Houston, We Have Profits: Analyzing Venture Capital Investment in the Space Technology Industry

Abstract

Due to a decrease in launch prices caused by the founding of private rocket companies, the space technology industry is experiencing a renaissance, garnering much attention from private investors. Venture capital investment in space continues to break previous records, raising $7 billion in 2020 and $15 billion in 2021. However, space companies are considered to be part of the "tough tech" group of industries, which are characterized by their difficulties being financed by venture investment. In this thesis, I use the challenges specific to the space technology industry to predict how venture investors fund these companies. I perform an analysis on historical funding rounds across the full set of venture-backed U.S. space technology companies in order to test these predictions. I also apply the Sharpe ratio as one metric to examine the risk-return profile of these space ventures. I found that venture capital firms diverge from historical financing trends when investing in space companies, much to the benefit of these start-ups, by choosing to invest larger amounts in the earlier stages compared to software-as-a-service (SaaS) companies. Furthermore, space-specific investors make up a smaller portion of the overall investor class per round than expected, but the trends in the data support the hypothesis that they play a crucial role as indicators of viable companies to generalist investors. Finally, the risk-return analysis indicates that space ventures are much riskier than a typical venture capital portfolio, although their returns are also much greater. However, the Sharpe ratio calculation indicates that these greater returns are not large enough to offset the increase in risk.