Betting on the stars: what value can investors find in space?

05 June 2019

At 10.30pm on the 23 May this year a SpaceX rocket carrying 60 satellites blasted off from Cape Canaveral Air Force Station.

The ‘mega constellation’ joined over 4,000 other satellites currently orbiting the Earth and, once deployed, promises to provide high speed internet access to billions.

The risky and expensive process of getting satellites into space was traditionally left to governments and international space agencies, but Elon Musk’s SpaceX is now one of many privately-run businesses breathing new life into a sector that has been dormant for many years.

Fifty years ago, the innovations that led to the first man on the moon were ignited by strategic political positioning. Since then progress has been driven largely by profit: mobile communications, GPS navigation and weather monitoring have all become a significant part of our daily lives. The UK’s space services, for example, provide vital support industries worth about £300bn to the nation’s GDP1.

The new space race, however, is fuelled by both commercial gain and entrepreneurial vision and it’s not just billionaires such as Elon Musk or Jeff Bezos who are getting in on the act. Even smaller start-ups such as Rocket Lab or iSpace are beginning to make a name for themselves.

Space: a democracy

Venture capitalists invested a stratospheric US$3.25bn into space technology firms in 2018, a 29% rise year-on-year, according to Seraphim Capital data, a London-based space tech venture fund2.

This flood of capital and the commercial production of parts are encouraging the democratisation of the space industry. Technology that was being pioneered in the sixties is now readily available to all at a reduced cost.

Now that the technology is collapsing in price, space is in the remit of start-up companies

“Now that the technology is collapsing in price, space is in the remit of start-up companies,” says Mike Lawton, CEO of Oxford Space Systems (OSS). “We’re seeing the transition from very large incumbents ruling the show to private companies having access.”

OSS technician

OSS recently won a £1m contract with the UK Ministry of Defence for the development of cutting-edge, lightweight antennas used to capture data from Internet of Things (IoT) sensors [see image to the left]. The move was indicative of an ecosystem where big missions are often funded by large government organisations, but made in partnership with smaller players.

“By the time defence companies develop technology along traditional timelines, their solutions often lag behind tech you can buy on the high street,” says Lawton. “So we’re seeing defence players examining their processes and working out how to partner with disruptive, agile tech firms.”

It’s this environment that has allowed the New Zealand-based firm Rocket Lab, for example, to launch rockets for just US$5m – a huge drop in price from the original US$1.5bn NASA space shuttle launch.

Do smaller players offer value opportunities?

Most space developments have their routes in the US defence program and NASA will often allocate huge contracts to private firms.

The United Launch Alliance (ULA), a major provider of spacecraft launch services, even has a ‘block buy’ deal with the US government, giving it exclusive rights to dozens of launches over the next decade.

In fact in 2018, 64% of investment went to US companies, while European companies’ investment grew from 13% in 2017 to 18%2 in 2018.

It’s often the US firms specialising in satellite development and launchers that have received the lion’s share of capital.

Rockets launch

“SpaceX and ULA dominate the [spacecraft] launch sector. Those two have a lot of financial muscle (and personal wealth in the case of Elon Musk) but there are areas of specialism they’re not in,” says Graham Peters, Chair of UKSpace – the UK trade association.

“In the launch sector, there are UK companies that have developed new technology for single-stage-to-orbit engines and other engineering developments that aren’t being pursued in the US,” he comments.

Single-stage-to-orbit vehicles reach orbit from their original base without jettisoning any hardware.

Europe has also attracted interest in its growing ‘build’ sub-sector. This includes the development of hardware (sub-systems, platforms and sensors), software (such as mission control, cyber-security) and materials making platforms lighter, economical and more efficient.

Investment in European build companies grew to 36% in 2018, versus just 4% in 20172 and remains a key growth sector. In 2018, some of the key space tech investments included OSS (US$8m), which has less than 50 staff, and Reaction Engines (US$37m) which is also an SME.

When asked what drew investors to OSS build technology, Lawton’s response was pragmatic: “A typical fund lifecycle is 10 years. We’ve shown, in our business plan, we can meet standard BC investors’ needs in the timeframe of a typical fund. We can also generate the multiples of returns that they’re looking for.”

A look ahead

Private space companies tend to have a varied set of ambitions, offering a range of potential value opportunities to investors.

Peters believes that developing robots to clean up debris from orbits in space will be a big area of industry growth over the next decade. Thousands of uncontrollable objects are flying around orbits, such as redundant satellites and rubbish that has come off other spacecraft. This is a threat to in-use vehicles.

Space debris
An Oxford Space Systems (OSS) AstroTube boom on a UK debris removal mission

“As we see launches of multiple satellite constellations increase there is a growing risk of these small satellites becoming space debris if they fail,” says Peters of UKSpace. “We need to keep the orbits clean,” he explains. “For those orbits to be sustainable, companies need to service and de-orbit satellites. This creates interesting business opportunities,” Peters adds.

The capabilities and returns don’t come overnight, but they can be really significant if the businesses get it right

Another key area of growth will be providing more robust encryption technology to corporations by distributing data across multiple satellites, Peters predicts: “There is demand to reduce the risks associated with the current generation of encryption technology using quantum techniques, which is an area the UK has scientific leadership.”

“It is not investing for the short-term, when you’re investing in the space sector (depending, of course, on the business). The capabilities and returns don’t come overnight, but they can be really significant if the businesses get it right,” Peters concludes.

Man on the moon – 50 years on

The most important step in a century was taken by a boy scout from Ohio. When Neil Armstrong took ‘one big step for mankind’ on the moon 50 years ago, many thought that, by 2019, the human race would have ventured further into the galaxies beyond.

However, the goal posts have moved.

For a time the US and Russia relaxed their extraterrestrial activities, in the absence of the Cold War threat, but recently competition has been heating up.

India and China are keen to show they’re on equal footing with the world’s superpowers. China has launched manned missions into space, while India launched a missile earlier this year to demonstrate how they could knock satellites out of the sky. Europe and Japan have successfully launched robotic probes.

In June 2018, US President Trump said: "When it comes to defending America, it is not enough to merely have an American presence in space, we must have American dominance in space.”3

Graham Peters, Chair of UKSpace, says: “Drone missiles are operated by satellite, so they really do rely on satellites for military power.”

Europe has made a concerted effort over the last decade to build an autonomous industry, Peters explains.

“This means satellite manufacturers aren’t dependent on getting an export license from the US which can slow down projects. This has created freer trade in the commercial space industry,” he says.

“Space is becoming very strategic because it underpins a lot of our digital economy,” Peters adds.

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