Closing Bell - Manifest Space: VCs and the Cash Crunch with Space Fund Managing Partner 3/16/23

Episode Date: March 16, 2023

Virgin Orbit has halted operations and furloughed most of its approximately 700-person staff as the launch service provider looks for a funding lifeline. The cash crunch comes amid consolidation in a crowded launch market. Morgan discusses the VC outlook with Space Fund co-founder & managing partner Meagan Crawford: an investor in SpaceX, Axiom Space, and more. For more Manifest Space, listen and follow here: https://link.chtbl.com/manifestspace

Another rocket company in turbulent territory as Sir Richard Branson's Virgin Orbit pauses operations and furloughs staff, seeking a funding lifeline amid a cash crunch. It speaks to a broader dynamic. A crowded launch market under pressure after a world once awash in capital now adjusts to tight monetary policy. It's a dynamic investors in the sector have been watching closely. Right now, we're currently tracking over 160 private launch companies around the world. So these are startups who are trying to emulate Elon Musk and Jeff Bezos. And they all have their own little original spin on their rocket engines or their business model. But there's not room in the market for 160 launch companies to exist. Even if 100,000 satellites are launched in the next 7 to 10 years, we believe 10 to 15 companies can fulfill that demand.

In this episode, Space Fund co-founder and managing partner Megan Crawford breaks down the state of space investing and where her venture capital firm is putting money to work. I'm Morgan Brennan, and this is Manifest Space. So we're still pretty young, pretty early stage for a venture capital firm. I like to say we're a startup ourselves. We founded the firm in 2018 but didn't really get started until 2019. It took us a while to get set up. And we have two funds, Space Fund 1 and Space Fund 2. We're really great at naming these things. And we have 19 companies that we're invested in across the two funds. So we have a pretty diverse portfolio. I like to say we only invest above the Karman line. So that's 62 miles or 100 kilometers up. So we don't do drones or electric airplanes. We're not aerospace. We're

very specifically space focused. And we invest across many of the subsectors in the industry. You know, everything from in-space transportation to communications to supply chain. And so we've built really a very diverse and interesting portfolio. Let's talk a little bit about some of those investments. I'm looking here, it looks like you're invested in everything from Axiom Space to SpaceX to, I mean, you have a whole bunch, Made in Space, Radian. I guess talk to me a little bit about some of the, I realize it's like probably picking a child, but like some of the investments you're most excited about right now. Yeah, that's exactly correct. I like to always say,

just like any good mom, I will not tell you that I have a favorite child. But, you know, we do have some of the big names, like you mentioned, Axiom and SpaceX and Space Perspective and Radian. And some of the ones that we're really excited about are the ones that are maybe a little less sexy and a little less well-known. Everything from NovoSpace, which is an Argentinian-founded company that's creating radiation-hardened computer chips as one of these all-important components for these satellites that are being launched. Cosmic shielding has created a completely new material based on NASA science to shield these satellites from that harsh environment in space. A company called Space Forge out of Wales in the UK is manufacturing computer chips, silicon wafers for computer chips in space using the natural environment of space, the low temperatures and the vacuum that are

required to create those pieces. OrbitFab has been in the news lately. They're creating fuel depots in space to refuel satellites. And so there's just this huge diversity. One company that I think surprises people a lot that we're invested in is a company called Eden Grow Systems. They're using NASA technology that was developed to grow vegetables on the space station to help individual households grow their own food. And in the wake of COVID supply chain issues, that's never been more important to have that food security. Most people don't think NASA is in the business of growing food, but the idea is then to send that technology back to space,

because if you're gonna be going to Mars and you're on a six month journey, you want some fresh fruits and vegetables on your route. So yeah, just a big diverse group of very exciting companies. I'm sure the astronauts that are hanging out in the International Space Station for six months wouldn't mind some fresh fruits and veggies as well. I know there's been some experiments there too. It's very cool. So how do you look for companies? How do you assess

companies? And I guess just how do you think about investing in some of these newer players? So we have developed what we call our investment sectors of interest. Now, we're not exclusively in those sectors, but those are the sectors where we're seeking out companies. And so this is what we call space transportation. We try to stay away from launch. Launch is obviously we've got our SpaceX investment already in that category. But what happens after launch? How do you move around in space?

