This article originally appeared in the Feb. 12, 2018 issue of SpaceNews magazine.

The surge of new space companies in the last few years has impressed even veteran industry observers.

“I’ve never seen the interest level so high to start new businesses,” said Hoyt Davidson, managing partner of investment banking company Near Earth LLC. “It’s a renaissance, a potential space renaissance.”

Davidson, speaking on a panel about space investment at the Federal Aviation Administration’s annual Commercial Space Transportation Conference in Washington Feb. 8, cited the formation of dozens of new ventures in recent years in areas from Earth observation to launch, fueled by what he estimated to be $1–2 billion a year in early-stage investment from venture capital (VC) firms and angel investors.

However, there’s enough uncertainty in the field for him, and others, to have doubts about the long-term viability of this boom. “I say potential because I’m not totally confident yet it’s going to be sustainable,” he said. “We’re certainly on the verge of it.”

Increasing investment and its returns

Those concerns have roots in two different, but linked, issues: access to large sums of capital to invest in space companies, and the ability to get a return on those investments.

While many startups have been successful in raising tens or even hundreds of millions of dollars, the most ambitious ideas, from satellite megaconstellations to long-term asteroid mining initiatives, will require many billions of dollars, likely from private equity investors. “To get to the renaissance, we’re going to need much larger pools of capital than the early-stage VCs and the seed and angel investors,” Davidson said. “Right now, we’re not getting that.”

That’s led to what he called a “bifurcation” in business plans for startups. Companies that can get to an initial product or service — what’s known in entrepreneurship as a minimum viable product, or MVP — relatively quickly and with only a few million dollars of investment have been winning over VC firms.

“But there is still in this industry a lot of businesses that just can’t start unless they have hundreds of millions of dollars, and some even more than that,” he said. “Those are struggling to get financed right now.”

Those companies that can start with a smaller amount of VC funding will face challenges as they try to grow. Investors at another recent event, the Space Tech Summit in San Mateo, California, warned that space companies will have to do a better job demonstrating their ability to provide a return on their money.

Shahin Farshchi, partner at Lux Capital, said at the conference Jan. 24 there was a “level of rigor” missing in the finances of space companies that could hurt their efforts to raise large sums of money. “If you are a project financier, a bank, a late-stage private equity firm, you’ll be weighing these kinds of projects against building strip malls, or building a cellular network in Africa, or any other kind of capital deployment opportunity,” he said. “If those numbers don’t add up, that [internal rate of return] isn’t there, then it doesn’t make any sense.”

Even smaller investments raise questions about returns for investors. While billions of dollars have flowed into space startups in the last several years, there have been only a handful of “exits” that gave those investors a windfall. The best-known example is the acquisition of Skybox Imaging by Google in 2014 for an estimated $500 million.

“We think it’s a fruitful industry and will have a wonderful return on investment. But what are those scenarios going to be?” asked Tess Hatch, an investor at Bessemer Venture Partners, a firm that backed Skybox. “Are they going to be acquired? Are they going to go public?”

Going public doesn’t seem like a likely option for most companies, given the difficulties of doing an initial public offering (IPO) of stock. “I don’t see the IPO window opening at all,” said Mike Collett, managing partner at Promus Ventures, a firm that has invested in launch vehicle developer Rocket Lab and smallsat constellation company Spire. “There’s zero reason to go.”

He and others at Space Tech Summit believed there was still plenty of investment capital to go into startups to keep them going, provided they show progress and start to generate revenue. “There’s a huge amount of private investment dollars available, so companies can stay in the crib for way longer than they would have historically,” said Chris Quilty, president of Quilty Analytics.

Alternate paths

Should traditional venture capital firms and private equity funds sour on space startups for one reason or another, there may be alternate financing sources. “There’s a lot more variety of funding sources now,” said Kyu Hwang, a market strategist for aerospace and defense startups who previously worked in both government and industry. That can provide some stability for the industry, he said, even if there is downturn in investment from VC firms.

For example, a growing number of large corporations have established their own venture capital arms used to make strategic investments that can offer companies not just financial returns but access to promising technologies and products.

One such fund is Lockheed Martin Ventures, which has invested in Rocket Lab. “We need low-cost access to space and high potential frequency of access, which would open different mission types,” said Chris Moran, general manager of Lockheed Martin Ventures. “The U.S. government was pushing us to have that kind of access, so we made that investment in Rocket Lab in their Series B.”

Lockheed Martin Ventures also invested in Terran Orbital, a smallsat manufacturer. “That’s been a great relationship for us,” he said, noting that Lockheed Martin is offering those smallsats to government customers that has resulted in several orders. “That’s the kind of ideal collaboration that we hope to make with the venture group.”

More of these strategic investments, and even acquisitions, are likely in the years to come. “Every one of the large aerospace and defense companies that I talk to is looking at this sector very carefully,” said Justin Cadman, senior vice president in the satellite and space practice at Raymond James. “Most of them realize they need to partner, acquire or invest.”

A non-traditional venture capital source is In-Q-Tel, the VC fund that backs companies with national security applications. “We’ve been looking at space investing really seriously in the last five years or so,” said Tom Gillespie, a partner at In-Q-Tel. He said the firm has examined companies across the spectrum in space, from launch vehicle and satellite constellation developers to those analyzing data coming from space systems.

In-Q-Tel, though, keeps a low profile. “Very few of our investments are actually announced, which is frustrating for me,” he said. “But we are quite active.”

Public private partnerships with the government, like the funded Space Act Agreements that NASA used for the commercial cargo and crew programs, could also help companies. At the FAA conference, Davidson said such partnerships may be needed to carry out the most ambitious ventures proposed, like lunar and Martian settlements.

“To have a million people living and working in space, a million people on Mars,” he said, echoing the visions of Jeff Bezos and Elon Musk, “that’s going to take this city — NASA, Congress, the administration — to figure how to create those markets with public private partnerships.”

But for ventures that are a little less out of this world, like satellite constellations and launch vehicles, Davidson was optimistic that private funding will be sufficient. “I’ve never been more bullish,” he said. “This is an exciting time.”