The Other Side of the Coin: A VC Perspective on Space Tech

Get a new perspective on #NewSpace! On the #NextSpace broadcast, Rachana Mamidi and special guest interviewer Ivan Kosenkov sat down with Maxim S., Managing Director of Atlas Ventures, a VC fund focusing on Southeast Asian markets. He provided a sharp insight into the vantage point of a VC fun stepping into the realm of space technology. This is an abridged transcript, you can listen to the entire conversation on Spotify.

Rachana: So what really made you think of space imagery or of space technology at all in the first place? 

The space economy is huge. It's already 400 billion. It's going to be 1 trillion at some point in time based on multiple sources. And then if you look at the sheer number of things happening, in the number of launches, for example, you'll see that it's a 10X growth in ten years.

VC is just starting to catch up.

We are a Southeast Asian-focused fund, but Southeast Asia as a region, in terms of VC, is probably ten years behind the U.S. and Europe.

Obviously, now it's predominantly led by governments, as everywhere else. But we all started seeing some companies in the space. We see companies like New Space in Singapore, Spectral, also in Singapore, and a couple of others that are focusing on some applications. Mostly on connectivity issues in Asia and Southeast Asia, because this is one of the areas that is still highly underdeveloped.

Now that you mentioned the intersection of other technology and space technology, especially since you've invested in a bunch of companies related to cybersecurity. Is that what triggered your whole thought process of considering space applications?

We made a couple of bets in cybersecurity, post-quantum cryptography is one thing that is getting more and more popular. And we looked at a couple of companies that specifically look into post-quantum cryptography for satellites

One thing that prevents space tech from getting a lot of VC attention is just regulation, which is insane. You have to go through and jump over a lot of hoops just to make that happen. In order to invest in the US, for example, as a Singaporean fund, we have to go through the CFIUS Regulation, which is a special law that is preventing foreigners from buying a significant stake in American companies, especially when those companies possess double usage applications. 

We mostly look at companies that are sort of enablers. There are companies that help us to do our due diligence, companies that by using satellite images help to assess ESG and climate scores for our companies.

And this is getting more and more important for us. Our LPs come from Europe and they ask us a lot about that. There actually was a meeting in Munich with one of our LPs that actually specifically asked about satellites and the way to make climate assessment more accurate.

Ivan: Singapore holds the third place on private investment into space tech. When I first saw this figure, I was a bit amazed. Do you know what are the investment activities in Singapore? Who invests in what in Singapore in space tech? 

When you see that Singapore is taking a leading role, say, in terms of the number of companies, number of unicorns–I’ll get to your question, this is just to set the context–it’s because a lot of companies are just incorporated in Singapore. So this number could be skewed by that. Obviously, Singapore benefits from this in a big way because when you incorporate a Singaporean company, you have to register your IP in Singapore, and when you register your IP in Singapore.

So getting to your question, it's led by the government and government-owned companies. So the number that I know that Singapore invested is not that much, it’s around 150 million SGD in research and development of space capabilities applicable to key industrial sectors. So when Singapore invests, they give it to Singapore. They are super-rational when it comes to investments.

It's mostly government, government-linked companies, and universities. It's probably going to be like that in the next ten years. And the reason being, the very simple financial reason is just ROI being something tough to determine. As a VC, we don't have such a horizon as governments and government-owned companies.

We can't plan for like 30, 40 years, 50 years. We need to return the capital to our LPs in ten years. So we need to understand how this thing is going to be commercialized, how are we going to sell it, and what are going to do with this? And in space tech, because precedents are very minimal, we still can’t justify investment sometimes.

Ivan: Recently we have seen an influx in private equity capital as well. But even if it is fueled by VC money, the sales are mostly made to the government. Do you see this changing?

As I said, the only way this thing can change dramatically is by reducing the cost of using the products of the satellite. There are a lot of forecasts about this that say it is going to drop by 100 times by 2040. It’s like the internet that emerged in the 1960s. 

Big private equity funds definitely use space tech a lot in their due diligence work and big hedge funds as well and private equity funds. But the problem with Southeast Asia is that we just don't have those big funds for now. We do have some, but it's just not enough to build a company specifically with that market.

There are just not enough clients for them. Even if they pay millions of dollars per year, which they don't, that's still not enough. So it's kind of a chicken and egg type of problem, really.

Rachana: You mentioned that most of your LPs are from Europe and they are encouraging you to focus more towards climate change mitigation problems. So do you have any LP's from the Southeast Asia region and what kind of areas are they interested in?

