Morgan Stanley
  • Ideas
  • Jul 21, 2020

Capital Flows as Space Opens for Business

The space economy will require a self-sufficient ecosystem that includes capital, strategic partnerships and evolving business models. Here’s how it may develop in the coming years.

Half a century ago, the Apollo 11 moon landing demonstrated the reach of human imagination, engineering skill… and Promethean audacity.

Although the 'space unicorns' have caught the eye of news media, hundreds of other new startups have formed in the past several years to explore opportunities in space.

The first human steps on extraterrestrial soil culminated decades of innovation in hardware, software and rocket science. The resulting technology and infrastructure eventually delivered the computer age—now foundational to businesses and homes in nearly every corner of the Earth.

Now, a new space age is dawning, setting technological goals that would have seemed the stuff of Isaac Asimov in 1969. Constellations of satellites, fusion-powered spacecraft, technologies to mine asteroids and 3D printers to replace worn-out equipment in zero gravity (something Apollo 13’s crew would have been thrilled to have had in 1970).

Only this time around, the space race is being powered not just by government but by a new crop of startups and visionaries. Although entrepreneurs, strategic partnerships and venture capital have been leading the charge on funding, the success of this nascent phase of the new space economy will require a self-sufficient ecosystem. How it develops in the coming years—from funding to business models to full-fledged industry—may be a tale even more captivating then one written by Mr. Asimov.

Capitalizing Space

Although the “space unicorns” have caught the eye of news media, hundreds of other new startups have formed in the past several years to explore opportunities in space infrastructure—satellite manufacturing, launch capabilities, IT hardware—and adjacent areas, such as space tourism, satellite broadband, media and even asteroid mining. But space is a world of heavy machinery, infrastructure and manpower. In other words, it requires vast amounts of capital—both in the research and development phase and as these companies build out infrastructure. However, investor curiosity has kept pace.

“You’re seeing a tremendous amount of interest in this area from angel investors, venture capital and private-equity firms,” says Ashley MacNeill, Co-Head of Technology Equity Capital Markets for Morgan Stanley. “A lot of it is real passion in the industry, but candidly, some of it is simply fear of being late to the party. Things are changing at such a rapid pace that investors are saying they have to keep up with the times.”

Because success in space promises to be a multidecade endeavor—with returns on some lofty endeavors that could be many years away—this new economy requires patient investors. One sign of investors’ willingness to wait is the increasing reliance on permanent and long-term capital funds.

“For some of these funds, the exit plans can be 50 years out,” says MacNeill, adding, “While the popularity of these permanent and long-term capital funds may not continue forever, currently, the level of interest for these funds vis-a-vis space is worth noting.”

MacNeill adds, however, that although investors seem prepared for these longer investment horizons, they are selective. “There are a lot of unproven technologies coming to market. To commit capital in size investors want technology that is differentiated and truly disruptive.”

U.S. corporations are also in the mix through strategic partnerships. For some, it’s still at a wait-and-see phase. “Right now, publicly traded companies are watching the space story unfold, and there’s a bit of ‘Do I watch it, invest in it or buy it?’ ” says Lauren Cummings, the other Co-Head of Technology Equity Capital Markets. These strategic partnerships appeal to both corporations and startups. For the former, it’s a connection to the latest technologies and solutions, while startups see possible distribution partners and growth capital.

Building an Ecosystem

To succeed, the space industry will need practical business cases and realistic profit models—which means a self-sustaining ecosystem. “Right now, you see a lot of attention on the launch business,” says Phillip Ingle, a Managing Director in Investment Banking.

“You have the large launch companies where some of the new providers are now competing with the traditional government providers. But there’s also a lot of activity on the small launch side—companies who are focused on launching smaller, lower-cost satellites into orbit. And some of these launch companies are already profitable, as there is increasing demand to launch smallsats.”

Indeed, the launch business is foundational to the space ecosystem—no launch, no space—and one of the biggest areas of funding. “Ultimately, these launch companies are trying to continually lower the cost of launch, until it can be thought of as another form of transportation. It’s the bus that gets you there,” says Ingle.

As launch becomes more refined—cheaper, easier, faster—it will allow for the rest of the ecosystem, from satellites to services, to grow into a broader marketplace. “The launch companies are depending on the small and medium satellite manufacturers. The manufacturers are relying on the services companies, who are focused on things like satellite broadband, low-earth-orbit imaging and weather monitoring, and then the loop feeds back on itself,” Ingle says.

That said, for the foreseeable future, NASA, NOAA, the U.S. Department of Defense and other government agencies are still the biggest clients, according to Ingle. “The successful companies will tell you that, at this stage, the government is still critical. The startups are going to need time to develop business models that work. Remember space is tremendously complex. It’s going to take time for the ecosystem to develop. And in the near-term, I think we’ll see that government is still going to be the most important game in town.”

A Generational Shift

Finally, the ecosystem will need human capital—and in plentiful supply. “Years ago, if you were a young engineer coming out of college with an interest in space, you really had just NASA or a government agency. Now, there are dozens and dozens of startups to choose from. You can actually pursue a career in space,” says Ingle.

Adds MacNeill, “In my conversations, I’m finding that Millennials and Generation Z are focused on two big areas: climate change and space—and there is even some crossover between the two areas. But the passion of these two generations is what’s going to keep interest in space going over the next several decades.”

For more information on opportunities in space, ask your Morgan Stanley representative or Financial Advisor for recent Morgan Stanley Research reports on the investment significance of the space economy. Plus, more Ideas from Morgan Stanley’s thought leaders.