WASHINGTON — Space startups have had to navigate a torrent of macroeconomic factors for more than a year, starting with the stock market volatility in January 2022, the fall of SPACs, rising interest rates and a slump in private investment. The failure of Silicon Valley Bank (SVB) earlier this month did not help.

“I think it sent a chill through the community,” said Matt O’Connell operating partner at Data Collective Venture Capital during a panel discussion at Satellite 2023. The failure of the bank and subsequent events impacted both investors and industry players.

U.S. regulators shuttered SVB on Friday, March 10 following a collapse of the bank’s stock and multiple waves of customer withdrawals. Over the weekend, the U.S. Treasury, Federal Reserve and Federal Deposit Insurance Corp. (FDIC) intervened to ensure depositors could access their money and mitigate “systemic risk” to the broader financial system.

Corporations and analysts continue to monitor the situation as well as the aftershocks hitting mid-size and regional banks. Yet, despite the near-term uncertainty, high-quality space ventures are expected to continue driving capital on the investment and procurement side.

Seraphim Capital CEO Mark Boggett told the audience at Satellite that his firm anticipates a strong rebound of capital deployed in 2023. Seraphim documented a 25% drop in total private investment in the space sector last year from a record $12.1 billion in 2021.

“My expectation is that we’re going to be back up to 2021 levels this year,” Boggett said.

He cited three factors fueling the comeback. Global military budgets are growing with leading nations focused on space procurement and technology investment. There is also a lot of “dry powder” in climate impact funds looking to deploy capital on environmental monitoring and management solutions that space companies are providing. Sovereign wealth funds are also positioned to turn their focus toward space. According to Boggett, several large sovereign wealth funds have begun making ambitious investments in the last five months.

What’s Lost in ‘Flight to Quality’

One of the more notable impacts of SVB’s failure has been a “mid-term flight to quality,” O’Connell said. Over the last two weeks, scores of companies, including some in the space sector, have pulled deposits from mid-size banks and shifted accounts to larger institutions perceived as more secure.

While the move may allay concerns about short-term bank instability, there are disadvantages. One of the reasons SVB was favored by tech entrepreneurs was its reputation for serving the needs of the startup community. It had industry-specific expertise, specialized financial services and typically offered less restrictive terms and more competitive interest rates than larger financial institutions.

“The issue has always been where you can get the best attention,” O’Connell said, noting that large banks aren’t typically equipped to meet the needs of an emerging space startup. “I think the issue is who’s going to really pay attention to the companies that need the attention?”

The shakeup has also come as space startups and established players struggle to access affordable funding. According to Space Capital’s Q4 report, private investment in space fell to $20.1 billion last year from its $47.4 billion peak in 2021. As a CEO for an AI-focused satellite software startup noted on a separate panel, capital is becoming “very expensive and very hard to get.”

At the same time, some investors are proving they will go above and beyond to ensure the success of their space partners. When one-third of his portfolio companies were impacted by the SVB failure, Boggett said his firm took on a different role.

“We spent the whole weekend trying to make arrangements to help them make payroll and do all the things they needed to do in the short run,” he said.

Going forward, Boggett anticipates “a significant change” in the way VCs work with portfolio companies and how portfolio companies manage exposure to banks, including developing more diverse banking relationships.

A Trigger for Further Consolidation?

In addition to spooking investors and deposit holders, the bank collapse could also accelerate the trend of mergers and acquisitions in the space tech sector.

“I think there’s going to be a lot of consolidation,” O’Connell said. “It can be healthy. Not every company is going to survive. Not every company is going to raise money.”

In 2022, there were 38 Space M&A, according to the market intelligence firm HigherGov. That marked a slight decline from 2021 but represented a steady shift toward industry consolidation and ongoing efforts by space incumbents to acquire new capabilities.

Outside of space tech, some analysts anticipate the failure of SVB could trigger an uptick in corporate M&A. An executive with the research and advisory firm Forrester recently noted that corporations may find themselves in a position where they need to acquire financially vulnerable startups that they rely on for their technology infrastructure. The alternative would be to allow the companies to fail and risk losing integral capabilities.

Continued Growth and Capital Opportunities

Despite market uncertainty, venture capitalists remain optimistic about the future growth of space technology. Beyond opportunities for innovators to access private capital, panelists at Satellite noted various government programs aimed at supporting startups. Such programs include AFWERX and SpaceWERX in the U.S. and government support for space-focused VC through the European Investment Fund.

Having government or military customers is an attractive attribute for investors, explained Stellar Ventures Founder and Managing Director Celeste Ford.

“For us, it’s ROI, ROI, ROI,” she said, referring to return on investment. “What critical problem are they solving? What customer do they have that loves them? All of those things are going to provide you with a sustainable business. And quite frankly, if it’s government related, you get more points because that is really…where most of the funding comes from [in the space industry].”

O’Connell reaffirmed that companies seeking private capital need to prove they can deliver a return on investment within relevant constraints. “The timeframe is important,” he said. Investors are typically looking at a 7-10-year horizon for returns. When timelines extend beyond 10 years, O’Connell sees government funding playing a bigger role than venture capital. Pitches for opportunities like asteroid mining and cislunar development are “an immediate turnoff,” he added.

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