for the private markets. Still excluding the Maxar take-private transaction, Q2 was the lowest quarter for private market investment activity in the space economy since 2015, due to a lack of large late-stage rounds. Just six companies raised more than $100 million dollars in a quarter.

Chad Anderson:

With another six billion invested in 91 companies in Q2, total equity investment across the space economy has now reached $280 billion into nearly 1800 unique companies since 2014, and VC continues to be the largest source of capital for space companies in the year accounting for a third of total investment in three quarters of all rounds, and infrastructure has shown more resilience than other layers this year, and it has emerged as the standout this quarter driven by Maxar's take-private transaction, which included $4 billion of equity that was added to our database.

Q2 became the largest quarter for infrastructure investment in the past decade. And as a result, infrastructure now accounts for a remarkable 73% of the total funding this year. And the US has consistently accounted for the majority of global investment and infrastructure, with SpaceX and Blue Origin collectively accounting for nearly a third of the country's total.

Meanwhile, China is pursuing many strategic developments to strengthen its position. Although it currently accounts for just 7% of global infrastructure total, China is poised to increase its share with its latest focus on small launch satellite communications and advanced manufacturing. While just 2% of total space economy activity, investments in emerging industries continue to grow, and year-to-date funding has already matched last year's total.

With another $135 million in Q2, there's now been five and a half billion of investment into emerging industries across 139 unique companies since 2014. VC investors have been key players here providing nearly half of the total funding with corporate and angel investors collectively contributing a third. Using the Gartner Hype Cycle as a guide, it's now clear that 2021 was the peak of inflated expectations with large financings and launch, speculative investments in emerging industries, mega rounds by crossover investors in location-based services, and a crescendo of disappointing infrastructure SPACs.

Chad Anderson:

However, the first half of the year saw selected companies build exceptional teams, achieve operational milestones, and secure funding as market headwinds weaken. For example, SpaceX achieved a record 44 launches and deployed over a thousand Starlink satellites. Muon Space proved its advanced satellite platform from concept to orbit in less than two years. Varda began operations of its microgravity manufacturing platform, and Umbra announced an open licensing model for its radar imagery. And hiring across the space economy dropped nearly 70% since its peak in May 2022.

While a number of well-funded companies have trimmed staff, founders are proving that they can do more with less, which is sending a positive signal to private market investors. Our team is closely monitoring several opportunities that have the potential to push the space economy through the current phase of disillusionment and drive significant near-term growth, satellite communications direct to cellular, the era of spatial computing powered by precise positioning and Apple's Vision Pro, and climate measurement and action powered by geospatial intelligence.

Chad Anderson:

So let's dive into each of these. Space technologies are playing an increasingly important role in the global economy. For example, with the iPhone 14, Apple partnered with Globalstar to provide emergency communication services to its one billion users. And Apple isn't alone. T-Mobile and SpaceX have also teamed up to bring persistent ubiquitous coverage to US customers using Starlink, and many others have joined the party because this convergence of terrestrial and satellite communications networks provides tremendous opportunity to rethink how our data is captured, routed, stored, and utilized.

A key takeaway from The SatCom Playbook is that one of the most desirable applications for satellite communications capabilities could come in the form of direct-to-satellite communication. Smartphones, laptops, wearables, and really any other device could one day be connected to the internet anywhere in the world. Laptop users could take the cloud with them wherever they go. Smartphone users could take advantage of augmented reality anywhere in the world, and smart wearables could track your health and provide emergency communications even in the most remote areas.

Existing applications that have become commonplace with smartphones such as Uber and DoorDash could experience further expansion in smart mobility beyond cars. And as terrestrial communications infrastructures impacted by hurricanes, wildfires, and other natural disasters, SatCom may provide an alternative network that ensures rich communication beyond just emergency services are online for civilians, governments, and first responders during these events.

One possible scenario could involve coordination of civilians, improved search and rescue, and faster rendezvous with loved ones. Connected drones could serve to deliver medical equipment such as defibrillators to people in need as demonstrated by a Swedish startup company, Everdrone, which saved its first heart attack patient in January of last year.

