A Closer Look at the NatSec100 Space Companies

September 28th, 2023

*First Flight of SpaceX's Falcon Heavy, February 6th, 2018*

This past July, Silicon Valley Defense Group (SVDG) released our inaugural NatSec100 Report, an annual ranked list of the top venture-funded defense and dual-use startups designed to offer a data-driven snapshot of the evolving techno-security ecosystem. Companies working on space-related technologies comprised over one-third of the NatSec100–the most dominant tech vertical across the list, tied only with AI/ML. A closer look at the space industry reveals a nascent yet growing landscape of companies, serving both commercial and governmental customers, that has flourished due in large part to foundational investments from the Department of Defense (DOD) and NASA. Yet more work remains if the industry is to keep advancing these critically important national security capabilities. The government must continue to serve as a reliable and consistent partner to commercial space companies, offering funding and guidance while keeping up with the pace of this industry’s innovation.

This report continues an ongoing conversation that SVDG began with this year’s NatSec100 report and continued during a recent SVDG webinar on venture-backed space companies and national security. The first section of the analysis below describes how NASA and the DOD’s early support of SpaceX–through guidance, signals, and funding–contributed to the company’s success, thereby accelerating the commercial space economy’s growth and development. This SpaceX case study is further explored as a model for the DOD’s capacity to support the development of critical emerging technologies by leveraging private capital. The report then examines this year’s NatSec100 space companies by their primary subcategories, noting several ways in which the DOD is currently trying to support the burgeoning commercial space market through nontraditional contracts. The government’s financial support to the NatSec100 space companies is then contrasted against the large sum of private capital raised by these companies. This disparity, along with recent declines in private capital investment, is offered as evidence that the ability of venture-backed space companies to provide critical national security capabilities is dependent on the government’s continued support of the commercial space market.

Sowing Cosmic Seeds: NASA, DOD, & SpaceX

*Viasat Satellite Rendering; Source:* *Viasat*

Space has historically been a vital national security domain. Advancements in materials, signals, and sensing technology developed by NASA and the DOD in the 20th century are illustrative of the traditional trend wherein technology created for national security purposes is later deployed for commercial use cases as well. Despite being built using strict government requirements, several space technologies had viable civilian applications that companies subsequently commercialized for non-governmental use. The development of satellite communications and GPS is perhaps the best example of the final frontier’s capacity to be fertile ground for new and emerging capabilities with both public and commercial appeal. Companies like Viasat, which has been operating at the intersection of national security and commercial markets for almost four decades, illustrates the commercial space industry’s rich history of deploying dual-use tech.

While many of the technologies that NatSec100 space companies are developing could be described as “dual-use,” the government’s participation in building this tech differs in several key ways from its role in the past. In fact, the growing commercial space economy is a direct result of the government, in some instances, being more open to assisting the development of technology that has overt commercial appeal from the onset. The government’s increasing willingness to support overtly dual-use space technology, in turn, helped to incentivize private capital to take a more active role in financing many nontraditional space companies.

SpaceX as a Model for Public-Private Partnerships

SpaceX, which ranked first on this year’s NatSec100, is not only the most notable example, thus far, of the government backing a private nontraditional space company, but also a significant reason why the commercial space industry exists as it does today. Notably, the manner in which the DOD and NASA offered early support to SpaceX was just as important as the support itself. For these reasons, SpaceX presents a compelling and recent case study of the government leveraging public-private partnerships to unlock pertinent national security capabilities while encouraging private investment.

DARPA awarded SpaceX’s first-ever government funding for the agency’s Falcon program (coincidently sharing the name of SpaceX’s first rocket: Falcon 1). Although the initial amount of this R&D grant was only half a million dollars, the value provided by DARPA to SpaceX in the form of general guidance and support is difficult to quantify. In addition to granting money to the then cashed-strapped startup, DARPA also helped SpaceX navigate their relationship with the Air Force and Army–the latter of which proved instrumental in SpaceX securing their first launch site at an Army installation on Omelek Island. DARPA continues to play an instrumental role in shepherding technology companies through the intricacies of the Department of Defense, as does the Defense Innovation Unit (DIU), whose mission is to accelerate the adoption of commercial technology by the DOD. In the case of SpaceX, DARPA’s support illustrates the importance of the government not only awarding R&D funds, but also acting as a guide for navigating the often-complicated process of becoming a new government contractor. Providing a DOD entryway was essential for SpaceX’s eventual success–as it remains for many defense and dual-use startups today.

