After the SPAC Rush, the Space Industry Moves On
By James Hydzik // June 30, 2021
As the SPAC phenomenon engages in an unplanned rapid decline (URD), also called a crash, investment into the space industry seems more uncertain than ever. The popularization of SPACs took a well-known process with clear risks and turned it into an investment fad. Now that the bubble has burst, where will all these space tech projects turn for funding?
It is possible that after the hype around the fall of SPACs calms down, specialists might still find the process a useful way to become a listed company. However, from a funding point of view, the majority investor in the space industry will be governments.
In 2020, Organization for Economic Co-operation and Development (OECD) pointed to the fact that the bulk of investment into the space economy was still from government sources. G20 governments budgeted USD 79 billion in funding for various space activities, including investment into new projects.
Moreover, OECD estimated in 2019 that world-wide commercial space sector revenue reached approximately 290 billion, but manufacturing space systems accounted for only USD 20 billion of that, and that it was “often sustained by government procurement”. For some segments of the space industry, at least, government support is likely to play a substantial role for the foreseeable future, despite commercial inroads.
Shiny new wrappers
SPACs became a vehicle of choice lately for companies in many high-tech fields looking to short-cut the typical path to gaining a stock exchange listing. However, SPACs have a decades-long history, and both the short-cut and its shortcomings are not secrets. Whether or not they become popular again among mainstream investors instead of space-sector specialists is irrelevant, as the route stays open for companies looking to gain institutional investment. Likewise, for the industry, the problems remain the same.
A SPAC consists of two corporate elements. The first is a company that is already, or becomes, listed on a stock exchange. Either way, the purpose of the company, as far as the SPAC is concerned, is acquiring the target unlisted company or companies. If this holding company is being created from scratch, it will have to go through the exchange’s listing process. However, passage will be relatively easy, given the lack of activity.
Sometimes the target company is already known, or the holding company is built around subject matter experts who are looking within a particular direction or industrial segment. Others are created from scratch as financial entities without a solid picture of their intended target. Regardless, the target company is not publicly traded.
Setting aside the current URD, SPACs have risks that the traditional route to listing a company does not have. Some are shared with reverse IPOs.
Clashes of corporate culture or direction can be deadly to a company. Due diligence on the unlisted firm needs to dig deeper more than just stated figures from the tax and projected earnings perspectives to ensure that the numbers match reality. On the other hand, SPACs can offer an advantage over a reverse IPO in that the listed company in a SPAC is always a shell company. The shell company should have a clean slate when it comes to due diligence.
Structure and infrastructure
While the headlines focus on the URD and the pain to retail investors, the question arises regarding how much this will affect the industry. For some segments, the answer is “Not much”. OECD notes that governments, and especially G20 governments, fund the bulk of the initial investment into launch and infrastructure.
Euroconsult, in its Space Economy Report 2020, noted that while the commercial upstream segment totaled $ 9 billion, the government sector alone totaled $70 billion without taking into consideration government downstream (roughly equal to post-launch activity).
When taking into account that governments are often the largest clients in space activity, the scope of government funding, either as an investor or customer, is the lifeblood of the industry. Euroconsult points out that total commercial downstream activity totaled $306 billion in 2020.
One recent example of how important government investment can be is NASA’s April 2021 awarding of a $2.9 billion contract related to the U.S. return to the moon, called Project Artemis.
Instead of the spacecraft being built in-house as it was during the Apollo era, SpaceX will build NASA’s manned spacecraft for the journey. Moreover, NASA is looking at Artemis as a stepping stone for further manned exploration.
This does not mean that government investment as an investor or as a customer is without controversy. Sometimes, the questions come as a matter of overall policy, like whether manned space exploration such as Project Artemis should be publicly funded in the first place.
A more direct controversy arose in 2020 when the UK became involved in the purchase of OneWeb. The Johnson government invested approximately £400 million to become one of two major shareholders in OneWeb, along with Indian telecoms giant Bharti Enterprises (and joined for another $550 million in 2021 by Eutelsat).
The company’s utility to the UK government has been under question since the first announcement of the purchase. Irregularities in the government’s handling of the decision making process and actual funding continue to draw fire. Assertions that OneWeb could be used as a Global Navigation Satellite System (GNSS) replacement for the EU’s Galileo, which the UK helped develop, were met by negative technical assessments by commentators.
Britain’s investment into OneWeb proceeded through the National Security Strategic Investment Fund (NSSIF), a state-owned venture capital fund set up as a vehicle for UK investment into dual-use high tech and emerging fields. Other NSSIF investments are not as high-profile as OneWeb. They include a synthetic data generator and a secure messaging platform.
The U.S. is considering venture funding for projects as well, but from a different angle. In a November 2020 report, NASA considers the best ways for the agency to leverage VC funding to achieve its many goals. This is a very different path from the Apollo-era government-funded route or even the late-90s, when companies such as Orbital Sciences initiated the horizontal launch era for both governmental and commercial clients.
Tighter communication and more open discussion of both NASA’s and the venture capitalists’ needs should make space technology as an industry more sustainable.
As the authors of the report put it:
“VCs pursue opportunities to seek profit, by investing in the development and growth of successful businesses, while NASA seeks a growing and thriving commercial space sector to provide the products and services needed to support its missions. There is much common ground to consider, and the study authors believe that increasing the depth of dialogue with the VC Community will serve Agency needs.”
At the same time, direct investment from the budget is not going away soon. One example of this is the investment into spaceports such as Spaceport Cornwall.
The Spaceport hopes to be in a position to begin hosting Virgin Orbit launches beginning in spring 2022, and is expecting to apply for licensing later in 2021. Turning Newquay Airport into Europe’s first commercial horizontal launch hub is possible after millions of pounds of investment by both UK Space Agency and Cornwall Council.
Government funding does not necessarily have to be direct, however. The space industry requires sets of skills that lend projects toward cooperation.
One case in point is the May 20, 2021 announcement by Firefly Aerospace that it had given the nod to SpaceX for launch services beginning in 2023 connected to Firefly’s Blue Ghost moon lander.
A SpaceX Falcon 9 launch vehicle will take the Blue Ghost lander to a point where, under the lander’s own power, it can carry 10 NASA payloads to the moon NASA is the primary customer for Firefly Aerospace under a $93.3 million contract that was awarded in February 2021, but up to 50kg of commercial payload, separately contracted, could also be delivered.
With NASA working more closely than ever with both commercial launch and lander companies as well as venture capital, the ups and downs of SPACs will not gravely effect the space industry.