Chasing In-Space Unicorns : A Space Manufacturing Thesis

Brandon Waterbury | July 31 2023

Executive Summary

The space economy’s monetary value and potential for societal benefit is now understood to a greater extent than ever before. This increased awareness has led to a surge in venture capital (VC) and private equity (PE) investments across the industry over the last two decades. While the companies building rockets have enjoyed the lion’s share of attention throughout much of the current era of commercial space activity (known as “New Space”), it's important to remember that there’s more to the space economy than just launch vehicles. In fact, subtle parts of the industry are positioned to lead the next chapter of New Space. One of those sectors is in-space manufacturing (ISM), which is generally defined as, “the production of goods while in space”. ISM is bifurcated into “space-for-space” (produced in space for use in space) and “space-for-Earth” (produced in space for use on Earth). Space-for-Earth ISM holds significant potential in the short-to-medium term to yield valuable companies and valuable products. The sector is currently undervalued and underinvested and should be further researched in order to determine which specific companies and use-cases could most likely offer investors outsized returns. The conditions for the emergence and development of ISM have been set for the following three reasons:

1) The Market Potential and Societal Benefits of ISM Activities are Significant

ISM’s value stems from its access to the unique conditions of space, mainly microgravity, the lack of an atmosphere, and increased radiation levels[1]. These conditions offer the potential for manufacturers from diverse industries to produce materials they otherwise could not on Earth. Possibilities span from ultrahigh-quality fiber optic cable to advanced pharmaceuticals and artificial human tissue. This paper seeks to allow readers to extrapolate the full benefits of ISM technology across varied applications by focusing on the specific ISM use case of producing artificial retinas.?

2) ISM Investment is low Compared to its Capturable Value

The space economy has yet to reach an agreement on the timeline of ISM’s development. A 2022 survey of space industry executives revealed that only 48% of them believed that ISM technology was sufficiently advanced to operate at scale[2]. This uncertainty may explain why “pure play” ISM companies have only raised $70 million in funding through mid-2023, despite estimates that the sector’s short-term value could be as high as $2.8 billion[3]. This is ultimately a win for investors, who have the opportunity to enter the market before increased consensus drives valuations up and potential fund returns down.?

3) Key ISM Enablers are in Place and Commercialized

ISM’s emergence has been enabled by the steady decrease in the cost of two of its main inputs: orbital launch and satellite manufacturing. Because the business case for space-to-Earth ISM requires the frequent launch and subsequent return of material to Earth, any decrease in the price of these two critical inputs furthers the viability of the sector.

The Market Potential and Societal Benefits of ISM Activities are Significant

The unique conditions provided by ISM will facilitate the development of breakthrough products across industries and customer segments. While it’s beyond the scope of this paper to explore how each of these conditions apply to all possible manufacturing scenarios, it is possible to understand ISM’s far-reaching benefits by examining its use in producing artificial retinas.

Growing Artificial Retinas

LambdaVision, a startup incubated by the University of Connecticut, is developing artificial retinal tissue and conducting production experiments onboard the International Space Station (ISS)[4]. These ISM retinas are created by applying 200 individual coatings of protein onto a base structure, which can then be grafted onto the damaged portion of the patient’s eye. The tissue is extremely difficult to manufacture on Earth due to the inconsistent distribution of particles within each layer caused by gravity. However, microgravity results in each protein layer having a more uniform composition, which is essential for the tissue to function correctly[5]. LambdaVision plans to use their technology initially to treat retinitis pigmentosa (RP), a currently-incurable genetic disease that slowly breaks down the retina[6]. RP affects roughly 100,000 people in the United States and 1.5 million globally[7]. There’s also the potential to treat other eye conditions such as age-related macular degeneration (AMD), which is another incurable retinal disease and the world's leading cause of vision loss in older populations[8].

