Space IQ: Q4 2023 Review

The Space Capital Podcast


February 20, 2024

In this episode we present the Q4 2023 Space IQ, the Space Capital quarterly review of startup activity and investment trends in the space economy

In the newest episode of the second season of the Space Capital Podcast and this is the Q4 2023 Space IQ review, our quarterly analysis of startup activity and investment trends in the space economy. Managing Partners, Chad Anderson and Justus Kilian are going to walk through the results published in our Q4 2023 Space Investment Quarterly, explore current market dynamics, and deep dive into specific themes with industry leaders in Satellite communications and Geospatial intelligence.


Show notes

Episode Transcript




Space IQ: Q4 2023 Review

“We've been talking about this every quarter as we've gotten deeper and deeper into this liquidity crunch. Investors are shying away from applications and location-based services, but at the same time and counterintuitively, there's record amounts of money going into space infrastructure.”

Welcome to the Space Capital Podcast. I'm your host, Chad Anderson, founder and managing partner at Space Capital, a seed-stage venture capital firm, investing in the space economy. We're actively investing out of our third fund with a hundred million under management. You can find us on social media @SpaceCapital. In this podcast, we explore what's happening at the cutting edge of the entrepreneurial space age, and speak to the founders and innovators at the forefront.

Chad Anderson:

Welcome, everyone to our office here in New York City. It's good to have you with us as Justus and I discuss startup activity and investment trends in the space economy. We're going to cover a lot of data from our Q4 Space IQ Report that we just recently published. Q4 is a fun one because we get to look back on the year that's just passed and the year ahead, and so, what to look forward to. 2023 was a tough year. The collapse of Silicon Valley Bank, a wave of layoffs, down rounds across tech. It was a tough year, but at the same time, the space economy was really resilient and showed a lot of signs of resiliency. There was $4.5 billion invested in Q4, so 18 billion in 2023. There's now been 298 billion invested into 1800 unique space companies over the last 10 years. To kick things off and get started, what were the highlights in your opinion, looking back at the year, what were the highlights for you? Why did space show resiliency?

Justus Kilian:

I think this year, as many years in the past, has to focus on SpaceX. No one executes like the team at SpaceX, head and shoulders above everybody else, every government in the world, they're just doing things that nobody can even keep up with. So we've heard some of the high-level numbers, incredible record-setting year in terms of launches, 96 successful launches, including five Falcon Heavies. Incredible. They set a record reusing boosters 19 times. It was only a few short years ago that we didn't think reusing boosters was even possible, much less 5, 10 times. Now we're almost at 20 times being able to reuse these boosters and...

Chad Anderson:

And they're certifying them for 40 going forward.

Justus Kilian:

Yeah. It's absolutely incredible. They did the shortest turnaround time between launches, set a record there with three hours between different launches within the company, and then they had two flights of Starship, and I would argue both of them were incredibly successful, got off the pad, didn't totally destroy everything, and learned a tremendous amount and made a lot of technical progress. So, just on the launch side, incredible milestones, record-setting achievements.

Then you get to the Starlink side of the equation, 67 of those 96 launches were just for Starlink. Starlink is SpaceX's biggest customer. It's incredible. And that's where that reusability comes into play, and it's so important. There was 1,776 new Starlink satellites launched. Again, a few short years ago that magnitude of total satellites was not even fathomable. Six new direct-to-cellular satellites that were launched that is really going to open up an entirely new market for how they operate. And we did get a peek into the revenue figures that became publicly available through Wall Street Journal World that said 4.6 billion in revenue for the company for 2022. Q1 cash flow, positive net income, and real potential to double those figures in 2023. That is real revenue growth, that is strong. There's a robust company here, so hats off to SpaceX, the team there. Just the incredible technical achievements. That to me is the one big thing for last year.

