Episode #223: Steven Jorgenson, Starbridge Venture Capital, “The Launch Sector is Literally Less Than 2% Of The Space Industry”

Episode #223: Steven Jorgenson, Starbridge Venture Capital, “The Launch Sector is Literally Less Than 2% Of The Space Industry”

 

Guest: Steven Jorgenson is Managing General partner of Starbridge Venture Capital. Starbridge is focused on space related technologies, investing in early stage companies with large terrestrial market potential, defined milestones, clear paths to liquidity, and whose products work to expand the aerospace economy.

Date Recorded: 5/6/2020     |     Run-Time: 1:01:35

Summary: Strap in and let your imagination run wild…In today’s episode, we’re talking about the space industry. We cover the space economy. There’s a lot more to it than just the launch sector. We dig into microgravity, and the opportunity it offers research and development. We chat about terrestrial market applications, and we even walk through a few investments in the portfolio.

If that isn’t enough, Steven lays out a timeline for the space industry over the next decade and beyond; it may leave you feeling that we’ll be living a sci-fi novel in the not too distant future.

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Transcript of Episode 223:

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: What is good podcast, friends? We’ve got an incredible show for you today. One might even say it’s out of this world. Our guest is managing general partner of Starbridge Venture Capital, a VC firm focused on space-related technologies, investing in early-stage companies with a large terrestrial market potential, defined milestones, clear paths to liquidity, and whose products work to expand the aerospace economy. Strap in and let your imagination run wild. In today’s episode, we’re talking about the space industry. We cover the entire space economy and there’s a lot more to it than just the launch sector. We dig into microgravity and the opportunity that offers for research and development. We chat about terrestrial market applications. We even walk through a few investments in the portfolio. If that isn’t enough, our guest lays out a timeline for the space industry over the next decade and beyond. It may leave you feeling that we’ll be living in a sci-fi novel in the not too distant future. Super fun. Please enjoy this episode with Starbridge VC Managing General Partner, Steven Jorgenson. Steven, welcome to the show.

Steven: Thanks, Meb. Nice to be here.

Meb: Where are you self-isolating and quarantining?

Steven: I am isolated in rural Wisconsin at the moment. I generally spend my time between here and Florida. We have people on the Starbridge team kind of scattered throughout the country. We kind of had a distributed model before this all happened, but yes, so we’ve got people in New York, California, Chicago, Mexico, even Europe at this point. But, yeah, it’s a little different, not being able to travel or see each other or get to conferences. It’s different.

Meb: Well, glad you’re safe and sanitised, is one of my guest’s…his phrase. You are a Madison undergrad. That’s supposed to be one of the premier, awesome college campuses around. What’d you study?

Steven: I actually studied science in my undergrad years for an incredibly long time, so I was one of those seven-year college students with dual degrees and almost three different minors if Wisconsin did minors. But yeah, I graduated with a bacteriology degree and a macrobiology degree. So kind of macro and micro, I got the whole set. Originally, I was thinking premed, but by the time I had graduated and had lived with I think three students in med school, at that time, I decided, “No. It’s not for me.”

Meb: It’s actually a very similar path that I was on. I actually started out in aerospace. I come from an aerospace family. My old man, which is the topic of what we’re talking about today, listeners, my old man was a Martin Marietta guy and then Lockheed and my brother’s currently at Northrop. I even did a summer working on rockets internship at Lockheed, but had transitioned to bio. So I also did a dual degree in bio and engineering. But it sounds like you’re a smart guy. I mean, seven years at Madison is probably, I think the right choice. But before you got interested in space, you worked in finance, right?

Steven: Yeah. So I kind of had finance in the background the whole time. I actually paid for my college by trading stocks. I had saved a little nest egg going into college and basically successfully traded through the late ’90s, which in hindsight wasn’t really that tough, but got me interested, got me tracking the industry, got me educated by doing. And so, by the time I was ready to graduate with a degree that I didn’t really wanna use at that point, I lucked into a job down at the Board of Trade in Chicago. There was a proprietary trading firm down there called Stafford Trading that was hiring science grads and training them on the job and giving them exposure into the Board of Trade, the financial pits there, the options exchange, back-office trading. They kind of ran the gamut of maybe 30 different types of trading groups and products and all this kind of thing. And yeah, it was a really, really great experience to get a lot of exposure to the professional finance world very, very quickly.

Meb: Talk to me about the path that kind of led you down the road to getting interested in space. Was this always an interest? And kind of, where was the initial aha moment?

Steven: It was always kind of in the background a little bit. It got subverted by a bunch of other things along the way, but yeah, once I was down working at fixed-income fund down in Florida, it was kind of boring, honestly, the products we were trading, so I kept looking into other sectors and I started getting interested in what was going on in the space sector back in around 2004, 2005. I think that was the time frame when the X Prize first came onto the picture, Peter Diamandis, a $10 million prize for a commercial vehicle launching to space, coming back and relaunching within a 2-week period. It really was a attempt to catalyse the commercial space sector because at that point there really wasn’t one. I mean, it was all government space and big contractors, extraordinarily expensive hardware. That wasn’t how you move a sector forward. I kind of got into a few of the companies that were involved in that space at the time.

There was actually a publicly-traded commercial space stack back then that people don’t remember. It kind of onboarded me a little bit into the environment and then I didn’t really do much with it until the cancellation of the shuttle was announced. And for some reason, that really bothered me because it seemed like we were retreating. We were going in the wrong direction in an area that inherently takes us forward. And so, I started looking at what really is going on here and I started going to a few conferences, talking to people, trying to understand the financial aspects of the industry or the lack thereof at that time and just really building a network of people in the know and people who could educate me on what I needed to know to really understand the industry.

