Closing Bell - Manifest Space: Space Pivot with Bessemer Venture Partners' Tess Hatch 11/30/23

Episode Date: November 30, 2023

While space is awe-inspiring and technologically groundbreaking, is it investable? Venture capitalist Tess Hatch, who has invested in space startups like Rocket Lab and Spire Global, is pausing her commercial space investments and setting sights on a related industry: defense tech. She joins Morgan Brennan to make the case for the strategic pivot and venture outlook.

Space is awe-inspiring, visionary, and technologically groundbreaking, but is it investable? That's the question one well-known venture capitalist in the space space is raising right now. I would love and want to continue to invest in space, but at the moment I am cheering for space from the sidelines. I don't know if the timing of this industry right now fits with venture capital, at least these new technologies. And I'm not interested in meeting with the 300th fantasy tiny rocket or the 57th communications constellation or the 32nd Earth observation satellite constellation. Tess Hatch is a partner at Bessemer Venture Partners, where she has invested in, among other things, space startups, including Rocket Lab and Spire Global. But while she is pushing the pause button on commercial space investment, she is setting

sights on another key area, defense tech, which still very much involves capabilities in and for space. On this episode, Hatch discusses her investing pivot and where she sees the industry and the capital necessary to fund this industry heading. I'm Morgan Brennan, and this is Manifest Space. I want to start a little bit with your background and how you ended up in venture capital investing and specifically focusing on an area like space. Sally Ride, our first American female astronaut, attended my childhood school in Los Angeles when she was a little girl. So after she had traveled to space and back, she came and spoke. When I was attending the school as a little girl, and I remember seeing this badass, brilliant lady on stage who had been to space and wanting to go, myself wanting to be her. So I started applying to NASA's astronaut program,

very underqualified, and noticing common backgrounds of astronauts, such as degrees and work in the field, started to embark on that journey. I got an undergrad and a master's, one from University of Michigan, one from Stanford in aeronautics and astronautics, worked at companies for internships such as SpaceX and Boeing and Northrop Grumman and NASA's Jet Propulsion Laboratory. And I was on my way towards trying to go to space, still am trying to go to space. I do hope to. But along the journey during my master's, I discovered this acronym VC, which I honestly genuinely didn't even know existed. I did not know this industry venture capital existed. And what resonated with me the most was that I could still be a deeply technical engineer,

but rather than as an engineer at a rocket company, at a supersonic aircraft company, I could be an investor in the ecosystem. And that's what I do now at Bessemer. I'm a partner leading all of our deep, frontier, tough, hard tech, whatever you want to call it, which was science fiction a handful of years ago. That's reality today. And I have the honor and pleasure of partnering and investing in companies that are doing those things, that are building rockets, that are building supersonic aircraft, that are doing those things, that are building rockets, that are building supersonic aircraft, that are building cow collars to move mobs of cows from herds around the pasture. And I still hope to go to space. I still apply to NASA's astronaut program, but maybe I'll go as a space tourist someday.

That's awesome. That's such a great story. So what are the companies that you're investing in? When you look at the ecosystem, where is it compelling from an investor standpoint? I'm going to answer broadly in terms of the industry. And then Morgan, if I forget, remind me because I love to shine and talk about our portfolio companies. But zooming out, pun intended, and if you laugh, I'll have more bad puns. Thank you for the fake laugh. I'm a sucker for a good pun. Keep it coming. Lasting off.

They're so bad. Before figuring out what's next, before my crystal ball, crystal globe of what's gonna happen next in space, I think it's important to go back in history and figure out and dig into what technical catalysts or momentum drivers got the industry to where it is today to then be able to best guess what's happening next. And I would argue there are two technical catalysts or momentum drivers that really transformed the space industry, really brought space to the mainstream. The first one was the invention of the CubeSat. The CubeSat is a 10 by 10 by 12 centimeter box,

the size of a tissue box. I've got a candle on my table. That decades of Moore's law exponentially decreased the size and increased the power of cheap commercial off the shelf electronics to allow for this invention. Now, why that's important is because before the CubeSat, the only way to launch anything into space was a school bus size satellite that would take years, if not decades, and hundreds, if not billions of dollars to design, build, test, and launch. That was a really high barrier of entry. That was really difficult. Really only primes could afford to launch and put something into space, this new CubeSat, this new tissue box, really lowered that barrier. Students, entrepreneurs, whomever, they were able to throw basically their phone. They were able to throw cameras. They were able to throw