Market Validation

To validate the demand for ISM retinas it is best to reference other solutions which use different technology in an attempt to solve the same problems. In 2013, Second Sight Medical Products was granted FDA approval for their Argus II Retinal Prosthesis System as a means of treating late-stage RP[9]. Argus II works by using a pair of glasses with a built-in camera to feed data to an electrode array implanted behind the patient’s eye[10]. While a significant engineering triumph, Argus II could only restore a patient’s vision to a level worse than legally blind[11]. This ultimately led to its discontinuation because its serviceable obtainable market (SOM) was limited to the most severe RP cases[12]. Despite the commercial failure of Argus II, its worldwide sale of over 350 units validated the market for vision-restoring retinal implants[13].? LambdaVision also conducted a study in 2021 to discern eligible patients’ feelings towards devices similar to Argus II. The study found that 43.3% of respondents were willing to have the implant (33.3% answered with a “strong yes” and 10% a “weak yes”), while 56.6% were not[14]. It can be inferred that if 33.3% of patients were highly willing to have electronics implanted behind their eyes, a greater percentage of them would be open to receiving electronics-free ISM retinas.

Market Size

The Argus II can also be used to find a rough order of magnitude (ROM) value for the retinal implant market. With the required technology development, the biggest market for ISM retinas would be to treat AMD. As of 2019, there were 19.8 million cases in the United States, with 1.49 million of them experiencing severe vision loss[15]. If ISM retinas are priced similarly to an Argus II system ($100,000)[16], and 33.3% (from the aforementioned Argus II survey) of the 1.49 million severe cases are willing to have a procedure, then the current U.S. TAM would be $49 billion. That figure should be considered the market’s floor, because a portion of the 18.31 million non-severe cases still experience a level of vision loss and would likely be interested in an effective treatment. In 2019, the Centers for Medicare and Medicaid (CMS) set an average payment of $152,500 for Argus II and its surgery[17]. There is therefore a precedent of Medicare covering cutting-edge retinal treatments, which is critical when working with older patients.?

When analyzing the market from a long-term and global perspective, the TAM becomes even larger. There will be an estimated 288 million people worldwide with some form of AMD by 2040[18]. The largest concentrations being in Asia (113 million) and Europe (69 million). Assuming a 7.5% rate of severe cases (as with the U.S. in 2019)[19], there will be approximately 8.5 million people with severe AMD-induced vision loss in Asia and 5.2 million in Europe by 2040. At $100,000 per implant, with 33.3% of severe cases willing to have the procedure, the approximate TAM for those regions would be $280 billion and $173 billion, respectively.

ISM Investment is low Compared to its Capturable Value

Heavy Competition Within Established Sectors

The space economy is already sizable and forecasted to continue growing over the coming years. In 2016, Morgan Stanley estimated its value to be $350 billion, and predicted it would grow to over $1 trillion by 2040[20]. Their report suggests that growth will expand the number of sectors within the space economy and change their relative sizes. For example, 62% of the economy was made up of "Ground Equipment" and "Consumer TV" in 2016. But by 2040, the satellite broadband category is predicted to emerge and account for 48%, while ground equipment and TV are reduced to 30%[21]. Those with the urge to invest in the next “hot” company within an established sector should proceed with caution. A significant amount of time, effort, and money has already been spent by incumbents to build formidable “moats” around their businesses. The low Earth orbit (LEO) broadband constellations being developed by Amazon and SpaceX serve to illustrate the types of advantages held by established players across different verticals.

Though many view SpaceX as a launch provider, their main business is actually the Starlink constellation. The company’s first “moat” comes in the form of their in-house rockets. Not only are they the most price efficient in the world[22], but each launch is also “procured” at-cost since SpaceX is acting as its own customer. SpaceX also has permission to operate almost 12,000 Gen 1 and Gen 2 Starlinks[23]. This puts them at an advantage relative to other constellation operators who have yet to receive permission and will face increasingly stringent regulators.?

Amazon’s LEO constellation is being developed under the name Project Kuiper. Unlike Starlink, Project Kuiper has yet to launch any satellites, but Amazon has still succeeded in building an impressive set of moats. Their first moat is the ability to self-finance the entire constellation. SpaceX president Gwynne Shotwell said in 2018 that it would cost her company at least $10 billion to bring Starlink online[24]. Using that figure as a proxy for Kuiper’s cost, then Amazon can confidently afford its multi-year development using profit from its other operations[25]. Kuiper also received FCC permission in 2020 to operate their full constellation of 3,236 satellites[26]. This exposes them to less risk than others who are relying on multiple applications to close their business case.

