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Space IQ - Q3 2022

PUBLISHED
October 24, 2022
BY SPACE CAPITAL
PUBLISHED
October 24, 2022
BY SPACE CAPITAL
Chad Anderson, Space Capital Founder and Managing Partner, provides a short review of Q3 2022 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 - Q3 2022

Hello everyone and welcome to Space IQ, our quarterly webinar where we review startup activity and investment trends in the space economy. This quarter, we're taking a closer look at investment in Q3 which saw significant declines across the space economy. We'll examine which industries are most affected and which are best positioned to weather the storm. Expectations for Q3 were high, with hopes that the Fed would tame inflation and investors would get back to deploying capital.

Chad Anderson

The economy is...economists were forecasting the US headline CPI to slow in August, signaling a June peak. Instead, it rose with stubbornly high rents and food prices. The Fed responded in September with another 75 basis points rate increase, resulting in the fastest rate hike cycle since 1988, which is putting pressure on equity and debt markets both broadly ending down for the quarter.

And these macro-economic factors directly impact venture capital and private markets, making it harder for startups to raise money. As legendary venture investor Bill Gurley said, Silicon Valley is more correlated with Nasdaq than anyone admits. And at the same time, Venture fundraising set a new annual record with 151 billion closed through September and nearly 300 billions of dry powder on the sidelines.

Chad Anderson

Many, including us, expected that VCs would get back to investing after Labor Day. And anecdotally from the front lines, valuations are normalizing and we're beginning to see deal activity ramp up. However, that's not yet showing up in the data. Pitchbook shows fewer deals closing in Q3 when compared to 2021 and less total capital deployed. This can be explained, at least in part, by a renewed focus on diligence and price control as VCs shift away from pure momentum investing.

Diligence is back in vogue, and I have to say that it is a welcome change of pace in this risk off environment. VC investment volume in space, particularly infrastructure, has fallen significantly more than the broader market. In fact, Q3 is one of the lowest quarters for private investment in the space economy over the last five years. We began publishing the Space Industry Quarterly in 2017 with the aim of uncovering insights about investing in the space economy.

We published our Q3 report yesterday, which is available on our website and in the links below. Now by our accounting with another 3.4 billion invested into 79 space companies in Q3. There's now been 268 billion of equity investment into over 1700 unique companies in the space economy over the last ten years. The US and China account for a full 77% of total investment over the last decade.

Chad Anderson

And while large and emerging industries get most of the media coverage, they only account for 11% and 1% of total investment, respectively. We expect the macro environment will disproportionately affect funding for these capital intensive companies for the foreseeable future, while companies that are providing data and insights and critical services to enterprises and governments will be better situated to grow revenues in the near term and therefore better positioned to raise additional funding.

And that's where most of the capital has gone. 88%. There are 237 billion of total space economy investment has gone to the satellites industry, but none of these industries were spared from the macro market pressures. The risk off environment has meant that VCs are refocusing on enterprise, SAS and deep Tech is feeling the pain as investments decrease across quantum robotics and space infrastructure.

Total investment year to date saw a steep decline versus Q3 last year. In Q3, VC investment volume in space was down 44% versus the broader market, which was down 31%. Infrastructure during Q3 was two and a half billion dollars, largely driven by growth rounds in Space X and several others. By our accounting SpaceX and Blue Origin now account for a third of total investment in space infrastructure over the last decade.

Chad Anderson

Since 2013, the United States has led global investment in infrastructure, representing a full 67% of the total. In Q2, we broke out emerging industries for the first time as a subset of infrastructure, and I think this data really highlights the irrational exuberance of 2021. Our data shows that over a little over 3 billion has been invested into these emerging industries over the past decade, with nearly half of that total invested in 2021 alone. This record level of investment last year was driven by venture capital firms, many of whom in the height of market mania, were investing in the category for the first time. So when you hear investors say that the space economy is in a bubble, you may want to look at their portfolio and see if they're really describing their limited experience with this 1% subset of the highest risk business plans.

It's not enough to merely identify a market opportunity. You also need the category knowledge and the experience to pick the winners. And overall, we expect that the macro environment will continue to disproportionately affect funding for companies with high upfront CapEx, including launch and emerging industries. But again, companies providing data insights and critical services to enterprises and governments will be better positioned to grow revenues in the near term and have a higher likelihood of raising growth rounds in a more selective market environment over time as the markets begin to differentiate.