Meb: So what year would this have been? Is this early 2000s mid, late 2000s?

Steven: This will be around 2011, 2012 time period.

Meb: And so, what was the transition? Because, listeners, Steven runs a venture capital firm called Starbridge, which we’ll get into in a minute. Now on fund number two. Congrats. Did you start investing prior to Starbridge? Was this the initial to say, “Hey, let’s just raise?”

Steven: Yeah.

Meb: What did the transition look like?

Steven: Yeah. So I remember at the time I was running a hedge fund down in Florida, so I was specialising in equities and equity derivatives trading and complex strategies and all that kind of thing. But it wasn’t… You know, it’s just trading numbers on the screen. The space industry is a lot more interesting and impactful, and especially if you’ve already kind of made a little bit of a nest egg and you’re looking for what’s next in life. And so, I started really trying to determine when and where the space industry was going to become investible because I could see a lot of really, really interesting trends coming together. And I’d give you a time period of around 2015, a lot of things started coming together generally in making this sector something that was worth looking at from an investment point of view. Before that, I would say no. Space was almost entirely uninvestible. Maybe you had one company like SpaceX that if you were lucky enough to find and invest in 2008, 2012, somewhere in there, you could have made a good return. I actually tried to buy SpaceX stock as one of my first investments, but they weren’t at the time selling to individual people so much as they were trying to take those employee shares that wanted to sell and bundling them back up into specific investor accounts. I actually tried three times over the years to get a SpaceX stock. And it would have been a home run if I had, but I’d say around 2014, 2015, I started making my first angel investments into the sector. I’d found a few companies that I found interesting enough and had the traditionally solid business models and at least I thought they did enough at the time because obviously I wasn’t quite as educated on the industry as I am now and didn’t know all the players, but there’s nothing like doing an angel investment in a series of companies in a sector to really get to know that sector.

So I made investments into companies like Planet Labs, which turned out to be great. They’ve had a lot of success and really kind of transformed a lot of parts in the industry. Then I had some not so great planetary resources where it was kind of an emotional investment more than a rational investment. In hindsight, you wanna be a part of that whole long-term ethos. And then I started really drilling down to what makes these companies good investment prospects and really learning what it takes to build a company in this industry, who the customer base is, how you select the right teams because wherever there’s an opportunity, there’s gonna be multiple companies trying to pursue it and picking the right horse is really kind of a little bit science, a little bit art in this early stage type of game.

Meb: As I think about it, I think most listeners would probably have the belief that space, as an industry, and you alluded to this earlier, is either a massive governmental sort of force, U.S., Soviet Union, or Boeing, Lockheed, I don’t even know who else these days, these massive corporations that have hundreds of thousands of people. So I imagine people are listening and saying, “Angel investing in space or Series A venture capital, like how is that even a thing?” Give us an overview of how that’s sort of become an opportunity in the past 5, 10 years. You mentioned SpaceX, which, by the way, we had one of the private stock platform founders on equities in a few times on the podcast talking about those sort of ideas. But talk to me a little bit about is that true that it’s dominated by these massive corporations, and where is this sort of industry starting to really bubble up and become an investible case?

Steven: Sure. So like all good stories, there’s a little bit of truth and a little bit of false in it. If you are looking at specific things like when people think of the space industry they think of launch, right? It’s natural to think of rockets and the various ways you get off the planet, basically. I would argue that that is one of the worst ways to think about the space industry from an investment point of view. The launch sector is literally less than 2% of the space industry. To put that in perspective, where do you want to invest? In the thing that is in the delivery truck that’s basically getting you the packages or do you want to invest in the packages and the people that are making the packages and the people driving value from that product? So most of the space industry is communications. That’s the first thing you’ve got to really understand. The vast majority involves communications and communication satellites and all the revenues generated from that. You’ve got your DirecTV, you’ve got your telecoms, all that, huge, huge business. And if you’re an investor, you do need to look at that as kind of your primary bread and butter. That’s where people are making money.

The government side of it, again, is more focused on the launch and some of the newer technologies. They do have a very big presence in the industry, especially in the start-up space. So we’re going through an interesting time right now with the economy and commercial companies pulling back a bit on their spending and their capital deployment plans and whatnot. But the government is turning out to be a surprisingly stable source of revenue for the space industry right now. And I know we have several companies in our portfolio who have recently won some very significant government contracts and that’s steady income that’s coming in, so I’m not gonna discount at all the role that government is playing in the industry, but the future of this industry is in the commercial players and them finding markets beyond just government. So when you get beyond about a five-year time frame, you’re going to want companies that have ability to address some very big commercial markets.

Meb: Let’s start to talk a little bit about the space economy you mentioned, which is surprising to me. I didn’t know that, that launch was such a small portion and communications are a large portion.

Steven: It’s about a $400 billion economy.

Meb: Where do you see over the next 10 years…the next 10, 20 years? Is that pretty stable? Does that pie change a lot? Give us the kind of just broad thematic runway of what the frontier looks like.

