Launch is Not Commoditized

I’m back! It's Mo, back with another edition of my secret newsletter. You're receiving this because you've referred at least one person to the Payload flagship newsletter!

Please note: this article is intended for informational purposes only and should not be construed as investment advice or recommendations for any specific transaction, service, or product.

Launch is Not Commoditized

The launch market is not commoditized. Despite the 180+ launch companies vying to get to orbit, there’s still opportunity for investors to generate real return.

Investors often highlight the growing number of launchers aspiring to make it to space as evidence that the market is at a tipping point, but the vast majority of these startups will fail to become viable entities.

This is not a commentary on their technical capabilities, but rather a reflection of the harsh economic reality that securing sufficient capital to compete against well-funded, established launch startups with meaningful development leads is likely an insurmountable challenge—especially for those focusing on traditional vertical launch.

A SpaceX Monopoly?

Although SpaceX currently has an effective monopoly over the launch supply, it will not be the sole winner, because:

• Smaller satellite operators still struggle to get on SpaceX's launch schedule. Transporter missions are intended to add more capacity for these small sat operators, but a rideshare mission might not even get to your desired orbit, which means additional costs for propulsion or an orbital transfer vehicle. This can lead to substantial cost overruns, which for startups, could lead to financial failure in today’s fundraising market.

  • A brief glance at of SpaceX's rideshare booking system reveals no upcoming flights to LEO this year or next. The next available rideshare flight to SSO is not scheduled until February 2025. While the website might not show the most recent data, the findings corroborate anecdotal evidence from potential customers.

• SpaceX has reached the upper bound of meaningful cost improvements possible from the Falcon 9. Consequently, the cost per kg is not expected to see significant changes in the future. Any drastic shifts in launch cost will hinge on Starship's development. Unless Falcon 9 can substantially increase its capacity for rideshare missions, a gap will persist for companies seeking to launch small-to-medium payloads into space.

  • Rideshare missions are also less profitable, giving SpaceX little reason to prioritize these types of launches. Absent an increased cadence, operators will have to weigh whether the 40-50% lower cost per kg with SpaceX is worth the scheduling woes.

• SpaceX will inevitably pivot most of its resources toward Starship and beyond-Earth applications, at the expense of Falcon 9. While Starship holds great potential for launching satellite constellations and large-scale space infrastructure, it’s unlikely to facilitate dedicated rideshare missions for small satellites in the near future. Most estimates predict the first commercial launch won't happen for another 3-5 years, offering a real opportunity for a new player to capture market share.

• Perhaps the most critical factor: the US government will never want to be beholden to one launch company and it will invariably require multiple reliable options, even if it means paying a premium. Exhibit A: United Launch Alliance. Outside of the US, it’s worth noting that foreign governments will also not want to rely on SpaceX, demonstrating an additional investment case since foreign countries will likely rely on domestic launch providers for national security missions.

Launch Landscape

Navigating the launch market as an investor is tough. History is littered with failed companies, including Virgin Orbit which declared bankruptcy this year burning substantial investor capital only to make it to orbit four times. Despite this somewhat bleak outlook, there are real opportunities for investors in launch startups that focus on the small-to-medium lift payload category.

The chart below compares the total capital raised against the payload capacity of some of the major US private launch companies that have attempted at least one launch: Virgin Orbit, Relativity, Rocket Lab, Astra, ABL, and Firefly. Note that this chart does not reflect any upgraded vehicles announced by these companies (as most have).

Although this representation may seem overly simplistic, it brings key questions that investors need to be thinking about to the forefront: How much capital are you burning to get to orbit? And does that lend itself to a viable business model?

I’ve provided additional details on each of the companies below. The TLDR? Relativity, Rocket Lab, ABL, and Firefly still have a real shot at capturing enough market share to warrant viable businesses, but they likely all won’t make it.

• Virgin Orbit: Not much needs to be said here. The company burned through a staggering $1.5B, primarily sourced from investor capital and some grants. The air-launch system was never destined for longevity. The lack of sufficient revenue per launch in the <500kg payload class, coupled with the inability to scale the launch significantly beyond a 500 kg payload capacity due to Cosmic Girl’s limitations, were overwhelming hurdles.

• Relativity: Relativity had the most successful first attempt of any privately-funded US launch startup in March. Despite their launch vehicle, Terran 1 (1,000kg to LEO), falling short of reaching orbit, it marked more milestones than any other company in its category on its maiden attempt. However, in a surprising twist, the company shelved Terran 1 development and redirected its resources towards its larger Terran R (23,000 kg + to LEO).

