Closing Bell - Manifest Space: Astro Angels with Space Capital Managing Partner Chad Anderson 10/31/24

Episode Date: October 31, 2024

As the general election broaches, what is the future of space policy? Investors see the space economy as a bipartisan issue, with gains to be made on either side. On this episode, Space Capital’s Chad Anderson joins Morgan Brennan to break down his space investing thesis, how China is moving at “breakneck speed”, and SpaceX. 

What does the U.S. presidential election mean for the future of space? I think that a lot of people go through this sort of awakening, right, where they think that space is all about commercial space stations and space tourism and rocket launches and things like that. You know, like these emerging areas, apart from rocket launches, you know, these emerging areas like lunar transportation, space stations, whatever, that really makes up like 1% of what's going on. Although it's like really fun to talk about, right? And it captures the imagination. The real opportunity is, again, leveraging this satellite infrastructure

for the benefit of terrestrial markets and life here on Earth. Chad Anderson is the founder and managing partner of venture firm Space Capital. He, like others in the industry, sees the space economy as a bipartisan issue, one that both candidates come to with a policy history already. As vice president, Kamala Harris is the current chair of the National Space Council, advising President Biden on the implementation of space policy across the federal

government. That policy, though, has been on a path similar to that of the previous administration, when then-President Trump revived the National Space Council and tasked the Department of Defense with standing up the Space Force. The topic first came up last week, when Anderson and I shared a stage at the New York Stock Exchange's second annual Space Summit. Space capital tracks quarterly investment flows into the sector. And after several years of sluggish activity, see signs of a rebound. We are in what you'd, you know, in space terms, what you'd call Max Q, the period of maximum aerodynamic pressure on the vehicle. That's sort of what we're feeling in the space economy right now. We're nearly we're making our way through that.

And like I said, we've got a lot of signs, a lot of reasons to be optimistic about 2025. But I think, you know, companies have a lot to do to regain the trust of investors after the SPAC frenzy of 2021. On this episode, Anderson breaks down space investing, how China is moving at, quote unquote, breakneck speed, and shares a surprising stat about SpaceX, in which the firm is an investor. I'm Morgan Brennan, and this is Manifest Space. Joining me now, Chad Anderson, the founder and managing director of Space Capital. Chad, it's great to have you back on Manifest Space. Welcome. Yeah, great to be here, Morgan. Thanks.

So let's start with what you're seeing in investing trends into the space sector. You did just come out recently with your Q3 report. And what is it showing? Yeah, kind of the macro backdrop is that venture capital continues to be the leading source of capital for space companies, making up more than half. So what's happening in venture markets is certainly impacting what's happening in the space capital markets. So a lack of liquidity producing exits is really slowing the pace of capital into space startups. And then valuations remain artificially elevated by a couple of reasons. One, AI deals, outsized AI deals are kind of masking what's going on in the background and some of the pain that some of these smaller companies

are facing. And delayed fundraising for companies that last raised during pandemic highs. So cash, last few years have been pretty difficult for companies broadly across tech, and it's true for space companies as well. They have continued operations, mostly through bridge finan push those valuations down into more sort of reasonable values in line with historical averages. So, you know, the Fed cutting rates was big. It's obviously impacted immediately the public markets. It takes a little time for that to flow through the private markets. we are certainly starting to feel some optimism looking ahead after a really uninspiring couple of years. You said a lot there that I can dig into and unpack further. But I guess let's start with

the lack of exits. At what point do you think that changes and how much does sort of the next chapter hinge on that? Well, I think it's important, you know, I mean, for this whole process to work, LPs, institutional LPs are committing capital to venture funds, those venture funds are investing in startup companies. Those investments need to exit to return capital back to those LPs so that they can reinvest, right? And if that's not happening, then things slow down. So that's where we are. And we're kind of working our way through a pretty significant run-up in 2021 through

the zero interest rate period. I think that we haven't really seen the rubber, you know, fully meet the road here. We are tracking, for example, 47 space unicorns. So companies, space companies that are valued over a billion dollars that are sitting in private portfolios. But I don't think that there are, that there are actually 47. I think that that herd is going to thin. We've seen some IPOs happen, but it's really been a trickle. Our report, we have a path to exit section, which looks at the most valued companies

to try to get the highest value companies to get a sense for and look for clues for who might go public next. We're seeing amidst all of this, we're seeing record high consolidation as companies really struggle to grow into their high valuations. But the average value of those acquisitions are near the lowest on record. So I think on the whole, we are in what you'd, you know, in space terms, what you'd call max Q, the period of maximum aerodynamic pressure on the vehicle. That's sort of what we're feeling in the space economy right now. We're nearly, we're making our way through that. And like I said, we've got a lot of signs, a lot of reasons to be optimistic about 2025.