Chad Anderson

We believe the value of deep technical expertise and strong fundamentals will be rewarded and our firm continues to invest accordingly. So, we've talked through how the macro market is affecting venture, particularly detect. But investors can be irrational, and markets tend to overcorrect but may get lost in the noise is that space technologies are playing an increasingly important role in the global economy. For example, with the iPhone 14 launch, Apple announced its partnership with Globalstar to provide emergency communication services to its 1 billion users.

While this service will only offer text messaging to start, this initial step, to integrate SATCOM into mobile devices has significant implications. And Apple is no stranger to innovating with satellite capabilities and the GPS playbook we explore. Apple's integration with of GPS into the iPhone 3G helped fuel the rise of location based services and companies like Uber, Lyft and SNAP, what we call the applications layer of the satellite industry.

Chad Anderson

Apple wasn't alone in their Satcom announcement this quarter. T-Mobile and SpaceX also announced plans to bring persistent, ubiquitous coverage to U.S. customers using StarLink to provide satellite to cellular service regardless of who comes out on top. This convergence of terrestrial and satellite communications networks provides tremendous opportunity to rethink how our data is captured, routed, stored and utilized. The SATCOM playbook unpacks the innovations driving these changes and what it could mean for our day to day lives.

Additionally, record revenues for remote sensing companies are demonstrating how the space economy is both counter-cyclical and resilient to macro market conditions. In September, Planet announced a 59% increase in fiscal year Q2 revenue year over year, with net dollar retention of 125%. This performance was driven by growth in both enterprise and government customers, existing and new, whose operations rely on critical data and insights from satellites.

The global geospatial market is expected to grow from 63 billion to 148 billion in the next five years. The ability to collect, process and analyze endless amounts of geospatial data is creating powerful new applications that are helping to reshape how the largest global industries operate. Now, to help us get our arms around these countercyclical investment opportunities and what all this means for companies operating in these markets, we're going to be joined by a couple of guests, each of whom are market leaders in Satcom and join.

Chad Anderson

First, we're going to speak to Anand Chari who's co-founder and CEO of K4 Mobility, a digital technology and Internet services provider for off grid communications. We invested in K four earlier this year. Anon has built an incredible career in telecoms, including 15 years as co-founder and CTO of Gogo, where he developed and deployed two generations of air to ground networks, expanded the company globally using satellite technology, IPO’ed and a billion and a half market cap, and continued to grow the company to over a thousand employees and 800 million in revenue. Anand, it's great to have you with us. Thanks for joining.

Anand Chari

Thanks for having me, Chad.

Chad Anderson

So first off, can you tell us a little bit more about K4 and what it is the company does?

Anand Chari

Sure. So we are a technology startup based out of Chicago. We developed network management solutions for enterprises. We started in maritime under two of its super yachts, but we are now expanding within maritime and beyond maritime. We started with super yachts just to get feedback from the customers and fine tune our software. So early adopters are those businesses that have numerous mobile and remote locations of nodes as you can imagine. We have numerous mobile and remote wireless Internet choice, often using satellites on cell tower-based technologies, but then the business has many locations, and each location they have a choice of wireless networks, satellite providers and cell tower providers. And they have many endpoint sensors, devices, people at each location, whether it's a ship player and retail location that want to connect to the Internet. So, the enterprise's challenge is really managing those many, too many to many the many endpoints, many locations, many networks, and therefore develops the software that helps some enterprise get visibility, get control, have security in all of these locations. So that's what we do.

Chad Anderson

Very interesting. Okay. And so can you tell us a little bit about your product, K4 Hydra, that you are your first go to market product and how you integrate 4G, 5G and satellite connectivity?

Anand Chari

Yeah, absolutely. So much like most of the modern products, our care for Hydra has three pillars an edge cloud and the app. So, Edge is a software running on a piece of hardware. That hardware could be a care for hardware and third-party hardware. That is a remote location, whether it's a ship or a plane or a store. And the cloud has much like iCloud, all the intelligence to control and orchestrate the edge as well as do data analytics. And the app is where all the power is. We bring a consumer like experience to an enterprise, the IT department or the ops department of a business using a mobile app or a web browser now can get visibility of all the locations.

You can do easy troubleshooting by clicking on the apple. A single connect gets you into any one location you have secure access. You can have different levels of access to different employees. So that's the product. It's a common software platform across all industries, but depending on the industry, the hardware that the edge on sound will differ. But the cloud and the app is a software only product that's applicable to many industries.

