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WASHINGTON — At a recent U.S. Chamber of Commerce event, space industry executives and investors grappled with unanswered questions about the Pentagon’s plans to commercialize its activities and increase its reliance on civilian technology.
Business leaders say they see bright spots in defense markets, including the Space Development Agency (SDA), which is building a proliferating constellation of low-Earth orbit satellites for military communications and missile tracking. He said he is purchasing hundreds of commercial satellites for the purpose.
But financiers who support companies in the field want the Pentagon to adopt commercial space products and services more broadly. They see increased activity in the form of research grants and pilot programs, but wonder if the Pentagon will make extensive use of commercial services, as NASA does with its space transportation and exploration programs. I have doubts.
Space venture investors and analysts who spoke at the Chamber of Commerce event on February 23 said that the industry is seeing some demand signals, but that these signals could be amplified and become viable in the near future. He said he hopes the initiative will move forward.
new reality
Venture capitalists traditionally prefer quick returns from fast-growing companies. However, today’s challenging funding environment has led VCs to recognize the reality that defense contracts provide a steady stream of business, even if the Pentagon’s intended timelines do not align with VC thinking. Ta.
Andrei Ioffe, managing director at BMO Capital Markets, said the Pentagon market is too big to ignore as access to capital tightens.
“Everyone loves to bash the government, but I think the narrative has changed over the last few years,” Ioffe said. “The fact that so many new venture funds are backing defense companies is incredible,” he added. “We’ve never had anything like that before.”
Over the past year, the biggest issue we’ve seen is that the commercial market is leaving us as customers. This has led to increased dependence on government. ”
However, the schedule of defense programs can be problematic for VCs. For example, Mr. Ioffe’s company was considering supporting companies that provide so-called virtualized imaging satellite constellations. This is a software-based service for accessing commercial images from multiple sources. “Everything ended in the fifth and sixth years, so the company was no longer viable,” Yoffe said. “We need some revenue up front today, not just promising that we’ll get there in five or six years.”
Programs like SDA are “a sign of good progress, but I think we still have a long way to go,” said Justin Cadman, co-CEO of market research and consulting firm Quilty Space.
Cadman said investors need to balance the risks of pursuing commercial opportunities with the risks of doing business with governments.
“Investors hate uncertainty,” he says. But a better understanding of whether small-scale projects have a realistic chance of transitioning into revenue-generating opportunities could help address uncertainty in government programs.
“This gives people more confidence in what their future looks like and ultimately allows them to fund that future,” he said.
If there’s no future for defense projects, “we really have to hope there’s a rapidly developing commercial market. What we need to do there to figure out how to develop them in a sustainable way.” It’s also important to avoid getting distracted by “shiny objects,” Cadman said.
commercial image market
One of the complaints from business executives is that the Space Force continues to fund Small Business Innovation Research (SBIR) grants and other so-called “pathfinder” programs to evaluate commercial technologies. However, the company has not disclosed what kind of activities it plans to commercialize.
“SBIR and pilots are good for experimentation, but bad for sending a signal to the market,” said David Gauthier, chief strategy officer at consulting firm GXO.
He noted that the National Reconnaissance Office has 10-year commercial partnerships with three companies that provide electro-optical satellite imagery, valued at nearly $5 billion. “This is probably the largest signal we’ve recorded,” Gauthier said. “This is a huge market signal.”
Gauthier said companies are hoping to follow the Space Force’s lead in areas such as commercial data analysis and imaging of space objects, for example. “If they say they have $1 billion in funding over the next 10 years, I think that’s a clear signal that they’ve set aside a lot of capital for that. It’s only for small pilots. Not.”
Not a “straight path”
Christopher Harris, global head of aerospace UBS defense and government services, said defense agencies have done a good job of supporting commercial space business and fostering innovation.
“The government is doing its job, albeit slower than many would like,” Harris said. But investors are now sophisticated enough to understand that the path from an SBIR award to a large contract is not a straight line, he said. “Ultimately, it’s the industrial base that drives that innovation. Then the money will naturally follow for those who are successful.”
He cited the “Other Trading Authority” agreement as an example of the government partnering with industry in a meaningful way. “This gives businesses and governments the flexibility to procure new capabilities without necessarily going through a recorded program,” he said. “Everything was very good.”
