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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on November 13, 2017 - November 19, 2017

The sky is no longer the limit. An explosion of emerging space industries is creating new and unprecedented opportunities for investors in Southeast Asia and the West.

The last few years have seen a huge drop in the costs associated with emerging space industries, which has opened up major commercial applications, some of which, the experts say, are only a few years away from generating returns.

Where previously the opportunities were limited to government contracts in defence and aerospace as well as large communications conglomerates, today’s start-ups are pioneering new and exciting applications for both enterprise and mass-market consumers.

The potential of this industry is astounding. According to news reports, in a note released last month, Morgan Stanley analysts estimate that the space industry will be worth more than US$1.1 trillion by 2040 with private companies driving much of the innovation, further cutting costs. Although the analysts concede that the opportunities are still limited, they believe companies providing internet bandwidth services from space will carry most of the future value of the space industry. They estimate “a US$400 billion incremental revenue opportunity from providing internet access to underserved parts of the world”.

The news reports add that wireless internet bandwidth from satellites is what firms are calling a “second order impact”, which denotes a way for internet companies to benefit from greater efficiency and the decreasing cost of satellites.

The flow of investment dollars in recent years certainly bears this out. Data from international market research and consulting firm Northern Sky Research (NSR) shows that between 2000 and 2016, some US$10 billion was invested in over 100 companies, 35% of which were emerging space start-ups.

NSR senior analyst Carolyn Belle tells Personal Wealth that the emerging space market has grown so diverse in recent years that some companies are rewriting the rules of traditionally earthbound industries.

“In the last decade, we have seen companies trying out space tourism and asteroid mining, and now there is even interest in using space to perform non-space-related activities. There are companies that are now working to manufacture fibre-optic cables in space simply because they are able to build a better product in a micro-gravity (almost zero-gravity) environment. This is still being tested, of course, but there are a few companies looking to build their business around that sort of service,” she says.

In fact, the US-based Made In Space is pioneering the commercial manufacture of micro-gravity-enabled fibre-optics. It says it will be able to produce optical fibres that are “orders of magnitude” superior to the kind produced on Earth. Interestingly, MIS has not accepted any venture capital and yet has turned a profit. It is most famous for its proprietary 3D printing technology, installed aboard the International Space Station.

There are also pharmaceutical applications that can be undertaken in the weightlessness of space. “Space is a great environment to commercially develop protein crystals that can be used for a myriad medical applications,” Belle observes.

As for returns, she says venture capital funds engaged in emerging space investments typically look for 10 times their initial outlay.

 

Huge potential

Seraphim Capital CEO Mark Boggett says the emerging space industry can be broken down into a series of discrete verticals (segments). The first is the “build”, or anything to do with the building of satellites, drones or unmanned aerial vehicles, including composite materials, electronics, sensors and basically any of the elements that make up the satellite or drone’s hardware.

“Then you’ve got the ‘launch’, which is most talked about at the moment, with Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin. These are the companies that are really pushing the envelope by driving down the cost of access to space. The price of taking a kilogramme of material into space is expected to fall 90% in the next handful of years, which will really help the growth of the industry,” says Boggett.

Seraphim Capital is the only venture capital fund in the world to focus exclusively on unearthing and funding fledgling companies in the space industry.

SpaceX has radically altered the aerospace sector and is edging closer to making reusable rockets a reality. In late October, the privately held company — recently valued at US$21 billion — conducted the 19th successful launch and landing of its reusable Falcon 9 vehicle. These launches cost a paltry US$62 million, undercutting the competition by US$38 million, says CNN.

Later this year, SpaceX will be test launching its new Falcon Heavy rocket system, and based on its current specifications, it will be the most powerful launch vehicle in the market.

Private aerospace manufacturer Blue Origin, founded and owned by Amazon CEO Jeff Bezos, has taken a slightly different path. It recently conducted a successful test-fire of its new BE-4 engine, which is more powerful and can be installed on other launch platforms, unlike SpaceX, whose engines are compatible only with SpaceX launch vehicles.

Seraphim Capital also looks to invest in the “collect” and “downlink” verticals — getting the data from space back to the ground within a time frame that still allows it to be usable.

“There is also the ‘storage and security’ and, lastly, the ‘analytics’ of the data. This is where there is a lot of use of computer vision and artificial intelligence (AI) and machine-learning techniques. These are the verticals (collect, downlink and analytics) that Spire is currently engaged in,” Boggett says.

An investee company of Seraphim Capital, Spire is one of the world’s leading nanosatellite constellation providers. “Before personal computers, getting access to computing power was limited to the elite. It was very unevenly distributed and costly. But when PCs came about, it changed the entire set-up from large, monolithic non-standard systems to small, rapidly iterating and cheap standard systems. And then, it all became connected to the internet,” its CEO Peter Platzer tells Personal Wealth.