Chad Anderson

So, what do you make of these satcom and terrestrial announcements of the last quarter, the Apple Globalstar and Space X and T Mobile?

Anand Chari

Look, it's really a great idea and it's a great service. And I believe it's the start of many things to come in the future. You know, in some ways I see it as a culmination of all the innovation and evolution that has been taking place in the wireless communication over the last three decades. I would say three things I would name.

One is the smartphone itself, and the smartphone is such a powerful device now that we have it in such announcements. And service is easy because it supports multiple bands, it supports multiple protocols. The second enabling factor is the nationwide availability of a mid-band spectrum, the 1 to 6 gigahertz spectrum. You know, in the nineties I was in the cellular industry there was no such spectrum available, of course, in regulatory bodies throughout the world have made that spectrum available.

Anand Chari

And that's what Apple, T-Mobile and Globalstar are planning on using. And the third is really cheaper satellites. The cost to launch a StarLink satellite probably sits at about the same cost of a lower cost than anything a cell tower and putting all the electronics. So then you combine these three things cheaper satellites nationwide. Mid-Band spectrum. A smartphone like powerful device. Now, you could enable a service like this. It makes all the sense in the world a cell tower should be 500 miles tall and sitting and covering in all vast space of Earth. That's the best way to provide grid connectivity, I think. I think we're going to see more innovation like this coming in the future.

Chad Anderson

That's great. So earlier this year at the the big satellite conference in D.C., there was a panel of satellite executives and they predicted that 5G based networks would combine with satellite and terrestrial infrastructure would combine and be available in the next 5 to 10 years. And that satellite mobility providers expect to offer customers seamless transitions between terrestrial and satellite networks within a decade. It seems like things may be moving faster than that. What what's your take on it?

Anand Chari

Well, it's a little bit of a mixed bag. Definitely. Things are moving faster. With the startling T-Mobile announcement and the April Global Start announcement. The traditional legacy players trying to have a unified 5G framework for satellite what they call a non-terrestrial network using 5G. I still think it's on a slower track, and I hear a couple of flavors of it. One is use of 5G over the out of protocol and the second flavor of the 5G core network protocol. But continue to use some legacy in modem and technologies and so on. I think the faster the working group and this initiative gets a real proposal, a real framework for standards-based approach, it's good for everybody because standardization is going to bring many players in the industry.

It's going to ease the adoption of the technology. It's going to in fact expand the total addressable market. I think the satellite industry for a long time has been playing what I call a zero-sum game. And so, they perceive in that realm as competitors, loss of competitors, winners that allow us to build proprietary systems. They increased the switching cost for everybody to go from one network to other. And those things got that viewpoint has to change. And I hope this 5G initiative is the right step in the right direction. It just needs, you know, more muscle behind it, more financial muscle, more technical muscle to bring it down to make it a reality. Otherwise, even after five, ten years, it could still be a working group item that is, you know, designed to a few intellectuals.

Chad Anderson

I'm glad you brought that up, because I wanted to ask you about that. You know, our research shows that customers are demanding this now as well. Right. That they're looking for interoperability and the ability to buy an antenna that can speak to multiple different systems, you know, terrestrial one. It makes sense. Satellite when it makes sense, you know, optimizing for the capacity and the price point and the latency, which is, you know, what you referred to as intelligent orchestration.

So, customers want this for working towards this. What do you think is the thing that's going that's going to enable this? Right. What's going to help make it easier for these customers to go out into the market, be able to buy an antenna that speaks to to the best system available?

Anand Chari

Yeah. No, there are two layers of enablement. And we are doing one of them right now, which is offer a network management platform that is neutral to all the networks that allows customers, like you said, they are looking for, you know, faster and cheaper connection and it is available in the form of Leo Terabits per second satellite constellation and 5G.

So, they are making it easy for them by giving them a network management layer that is not so network specific. So now they could easily switch, upgrade to new networks. The second layer of enablement is what you are talking about. I think the industry should speed up and interoperability, whether set a modem level at an internal level. So, you need those multi-band antennas, you need those multi constellation antennas and modems that are standard. The best way to go across terrestrial and satellite networks and across a variety of satellite networks. So the second stage or the second layer of enablement could take some time, but we are enabling the first layer right now.

Chad Anderson

That's great. Then last question for you. We have serious capacity coming online with StarLink and Amazon's Keiper, Oneweb, etc.. How do you think about this new capability? What's on the horizon? What will you know? How will Satcom continue to evolve over the next few years?