*SpaceX Crew Dragon Endeavor; Source:* *NASA*

SpaceX’s next significant contract came from NASA–also through nontraditional means as well. In advance of the Space Shuttle’s retirement, NASA sought commercial partners' services to transport supplies to and from the International Space Station (ISS). After SpaceX successfully protested a NASA contract for transportation services awarded to Kistler Aerospace, NASA developed the Commercial Orbital Transportation Services (COTS) program. To fully leverage the potential of a highly nascent commercial space industry, NASA did not force bidders to confirm with a detailed set of requirements. Instead, bidders could choose which capabilities to offer amongst several broad possibilities. By utilizing cooperative Space Act agreements instead of traditional FAR-based contracts, companies were allowed to innovate on specific capabilities that could have commercial appeal in the future. Unlike conventional cost-plus contracts, potential commercial partners shared the development costs of creating their COTS system; in exchange, they retained the intellectual property rights to their system, which aided in bolstering the commercial viability of a potential marketplace in which NASA was just one of several customers.

Although SpaceX was awarded funding through COTS, the ultimate success of NASA’s procurement strategy was pairing COTS with the Commercial Resupply Services (CRS) program, wherein NASA would independently purchase ISS resupply services from commercial companies that possessed this capability. This two-step acquisition strategy provided companies with funding for the research and development of new systems and a direct pathway to future fixed-price contracts that would yield recurring revenue.

SpaceX’s demonstrated success in securing government awards aided its ability to secure private funding. Moreover, private capital’s willingness to invest in SpaceX was also a result of NASA clearly signaling its intention to award additional recurring revenue, which it did through public statements geared towards companies developing relevant capabilities. In addition to these announcements, the pipeline from COTS to CRS was also an essential element of NASA’s success in encouraging private capital markets to invest in SpaceX. This pipeline demonstrated the government’s willingness to fund R&D for desired capabilities and its intention to procure those capabilities through services from SpaceX in the future–a key indicator for investors when evaluating SpaceX as a potential investment.

Early Dividends: Government’s ROI from SpaceX

DARPA and NASA could not have anticipated the effect their early investments into SpaceX would eventually have in 2022 after Russia invaded Ukraine. Until SpaceX’s Crew Dragon began carrying American astronauts aboard American rockets from American soil in 2020, the United States relied solely on Russian spacecraft to transport humans and cargo to and from the ISS for nearly a decade. The implications of this reliance in light of the war in Ukraine could have been profoundly negative. Further, SpaceX’s satellite internet system, Starlink, became indispensable to Ukraine’s ability to remain connected after the Russian invasion. Although the DOD did not contribute directly to the development of Starlink, the government’s foundational support to SpaceX contributed to the company’s ability to develop new critical technologies that eventually did have a profound impact in a military conflict.

*Starlink Constellation as seen from Earth*

While the DOD may never be able to fully anticipate its future needs, it can nevertheless maintain access to a vast array of cutting-edge capabilities by supporting the development of a robust entrepreneurial market of dual-use companies. Leveraging private capital in such a manner increases the likelihood of these companies developing technologies that may one day prove instrumental in preventing or winning future conflicts.

In addition to providing transportation for supplies and astronauts, the government’s early investment in SpaceX yielded two other benefits that have dramatically changed the commercial space industry: increased orbital access and a growing pool of space talent.

The success of SpaceX’s Falcon 9 program was due to the technical ingenuity of the company’s pioneering reuse of an orbital-class booster. This success, which came after three early failures of the company’s Falcon 1 rocket, was made possible through both private and government investment. SpaceX’s success increased launch availability and decreased the price of launching mass to orbit, enabling a new generation of companies to build businesses based on a growing space economy. Moreover, the technical expertise developed by the employees of SpaceX has now since flooded the emerging tech ecosystem, as many of these individuals have gone on to either found or join new space startups of their own–indeed, nearly a quarter of all space companies in this year’s NatSec100 were founded by alums of SpaceX.

The NatSec100 Space Companies

The array of space companies on SVDG's inaugural NatSec100 list represents the industry's past, present, and future. Not including SpaceX, the other 33 space companies have attracted over $7 billion in private capital. While many of these companies are developing several space-related capabilities, for the sake of comparison, Figure 2 organizes companies by their primary subcategory of technology. This is admittedly a somewhat-arbitrary way to delineate these companies, but nevertheless helpful in illustrating broader trends amongst different groups of space companies. DOD and NASA continue to play a central role in providing funding to companies in each of these categories, as will be further explored below.