But I think, you know, companies have a lot to do to company private after losing 99% of its value in just three years. Arquette was another high profile space company lost 99% of its value in the same period. And Terran Orbital was is being acquired by Lockheed for 450 million,, which was valued at $1.8 billion just two years ago. So I think the Fed cutting rates is a significant factor in driving an increase in IPO activity. But what's most likely to spark an IPO revival is businesses that actually perform well. The public markets are wary of companies with flimsy fundamentals, and rightly so. Do we have some of those companies waiting in the wings in the private market? I think so. You know, if you look through, again, in the report, if you look through the list of

most valued companies in private portfolios, you'll see SpaceX. Everyone wants to know when that company is going to go public. I think that the leadership there has tapped the brakes on any of those ideas. Next up is Blue Origin. Jeff Bezos is the only shareholder in that company. He has the capital he needs to fund that company, i don't see why uh that company would go public um maxar is another big one that was most that was recently taken private so um not likely an ipo candidate but then you've got sierra space right and sierra space has been talking i don't know for the last six months or something i think you've reported on this as well that um they are eyeing an ipo and i think it's really just a function of of timing right i mean um they've got a lot going on um they're involved in a number of

different uh initiatives uh and i think you know you want uh to have a solid 12 months of performance under your belt um uh to really uh do well after going public. So I think, you know, it's really just a matter of timing for them. There's a few other companies there as well that, you know, they will have to see what happens. But I think it's gonna be quiet for the next couple of months. But hopefully in 2025, we start to see things open up. So when we do talk about, I mean, you mentioned AI and sort of the investor appetite for AI and what that means in terms of capital coming into the sector more broadly. Where are you seeing it and how does that speak to some of these new, I'll call them

defense tech players who are increasingly starting to set sights on space? Yeah, absolutely. So a key takeaway from our recent Space Capital Summit was that the number of satellites on orbit is now growing at a pace that is faster than Moore's Law. So if you look at the doubling time of the number of satellites on orbit, it has gone, if you look at it over the last eight years, it's doubled every 24 months. If you look at the last four years, it's actually doubled every 18 months. So if you've seen these charts,

I'd encourage you to Google them and look them up. It is wild, the amount of growth that we're seeing in the space economy today. If you chart the number of satellites on orbit, it is now a vertical line. And there are lots of reasons, there are lots of things happening right now that are actually going to somehow accelerate that trend. So we are inundated with data. A lot of these are communication satellites, but a lot of these are Earth observation satellites. So satellites with cameras or other sensors that are generating this really valuable data about what's happening on the surface of our planet and in our skies and with our weather and on and on.

But we are there's been an exponential increase in data from orbit, but we've really struggled to derive any useful insights from that data unless it can be passed through an ai system it's just too much for humans to understand to get our arms around to comprehend the national geospatial intelligence agency is as a first step, you know, recognizing that they need to apply these AI tools to annotate the data to make it useful. And they're throwing hundreds of millions of dollars at it right out of the gate. And that's before we get into the really interesting stuff. So there is, I think that from an investor's perspective, from our perspective at Space Capital, the greatest opportunity in the space economy today is are all, if they have a cloud offering, they are all scrambling, doing what they can to get these companies, these new satellite companies and get their data onto their cloud. Because there's a lot of opportunity for storage and compute, but also value added services on top of these massive data sets.

So probably the single biggest area of opportunity for us, space capital. So what are, I guess, so then to the extent you want to name names, what are some of the startups that you'd be excited about then in this space? Yeah, so some of them, you know, Planet Labs was a high profile IPO in 2021 on the New York Stock Exchange. They're one of the data providers. We've also invested in some really interesting companies that are newer. Muon Space is particularly interesting.

They're based out of Mountain View. This is the old team from Skybox Imaging, which made some exquisite satellites and folks from NASA JPL, and really an incredible team. And they're building really interesting satellite constellations. For example, you might have seen their recent announcement of Firesat, which is using satellites and AI to create a breakthrough in wildfire detection. This is going to be a step change in capability at a step change, lower cost where they can, they're working with google.org and the environmental defense funds and the Moore Foundation.

They are going to track wildfires, the size of a classroom within 15 minutes. So you can actually take action and put these wildfires out before they start to grow. So this is an example of the infrastructure layer, the type of satellites that are on orbit that are generating this data. We've invested in a company called Skywatch that aggregates over 90% of the world's Earth observation satellites on their platform. They structure it. They make it really easily accessible through an API. So similar to what Trimble did for GPS,

Skywatch is making Earth observation data very accessible at a very low cost. And this is enabling thousands of unique applications in areas in really an infinite number of use cases, just like GPS is now powering all of the consumer apps, enterprise and government. GPS is what powers the modern global economy in the same way Skywatch is enabling access to Earth observation data. We're on the front end of that curve.