Anand Chari

Yeah, no we welcome it. In fact, if there is a one pain point that the industry has faced over the last couple of decades, it's that the bandwidth is expensive and slow. So all this new bandwidth and new capacity solves that problem. Now it's a matter of how do you get fast adoption? And I think the way to get faster adoption is make it super easy for them to upgrade and switch to these networks and make it easy for the businesses to manage such upgraded networks are a mix of some legacy networks and newer networks.

And of course, the more interoperability we drive into these innovations, the more interoperable these capacity becomes that adoption is going to increase much like, you know, smartphone revolutionized the world for consumers. I believe this new capacity is going to revolutionize the connected connectivity of the connected world for the businesses.

Chad Anderson

And that was great. Super insightful. Thanks again for taking the time to join us.

Anand Chari

My pleasure. Thanks, Chad.

Chad Anderson

Next up, we're going to be sitting with James Slifierz, founder and CEO of SkyWatch, the company that's enabling a new era in geospatial intelligence by providing developers the tools they need to efficiently and cost effectively integrate Earth observation data into their applications and workflows. We first invested in SkyWatch’s Seed Round back in 2018 and have invested several more times over the year since.

James, thanks for joining us.

James Slifierz

Chad Thanks for having me.

Chad Anderson

For those who aren't familiar, can you introduce SkyWatch and your value proposition?

James Slifierz

Certainly so. We are the market leading distribution platform for Earth observation. So, to give you a semblance of what that means, we have hundreds, nearly 400 satellites in space in orbit, going nearly eight kilometers a second that have cameras on them of all different types owned by dozens of different companies, organizations and governments around the world.

And then we have the millions of people on the planet that we think could benefit from this data. And SkyWatch’s job and its mission is to connect those two things to help the people here on the planet benefit from all the interesting data that we are capturing in space. So, we do that primarily through two products.

James Slifierz

We have Earth cash. Earth cash is our API for satellite data. You can think of it as analogous to something like Twilio or Stripe, just a few lines of code. Our customers can easily integrate satellite data into their software or their applications or workflows, etc. They can tell us what they need imaged. We work with satellite operators, by the way. They tell us programmatically what they image and we work with the satellite operators to make sure that those needs get scheduled, captured and then delivered back to our customers.

And then we also serve data we serve a product called Terrastream into the satellite operator space. And you can think of Terrastream as a Shopify for space companies pulling together all the downstream infrastructure that they need while providing excellent data management and distribution capabilities so that they can focus on serving customers, generating revenue, and building a profitable company once they're able to get their asset up into space.

Chad Anderson

I'd love to hear the way that you're talking about this traditional EO as very vertically integrated. It's built, you know, kind of for a big monolithic government customer. Your model is very different and it's helping to create an entirely new customer segment on the commercial side that a lot of people have talked about, thought about, imagined and hoped for. Who are your customers? You know, where are you seeing the greatest adoption on the commercial side?

James Slifierz

So, you know, I'm proud to say that SkyWatch has one of the largest customer bases in all of Earth observation. So, we are just passing the 800 customer mark. Those customers are across 50 different countries in over 25 different verticals. So, it's a real true horizontal go to Marketplace.

We'd like to say that the value proposition is that a satellite is the fastest and most affordable way of getting information about any location on the planet. So if you are in a business in which you need information about some location, so whether you are monitoring an oil pipeline, a railway, you're monitoring deforestation, you're monitoring the climate, if you can observe it from space, you can do it through SkyWatch. You know, most recently we saw we're all familiar with the events happening in Eastern Europe between Russia and Ukraine and the BBC had cited Sky Watch at the time. In fact, SkyWatch and one of our customers being months ahead of the rest of the world and identifying what was about to take place there. And a lot of that was enabled through satellite imagery.

Chad Anderson

Amazing. And so you talk about the opportunity here and you say that it's the biggest GPS. You know, we tend to agree with you, you know, but I'm curious, you know, can you talk us through your thinking? Help us understand what you mean by that.

James Slifierz

Certainly so. GPS largely started to get its commercial traction in the early 2000 and against a lot of skepticism. But we say that, you know, we often like to cite GPS as having grown as fast as it did due to three core attributes affordable affordability, accessibility, and standardization. And when you look at Earth observation, it has help. The inverse of all three of those attributes, it has been unaffordable, inaccessible and very fragmented industry. And it's a shame because we believe to you what your point.

