Closing Bell - Manifest Space: The Capital Comeback with Seraphim Space CEO Mark Boggett 4/27/23

Episode Date: April 27, 2023

While private space investment plummeted back to earth in the recent capital drought, VCs may be looking for a rebound. According to Seraphim Space Index, total investment rebounded 75% to $1.4 billion. Morgan sits down with Seraphim Space CEO Mark Boggett at the Space Symposium to discuss the private market landscape and his outlook. For more Manifest Space, listen and follow here: https://link.chtbl.com/manifestspace

Space is hard, and investing in it is also hard. As central banks raised interest rates and capital evaporated, private investment into the space sector plunged. But the worst may be over. According to the Seraphim Space Index, in the first three months of this year, total investment rebounded to $1.4 billion, a 75% surge from the final quarter of 2022. There's been a return to growth stage investing.

So this quarter saw a record number of B rounds, C rounds, D rounds, E rounds than any other quarter in the history of our publication. So that suggests to me that there's been a pause during 2022 as investors just took stock of what was going on in the market. Mark Boggett is the CEO of Seraphim Space, a leading venture capital fund specializing in, well, space. He's been investing in the sector through Seraphim since 2016. And the firm's portfolio includes companies that have appeared on this podcast, like Leo Labs and Hawkeye, plus many, many more.

In this episode, Boggett joins me from the Space Symposium in Colorado Springs to discuss the current investing landscape and where he's making big bets on the future. I'm Morgan Brennan, and this is Manifest Space. Mark Boggett of Seraphim Space, thank you so much for joining me today. Thank you for inviting me. So we are at the Space Symposium. It's one of the biggest space conferences of the year. It's gone through, even just for me in a handful of years, I've seen it go through these iterations, very commercial focused, very military focused.

This time around, it almost seems like it's more of a mix of commercial and military defense. And then, of course, we've got investors like yourself here. I guess, walk me through your purpose in being here this week. Yeah, well, so I've been investing in space through Seraphim since 2016 and coming to events like this around the world. And in 2016, 2017, 2018, I find myself often the only VC in the room. And what's really changed over the last handful of years is that space has really opened up more broadly to the investment community. So this is an event that was traditionally military focused

the defense related event and during the course of the last two or three years the defense community have really been focused on how they can leverage the capability of commercial space so as as a consequence, this event now, there are many commercial space companies here, many space startups, and as a consequence of that, many other VCs are here. So all of the leading VCs are represented here, and they're here to identify what the emerging technologies are from the exhibition room. Why do you think that is that we've seen more of the VC community come into the space space?

Is it because there's more innovation and there are more companies doing more things and proving the business case? Or is there something else going on? Well, I can tell you exactly what's happened. And it's a learning curve that the investment community's gone through. When you first come across space, it's all about rockets, it's all about satellites.

It doesn't really sort of interest the generalist technology investor. But once you start looking deeper, you start to appreciate that space is a lot more. It's a horizontal market. So it's a bit like AI that actually impacts every single vertical terrestrial market. So once investors start to understand the sheer breadth of the opportunity that's presented by the space market, they get sucked in. So what happens is that entrepreneurs are approaching these investors and they're coming across good teams with great models and new businesses that they're interested in.

And that draws them to attend events like this to see what's next. So what is next? So, well, where we are today, in our view, is the phase of the commercialization of space, which is around the building of a digital infrastructure. Thousands of satellites in low-Earth orbit that are looking at our planet, they're gathering information in low cost, high resolution, great detail and you can use that information to use resources more efficiently, to monitor everything that's going on, catch bad actors that are doing bad things like dumping effluent into the sea. That's the market today,

the nearest to revenue opportunities. If you look a little bit further into the sea. That's the market today, the nearest to revenue opportunities. If you look a little bit further into the future, and a little bit further is only measured by a small number of years, maybe three, five at the most, we're then building upon that infrastructure, heavy infrastructure. So these are things like data centers in space, things like solar farms in space, things like manufacturing in space, lifting dirty industries from planet Earth into space. So this is being driven by the cost of launching into space and the lowering of that cost. So there was an event that was supposed to happen during the course of this week with Starship

being the world's largest ever rocket to be launched. That's going to herald a new era of being able to do significant infrastructure in be launched, that's going to herald a new era of being able to do significant infrastructure in space. So that's the sort of nearer term. We've just started as an organisation investing into those types of companies. So companies like Voyager that are building space stations and focused around manufacturing are the type of investments that we've been making. Astroscale as another.