NatSec100 Space Subcategories & Government Support

The plurality of space companies on this year’s list are developing technology to enable different kinds of in-space infrastructure. The advent of commercial transportation options for supplies and people to low earth orbit (LEO), including SpaceX's Crew Dragon (#1 on the NatSec100 list), Boeing's Starliner, and Sierra Space's Dream Chaser (#4) has made commercially operated LEO destinations viable. NASA has publicly stated that they intend to transition their LEO presence to private space stations–where they would again be one of many government and commercial customers–once the ISS is retired in 2030. Companies such as Axiom Space (#6) and Voyager Space (#80) are developing such private stations.

Furthermore, companies are now being developed to service the greater number of satellites currently in orbit–a number predicted to continue increasing as launch becomes even more readily available at lower costs. These companies include Impulse Space (#30), which is developing orbital maneuvering vehicles, and Orbit Fab (#74), who is developing orbital “gas stations” for refueling spacecraft. The capabilities of all of these companies have commercial and national security implications, and many are already actively working with both commercial and NatSec customers.

*Relativity’s First Launch of Terran 1, March 23rd, 2023; Source:* *Relativity Space*

Launch providers continue to represent a major contingent of space companies on the NatSec100, as both NASA and the DOD continue to fund access to space across various companies. These launch companies are targeting a variety of segments of this market, from small and medium satellites (#85. Phantom Space) to large satellites (#31. Blue Origin), and through novel approaches, such as 3D-printed rockets (#7. Relativity), ultra-flexible ground systems (#35. ABL Space Systems), and fully reusable rockets (#26. Stoke Space). The DOD continues to be a significant purchaser of these services through both traditional and nontraditional means. The Space Force recently expanded their National Security Space Launch (NSSL) Phase 3 plans to include a third provider of heavy lift capability and added 19 new missions. NSSL also takes a two-lane approach with opportunities to onboard developing rockets through less stringent requirements and a more flexible bidding process.

There is also incredibly strong commercial demand for transporting spacecraft to orbit from a variety of commercial companies, some of which are on the NatSec100. These companies include satellite internet providers of varying sizes, such as Astranis (#34), Amazon Kuiper, and One Web. It remains to be seen, however, whether the current number of launch service providers, including publicly-traded companies like Rocket Lab and Astra, will lead to an oversupply or shortfall of launch availability. The implications of SpaceX’s Starship system, which SpaceX purports to be the largest and most powerful rocket ever developed, are also too early to assess accurately.

On the other hand, the impact that NatSec100 companies are having on the global national security ecosystem has already been made readily apparent in Ukraine. In addition to SpaceX’s Starlink, several other commercial companies have played a critical role in this conflict. For instance, HawkEye360 (#81), one of the 6 NatSec100 companies working on satellite imagery and sensing, was able to detect GPS interference in Ukraine using its satellite constellation. Although the relationship between the DOD and these nontraditional commercial providers with battlefield-relevant capabilities is still embryonic, the impact of these companies’ technology is genuine, and will continue to be in future conflicts as well.

Leveraging Private Capital

A key benefit of venture-backed NatSec companies is their ability to leverage private capital to fund research and development when creating new leading-edge technologies. Private investment allows these companies to attract top-tier talent, iterate technology quickly, and scale capabilities quicker than if they utilized government dollars alone. Selling into commercial markets first enables dual-use companies to begin recouping initial investments while navigating the often-complicated DOD contracting ecosystem. However, to deliver emerging technology capabilities to the DOD, these companies must demonstrate to potential investors that the government is a viable and worthwhile customer. Indeed, for some technologies, such as satellite imagery, the commercial market may still be too nascent to adequately support dual-use companies. In these cases, especially when the capabilities are pertinent to national security, the government must play an outsized role in providing funding to ensure the health of the commercial space market.