So that's pretty interesting and then of course like i said i mean applying ai to all this data to help us drive useful insights we've got a company called rendered ai that is built a synthetic data platform and synthetic data has become an essential tool for training um ai there's not, you know, real data is not sufficient for a number of reasons. There's not enough of it. It's too expensive. The thing that you want to train it for doesn't exist yet. So a lot of the companies that I mentioned and many more of the big ones that you know and are likely invested in if you're invested in the public markets are leveraging synthetic data to train their AI and Rendered has got the platform for computer vision. I'm amazed we've gotten this far in the conversation. We haven't talked about

SpaceX yet. So let's talk a little bit about SpaceX, especially because obviously they're the giant in the sector when you talk about commercial space on a number of fronts. But also I think perhaps just as interestingly, I didn't realize this until you pointed it out to me with your research, they have not been tapping the capital markets, even as they do move forward with Starship and with Starlink. Yeah, that's right. I mean, if you look again at the most valuable companies in the space economy, in the private markets, SpaceX stands out right there, the largest piece of the pie. And they had a massive quarter. So they were tapped by NASA to rescue two NASA astronauts that were stranded on the International Space Station when Boeing's Starliner was deemed unsafe to take those astronauts back.

And it's really, for me, that was a very triumphant quarter, a triumphant moment for SpaceX, who's gone from being the underdog to the apex player in the span of a decade. They also launched the Polaris Dawn mission for astronauts to the highest orbit since the last Apollo mission, which very interestingly, you could follow along and watch thanks to Starlink. They were testing Starlink's ability to be used for in-space communications. They also tested their own new spacesuits. Starlink on Earth hit 4 million subscribers. They inked a landmark deal with United Airlines. They're preparing to, it's nearly going to be deployed on rail. So business is booming for SpaceX. And yeah, I mean, they have not tapped the capital markets to raise capital for the company since 2022.

So, you know, they've been a big piece of investment into this category, right? I mean, they've raised over $10 billion over the last 10 years. So they left a pretty large gap in the investment data, which, again, you know, in terms of optimism and thinking, you know, that that there's that there's a lot more going on here than just SpaceX. That gap has been filled by new underdogs of companies that are coming in and innovating and and trying new things and raising investment capital to help fuel that growth. I mean, we talk about so much of this from the U.S. lens, but obviously there are other countries that are really starting to put some serious capital to work, either from a public sector or private sector standpoint, China perhaps being the most prominent and

dominant example of this. How does that speak to what we're seeing, especially as particularly from a national security standpoint and even from a civil space standpoint, you're seeing this increasing framing of the U.S. and China are in this new space race? Yeah. Well, I mean, the U, the US is certainly where the action is. Space is, the space economy is global. There's global opportunity. But if you look at the, at where the action is, where the activity is, right, 50%. So we're tracking in our database, there's $330 billion invested since SpaceX came online into 2000 unique space companies. And 50% of that has gone to US companies. 25% has gone to

Chinese companies. So that leaves 25% for the rest of the world. And there's not really, you know, third place is pretty far off. So it really is, if you look at from a geopolitical perspective, from an investment perspective, from an innovation perspective, it really is the U.S. and China. And it appears that the U. is uh ahead in many ways um but uh china is uh uh accelerating innovation at a breakneck speed their capabilities have grown at a breakneck speed and when i say breakneck i mean i mean that in its truest sense right they um you maybe have seen the videos of last quarter. Sorry, Q2. They had a test test and they were testing a new rocket and the rocket broke free of its clamp downs and took off. Right. And people from the road were filming this with their phones and things, which is pretty wild in q3 Shanghai space comm satellite technology they launched the first of their sort of response to Starlink where they're gonna

launch tens of thousands of communication satellites as well they launched the first of those and the vehicle blew up in orbit created you know a thousand pieces of debris fragments which is polluting low-earth orbit. And they have, you know, a number of satellites that are, so they have their next satellites are ready to go already. And there's other initiatives in China underway as well. So Geely, the big auto company in China has launched their own satellites to connect their cars um they have what 30 satellites in orbit now um and they are planning um many more as well i think they've got 2000 in that constellation so if you look at all the satellites in orbit right it's really