Chad Anderson:

Yeah, absolutely. The number of launches is incredible, right? It was a record year globally for orbital launches. SpaceX accounted for half of that, so clearly dominating the market. Everyone last year launched on SpaceX. But the number of launches is one thing. The massed orbit is like SpaceX absolutely dominates the market in terms of massed orbit, and a lot of that's Starlink, really fascinating stuff.

So, we should probably address this one head on if you look at total space economy investment, 2023 was the lowest year on record for the last 10 years. And the reason for this is because investment into applications really fell off a cliff, so they account for three-fourths of all investment into the space economy over the last 10 years. So when applications takes a hit, that really has an outsized impact on the overall numbers. This isn't a surprise, we've been talking about this every quarter as we've gotten deeper and deeper into this liquidity crunch. Investors are shying away from applications and location-based services, but at the same time and counterintuitively, there's record amounts of money going into space infrastructure.

So last year was the second-highest year on record for investment dollars going into space infrastructure companies. Only 2021 was higher, the height of market frenzy. Infrastructure investment accounted for 70% of all investment last year. That was the primary, the dollars that were going into the space economy went to infrastructure, and also into some of these emerging industries in lunar and space stations and manufacturing and space traffic management solutions, so why is this? I think that one of the big things for me looking back on 2023 was, why is this sort of counterintuitive scenario playing out? And it's because of government dollars. In this market, in this economic downturn headwinds, revenue dollars are hard to come by, but governments are continuing to spend across market cycles, and there's more investors that are willing to fund them.

Every VC right now is talking about defense tech. They're talking about defense tech, and they're talking about AI, both of which space companies have a huge role to play, and companies are doing interesting things in both of those areas, so that was a key theme for me. And also, just thinking about governments around the world starting waking up and recognizing that space-based technologies are essential for our national security, and economic stability, and economic growth. And so, you think about, we pointed out in our opening letter and that the DOD is re-architecting its approach to solutions and leveraging more commercial capability. And the US DOD is a trillion dollar annual budget. So, any small movements here are going to have an impact, a large impact on space startups and investment. This, is something that was really pronounced in 2023, and it's going to continue into 2024 and beyond as large government agencies learn to work with and how to procure services from commercial companies. I know you're doing a lot of thinking about this too, anything to add there?

Justus Kilian:

I think that's the key-point. You heard a lot of space companies talk about a shift to defense tech, and that was a clear theme in the year. But what underlined that is the US government, US DOD, re-architecting how they build and manage their assets. And this is going from concentrated systems, where you have key-points of big expensive, elegant solutions both in orbit and around the world, to distributed systems, low cost, high-tech, more software based, that are expendable. And this is in ramp up to a new potential space race and global arms race. And there's a fundamental re-architecting that is underway. And so you can see in the budget, the growth, particularly within what goes to the space force and total space spending has been increasing significantly more so than other departments-

Chad Anderson:

20 or 30% a year, or something like that.

Justus Kilian:

Yeah. Over the last three years. So, their increased dollars, increased willingness to adopt technology, and an increased reliance on commercial partners to help augment the capabilities in this transition, and the transition still underway. The plan is out there, it's known, but the government is picking the winners and, ultimately, who they're going to rely on to determine how they're going to win. And so, that's what the investment dollars are pursuing, that one or two or three of these companies are going to really end up dominating and be critical part of how the US DOD operates.

We do have a new report that'll be coming out, that focuses really specifically on space and the soft underbelly that has created a real opportunity for our adversaries and how that re-architecting is happening, and we go really deep into it. It's actually a really great piece. And so, some people should keep an eye out for because there's a tremendous amount of insight there.

Chad Anderson:

We were talking about this earlier, but just picking up on something that you mentioned about the government picking winners. So the government thought, they're looking to tap into commercial capability. Commercial companies are moving very quick, they're innovating very fast. Look at the accelerated test programs of SpaceX and others. There's some really interesting technology that's being developed, and governments generally are not great allocators of capital, so they're not great at picking the winners. What they're looking to do is to cast a wide net, and get access to some of these new capabilities and plug them into their programs. And so, that's part of our role, is helping to find these companies early on, and to invest in them, and help to make those connections. Right?