And as humanity is moving further and further out into space, this becomes a more important problem to be solved. We're looking at in-space communications. This is a startling statistic that I was shocked by when I first realized how true it was. Right now, the satellites that are orbiting Earth, most of them are collecting data about Earth. Less than 1% of that data makes its way back down to Earth to be analyzed. And this is for a variety of reasons, but there's a lot of problems. Yeah, less than 1%. This has to do with onboard computing and storage power aboard the satellite. This has to do with downlink capability. And so there's just a wide variety of issues causing that bottleneck. And when you see issues like this, we look at them as opportunities. These are problems to be solved where there's a lot of capital available for the people who can solve these problems properly.

We also are interested in human factors. This is keeping humans alive and healthy in space, right? Going back to our discussion about fresh fruits and vegetables, especially as people are going to be spending more and more time in space, that health factor, whether it's mental health or physical health becomes very important. And then the in-space supply chain. We just talked about orbit fab, building those fuel depots in space. We're looking forward to a future where the ingredients for that fuel, hydrogen and oxygen in most cases, so water, is being mined on the moon or asteroids and delivered to these low Earth orbit gas stations so that you're not having to launch all of that mass to orbit to refuel these spacecraft we're also very interested in energy in space energy capture creation and storage and so this is everything from better solar panels to better batteries to eventually

a future where space-based solar power could power our entire planet without any ecological consequences on Earth. So there's these are the categories that we're really interested in. And once we find a company that we think is a good fit for kind of our bigger picture vision of where the space economy is going, we then take a quick look at what we call tech team and timing. So do they have technology that's valuable, that's defensible, that works, right? A friend of mine who works at DARPA likes to always say, if it purports to break one law of physics, fine. If it says it breaks two laws of physics, now we're skeptical, right?

So does the technology actually work? And then the team, is this the right team to bring this technology to market? And then timing. Is it the right time in the market for this technology? And so that's the kind of basic hurdle that a company has to pass to get into our due diligence process. The timing piece of it I'm curious about because we know it's long lead times and a lot of investment when it comes to space. So how do you so how do you think about that in terms of return on your investment? So this is something that was a real sticking point when we were first setting up the firm. I mentioned we founded the firm in 18 and didn't get started until 2019. We spent that year doing all of the research to prove that space venture

capital actually had a business case that closed because most venture capital firms invest on a seven to 10 year timeframe. And the general thought process was that, you know, space takes too long to develop and it doesn't fit within that traditional VC timeframe. We found that not to be true. We did some research and cataloged all of the space startup exits over the last 50 years, and the average age at exit was seven years. So it fits perfectly within that venture capital timeline. Obviously, there's examples that run the gamut, much longer timeframe and much shorter timeframe, but that average age was seven years. And so one of the things that we're seeing this amazing sea change that's happened in the industry over the last decade or so is that

the startup mentality, the move fast and break things attitude of Silicon Valley has finally made it to the space industry. This is not your Lockheed Martin or Boeing program cost plus government contract that's loaded and takes, you know, takes 10 times as long as it's supposed to. These are real entrepreneurs who are innovating quickly and making real progress in a way that we've never seen before in the space industry. I feel like I ask this question often, regularly. I'm going to ask it to you as well, because I've been covering the sector for a while. I've been having these conversations for a while. Are we finally at a moment? Are we finally at a tipping point in terms of the realization of this commercially based

space economy? Because we've been talking about it for a long time. Is it actually here? Is it happening? It finally is. It finally is. because we've been talking about it for a long time. Is it actually here? Is it happening? It finally is. It finally is. And when I first started hanging around this industry in 2008, Elon hadn't even had a successful launch yet.

And so it was this big promise and these big dreams of this idea of entrepreneurial space. Well, it's finally here. In 2009, I founded something called the New Space Business Plan Competition, which, as the name implies, is a business plan competition for space startups. And at that time, there were only a handful of space startups to the point where I knew most of them personally. Eventually, it got to the point where I couldn't remember them all. I had to start a database and there were about 600 companies in that or in about 2011. Space Fund is now tracking well over 3,000 space startups around the world. And those are just the ones we know of. Think about how many more there are that we haven't encountered yet or that are still in stealth, right? And so here's another important statistic that I think is really valuable. Right now there's about 6,000 satellites orbiting the earth.

We expect 100,000 satellites to launch within that 7 to 10 year investment window that we look at as venture capitalists. So that's a huge change from 6,000 satellites to 100,000 satellites. And that again creates opportunity. What are the products and services that all 100,000 of those satellites are going to need? And the opportunity for new business ideas and new solutions is just growing exponentially right now. You know, we have a lot of these debates on CNBC about, you know, hard landing, soft landing, no landing. Basically, is a recession coming or not?