Steven: Yeah. Launch is a very chaotic part of the market right now if you’re a business person in it. There, in the last two, three years was an influx of small launch vehicle companies that came into the market and raised money. When I say an influx, I mean like 140 companies are out there, elbow to elbow, trying to get investors and get those contracts and get their first launch off the ground. I’ve personally avoided that sub-sector like the plague because it’s been almost impossible to find good business cases in that sector, in that sub-sector. SpaceX is just too disruptive to what’s going on right now. They, of course, kind of started with small rockets and went up from there and now they’re planning this massive vehicle called the Starship that actually just won a lunar supply…you know, it’s a crude mission contract along with several other candidates there. But SpaceX has…I can’t express how much impact they’ve had in disrupting the entirety of the sector.

When I was first looking at the cost of launching cargo on in the space shuttle, maybe 10 years ago, 12 years ago now, we’re talking something in the range of $20,000 per kilogram, give or take, depending on how you do the calculation. In the last few years, that’s come down to maybe a couple of thousand and probably in a lot of cases even below that. So we are literally talking order of magnitude decrease in costs. That alone has enabled a lot of business cases to close that couldn’t previously just because your cost of doing business is so much lower. If the Starship gets online in the next 2, 3 years as we expect it to, you’ll probably have another 50% cut in the cargo launch cost at that point. Plus, you’re bringing a system online that theoretically can launch 100 people at a time and everything, all the economics of the sector kind of change when you have that kind of a capability entering the market. And that really is only two, three years away.

Meb: And what does that enable? So you mentioned communications, launch. Tourism, I think, would be the first thing that everyone starts to think about, but what are the other use cases of actual commercial applications that this opens up the ability to launch? I mean, that’s an incredible order of magnitude like you mentioned, if not more. What does that open up that people probably aren’t thinking about?

Steven: It’s gonna be a ramp-up process. It can take a few years. A couple of years, you’ll start seeing it happening. We’re gonna have some tourism and actually, tourism to the International Space Station itself is picking back up here again. I’ve heard of some interesting contracts that have been going on with that recently, but once you have the capacity to bring more people, you’re going to have more destinations that are gonna be put in space, so you’ll have an expansion of ISS. You’re likely to have some free-floating commercial facilities or stations or however you wanna term them. You’ll probably even have Starship fitted for spending a little more time in orbit than it normally would by bringing some passengers on board. That would be my guess. But overall, you’re gonna see more activity, more destinations, and more things to do.

So specifically, beyond the tourism, I’m not real enthusiastic about the tourism part of it. I think it’s gonna take too long to get there and it’s got a lot of if, then, maybes attached to it, but in-space manufacturing and research is really, really interesting. So let’s think of this from… We’re both biology people. Let’s think of this from a biology standpoint. What is the one laboratory variable, experimental variable that no living organism on Earth has ever experienced? It’s microgravity. Once you expose living things to microgravity, you get some really, really interesting results, especially if you’re talking like stem cells, or pharmaceutical research, or even manufacturing of very specific types of compounds and metals and, you know, all this kind of stuff. It all acts differently, very, very differently in a microgravity environment, and then you pour a vacuum environment on top of that, and this is a brand new frontier of research and manufacturing that we’ve barely scratched the surface of so far. And we’ve seen some really interesting stuff already.

Meb: Yeah. Tell me. Let’s go down that thread. I would love to hear a little bit more because it feels like science fiction already, right?

Steven: It does.

Meb: Because it is 2020, it’s a new decade, it’s starting to feel that childhood wonder of space that I feel like has been absent for a while now is starting to accelerate. Tell me some of the potential use cases more specifically.

Steven: Sure. So one of the companies that we have in our portfolio Made In Space, their specialty is in-space manufacturing and in particular, 3D printing. Towards the end of last year, they won like a $70 million contract to demonstrate 3D printing in space of basically satellite components, structural components for satellites. Instead of being limited by the size of the fairing of the rocket, of what you can put in there… And if you’ve ever seen a satellite when it gets launched and enter service, it has to unfold, and unfold, and unfold. It’s like an origami experiment when they put it up there. Well, that severely limits what you can put up. There’s a budget basically, for every component and asset that you have on the satellites, power budget, how much you can allocate here, there, whatever. And a lot of it is determined by how much solar power you can pump into.

Well, okay, so now instead of having a 10-metre solar panel, you can print out 100-metre solar panel. That opens up so many more possibilities for small sats, whereas normally you’d have to have this massive launch of a half-billion-dollar satellite. If all you need is more power on the same sensor, you can do so much more with so much less. That’s one thing. The same company is currently experimenting with a type of fiber optic called ZBLAN, which if you look at the chemistry of how it’s made, you can make it on Earth, but it’s gonna have flaws in the glass and that severely limits the effectiveness of the fiber but if you make it and cool it in a microgravity environment, most of those occlusions, those flaws in the glass don’t form. And so, you can make hyper pure type fiber optics where you don’t need to have repeaters, if you have a long-distance, you don’t have the signal loss.

In a lot of cases I’ve seen is maybe even a prerequisite for quantum computing and some of the construction of some of those type of systems. There’s a lot that you can do with that particular product. There’s also a series of other semiconductors and kind of high-tech related materials and sub-components. I’ve seen some very promising research and initial testing that you can get a much, much better product if you do it in a microgravity environment because crystals form better. And that’s the general concept. Microgravity crystals just form better.

Meb: It’s not something I would have considered to be one of the most obvious use cases, but now that you explained it, it seems incredibly clear that that would be something, particularly with the limitations on launch versus what you could build in space.

