The Final Frontier 🖖🏾👽

A conversation about investing in space with Jeff Crusey

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Today, a conversation with Jeff Crusey from Seraphim Capital. You can listen to it here (Spotify), or here (Google Podcasts). I’ve summarised my favourite insights below.

Something special is happening in the aerospace industry at the moment.

Companies like SpaceX and Blue Origin are pushing the envelope of what is possible. New missions to the moon have been announced. Six space companies have been taken public by SPAC in the last six months alone.

There is undoubtedly a lot of hype. Virgin Galactic is looking like a seriously sketchy bet…both Chamath Palihapitiya and Richard Branson have dumped their stock since Social Capital took it public in October 2019. The market is incredibly busy… apparently last year, there were more launch companies started than there were satellites put into space.

Peak bubble? Perhaps. But, as is often the case, there may be method to the madness.

The emerging cold war between the West and China/Russia, combined with what can only be described as “the Elon Effect”, is turning our gazes once more to the stars.

We are on the cusp of moving from a world of earth-focused space innovation (“earth observation” technology), to a world of space-first technologies and economies. With the right momentum, space-based manufacturing at scale, permanent bases on the Moon and travel to Mars will all likely be possible in the coming decades.

I recently sat down with Jeff Crusey, to talk about investing in this sector in more detail. We covered Jeff’s journey into the industry and looked into his thesis.

This is the second conversation I have had on the subject recently: in January I chatted with Mark Cowan and Marc Dayas, both formerly of OpenCosmos, to get an operator perspective.

By all accounts, the space business is booming.

What an exciting time to be alive.

A bit about Jeff

What impressed me most in this conversation was Jeff’s boundless curiosity. He’s had a very interesting life, and also seems to have that rare ability to turn his hand to almost anything.

Having originally studied finance and economics, he started his career as an investment banker, but quickly tired of things. A short stint as a climate-focused VC followed.

He then spent some time building gallium nitrite silicon wafers (sounds easy), writing natural language processing algorithms (no big deal), and founding a varifocal optics and computer vision startup (whatever). 

Jeff also does a variety of pretty cool digital artwork in his free time. Check out his insta page and twitter feed:

A post shared by @jeffcrusey

Not your average banker-turned-VC, I think it is safe to say.

After the acquisition of his VR startup in 2019, Jeff decided to follow his passion - space. He moved to the UK - the homeland of his wife - and joined Seraphim, one of Europe’s leading space investors. 

Since then, the Seraphim team have made 9 investments, including 6 brand new ones. 

A golden age for space tech?

So what’s happening in space right now? Here's an overview:

  • The SpaceX effect
    Because SpaceX has been such a runaway success, we have investor FOMO. There is more and more interest from people outside of the core space investor community (i.e. more generalists). This is spinning the industry's flywheel attracting more talent, improving valuations and driving liquidity through SPACs.
    Take for example Magdrive’s seed round - 7 percent ventures invested alongside Luminous and Founders Fund. Would a pre-seed and seed generalist like 7pc have invested in a plasma propulsion company ten years ago? Would that company have even been founded?

  • More space companies going public via SPAC
    There have been at least 10 announced space SPACs in the last year. Perhaps there’s a bubble, but maybe there is also better alignment with the needs of these companies - lots of capital and long time horizons…

  • There are signs of mania, similar to the Dotcom bubble or the 2008 clean tech bubble. However, we are also laying important foundations
    These frothy periods are crucial in creating many of the big success stories of the future. Google, Facebook and many more great companies came out of the aftermath of the Dotcom bubble, and were only made possible by the telecoms infrastructure deployed in the 90’s (at great cost). Tesla came out of the clean tech bubble. If there is a space tech bubble within the Everything Bubble we’re currently experiencing, what might the future hold? Probably something good.

