Closing Bell - Manifest Space: Starships Are Meant to Fly with Space Capital Managing Partner Chad Anderson 4/13/23

Episode Date: April 13, 2023

SpaceX’s Starship is expected to launch its long-awaited orbital flight any day now as it awaits its launch license. Morgan sits down with Chad Anderson, an early investor in SpaceX and CEO of VC fund Space Capital to discuss the economic impact of what will be the world’s most powerful rocket ever flown. For more Manifest Space, listen and follow here: https://link.chtbl.com/manifestspace

The long-awaited, highly anticipated maiden orbital flight of SpaceX's Starship is almost ready for liftoff. A 394-foot-tall mega-transportation system, Starship is Elon Musk's vehicle to carry people and cargo to Mars. It's NASA's solution to land astronauts on the moon, and it is poised to become the most powerful rocket ever flown. It is hands down absolutely a game changer. It is a massive vehicle, fully reusable, 100 sorry, 1100 cubic meters, enormous space payload capacity, 150 tons to low Earth orbit. And it can do all of this for essentially the price of fuel. Chad Anderson, CEO of VC Fund Space Capital, is an early investor in SpaceX,

which plans to have Starship's second stage complete a full orbit of Earth before re-entering the atmosphere and splashing down off the coast of Hawaii. The only thing standing in the way? An FAA-launched license, which should come soon. On this episode, Anderson breaks down the economics of Starship and what it means for future investment opportunities in the space sector overall. I'm Morgan Brennan, and this is Manifest Space. All right, I think we need to start with Starship, which is poised to have its first orbital test flight really any day now. You're an early investor in SpaceX. What makes Starship so meaningful?

So it's very, very, very exciting times. It's getting very real. The Starship and Super Heavy Booster are fully stacked with their giant chopsticks at Starbase in Texas. It looks like they are technically ready to go, and they're just now awaiting a launch license from the FAA. So it looks like we might see this within the next week. This will be the first orbital launch from Texas. From everything I've heard, it sounds like a launch license is forthcoming. And of course, NASA is tracking this orbital test flight very closely because it intends to use Starship as a lunar lander for its astronauts as part of the Artemis moon missions. So, you know, what makes this vehicle special? It is hands down, absolutely a game changer. It is a massive vehicle, fully reusable, 100, sorry, 1100 cubic

meters, enormous space payload capacity, 150 tons to low earth orbit. And it can do all of this for essentially the price of fuel. So Elon has thrown out a number of $10 million per launch. I think that there is some optimism built into that. Our estimate based on fuel prices today, it seems like it's probably something more like $ 50 million per launch. But even then, it's still lower than the cost of one seat to the International Space Station today. So massive vehicle. And to sort of put it into context, you know, it's double the thrust of the largest vehicles to date, which are the Saturn 5, which powered the Apollo missions and the current latest NASA vehicle, the SLS. So twice the power of those vehicles. This is the first orbital flight, which means that it may not actually reach orbit.

It could fail. It could explode. It could blow up. I mean, the chances of that are high, as is the case when you're testing a new and launching and flying a new rocket. But whether it's this first flight or whether it's whatever next flight that happens, what are we talking about in terms of all the different use cases around Starship? Yeah, I mean, nobody knows really what's going to happen here or really what the odds are. But I can tell you that as somebody who has spent a lot of time over the last decade plus looking at all the exciting things that are happening within the space economy, this tops the list. You know, this vehicle is all the things that we just mentioned. It's capable of carrying humans to Mars and other destinations in the lunar surface.