But if we look forward maybe another three to five years there's the next emerging market so this is around cis lunar so this is um around doing things um on the moon and really being able to uh habitate permanently the moon so there's so many new technologies there's so many requirements to enable that these companies are now just being formed so these are the seed stage companies of today, the companies that are doing everything that there is around creating a livable environment on the moon. And then hopefully that will then translate to other planets like Mars. So from an investor perspective, the nearer term sort of opportunities that are underway right now are these digital infrastructure plays.

And this is where defense is main customers, climate and sustainability. And then we start term sort of opportunities that are underway right now are these digital infrastructure plays. And this is where defense is main customers, climate and sustainability. And then we start to look further out into the future that's just coming into investors' purview at the moment. It's absolutely fascinating. And I mean, just in terms of that NeuroTerm play, it's almost like space for earth. Yes. And really, it's going to drive a whole range of climate-related activities. ESG, a key focus for investors around the world, really trying to use investment to make changes within the businesses they're investing into. But you need to be able to measure that, and you need to be able to measure that independently. There needs to be transparency.

And this is one of the things that is going to be delivered by space over the near term. And then as you look further out, then space is going to start addressing some of these big climate related problems, things like we talked about with solar space, being able to provide clean energy and that type of thing. This idea of heavy industry in space, I mean, do we even know what this addressable market is going to be yet? No, no, we don't. And as an investor, you know, that's one of the biggest risks that we take. It's not really about even what the size of the ultimate addressable market is, is when will this market start to be able to have commercial revenues.

Right now, there are governmental revenues. So, for example, in the Artemis programme, you know, NASA is really sponsoring a whole range of events. And we're trying to pick the companies that are leveraging that kind of government investment to then turn commercial. So, again, if you'd like me to go into detail in one of our companies, I think it's a good example of how that's happening. All right. Let's do it. So let's talk about Voyager. So this is a company that's four or five years old. They have grown by acquisition. So they've made seven acquisitions to date.

What they've done is they've acquired companies that are profitable already. These companies, in their own right, have a broad range of customers that they're selling into. Each of the acquisitions that they've made have been identified that when you pull them all together, they've got the capability to build a space station. So they've then won this contract from NASA for $160 million to build the space station, using all of the capabilities of these seven companies that they've pulled together and other acquisitions that they'll make in order to be able to fill out their capabilities. And then they'll go on this path to launch a space station and then to operate this space station.

But one of the things that's really clever about their approach is that they're not reliant on these government grants in order to be able to thrive. Because each independent element of their business is profitable in its own right and growing. So they're able to sustain this business until the market arrives to them. And that was one of the reasons why we picked this company, because it's so well positioned, so thoughtful about how they're approaching this market. And one of the areas that they're really interested in is actually one of the areas I'm excited about at the moment, which is around biotech in space, space pharma, and how using zero G to undertake experiments is going to result in different outcomes to that that

happens here on Earth where these experiments are subject to gravity. So we believe that there is tremendous technological breakthroughs that are going to come through for biotech and pharmaceuticals as a consequence of being able to do all of this experimentation in a zero-g environment. So Voyager is one of the key companies that's establishing themselves really to create a science park in space for all of these pharmaceutical companies to be able to do this kind of experimentation at scale.

And we really think that there's gonna be some huge game-changing results as a consequence. What is doing some of this pharmaceutical experimentations and development in space, what makes it different than doing it on Earth? So to put it simply, the molecules behave differently in a gravity environment to a non-gravity environment. So crystals, for example yn ffordd 3D yn hytrach na'n

llaw yn y petriwch, ac mae'n newid y stwythiad o'r organigion hynny yn gwbl, ac mae hynny'n canfod ymddygiadau gwahanol pan fyddwch yn ymuno â'r testiau. Felly, rydym yn credu bod cyfle mawr i edrych yn ôl ar yr holl ddruws gwahanol sydd wedi cefnogi'r massive opportunity to look back at all of the different drugs that have failed to succeed as they go through the various stages of getting their qualification to be sold, to retest them in a zero G environment. All the billions of dollars that have already been invested into those experiments that ceased because they haven't been able to get their approvals can all be retested in a new environment. And that's the type of thing that when done at scale, we think that there's going to be some game changing results. Wow.