Steven: There’s another aspect of that with the launch part of it and why now some of these things are coming online versus what we could do in the past, and that’s frequency of launch. So a lot of these experiments have expiration dates and you can’t put them up on orbit for two months at a time waiting for your return vehicle to get back. The experiment will be ruined. And you can’t have them sitting on the launch pad through multiple delays and still expect to have a good experiment when you launch. So I can’t emphasise enough how important reliability, predictability, and frequency of the launch schedule is. So think about that when you’re looking at what kind of businesses are actually viable and when.

Meb: Where are most of the launches taking place in 2020? Is it kind of all over the globe?

Steven: There is quite a bit going on. Yeah. Yeah. We’ve got several different players. China has really stepped up the game and has in the commercial space sector now. One of the analysts is looking at that. I can’t invest in it, but I looked at it. We’re getting launches from both coasts here in the United States now. India has a really robust program that you got to keep an eye on as well. We’re actually seeing some Indian space start-ups that are coming across our desk.

Meb: Is your fun domestically-focused only or are you open to international start-ups?

Steven: We are perfectly open to international start-ups. We’re seeing the most quality deals still coming out of the United States, but we’ve made investments in a Canadian company, a U.K. company, and we’ve looked at deals from Singapore, Taiwan, India. I think we’ve seen a couple from South America. So, yeah, we’re seeing a lot of…several from Europe. Yeah. A lot of international deal flow. It’s just that the quality of the U.S. deals seems to just kind of outclass most of them.

Meb: So talk to us a little bit about what is your framework and criteria, what you’re looking for in an investment. I think a lot of listeners would probably, when they think of space, are thinking seed and Series As, interesting. Almost like a fantasy. You know, you think of these massive governmental programs or SpaceX, these multibillion-dollar companies, what fits this framework? What are you looking for? And what’s been interesting?

Steven: So at Starbridge, we tend to focus on the Series A round, but oftentimes, we have tracked these companies from their initial founding, all the way up until that point. So in several cases, we do actually dip down into the seed and even the pre-seed in some cases, just because it’s the perfect fit for our portfolio. We already know the management team were on board from the beginning. We’ve got a couple in the portfolio like that already. But what we’re really looking for… So you might be surprised at the size of the valuation of the companies when we first get in here. Usually, they’re not above $10 million by this point. So there are a lot of companies we’ve looked at that have multibillion-dollar long-term spending trajectories. They get a very critical eye when it comes to that, but there’s a lot of companies where we enter in at maybe a $5 million, $6 million total valuation. And these are companies that have potential $100 million a year revenue streams. So this kind of brings up another topic where in a lot of ways I feel like this sector is very overlooked by a lot of investors because it’s so hard to do the work. We literally are talking rocket science here. And so, for the average investor, it’s really, really hard to have the level of diligence necessary to understand the technology, understand the team, understand the industry, understand the customer. And we spend a lot of time looking at the customer for the companies that we’re trying out for potential investment. We tend to act very conservatively in how we actually do the investment.

Meb: It’s amazing to hear one because from someone who’s been investing in private companies for 6, 7 years now, you don’t see that many sub $10 million valuations even just across the board is that you may be now in 2020 but…

Steven: Even in something as cheap as software to do. The valuations are sky-high.

Meb: A question for you, so where does most of the funding come from today? I don’t personally know that many space VCs. I would assume like a lot of it is government funding, grants in nature. Is it family offices, the venture capital? Is it corporations doing sort of corporate VC? Where is most of it coming from? And are there even any other space focused VCs? I don’t know any.

Steven: Yeah. There’s actually five of us that I know of worldwide. There’s three here in the U.S. and two overseas, not including any kind of sovereign wealth fund-type initiatives.

Meb: And Bezos?

Steven: Bezos is his own fund, but he only funds himself basically, is the word I’m… Sorry. I would say we probably have the deepest financial discipline and experience of anybody out there just because I tend to split our team up between technical experts and financial experts and kind of marry the two together. There has grown to be a really good start-up community and incubation system around the space industry and just kind of generally start-ups in general. So that used to be a problem 5, 10 years ago where you couldn’t get off the floor. Now there’s plenty of incubation programs and initial funding up to half a million or something like that to get the team together, get the concept together.

There are angel investors that you will see space deals even on AngelList and other types of investor platforms now, which you wouldn’t have seen before. There’s a lot more venture capital interest in this. The big funds generally don’t come in until the year C round. A lot of these companies, firms like us, I said obviously coming into A or maybe a little bit sooner just because we understand the industry more and we oftentimes even become kind of the educational firm for some other venture capital funds to come in on the next round because we can explain the company to them in the kind of language that they understand.

Meb: And how do you work with the start-up entrepreneurs? Are you guys leading the rounds or are you just participating? Do you take board seats? Are you involved or are you just totally silent? How does it work and does it vary by company?

Steven: We will be leading rounds and Fund 2 here. We have Fund 1 under our belt. It was relatively small, so we tended to be one of the smaller checks that comes into this. We had a combination of GT Capital and 20 different individual investors in Fund 1. Fund 2, we’ll have more firepower with family offices and the like of more institutional investors. So we haven’t led around yet but we’ve heavily influenced, I guess you could say, how the round went and who was investing and brought some other investors on board.

Meb: I think it would be really interesting for the listeners to the extent you’re willing to talk about it, we’d love to hear sort of the framework of how you think about investments with potentially a couple case studies. You mentioned Made In Space. Are there any other that come to mind? And would just love to hear the story, how you source the deal, how you said you invested in what they’re doing, why it was attractive, why it fit the criteria, all that good stuff.

Steven: So Made In Space is an interesting one for us because they are a start-up that has been around for about 10 years and they’ve been profitable almost every year of those 10 years. They’ve just been scraping together contracts and building, and building, and building and not taking any outside capital. They didn’t need it. There was a company that…

Meb: That’s a real one?