“This is what we’re seeing with nanosatellite constellations. We’re moving from access to data from space being an elitist, very expensive and slow-moving resource to something that is democratised, rapidly innovating and cheaply available.”

A key emerging space sector — satellite imagery and analytics — is supported by an expansive supply chain, a growing list of interested commercial consumers and a major drop in launch cost and satellite size, Boggett says, adding that these technologies will drive the development of a range of data analytics capabilities that will benefit a host of Earthbound industries.

“You’ve got uses in logistics, finance and insurance, agriculture, construction, government and maritime. In fact, the renewable energy industry is now setting up onshore wind farms and right now, the industry does not have the data sets to identify the best spots for their construction. Through the use of satellites and machine learning, you can look into weather patterns and automatically pick the best places in the world to construct an onshore wind farm.”

Spire excels at this. With proprietary machine learning and AI technology, the company repackages and value-adds its satellite imagery to provide near real-time insights into a slew of earthbound industries.

 

Honey, I shrank the satellite

People tend to think of satellites as hulking, bus-sized contraptions that require billions just to construct, to say nothing of the attendant launch costs. This was the case for decades but not anymore.

The emergence of nanosatellite constellations has drastically reduced the cost of both building and sending satellites into space. These constellations — some with hundreds of small satellites orbiting the planet and working in unison — are able to provide new and unique insights for clients on the ground.

For instance, orbiting nanosatellite constellations are now able to provide high volumes of high-resolution imagery of vast farmlands. The nanosatellite companies then advise a client on particular patches of farmland that are not receiving enough irrigation. The client is then able to immediately correct the imbalance without wasting precious resources.

Additionally, the high-resolution imagery can be used to track the density of parking lots at a large national retail chain. Car parks make an excellent proxy for footfall and having a series of images taken over a period of months would provide a fund manager with a reliable measure of the retail chain’s performance.

The US-based aerospace engineering firm SpaceWorks Enterprises Inc predicts that over the next few years, commercial nanosatellites (weighing between 1kg and 50kg) will dominate launch schedules, well ahead of government and academic nanosatellite launches.

Although Earth’s imagery is the most ubiquitous of the nanosatellite applications at the moment, NSR’s Belle believes more far-reaching applications are in sight.

“We see revenue potential in mega-constellations that will address communications requirements, especially in high-speed broadband. I would look at players that are able to tap not only consumer markets and regions with little broadband coverage but also broadband for enterprise for revenue potential,” she says.

In the longer term, Belle sees nanosatellite companies partnering traditional communications incumbents to deploy their capabilities. With unique market demand in each country in addition to regulatory challenges, it would be difficult to deploy a global nanosatellite constellation without local partnerships, she says.

“And we’re actually seeing this happen right now. (Japanese telecommunications and internet giant) Softbank made a billion-dollar investment in (the US-based) OneWeb, a company looking to deploy nanosatellite constellations for communications. OneWeb also owns a stake in a mobile network operator in the US.”

As for returns, Spire’s Platzer thinks a “reasonable expectation” for an exit in some shape or form would be about three years. That said, he remains open to the prospect of staying private for longer despite being able to generate a return immediately.

“At any given time, if we had sold ourselves for the valuation we received at the last investment round, we would have generated a return for our investors. However, if you conduct a merger, you give up control over your culture because you’re now part of the larger company. Now, that might make it faster to accomplish what you want to do but it may also slow things down.

“As for a listing exercise, you give up a lot of your advantage because now you have to divulge a lot of details in your quarterly reports, but you still get to keep your culture since the company is still yours.”

It is for these reasons, he says, that a lot of companies in the US are delaying exits for longer. “The upside is that you keep your culture and don’t have to produce quarterly reports, but you now have to figure out how to create liquidity for your employees and investors. But there are ways to do this. SpaceX has existed for 15 years with no exit in sight and it has internal mechanisms for employees and investors to get liquidity for their investments.”

 

Nascent industry in Asia

Although much of the commercial space buzz is still concentrated in North America and Europe, Asia has its share of interesting upstarts and with it some early angel investment opportunities.

In addition to nanosatellites as an exciting aerospace segment, supercharged broadband services, provided by massive nanosatellite constellations, is another segment that could radically alter entire countries.

To this end, one Singaporean start-up is pioneering broadband technology that can be installed within nanosatellite constellations to provide cheap supercharged broadband services.

The company — Transcelestial Technologies — is pioneering the transfer of data between two points using lasers. Unlike traditional data-transfer technologies like radio waves (which are used to transmit television and radio programmes) and microwaves (used to transmit information for mobile phones and current WiFi connections), lasers can transmit data, quite literally, at the speed of light.