Chad Anderson:

Supplementing this technology with video communications enabled by direct-to-device satellite communications could enable opportunities in telemedicine, ensuring even people without proper medical training can be guided through these scenarios using the equipment at hand and save lives.

As many more organizations become reliant on distributed data for core operations, this category could become one of the largest markets that SatCom has ever seen. GPS is converging with computer vision and ushering in a new era of precise positioning that will unlock millions of new applications never before possible, including the mass adoption of augmented reality experiences as we mesh the physical environment with digital information.

As one of the first next-gen applications that's offering a new layer of experience for location-based services, these applications have been built on the current GPS infrastructure with companies and navigation and gaming being the first to take advantage. But to realize the full potential of AR, enhancements and positioning are needed. Even with GPS III, which is more precise and interoperable with other international GNSS systems, new AR applications require even greater precision. Due to signal refraction in the atmosphere and satellite orbit and clock error, GPS accuracy will still be compromised.

Chad Anderson:

Additionally, these errors will be compounded in urban canyons where line of sight is often limited by tall and reflective buildings. In order for AR to become mainstream, AR experiences must persist in the real world across space, time, and devices.

For this functionality to exist, precise location and orientation data is needed. Without it, the physical environment and digital information won't properly mesh together. So to unlock this functionality, we're seeing a number of companies create real-time 3D maps of the environment using computer vision. And these maps provide visual localization, but GPS provides a valuable constraint on the target area. The Cambrian explosion of mobile entrepreneurial activity was predicated on ubiquitous, highly precise positioning, the presence of developer tools and a multifunctional platform that resonated with consumers i.e. the iPhone and the app store.

AR has strikingly similar prerequisites. And as these are satisfied, we expect to see an explosion in AR entrepreneurial activity of similar magnitude. Already, companies like Meta and Google are actively building out a real time 3D map of the world, not just in an attempt to create a visual positioning system, but to own a piece of the virtual real estate that all future AR applications will be built on.

Chad Anderson:

At the same time, there's a great deal of activity in AR developer tools. Just as the Google Maps API enabled developers to readily build location-based services applications, ARKit, ARCore, and many others are making it easy for developers to build realistic, powerful AR experiences.

Another essential component in making AR the next big thing is creating the systems that produce AR experiences for users. In other words, AR is waiting for its iPhone moment. Way back in 2017, Apple CEO, Tim Cook said, "The AR is a big idea like the smartphone. The smartphone's for everyone. We don't have to think about the iPhone is about a certain demographic, or country or vertical market. It's for everyone. I think that AR is that big. It's huge."

And so as we all know, in Q2, Apple launched their Vision Pro designed to usher in an era of spatial computing. Most people have written the Vision Pro Office, another gadget for the ultra wealthy given its price tag. But Apple has much grander ambitions. And in five years, we expect that this will be as ubiquitous as the iPhone at a fraction of its current price.

Chad Anderson:

As information and consumer engagement moves away from screens and back into the real world, new companies and business models will be created, transforming nearly every industry on earth. And like mobile, this phenomenon will be enabled by satellite technologies delivering precise positioning, digital twins, and global connectivity.

Space plays a foundational role in enabling climate markets. In fact, we wouldn't know about our changing climate if it weren't for space, and that's because over half of essential climate variables fundamental to earth science today can only be measured from space. And over 99% of accurate weather forecasts come from space. Our partners at Space Capital have led some of the world's most ambitious climate projects, including MethaneSAT, a $100 million dollars subsidiary of the Environmental Defense Fund. We're also generating industry leading insights, and our portfolio includes market leaders delivering climate solutions. GHGSat is the only company that is capable of monitoring facility level emissions. That's important because of the huge gap in self-reported data.

Planet Labs is measuring deforestation and other changes on the surface of our planet. Muon is building satellites as a service with more sophisticated sensors to help close the data gap. Regrow's transforming agricultural systems, and the CEO says that it is the single most important thing that we can be doing to combat climate change.

