The Space Reviewin association with SpaceNews
 

NSRC 2020

 
XA 1.0 illustration
Despite overall concerns about the economy, companies like Masten Space Systems, currently developing the XA 1.0 suborbital reusable launch vehicle (above), came to Los Angeles last week to seek investment in their space ventures. (credit: Masten Space)

Space and the financial crisis

For the last several weeks the news has been dominated by the ongoing financial crisis that has roiled markets around the world. The failure of several major financial institutions and the bailout of others—to the tune of at least $750 billion in the United States alone—have caused many to worry about the fundamentals of the economy. Some have gone so far as to call this the greatest economic crisis since the Great Depression three-quarters of a century ago, or even “the end of American capitalism”.

Whether those statements are accurate assessments of the situation or hyperbolic overreactions in the heat of the moment is a judgment best left to future historians. However, regardless of whether this turns out to be crisis that permanently alters the global economy or simply a short, if sharp, recession, it’s natural to wonder how it will affect us in the near term and beyond, and the space community is no exception. An initial survey suggests that the crisis’s impacts could be wide ranging, from government space programs to entrepreneurial “NewSpace” ventures, but exactly how big of an effect it will have is yet another uncertainty.

Government and big business

For much of this election year, space advocates have sought to divine the space policy positions of the presidential candidates, Democratic and Republican. By mid-August, both campaigns had issued detailed space policy statements that strongly supported NASA, to the point of promising additional money to the space agency in order to minimize the gap between the retirement of the shuttle and the introduction of Constellation.

Whether McCain or Obama will be able to follow through on their pledges to increase NASA’s budget is an open question given the current financial crisis.

There had been some concern about whether the Republican candidate, Sen. John McCain, supported a budget increase for NASA because of his campaign’s promise of a one-year spending freeze on almost all discretionary items in the budget, with the exception of defense, veterans’ programs, and unspecified other “vital” programs. Democrats campaigning in the Space Coast region of Florida, a battleground state in the general election, used that proposal in recent weeks to claim that NASA’s budget would also be frozen in a McCain administration.

McCain himself eliminated any ambiguity when he addressed a crowd in Melbourne, Florida, on Friday. “I’ve always been a strong supporter of manned spaceflight and NASA,” he said during a brief portion of his speech that dealt with space policy. “I will fund NASA including the $2 billion needed to minimize the gap between the retirement of the shuttle and the movement to a new vehicle.”

However, whether McCain or his Democratic opponent, Barack Obama, will be able to follow through on their pledges to increase NASA’s budget is an open question given the current financial crisis. The combination of the financial bailout package, new economic stimulus proposals being debated by Congress, and reduced tax revenues common during a recession could all push the federal budget deficit in fiscal year 2009 to as high as one trillion dollars. That will doubtless lead to calls for reining in spending elsewhere in the federal government. That doesn’t mean that it will be impossible for NASA to get the additional money promised by the presidential candidates—particularly if it’s sold as an economic stimulus package of its own for the aerospace workforce—but it will mean increased competition and a decreased chance NASA will get the full $2 billion promised by both candidates.

If there are cutbacks or reduced growth at NASA or in military space efforts (whose penchant for cost overruns and schedule delays could make them tempting targets for cost-cutting budgeteers), the impact will go beyond the government agencies themselves. Aerospace companies who work on civil and military space programs will feel the impact of any cuts, leading to reduced income, layoffs, and more.

Many of these companies also do business in the commercial space sector, in particular building and launching communications and remote sensing satellites, but there likely would be only limited opportunities, at best, to mitigate the effects of cuts in government programs. An economic slowdown, especially when coupled with the contraction in credit seen recently, will have even healthy satellite operators rethinking their plans for purchasing new satellites. This is especially true for low Earth orbit satellite companies like Globalstar, Iridium, and ORBCOMM, all of whom are developing next-generation satellite constellations to replace their existing, aging spacecraft.

Moreover, not every satellite operator is in good health. Last Friday, WorldSpace, a US-based satellite radio company that primarily serves customers in Africa and Asia, filed for Chapter 11 bankruptcy protection. That filing is not necessarily linked to the recent economic turmoil—the company had been in dire financial straits for some time—but it clearly did not help, and puts the company’s survival into question.

Can NewSpace weather the crisis?

At the other end of the spectrum from the big aerospace companies and satellite operators are the fledgling entrepreneurial space companies developing suborbital and orbital launch vehicles, among other products and services. While a few of these companies, like Virgin Galactic, SpaceX, and Blue Origin, have deep-pocketed founders who can fund most or all of their development internally, many others need to seek outside investors, be they individual “angels” or larger institutional ones. That search, already difficult in good economic times, may become harder in today’s uncertain economy.

