Analysis: Rocket startups face adapt-or-die moment amid investment drought

Astra Space

17/04/2023 11:00

By Joey Roulette
       WASHINGTON, April 17 (Reuters) - Demand for sending
satellites into space remains strong, but U.S. rocket startups
are taking drastic measures to survive a tight funding
environment where fears have been exacerbated by the bankruptcy
of Virgin Orbit.
    The industry faces an interesting dichotomy. Demand has
surged from launching a few satellites on small rockets to
launching swarms of satellites at once using bigger rockets,
even as investors shy away from the sector in search of safer
bets.
    Venture investment in space startups has dropped 50%
year-over-year in 2022 to $21.9 billion, according to VC firm
Space Capital. 
    As the cost of capital rises with the Federal Reserve's
interest rate hikes, investors are less incentivized to fund
capital intensive projects that do not have a clear revenue
stream or path to profitability, leaving many space startups
scrambling for funds.
    "I've never raised capital in a harder market than the one
we're in right now," Firefly Aerospace CEO Bill Weber said. "The
I word and the R word - recession and inflation -  make the
investment market conservative and a little more cautious."     
  
    The failure of billionaire Richard Branson's Virgin Orbit,
which filed for bankruptcy this month, has only ratcheted up 
pressure on rivals trying to keep up with Elon Musk's SpaceX,
Rocket Lab  RKLB.O  and the Boeing  BA.N -Lockheed Martin
 LMT.N  joint venture, United Launch Alliance.    
    Texas-based Firefly is trying to mass-produce its
medium-sized rocket, while developing a larger launcher under a
new partnership with Northrop Grumman  NOC.N .    
    Fresh off celebrating its Alpha rocket's orbital debut last
October, Firefly tried to raise $300 million by year-end to
become cash-flow positive. By mid-February, it had only raised
$30 million according to regulatory filings, although Weber said
since then the company had reached about 75% of target.
    Firefly expects to hold another funding round in mid-2024,
Weber said.
    Relativity Space said last week it was ditching its
centerpiece small rocket, Terran 1, for a larger planned rocket,
Terran R, a decision roughly a year in the making as demand for
small rockets faded, CEO Tim Ellis said in an interview. The
Long beach, California company to date has raised $1.3 billion,
compared to Firefly's total $390 million which includes some
funds from the ongoing fund-raising effort.
    "It was a lot better to just put those resources into Terran
R because that's going to be a way-more-profitable way to
allocate the team that we have," Ellis said.
    The bigger rocket's planned debut in 2026 will leave the
company without any missions for roughly three years, but Ellis
said he is not worried about future funding and declined to say
when the company would do another funding round.
    Astra Space  ASTR.O , which ditched its small Rocket 3.3 for
a planned, larger Rocket 4 in the next few years, has struggled
to bring its stock price above $1, facing delisting threats from
Nasdaq. Astra declined to comment on its financial struggles.
    Firefly and Astra have added other business lines to make up
for lost revenue, while Relativity has said its 3D printers used
in rocket construction will be eventually employed for other
products.
        Firefly, which was forced by U.S. officials in 2021 to
sever its Ukrainian ties through Noosphere Ventures over
national security concerns, counts a lunar lander named Blue
Ghost as a "very profitable" line of revenue, Weber said.
    "I know Firefly's management is very proud and vocal about
Blue Ghost, but let's hope they can walk the walk without the
Ukrainians," Noosphere founder Max Polyakov told Reuters.
    Despite the startups' struggles, launch demand has soared
after sanctions following Russia's invasion of Ukraine cut off
access to Russian rockets. Recent failures with Europe's
Arianespace's Vega-C rocket have added to demand in the U.S.,
outstripping the number of available rockets.
    Shared missions to space on SpaceX's Falcon 9 rockets, a
cheaper, so-called rideshare option for satellite companies that
helped kill the business case for small rockets, have taken some
of that demand, but much of it remains.
    Private plans to deploy mega-constellations, vast swarms of
satellites in low-Earth orbit, have also given launch startups
hope for future demand.
    "The industry is now behaving as a more rational,
capitalistic industry," Erich Fischer, a senior partner at Bain
and Co who advises space companies, said. "It's never behaved
that way before, ever."

 (Reporting by Joey Roulette, additional reporting by Krystal Hu
in San Francisco and Joanna Plucinska in London, editing by Ben
Klayman and Chris Reese)
 ((Joey.Roulette@thomsonreuters.com; 7034696632;))