Arbol's parametric insurance platform is delivering climate risk management products. Climate tech companies were mostly spared the carnage in the markets that hit the other areas of tech last year. Valuations have been heating up, in part in response to the Inflation Reduction Act, which committed $370 billion to combat climate change over the next decade.

Many leading VC firms have dedicated funds now. And we're seeing huge amounts of capital available for climate startups with strong teams and novel approaches. And this is definitely an area that we expect to see a great deal of growth from going forward.

Following the first integrated flight test of SpaceX's Starship in Q2, the next gen launch vehicle is expected to complete orbital testing this year, which will further accelerate growth in existing markets and enable emerging industries, including orbital transfer vehicles that are going to leverage unprecedented access to Earth orbit and deep space destinations like the Moon.

Chad Anderson:

It might seem far off, but similar to launch a decade ago, the lunar industry is primarily now a government-led market, but it's becoming more commercial. NASA's Artemis program is underpinning the growth in lunar activity, committing billions of dollars to build a permanently crewed outpost. The successful Artemis mission was the first time in 50 years that a crew-capable spacecraft has entered lunar orbit and successfully demonstrated the technologies needed to take humans back to the moon. And then, next Artemis 2 mission won't take humans to lunar orbit until next year at the earliest, but we're already seeing a lot of activity and preparation.

The first in a series of Robotic Precursor missions launched at the end of last year, and several more are planning to launch this year, including Astrobotic and Lunar Outpost, both of which are Space Capital portfolio companies. And China's lunar ambitions have put the country on a trajectory to overlap with the US at the lunar south pole, reflecting the limited amount of prime real estate based on access to water, ice deposits and sunlight.

The accelerating timeline of Chinese plans prompted the NASA administrator to warn that Beijing could establish a foothold on the moon and dominate the most resourced rich locations on the lunar surface. So rising geopolitical tensions, particularly with China, are driving an increase in US government funding to meet the occasion.

Chad Anderson:

Funding to AI companies remain strong in 2023, driving growth in an otherwise tepid market, and recent advancements in artificial intelligence are enhancing the capabilities of companies across the space economy. As a horizontal technology, AI cuts across everything including next-gen manufacturing and supply chain management, satellite design and operations, deeper and more actionable intelligence, satellite communications, network management, and many, many more.

The AI use cases in the space economy are nothing new, particularly within geospatial intelligence. As we explored in the GEOINT Playbook, NVIDIA introduced the first widely available GPU in 1999, which led to a new paradigm of GPU accelerated computing that makes large complex data sets usable in real time. Today, NVIDIA's platform is powering everything from simulation to design and operations to asset management on orbit.

Meanwhile, synthetic data has become an essential tool for the advancement of AI and machine learning. Given the massive data sets produced by Earth-imaging satellites, GEOINT is the largest initial market for this technology, and leading geospatial intelligence organizations like Maxar, Planet Labs and the NGA are leveraging this technology for AI training and validation.

In Q2, rendered AI made AI training simpler and more accessible by integrating their data generation platform with NVIDIA's Omniverse Replicator. They're also on the AWS marketplace, and their platform is being leveraged across many other use cases outside of geospatial intelligence. As much growth as we've seen in recent years, AI is not as widely adopted as it will be, not by a long shot. Computer vision tools are still in the early stages of adoption and we expect to see much more innovation here.

Chad Anderson:

In conclusion, after 18 months of downturn in the financial markets, it's clear that the era of free money is over, and companies are beginning to adapt to this new normal. The reset in the financial markets has brought about healthier market dynamics, enabling disciplined investors to identify opportunities and invest in high quality companies at more reasonable valuations.

Despite persistent market headwinds affecting the space economy, we remain optimistic about its future, as breakthrough technologies and exceptional teams demonstrate that the pace of innovation is only accelerating. Those investors and founders that are able to survive will reap the largest rewards of the next decade. And at Space Capital, we are actively investing in the market today.

All right, folks, that's it for this episode of Space IQ. To learn more about the space economy, as always, check out the wealth of information that's available on our website for free, spacecapital.com. We'll see you all again in October to cover Q3.