Steven: We have a lot of really rare start-up companies in the space sector and very unique stories. This is one of them. So as to how we actually got into this deal, I’ve been bugging them probably for five years to open up to outside investors. This is what I’m saying, that we track these companies for a long time and kind of know what we want and even identify certain technologies that we wanna plug into the portfolio because we can see how it’s likely to unfold over the lifetime of a VC fund.

And so, in early 2019, I think it maybe it was ’18, they finally opened up around for select investors and so, we were one of the people that were on their radar along with a couple other kind of friendly funds. But if you didn’t know them ahead of time and you hadn’t developed a relationship, there is no way you would get in on that round. And to this day, I don’t think they’re looking for general outside investors. That is one of the biggest problems for a generalist angel investor or someone just kind of coming into this space. They’re very unlikely to have access to the better deals. You really kind of have to know the network and know who’s doing what.

Meb: And what’s the sort of major milestones for Made In Space? Are they at sort of testing phase? Are they actually deploying?

Steven: Oh, yeah. They’ve had 3D printers on the International Space Station for years at this point.

Meb: What’s the major sort of next monster milestone? Is it just a continual proof of concept or just actually just manufacturing?

Steven: Yeah. They’ve got a very definite product development plan. So in-space manufacturing of the satellite solar panels, I mean, that’s them. That’s under the guise of the Archinaut program, as they call it. That thing, they’ll be working on that from here to eternity, basically, scaling up the different concepts and applications. And I think last I checked they had five different contracts in the works, major contracts from different agencies or corporations or whatnot to kind of flesh that concept out in various directions. And then, of course, they got the ZBLAN. Quite a few other initiatives. So one of the more interesting ones is they just opened an office in Luxembourg and with the support of the Luxembourg government, are putting together a European division of the company that focuses on constructing robotic arms.

Now, why are they doing robotic arms? Because this is something they could not easily source in the existing system, but if you think about what 3D printing looks like long-term, you need to actually manipulate those parts and construct things. If you wanna make bigger and bigger things, you are gonna basically have to have construction robots in space. And, again, we’re getting to sci-fi but I’ll blow your mind a little bit later if we go through kind of what’s gonna happen in the next few years and what’s likely to happen.

Meb: Yeah. Awesome. Well, go ahead. I mean, you can’t have that lead and just leave me dangling. Let’s hear it.

Steven: [crosstalk 00:33:35] All right. So a lot of people probably know that by the end of this month we’re likely, unless they scrub it for one reason or another, to launch the first two astronauts from U.S. soil, two U.S. astronauts from U.S. soil, the first time in almost a decade. That is really cool, but what’s really, really cool is that it’s going to be launched on a completely commercially designed, operated, launched rocket system. SpaceX is going to be the carrier and that kind of kicks off a whole new era of what the space sector is going to look like. I mentioned earlier, a couple more years from now, we’re going to have the SpaceX Starship system coming online, fingers crossed, and what that does to the lowering of launch costs and accessibility. I don’t think the space industry itself even has its head around just how transformative that will be and how that’ll play out over time. And now, if we were talking say 2025, now we’re going to have commercially produced and operated space stations, actually, in LEO, in low Earth orbit. That’s already contracted in the works. These aren’t speculative things. This is happening. We’ll also, around that time frame, have the first components of the Artemis program, landing on the moon in preparation for a permanent lunar base.

That was something even three years ago I thought wasn’t gonna happen for a very long time, but they have put that together very quickly and they have signed a lot of contracts with a lot of commercial vendors in the space industry to make sure that really happens. By 2028, I think that’s about the time period where you’re going to see a lot of that first stage of in-space manufacturing that I was talking about, a lot of high-value materials, likely new biotech products coming back down for use on Earth. That’s a major milestone for the industry, to actually produce and manufacture something in space regularly and consistently for use and sales back on Earth. That kind of closes the model for why you’re investing in these things to begin with. And then by 2029, and it seems unreal, but this is about the time frame, we’re looking at the first cargo missions to Mars, laying the groundwork for the first human landing a few years later. Now, if Elon has his way, he’ll probably try to sneak that in before the end of the decade, but I think that’s probably gonna happen around 2033, would be my guess. We’ll have the first human on Mars.

Meb: That gives me chills. That’s so exciting. Elon’s probably celebrating that. He’s just listed all his houses for sale in LA, so he’s got some more capital.

Steven: Oh, yeah. He’d totally say I’m too pessimistic on 2033.

Meb: Well, I’m sure there’s a lot of engineers that as this starts to snowball, particularly ones that are now unemployed after Uber and Lyft and many of these San Francisco tech focused funds, I imagine this will be an extremely prosperous industry over the next decade. I mean, if you look back, historically, aerospace used to have these just very kind of cyclical boom-bust periods. Los Angeles and Colorado where I grew up quite a bit are two big hotspots for that, and you can see it starting to bubble up. I’d love to hear a little…any other portfolio companies you think that have been doing interesting work or that you think are pretty good illustrations of what you guys are looking for? If there’s any aerospace scientists in their garage listening to this or family offices wanting to allocate, what are some other companies?

