WASHINGTON — Space industry executives and investors at a recent U.S. Chamber of Commerce event grappled with unanswered questions on the Pentagon’s plans to commercialize activities and increase its reliance on private-sector technologies.
Business leaders said they see bright spots in the defense market such as the Space Development Agency (SDA), which is buying hundreds of commercial satellites to build out a proliferated low Earth orbit constellation for military communication and missile tracking.
But financiers who back companies in the sector would like to see a more widespread DoD embrace of commercial space products and services. They see spurts of activity in the form of research grants and pilot programs but wonder if the Pentagon will use commercial services in a major way like NASA does with its space transportation and exploration programs.
Space venture investors and analysts speaking at the Feb. 23 Chamber event said the industry is perceiving some demand signals, but they would like for these signals to be amplified and transition into actionable commitments in the foreseeable future.
The new reality
Venture capitalists have traditionally preferred quick returns from rapid growth companies. But with today’s tough fundraising environment, VCs have come around to the reality that defense contracts offer a steady stream of business, even if the Pentagon’s deliberate timelines don’t match the VC mindset.
The DoD market is too big to ignore given tighter access to capital, said Andrey Yoffe, managing director of BMO Capital Markets.
“Everyone loves to bash the government but I think that in the last couple of years the narrative has changed,” Yoffe said. “The fact that we have so many new venture funds that are backing defense companies is incredible,” he added. “We’ve never had that before.”
Over the past year, said Yoffe, “the biggest issue that we saw was that the commercial markets kind of went away as a customer. And so the reliance on the government has increased.”
However, the defense program timelines can be problematic for VCs. Yoffe’s firm, for example, was considering backing a company offering a so-called virtualized constellation of imaging satellites. That is a software-based service for accessing commercial imagery from multiple sources. “It simply became not a viable company, because everything was in year five and year six,” said Yoffe. “Today you need some revenue upfront … and not just promises that in year five or six, we’re gonna get there.”
Justin Cadman, co-CEO of the market research and consulting firm Quilty Space, said programs such as SDA’s are signs of “good progress, but I think there’s still a long way to go.”
Investors have to balance the risks of pursuing commercial opportunities against the risks of doing business with the government, Cadman said.
“Investors dislike uncertainty,” he said. But they could deal with the uncertainty in government programs by better understanding whether small projects have a realistic chance of transitioning to revenue-generating opportunities.
“That helps give people a lot more faith in what that future looks like and ultimately to finance that future,” he said.
If a defense project doesn’t have a future, “you really have to hope there’s going to be a commercial market that develops quickly, and there’s a lot of work to be done there to understand how do we develop them in a way that’s sustainable.” It’s also important to avoid getting distracted by “shiny objects,” Cadman said.
Commercial imagery market
One of the complaints from business executives is that the Space Force has not identified what activities it plans to commercialize, although it continues to fund Small Business Innovation Research (SBIR) grants and other so-called “pathfinder” programs to assess commercial technologies.
“SBIR and pilots are good for experimentation but it’s not good for sending a signal to the market,” said David Gauthier, chief strategy officer at the consulting firm GXO Inc.
He pointed to the National Reconnaissance Office’s 10-year commercial partnerships with three companies that provide electro-optical satellite imagery, agreements worth nearly $5 billion. “That’s probably the biggest signal we have on record,” Gauthier said. “That is a massive market signal.”
Companies want to see the Space Force follow suit in areas like commercial data analytics and imaging of space objects, for example, said Gauthier. “If they said there’s billion dollars for the next 10 years, I think that’d be a clear signal saying they have significant capital set aside for this,…
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