The Starship vehicle is going to be the vehicle that delivers crew to the lunar surface in 2025. You know, but that's just sort of all surface level stuff, all the stuff that we know about. But there's a lot that's sort of bubbling up and happening in the background. While venture momentum in the space economy continues to set all-time records in terms of technological progress and investment, much of that capital is still chasing solutions that are based on the decade-old Falcon 9 launch paradigm. With Starship expected to come online, we are entering a new phase of infrastructure development. It's going to make existing infrastructure obsolete. It's going to accelerate growth in existing markets. It's going to enable entirely new ones. And

it promises to shake up all of the givens about space that it is expensive and difficult and dangerous to get there and that everything you launch has to be purpose built and over engineered and tested for years and that every ounce matters with starship you no longer need to push the envelope of performance and weight and reliability to the limit without any regard to cost. With a vehicle like this, just one example is that we've seen hundreds of millions of dollars invested into capabilities that can de-orbit defunct satellites and old rocket bodies and debris that's in orbit. They do all types of complicated maneuvering. We've seen harpoons and nets, static electricity, tethers, and all kinds of different things,

right? These complicated systems that go and launch on a Falcon 9 and they go into orbit and they can deorbit these things. With Starship, it can launch on its primary mission, which is to say, launching and landing humans on the moon. On its way back, it could open up its hatch and gobble up garbage and be a debris mitigation solution on its own for zero marginal cost. We've also seen hundreds of millions of dollars going into commercial space stations

to replace the International Space Station when it's retired at the end of the decade. But these are very expensive systems and habitats in orbit where Starship is so big and so inexpensive that it itself could be a space station. And so, you know, we've seen, you know, most of what's happening in the space economy is in satellites and the data that's coming off of satellites and in launch. And then there's what we call emerging industries, which are space stations, in-space manufacturing, debris mitigation and these types of things. And this is really where, you know, we've seen three plus billion dollars invested over the last 10 years into these nascent markets. And a lot of that wealth is going to be transferred to new solutions in a Starship world. And of course, Starship also represents, Musk has talked about this is the transportation combination that's going to take cargo and humans to the Mars for future colonization as well.

But it's the holy grail of reusability too. That's part of how SpaceX is trying to bring launch costs down and make this entire process as affordable as possible. Have we ever seen this type of capability where you have a system that is fully reusable and works to this level, to this degree? No, never. I mean, this would be the first of its kind, and it's the first in several ways. One is, again, its size and its cost is enabled by the full reusability and the manufacturing techniques that they've adopted from the beginning. They have made this a low cost solution from the outset using stainless steel instead of carbon fiber or some more of these more exotic and more expensive materials, fully and rapidly reusable, meaning that the super heavy booster and the

Starship vehicle on top that carries the payload, both of those launch together. It gets to orbit, whereby it separates. The Starship continues on its journey where the booster comes back and lands in the same way that the Falcon 9 vehicle is landing today, although it's much larger and it's getting caught by those chopsticks that they have down at Boca Chica. And then the Starship vehicle itself can land on other planetary bodies or back down on Earth and be restacked with those chopsticks and rapidly launched again. So this is revolutionary in a number of aspects, you know, size, power, cost. But really, it's that cost piece that's going to be enabling all of these new markets to develop

and enable much greater participation in the space economy. Again, you know, up until this point, it's been you've had to optimize for size and weight regardless of cost. You've had to have these super complex origami structures like the James Webb Space Telescope, for example, where they had to fold all those mirrors and then unfold them. And hopefully everything aligns appropriately, right? You could launch that whole mirror in a starship. You know, instead of having specialized space robotics companies going to the moon and building out infrastructure there, we could be leveraging our knowledge of mining and heavy machinery here on Earth. And Caterpillar and some of these other larger companies that have this expertise could

then adapt their vehicles and launch on a starship. And we could benefit from inherent knowledge and experience that will rapidly accelerate all of these efforts. Yeah, it's pretty incredible to think about where this could all go. And I've had conversations with the likes of the CEO of T-Mobile, for example, which has partnered up with SpaceX for Starlink. And part of that plan has to do with Starship becoming operational as well. So there's just all these real life already inked use cases and deals and contracts, and then all the places it could go that we haven't even really fully dreamed of yet, to your point. You're very bullish on all of this and very optimistic on all of this. And I would expect