This way of providing internet bandwidth will achieve global coverage once the technology is integrated into a nanosatellite constellation. Thanks to the plummeting cost of launching nanosatellites into space, hundreds of internet-enabled nanosatellite constellations could soon provide wireless internet speeds that are orders of magnitude greater than anything currently available, from thousands of miles up in space.

Transcelestial Technologies co-founder Rohit Jha explains, “The individual technologies needed to make laser communications possible only matured and became commercially available in the last year or so, so we’re taking advantage of that.

“Instead of the current technology where satellites use radio frequencies, radio waves and microwaves, with laser technology you get faster satellite connectivity by a factor of at least a thousand, and this is going to take satellite communications into an entirely new era.”

Rohit and fellow founder Mohammed Danesh believe they are on the cusp of making laser communications technology as reliable and consistent as other legacy data-transfer technologies. “What we have developed will work reliably not only on the ground but also in space,” says Rohit.

Apart from supercharged internet connectivity brought about by laser communications technology, the co-founders are betting that the allure of massive cost savings will be another shot in the arm for Transcelestial Technologies.

Danesh observes that the total cost of laying just one undersea cable between two points is easily half a billion dollars and he is banking on nanosatellites to get the job done for much less.

“Having spoken to communications companies that provide transpacific and transatlantic fibre-optic cables, we know that laying cables from Japan to San Francisco will run into hundreds of millions of dollars. And then there are the huge dollar and energy costs involved in maintaining these lines. And because the cables are laid on the seabed, a large amount of infrastructure is needed to accomplish this,” he says.

Rohit adds, “But the cost of putting a satellite in space and maintaining it has fallen by at least one or two orders of magnitude in the last few years. That is what we’re taking advantage of, and this is why we’re confident of beating undersea fibre-optic cables by using nanosatellites integrated with laser communications technology.”

The company has received about S$100,000 from private and government sources in pre-seed funding and, according to Rohit, it completed its maiden seed funding round in July. “The investments came from a mixture of venture capital funds, government funds and angel investors.”

 

High risk, high reward

At the end of the day, the emerging space industry is a high risk-high reward vertical and investors need to manage expectations before committing investment dollars to funds or companies operating in this space.

As an A-round investor, Boggett says it will typically be five years plus before he starts to see returns from an A-series investment. “Yes, it is a high-risk investment category, so we’re looking for multiples on our original investment over that time period. If you’re investing in space technology, then investors will be looking to make significant returns.”

He adds that the firm’s all-new Seraphim Star Fund is about to be launched. “This will be open to funds, corporates and high-net-worth private investors. The minimum subscription will be US$500,000, payable into a Luxembourg Limited Partnership structure over the 10- year life of the fund. Returns will be subject to management fees (2%) and a performance-based carried interest (20%). We anticipate realisations may start occurring after four years.”

NSR’s Belle says the emerging space ecosystem, as a whole, is expansive, complex and interconnected in a way that many other industries are not. “There is a lot of activity in these emerging markets with many space players going after the same customer base, whether manufacturers trying to target the same satellite builders or launch service providers.

“Also, launch capabilities are one of the missing pieces for operators trying to develop nanosatellite constellations, and this is because none of the launch players is quite there yet. However, the launch players need the nanosatellite constellation providers to somehow survive so they are able to have a stream of customers. At the same time, the constellation players need to hang on until the launch players are ready.”

She adds that there are far too many players in certain space verticals, so much so that some of these markets are saturated with very few players delivering any services. “While this leaves a lot of opportunities to fill, not all of these players are going to survive and this is going to be a challenge for investors.”

It can also be a challenge to overcome regulatory hurdles to launch something into space. “Many countries have a slate of regulations to satisfy before you can launch,” Belle adds.

Transcelestial Technologies’ Rohit echoes her sentiment about regulations, explaining that they set up in Singapore rather than the US because of Cold War-era restrictions on satellite and propulsion technology.

“The US has the International Traffic in Arms Regulations that were enacted during the Cold War. These regulations extend to space because back then, the authorities regarded it as a potential front for war. So if you are a US-based company involved in manufacturing something for space, you fall under ITAR regulations. This heavily constrains US space tech firms and start-ups when it comes to hiring non-US citizens or selling products outside the country. Firms have to work with the Department of Defence first to get the relevant clearance.”

Danesh highlights the importance of focusing on the scalability and commercialisation potential of any space-based technology. “For example, the people at NASA have achieved some amazing scientific breakthroughs in the past, so we know these are things that can be accomplished. But the challenge is turning that very interesting scientific experiment into something that can be scaled by factors of hundreds or thousands.”

In addition to the usual considerations of knowing the management team, their business and technical background, Belle says investors need to consider the nature of the product or service being developed by the company. The more exotic the offering, the longer it takes to realise returns, she adds. “If a company is working on nuclear propulsion technology, that is going to take a longer time to develop.”

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