Space investing is still in its infancy, but changes are afoot.
Technologies are becoming cheaper, entrepreneurs more plentiful and ambitions greater. Companies such as SpaceX and Planet Labs grab big headlines, and Skybox Imaging’s $500 million sale to Google shows that lucrative exits are possible.
One organization hoping to mine the growing excitement is the Space Angels Network.
The Los Angeles-based investment group has a focus on aerospace companies with a space component and drone technologies that dovetail with its space mission.
Growth is impressive. The network is adding one new angel a day, “which means we’re on track by the end of 2016 to be one of the largest angel groups in the country,” says Managing Director Amir Blachman.
The organization will typically make initial investments of $250,000 to $600,000 in pre-seed to Series A rounds where it sees a strong team, a defensible technology and a healthy gross margin in the first years of a company.
“The traction we are looking for is a strong need case,” Blachman says. “So we want to see letters of interest from future customers. We want to see a very deep competitive plan.”
VCJ recently had the opportunity to speak with Blachman about space investing. An edited transcript of the conversation follows.
Q: You had 149 angels in your network as of mid-February. How have you sparked the growth you’re seeing?
A: We explored different ways of running an angel group in our early months. We tried first with a small membership fee, then with a large membership fee. We ended up understanding that angel investors look at annual membership dues as management fees paid in advance on deals they don’t know whether they are going to make.
Since we took away membership dues and since we really started to pick up the speed of our due diligence and put out more offerings to our investors, we are now growing at a rate of one new member a day.
Another thing people are seeing is that we have an unrealized rate of return in excess of 30 percent and we’ve never had a loss on an investment. Although we haven’t seen any exits, we are seeing subsequent rounds at higher valuations. We’re seeing earning growth across our companies.
Q: The Space Angels Network earns carry on its success investments. How do you structure the carry?
A: We have what’s called a net carried interest. First of all, investors get their capital back. Then any fees they paid during the duration of the investment, we return to them. And then we take 20 percent carry of whatever is left.
Q: Space admittedly is a new area for private investment. When do you expect to see exits?
A: You’re going to start seeing the fruits exhibited over the next two years. And then from there, as the portfolios mature, you’ll start seeing those exits accelerate more and more. There is a pent up exit backlog.
Q: Do you see maturing business models in the space?
A: Yes. It’s really not just about the technology. For example, among ground networks, we’re seeing people moving from a general time-based subscription to a minutes-used subscription, which is a big price savings for a customer.
Another model is payload aggregation. So products are being designed for modularization for customers. That’s allowing more of a shipping aggregator model than a traditional buy-a-whole-mission or a major part of a mission. We’re seeing an evolution in the way cash flows are managed and in the tailoring of billing structures for customer needs. The entrepreneurs are becoming more sophisticated.
Q: Your typical first investment is between $250,000 and $600,000. What level of ownership do you seek?
A: The general rule of thumb is that, at the seed stage, companies are valued somewhere between $1 million and $5 million, depending on how far along they are in all the different areas: how well the team is built out, how far along they are in R&D, how far along they are with customers.
Depending on that progress will depend on how much of the company we expect to own for that typical amount investment.
Q: I can imagine young companies vary a great deal in maturity and traction.
A: Sometimes we’ll do something unusual: what’s called being the minority lead, where a company will want to raise $2 million or $3 million and generally Space Angels doesn’t invest that much.
So we’ll act as the lead investor doing all the work of a regular lead, putting together the term sheet, providing all the documentation, doing all the due diligence, but knowing we’ll only take a small portion of the round.
In those cases, we’ll bring in a VC partner even for the first round. Sometimes companies will skip the seed and move straight toward a small Series A.
Q: Which VCs do you work with most frequently?
A: The VCs we work with more often are those that focus on space investing. We’re in frequent communication with Bessemer Venture Partners. We’ve co-invested in Planet Labs with a VC that is focused on big data. That would be Data Collective.
When it comes to drones, we’ll test our investment opinion by talking to our associates over at Lux Capital. They have a serious expertise in the drone area.
Q: What changes do you see ahead for angel groups such as Space Angels Network?
A: The next wave is diversified angel funds. Within a couple months we’ll have our first diversified fund. You’re going to see a minority of angel groups doing that.
To do that you need to have significant deal flow, you need to have expert management and so that is something that I think is going to push more angels to come in as well.
Q: How will your diversified funds work?
Q: Imagine at any given time, our members can log into our portal and they have five or six companies to choose from. And they look at all the companies and say, ‘Wow, these guys have done months of due diligence on these companies. They are 2 percent of all the companies that have come to them and I really don’t know what to pick. I wish I could spread my money across all of them.’ That’s the situation.
Q: Where have you invested recently?
A: In 2015 we invested in several companies, including Planet Labs and Planetary Resources. We’ve put a lot of emphasis on remote sensing, in other words, technologies that are looking at earth from different vantage points.
We find that is particularly interesting for a couple of reasons. One of the reasons is that there is a broad recognition of the important of space-derived data. That is now spreading to so many industries. So what ends up happening is what was before limited to, say, intelligence and weather is now branching out to the obvious ones, like agriculture and petroleum, but also to some fields that weren’t quite as developed as before, including advertising, urban planning and high precision agriculture.
We’re seeing specialized software algorithms for identifying things like fires or what’s called ‘patterns of life.’ Patterns of life adds a lot of value to areas like intelligence and financial regulation.
Q: Can you give me examples of patterns of life?
For example, you’ll see satellite derived x-ray data and you can sense if there are a bunch of ships sitting off a coast that are full oil tankers. If so, then maybe it’s a sign that somebody is trying to tamper with the supply side for a particular region.
You’ve got the ability to tell the difference between a real city and a shadow city. Say a country is trying to hide any type of nuclear activity. Or even something more mundane. If you want to see patterns around outdoor sporting events and decide pricing models for outside advertising. You’re seeing a deeper and deeper integration of satellite data into all sorts of fields.
Q: Where do you see space investing going next?
What we’re going to see more of in the next three to five years especially is what is called machine-to-machine communications, otherwise known as the Internet of things. Satellites will talk with individual devices and that will help with all sorts of things that are location-based.
Those are retail technologies, technologies for finding people, finding items.
There is a huge application in inventory, so tracking containers and things like that. So we’re looking a lot of that remote sensing data.
Action item: Space Angels Network: http://spaceangelsnetwork.com/
Photo illustration of rocket launch from Shutterstock.