Space is cold. About -458 degrees Fahrenheit to be exact. However, for startup founders and private investors, it’s as hot as a SpaceX Dragon capsule reentering the atmosphere (3,500 degrees Fahrenheit). Annual investment in space companies grew from $300 million in 2012 to $10 billion in 20211. Fueled by technological advancements such as reusable flight vehicles, miniaturization of electronics, software, and off-the-shelf components, many theorize that lower launch costs and increased launch volumes will enable new space activity not previously economically feasible.
So for those of us who missed SpaceX’s first institutional round (my access to capital in the 4th grade was limited), how should we think about investment opportunities in the 2020’s? Excitement around the sector is high, which should induce a few red flags for investors. In the hype cycle, are we at the peak of inflated expectations, or are we making our way up the slope of enlightenment?
I’ll give a brief history of space and how I segment the market. I’ll then share a few insights I’ve had over the past six months as I’ve really dug into the space (purposeful pun), and finally share my thoughts on the broader market and where I think the opportunities are.
If you are already familiar with the space industry, feel free to jump ahead to Part II.
Part I – Space History and Sectors
A Brief History of the Space Economy
The history of the space economy began with the launch of Sputnik by the Soviet Union in 1957, marking the start of the Space Age. This event sparked a Cold War competition between the United States and the Soviet Union, known as the “space race”, to develop aerospace capabilities, including artificial satellites, unmanned space probes, and human spaceflight. The combination of technological and scientific advances, political competition with the Soviet Union, and changes in popular opinion about space flight came together in the 1950s to affect US public policy in favor of an aggressive space program. Over the following decades, the space industry continued to evolve, with various nations launching satellites and sending astronauts into space. However, until the early 2000s, space exploration was largely the domain of government agencies.
The inception of SpaceX in 2002 by Elon Musk marked a significant shift in the space economy. After being ousted as the CEO of PayPal, Musk turned his attention to space exploration. His initial goal was to put a greenhouse on Mars, a project known as Mars Oasis. However, after two unsuccessful attempts to procure a missile for the project, Musk decided to build a rocket himself. Since then, SpaceX has made significant strides in the space industry. It was the first private company to successfully launch and return a spacecraft from Earth orbit and the first to launch a crewed spacecraft to the International Space Station. SpaceX has developed and produced multiple different launch vehicles including the Falcon 9, Falcon Heavy, and Starship. They have decreased the cost of launch by 10x over the last decade, and it is estimated that Starship will decrease the cost another 10x as it scales. SpaceX has also created a satellite constellation known as Starlink to provide high-speed internet access around the world. These achievements have not only revolutionized the space industry but also made space more accessible than ever before.
Modern Space Economy Made Simple(r)
There are multiple ways of slicing and dicing the space economy into smaller segments. A quick Google search will yield dozens of market maps. However, I find it easiest to split it into 5 subsectors: enabling services and components, launch, payloads for earth (space-for-earth), payloads for space (space-for-space), and data processing & ground network infrastructure.
Enabling Services and Components
These companies support other companies in building, manufacturing, and assembling the satellites that will go into space. On the services side, there’s several startups like Antaris that support the unique engineering workflows needed by aerospace companies. Companies like Leo Labs help track and monitor your satellite in space to ensure it’s on the correct orbit and not on a collision course with another satellite.
On the component side, companies like Apex and K2 Space provide satellite buses, which are the main body and structural component of a satellite that carries the payload. Some companies provide standardized components, like Spectrolab (Boeing) who builds solar panels and Morpheus Space who builds propulsion systems. For custom components, new-age manufacturing companies like Hadrian help CNC complex parts. While most of these companies have components in space, they aren’t necessarily the ones launching; they are just supporting players for companies who want to place payloads in orbit.
Launch
If building a satellite wasn’t hard enough, getting it into space is a monstrous task. Fortunately, there are several well-established players who provide launch services. SpaceX is the 800-pound gorilla in the room. The SpaceX Rideshare Program, introduced in 2019, enables small satellite operators to share launch costs with other operators rather than requiring them to purchase a full-launch. Companies can put a 50 kg satellite in orbit for as little as $300,000. While SpaceX is the dominant player, there are still other options. Companies like Relativity Space, Rocket Lab, Stoke Space, and ABL Space Systems are all taking their unique approach to decrease costs for customers while providing a timely launch experience. Large legacy rocket companies are also in on the fun. United Launch Alliance (ULA, a joint venture between Boeing and Lockheed Martin), is building for NASA and the DoD, while Blue Origin is building for space tourists. While there are multiple launch providers, SpaceX is still clearly ahead of the competition.
