Private investment in the space sector fell by 58% in 2022, according to a new Space Investment Quarterly report from Space Capital.
The $20.1 billion in private market investment last year is the lowest annual total since 2015, said Chad Anderson, founder and managing partner of Space Capital. While early-stage investments remained largely unchanged, the sharp drop came in early-stage and growth-stage businesses.
The report cites several factors explaining the pullback, including the fastest interest rate hike cycle since 1988, a challenging investment environment and continued economic recovery from the COVID-19 pandemic.
However, Anderson told Ars another factor was the relatively low returns from space companies that went public through the Special Purpose Acquisition Company, or SPAC, process dating back to 2019 when Virgin Galactic did. According to analysis by SpaceWorks, $100 invested in a “new space” stock index in January 2021 would be worth around $15 today, compared to $127 for a traditional space stock index.
“The poor performance of the SPAC companies has certainly influenced the attitude of investors,” Anderson said. “This is just one of many factors influencing investor sentiment, but it is certainly important. Amid the general decline in tech investment, space companies are often seen as a higher risk category, and Underperforming SPACs like Virgin Galactic are clearly driving these perceptions.”
Anderson said it typically takes about six to eight years for a company to go from its first round of seed funding to an initial public offering of shares. By this criterion, many space companies that went public through the SPAC process did so prematurely – not just before revenue, but in some cases before product.
Some of these companies, such as Virgin Galactic, Virgin Orbit, and Momentus, still don’t have a viable commercial product years after their IPO. While these companies may have needed public funding to survive their early years of development, this added scrutiny made innovation much more difficult.
“It’s hard to build a core product, fail, pivot and innovate as a public company,” Anderson said. “Public markets prefer operational stability and predictable revenues. It’s no wonder many of these companies have disappointed.”
Focus on the fundamentals
That said, Anderson thinks some SPAC companies are beginning to demonstrate their viability. Plus, he said, there are “incredible” space companies that have been working in the background for several years. These companies will be ready to go public, via a traditional IPO, within a few years.
As for the report’s other notable insights, Anderson drew attention to SpaceX’s $2 billion capital raise in 2022, the company’s second-largest annual raise. SpaceX requested the additional funding as it works to bring two major development projects, the Starlink internet constellation and the Starship launch system, online.
China also appears to be closing the gap with the United States when it comes to private investment in the space economy, Anderson said. Chinese companies attracted 35% of all investment in space applications, for example, compared to 41% for American companies. This is due to the boom in e-commerce and location-based services in China.
Looking ahead to 2023, Anderson sees another tough year for space startups due to the lack of investment capital available for small businesses. However, he sees the shift from “dynamic investing” to a greater focus on fundamentals as a positive trend, which will benefit quality space companies in the long run.