um uh us and china satellites as well but you have to, you know, there's some really great reporting done over the quarter that talks about China's economic slowdown and a crackdown on tech by the CCP, which is throttling the country's private sector. And there's some really startling charts and data that the number of startups founded in China has dropped a staggering 50x since the peak in 2018. Now, like 50%, 50x. And it's on track to be even lower this year. So from our perspective, what's most interesting to us is to see how the outflow of global investment and the massive drop in the valuation of these Chinese companies impacts their global space ambitions. You know, will the government step up in a bigger way to

fill the gap? We don't know. You and I sat down recently at the New York Stock Exchange's Space Summit. This is their second one that they've done um i just wonder i wonder how much that uh signifies how much the investor mindset around investing in the space space uh has changed because it does seem to me that uh folks understand it a little bit more and there's a real awakening to how much is happening in space that then benefits Earth. Yeah. Well, I mean, it was great. It was great to do that event again with you this year. I think one of the biggest opportunities that I've seen over the last, you know, 12 years of focusing on this category is that you've

got these two very different communities right you've got the the the space community and these are mostly the infrastructure folks right the people who are building the rockets and the space stations and the lunar rovers and the satellites and they all go to their own conferences right and they only they have their their own conversations where they all go to their own conferences right and they only they have their their own conversations where they're talking to them you know amongst themselves and this is mostly the supply side of the equation um but the market side it's it but but the space economy and the value here is not about the infrastructure that's in orbit it's really about how you're

leveraging that infrastructure um to address market needs and market demands, right? If you want to go and talk to the demand side of the equation, you don't go to these conferences, you go to construction tech conferences or to TechCrunch Disrupt or, you know, you go to, anyway, some of these like startup and tech events or the specific industry events, like that's where the demand is. And these two audiences haven't really, they don't really meet. And so, you know, a lot of the value that we saw early on at Space Capital was to bring these two groups together, bring the supply and the demand together. And I think that's what, you know, was done at the New York Stock Exchange event, right?

You've got both sides of the equation. And in addition, you know, it's held at the stock exchange. So speaking about it through a capital markets lens, which I think was really, really valuable. And again, you know, we're pretty new into this category, right? I mentioned the $ 330 billion dollar number earlier and we we really under we we anchor that to 2009 when spacex launched their first customer because before spacex you know we've been operating in space for decades but it's really only become a category for investment since spacex since they removed the barriers to entry since they enabled greater access at lower cost, which enabled new entrepreneurs and innovation and investment capital to flow into this category, right?

We've seen that happen over the last 10 plus years. And now we're starting to see it come together in this way. I think it's really great for the space economy at large. And I hope we see more of this in the future. And of course, I'm going to ask you the election question because we're only a couple of days out. Does the outcome of the U.S. presidential election change the trajectory for space and where the priorities lie? Well, I think, first of all, that this is important.

This should be important to all Americans. You know, I think when the Biden administration came in, I think that they were not really thinking about space. Their mindset was really, you know, we've got these problems here on Earth that we need to focus on. Why are we thinking about space? But then they started working through their agenda items. Right. And the high on the agenda item was like what's going on with our climate. So they assembled the world's leading climate scientists that came together and they told them that all the data that we rely on,

everything that we know comes from space, right? Oh, okay. Well, you know, that's interesting. And I think that a lot of people go through this sort of awakening, right? Where they think that space is all about commercial space stations and space tourism and rocket launches and things like that. You know, like these emerging areas, apart from rocket launches, you know, these emerging areas like lunar transportation, space stations, whatever, that really makes up like 1% of what's going on. Although it's like really fun to talk about, right? And it captures the imagination. The real opportunity is again,

leveraging this satellite infrastructure for the benefit of terrestrial markets and life here on earth. And we watched the current administration go through that awakening. And Harris has been at the, you know, leading the National Space Council meetings and things like that.

So she's gotten more and more plugged in. So I do think it is, it is high, um, up in her, uh, consciousness now, particularly with the, um, with the natural disasters and things like that in, um, in, uh, in Florida, um, where satellite technologies are enabling us to really, um, address those and then also in the conflict, um, areas like in Ukraine, in other places, right. It's really brought this front of mind. The other administration is, you know, you think back to the space economy, sorry, the Space Force was started on their watch, but also, you know, Mike Pence was a key driver

of a lot of the space initiatives back then and was a driving force behind the development of that agency is behind that force as well. So and he's obviously no longer on the ticket. So, you know, obviously things have changed over the last few weeks. You could certainly see how one company, if we go that way, how one company will benefit. But like I said, you know, there's 2000 unique space companies out there. And it would be who've, you know, it should be in the interest of all Americans to see more of those companies grow and thrive. And to give, you know, the apex player a run for their money. Chad Anderson of Space Capital. It's always great to speak with you.

Thank you for taking the time today. Likewise. Thanks, Morgan. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.