He said investors are encouraged by the government’s published “roadmaps” for future technology needs, but it is unclear how those roadmaps link to procurement efforts for many companies. It is said to be unknown.
SDA is a “real market”
The Space Development Agency is a Space Force organization that relies on a broad supplier base of commercially produced small satellites and laser communications terminals to build its low Earth orbit constellation.
SDA’s budget for 2020 was approximately $20 million. The amount requested in 2024 will exceed $4 billion. “This certainly shows that the SDA as a market is real, and that market will stabilize at more than $4 billion per year in perpetuity,” said Derek Tournier, the agency’s director at the Chamber of Commerce. stated at the meeting.
Mr Tournier said he was concerned that some investors were focusing on speculative pie-in-the-sky markets while viewing SDA as a “nice to have” customer. Ta. “Forcing companies to focus on them at the expense of real markets could actually hurt them, and hurt me in the process. Because we won’t be able to supply it.” Concentrate. “
“We want every company we do business with to have a source of revenue other than the Department of Defense,” Tournia added. “The only thing I would advocate is that while we are chasing other markets, we should always remember that we are the market.”
Kirk Connert, managing director of private equity firm AE Industrial Partners, said the SDA has helped the satellite industry not only by placing orders, but also by forcing it to cut costs and become more competitive.
In 2022, AE Industrial Partners acquired a majority stake in York Space Systems, one of SDA’s major suppliers.
SDA buys satellites under fixed-price contracts, but some defense companies have objected to the deal, saying it exposes them to potential losses. “We think that being able to provide better technology at a lower price is good for the industry,” Konert said.
“Can’t get out of the innovation cycle”
Gauthier noted that outside of the SDA, parts of the Pentagon’s space program remain “stuck in the innovation cycle.”
The space industry believes economics and security are important when planning for the future defense space market, which is why the companies chose to involve the U.S. Chamber of Commerce in this discussion. Gauthier said.
It’s not just about the company’s bottom line, he said, but also the important technological advantages that the Department of Defense is balancing in suggesting its approach.
“We’re bringing together financial executives, government leaders, industry leaders to really talk about this issue and look at new economic incentives and maybe government “We wanted to see if we could create new actions and policies.” We need policies that help support this sector. ”
While the Department of Defense has come a long way in establishing record-breaking programs in areas such as launch services and satellite communications, the question now is whether other commercial space services are being funded by investors. The question is whether similar opportunities exist in other countries, he said.
These include satellite imagery and weather services in support of military operations, remote sensing in space, and in-orbit servicing and manufacturing. But “the Department of Defense doesn’t have a program to move these into mainstream operations at scale,” Gauthier said.
Mandy Vaughn, founder of GXO Inc. and member of the National Space Council’s User Advisory Group, said the goal is to force the Department of Defense to rely on commercial industry for mainstream activities, rather than just “augmenting” them, and to offer commercial services as an alternative. said that it is to provide funds to the For bespoke government systems.
“We haven’t been able to close that gap yet,” she said.
There remain concerns regarding the reliability and technical readiness of commercial systems. If these problems can be overcome, commercial industry will no longer be an “ancillary,” and the Department of Defense will partner with private industry, just as NASA partners with companies that provide cargo and commercial crew services to the International Space Station. There will be a partnership, Vaughan said. “This is a different level of integration into day-to-day operations that the Department of Defense has not yet considered.”
Future Space Force Strategy
Future directions may be revealed in a U.S. Space Force strategy document outlining how it will work with the commercial space industry. The strategy is being developed in conjunction with Department of Defense 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 extremely valuable.
“I think the government needs to find a way to send a signal of demand,” Calvelli told the Center for Strategic and International Studies on February 23.
“The strategy coming out of the Space Force is very good,” he said. “I was really struck by the fact that we say, ‘These are things that we think are essentially government things, like nuclear command and control and missile warning. But there are other things where we think the commercial market could play a bigger role, such as space domain awareness and satellite communications.”
“Once that strategy is announced, it will help us inform the situations in which we think commercials will play a bigger role for us, rather than just speculating,” Calvelli said.
“We’re very fortunate that the space economy is full of great companies that are doing really great things in space,” he said. “So I think the opportunities are almost endless.”
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