Steven: So let me take it and address one of the other issues that we have with traditional space investing and how we do things a little differently. So we don’t see the space sector as a standalone industry. We really try to focus in on how it connects to the terrestrial market and the broader economy. So a lot of the things that we’re looking at and even investing in, you might not immediately see it as a space company. We can look over the portfolio and I can point a few out like a battery company and a drone company, and airspace management, that kind of thing. We’re really looking for the best opportunities to plug in the space economy into the broader economy because that’s really where you’re gonna make the best impact and the best investment choices in the near term. Remember, as a venture capital fund, we have a 10-year time frame.

So everything that I’m investing in, I’m feeling very confident we’re gonna have an exit in the next five to seven years. And if we don’t, I’ve got to figure out how to deal with that. And so, I’d rather think about that on the front end than on the back end.

Meb: Is that traditionally, for most, I imagine the stage just M&A?

Steven: There’s a lot of M&A. We’re seeing in the case of like SpaceX, they may never go public or be bought out or have any kind of event like that, but you’re seeing an active secondary…

Meb: After Elon’s experience with Tesla…

Steven: Can you imagine? Yeah. Taking another company public and having to deal with the SEC? No. But there’s active secondary trading markets for these types of stocks and the way we construct our portfolio, we actually have an SPV for every investment that we do and so that gives us internally a lot more flexibility with what we can do and when with the positions, even if it’s not involving a technical event or acquisition or something like that, and we still have flexibility with our investors to do what needs to be done when we need to.

The exits are one of the problem parts of this industry right now just because like I was saying at the beginning of the call, it’s only really been investible for the last five years. There just wasn’t the type of good opportunities and deals, so think of it really as what would be the time frame you’d expect to see exits from an industry that was just emerging. So we are seeing some increased amount of acquisition activity. A lot of it, unfortunately, in this environment is probably going to be down round type deals or gobbled up just to survive and keep the workforce. We really try to avoid getting into situations where that’s the case. We tend to invest in the company and their sector or sub-sector of the industry in contracts in hand. I don’t think we’ve invested in any company that doesn’t have a signed customer already at that point. So we have a great deal more visibility at what their runway is, keeping a close eye on their cash burn, making sure, especially in this industry that you have enough runway to get through these cycles like what we’re into right now. 2020, without the virus issues, would have been a probably really fantastic environment for this industry just because the first 2, 3 months of the year really set the stage for some very, very exciting stuff that’s going to be happening throughout the year. We have a couple of companies in our portfolio who are going to be doing capital raise in the next month or two, I would say, and so, it’ll be very interesting to see what the reception is there. Fortunately, for them, they’ve had such a string of good news involving their actual companies. I think they won’t have a problem. And just kind of talking to various people in the industry and investment side of things, I really don’t think they’re gonna have a problem. So I think we’re good there. But in general, it’s going to be tough the next few months, especially in the small launch side of things. They’re the ones that are probably gonna see the most casualties.

Meb: Yeah. I think always the case with bear markets and recessions and everything going on, good companies hitting milestones that are doing well always can find the funding somewhere. And you’ve seen some pretty amazing companies come out of the last two crises in the U.S. as well. Any other companies you are willing to talk about as far as interesting work they’re doing, what they’re up to? I just love hearing these ideas. I could go on for two hours about this.

Steven: Yeah. I can tie in a couple more here. So the Made In Space idea and the in-space manufacturing, you have to have someplace to do that and so, Axiom Space is another one of the investments in our portfolio. They were the ones who won the port contract in the ISS earlier this year where they will actually design, build, and construct launch and attach their own commercial module to the International Space Station and then over the next few years they’ll be adding more modules to that. And when the ISS is scheduled to retire sometime in 2028, 2030, they will actually take a couple of high-value pieces off of the ISS and attach it to their own station and then the old ISS station will be retired. There’ll be no more activity there. And the Axiom station will separate and literally become the new station at that point.

So that’s a very interesting story that we’re very excited to see how it plays out over the long term here. That same company has contracts with NASA and other foreign governments to launch astronauts even now. So they have the station revenue, they have the astronaut training and launch and revenue from that activity, then they’ve got a in-space research activity and various hosting platforms that they’re doing on that. So they’re really kind of at the centre of a whole bunch of other companies that we’re looking at that need their product and their facility to actually implement these other business plans. We do try to construct a portfolio where if we see a roadblock or an obstacle for companies, and especially if there’s a lot of companies and a lot of different tech development pathways that are being blocked by this one thing, we tend to really focus in on finding the right company, the right investment to actually address that need. So like I was saying earlier, we do a lot of kind of technology pathway planning and really trying to understand how things are going, and that helps us to identify not only the companies, but the general types of technology or investment that we need to deploy into to successfully have the right pieces at the right time in the portfolio. So as an options trader, I’m obsessed with timing.

Meb: Yeah. Well, the financial part of it is obviously important. That sort of company, it seems like anytime you get the government involved where there’s contractual obligations, milestones, you can model out fairly accurately what it…as long as they don’t muck it up, right?

Steven: That’s true.

Meb: As long as they deliver, it becomes a pretty amazing moat that they would have for the next decade, I imagine.

Steven: Well, let me throw a completely commercial product at you though too that’s in the portfolio. So we have a company called Link, used to be called Ubiquiti Link. They have developed a type of communications technology and well patented and all that that actually allows your unmodified cell phone to talk directly to their LEO satellite system. It really does bridge that last gap between the user and having global connectivity because wherever you are, you will have the sky above you and the ability to, at least in the beginning, text message and small packets of data but as they build up that system, that constellation more and more data rates of what you’re going to be able to do for a very accessible budget. You don’t have to have the special equipment or the antennas or anything like that. It’s the same cell phone you have in your pocket right now.