communication devices onto this new form factor and launch it into space for maybe a few hundreds of thousands of dollars. In my grad school, I worked on a CubeSat program. And as a student, I was able to launch a sensor. It's an ion mass spectrometer into low Earth orbit. So tying that into some portfolio company investments that motivated Bessemer's investment into Spire Global that has launched over 150 satellites into low Earth orbit and listens to the Earth. We have sensors for maritime tracking, aviation tracking, and weather monitoring and predicting. Great. That was technical catalyst number one. I told you we had two. We have all these new CubeSats. We have all these new form factors. But we had an issue. There was no way to launch this specific satellite into space.

Every rocket that was available was designed for the school bus. This new form factor had just been invented. It was very difficult to get it into space. Launch in general was a huge bottleneck in the industry because there weren't many launch vehicles. United Launch Alliance, which is America's Boeing and Lockheed, had the Delta and the Atlas. India had a PSLV. Russia had the Soyuz.

And SpaceX came in. They really did disrupt the industry with their Falcon 9. But the disruption was on price. SpaceX sold the Falcon 9 for $60 million rather than triple-digit millions. But even the Falcon 9 was designed for the school bus, not the tissue box. So I would argue the second technical catalyst or momentum driver in the industry is the tiny rocket, a little tiny compared to SpaceX's Falcon 9, 300 kilogram rocket that was designed for the tissue box in low Earth orbit, not the school bus. And by the way, low Earth orbit,

500 to 1200 kilometers, not the school bus in geostationary orbit, 36,000 kilometers. And that motivated Bessemer's investment into Rocket Lab, which is one of those tiny tissue box satellites. And over the course of Rocket Lab, we've launched 39 times deploying 170 satellites to space. And those are used to assist with things like wildfire tracking, photographing the earth, people communicating in the middle of disaster or conflicts. So great. Morgan, I'm finally getting to your question. Long context, keeping you on the edge of your seat. What's next? So we have the CubeSat, we have the tiny rocket. Space is open for business. What's next? Well, there are, gosh, hundreds of space startups who think they're the next technological catalyst or momentum driver in the industry. There are folks taking people to space for space tourism. There are folks and there are companies manufacturing in space, pharmaceutical testing in space, mining asteroids, creating low Earth orbit hotels

and stations in our low Earth orbit. There are people colonizing, mining, doing things on the moon, which the aerospace engineer in me is so jazzed and so one of these potential technologies but in my day job i have to take off that hat sometimes and put on my investor hat and i have to question the timing and the technological readiness level of some of these technologies okay so it sounds like you're not ready to invest in some of those technologies or that the timeline is longer than it would make sense right now to invest. Space is my favorite topic. And we at Bessemer are so delighted to have invested in Rocket Lab, invested in Spire. And then actually even before that, in 2010, we invested in Skybox, which we sold to Google.

And the other two, Rocket Lab, Inspire, Rocket Lab, as we were chatting, went public on the NASDAQ. Inspire went public on the New York Stock Exchange. And I would love and want to continue to invest in space. But at the moment, I am cheering for space from the sidelines. I don't know if the timing of this industry right now fits with venture capital, at least these new technologies. And I'm not interested in meeting with the 300th fantasy tiny rocket or the 57th communications constellation or the 32nd Earth observation satellite constellation. However, because that makes me sad, zooming out because space is a piece of defense tech, I'm really excited about the future of defense tech. Space is a very crucial part of that. But for now, I'm really focusing on defense tech.

Okay. So what kind of defense tech? Thank you for asking me all the questions that I'm excited to talk about. Global conflict is on the rise. Pax Americana is waning. And I'm focused on investing in companies that are building dual use, so commercial and government customers or government only. And specifically, after dozens of DoD interviews, asking them what they're interested in investing, they're interested in partnering. I'm focused on two categories of companies.