Justus Kilian:


Chad Anderson:

I think we do some of that in our reporting, and we talk about that a little bit in the report too.

Justus Kilian:

And I think the dollars... The companies that the VCs back and consolidate their investments around are going to force a winner here. It's going to be an interesting dynamic to watch play. Government wants to spread the money around. Venture wants to consolidate that money, and so, there's going to be a real tension there to see how it actually plays out.

Chad Anderson:

And if it works, well, we're going to get access to some really interesting innovation, new capability.

Another thing I wanted to touch on is a new section that we've published in the report, The Path to Exit. What we're really trying to do is to connect our private markets' investment and startup activity data to the public markets. It's to provide some connective tissue. So I think there's some really interesting data and insights that have come out of that.

We're two years into this market downturn and this liquidity crunch. How is it affecting M&A and IPOs? How is it affecting valuation multiples of these companies as they go, as they get acquired? Who are acquiring these companies? What are the most valuable companies in the space economy, in the private markets? So, we cover all of that.

There was record M&A deal volume last year. These are not the types of acquisitions that investors really want, these weren't very high value or high valuation step-ups. But there was a lot of activity as companies look to integrate interesting strategic technologies, acquihire, interesting teams, but the majority of companies that were acquired were infrastructure companies that need a lot of capital and might be struggling in this market and get picked up by a competitor or someone else that's in their space. And so, Rocket Lab, for example, is very active on the infrastructure side, acquiring satellite companies to help them build out that part of their business. Planet is really active on the applications side, trying to stimulate market growth and help drive applications being built on top of their dataset.

So, anyway, the exit data is really interesting, and it's also shows the differences between the space capital markets and the broader tech and capital financial markets, because this was a rough year for M&A activity and IPOs. The IPO market is frozen. M&A activity was at record lows, broadly. But in the space economy, there's a lot of activity happening as things start to consolidate. So, anything to add to the path to exit section that you saw that was interesting?

Justus Kilian:

It's really critical data, and it was exciting to look at it, particularly the heat map of how value is being registered within the whole space economy, and just how much SpaceX actually really makes up of the total valuation. It's very visually apparent how big of a fish they are. The other thing that was really interesting is we talk about the total capital that has come in to these companies, but then, you can look at the total exited valuation across the top 10 transactions, and we actually highlight that in the report. And so, just within those top 10 transactions, there's a positive multiple in terms of return on capital across all the other failed companies. So that is a positive indicator of health across the space economy that I think is probably a little bit more subdued in the report but worth people being aware of.

Chad Anderson:

Oh, absolutely. Thanks for calling that out. So $289 billion of investment capital into the private markets, private space markets, over the last 10 years. Just in the top 10 exits there's been a positive multiple on that total investment. So, good to call that one out.

Okay, so one thing we should definitely talk about before we get off the line here is areas to watch in 2024. So why don't you kick us off, and what should we be looking forward to? You mentioned already the direct-to-device satellites at SpaceX launch at the end of the year, which is, we're all very excited about that, but what else you got?

Justus Kilian:

Yeah, so there's a couple transactions that were really emblematic of what was important for 2023, and what's going to be driving 2024. So, one that I think is worth highlighting is, Blue Origin self-recapitalization. We highlighted their $2 billion investment, huge reorganization there, big efforts on getting their launch capabilities to market and some of their broader applications that they're focused on, getting to the lunar surface. And so, that's really exciting to see potential competition coming into play here.

Armada is a company that came out of Stealth with their seed and series A announcement raising 55 million. We talked pretty extensively about the importance of satellite communications, the downstream use of satellite communications. But for SpaceX and Starlink to really realize its value, they have to have distribution partners, so T-Mobile is a key one. So our motto is really that the customer service and delivery arm of Starlink, and they're focusing on some of the highest value opportunity sets with edge computing for defense and energy and mining in remote or resilient communication environments, so it's a really important one to watch because it's helping increase the size of the market, helping make this capability and technology more accessible.

