Space industry seeks clarity on defense market plans

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Space industry seeks clarity on defense market plans


WASHINGTON — Space industry executives and investors at a recent U.S. Chamber of Commerce event grappled with unanswered questions on the Pentagon’s plans to commercialize activities and increase its reliance on private-sector technologies.

Business leaders said they see bright spots in the defense market such as the Space Development Agency (SDA), which is buying hundreds of commercial satellites to build out a proliferated low Earth orbit constellation for military communication and missile tracking. 

But financiers who back companies in the sector would like to see a more widespread DoD embrace of commercial space products and services. They see spurts of activity in the form of research grants and pilot programs but wonder if the Pentagon will use commercial services in a major way like NASA does with its space transportation and exploration programs. 

Space venture investors and analysts speaking at the Feb. 23 Chamber event said the industry is perceiving some demand signals, but they would like for these signals to be amplified and transition into actionable commitments in the foreseeable future. 

The new reality

Venture capitalists have traditionally preferred quick returns from rapid growth companies. But with today’s tough fundraising environment, VCs have come around to the reality that defense contracts offer a steady stream of business, even if the Pentagon’s deliberate timelines don’t match the VC mindset. 

The DoD market is too big to ignore given tighter access to capital, said Andrey Yoffe, managing director of BMO Capital Markets.

“Everyone loves to bash the government but I think that in the last couple of years the narrative has changed,” Yoffe said. “The fact that we have so many new venture funds that are backing defense companies is incredible,” he added. “We’ve never had that before.”

Over the past year, said Yoffe, “the biggest issue that we saw was that the commercial markets kind of went away as a customer. And so the reliance on the government has increased.”

However, the defense program timelines can be problematic for VCs. Yoffe’s firm, for example, was considering backing a company offering a so-called virtualized constellation of imaging satellites. That is a software-based service for accessing commercial imagery from multiple sources. “It simply became not a viable company, because everything was in year five and year six,” said Yoffe. “Today you need some revenue upfront … and not just promises that in year five or six, we’re gonna get there.”

Justin Cadman, co-CEO of the market research and consulting firm Quilty Space, said programs such as SDA’s are signs of “good progress, but I think there’s still a long way to go.”

Investors have to balance the risks of pursuing commercial opportunities against the risks of doing business with the government, Cadman said. 

“Investors dislike uncertainty,” he said. But they could deal with the uncertainty in government programs by better understanding whether small projects have a realistic chance of transitioning to revenue-generating opportunities. 

“That helps give people a lot more faith in what that future looks like and ultimately to finance that future,” he said.

If a defense project doesn’t have a future, “you really have to hope there’s going to be a commercial market that develops quickly, and there’s a lot of work to be done there to understand how do we develop them in a way that’s sustainable.” It’s also important to avoid getting distracted by “shiny objects,” Cadman said. 

Commercial imagery market

One of the complaints from business executives is that the Space Force has not identified what activities it plans to commercialize, although it continues to fund Small Business Innovation Research (SBIR) grants and other so-called “pathfinder” programs to assess commercial technologies. 

“SBIR and pilots are good for experimentation but it’s not good for sending a signal to the market,” said David Gauthier, chief strategy officer at the consulting firm GXO Inc.  

He pointed to the National Reconnaissance Office’s 10-year commercial partnerships with three companies that provide electro-optical satellite imagery, agreements worth nearly $5 billion. “That’s probably the biggest signal we have on record,” Gauthier said. “That is a massive market signal.” 

Companies want to see the Space Force follow suit in areas like commercial data analytics and imaging of space objects, for example, said Gauthier. “If they said there’s billion dollars for the next 10 years, I think that’d be a clear signal saying they have significant capital set aside for this, and it’s not just small pilots.”

Not a ‘linear path’

Defense agencies have done a good job supporting commercial space businesses and fostering innovation, said Christopher Harris, global head of Aerospace UBS Defense and Government Services.

“The government is doing its part, although slower than a lot of people would like to see,” said Harris. But investors are now sophisticated enough to understand that getting from a SBIR award to a major contract is not a linear path, he said. “Ultimately, it is on the industrial base to drive that innovation. And then the money will naturally follow those who succeed.”

He mentioned “other transaction authority” agreements as an example of the government partnering with industry in meaningful ways. “That provides flexibility for companies and for the government to procure new capabilities without necessarily going through programs of record,” he said. “All that has been very good.”