One, AI and software for the DoD. Okay. Two, autonomous systems for air, land, sea, and space. Those have been the two areas in which our DoD is most excited about. And even, I mean, a catalyst of why now, our Secretary of Defense, Lloyd Austin, September of last year said, we need to be able to move faster. We need to be able to do it more affordably. And that means working with startups. They're the ones who are coming up with the latest and greatest technologies, and they're

doing it at a fraction of the cost of the traditional defense contractors. So I'm excited about this industry. Now, I will tell you, while there's pros and cons of investing in defense tech, the pros are, on one hand, it's sometimes just the right thing to do, a sense of nationalism and pride. And on a more lucrative hand, the United States' DOD is the world's biggest customer. They spent $866 billion. So there's a huge market. They're a very strong, loyal customer.

You're not worried about them going out of business. Once you're in, it's really sticky. It's really easy to expand. The potential size of your contract is huge. And the government might be able to help you define and develop your product with money along the way. And it's usually in the form of non-dilutive grants. I love free money. On the other hand, some cons. There's three.

One, lumpy, bumpy, and unpredictable. It's really hard to forecast. Specifically, you'll have a really big Q3 with the fiscal year ending in September. Two, really long sales cycles. It takes a lot of investment upfront to get into selling to the DOD. So it might take you years to land a multimillion dollar contract. Then the contract's pretty big. Then lastly, it's pretty cumbersome. A lot of bureaucracy. You got to cross those T's and dot those I's with a lot of red tape to have the compliancy, to be compliant to sell to the DoD.

But I think, you know, all those cons can also be framed as pros. And I'm really excited about spending time in this area, which does still include space tech going forward. Yeah. And of course, there's a catchphrase for all this in terms of the cons, which is value of death. Just something that a lot of the defense tech startups have been navigating and dealing with, because even though the DOD is beginning to cut red tape and starting to make more money available for the startup community and small business community, that doesn't necessarily translate into a program of record that is much trickier to get to, to your point. The small business innovation research grants, phase ones, which are early contracts, and they go to phase two and they go to phase three, but only 5% graduate, 5% of companies

graduate from a simple phase two to three, when 80% of the DOD budget's in this three, which is the program of record, the category, the reoccurring contract, which we need for our customers and our startups. So I'm delighted and thrilled. They're doing a great job on the phase one. They need to cut more red tape in the later end of the process. Yeah, definitely. Okay. So what does this look like? What are some of the companies you're investing in or have you not announced those yet? Well, for the space industry, Skybox Global, which sold to Google became Terra Bella and it's now part of Planet Labs. Planet, excuse me, the new name for me 10 years ago or 15 years ago when they started was Planet Labs.

Spire Global and Rocket Lab are our three former space portfolio companies. One was acquired and two went public. So when they go public, we step off the boards and continue to still be huge fans of all three. In broader aerospace at Bessemer, we're invested in Boom Supersonic, which is reinventing supersonic passenger travel. In broader aerospace, we're invested in DroneDeploy, the leading drone enterprise software solution. So if you've got a drone and you've got an agricultural farm, a construction site, a windmill, we can help you tell the drone where to fly, what information to aggregate, to then throw up in the cloud to do analysis on cracks in the turbine or the construction site's a little off from the plans.

And zooming out even further to deep tech in general, Bessemer's portfolio includes quantum computing companies like Rigetti and Xanadu. It includes food tech companies like Black Sheep Foods making plant-based meat. It includes cow collar companies. Yes, a collar that you put on dairy and beef cows to tell the cow where to move among the pasture. So there's tremendous data that you can get from the caller that's, you know, purposes to move them, but also helps with the cow's health and the grass among the farm, which has a sustainability element to it. So certainly back on space, I realize space tech as it relates to defense and national security is still attractive here, still an opportunity here right now in the near term. What would it take for you to start to look at some you know, there's only a couple more months of 2023. So let's say 2024. I need some theory to go to reality of a, one of these exciting net new ideas. I need, I used to say for the past seven years that I've been doing this for these constellation

plays with a new unique sensor, I'd say, Hey, get some flight heritage, throw something up there to prove to me that it works. Morgan in grad school, like I said, I was able to throw up a CubeSat in low Earth orbit for a couple hundred thousand dollars and a couple quarters at Stanford. And entrepreneurs can do the same thing to prove that their tech works. However, now we've got a lot of constellations with a lot of sensors. What's the next thing? So if you're a manufacturing company, prove to me up there that you can produce something. And I'm delighted Vardas had something up there and it's working. Correct me if I'm wrong.