And then, Shield AI, they had a 300 million raise, focus on GPS, denied environment, communication, denied environment, creating autonomous capabilities, defense tech. That will continue to be a key theme in the year ahead. So those three transactions really stood out to me as indicators of what was happening last year, but are going to lead into the year ahead. Those are things that I thought were really important, and we do have a bunch of extra research, that if you want to go deeper, you can. The SatCom Playbook's a really good one to dig into.

Chad Anderson:

Just a couple of things to add to that too, so it was a record year for launch last year. That cadence is going to increase this year. SpaceX did 96 launches last year. They're talking about doing 150 this year coming up, including orbital launches of their next generation vehicle, Starship, which is going... Talk about math-orbit, this is going to make the records of today look minuscule by comparison. They're be launching a lot of their new Starlink satellites, including their direct-to-device satellites. It's been really interesting to see just in... They've got a partnership with T-Mobile to help distribute and connect your cellular connectivity in remote areas where you don't have connectivity. They've just did a big deal with John Deere to connect tractors, so we're just on the front end of starting to see the importance of this.

But despite SpaceX's dominance, their competitors aren't going away quietly. As you mentioned, Jeff Bezos continues to invest heavily into Blue Origin. This could be the year that we see the sleeping giant awaken and get to orbit and to start delivering on a lot of these promises that they've been making over the last few years, which would be great. There's long awaited competition for SpaceX. Competition is great. You want to see it in, as investors or innovators or just participants in a market. You want to see more competition. It increases innovation and lowers prices. And you see Amazon's Kuiper satellites, they've got their first two prototypes towards the end of last year launched. They're going to be doing more of that later this year with the new Glen vehicle that's coming online. So, we will have Starlink and alternative Starlink as well. Again, really positive.

Advancements in AI. AI plays a large role. It's horizontal that cuts across the space economy. It's going to continue to be, 2023 was a year that we experimented with AI. 2024 is going to be a year that it gets integrated into enterprise workflows, and we start to see it play a more integral role in companies. And with all this activity, we've got a more need for space traffic management and space traffic coordination. At the end of last year, we saw the first fine for not the orbiting a satellite, it was a small fine, but it laid the groundwork for helping to make sure that people maintain clean operating orbits. Office of Space Commerce has made their first purchase of procurement of space situational services in the first part of this year. So, that's going to continue to be an important thing 2024 and going forward.

And then, probably, again, going back to where we started, investment in the space economy remains strong, remains resilient. A lot of companies are showing how they can tap into countercyclical government and enterprise dollars. And this turning of the ship in terms of US DOD re-architecting its approach to procuring more commercial services. That's not going away. This is going to continue. So, it's a really interesting time to be here. Innovation is happening at a record pace. Government funding is only increasing, and private market investment dollars are following suit, really exciting time to be investing in this category. I think that the Q1 report's going to be really interesting to look at and see as we start to turn this corner and see where we start off in 2024. But anything else to add?

Justus Kilian:

The single most important thing that I'm looking for is, we've built a lot of this infrastructure, there's incredible capabilities on orbit, and it's really how do you make that more accessible to different industries and different users at scale? And AI is going to be an important part of that. It lowers the barriers to adoption, what AWS is doing with SageMaker and their project Argus, what IBM is partnering with NASA to be able to do that. Meta is doing a Segment Anything model, and these are lowering the barriers to entry for geospatial. Armada doing that with satellite communications, T-Mobile also doing that. So, there's a bunch of interesting and compelling opportunities there, but that, to me, is the single most important thing to justify all this infrastructure. You have to have more companies, more industries, more applications leveraging it and realizing the benefit. And that makes the market bigger for everybody. It really expands the TAM of the space economy, and that, to me, is the single thing I'm going to be watching.

Chad Anderson:

Yeah. Awesome. Let's end it there. Thanks everyone for joining us. We look forward to seeing you again in Q1.

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