Meb: I feel like we were talking about this 20 years ago with Iridium and it’s finally getting developed to the point of real commercialisation and…

Steven: Well, on Iridium, you had to have the special hardware and chipsets…and it wasn’t always the greatest, but this type of technology actually plugs directly into the existing cellular networks, so your cell phone thinks it’s talking to a cell tower on the ground. We’re tricking it into believing that, and one of the other really good aspects of this is that it’s a B2B business and so, it’s selling the service directly into the existing service providers, meaning they don’t have to go through the enormous cost and headache of frequency allocations and all the regulation of country, by country, by country, they can just plug the system right into the existing cellular phone contracts.

Meb: I’d be a customer. The only place in Los Angeles, there’s like a one square block radius around my house where there’s zero cell phone services. It’s the most ridiculous thing. You’d think in one of the most populated cities in the world, you could get it but you can’t. So it’s kind of nice because then I can just tell people I’m not available to chat on the phone.

Steven: Yeah. There’s a lot of stuff going on in communications. You’re going to be pleasantly surprised.

Meb: Where do we stand with imaging? Is that something that’s already well-developed? I feel like that was the early use case of satellites that everyone was on board with. Is that kind of commoditised at this point? Is there anything interesting going on there?

Steven: The optical side of it is getting a little bit commoditised. Imagery and earth observation, as we call it, is kind of the second pillar of the new commercial space economy. We’ve got companies like Planet Labs and other existing players who’ve pretty well developed the optical side of it. One of the companies in our portfolio, one of our first investments actually is in a company called Umbra Lab. It does synthetic aperture radar imagery, which is a really, really cool technology because you’re basically bouncing radar signals, RF signals off the planet, and getting them bounced back and read by the satellite. The things you can do with that are really, really cool. You can basically 3D model everything that you’re looking at. If you’ve got a high enough resolution, you can even tell what make a car you’re looking at or if you can lower the noise floor enough, you can even sense other signals and maybe even sense that there’s electricity flowing through those power lines. It gets a little spooky at what you can do as the technology and the resolution get better and better. Right now Umbra is able to go down to about 10-centimetre resolution in an optical standpoint, I think about 10 centimetres per pixel, but that is a really, really good technology that the military, especially is very interested in.

Meb: Right. Is there any other use case besides military applications? Is there commercial main use cases that are…is it farming, mining?

Steven: Yeah. So depending upon the bandwidth you use for radar, you can monitor crops, you can monitor commodities, you can monitor shipping. Anything you need to monitor or figure out what’s going on, SAR is gonna be a very good technology there because it works, day or night, rain or shine. Clouds don’t matter. Darkness doesn’t matter. You can get that image all the time. Where I’m excited is seeing how several of these technologies kind of fit together to give you an entire [inaudible 00:50:11] of what’s going on.

So one of the next type of technologies that we’re looking at actively right now is hyper spectrum, which is basically a type of optical, but it cuts the spectrum into 500 different segments. And so, if you know what a spectrometer does, it’s basically that same kind of concept from space. So you are able to tell what material you’re looking at, the moisture content, whether the surface has been disturbed in any way, if there’s any kind of gas leak. It’s really adding in a next level of data into the whole process that it’s gonna be very exciting to see these various types of observation technologies coming together in one [inaudible 00:50:56] because then you really start getting a good picture of what’s going on on the planet from weather, to climate change, to activity, to illicit activity. If you’re worried about a big brother type state, it’s probably not a fun idea for you just because it is going to be a really tight global monitoring system in the future, some would say out of necessity.

Meb: Yeah. Wow. So many ideas and questions I could follow up with there.

Steven: Yes, there are. Yes, there are.

Meb: We’re gonna have to have you back on in six months and talk about this again. As you look… Obviously you’ve built your network over the past decade in this industry. For someone who’s interested in getting up-to-speed, what are the main resources you think of? Are there conferences? Are there books? Are there people? Do you guys do a writing on sort of the space in general? Where do people sort of, if they wanted to go deep on this theme, any suggestions?

Steven: So there’s various routes you can take on this. Traditionally, you would have to kind of do what I did, and visit the conferences, talk to the people, kind of make friends with the industry. This is actually a really friendly industry. People love to share their ideas and what’s going on. They don’t like to talk about the stuff that they can’t talk about, but I think other than that, it’s a very good, airtight community. There’s several good podcasts that deal specifically with space. I got a lot of my early education by listening to back episodes of “The Space Show” with David Livingston. That was an interesting way to kind of get up-to-speed with a lot of good guests and a lot of specific technologies. We actually have an open office hours type podcast right now that we started…with the pandemic, we started it but on Tuesday mornings for like two hours, Michael Mealling, one of our other GPs hosts essentially an open office hours where you can talk about any topic you wanna bring to the table. He usually starts off with something that’s in the news and we just go completely off the rails from there.

But yeah, there’s quite a few different resources if you just kind of spend the time, go out there and look. There’s even a lot of institutional interest and analysis coming out now. So there’s quite a few analyst type organisations that put out sometimes even daily type activity reports. You’ve got major banks like Bank of America, Morgan Stanley, I think even Goldman, they started putting out kind of investment style reports on what’s going on in the industry and what they see coming out over the next few years. I mean, they’ve got some big targets.

Meb: As the money and profit flows, certainly the investment banks are not far behind. You know, that’s one thing you can count on. Well, if you think of any specifics on the conferences, we’ll add these on the show notes, links, listeners, mebfaber.com/podcast, so.