For the first fund, we didn't have anyone in Southeast Asia. Only for the second fund, we'll have some LPs coming from Singapore, but mostly family offices and high-net-worth individuals. Unfortunately, again don't want to offend anyone, but obviously, climate tech is not on their agenda at all. Right. For climate, they’re obviously interested as individuals. 

We invested in a couple of climate tech companies, but this is something not critical for that, right? They're not investing in VCs for us to make an impact or positive impacts on the Southeast Asian region. They're investing for their own reasons such as obviously ROIs, plus a lot of LPs invest just to gain access, just to get some knowledge on this, on the frontier sectors of tech.

Rachana: Now that you mentioned ESGs, how do you at Atlas Ventures compute the ESG scores? And VC funds in general, do they just outsource the whole ESG assessments to other companies?

I had to do a lot of things myself. You kind of outsource it. There are companies like Offseted. They're helping you to structure all the data. But then you receive a call from the CEO of one of your portfolio companies who says “Come on, man. A 25-question questionnaire? Do I need to allocate, like, a couple of hours of my life to do this?”

And the supply chain. We're happy to give it to you. And thanks a lot for doing this for free. Because, for a  lot of companies, we're doing this for free for our portfolio companies. And if they were to do this themselves, they'll pay tens of thousands of dollars just for this exercise. I believe it's a part of our value add to some of those portfolio companies.

Ivan: The thing that I really understood is that regional VCs would rather attempt to invest in application than hardware. Investing in hardware, for many VCs, is still a red flag. What are the barriers against investing in companies building hardware?

It's a good question. I mean, partially why there is not enough funds investing in space tech is because of the nature of this being hardware mostly. Obviously, there are some byproducts of this or applications that are on the software end but you need to invest in the guardrails first. You have to build the infrastructure.

We had a case when we had a manufacturer who in assembling our equipment used [pre-used] components. And we didn't know about this. We just learned about it when we shipped to our customers and [they] obviously were not super happy.

It's a good question that dictates why investments in space tech are largely government-driven and R&D-focused because hardware is hard and a lot of things need to be done right and it's very, very expensive and the payback is very long.

But sometimes you have to invest in hardware for things to work, right? You have to build those guardrails, otherwise, you can't build any applications on top of it. So it's a railroad type of solution. Someone has to invest in railroads and historically this has been very unprofitable, but without railroads, we wouldn't be here now.

Rachana: I mean, as someone who works with hardware in the space sector, you are right. Space is hard. Hardware is much harder. But do you see this kind of attitude among your high-net-worth individuals from Southeast Asia or Europe or anywhere else who want to place these kinds of long bets?

Yeah, for sure. Again, this is, as I said, like a lot of LPs, especially high net-worth individuals or some family offices, they do not invest exclusively to make money out of VC funds, and they are all f smart people who understand that a lot of VCs don't make any money. Because at the end of the day, they are super risky. By definition, it’s’ a venture, right?

You don’t know where it goes. I mean, it could go to zero or it could go to billions of dollars. So, yeah, I mean, liquidity is a problem. A SPAC helped it out, but with the current market, I don’t see liquidity being solved at all. 

Ivan: What are the exit strategies for VCs for this kind of domain? We have seen some SPACs, but most of them have performed poorly after going public. 

There are really a limited number of ways you can do this right now because (a) if you're talking about trade sale, there are not many acquirers. So, it is the problem of concentration of acquirers. They know there are a few of them that dictates the price at the end of the day.

So you probably can't expect a really good return. So trade sale is possible. But again, historically, selling a hardware company with a lot of working capital needs and all has been really, really tough. So it's a cash flow problem. So I see the only way that is possible for space tech is being able to attract as much government funding as possible and become self-sustainable and maybe at some point of time to file for an IPO and go public via either SPAC, direct listing, or just the standard route. 

Ivan: In a nutshell, from what I have heard, Southeast Asia is not an easy market for space tech companies because the government funding is still relatively low, plus you have the problems of limited access to the workforce and in matters of regulation. But it is still growing with the use of space data and also environmental monitoring and ESGs are going to be hot topics in the coming years. Would you add something to it as well?

I think you pretty much covered it again. We're definitely not the pioneers in this space. I hear this kind of conversation over and over again. I just wish that this translates into actual investing at some point in time and as a fund, we'll continue looking for good investments. And obviously, if you see something interesting and, you know, any good teams building something, just send them our way.