The potential can be much larger than GPS because the reaches broader like the amount of verticals we're seeing adopt, this technology is stronger. And then the depth in which you can help these industries with this data is stronger as well because, you know, different from GPS, which is primarily location data, earth observation provides very rich contextual information about what is happening in those locations. And so we see it as our mission to make Earth observation standardized, accessible, affordable, and to enable the type of market growth that we hope rivals GPS over the next couple of decades. So right now, earth observation, if you were to compare with GPS it is about 2002 or 2003 right now.

Chad Anderson

I love that analogy. I mentioned earlier that the space economy, particularly geospatial intelligence, is counter-cyclical and resilient to these macro market conditions. Are you seeing the market demand for Earth observation data increase as the world becomes more dynamic and uncertain?

James Slifierz

Yeah, it's very interesting. You wouldn't tell by traction and developments in the market that we're going through a down market of any type. The growth, just for example, within our customer base growth continues to be three X year over year across all major KPIs.

And part of that is driven by if it's, you know, so it's countercyclical. People are trying to find more efficient ways of doing things that they already do. So if you ask me, like, who are some of your early adopters, they're they're not creating necessarily a lot of them are creating new use cases, but a lot of them are just figuring out how to use space technology to do something they already solve inside their business, but more efficiently and more affordably and it goes back to that value proposition, that satellite imagery is the fastest and most affordable way to get information about any location on the planet.

James Slifierz

And then on the satellite side, you know, as capital has become more expensive over the course of 2022, it's been it's been I think more companies are trying to figure out how to get into orbit more efficiently and reach customers more profitably. And so with our territory and project a product, we've seen just a tremendous uptick in adoption there over the last nine months as companies realize that they don't necessarily want to deploy the capital to build this type of infrastructure themselves, which is primarily how companies have gone to market in the space for the last 20 years.

So there's things that are shifting really favorably and to the point you made in your investment quarterly, if you're not a CapEx business and if you are a CapEx heavy business, if you can convince investors that you have a path to market and a path to customers that is efficient and competitive with what everyone else is doing, I think you put yourself in a favorable advantage.

Chad Anderson

Okay, so this growth is not going unnoticed. Big tech cloud providers have gotten in the game AWS, Microsoft, Azure. Are these competitors or partners or how do you how do you view their entrants?

James Slifierz

They're certainly partners in the truest sense. We've been we've announced partnerships with Amazon Web Services, particularly their AWS space and ground segment business line, as well as having announced agreements and partnerships with Microsoft, Azure, Orbital and the goal there and I think what they want to enable and what we want to enable is they want they're...I mean, they identify by how fast this market is growing and how lucrative it's going to be over the next 10 to 20 years. And they're trying to position themselves as the infrastructure to support the massive amounts of data that are going to be transmitted and processed in this ecosystem.

And they see us as an enabler of that. The companies we work with, both the customers and the satellite operators, because we're right in the middle of the market, they trust us tremendously. So if they're looking to use a ground station or looking to use a cloud provider, they come to us first and the cloud providers want to partner with us as well as are the other big tech companies, because they know that we are an interesting and reputable insight and window into where the market is going and they can help us better serve our customers through highly scalable computing infrastructure and hopefully continually decreasing downlinking costs.

Chad Anderson

Okay. Last question for you. As you think about this macro market that we're in. What's on the horizon? How will it go and continue to evolve in the future?

James Slifierz

You know, what we try to push here in our organization is to continue to think about a programmatic world where so many of these interactions are machine to machine. We don't talk enough. I don't think about sort of the weather industry or weather vertical and how space enabled that is. And a lot of that is purely programmatic. And look what it's enabled in terms of applications and insights around the world. Within Earth observation, I mean, I would say geospatial and GEOINT more broadly, just like every company, you know, became a technology company and soon every company will become a space company.

We fundamentally believe that every company in some sense will be a geospatial company as well as well, in that they need to manage geospatial data and infrastructure. And we see a world in which we are the backend of all of that and enabling that. And so in order to make that vision in that world come to fruition, costs and to come down infrastructure needs to be built and we'll continue to push on that mission and that vision.

Chad Anderson

It's a great note to end on, James. Very interesting stuff. Thanks for coming on.

James Slifierz

My pleasure. Thank you.

Chad Anderson

All right, folks. That's it for this episode of Space IQ. Thanks again for joining us. We'll see you again in Q4.