So let's talk a little bit about the investing climate now, because we have seen the Federal Reserve and other central banks tighten and raise interest rates. And we've seen liquidity drop and capital dry up to a certain extent. How has that affected investing in space? So space is not immune to the macro backdrop. So 2022 has seen a significant fall off in space. So I should add here, I'm going to be quoting a few figures here. And these are from, we've been doing a publication quarterly since 2017, which we call the Seraphim Space Index.

And what we've been doing is measuring all of the private investment flows into space globally in this market so that we can talk about and answer these kind of questions that you've just posed. So in 2022, there was a 30% reduction in the total amount of investment that was put into space globally. So it went from 9.9 million to i think it was 6.9 billion was the total figure and and that was sort of throughout 2022 sort of tailing and trending downwards and we've just released the first report first quarter for 2023 so this is the period to the 31st of march

and there's some good news there's been a strong rebound on the quarter so 50% up on the on the quarter on the fourth quarter and there's some really interesting trends that sort of underline that so so one of them is that there's been a return to growth stage investing so this quarter saw a record number of B rounds C rounds rounds, D rounds, E rounds than any other quarter in the history of our publication. So that suggests to me that there's been a pause during 2022 as investors just took stock of what was going on in the market. The underlying companies adjusted their cash flows and they reserved their capital best they could.

And now there's a catch-up happening in Q1 as investors are coming back to those companies and providing them capital. So the level of capital that they're providing isn't as big as it was in 2022 or 2021 so the actual average size of a round has fallen marginally but it shows that there's ongoing interest in this area. So we're particularly pleased about that because growth stage capital is an absolute requirement for the industry to continue to scale on the trajectory that it's on. And then the other thing that's happened, and this is a first for the market, is that in the

first quarter of 2023, there was more investment from Europe investors in terms of more companies and more actual investment than the U.S. market. Now, this is the first time that that's ever happened in the history of our report. Why is that happening? I'm surprised by that. Yeah, well, you know, we were surprised by that as well, but positively surprised. So, one, there's been a massive setback in American investment. That's the driver of this. But what it really demonstrates is that there's actually been a continual quarterly increase, almost at a sort of 45 degree angle over the last few years from the European investment community in space. There's been a real focus around this market.

There's been a number of sort of governmental structures that have been put in place over the course of the last couple of years that are now really coming into play and demonstrable through o stwrtiau gwleidyddol sydd wedi cael eu rhoi i mewn dros y cyfnod diwethaf y flwyddynau diwethaf sy'n dod yn dda i'w ddefnyddio a'u dangos trwy'r niferoedd rydyn ni wedi'u gweld. Felly dyma bethau fel er enghraifft mae'r DU wedi rhoi 650 miliwn o euro i'r EIF, y Ffyniad Gweithredu Ewropeaidd ac mae'r hyn maen nhw'n ei wneud yw eu bod yn cyflwyno hynny i rheolwyr ffyniadau ffyniadau sy'n arbennig ar ystod y maes. Ond maen nhw'n mynd i and what they're doing is that they are allocating that to venture fund managers that are specialising in space. But they're only actually going to provide about 25% of any full fund.

So that means four times that amount is going to be invested into the market. And that's already started to come through. The first investors have been supported by the EIF and they're now investing in the market. And then we've got other structures that have been put into place, such as the NATO Innovation Fund. So this is a fund that's announced earlier this year. It's going to be launched during the next quarter

and that's a billion euros that's going to be focused on investing into the type of space companies in Europe and more broadly. So these kind of activities that are structured from government are really adding to the scale of the investment climate in Europe. I think looking ahead, there's going to be a recovery from the US investors. So I don't think that this is going to be sustained quarter on quarter. But I think that Europe is going to continue on its trajectory and that ultimately there will be a point in the future again where we'll see Europe matching the total investment from the US. Yeah. The other the flip side of this is, as we've seen this correction and now it sounds like rebound to start 2023.