  The primary rationale for this pivot, as far as I can tell, is fundraising-related, with Terran R being a more palatable proposition for investors because of its closer resemblance to SpaceX’s Falcon 9. Relativity has now delayed its revenue generation by another one to two years and is likely in need of billions in capex to fund Terran R. The company's new direction aligns it more closely with SpaceX, but the long-term capital requirements present a real risk to investors.

• Rocket Lab: Rocket Lab quickly realized that the Electron (300 kg to LEO) was never going to be a viable business (despite successfully launching 34 times, the launch business still does not have positive gross margins). Currently, Rocket Lab's launch business accounts for a mere 35-40% of its total revenue. Its spacecraft division generates the rest.

  The company has pivoted toward the Neutron (13,000 kg to LEO) launch vehicle, which promises to significantly cut costs through reusability. As of Q1, Rocket Lab reported $400M of cash reserves. Given its track record of successful execution thus far, the company is well-positioned to deliver on Neutron.

• Astra: Unfortunately, Astra is at its last stand. At the end of Q1, the company had $63M of cash left, giving it about three quarters of operational runway. The company lacks the time it needs to build the necessary credibility to generate launch revenue. It’s difficult to see how this business will continue outside of a sale.

• ABL: ABL’s first launch attempt of its RS1 (1,350 kg to LEO) vehicle earlier this year ended 11 seconds after launch when the first stage suffered a loss of power. Since then, the company has been strategically quiet about its technical progress towards its second launch attempt.

  ABL is using a novel, mobile, ground-based system that allows the vehicle to theoretically launch from any flat surface—a technology that has significant defense use cases. Given when the company raised its last fundraising round (October 2021), there’s little doubt that the company is in market or soon will be for another fundraising round.

• Firefly: Firefly dramatically reached orbit on the second launch attempt of its Alpha (1,375 kg to LEO) launch vehicle last Fall. The company has raised the least amount of capital of its class so far (the company is in the midst of a Series C), but it needs to demonstrate launch consistency with its third Alpha launch slated for this Summer. Long-term capital concerns are somewhat mitigated because of its collaboration with Northrop Grumman on its next-generation launch vehicle, MLV, which is anticipated to replace the Antares.

Outside of these companies, there are a few other potential options, but they all come with their own caveats:

• Blue Origin: The New Glenn (45,000 kg to LEO) launch vehicle will be Blue Origin’s answer to SpaceX’s Starship. However, like Starship, New Glenn is likely to grapple with scheduling issues for smaller satellite operators. Plus, New Glenn has been lagging in its timeline, with no concrete deadline for operational readiness.

• ULA: With the retirement of the Delta IV Heavy and the Atlas V, ULA’s new hope is the two-stage to orbit Vulcan Centaur (27,200 kg to LEO). The Vulcan is manifested out into 2025 between USSF and NASA’s CRS missions, so it’s not a near-term option for commercial customers.

• Stoke Space, a Seattle-based outfit, might be the only other dark horse among US-based launch startups. The company is emphasizing rapid reusability, and innovating by building and testing its second stage first. Stoke boasts an exceptional team and is performing well technically, but will not be able to showcase any type of orbital attempt until late 2025.

Despite the differences in tech and timeline among the companies on this list, they face some common challenges:

• Capital: We’re in a fundraising market where any company attempting to raise over $100M is going to have a very difficult time. The market for growth capital remains closed and the IPO window is likely not going to open until the first half of 2024. Any company without orbital success seeking additional funding will need a special blend of a unique business model or a compelling technological edge to win the hearts of institutional investors (there are a couple of companies here that fit the bill).

• Business Model: The market for <1,000 kg to LEO payload capacity does not scale commercially. The margins don’t work (as evidenced by Virgin Orbit). However, 1,000+ kg to LEO holds promise. Between Relativity, ABL, and Firefly, there are collectively billions of dollars of opportunities (LOIs, MOUs, and binding contracts) for their small launch vehicles over the next few years. ABL’s RS1 alone won a Lockheed Martin block buy of 26 vehicles through 2025 and then up to 32 additional launches through 2029. As long as one of these companies can deliver a consistent and viable launch system, there will be a market.

If you're still with me, let me leave you with this takeaway: investing in launch is certainly not for the faint of heart. However, for those willing to roll up their sleeves, a significant investment opportunity exists in this large, rapidly-evolving, and nuanced market. Ultimately, primes and governments don't want to rely on a single provider, and the commercial market is seeking greater flexibility in launch scheduling. These dynamics alone could pave the way for other winners.