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Who will win the SPACe race?

The Rundown – Your weekly SPAC Deep Dive (09/19/21)

Hello Friends,

Elon Musk and SpaceX are often credited with democratizing space exploration for private firms. As Musk puts it, if humans are to be a multi-planetary species, there are key technical challenges that need to be solved over the next decade. Space exploration remains as elusive as it was five decades ago when the human race first landed on the moon. There are two key reasons for the slow progress.

First, the cost of orbital delivery has been too expensive in the past, for it to be feasible. According to a study, it was estimated that the cost of launching a kilogram of the payload onto space would cost approximately $54,500. Second, high technical failure rates meant that, even if companies were able to secure funding, they only had one or two shots at solving several challenges. 

Breakthroughs in efficiency combined with innovative solutions like reusing parts of the rocket mean that orbital delivery costs are down to as low as $500/kilogram. With launch costs falling by a magnitude of 100x, it is now more practical for firms to build space startups. There are now more than 10,000 space-focused companies globally, with the total value of these companies exceeding $4 trillion and projected to grow to $10 trillion by the end of the decade.

A low-interest-rate environment coupled with such explosive growth has resulted in frenzied investment from VCs, PE, and more recently SPACs. Over $10 billion in capital has been invested in firms that have gone public through a SPAC merger. But ’Space’ is a broad term that encompasses numerous firms aiming to solve vastly different things. So what are the recent trends in Space SPACs? Who will come out on top? Which space company will be the first to command a $1 trillion valuation? Let’s delve deep to understand the intricacies of the broader market.


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The Big Picture 

The space value chain encompasses a host of companies competing in various sub-segments with varying business models. While most industries on Earth have either seen Monopolies or Duopolies through years of consolidation, the technology in space is rapidly evolving and is ripe for disruption. Broadly speaking, ’Space’ companies can be divided into three categories, namely Launch & Orbital Delivery, Remote Sensing, and Infrastructure companies.

Launch companies have surged in popularity amongst investors, thanks in part due to the billionaire space race between Sir Richard Branson’s Virgin Galactic, which went public through a high profile SPAC merger, and Jeff Bezos Blue Origin. But other launch companies like RocketLab, Astra, and Momentus have had high-profile deals with valuations ranging from $1 – $4 billion.

Current Space SPACs are not only targeting different sectors but are also looking to pursue different kinds of clients. For instance, Remote Sensing companies like Spire Global specialize in making small satellites used for forecasting weather, track ships at sea, airplanes in flights, and then sell this data to enterprises through a SaaS model. AST Spacemobile, on the other hand, is targeting telecom providers to extend cellular coverage to customers.

On the other hand, most of Redwire sells components to other space companies and the US government, but they also have innovative in-space 3D printing capabilities that could help push the boundaries of in-space manufacturing. Space SPACs are also building digital infrastructure, with companies like Arquit, which went public at a $1.4 billion valuation, building quantum encryption that will prevent any network device from cybercrime, including attacks from a quantum computer.


Valuations Out of this World 

Given that many space companies that have recently gone public through SPAC mergers are either pre-revenue or have huge operational losses, but with potentially parabolic growth curves, traditional valuations models rarely apply.

Instead, SPACs have project valuations using forward-year multiples of revenue and EBITDA. RocketLab’s deal of $4.1 billion, which management claims are reasonable based on the FY24 revenue multiple of 9x may seem pricey, but with companies like Virgin Galactic trading at 19x, the right multiple isn’t obvious at first sigh. Critics have been calling Space SPACs the next Tulip mania, but a comparison with the dot-com bubble seems more apt. 

Fred Wilson, who funded dot-com companies and lost 90% of his net worth when the bubble burst, said that ‘Nothing important has ever been built without irrational exuberance’. Speculation in the market ensures that investors finance the building of railroads, automobiles, or the next technological breakthrough.

The dot-com bubble, which saw $1.8 trillion being wiped out in a few months, also laid the foundation for today’s technology. While many firms closed shop during the bubble, several companies like Amazon, eBay, and Google have gone on to consolidate market share and create over a trillion dollars in shareholder value. So while some Space focused SPACs may fail over the coming years, they are not a fad, but a trend that is here to stay. 


What is a Successful Space SPAC? 

While Space SPACs have captured the attention of the media, entrepreneurs, and investors over the last eighteen months, they are far from a new phenomenon. Iridium, which went public through a SPAC merger more than a decade ago, is a great example of a successful SPAC merger in the space industry. In 2008, Iridium needed between $1 and $2 billion in funding to replace its fleet of satellites, a project that the company eventually ended up replacing in 2019.

The company went public through a SPAC sponsored by boutique investment firm Greenhill & Co, just before the market crashed at a valuation of $593 million. With successful fundraising through the deal and additional financing from France’s export-import bank, Iridium has gone on to developing, building, and launching 66 satellites, which provide telecom services to customers across a diverse range including the US military, cruise ships, and airlines.

The company reported revenues of $583 million in revenue for 2020 with EBITDA margins over 60%, demonstrating that Space SPACs can indeed be very lucrative, given time and proper execution.

But that growth wasn’t linear. The company’s shares generally traded below $10 for roughly seven years after the SPAC merger. But in 2017, it became clear to the public markets that the company would complete its new fleet on the back of SpaceX’s reusable rockets. As space-based companies have become more palatable for investors, the stock has more than quadrupled in just four years.


Bottom Line 

Investing in Space SPACs is akin to testing rockets a few years back. Most will fail, some will show potential, but the few that do take off will present massive opportunities for stakeholders. While some may balk at the thought of investing in pre-revenue companies or with substantial losses, there has never been a better time than now for retail investors to get the same opportunities as most venture or PE firms routinely do. Even though there is plenty of downside, the potential return can oftentimes be boundless and outweigh the risk.

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