Have we seen enough of a correction in terms of valuations? Have we seen enough of a correction in terms of the amount of companies that are out there vying for a piece of the space economy? Because especially on the launch side, and I think about a Virgin Orbit, which recently filed for bankruptcy. Is there more consolidation? Is there more shakeout, for lack of a better term, that needs to come? So I think that that is inevitably going to happen, as it does do with any sector where there's a crowd of businesses trying to achieve the same objective. You know, in launch, there's 150 launch companies. You know, anybody can look at this market and see that there's too many companies for the size of the addressable market. And whilst it's disappointing news around Virgin

Orbit, you know, I personally think it relates more to the structure of their investment being a SPAC rather than the underlying company. I think that was one of the things that made it a challenge for them to raise money. But, you know, at the same time, we're seeing other launch companies very successfully raising money this quarter. So I saw the German launch company was the number one largest investment in the first quarter of this year. We've seen other companies like Relativity Space that have just successfully launched

their first 3D printed rocket. Now, it wasn't 100% successful, but that rocket launched, and that's a whole new entrant of 3D printed completely a rocket into this market. So I don't think there's a whole new entrance of 3D printed completely a rocket into this market. So I don't think there's a problem with launch per se, there's just too many companies in that part of the market and investors are discerning. There's a wide range of choice so they're going to go with the

companies that they perceive to be the premium companies and what we've been ourselves seeing in the market, particularly through our own portfolio, we've got over 100 portfolio companies. We're the most active investor in this market globally. And what we've witnessed is that the companies that are considered to be the premium companies within each of the different categories of the space market,

they've been comfortably raising money throughout 2022. It continues in 2023. So, you know, I'll give you an example. Astroscale just recently closed a $75 million round. So Astroscale is a in-orbit services company, and yet they're still comfortably raising large rounds. And actually the pricing of that round was the same as the 2022 pricing. So even though the business has progressed significantly during the course of the year the round pricing is flat but nevertheless

I think that still shows that the pricing is robust in the market. The other thing really that comes in here and this sort of relates back to where we are today at Space Symposium, is that the Ukraine has very much changed everything that's going on in the space market. It's really brought a renewed emphasis and interest in the capabilities of new space companies. These satellite constellations that are large enough to provide frequent revisit, they're applying artificial intelligence to provide real time insights onto what's going on on the ground. And what's been going on in the Ukraine has really sort of brought this immediately to the attention of the defence community.

So what we've seen since is really an increased interest in defence and intelligence to access these kind of companies. sydd wedi cael ei weld ers hynny yw cymaint o ddiddordeb yn ymdrin â chyffrediniaeth a chyfweliad i gyflwyno y math hwn o gyrffion, ac mae hynny'n dod drwy'r cyfrifion y byddai'r busnesau hyn yn ymwneud â hyn. Felly, er enghraifft, yn ein canlyniadau diweddaraf, roedd y 10 o'r cyfrifion serafin yn cynyddu 53% o ran cyfrifion dros y 6 mis year. So there's genuine revenue growth happening despite this macroeconomic backdrop. And it's largely because defence is like a new customer. It's not a new customer, but it's a customer that's got new budgets. There's imperative to act now. The timescales for signing up and proof of concepts

and moving those through to full blown contracts is contracted. And that's now being seen in the numbers. So investors who are looking at this market are able to see that there's strong growth in these businesses. And when they dig down, they can see that the outlook remains really positive because most of these companies are not focused around defense as a focused area. They're dual use technologies. So they've got other commercial markets

that they're going for as well. And the next nearest and biggest commercial market are those things that relate to climate and sustainability. So the other driver of revenue within the typical companies in this market is also climate and sustainability. And we know that there's trillions of dollars to invest into those businesses. And there's an impetus from companies and governments to actually use those

solutions. So there's two really big drivers that are really pushing the growth in this market and investors are recognising that. So that has really meant that the valuations have remained pretty robust on 2021, 2022 numbers. And the premium companies are getting funded without much of a problem. Yeah. This idea of secular growth, maybe even recession proof investments potentially, depending on what the rest of the year, next year bring. Yeah. Mark, appreciate the conversation. We covered a lot. Thank you so much for joining me. Thank you for inviting me. 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.