Risks and Rewards of Investing in Space
By Mateo Michalec
The space industry has a lot of volatility which can present some unique investing opportunities. You may often hear the adage “Space is hard!” And it is!
For now, most companies on the market are high risk/high reward type investments. As companies start to filter over time, we will see which ones will be more stable and which ones will fail. The largest risk will be on any new space company on the market. If you look at any startup rocket or satellite company, you can see most of them having multiple failures in the beginning. The key question is, how many failures can a company go through before they burn through their cash holdings or their ability to obtain new investors? Refer to the book “The Space Barrons” for further info on the early successes and failures of space startups. SpaceX is a great example. They were successful on the 4th launch attempt. They originally had money for 3 attempts, but they were saved by a private investor (Peter Thiel) – the company’s first outside investor. Now they have an excellent track record, however this did not come with significant risk to the company and its investors in the beginning.
It does not look much better in the satellite segment either. According to the NASA Ames Research Center 41.3% of all small satellites launched failed or partially failed between the years of 2000 – 2016. Now as more companies come on the market, we can expect to see exponential growth of satellite launches. With the advancement of communication systems and cheaper cost we are seeing hundreds more being deployed each year. (Stay tuned to find out what happens with these failed satellites in the last segment of this series on space.)
The success rate of launches is gradually increasing. SpaceX’s success rate of launches (Falcon 9 rockets) is 98.45%. Rocket Lab’s success rate is about 85% as of today (they have not launched since the end of July due to COVID 19 restrictions). Some have presented the argument that we have too many space launching startup companies on the market. Today we have over 100 space companies, but only about 15 that are past the original development phase. I counter this argument by looking at the number of clients looking to use these space services. There is no shortage of demand: Astra Space for example has over $150 million in back logged clients, Rocketlab over $141 million and Virgin Galactic over $150 million.
I believe the biggest risk is in the space tourism industry with companies such as Virgin Galactic and Blue Origin that are mainly focused on taking people into suborbital Space.* This is because your risk is amplified with people on board. You have very little room for error. In 2014, Virgin Galactic had a fatal accident caused by the co-pilot.
The rewards can be tremendous. SpaceX’s valuation has been recently reported at $100 billion (a large portion being the Starlink satellite communications system). The original investment into SpaceX in 2002 was $18.8 million. If any of the newer companies can even get a fraction of this, we can see some great upside potential. If you look at the early days of SpaceX you can see that nobody gave Elon Musk and his company a chance. New companies are also starting to see some of this success and over time I am sure we will hear of more great success stories. Investing in this industry can be exciting but requires the utmost attention to details and a very disciplined risk management approach. Book a meeting with me if you’d like to learn know more.
Next in our space series we will look at the different sectors and how other industries are affected by the space industry.
*Debate is on going as to what qualifies as space (International Kármán line @ 100km vs U.S Military and NASA @ 50 miles)
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