COLORADO SPRINGS — A drop in space company valuations could open the door to more transactions in the industry, according to an April 17 Space Symposium panel on the outlook for deals, as long as they can navigate increasing regulatory scrutiny.
“There were a lot of deals that we haven’t participated in over the last five years because the companies were overvalued,” said Megan Crawford, co-founder of venture capital firm SpaceFund.
“I like to refer to this as the magic space sprinkles,” she said, “you add space, or AI, or blockchain to the name of your company and all of a sudden the valuation goes up by 100x.”
She said this issue was compounded by a spurt of early-stage space companies that went public in recent years by merging with a special purpose acquisition company (SPAC), often with lofty business projections despite a lack of current revenues.
Their high-profile valuations helped raise price tags across the rest of the industry, however, the vast majority of early-stage companies that merged with a SPAC have since significantly underperformed in the public market.
“On the public side, I think there’s a lot of blowback from public equity investors about the newspace sector,” said Matt Kuta, chief operating officer at industry consolidator Voyager Space.
He said “a lot of institutional investors have lost hundreds and hundreds of millions of dollars, and that then trickles down to the folks that are looking to allocate private capital.”
The poor trading performance of space companies that went public via a SPAC, coupled with high inflation and other macroeconomic challenges, are weighing on valuations as investors become more conservative in general.
The hype that had been inflating space valuations is “starting to fade,” Crawford said, “and we’re starting to see deals that are a lot more in line with what we think are the real valuations of a lot of these … companies that we think were highly over-valued over the last couple of years.”
However, the panel also pointed to an increasingly tough regulatory environment standing in the way of acquisitions in the space industry.
The Committee on Foreign Investment in the United States (CFIUS), which reviews certain foreign investments in American companies, “remains a huge concern, as well as anti-trust” obstacles, said Sameer Garg, managing director and head of space investment banking at New York-based Citi.
“We’re seeing that all across the board,” Garg said. Regulatory concerns are now “really front and center” of conversations Citi has with clients early on in a merger and acquisition (M&A) process, “as opposed to something that you typically pick up in the second round of diligence,” he said.
But while Garg expects increasing regulatory scrutiny will impact both private and public transactions, he said the underlying M&A environment continues to be constructive for deal-making.