The space sector is coming to maturity

Mark is Seraphim Capital’s Managing Director and has 18 years of venture capital and technology investing experience. He is also on the board of Cavendish Capital. Prior to Seraphim he was at YFM Equity Partners serving on their main board for a number of years and working on the British Smaller Company VCT 1 and 2. He initially trained as an equity analyst and fund manager at Williams de Broe and Brewin Dolphin before moving into venture. He has a Degree in Accounting & Finance, MA in Economics & Finance from the University of Leeds and a range of professional investment qualifications.

Interview by Alfonso Delgado-Bonal.

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Seraphim Space Fund is based in the UK. Do you invest in UK startups only?

We are based in the UK, but we are a global firm; we invest everywhere. So far, we have invested in over 50 SpaceTech startups worldwide in seed, pre-A an A, and occasionally B.

2020 has been a “different” year, and we have seen the impact of COVID-19 in many aspects of our lives. How has the virus affected the productivity and development of your portfolio?

In reality, the pandemic has increased the productivity of our portfolio. Remarkably, 100% of the portfolio raised money during this unprecedented year, and that is because the companies adapted very quickly to the environment. With the lockdowns and restrictions everywhere, they relied on technology to do their businesses. They were able to meet faster and make more decisions, in many cases getting to a proof of concept quicker. If the situation extends too long, that might change, but until now, it has not affected our portfolio in a bad way. 

Access to space is getting cheaper, the number of space companies is increasing exponentially, and the number of investors is rising accordingly. What is that telling us about the industry?

Everybody who is invested in this sector is aware that there is going to be a significant risk of failure. There is a higher failure at the seed stage, and it reduces as you go through series A, and B, and beyond. Space is no different from any other sector from that perspective.

Sometimes, those who have been involved with this industry for a long time do not recognize it but we are at the foothills of the potential of LEO. We have been going to LEO for five or seven years, and there are still a very limited number of companies that have large constellations and are delivering on the promise of Leo. All of New Space’s promises are nowhere near being delivered against, so it is only appropriate that investors are starting to really pay attention now because it is still very early days.

I think what we might see is some consolidation by some of the players. Established companies using their maturity to acquire some of the companies that have great complementary technologies but have not been able to convert that into paying customers due to the pandemic. I think we might see some interesting relatively low-priced Mergers & Acquisitions that will take some of the players out of the market. Obviously, it is going to be some failures too, but overall what we are going to see is more money coming into the market, and more success.

In your opinion, what specific sectors are currently “hot topics”? 

Last year we developed this map about SmallSat constellations. I think this is a really good example of the market right now. Below the first line, you can find the companies that are just funded by grants or Angels and have not had the first Venture fund. There are potentially too many competing companies at that stage so you can see that there are certain elements of the market that are much more competitive than others. 

In the infrared and multispectral markets, there is a limited competition but when you look at Satcoms or IoT, you can see clusters of companies that will be looking for Venture funding. Therefore, radio signals or infrared might get easier access for Venture funding because there is less limited competition there.

This is the reason why we put out this kind of material, to help Venture capitalists in the market that do not about this market. As investors are getting more and more attuned to the space sector, they get more sophisticated in how they evaluate which companies they are going to start backing. The speed at which technology investors have matured their understanding of the sector is huge, and it is the same for every sector. Investors are very capable of getting to know the pros and cons of the different parts of the sector very quickly.

We read every day about the Space Force, the Artemis Accords, mega-constellations, SpaceX & Blue Origin, etc. Are we seeing a lot of hype in Space, or the investment is here to stay? 

There is clear evidence that growth-stage investors are coming into this sector and increasing their engagement in the sector. That is a demonstration that the sector is coming to maturity, bringing investors on board who are looking at investments under traditional views: how much money is this investment going to make; what is the profit that it is going to make; what is the risk; etc. For us, in early-stage investments, we expect a big proportion of them to fail but the investors who are investing at growth expect very low levels of failure. That is evidence of the market maturing but it is still very early on that level of maturity.

Where is the sector going? 

I think the space industry has had many years of growth because at this point we are interested in connectivity and data that is generated from platforms in space. We have not seen the benefit of that and the money that is earned from that yet. As soon as those investments start to pay off, which will be in the next 2-5 years, the investors like myself will be moving on to investing in space activities like data centers in space and manufacturing in space. After the next five or ten years, the next level will be about interplanetary living and such. That is what is great about the space market, that the next 20 years are pretty well mapped out. You can’t really say that for any other tech sector, and that is another reason why people like the space sector.

Imagine a startup looking for funding. What would be the best way of approaching you?

It is really easy to approach me, just send an email. Every single email that we get gets looked at. But you have to send something that makes me want to read it, which normally means that it is pretty short. In any case, you are still going to go into our deal flow because like most funds we have a process for inbound interest, but it might take more time.

If you have a good proposition, it will shine through, and if you do not, that will become apparent very quickly. And then, there is a crossover where people do have a really interesting business, but they are not able to articulate it very well. This is the reason why the number of accelerators is increasing so much, because they will help a technologist to be able to articulate their business in a language that investors like me want to read about it. At those accelerators, you are also introduced to investors so that is in reality the best way to proceed.