The space industry is experiencing a significant shift in venture capital investment, with startups increasingly turning towards defense and intelligence applications to secure funding. This trend, discussed at the SmallSat Symposium in Mountain View, California, marks a departure from the previous emphasis on purely commercial markets.
Timur Davis, investment director at Munich Re Ventures, noted that “One topic that has sort of started to emerge in the past couple of years, but really reached a head last year is the emergence of pure defense tech investing.” This reflects a change from a few years ago when startups were encouraged to prioritize commercial applications.
Companies like Voyager, Planet, and Redwire are among those expanding into the defense sector, fueled by increased Pentagon investment in space technologies. Raphael Roettgen, founding partner of E2MC, highlighted the need for both space sensing and hypersonic interceptors, stating, “It’s basically a ton of space sensing on the one side, and then you need a ton of hypersonic interceptors.”
Chris Thein, CEO of EOI Space, pointed out that over 80% of the Earth observation market already caters to defense and intelligence needs. “We’ve definitely seen a shift in VCs that have interest in that, which is helpful for us,” he observed. However, industry veterans caution against solely chasing defense contracts without considering the long-term implications.
Raphael Roettgen warned, “Your mission is to build a product or service that adds value to someone. Don’t get caught up in fads,” comparing it to the 1990s internet bubble. Meagan Crawford, founder of SpaceFund, emphasized the ongoing challenge of cash flow for many startups, stating that “it’s about that ever-important next contract payment from the U.S. government customer.”
Delayed government payments and complex regulations contribute to cash flow problems, with Crawford adding, “I have seen more times than I can count startup company CEOs ready to have a panic attack or a heart attack because a contract payment that was supposed to come through is held up.”
Ari Juster, chief operating officer of Starfish Space, advocates for a balanced approach, emphasizing the importance of focusing on customer needs rather than simply following market trends. “You really have to anchor your business to what are the problems that I’m solving for my customers,” he stated.
The U.S. Space Force’s reliance on commercial providers has opened opportunities for various business models. Greg Smirin, president of Muon Space, noted, “There’s really a lot of ways, whether you’re 100% focused on defense or dual use, to be able to be true to yourself … and also leverage what’s really a critical national security need.”
Michael Brown, partner at Fenwick & West, warned against superficial pivots to defense, advising investors to discern between genuine capabilities and "shiny decks". The consensus among panelists is that the trend toward defense focus will likely continue, driven by market demands and investor preferences. As Noel Rimalovski of GH Partners succinctly put it, successful space companies are increasingly catering to defense and intelligence sectors “because that’s where the money is.”