Over the past decade, small satellites have revolutionized the space industry while influencing life on Earth in ways as varied as providing broadband access, monitoring infrastructure, improving weather forecasting, and supporting the war effort in Ukraine.
Borne out of low-cost launch, the cubesat standard, and a more permissive attitude toward risk, today’s smallsat revolution began just over a decade ago. In 2013, my team organized the space sector’s first-ever enterprise conference. There have been barely enough startups to fill the room, however the entrepreneurial spirit was strong, and visionary investors saw that the space industry was onto something big. Fast forward to the first-half 2023, and Quilty Space’s market monitor recorded 64 enterprise space equity financings in six months – greater than half related to the smallsat ecosystem.
While impressive by historical standards, the enterprise deal count for the primary six months of 2023 was off by 46% versus the high-water mark set within the second half of 2021. There have been 25 space-related M&A transactions throughout the first half of 2023, down from a peak of 41 within the second half of 2020. Are investors souring to space? And what do the shifting sands mean to the sector?
The reply to the primary query is a convincing “no.” It’s true that some investors have moved on, shifting their attention to “capital-light” business models and more familiar sectors. But many of the decline is attributable to macro conditions; in spite of everything, U.S. enterprise deal volumes were down 34% from their peak, while mergers and acquisitions (M&A) volumes were off 27% from their last peak. Investors remain highly excited by the secular growth opportunity presented by space, but capital is scarce and investors have change into far more discerning.
How might a financing downshift impact the smallsat industry? The impact starts with constellations, which form the inspiration of the smallsat industrial base, driving demand for components, smallsats, launch, and myriad upstream and downstream services.
After years of gestation, dozens of constellation deployments are well underway and can soon reach an apex. Based on Quilty Space’s mid-2023 satellite demand evaluation (excluding megaconstellations), there might be about 370 smallsats (500 kilograms or less launched in 2024, excluding China and Russia. This might be a modest increase from the roughly 350 launched last 12 months. Underpinning a growth rate downshift is tighter availability of financing, driving some less successful and earlier-stage constellation players out of business while downsizing the aspirations of others. We’re entering the smallsat “show-me” era, where constellation operators must show the viability of their business models.
The derivative impact on the smallsat industrial base can be clear: smallsat space hardware and launch firms which have built a track record can capitalize on this shift, driving growth and expanded moats, while newer entrants may find it increasingly difficult to carve out a defensible area of interest. This trend might be reinforced by a shift in “demand gravity,” from mostly startup-driven smallsat demand just a few years ago to demand sourced from more established, often more risk-averse buyers (industrial and government/ defense).
At the identical time, the birth of the LEO smallsat economy is now fueling the rise of adjoining investment opportunities. Growing space traffic and debris is prompting keen interest in space situational awareness, collision avoidance, and the like. Greater than two dozen firms are developing space tugs to deploy satellites, orbit-raise, and supply servicing. And, not forgetting the bottom segment, advances in cloud and AI portend one other bump in smallsat capability. A brand new space ecosystem is on the rise.
Super-heavy launch (e.g., Starship and Latest Glenn) could change into yet one more game changer for smallsat. Low-cost, high-volume, super-heavy launch is critical to the long-term success of megaconstellations, but it would also profoundly impact the design selections for smallsats, propelling satellite mass, capabilities, and constellation size upward. Once super-heavy launch can bend the associated fee curve, recent applications and investments will soon follow.
Returning to the financing environment, the tailwinds in smallsat are still favorable, but uneven, thus demanding more resilient business models. Rational growth strategies, viable performance, creditworthy customers, and prudent financing strategies are musts on this recent environment. Smallsat stakeholders that adhere to this “show-me” philosophy will emerge stronger than ever.