Steven: Yeah. Unfortunately, conferences are kiboshed at the moment, but there’s a lot of online resources and YouTube. YouTube is a tremendous source of education, especially when you’re in lockdown here, but eventually you do need to just connect with the people themselves and have those conversations because that’s the only way you’re really gonna understand what’s going on. And I would suggest not doing anything on the investment standpoint unless you’ve spent a good amount of time talking to the people in the know.

Meb: Or just go small. That’s the other part. If you’re going to do it, go small or hire someone like Steven and invest in his fund. That’s another way to do it.

Steven: Yeah. We’re always here for a conversation.

Meb: Yeah. Two quick questions and we’re gonna let you go, get back to your day. Does Madison have much of an academic in the aerospace world going on? Is the engineering school or anything else there?

Steven: They have a very good engineering program. I’m not aware of anything in the space sector, specifically. If you’re looking for that, there’s quite a few good aerospace programs around. I would highly recommend interviewing with SpaceX and just going through that process. We see a lot of companies that come straight out of college and wanna put together a company, a product, whatnot, but they haven’t really seasoned themselves yet into the industry and they have a lot of bad assumptions. It’s very valuable to work for somebody else in the industry for at least a couple of years and get that experience. It’s good for your resume, it’s good for your mindset, it helps you understand what you’re doing and where the needs are versus just coming straight out of school and attempting this. Yeah. There are some very good aerospace programs around.

Meb: Our office is pretty close in that El Segundo corridor and there’s lot of start-up breweries nearby and I definitely happened upon a SpaceX happy hour one day. You can tell it was a bunch of engineers. I can say that, I was an engineer. A bunch of engineers at happy hour is fun.

Steven: Those folks are motivated.

Meb: Yeah. What’s been your most memorable investment? And you can either put this in the investment career, pre-space, it could be since you started doing space. Does anything come to mind, good, bad, in between?

Steven: Sure. Long career, so quite a few come to mind, but I’ll mention one that kind of puts my investment philosophy into a little bit more context. So it was my very first investment. It was the very first stock I ever bought and I was 12 years old at the time and it was one that my parents actually got me, a little company 30 minutes away called Fastenal. And if you know that one, this was probably the mid-’80s at the time, and this is a tiny, little company with maybe three or four locations at that time. My dad knew the guy who was running it and he’d been there to those locations. He’d used the product and he really understood, this is a really good company. So he bought a couple 100 shares and it wasn’t much, but over the years, we held those shares and we held those shares and they split, and then they split, and then they split again. It must have split 8, 9, 10 times by this point. And over the course of that time, that same position is now paying more in dividends in six months than that entire investment. So the cost basis is almost zero on that investment, but the power of sticking with something where it’s got a major theme over decades…and you could jump in and out of that anytime you wanted, but you always saw that trend and what was going to unfurl, likely to unfurl over a long period of time and so it gave you that confidence to stay in and play the long game on something like that, and that’s how you get those 100X type returns over a lifetime.

Meb: The biggest challenge for investors is holding the long-term compounders. How’d you resist the temptation after it doubled, particularly being a young kid? You probably had maybe your parents’ guidance, but it doubles, it triples, it quadruples, it 10Xes. How’d you not say, “Oh, my God, I’m rich. I got to sell everything?” Like, how do you think about that and allow the runway and leash to be able to hit that 150, 100-bagger status?

Steven: At some point, you invariably have to give in to a little bit of that temptation, so I think when I was in college, I think I sold off about half my position just because it was just silly to have that for so long and not have the capital for anything else. So I’m not averse to locking in your cost basis or something like that in an investment. If you do that, you tend to kind of relax a little bit. And it is really hard to let those winners run. You wanna sell the winners and buy the losers, right?

Meb: That’s the beauty of the private investments that you’re making now that we talk a lot about. So used to be, in my mind, I thought illiquidity was a bug. In many ways, it’s the future because it keeps investors behaviourally keeping their hands out of the cookie jar and allowing these things time to compound, but also on the flip side, I do think it’s prudent to be able to trim those because talk about the amount of emotional and psychological trauma that if you did have a 20, 50, 100-bagger and then something happened, it goes to 0…those have happened in the real world too if you look at kind of what’s happened with GE.

Steven: This is why I don’t play with biotech.

Meb: Yeah. Exactly.

Steven: Biotech has burned me too many times.

Meb: It’s still too raw for me to talk about and then all my worst trades are biotech. It’s not even close.

Steven: Yeah. Just avoid the sector if you can.

Meb: I know. Steven, where do people find what you guys are up to, what you’re writing about? If they’re interested in investing, where do they go?

Steven: You can go to starbridgevc.com, Victor Charlie. That’s where you’ll find all of our fund materials, full deck. Just sign up with your email and you can get access to that. If you reach out to me, I can probably even send you some of our LP updates if you want some more in-depth look at how we think and what the investments look like and what they’re likely to be over time, even have some very good performance numbers out of Fund 1 that you can take a look at. We’re actively doing Fund 2 at the moment, so that’s what’s occupying most of my time. We’ve got some good LPs coming in for the first close of Fund 2 and several companies in final diligence here that we’re pretty excited about to introduce to some of our investors.

Meb: Exciting. Well, this has been super fun. It’s been very generous of you. You’re definitely gonna get some emails, so thanks so much for taking the time, Steven. It was a blast.

Steven: Yeah, it was a pleasure. Thanks.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you loved the show, if you hated it, shoot us feedback@ themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. My current favourite is Breaker. Thanks for listening, friends, and good investing.

 

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