Payloads – Space-for-Earth
Payloads are the stuff you actually put into space. I’ve broken the space-for-earth economy, or goods and services produced in space for earth purposes, into two categories: proven and unproven.
The proven market consists of goods and services that we know work and we know are valuable. The biggest market here is obviously communications. These industries have been around for a while, but that doesn’t mean there isn’t room for disruption by companies like Astranis or SpaceX’s Starlink. Earth observation is another growing category. While cameras have captured optical images for decades, startups are now using hyperspectral imaging (Pixxel), synthetic aperture radar (Capella Space), and even radio frequency data (HawkEye 360) to give us a bird’s-eye view of what’s going on. From the national security perspective, companies like True Anomaly help identify and track space threats in real-time. Each of these companies is selling into a well-defined customer base with an existing need, which makes these proven markets.
On the other hand, the unproven market is building things that we either don’t know if they’ll work or we don’t know if they’re valuable. Asteroid mining companies like AstroForge are attempting to land a satellite on an asteroid, extract and purify platinum, and then return it to earth at a cheaper cost than mining it here. Other startups like Varda are building factories in space to produce pharmaceuticals and other goods that benefit from the microgravity environment. If these sound like science experiments, that’s because they kind of are. We’ve never mined an asteroid for platinum, and while we’ve manufactured protein crystals on the ISS, we’ve never done it at scale. While the jury is still out on whether they will be accretive in the long-run, this hasn’t stopped investors from pouring hundreds of millions into the space.
Payloads – Space-for-Space
The space-for-space economy, or goods and services produced in space for space, has seen somewhat of a renaissance in recent years. The most promising companies in this arena are building the servicing and maintenance infrastructure to support a future influx of payloads. Lumen Orbit is building in-space data centers for satellite cloud computing, Starfish Space will help satellites stay in orbit for a few more years with helpful “pushes”, and Impulse Space will deliver new satellites to their correct orbit.
Some startups are thinking even bigger by laying the groundwork for a self-sustaining space ecosystem, humans and all. NASA research in the 1970’s forecasted a future state of thousands of humans living in space with a fully-supportive ecosystem. While we are far from this (the most people to have been above the Karman Line is 19 on December 11, 2021), it has become apparent that as the space economy grows, it will be more economical to make things in space rather than bring them up from Earth. Axiom Space and Think Orbital are building space stations. Star Catcher is building a space-based energy grid. While this may seem like science fiction, there are founders and investors who are dedicating their time and energy to make it science fact.
Data Processing & Ground Network Infrastructure
Most of this category isn’t technically a space category (more on that later), but data processing and ground network infrastructure is an unsexy yet enormously lucrative piece of the space puzzle. These companies are focused on taking massive amounts of space data, both proprietary and public, and making it useful. Northwood is helping bring satellite data back to Earth. AiDash helps utility companies mitigate vegetation and climate threats. Danti makes it easy for anyone to query satellite imagery to find answers. While most of these companies are partnering with the space-for-earth companies for their data, they are providing a valuable service by making that data actionable.
Part II – Opportunity Analysis
As I’ve been digging into space, there’s been 3 key insights that I keep coming back to. These have been instrumental in helping me form my hypothesis on where the opportunities are.
1. The market size you’ve seen for the space economy isn’t really the market size for the space economy.
We’ve all seen gargantuan estimates for the size of the space economy. The World Economic Forum in partnership with McKinsey estimates a market size of $630 billion in 2023 that will grow to $1.3 trillion in 20302. Many other analyst reports peg numbers in the same ballpark including Grand View Research3, CoherentMI4, and Morgan Stanley5. However, space economist Pierre Lionnet, Managing Director of Eurospace states that it’s really only an $80 billion market6 (only 13% of McKinsey’s estimate!). To reconcile this discrepancy, let’s first make sure we all have the same definition of what the space industry actually is.