you to be, given the fact you've been a longtime investor in SpaceX. I guess just give me some of the stats in terms of when you invested in this company and how that has gone for you and for Space Capital so far. Yeah. So it's not just SpaceX. It's everything that this company has enabled. So we've invested in the company several times over the last number of years. And I remember conversations when back when it was in the low, low double digit billions of valuation and people were saying, you know, really? I mean, it seems pretty expensive. And, you know, obviously it's a different a different sort of situation today. They've stayed private for so long that the market for this stock is pretty liquid. And so a lot of folks have made money with this company. We've started to see investors make

money in other companies as well. Skybox Imaging is a great example. A small satellite company that was acquired by Google in 2014, 2015 for half a billion dollars. My partner at Space Capital was leading the company and led that sale. So launch is the first important piece of the puzzle. Solving that and removing the barriers to entry and enabling new entrants to come in and innovate and try new business models and new technologies. The infrastructure is very important, but we're really interested in the orbital assets and the data that is coming off of them. There is no doubt that amid these challenging economic times, that one thing remains certain, that space-based technologies are playing an increasingly important role in our economy and will continue to transform the world's largest industries for decades to come.

It is already, space technologies are already the invisible backbone that powers our global economy. The timing in GPS is essential to enabling our global financial markets. Without that piece, without that global timing piece, the global financial markets do not work. Geospatial intelligence, earth imaging companies are playing an increasingly important role in insurance and in agriculture. the Russian invasion of Ukraine and the conflict there, giving us a ground truth of what's actually happening on the ground. And satellite communications are increasingly playing a role in connecting the remote places of our planet. And Starlink, as you mentioned, is a key piece of this and also played a key role in keeping

the Ukrainians connected throughout this conflict. And so we see huge opportunity in the data that's coming off of these space-based assets. As the world becomes more dynamic and more uncertain, we've actually seen an increase in demand for the products and services that our portfolio companies are offering. Because enterprises and government customers want more information, not less, when things get more uncertain. And we've actually seen, you know, in Q2 of last year, in the steepest decline in the public markets, the National Reconnaissance Office, one of the big five U.S. intelligence agencies, made their largest ever purchase for satellite imagery.

And so some segments of the space economy are counter-cyclical and recession-proof and are seeing record revenues in these challenging economic times. And so that's why, you know, we've just launched our Space Capital 3. It's a $65 million fund to continue investing at the intersection of space and tech. And we've never been more bullish on the opportunity set at large. Let's talk a little bit about that. Because it does, after you've seen some of these publicly traded space names, just get bludgeoned in the last year and a half. And now you're starting to see some of those companies that maybe have had cash crunches begin to go into bankruptcy, like Virgin Orbit or Face Delisting, as you're seeing with Astra, etc. Where do you specifically see the opportunities right now, whether it's in your current portfolio companies or whether it's in new and emerging startups that maybe we haven't discussed before?

Yeah, I mean, unfortunately, what we've seen with a lot of these companies, space companies going public, you know, most of them prematurely via SPAC, we're starting to see the rubber meet the road a bit. You know, these companies were, many of them were not ready for the public markets or the level of disclosure that was required. They weren't just pre-revenue, they weren't just pre-profit or pre-revenue, they were also pre-product. And that makes for a difficult situation for a public company. We're tracking 120 or so companies, launch companies that have raised venture capital or private market capital, but there aren't hundreds of launch companies. There are hundreds of PowerPoint presentations about launch. There are two venture launch companies. There are hundreds of PowerPoint presentations about launch. There are two venture backed launch businesses that are in operations.

Everyone else is talking about launch. So SpaceX makes it look easy, but it's not. Launches is very difficult. And if you talk to the CEOs of launch companies that have successfully made it to orbit, they'll tell you that the launch market alone is not enough. Everyone that gets to orbit with a launch vehicle, with a new launch vehicle, the first thing that they do is get into services. And this all starts with SpaceX, right? They immediately got into the satellite communications game with Starlink. And that is a key driver of the value of the business is the opportunity in connectivity.