  • Patience and focus will define the winners
    When you’re cash-starved, you start to take projects and demo’s that are off-market and off-plan. Before you know it you’re building something that is nothing to do with your mission. This might seem like a good way to survive, but being fixated on the long-term vision instead is a superpower. It’s time horizon as a competitive advantage.

Jeff’s Thesis

So why is now a good time to invest in space? And what specific areas are attractive?

  • If we look back in history, a lot of innovation has been born out of state investment, especially during wartime periods.
    This is because there is no immediate reward for private capital at the frontier of innovation. At the very beginning, it’s pure research. Then, the state must work with the private sector to deploy the base infrastructure and decide the rules of engagement. Once a clear footing has been established on which investment can reasonably be expected to make a return, VC’s get involved more heavily. Governments take care of the risky, radical stuff, then capitalists come in to scale market applications.
    See Bill Janeway’s “Doing capitalism in the innovation economy” and Carlota Perez’s “Technological Revolutions and Financial Capital to dig into the subject of innovation cycles further.

  • Interestingly, the venture capital industry itself was the product of post-war boom.
    WWII created a wealth of innovations and certainly brought the computing era forward by a decade or two. The British state funded Colossus, the world’s first programmable, electronic, digital computer, to help with the Enigma codebreaking efforts. We also made huge advances in manufacturing, aeronautical engineering and medicine.
    See “Creative Capital” by Spencer E. Ante, the story of how Georges Doriot built American Research and Development Corporation, the first VC firm, to support US soldiers starting businesses after the war, and turned a $70k investment into $38 million. He also founded INSEAD - not a bad innings for one lifetime.

  • A new war is in play. We are now in a Cold War space race between China and The West.
    As a result, federal government will likely spend more time and money on space —> more innovation —> upside potential.

  • There will be potential to create whole new classes of product and economies in space.
    However, we are not there just yet. We can’t even think about doing that until we develop cheaper and more frequent access to space, and put the right stuff in place to do the job of communicating, organising and building - the infrastructure. This is already happening. In the next couple of years we’ll launch more satellites than in the history of human existence up until this point.

  • Early monetisation is already moving downstream - we are productising earth-focused satellites
    We are using satellites to help with agriculture, shipping & logistics, positioning data for phones and autonomous vehicles, and many other areas. This “earth observation” technology is well-established, and is where the lower-risk opportunities for upside currently lie.

  • Next up could be the development of the “cis lunar economy”.
    This economy will serve the needs of the Moon's new residents. However, this will only be possible thanks to government interest in going to the Moon (and Mars). Who are SpaceX’s biggest customers? You guessed it - NASA (and the Pentagon).

It may be difficult to see the opportunity here. What is happening in the space industry still feels like “deep tech”. There is a lot of hardware, a lot of risk, and huge amounts of money are required to make anything happen. Is this a place for VC’s, or is it better suited to government? Shouldn’t I just invest in B2B SaaS companies?

I enjoyed Jeff’s response to this…

  • It’s about timing. Each wave of hardware infrastructure begets new software applications.
    For example:
    - Satellites —> GPS;
    - Silicon transistor, personal computer —> the desktop software revolution;
    - Smartphone —> app revolution, social media;
    - Better cameras —> LIDAR and self driving cars.
    So you have to time it right and figure out when to invest in the applications and when it might be smart to start investing in the infrastructure. Investing in SaaS right now is competitive, cut-throat, threatened by revenue-based financing and therefore likely to be lower upside. Maybe space is a smarter place to find venture returns.

  • Investing in space is not about paradigm shifts in technology
    We’re not trying to figure out what is “the next silicon transistor” here. But it is likely to be a beneficiary of the new radical innovations coming our way (for example advances in biotech to allow us to travel long distances, or quantum computing to allow us to make calculations much faster). So it’s potentially a good way to ride the wave of whatever comes next.

Trying to pre-empt the next big innovation is, of course, the wrong approach to VC.

One must seek simply to see the present very clearly.

And right now, space is taking off.