Private funding in commercial space startups dramatically outpaces government investment but venture capital (VC) could wane if the Defense Department fails to quickly boost its contracting with these companies, potentially depriving the DoD of key space technologies, a group advocating for VC-backed national security companies says in new report.
Startup commercial space companies—excluding SpaceX—that make up 33 of the top 100 businesses in the Silicon Valley Defense Group (SVDG) National Security 100 list have raised $7.7 billion in venture funding so far yet have only received $895.5 million in government contracts, the report says.
Many of these companies are pursuing dual-use technologies, meaning they have capabilities that can be sold to government and commercial customers. The danger stemming from under investment by the DoD in the commercial space sector is that the VC community begins to withdraw from the market because it doubts a return on its investment.
“Without an increase in substantial contracts from government customers, it is not inconceivable that the commercial space sector could begin to shrink in terms of both the number of companies being founded in that industry, and the number of companies actively engaging with government customers,” SVDG says in the Sept. 28 report.
The report also warns that in some cases, such as commercial satellite imagery firms, the commercial market is still early stages and not mature enough to support these companies.
“In these cases, especially when the capabilities are pertinent to national security, the government must play an outsized role in providing funding to ensure the health of the commercial space market,” SVDG says.
The report’s observations are essentially the same as one SVDG published in July examining larger national security startup landscape (Defense Daily, July 14). The earlier report was released in conjunction with the publication of the group’s top 100 list of VC-backed national security companies.
The report highlights that in the first quarter of 2022, venture capital investments dropped to an eight-year low.
“A decline in the health of this industry would jeopardize the DoD’s ability to access innovative technologies in the space domain at a critical juncture in which China is rapidly expanding its own space-based capabilities,” SVDG says.
SpaceX is the top company in SVDG’s list, although the company is now the routine beneficiary of launch contracts for DoD, NASA, and commercial entities. The report provides a case study of how early investments by DoD and NASA in SpaceX, along with a clear line by NASA between research and development funding and future launch contracts, helped pave the way for the company’s success.
Of the 34 space companies in the National Security 100, nine are developing technology for in-space infrastructure, eight are in the launch business, six are involved with satellites and sensing, six in propulsion, three are in logistics, and two are pursuing satellite internet services.