Rocket Lab has done the same thing with its electron vehicle, turning its second stage of its rocket into a satellite and acquiring some satellite manufacturers like Sinclair. And so, yeah, if you look at the launch market alone, likely peaks out at $3 to $5 billion a year, but Starlink and uh the connectivity business is supposed to be more than 10 times that so it's like you know within the the gps text tech stack which is the most successful space technology in existence it's generated trillions of dollars in economic value um in some of the largest venture outcomes in history but it wasn't the satellite

hardware that generated all of that value. It was the applications. It was the location-based services that were built on top of those signals generated from orbit. And so, you know, we often say that the space economy is counter-cyclical, but space itself is not. Certain segments are. And it's important to know which ones when making investments. So there's a few areas that are poised to take off this year. One is in climate technology. So we wouldn't know about our change in climate if it wasn't for space. Over half of all essential climate variables are only available from orbit and over 99% of all accurate weather forecasts come from space. So climate is a huge area, one that has proven to be resilient through this market downturn.

There are more funds and more capital chasing very interesting deals. And this market in terms of deals being done and evaluations has held up very, very well. It's a new market with a lot of promise. And we're expecting to see some big things here in 2023. We've made several investments in this category and will continue to make more. And then also geospatial intelligence more broadly. You know, SpaceX removed the barriers to entry in 2009 when they launched their first paying customer. And then we started to see small satellites being launched. And instead of having, you know, one massive monolithic satellite, uh, launched by the government, you know, kind of taking a picture of every place of a place on earth, every couple

of weeks. Now we had these distributed networks of satellite constellations with redundancy built into the number of satellites. So we could build them low cost and some of them could fail. Um, and we were generating an unprecedented amount of new data about the surface of our planet. Every corner of the earth is now being imaged on a daily or more frequent basis, which is giving us really interesting insight into how things are changing and the movement of goods on the surface of the planet. But then we had a hard time. We didn't have the infrastructure to be able to bring all that data down to the ground. With big tech getting into the game with Amazon Ground Station and Microsoft getting into the game, we're now bringing that in GPS, when GPS receivers like Trimble and Magellan and Garmin harnessed this really valuable signal and made it available for

location-based services to be built on top of it. The same thing now is playing out in geospatial intelligence, where we have all this data and now it's all structured and easily accessible through an API. And we're just starting to see the first applications being built on top of this really valuable data set. And so we think 2023 is going to be a breakout year for these types of companies as well. These are also the types of companies in our portfolio

that are counter-cyclical and recession-proof and currently experiencing and seeing know, and seeing record levels of revenue. And then you layer the AI phenomenon on top of that. And, you know, using synthetic data to train our algorithms on this massive, massive data set. And we're starting to generate some really, really useful insights. So 2023 is going to be a breakout year for these types of companies. And that's another area where we're looking to invest. Very cool. Are there names you can name right now?

I mean, a couple of companies in our portfolio are maybe young for your audience. We're seed stage investors, so we're getting in very early. But Skywatch is one of those companies. It is based in Waterloo in Canada, and they have built a platform to aggregate all this data and structure it and make it easily accessible through an API. Rendered AI is a company based out of the Seattle area in Washington state. And they have built a synthetic data platform, common application framework, meaning that you can leverage their platform to generate synthetic data sets and train your AI, use it to train your AI algorithms. And their beachhead market is in satellites. And so the CEO of Maxar has said that publicly traded company provides most of the

satellite imagery to the US government has called synthetic data, the new gold. And the reason for that is because they've got these great, you know, new satellites that they're looking to launch. And the old way to do this was that you would build these satellites, and then you would launch these satellites, and then you'd commission them and turn them on and start to get that data down. As it started to come down, you would use that data, that real data to train up your AI algorithms, which then would allow you to build a sellable product. So that's a lot of time lost. Whereas within synthetic data, you can train your AI algorithms based on the data that you think you're going to get. So that when you launch these satellites and you turn them on, you can immediately start generating revenue. And that's just one example of an infinite number of potential use cases.

