Exploring the Business of Space
With dramatic reductions in payload costs, commercial opportunities in space are starting to take off. Entrepreneurs and investors alike are moving into the sector. John-Paul Menez ’07, a former naval intelligence officer who is now a commercial banker specializing in space startups, says finance, insurance, and law must keep pace if this new era of space innovation is to reach its potential.
Q: How big is the space industry?
It’s estimated the total addressable market for space will reach $1.25 trillion by 2030. Governmental money, either civil or department of defense, is still the primary source of funding. That pattern holds in other countries, too. However, in the last eight years, private investment has become a material part of the equation. Startup space companies attracted $15.4 billion in private financing in 2021. That’s double the $7.7 billion for 2020 and over ten time what was invested in 2014.
Q: What’s driving the interest from investors?
Elon Musk made space exciting again. Through SpaceX, he has also changed the economics. Payload costs have come down so dramatically that the market has opened to thousands of companies.
“We’re starting to see space-focused venture capital and private equity funds. They see it as one of the disruptive sectors of the 2020s.”
That has made space extremely attractive to investors. We’re starting to see space-focused venture capital and private equity funds. They see it as one of the disruptive sectors of the 2020s. Even institutional investors are starting to want exposure to space.
However, there isn’t a depth of knowledge about the sector. Wall Street’s aerospace and defense analysts typically just covered the big three aerospace companies. And tech analysts haven’t covered rocket or space companies. Even venture capital and private equity mostly weren’t covering space, since subcontractors and startups relied on government programs for funding. There’s a real need to professionalize the financial services coverage of the space economy.
Q: Why do payload costs matter so much?
Ideas and business models that didn’t make sense five years ago can work now because payload costs are affordable. We’re seeing exciting things: satellite constellations that could deliver high-speed broadband internet in developing countries where the ground-based infrastructure doesn’t exist; imaging technology that could enable improved navigation at sea. The innovations are just beginning because many possible applications weren’t even conceived until the costs of sending payloads into space dropped.
These developments are creating the possibility of a new coherent value network. We saw it in the ’60s when thousands of NASA contractors were creating everything from space suits and food for astronauts to the means to monitor and communicate with a crew that has left the planet. NASA even developed new organizational capabilities to oversee complex projects that included so many contractors and subcontractors. Whether directly or indirectly, the space race led to a huge number of innovations—as well as the space-based technological infrastructure of our daily lives, from GPS to communications to banking to national security
In this new era, there are already companies that are the visible part of commercialized space. They get the 60 Minutes stories. There are many more invisible companies enabling those high-profile ventures. From a value standpoint, it might well be the companies with names we don’t know that have more sustainability and more growth potential. As has been pointed out before, during the Gold Rush in California it was rare for miners to get rich, but the people selling pickaxes, Levi’s, and mules had a good chance to make a fortune.
Q: Space is pretty big. Where is the commercial opportunity?
For exploration, for development of technologies that let human beings fly farther and faster, the civil agencies—NASA and the European Space Agency—are still central. But there are people trying to commercialize and develop markets all the way out to the asteroid belt. There are companies looking to commercialize the moon, whether for natural resource mining, communication stations, or even tourism. Those are all potential future markets.
When we talk about space as an investment or as a business opportunity today, the focus is low-Earth-orbit applications. To give you a sense of how quickly that’s growing, there are currently about 4,800 operational satellites in orbit. By 2030 there may be 25,000.
Q: What do space startups need to grow?
A lot of these companies are working on extremely esoteric stuff. It’s hard to find advisors and investors who know which of the technologies are viable and in demand, which companies have a sustainable business model that addresses the very real risks.
Companies that have an informed advisor, cash flow, and an economic model that banks could potentially lend to can still have a hard time finding funding. Many traditional underwriters are risk averse and wary of lending or approving credit for things that they don’t fully grasp.
I think a good analog would be the period when private companies like the Dutch East India Company started developing not just regional but global trade routes. It required financial innovation. How do you perfect a lien on a ship on the other side of the world? What about the cargo?
In fact, a lot of the rules for what’s happening now in space are based on maritime law, but maritime law itself is outdated and isn’t ready for a sector evolving as quickly as commercial space. There are all kinds of things that need to be worked out around financing, legal frameworks, and insurance.
Few insurance companies participate in the sector. Those that do are comfortable with launches; we’ve been launching commercial satellites for 30 years. But when we start talking about other types of business, that comfort drops drastically. How do you insure a commercial space station? How do you collateralize it? Who owns it? How do they get it? Insurers need to think about these questions and come up with innovative solutions.
Q: These sound like significant challenges.
To be clear, there are already a lot of companies with terrific business plans that have been extremely successful navigating the growth phase. But for the space industry to continue on its current trajectory and become a mature market, these challenges do have to be overcome.