Is the macroeconomic slowdown upon us in a really meaningful way yet or not? Meantime, you do have more government funding, at least here in the U.S., but in other places, too, going towards this sector. So how do you think about that in terms of the current macro environment, given the fact that capital is, at least we see it in the public markets, capital is not quite as plentiful as it was, but you do have this government funding that is, you know, helping to propel the sector as well. So we did some research around this as well, because as a venture capitalist with a background in finance, I'm all about the numbers and the spreadsheets, right? I like to know what I'm talking about from a numbers perspective. And it turns out there is no correlation between the

space industry and the wider global markets. And there's a couple of reasons for that, the most important of which being that the world's largest space customer is the U.S. government to the tune of somewhere between 20 and 30 percent. It's hard to really nail down what that number is. But so let's say it's 20 percent of the global space economy is dollars coming from the U.S. government. The U.S. government tends to spend more money on defense during a down market. So that provides the industry a really nice cushion against market volatility.

But what we have seen is these larger kind of macroeconomic trends, specifically the space companies, the whole group of them that went public via SPACs over the last couple of years. Some of those companies, most of them, in fact, are down 50% or more due to the current economic conditions. And while we think those will bounce back and that those numbers aren't necessarily representative of those companies and where they're going, the great thing for us as early stage investors is that that macroeconomic climate has driven valuations down across the board, both public and private markets. And so as an early stage VC investor, you know, the number one rule of investing is buy low, sell high, right? So we're actually kind of excited about those, what we think are more realistic valuations for those early stage companies

that are allowing us to make more investments and really expand our portfolio and further diversify. So is a recession going to happen? Is it not going to happen? That's probably outside my area of expertise, but we are still very bullish, especially on those early stage space investments where we see a ton of value being created right now it's a it's interesting too because you're starting to your point and this whole idea of you know buy low sell high you're starting to see it drum up in some M&A activity as well whether it's you know reports that maybe new LA could be on the sale block or max are being taken private through private equity or some of the other things that seem to be afoot right now. I wonder if you think or if you've seen even through your own funds, more investors, more folks that maybe were not paying attention to space,

including institutional money that was not even paying attention to space a couple years ago, now come to the sector? Yeah, absolutely. And, you know, obviously, venture capitalists, we have investors ourselves. And so over time, we've seen a real change in the kind of traditional financial communities understanding of space. It used to just be, well, Elon's got a rocket company and Jeff Bezos has a rocket company, so I want a rocket company, right? But we're seeing the level of sophistication of those institutional investors really increase as this industry becomes impossible to ignore because of all the value being created here. And we are expecting quite a bit of consolidation over the next couple of years because that's what you see in a growing sector, number one.

But here's a great example. Right now, we're currently tracking over 160 private launch companies around the world. So these are startups who are trying to emulate Elon Musk and Jeff Bezos, and they all have their own little original spin on their rocket engines or their business model. But there's not room in the market for 160 launch companies to exist. Even if 100,000 satellites are launched in the next 7 to 10 years, we believe 10 to 15 companies can fulfill that demand. So we are going to see a lot of consolidation. A lot of these rocket companies are going to go out of business. Some of them are going to be aqua hired, right? They're going to be acquired just for their talent. Some of the

technologies are compatible, some are not. And some are going to consolidate an IP portfolio of several different rocket companies. So that's one area that we expect to see a lot of deal activity in the next few years. And then there's other sectors of the industry as well, where we're starting to see little pieces of the puzzle that are being developed by different companies starting to come together. One really great example of this is one of our portfolio companies, Voyager Space Holdings, and they are creating a competitor to your Boeings and your Lockheeds and your North Roads by consolidating a bunch of interesting startups that have these pieces of the puzzle that you need to compete with a Boeing.

And they're putting them all under one umbrella and providing the infrastructure to allow those startups to be competitive with the big boys. So we're seeing a lot of private equity interest as well. And so we are gonna see some very interesting and much more sophisticated deals in the space ecosystem in the next few years. And of course the question I have, I know Voyager well, but the question I have about this idea of taking on

kind of the established stalwarts in space is, are governments paying attention? Is it going to be, is the process going to become easier for some of these new entrants to actually be able to, and it seems like NASA seems to be really on the forefront of this, but in general to be able to, you know, come in and contract with the government. So yeah, NASA has done a great job of this. Quick shout out to Lori Garber and Jim Bridenstine and all the other folks over at NASA who really helped push that agency forward and into the 21st century as far as how they're doing their contracting and the types of companies they're working with.