So one of the questions I get asked a lot, and I'm going to ask you now, is, especially if you're talking about a public market where a lot, and I'm going to ask you now, is, especially if you're talking about a public market where a lot of companies went, you know, began trading and maybe were premature in doing that, I've certainly seen the reaction in their stocks because of it. How does the everyman get involved in investing in the space sector, especially if we are on the cusp of, as I've heard some folks, you know, compare it sort of this next, the next biggest thing since the internet or the next biggest thing since the iPhone or name your major era of super innovation. Yeah. Well, I call it exactly that in my new book, The Space Economy. And this is exactly the type of thing

that I'm looking to address, right? Is to help, it's meant to be a guide for investors and would-be entrepreneurs and aspiring professionals that see an opportunity here and are looking to get involved. I think it's important to sort of pull back and think about where we are in terms of the maturity of this as a category. The only reason we're even talking about space as an investment category is because of SpaceX.

Before that, the market was very limited. There was a handful of defense contractors on the one side and the government really as the sole customer on the other. And the barriers to entry were very high. And so this was really sort of something that was interesting, but reserved just for the special, you know, sort of few. And things have changed pretty rapidly over the last, you know, 10 to 14 years with SpaceX, again, removing those barriers to entry. But so 2009, in our mind, is sort of the starting point of this new era in commercial space activity. And so SpaceX removes the barriers to entry. A couple of years go by,

we start to see some companies experimenting with small satellite platforms. It takes a few years for them to get up and build their satellites and launch them and start experimenting with them. We saw that in 2013 and 2014. Then in 2015, things really started to take off. That's when SpaceX launched their... Sorry, when they landed their launch vehicle and ushered

in an era of reusability. They also announced Starlink that year and Google put a billion dollars in to back that effort. So things really started to take off in the space economy in 2015. That's when we really started to see a lot of private market capital coming into the category. And so if we're talking about 2015 to today, you know, it's eight years later. Most of the activity is still in the private markets, and that's because it takes time for these things to mature. Right. As a seed stage investor, we're we're usually the first check into a company. And our hold period, our expected hold period is, you know, five to eight years. It takes six to eight years, generally speaking, for companies to go from initial investment until, you know, being listed on a public market or being ready to, you know, minus the SPAC sort of blip. And acquisitions happen a bit faster than that, you know, in sort of time frame about

five to seven years. We've seen the acquisitions have started to pick up and we're seeing more M&A activity. And we are seeing some companies go public and thrive on public markets. government market that is interested in this data or interested in the critical infrastructure that these companies are building, regardless of market cycle. So I guess what I would say to answer that question is, if you're a public market investor, a retail investor that is looking to get more involved in space companies, be patient because it's coming and it's likely coming soon. There's several companies in our portfolio, for example, that have been making fantastic progress and are actually in a position where they are or started to think about going public before the IPO window closed. So we do have a couple, even within our portfolio, that when the IPO window opens, there's going to be a chance likely to participate.

And there will be more that are outside of our portfolio as well. So you just sort of have to think about how far we've come in the last 10 years or so. And the best is yet to come. I mean, Starship comes online. It's just going to accelerate things from an infrastructure perspective and what we can launch and put up there and the type of data that we're getting down. And so there will be plenty of time for participation. Amazing.

And just for our listeners out there, where and when they can access your new book? So The Space Economy, Capitalize on the Greatest Business Opportunity of Our Lifetime. It is published by Wiley and available April 11th. Well, congratulations on the book. And Chad, thank you so much for joining me to break down the significance of Starship and what it is to invest in this sector. Chad Anderson, thank you. 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.