Investment Perspectives: Charts and Thoughts from SmallSat Symposium 2020

February 13, 2020 • By Sven Eenmaa, Director of Investment and Economic Analysis for the ISS National Lab

The International Space Station (ISSInternational Space Station) U.S. National Laboratory had an opportunity to attend the fifth annual SmallSat Symposium, held in Silicon Valley last week. The event brought together more than 900 participants from across the industry, providing valuable insights and updates. Below we highlight some of the key takeaways from the symposium.

Looking to the rest of 2020, the smallsat (satellites 600 kg and under) launch mix looks increasingly communications heavy. Remote sensing constellations, including some of the largest in the NewSpace ecosystem so far, continue to execute on their promising technology deployment and service monetization roadmaps; however, the event did not point to a particular catalyst for a breakout in 2020.

All in all, the industry landscape across various constellation plans continues to look crowded. Investor appetite looks more mixed than it was a year ago, with funding criteria tightening; however, the recent financial media reports on Starlink plans could indicate a positive catalyst in the making.

Smallsat Launch Numbers, Constellation Plans

During the symposium, Bryce Space and Technology published its summary of smallsat launch data, reporting modest growth for 2019, with a significant shift in the mix that benefited from SpaceX’s initial ramp-up of its Starlink launch activity. We have seen an additional two patches of 60 Starlink satellites launched in January 2020, nearly doubling the total units deployed so far, and twice per month launch cadence is targeted for the rest of the year. Reflective of this aggressive pace, as well as deployments from other communications and IoT fleets, the 2020 smallsat launch mix looks to significantly swing toward the communications sector.

Led by lower commercial deployments, the number of remote sensing satellites launched in 2019 declined close to 20% from 2018 levels and was less than half of comparable satellites launched in 2017, a year when Planet launched 140 Doves and 6 SkySats. Close to one-third of smallsats launched in 2019 were for various technology development, hardware design studies that continue to be driven predominantly by government/academic/nonprofit customers.

Meanwhile, plans for smallsat constellation deployments remain extensive. At the symposium, Northern Sky Research presented data tracking more than 125 such constellations across communications, IoT/M2M, Earth observation, situational awareness, and other applications, aiming to launch a combined 6,100+ satellites between 2018 and 2028. While this is more modest than some of the prior statistics we have seen, the landscape continues to look crowded to us. Based on its analysis, Northern Sky Research sees only 18% of the planned constellations as highly likely to reach the launch stage.

In addition, and very importantly for the investor community, on February 6, Bloomberg News reported that SpaceX is contemplating a spin-out and IPO of Starlink. Per media reports, Starlink is targeting to commence the initial delivery of broadband internet services this summer. Prior news reports have also cited the company stating that the constellation would bring in $30 billion to $50 billion per year once fully operational. Wall Street analyst estimates indicate that the company’s initial FCC-approved 12,000-satellite constellation would require capital expenditures in the $10 billion to $15 billion range over a five-year period through 2025.

Given the significant capital intensity of the initial buildout as well as fleet replacement, attractive subscriber economics are of high importance for the Starlink business model to pencil out. One key factor of this subscriber economics is the cost of the customer terminal, which Elon Musk has described as looking like “a thin, flat, round UFO on a stick.” Referring to the satellite industry’s significant and challenged development history with flat panel satellite terminals, it was interesting to hear symposium panelists raise questions on the cost levels achievable in the near term with this technology.

Earth Observation Progress

Similar to the SmallSat Symposium commentary a year ago, the big-picture view of the Earth observation market continues to appear promising, particularly as it relates to the value-added services. Euroconsult expects the global market opportunity here to approach $10 billion by 2028, which implies a CAGR of 11%+ from a $3.4 billion market in 2018.

However, for the value-added Earth observation services market to reach such projected levels, we would need to see a significant uptake from a range of industries beyond just further penetration of defense opportunities, including from sectors such as finance, maritime, location-based services, energy, and disaster management. To achieve such a broad B2B market adoption, several things still need to fall into place, including not just lower price points but also appropriate service, pricing, and distribution models.

Indicative of the current environment, Orbital Insight’s symposium presentation highlighted slower than expected progress with the industry’s next generation technology deployments as well as significant challenges in aligning sensor and constellation requirements with actual user requirements of commercial markets. From the AI and machine learning panel discussion at the symposium, we continued to hear about the lack of sufficient volumes and quality of Earth observation market data to train models.

In the last 12 months, we have seen some significant investments in various layers of the Earth observation ecosystem, including startups planning to deploy hyperspectral and SAR constellations, as well as companies focused on geospatial image aggregation/data management and analytics software and services.  Our investor communications indicate increased interest in software-rich and capital-light models. However, the question of the right amount of vertical integration required to significantly catalyze the Earth observation market is still not off the table, in our view.

Observations on Investor Sentiment

Based on our conversations during and prior to the SmallSat Symposium, investor interest appears more mixed than a year ago. From one side, venture capital funding positions are strong, there is capital to deploy, and new investors are continuing to learn about space as an investment theme. From the other side, investor focus looks to be increasingly shifted to financial discipline and product-market fit versus earlier higher prioritization of disruptive technology potential and market opportunity size, particularly when it comes to capital access beyond the initial funding rounds.

These developments look to be only partially a function of broader market dynamics, such as IPO market performance in 2019 and value losses at previously high-flying startups. Some of the companies in the NewSpace industry are not that new anymore, and we have seen technology and milestone execution take time, with targets being pushed to the right in some cases. In addition, there have been a few failures, and looking at the landscape of planned constellations and launch vehicles, further rationalization or consolidation should not take an investor by a surprise.

Hence, it is not surprising to see in Space Angels’ Space Investment Quarterly 4Q 2019 great funding totals of $5.8 billion for 2019 (versus $3.0 billion in 2018). However, if you exclude the $3.8 billion of the funding attributed to Blue Origin, OneWeb, SpaceX, and Virgin Galactic, the remaining later-stage funding is about 11% below 2018 levels.

In discussions on the space-sector funding outlook, some investors have expressed the fundamental view that if an entrepreneur is building a truly disruptive business solving hard problems, then the short-term financial market volatility does not matter. Great businesses can be built during market downturns. From the entrepreneur’s perspective, this should mean that the focus needs to be on building a business that creates shareholder value on a stand-alone basis and not contingent on an exit via M&A.

By now, NewSpace investors increasingly need exits to validate return assumptions of earlier investments. Plans for a public listing of an entity such as Starlink, if confirmed and executed, would be a very significant development in a path of de-risking and accelerating investments in the space economy.