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Apr 19, 2023

Apr 2023 | Sector insight: A renewed focus on defence and security is opening up new growth opportunities for spacetech companies

The technology market downturn of the past 12 months may have made it more difficult for some spacetech companies to secure financing, but investment into businesses with solid technology and strong growth potential continues to be healthy. Indeed, the sector appears to be having a moment in Europe. The first three months of 2023 saw 128 private investments in European spacetech companies – the sector’s highest-ever quarterly total, according to the latest Seraphim Space Index[1].

These include: Swiss space debris removal company, ClearSpace, raising $29m in January this year — a transaction on which Silverpeak acted as a financial adviser; France-based space services company, Exotrail, raising $58m; and German reusable orbital vehicle business, The Exploration Company, attracting €40m in a series A round. The largest deal of the quarter was Isar Aerospace, a German rocket launch company founded in 2018, which landed €155m in a series C round from a syndicate of investors that included Earlybird, HV Capital and Lakestar.

This increased deal activity may well be the result of European spacetech growth opportunities broadening over the past year. Discussions at a recent Space Sector CEOs dinner in London (which Silverpeak co-hosted with space investment firm Seraphim and deeptech recruitment specialist Gillamor Stephens, with speakers from NATO Innovation and UK Space Command) highlighted an increased focus on security among governments and supranational organisations in response to Russia’s invasion of Ukraine. This, said participants, is leading many spacetech companies to consider defence applications more closely than previously.

The backdrop

To date, spacetech has attracted capital largely on the premise that commercial opportunities — such as providing satellite imagery to insurance companies or data on pipelines to energy businesses – will overtake traditional government sector space spend.

Today’s spacetech funding ecosystem grew from the emergence in the 2000s to the early 2010s of a commercially focused “New Space” sector, which was driven by a wave of investment from billionaires, including Microsoft co-founder Paul Allen, Tesla entrepreneur Elon Musk, and Virgin Group founder Richard Branson. Spacetech’s commercial viability improved as innovations lowered launch costs, miniaturisation led to the development of low-cost, smaller satellites and off-the-shelf components became commonly used.

Another wave of investment followed from around 2018 onwards as a wider range of investors entered the sector and potential exit routes became clearer. Private equity-backed roll-up strategies — exemplified by the merger of Adcole Space and Deep Space Systems to create Redwire (which has now gone public) — demonstrated investment appetite for spacetech businesses and led to more interest and capital from growth investors. Annual equity investment in early and growth-stage spacetech companies grew from less than $100 million to over $5 billion in 2020.

However, raising investment for spacetech companies has become much tougher since 2022. Speculative investors have gone and funding now relies on more educated investors with a clear thesis on the sector’s future evolution.

And while it is likely that commercial opportunities for the spacetech sector will prevail over the longer term – several studies, including one published last year by Citigroup[2], have forecast $1 trillion annual sales for the space industry by 2040 — many have been slower burn than investors had hoped.

Enter defence

An increased focus on security and defence has therefore become an opportunity for spacetech companies facing slower than expected commercial adoption. Businesses can reposition many of their technologies for security applications – broadband satellites, for example, can provide battlefield troops with mobile communications access, while earth observation satellites can quickly locate enemy positions using optical, radar or infra-red analysis.

By pivoting towards defence applications, companies can tap into additional sources of capital, some of which have emerged in the wake of Russia’s invasion of Ukraine. NATO, for example, announced a new €1 billion Innovation Fund in 2022, the world’s first multi-sovereign venture capital fund, which is designed to “help bring to life those nascent technologies that have the power to transform our security in the decades to come[3]”. Space is one of the fund’s nine priority areas.

Individual governments are also upping their defence budgets, with space a clear spending target area. Germany has committed to spend an additional €100 billion on defence, while the UK launched a Space Defence Strategy in 2022, which focuses on driving innovation and includes over £6 billion of funding for existing and experimental programmes. Further, France is investing heavily in military space capabilities and its Armed Forces Minister, Florence Parly, recently wrote in an opinion piece: “If space was the new frontier of the 1960s, there is no doubt that today, it is a new front on the battlefield[4].” The creation of defence collaborations between nations, such as Five Eyes and Aukus, also spells opportunity for spacetech businesses.

What’s interesting about many of these programmes and initiatives is that they follow the US lead of fostering innovation by providing investment and offering smaller companies government contracts. This is a welcome shift from the more traditional approach of one-off grants the UK and Europe has historically taken, as companies can raise private capital having secured commercial contracts.

ESG shift

Finally, there is one other aspect that has changed over the past 18 months for spacetech companies: the situation in Ukraine has shifted mindsets around what investing with an ESG lens means. Where previously, some investors may have screened out businesses with any defence element, they are generally more prepared to invest today in defence-related companies on security grounds. Swedish bank SEB, for example, removed an exclusion on defence stocks from its funds less than a month after the invasion last year[5].

All this suggests that spacetech businesses should also be looking at defence and security applications for their technology while the commercial market continues to develop. However, they should be aware of some of the challenges these markets can present. These include getting to grips with the different ways in which various defence and military organisations work, plus a large amount of red tape, which makes it important to bring in expertise in these areas. Defence contracts may also preclude selling technology to other markets on security grounds, which could limit future company growth.

The commercial market will present further opportunity. In the meantime, increased defence spending and focus – in space in particular – means that spacetech companies should be looking closely at the potential for growth that government and supranational investment and contracts could bring. This could well be a lifeline at a time when growth capital investment is constrained.