You probably know this. You talked to Will and Delian. I don't know if they're still up there, if they've gotten CCFAA approval to come back down. As of the last time I spoke to them, they were still waiting. I cannot wait for them and hope that it comes back down and that they're able to pull something out of the capsule. Like that would be an example. And that one's a pretty foreseeable future one. But mining an asteroid, I mean, I don't know which company is going to get there first, grab it and be able to bring it back. But I really would love some flight heritage and whatever is applicable to the company that you're working on.

OK, so what do you think this means for the industry writ large right now? I mean, you think a shakeout's afoot? Do you think consolidation's afoot? A right sizing, if you will? I mean, you mentioned the hundreds of rocket company pitches that have come your way. I mean, what is it going to take, I guess, for things to be right-sized based on market conditions to then move to this next phase. I'm one data point in the industry and I am delighted there are so many folks investing in space as opposed to in 2010 when I would argue there's only a handful. We, right now, we have entire funds dedicated on investing in space. I listened to your podcast with Megan and you interviewed Chad Anderson at

the New York Stock Exchange event. I mean, their funds exclusively focus on investing in space. What would need to happen to the space industry? Well, a handful of years ago, my answer would have been, and therefore I still think it might be, but I'll explain why it's a little different now, is liquidity events. If we had this conversation in 2020, I'd pound my fist on the table and say, we need exits. As venture capitalists, I need to be able to have public comps to show my LPs that space is a venture returnable industry, and this is the multiple off top line that it trades at. And thank God, and I'm so grateful we have SpaceX, because SpaceX really has paved a strong and wide path for all of these other companies

to follow in its footsteps. I'd also argue, and so thankful for Skybox. We invested in 2010 and sold to Google for half a billion dollars four years later. I would argue Skybox and SpaceX were the two reasons all of these folks are investing in space today. Their ears perked up and they heard four years, half a billion dollar exit to Google. What's the space thing in 2014? Kind of sounds like SAS, space, I don't know. And that's probably what catalyzed all of these folks to now start investing in space and 10 years later have funds focused on space. And we've got hundreds of companies, like you said, following in these footsteps. But we need more liquidity events. One to Google in 2014 wasn't enough.

And as you know, a couple of years ago, we got those liquidity events in the form of SPACs. Bad pun. you can't spell space without SPAC. And SPACs became the trend. They really did. And not just for space companies, but for deep tech companies at large. And why did they become a trend? SPACs were always around. However, there were more SPACs in that year than in the prior decade aggregated together in 2021 versus, you know, 10 years before. And why did it become a trend? Well, SPACs are just like a traditional IPO or direct listing. But in the case of the SPAC, the biggest difference is that the SPACs can share long-term projections with the institutional buyers, which traditional

IPOs can't. And that made it really an enticing fit for deep tech companies that have the potential to make a billion in revenue, but five years out. And we had about a dozen space companies go public via a SPAC in that time horizon, including Rocket Lab and Spire, including Planet and Astra and Momentus, and the list continues. There are about a dozen. And we got those liquidity events. We got those data points. Now, the SPAC trend stopped because the pipes clogged. I forgot to include some puns. So there's your one for the last five minutes. And where we're sitting now, some of those companies, you've forgotten they went public

via a SPAC and they are hitting their projections and trading like a traditional IPO company. Some of them are struggling. So I think this wish of mine for liquidity events has been a blessing and a curse. We've got good multiples for space companies. We've got some bad multiples for space companies. But I would argue there's still onesie twosies, right? We've got a dozen and one space companies that are public and are trading and have had exits. We need more liquidity in the industry. And that could also be in the form of M&A. Around the SPAC phase of 21 and 20, we saw a lot of acquisitions. Rocket Lab acquired Sinclair. It acquired Sol Aero. It acquired Planetary Systems. It acquired Advanced Solutions. Spire acquired Exact Earth. Recently, though, in 2023, we're seeing big primes make some acquisitions.

Boeing acquired Wisk. Raytheon acquired Collins Aerospace. Saffron acquired Raytheon's flight control unit, Collins Aerospace. So maybe we'll continue to see the big primes make some acquisitions in 2023, but I think we need a little bit of both. Okay. Great. Anything else that we haven't talked about? Anything in terms of your outlook or other trends that are going below the radar right now? I was chit-chatting away. I didn't even realize we're over time. Thank you so much for having me. This has been so lovely. Well, thank you. It was wonderful to have you on here. What a great conversation. 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.