Companies are solving the problem that they can control. They are working to build a space plane or develop a software application to manage satellites. They’re going ahead with those innovations with the assumption of that the wider issues will be fixed. They believe space-based commercial enterprise is inevitable. They understand it will be different from the information revolution, because developing an app or launching a social media company didn’t involve solving the kinetic issues and tangible engineering problems of putting highly advanced systems into space.
Luckily, financial institutions like to make money. If there’s a market that they can participate in, they’re going to try to find the solutions and innovations that let them participate, adjusted for the risk.
The evolution of financial solutions for space is happening, incrementally. How do we think about assets in space as something you can lend against? Maybe it’s not framed as securing a physical asset; instead it’s securitizing contracts, which is something banks do all the time.
Q: Are there issues that require policy and governmental action?
We need a legal and regulatory framework on the governance of space. We have standards for deconfliction of airspace for airplanes; we need something similar for space. We need it for safety, political, and defense reasons. We also need it to get investors and financial institutions comfortable with lending, to get insurers comfortable insuring. It will de-risk participation or at least create an analog to other sectors.
There are also technical issues that need to be addressed. The most pressing one is orbital debris, or space junk. NASA tracks 23,000 pieces of debris larger than a softball. But there are something like half a million pieces of debris larger than a marble. Some are moving as fast as 17,500 miles per hour. A little bolt going that fast could be lethal to the International Space Station (ISS) or any other asset in space.
The ISS and some satellites have the ability to maneuver to avoid collisions. But mostly we’re counting on space being big enough that there’s aren’t impacts. The more objects that are in low Earth orbit, the greater the chances of an event.
When we began going into space, nobody thought about the debris we were leaving. We’ve become smarter at managing it than we were in the past. But space junk is an impediment for the industry. It’s also an opportunity for companies that can solve the problem, whether that’s cleaning up the existing debris or improving how we deorbit satellites at the end of their useful life so they never become space junk.
These very big issues need to be addressed. There hasn’t been a lot of movement and there isn’t even a single body, agency, or international organization that can clearly take the lead. It underscores that this is a new era; these are issues the space program in the 1960s did not have to deal with.
Q: Initially, the space race was driven by the Cold War. That was followed by a period with a great deal of international cooperation. Where do you see things going now?
The ISS has been flying around the earth for 20-plus years. It has been a testament to international cooperation in space. In July, Roscosmos, Russia’s space agency, appeared to announce that they would end their participation in the ISS after 2024. They have since walked that back, somewhat, but we may be entering a new era of polarization.
Because there’s been so much cooperation among countries, commercial space ventures have been very global too. It’s possible going forward companies will be pushed to choose spheres of influences. Do they want to work with the Russians, the Chinese, or Europe and America?
As a banker, I’m very concerned about risk. For space companies, the existential threat to the market from geopolitics or national security conflicts is something they have to be very aware of.
A typical company I work with has 50 employees. They might have raised $50 million from series A and B funding. These passionate ambitious engineers and entrepreneurs are building amazing things. They may already have a launch date with SpaceX. And then, all of a sudden, they’re at the mercy of the ministry of defense in another country.
For instance, in November 2021, the Russians tested an anti-satellite missile by blowing up a defunct satellite. It created a huge debris field. The astronauts in the ISS, including Russian cosmonauts, had to don their pressure suits and take emergency shelter in the docked spacecraft until it was clear there wouldn’t be a collision with the debris.
The test was widely condemned, but that doesn’t do much for the space startups. They’re solving really difficult technical problems, and they have to deal with contingencies that even large established companies in other sectors never have to think about. Will a country decide to test a weapons system and close the window for launches? Or worse, wipe out all the tangible assets they have? It’s necessarily different.
“There’s no better feeling for a business owner than the thunder and shaking of a successful rocket launch as their asset lifts off on its way to space.”
Those issues are significant. On the other hand, there’s no better feeling for a business owner than the thunder and shaking of a successful rocket launch as their asset lifts off on its way to space.
Q: How did this come to be your area of focus?
I’ve always been a space nerd. Growing up in Houston, I wanted to be either an astronaut or a cowboy. My parents sacrificed a lot to come to the United States. Having been given that opportunity, I wanted to do something where I could give back, so I joined the Navy.
What binds veterans is that there’s something besides just the task in front of us. We’re always mission-oriented, whether it’s your team, your service branch, or your country. We’re always working to serve something bigger. When I thought about business school, I was attracted to SOM because of that same focus on mission and service.
I agree with President Kennedy that it’s important to do things “not because they are easy, but because they are hard.” I think the United States builds fast and beautiful flying machines better than anybody else, and I love helping American companies push the edge of what humans are capable of doing.
My background in naval aviation and intelligence lets me understand the applications of these new technologies and communicate the value proposition to underwriters and investors. Studying with people like Sharon Oster, Paul Bracken, and the other amazing faculty at Yale SOM prepared me for helping these companies navigate a complex, dynamic global market.