But we're seeing this across the DoD. And one of the things I think that's been one of the biggest innovations is the creation of Space Force. Think what you will about it politically. But from a space startup perspective, it's probably the best thing that could have ever happened to the industry because Space Force perspective of looking at the entire marketplace, not just the the top five aerospace DoD primes that you're used to hearing about. And so we're seeing a ton of capital flowing into the startup economy through SBIRs, through OTAs, through TACFIs, StratFIs, all of these kind of innovative contracting vehicles that have existed in the past, but have never really been used to their full potential. We're seeing both Space Force and Air Force really step up their game on this front

and have a lot more programs and funding available for these startups. And they're keenly aware of what we call in the startup world, the valley of death, that there's funding available at these early stages for R&D. And then there's funding available for a finished product to sell into the DoD. But what about that point in the middle where you need that funding to cross the chasm and actually become a successful company? They know that venture capital is the right answer for that. So we've seen this great outreach from the Department of Defense to the venture capital industry, and they're acting as a co-investor with us right now.

And I think that's probably the most efficient way to get this industry really off of its feet. And the DoD has been a wonderful partner to us. Everybody from the Defense Innovation Unit to DARPA to Air Force Research Lab, Space Force, Air Force. I could sit here all day naming acronyms, but there has been an absolutely massive push to do what America does best and innovate. I love hearing that. And yes, there's like acronyms for days. I can't write a book. Yeah, like Cliff's notes on the acronyms. Tell me a little bit about yourself. How'd you get involved in space? How did you end up a VC for an early stage fund, early stage startup fund?

So I've been in the industry since I was in grad school. I was doing my MBA and I had an amazing career counselor who inspired me to really follow my dreams. And I got an internship at the NASA Johnson Space Center in Houston, working in their technology transfer office. And that's when I really got to kind of take a look under the hood, if you will, and see that there were companies that were commercializing this NASA technology. And it just kind of sent me spinning down the

rabbit hole of all the amazing things that were going on. I originally got involved as a student volunteer for an organization called the Space Frontier Foundation, which was really kind of leading the charge, both from a policy perspective, changing the rules so the startups could play with the big boys, and all the way to helping the startups develop their business plans and work with them to really build profitable businesses. And so that was kind of my foot in the door, I would say to any students out there or young professionals who are interested in finding a way into this industry, Space Frontier Foundation has been an amazing resource for so many of us since it was founded in 1988, I believe.

And so through that organization, I was able to build a network. I worked at several space startups. I was in Silicon Valley with my nose to the grindstone trying to build a successful space startup for a number of years. And when we had an exit, which, you know, was rare at the time, one of my colleagues at that company, we were sitting around talking about

what's the next right thing we can do for the industry. And at the time we were seeing our friends, these brilliant space entrepreneurs, getting doors slammed in their faces all up and down Sand Hill Road in Silicon Valley because the VCs just didn't really understand this market or where it was going. And so we founded Space Fund to be the bridge

between the traditional capital markets and the space industry, because we knew both of them so well. And I like to say that my dream job didn't exist, so I created it. I love that. It is Women's History Month. I wish we didn't even have to have a month to celebrate women's history. I wish this didn't even have to be a conversation. But

I'm going to ask you, are there enough women in this industry? How do we get more women into this industry? That's a great question and one that's near and dear to my heart. So my personal goal is the permanent human settlement of space. I want to see that happen in my lifetime. And for a true sustaining off-world settlement to exist, you're going to need 51% women for biological 11% of the people who have been to space have been women. So how do you get from 11% to 51%? That's a pretty significant jump. And I think there's a lot of programs and a lot of nonprofits and a lot of good things going on out there to help get more women into STEM. But one of the things that I would say is that this is a full-blown industry now. You don't necessarily have to be a rocket scientist or an engineer to get a job in the space industry.

We need marketing people. We need sales. We need finance. We need anything that you can do that's applicable in some other industry is applicable in the space industry now. And beyond that, I'd say that one of the best things that we can do, the women who are in this industry, is to be vocal, to tell our stories, because young women especially need to see themselves in a role, need to visually see themselves, be able to visualize themselves in a role. And the only way they're going to do that is by seeing the women who are already doing it. And along this line, I started a podcast. I'll do a little plug for myself here. It's called the Mission E podcast. It's available anywhere that you consume podcasts. We're hopefully releasing season two this summer. And that's exactly what we're doing is we're interviewing women with all different types of jobs, all different types of backgrounds to let them tell their stories to

hopefully inspire more women to join us. That does it for this episode of Manifest Space. Make sure you never miss a launch by searching Manifest Space wherever you get your podcasts. I'm Morgan Brennan.