Consensus Leads to Oversaturation

The space industry hasn’t reached a consensus on the short-to-medium term future of ISM. Deloitte surveyed 60 space industry executives in 2022 and found that they anticipate most investment into the industry will flow towards national security, satellite communications, and edge computing/artificial intelligence[27]. Only 48% of those executives believed the technology existed for large scale use of ISM[28]. This is ultimately a win for savvy investors, since a lack of consensus means the true value of the sector hasn’t been priced in.

This contrasts with other sectors where general consensus has led to a surge in investment followed by oversaturation. One of the most notable examples of this can be found in the small launch industry. As companies began launching more small satellites, the industry realized there was a need for a high volume of rockets that could ferry a handful of satellites each. The companies that formed following this “consensus” proceeded to raise $5.2 billion between 2020 and 2023[29]. However, the robust market for small launch vehicles did not materialize, with one report estimating its TAM was just $1.03 billion in 2021 and would grow to only $3.22 billion by 2030[30]. Of the companies founded to serve the small launch market, one had gone bankrupt (Virgin Orbit) by mid-2023, while several others had to increase the payload capacity of their rockets in an attempt to become competitive (Astra, Relativity, ABL Space Systems, Rocket Lab).?

ISM’s Uncertain Future Leaves it Unsaturated

Despite the doubts of some, published research so far suggests that ISM’s future is promising. In 2022, McKinsey conducted an analysis estimating the value that ISM businesses could capture in four different markets (pharmaceuticals, beauty/personal care, semiconductors, and food/nutrients). In the short-to-medium term, the TAM across those verticals is estimated to be $2.8 billion to $5.8 billion, respectively[31]. McKinsey acknowledged the difficulty in quantifying ISM’s TAM by saying, “In space, as in any nascent sector, the revenues from commercial growth opportunities are still uncertain”[32]. Considering how the passage of time has historically increased the utility of other space sectors (heavy launch, satellite communications, Earth observation), McKinsey’s estimates likely only take into account ISM’s early use cases.?

Even with the limited TAM that McKinsey felt comfortable predicting for ISM, the field has still received a low level of funding relative to other sectors. Cross-referenced searches on CrunchBase[33], The Space List[34], and Factories In Space[35] show that there are 19 companies operating in space-to-Earth ISM. Eleven of them are pure play and have raised approximately $70 million through mid-2023, 87% of which went to Varda Space Industries and Space Forge. Non-pure-play companies have disclosed $526 million in equity financing through the same time period, with 98% attributable to Axiom, Redwire, and Nanoracks. It is important to note that both Axiom and Nanoracks are focused on building private space stations, and Redwire is a public company with multiple business lines.?

This relative lack of funding is a clear sign to investors that there’s still time to enter the market before ISM’s utility is widely understood and the value of participating companies rise accordingly.

A Precedent for Undervaluing Breakthrough Tech

There is also a precedent within the space industry to undervalue breakthrough technology while it’s in its infancy. Even after SpaceX’s successful Falcon 1 flight in 2008, established players still didn’t accept that it had shattered the decades-old “truths” of rocketry[36]. Industry researcher Ashlee Vance described the sentiment of traditional aerospace companies at the time as, “They still viewed SpaceX as an oddity, a minor-league player…At best, SpaceX would end up bloated and expensive just like all the old-line companies”[37]. The aerospace establishment turned out to be wrong. As of July 2023, SpaceX is valued at $140 billion[38], while at the same time the century-old aerospace giant Boeing was valued at roughly $128 billion[39].

Key ISM Enablers are in Place and Commercialized

Enabler 1: Reduced Orbital Launch Cost

ISM’s emergence has been enabled in part by significant leaps in launch technology made over the past two decades. Launch costs have dropped from $8,100/kg (Atlas V) in 2002[40], down to $1,500/kg in 2018 (Falcon Heavy)[41]. Despite this substantial decrease, constant downward pressure remains on prices due to the development of new vehicles, the most famous being SpaceX’s Starship. Official pricing hasn’t been disclosed, but Elon Musk predicted in February 2022 that a full payload of 150 tons to LEO would cost customers less than $10 million[42], which equates to just $66/kg. Even if Musk is off by a factor of 10, and the final flyaway cost is $660/kg, it still represents a 56% decrease compared to Falcon Heavy.

