For the last few years, investors, analysts and other observers of the entrepreneurial space industry have been forecasting end times for the industry’s current boom. The billions of dollars invested into smallsat constellations, small launch vehicles and related ventures, they argued, could not be sustained, given the lack of returns on those investments and an overcrowded marketplace that includes dozens of companies proposing constellations and more than 100 small launch vehicles. The industry was in a bubble, they predicted, that would soon burst.

So far, they’ve been proven wrong. Space companies have continued to raise ever-larger amounts of funding. Space Angels, a fund that is one of several organizations that tracks funding of space startups, said in a January report that it tallied $5.8 billion in investment in space companies in 2019, the most per year since it started tracking investment in 2009. Moreover, the individual companies that have failed in recent months, like constellation company LeoSat and small launch vehicle developer Vector, have been isolated events that haven’t hurt other companies in the same sectors.

“It just keeps going up and up,” remarked Tom Gillespie, managing partner at In-Q-Tel, during a panel at the SmallSat Symposium in Silicon Valley in early February. “You’ve seen a few relatively high-profile failures along the way, and interestingly, they haven’t really rocked the market. You don’t see people running away from the sector.”

During the conference, investors and others sounded guardedly optimistic about the prospects for future investment in the industry. If there is a bubble, they concluded, it would not suddenly burst, like the dot-com bust two decades ago.

Janice Starzyk, vice president of commercial space at Bryce Space and Technology, said her company was wrapping up its own report on the state of space investment in 2019. “It was another really big year,” she said. “We’ve been talking about a bubble and when it’s going to slow down, and it hasn’t yet. It might still be a couple years.”

“I don’t think it’s a bubble popping as much as perhaps things are leveling out a bit,” said Melissa Farrell, vice president of commercial initiatives at Stellar Solutions. Current investors, she said, are waiting to see a return on their investment, “and as we all know, those timelines for return on investment in this business are very long.”

One reason for that is that there appears to be no shortage of capital. “You have a large number of funds that are sitting on large amounts of capital waiting to be deployed,” said Shahin Farshchi, a partner in Lux Capital. Startups, he argued, shouldn’t try to time funding rounds to larger market conditions or the overall economy. “You should go out any raise money when you feel like the timing is right.”

Money is continuing to flow into startups. During the symposium, Accion Systems, a developer of smallsat electric propulsion systems, announced a $11 million Series B round led by Boeing HorizonX Ventures and Shasta Ventures. A week later, Astranis, a startup creating “micro GEO” communications satellites, raised $90 million in debt and equity as it prepares to launch its first satellite.

IPOS AND OTHER EXITS

Despite the continued influx of money into companies, there have been few exits for investors: opportunities for them to get a return, through an acquisition of that company or an initial public offering (IPO) of stock.

“There hasn’t been a major exit in this sector since Skybox,” said John Serafini, chief executive of HawkEye 360, referring to Google’s acquisition of Skybox Imaging for a reported $500 million. That deal took place in 2014.

There have been, though, deals involving space companies outside of the smallsat industry. The most prominent of them was Virgin Galactic’s merger with Social Capital Hedosophia, a special-purpose acquisition company, last year. That effectively served as an IPO for Virgin Galactic, providing it with more than $800 million that will go toward development of its suborbital spaceflight business while also buying out some earlier investors.

In recent weeks, Virgin Galactic’s stock has been on a trajectory that resembles the rocket-powered ascent of its SpaceShipTwo vehicle. The stock closed Jan. 2 at $11.79 a share, the same price it was when it started trading under the Virgin Galactic name and SPCE stock ticker in late October. By the time the conference started Feb. 3, the stock rose by 50% to $18.61 a share. By the close of trading Feb. 20, the stock price had doubled to $37.26 a share.

That sharp increase is puzzling to the industry, given that Virgin Galactic has not made any major announcements about its activities or finances that could explain the increase. Even some of the most bullish advocates of the stock, like Morgan Stanley analyst Adam Jonas, say the stock needs a “breather” in the market. “We must acknowledge that the move in the stock price of late appears to be driven by forces beyond fundamental factors,” he said in a note to investors Feb. 18.

“I can’t think of any other reason that you can talk about a $3 billion market cap for Virgin Galactic than people are just excited about flying into space,” said Rob Coneybeer, managing director of Shasta Ventures.