Eurospace defines the space economy as “the economy of using space assets and infrastructure. They estimate $50-60 billion for satellites, $10-12 billion for launch services, and $6-7 billion for ground operations. McKinsey doesn’t break it down as clearly, but they do divide the space economy into “backbone” and “reach”. It describes “backbone” as space hardware, service providers, and launches. This aligns well with how Eurospace defines the space economy. And this is how McKinsey describes “reach”:
“Meanwhile, space is playing a key role in enabling companies across industries to generate revenues. Entire markets would not exist but for these space technologies, which are considered the “reach” of the space economy. For example, without the combination of satellite signals and chips inside your smartphone, Uber would never have reached such a global scale with its unique ability to connect drivers and riders and provide directions in every city.
The reach of the global space economy is visible across all industries, representing $300 billion in 2023, roughly the other half of today’s space economy. Reach applications are pervasive in everyday life, from weather services to parcel tracking to food delivery.”
Ok, so according to McKinsey, if you take into account the effect space has on all the downstream applications (which because of GPS and communications satellites is basically every industry in existence), we get a market size of $630 billion! I find this a little disingenuous. If you were to dig a little deeper into each of these analysts reports, you would find similar frameworks. While these downstream applications are absolutely valuable and real to customers, it’s not a great representation of the space economy.
But should we believe Eurospace’s $80 billion estimate, or McKinsey’s $330 billion “backbone” estimate? It’s probably safe to say it’s somewhere in the middle, around $200 billion. Do I believe that a $200 billion market is too small to play in? Absolutely not! I do, however, believe that these overinflated market assessments are a signal of overhype.
2. Payload operators are the key players.
A helpful exercise when trying to understand a sector is to map out the flow of funds—who sells to who. Below is my assessment of who sells to who in the space economy as it stands today.
As we see here, the operators who are actually putting payloads into space are essentially the final buyers in the space ecosystem. Apex sells their buses to operators. Leo Labs sells their software to operators. SpaceX sells launch services to operators. Impulse Space sells their satellite transportation services to operators. And then once the satellite operators get into space, they can begin creating value for their customers. Whether you’re a launch, manufacturing, buses, components, sensors, in-space data center, or monitoring company, you are selling to the same customer: satellite operators.
This exercise shows us that these operators are the real heroes of the ecosystem; in order for the ecosystem to grow, satellite operators have to grow. This may seem simple, but it’s going to be the crux of the next insight, which is…
3. The number of payload operators isn’t growing as quickly as the rest of the market.
If the payload operators are the key piece of the puzzle, let’s look at the historical growth of that segment. You may have seen this graphic of the number of objects launched into space over the past 70ish years.
Upon first glance, it looks pretty steady from the 1960’s to 2000, then it dips slightly until it starts to absolutely rip in the mid-2010’s. So where did that growth come from? Well, we know that SpaceX began launching Starlink satellites in 2019 and have continued to add to their constellation year after year. What happens if we take Starlink out of the equation? Let’s use the data from Gunter’s Space Page to do just that.
We still see an increase in satellite growth, but it becomes very obvious that the majority of the growth was due to Starlink. In fact, 75% of payloads in 2023 were Starlink! If we were to take out three other large satellite operators starting in 2017 (Planet Labs, OneWeb, and Swarm Technologies), we would still see growth year-over-year but it is significantly decreased. This shows that in-space payloads have been subject to the power law: only a handful of operators (mostly governments) have launched a vast majority of satellites.
But enough with historical data! Let’s look to the future by observing venture investment into the space industry. By looking at where investors are allocating their capital in the space, we can potentially see where to look for growth. Using data from Pitchbook7, we find that 112 Space Technology companies have raised over $4.7 billion in the last ~18 months (since January 1, 2023). However, of those 112, only 34 are actually putting satellites into orbit, and only 18 are building in the space-for-earth category!
This similarly reflects the actual dollar amounts invested in each of these sectors. Approximately 30% was invested into payload companies, and only half of that (15%) was invested in space-for-earth companies.