The downward pressure is also coming from other companies who want to remain competitive in a market dominated by SpaceX. One of them is Rocket Lab and its in-development Neutron vehicle. Capable of carrying 13 tons to LEO[43], Neutron is targeting a price tag between $50 million and $55 million[44]. Though that equals roughly $4,250/kg (compared to Falcon 9’s $2,600/kg)[45], it is still a significant improvement over the historical alternatives to Falcon 9, like the Atlas V ($8,100/kg) and India’s PSLV ($8,500/kg)[46]. Legacy space companies have also stepped up to the plate with new vehicles. This can be seen with United Launch Alliance and their heavy-lift Vulcan Centaur, whose price per kilogram generally falls far below[47] its predecessor, the Atlas V.?

For ISM products to be economically viable they must be worth more than the cost to launch their raw materials into space. With every decrease in launch cost, more products will be feasible to manufacture, which increases the TAM of ISM companies, and therefore their potential value.

Enabler 2: Reduced Satellite Manufacturing Cost and Improved Supply Chains

Historically, satellites cost millions of dollars apiece to build. But that began to change in 1999 when professors from Cal Poly and Stanford invented CubeSats[48]. The CubeSat is an open-source dimensional standard for satellites, based around 10cm x 10cm x 10cm “cubes”. Enabled by the miniaturization of commercial electronics, a functioning satellite built using the CubeSat standard can cost as little as $200,000[49].?

Over 2000 CubeSats have been launched from around the world, including many from countries that lack traditional space programs[50]. To support this growing market, at least 511 companies have started to offer satellite hardware, software, and services[51] . There are 60 companies alone producing propulsion systems, and 40 that sell on-board computers[52]. Competition is so fierce that some groups have even broken industry norms by advertising prices on their websites[53].?

Because ISM requires building satellites in high volumes in order to transport raw material to and from space, a robust supply chain with stiff competition between suppliers will help drive down satellite costs. This decrease further contributes to broadening the number of products that can feasibly be made in space.

Risk Factors

All new ventures, especially those involved with the space economy, are inherently risky. While not an exhaustive list, there are several key business and technical challenges that could affect the ISM sector and the companies operating within it.

Business Risk

Fundraising

In order for ISM start-ups to operate and eventually become profitable, they need to raise a large amount of capital. However, the absence of a track record of successful ISM companies may cause investors to hesitate when asked to fund new ventures or participate in the subsequent rounds of existing companies[54]. Because existing ISM ventures are still in their research and development phases, and new entrants will take years to build prototypes, any widespread difficulty in fundraising could wreck the sector.?

Customer Acceptance

There currently are not any companies regularly producing ISM products and selling them at scale back on Earth[55]. Therefore, it could take time for potential customers to warm to the idea of using products manufactured in space. Developing and then publishing standards and test data will facilitate customer acceptance by demonstrating that ISM products are safe and appropriate for their particular use case. Failure to convince end-users that these products are safe and effective could result in challenges for individual ISM companies and the sector as a whole.

Technical Risk

Advances in Earth-Based Manufacturing

All else being equal, it’s cheaper and easier to manufacture a given item on Earth than in space. Because of this, commercial interests will likely continue to search for ways to replicate ISM’s benefits using terrestrial production methods. If advances in Earth-based manufacturing progress far enough that they can fabricate items of similar quality to those made in space, then most of the space-to-Earth ISM sector risks obsolescence.?

Orbital Debris and Kessler Syndrome

One of the downsides of increased orbital activity is the proliferation of space debris, which includes anything from disused rocket bodies to the tiny remnants of explosive bolts. But the common trait between all debris is the threat it poses to spacecraft. If enough debris is created, it’s possible that a runaway chain reaction will occur where pieces collide with each other and ultimately render certain orbits inaccessible[56]. This phenomenon is known as Kessler Syndrome, and it would present an existential risk to both the ISM sector and the entire space economy.?

Conclusion

In order to be competitive, investors must continuously search for disruptive technologies that enable companies to “leapfrog” their competition. But, anything with a high level of disruptive potential is going to come with uncertainty and risk, especially during early development. Therefore, it’s essential for investors to look past current technology readiness levels and instead focus on potential impacts at maturity. This thinking was successfully applied during the information revolution to facilitate the growth of what became some of today’s most valuable companies. While ISM business models differ from those who powered the information revolution, the importance of investing in order to capture the long-term benefits of nascent technology remains unchanged.

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