Translating that enthusiasm to the smallsat industry is more difficult, he said, because many of the customers are government agencies, but he was optimistic they would start spending money in this area. “The government appears to be really waking up to the opportunity,” he said. “From an investor’s point of view, it’s a little frightening, though, since you don’t know exactly when those dollars are going to happen, and you don’t quite know the magnitude.”

He said he expected one of the “well known” space companies to attempt an IPO, citing as potential candidates Planet, Rocket Lab and Spire. “One of those companies going public could be a watershed event in terms of how people think about the market,” he said.

“There aren’t a ton of paved paths or data points” about how space startups can exit, said Tess Hatch, a vice president at Bessemer Venture Partners. She said she is keeping tabs on those three companies as potential candidates for an exit (Bessemer is an investor in both Rocket Lab and Spire) as well as SpaceX, a company with no plans for the foreseeable future for an IPO but is reportedly considering at some point spinning off its Starlink constellation into a publicly traded company.

Mike Collett, founder and managing partner of Promus Ventures, was skeptical many companies will go that route. “I actually don’t believe there will be a lot of IPOs. There’s really no reason,” he said, because of available private capital.

A major obstacle to an IPO, he said, is that companies lack financial metrics like EBITDA — earnings before interest, taxes, debt and amortization — that make them attractive public offerings. “The markets are very much looking for numbers and margins and free cash flow and EBITDA,” he said. “EBITDA is a word we really just don’t hear too much in board meetings in our early stage companies.”

“Exits are not going to be as plentiful as we would all like,” he concluded. “It’s just the nature of the game and the nature of the industry.”

Serafini also doubts many smallsat companies are profitable, given the capital expenditures involved. “I’d guess of those smallsat networks just a handful, maybe one or two, could be approaching profitability.”

There are still ways, though, for investors to get a return. Serafini noted that Allied Minds, an early investor in HawkEye 360, sold its stake to another investor last year. “We were able to get them a 6X return,” or six times their original investment. “We need more of those before I anticipate more venture capitalists coming into our sector or the existing VCs wanting to write more checks.”

FLIMSY BUSINESSES AND AN IMPENDING SHAKEOUT

All that money flowing into the industry can have its drawbacks. “Capital is abundant,” said Christopher Baugh, chief executive of Northern Sky Research. “Funding is still highly available, especially early stage funding.”

That means, though, a lot of money is going into launch vehicle and satellite constellation companies that look like many other launch and satellite companies. “A lot of flimsy business plans are still out there,” he said.

Marco Villa, president of smallsat manufacturer Tyvak Nano-Satellite Systems, said he wasn’t impressed with many of the smallsat businesses he saw. “There’s a lot of interesting stuff out there, but by no stretch of the imagination do I want to believe that’s the best we can think of,” he said. “I think in the last two or three years there has been a little bit of a stagnation of new ideas.”Eventually, investors believe, there will be reckoning: not a bubble bursting but a shakeout as a few successful companies emerge from a much larger group. That’s especially the case in launch. “Do not invest in launch. It is a tough market, and it’s tough because there’s a number of well-funded companies,” said Mark Watt, a partner at Noosphere Venture Partners.

Noosphere, of course, has invested in the market: it’s put more than $120 million into Firefly Aerospace, taking the company out of bankruptcy and close to the first flight of its Alpha launch vehicle. He sees the value in Firefly by combining its launch services with other activities, such as plans for space tugs and lunar landers. “We see Firefly as a way to invest in a broader part of the space industry.”

Watt said he expected a shakeout in the small launch industry in the next year or two, with SpaceX and its new smallsat rideshare service playing a major factor. “I think 2020 is going to be fascinating for launch,” he said. “When all the dust is settled in 2021 or 2022, I think the landscape is going to be changed.”

Other factors outside the industry, like a global economic slowdown, could affect that shakeout. While some investors, like Farshchi, argued that companies can raise funding regardless of economic conditions, Mark Boggett, chief executive of Seraphim Capital, was doubtful. “I’m not so sure we can sidestep any macro trends,” he said. “It’s a market that serves other markets and that’s the reason why it will be affected by any headwinds.”

Boggett said his firm’s own estimates of investment in the sector showed a slight downturn in 2019 compared to 2018, although investment last year was still ahead of 2017. “There’s more reality setting in,” he said. “It’s going to continue to be more and more difficult for companies to raise money going forward.”

Coneybeer argued that any shakeout, or even a dot-com-like crash, is just part of the nature of the business cycle. “In any capitalist economy,” he said, “anything worth doing is worth overdoing.”

This article originally appeared in the Feb. 24, 2020 issue of SpaceNews magazine.