So while large amounts of capital have been invested into the space economy, only 16% of space startups and 15% of venture capital are actually putting payloads into space. Put differently, 75% of venture-backed space startups are hoping to be the vendors of only 16% of venture-backed space startups and serve a long tail of legacy operators who are putting up a minority of payloads.
My take on the broader market
Especially in LA where Elon fanboys and SpaceX alums run the west side, there’s a palpable excitement around the growth of space. Over the past few weeks I’ve had the privilege of touring the facilities of Apex and AstroForge, and I walked away from both of them inspired. I can see how investors have flocked to these companies. In a world where most tech companies are SaaS-ifying yet again another business process (this time with AI!), it’s a breath of fresh air to speak with the teams who are literally putting things in outer space.
So amid a smaller space market than analysts may want to admit, nearly flat growth in launched satellites, and only a handful of satellite operators receiving venture funding, how are people still willing to build space companies? Almost everyone I’ve talked to, every blog post I’ve read, and every podcast I’ve listened to rehashes the same belief that has inadvertently become the big bet of all space companies: as launch costs decrease dramatically, interest in putting payloads into space will increase dramatically; we don’t know what these payloads will be, but if you build it, they will come.
And this is where I get a little lost. Beyond communication, earth observation, defense, and some science projects, I have a hard time envisioning what other payloads people can launch, and in turn, what satellite operators are going to pay the bills for all these non-payload companies. Everyone wants to sell picks and shovels in a gold rush, but you need miners to sell those picks and shovels to.
Where I see opportunities
That being said, I’m still very excited about the space sector. Specifically, here are a few broader themes that I can get behind.
Companies building novel payloads
I think True Anomaly is a terrific example here. Potential adversaries have satellites in space. We know where they are, but in some cases, we have no idea what their capabilities are. True Anomaly’s Jackal satellites help defense organizations with intelligence, surveillance, and reconnaissance.
I’m also interested in other startups that are building real payloads that enable us to solve real problems here on earth.
Companies with an unfair advantage selling into legacy operators
Even with flat satellite growth, there are still dozens of satellite operators who are used to building spacecraft the old way: large, slow, and verticalized. I’m bullish on startups that not only have a better satellite-building mousetrap, but have unique access to these legacy operators who are looking to deploy more satellites faster and cheaper as their existing constellations come up in their service lives. I think Tom Mueller and the team at Impulse Space are a great example of this.
Downstream data processors
I know I just argued that these data processors are not technically space companies (and I still believe they aren’t), but I still like the idea of taking unstructured data and making it useful and actionable. I love this tweet from Joe Morrison of Umbra Space:
This was said in the context of the earth observation industry, and I think it holds true for other space (and general deep tech) companies as well. It’s quite easy for engineers to get so excited about the technology and the prospect of putting something into space that they lose sight of the customer and their problems. I’m bullish on companies that haven’t lost sight of the customer and are actively using proprietary data sets and AI to serve them.
Conclusion
I’ve realized one of the reasons I’ve fallen in love with the space sector is space is magical. You’re telling me my phone can triangulate my exact location on earth because of some hunks of metal moving 7,000 miles per hour 12,000 miles above my head? Magic. You’re telling me we sent a robot to drive around on a planet that’s so far away it takes light 3 minutes to get there from Earth? Magic. You’re telling me that we put a giant telescope and camera into space that allows us to look back 13.5 billion years to see the formation of galaxies and stars8? Magic.
I still believe that space is a huge opportunity. Building for the final frontier is no longer an Elon Musk pipe dream. It’s a burgeoning economy going through a renaissance that JFK would be astounded to see if he were alive today. My worry is that unfaithful charlatans will see the frothy nature of space and take advantage of a well-resourced industry. My hope is that the number of good actors outweighs the bad ones. In a world of culture wars and political strife, we could use the joining force of magic to bring us together.
A few weeks ago my 4-year-old and I watched from our apartment parking lot in West LA the SpaceX launch from Vandenburg carrying the National Reconnaissance Office’s small satellites. As I explained to her that rockets sometimes carry people up into space she asked, “Dada, do people drive rockets?” to which I responded, “yeah, they kind of do!”. She responded, “Do you want to drive one with me sometime?” This memory is now etched in my mind, knowing that she may one day be able to “drive” a rocket in her lifetime. I hope I can join her.
Tanner Johnston 