Presently, the DOD offers several paths for providing funding to startups that are developing new technology. Among the most pre-eminent are the SBIR and STTR programs. For space startups that are eight years and younger, SBIR and STTR awards are the most common forms of public funding–accounting for 44% of all public awards to these companies, according to Space Angels. These programs may also serve as a noteworthy signal to potential investors, although the conversion between SBIR/STTR and future recurring government revenue is rarely so transparent as were NASA’s COTS, CRS, and Commercial Crew Programs. With that being said, SBIR and STTR have been an effective means of promoting commercial innovation in the past. Viasat is often hailed as one such example in the space industry. Having received its first SBIR award in 1987, just one year after the company’s founder, Viasat would later go on to generate billions of dollars in both commercial and federal revenue leading it to a successful IPO in 1996.

*Ursa Major tests its Ripley engine; Source:* *Ursa Major*

The DOD does deserve credit for recent initiatives to enhance the SBIR program’s ability to help nontraditional companies transition between R&D funding to programs of record. The Air Force, specifically the Air Force Research Laboratory (AFRL) and AFWERX (Technology Directorate of AFRL), have developed the Strategic Funding Increase (STRATFI) and Tactical Funding Increase (TACFI) Programs to help bridge the “Valley of Death'' between SBIR Phase II efforts and SBIR Phase III scaling efforts. STRATFI and TACFI awards provide DOD matching funds for companies already awarded an SBIR who are raising private capital to assist the development of their critical national security capabilities. Several of the NatSec100 space companies have received these awards, such as Ursa Major (#20), which is developing rocket propulsion systems that service commercial launch, Tactically Responsive Space launch, and hypersonics. After winning a TACFI last year, Ursa Major recently announced an eight-figure AFRL contract to develop an engine capable of powering hypersonic launches. Varda Space Industries (#99), which is developing an in-space manufacturing platform, is another recent recipient of a STRATFI. Varda’s $60 million STRATFI includes $15 million from Air Force and NASA customers, $15 million from AFWERX, and $30 million in private capital. All of these awards represent significant government revenue for their respective companies, and do indeed serve as an important signal to each companies’ investors.

In terms of other innovative funding strategies, DIU has developed a novel solicitation approach called the Commercial Solutions Opening (CSO), in which it utilizes Other Transaction (OT) agreements to procure capabilities and services–such as access to launch. One such program is DIU’s Victus Nox mission, in which Firefly Aerospace (#58) and Millenium Space Systems had less than 60 hours’ notice to integrate, launch, and establish communications with a satellite. ABL Space Systems (#35) will also complete a similar mission for the Space Force in the coming years. DIU credits its use of OTs and its CSO process to the organization’s cumulative transition rate of 47% from prototyping to end-user sales in the DOD and civilian agencies. DIU’s recent realignment under the authority, direction, and control of the Secretary of Defense was another promising signal of the DOD’s desire to adopt commercial technology in the future, as was the creation of the Office of Strategic Capital (OSC) at the end of last year.

Such a change would be predicated by investors deciding to not back companies who aim to sell into government as a major component of their business. In fact, early signs of this are already beginning to show: venture capital investments in the US space industry dropped to an eight year low in Q1 of this year, according to Space Capital. A decline in the health of this industry would jeopardize the DOD’s ability to access innovative technologies in the space domain at a critical juncture in which China is rapidly expanding its own space-based capabilities.

Venture-backed space companies’ domination of SVDG’s inaugural NatSec100 list is not coincidental. NASA and the DOD’s early investment in the commercial space industry yielded first, second, and even third-order dividends that are just beginning to demonstrate their ability to enhance our national security capabilities in space. These capabilities have broad commercial and national security implications, and aided by easier access to orbit, a robust ecosystem of space startups has formed to advance space technology even further. Keeping the United States’ commercial space economy vibrant is imperative. The DOD’s ability to rapidly respond to urgent operational needs is dramatically enhanced when it can source new capabilities from the entrepreneurial sector–something it can only do by fostering buy-in from private capital providers who may consider backing dual-use companies. While the DOD has made progress in supporting nontraditional companies through organizations such as DIU and AFWERX, more can be done to double down on their efforts. Congressional support for these DOD agencies, and newer initiatives such as the Office of Strategic Capital, is also an essential element of enabling the DOD to be more effective in leveraging the entrepreneurial sector and private capital. At present, the commercial space industry is well-positioned to provide the DOD with access to a wide range of emerging capabilities in the space domain to address both anticipated and unforeseen future challenges. However, the DOD must do more to ensure this industry remains vibrant by demonstrating its commitment to being an essential partner for companies looking to embark on their journey into the cosmos.

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