“I don’t think the economic climate has a direct impact” on investing in NewSpace companies, said Kollipara. “It’s hard before and it still is hard.”

Angel investors, for example, may be more reticent to invest in space companies—or other ventures, for that matter—if their portfolios took a hit in the recent stock market plunge, causing them to rethink where they should put their money. Moreover, that same class of wealthy individuals is also being courted by space tourism companies to become customers at around $200,000 a ticket. Given the impact of the market turmoil on their net worth, what a few months ago might have seemed a bargain to realize a dream of a lifetime could now be seen as, at least for the time being, an unnecessary extravagance.

Those worries were foremost on the minds of many attending the Space Investment Summit (SIS) 5 last Wednesday in Los Angeles. The day-long event, the fifth held in the last 18 months to bring together space companies and potential investors, had a smaller turnout than some of the previous events in the series, a factor at least partially attributable to the economy. (An exacerbating factor, at least in gaining press coverage for the event, was a series of wildfires that flared up in the Los Angeles area in the days before SIS5, grabbing the full attention of the local media.)

Right now, speakers said, the impact of the financial crisis on NewSpace or other investment is limited. “I am not seeing it yet,” said Michael Leventhal, an attorney and consultant who has worked with startups in a variety of fields. “I work a lot with investors, and I have not—although I’m expecting to—but I haven’t see a whole lot of evidence of deals dying on the vine.”

“The fundamental premise is that investment in this industry, at least for NewSpace companies, is not easy, it’s extremely difficult,” said Amaresh Kollipara, founder and managing partner of Earth2Orbit LLC and a former consultant with Accenture. “I don’t think the economic climate has a direct impact. It’s hard before and it still is hard.”

Similar advice came from the day’s keynote speaker, Steve Jurvetson, managing director of venture capital firm Draper Fisher Jurvetson (DFJ). “When the market is uncertain and tumultuous, the latest stage investors dry up the soonest,” he said. “That means your ability to get a $50-million check for expansion capital quickly dries up because those are the people who watch the IPO [initial public offering] market closely.” By contrast, early-stage VC investors like DFJ look beyond near-term economic conditions. “We’re looking out five to seven years from first investment,” he said. “Today’s market doesn’t matter.”

“Getting a first round of financing might not be that much more difficult; it’s going to be harder, but not that much more harder,” he concluded. “Whereas getting that next check is really tough.” He advised companies to not rely on outside money for at least a year if at all possible.

In that vein, Jurvetson advised companies to find a balance between long-term “science projects” and near-term opportunities for generating revenue. “If you can get early customer revenue and have that vision of the stars both, that combination gets a little more interesting as a business.”

While Jurvetson is an amateur rocketry hobbyist, neither he nor DFJ invests in the space industry. “I don’t know where the areas of investment interest in space and space-related technologies lie,” he admitted. However, he did suggest several that could meet the need for short-term revenues while developing long-term technologies needed for space exploration and settlement, including synthetic biology, novel materials, and energy.

None of the companies presenting business plans at SIS5 were directly involved in those areas, focusing instead on launch vehicles, spacecraft, and other space services, or using space-derived technologies for applications like medical monitoring. Their funding needs were relatively modest, ranging from about $1 million to $60 million, with most in the single-digit millions.

In their presentations, and in conversations throughout the day, a mixed message emerged. There are companies who are finding some success raising relatively small amounts of money from angel investors. However, others seeking larger amounts—in the tens of millions of dollars—from institutional investors have found their work to be much more difficult in recent months as the financial crisis grew. Some in relatively good shape financially worried that their lines of credit would be reduced by their banks as part of across-the-board cuts.

Jurvetson advised companies to find a balance between long-term “science projects” and near-term opportunities for generating revenue. “If you can get early customer revenue and have that vision of the stars both, that combination gets a little more interesting as a business.”

Robert Jacobson, a co-organizer of SIS5 and managing partner of Desert Sky Holdings LLC, hoped companies and investors alike would look past the current economic problems. “Although the financial world we presently live in is unpredictable and filled with unprecedented new challenges, there’s one thing that I am certain of,” he said. “That there are deals in the space industry worthy of your consideration and, hopefully, investment. It’s no longer a matter of if, in my opinion, only a matter of when.”

The next Space Investment Summit is planned for late May in Orlando. By then a clearer picture of the state of the overall economy will be in place, as well as what effects the new administration will have on government spending and economic incentives. For those companies presenting in Los Angeles last week, and others in the NewSpace field, they will hope that Jacobson’s “when” moment for broader space investment will have arrived—if the economy permits.


Home