Investors are encouraged by “roadmaps” the government publishes for its future tech needs, he said, but it’s unclear for many companies how those roadmaps are connected to procurement initiatives.

SDA is a ‘real market’

The Space Development Agency is a Space Force organization building a low-Earth orbit constellation by relying on a broad base of suppliers for commercially produced small satellites and laser communications terminals.

SDA’s budget in 2020 was roughly $20 million. The 2024 request is over $4 billion. “That certainly shows that SDA as a market is real, and that market is going to be consistent at or above $4 billion a year in perpetuity,” the agency’s director Derek Tournear said at the Chamber conference.

Tournear said he is concerned that some investors view SDA as a “nice to have” customer but put more of their focus on speculative pie-in-the-sky markets. “If you force companies to focus on those at the expense of the market that is real, then you can actually hurt them and you’ll hurt me in the process, as they won’t be able to supply SDA because they’ll lose focus.”

“I want every company that we are doing business with to have other sources of revenue other than DoD,” Tournear added. “The only thing that I’m advocating is to make sure you don’t forget that we’re a constant market while you’re chasing these other markets.”

Kirk Konert, managing director of the private equity firm AE Industrial Partners, said SDA has helped the satellite industry not just by placing orders but also by forcing them to lower costs and become more competitive. 

AE Industrial Partners in 2022 acquired a majority stake in one of SDA’s major suppliers York Space Systems.  

SDA buys satellites under fixed price contracts, and some defense companies are pushing back because it exposes them to potential losses. “We think that’s a good thing for the industry, to provide better technology at a cheaper cost,” Konert said. 

‘Stuck in the innovation cycle’

Gauthier pointed out that, outside of SDA, some of the space programs in DoD remain “stuck in the innovation cycle.”

The space industry sees vital economic and security implications in mapping out the future defense space market, which is why companies decided to bring the U.S. Chamber of Commerce into this discussion, said Gauthier. 

It’s not only about corporate bottom lines but critical technological advantages that hang in the balance as the Pentagon signals its approach, he said. 

For this conference at the U.S. Chamber, he said , “we wanted to try to bring financial executives, government leaders and industry leaders together to actually talk about this issue, and see if we can create new financial incentives and maybe some new government behavior and policies that would help support the sector.”

DoD has come a long way establishing programs of record for sectors like launch services and satellite communications, and now the question is whether there will be similar opportunities for other commercial space services that investors are funding, he said. 

These include satellite imaging and weather services in support of military operations, in-space remote sensing, on-orbit servicing and manufacturing and others. But “there’s no program in the DoD to move those into mainstream operations at scale,” Gauthier said.

Mandy Vaughn, founder of GXO Inc. and a member of National Space Council’s User Advisory Group, said the goal is to get DoD to rely on commercial industries for mainstream activities, not just as an “augmentation,” and to fund commercial services as substitutes for bespoke government systems. 

“We still have not bridged that gap,” she said. 

There are still concerns about trust and technical readiness of commercial systems. If those issues can be overcome, said Vaughn, then the commercial industry will be less of an “ancillary thing” and DoD will partner with private industry like NASA has with companies that provide cargo and commercial crew services to the International Space Station. “That’s a different level of integration into your day to day ops that the Defense Department just isn’t looking at yet.”

Forthcoming Space Force strategy

 Some clarity on the way forward may emerge in a U.S. Space Force strategy document outlining how it will partner with the commercial space industry. The strategy is being written in collaboration with the Pentagon’s space policy and is expected to be released soon.

Frank Calvelli, assistant secretary of the Air Force for space acquisition and integration, said the industry will find the blueprint very valuable. 

“I do think the government needs to figure out how to send a demand signal,” Calvelli said Feb. 23 at the Center for Strategic and International Studies. 

“The strategy that is going to come out of the Space Force is quite good,” he said. “I was really impressed with the fact that we say: ‘These are things that we think are inherently governmental, like nuclear command and control, like missile warning. But these are other things that we think the commercial market may play a bigger role in, like space domain awareness, like satellite communications.”

“That strategy, when it comes out, is going to help signal where we see commercial playing a bigger role for us, as opposed to just trying to guess,” said Calvelli.

“We’re very fortunate that the space economy has an amazing set of companies doing really cool things in space,” he said. “And so I think the opportunities are almost endless.”

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