The votes are in an this update of Space and Ecology themed Economics and Finance topics by Lizard King is a discussion of the Space Fund. Space Fund is a venture capital firm investing in space and related industries. I’m going to discuss the venture capital process, how space ventures are poorly suited to the VC process, and the imaginative solution Space Fund has to resolving the dilemma.
One of the challenges of Venture Capital is it is limited in the scale and scope of its investors. The legal organization of most VC firms has them limited to only 100 investors per fund. That makes it difficult to pool a trillion dollars. Especially since they must also limit themselves to “accredited” investors. These are high income individuals or high net worth individuals that are free from other government restrictions such as country of origin being from a sanctioned county. Other restrictions prevent certain countries from obtaining more than 10% ownership in key or sensitive technology startups. The VC firm must have a robust vetting process to ensure it does not take in investment capital from those who are not qualified. Fear not. Space Fund has an innovative solution.
The typical VC fund lasts about a decade. This requires the firm to focus on investments that have a 7 to 10 year “exit”, usually an IPO but sometimes a cash sale to larger firm. Many space technology firms have gone up to three decades before seeing their first REVENUE, much less profit. A fresh space start up might need half a century to make a market exit. This might be fine for an ultra-wealthy family that is investing part of its wealth for inter-generational use or a University endowment with a centuries long investing horizon. For individual accredited investors it can be a non starter. To make space investing work on a large scale, there needs to be a way for individual investors to exit their investment prior to the companies going public. Space Fund’s solution resolves this too.
For conventional VC investors liquidity is very poor. You essentially lock up your capital for a decade with no realistic way to live off distributions or cash out for a better opportunity. Part of the problem is even if the fund was designed to let investors, borrow, lend, or sell their interest, someone has to ensure the counter parties have the legal right to invest in the VC. Another issue is VC investments tend be in large indivisible lump sums of half a million dollar units or more. If you speculate with a portion of your retirement so that you want to withdraw 4% of your balance a year after a certain date, there is no mechanism to divest of less than a 25% or more at a time. Space Fund’s solution fixes this as well.
Space Fund proposes to resolve these issues and other lesser problems with Block Chain technology. Ownership in the VC’s interests will be tokenized within a “smart contract” coin. These coins will be highly divisible and the block chain will do the grunt work of ensuring that anyone wishing to purchase coins or partial coins is properly authorized. A permanent record of all transactions from the inception of the fund to its eventual termination will be kept on the block chain for inspection by money laundering authorities, security agencies, and tax authorities. You can sell off part or all of your stake in 10 years if you have the typical VC mindset. It has taken quite some time to convince the Security and Exchange Commission that this is a valid approach but they have warmed to the idea and approval is all but certain at this point.
Space Fund takes in investments from accredited investors in $500,000 or larger tranches. It pools the capital and spreads it out across a number of promising companies in the broader space investing universe. There are five major categories of interest: Transportation, Communication, Human Factors, Supply Chain, and Energy.
The transportation sector is pretty obvious. There is a need (and money to be made) in getting things off planet and moving them around from place to place. Investment is needed in on ground based infrastructure, rockets, propulsion systems, and cargo modules.
The communications sector is critical. There is a need to get data from one point to another both from one point in space to another but also between Earth and orbit. This is probably the first area where there will be early exits as the market and regulatory environment for communication satellites is already well developed.
Human Factors should be near and dear to the Living Universe Foundation. This sector is for investments in anything and everything that is necessary to keep people alive off planet. But it is also for anything that can also make life better on Earth.
Supply Chain is a segment for anything that is needed to keep human and/or robotic activity supplied off planet. Naturally, there will be some overlap with terrestrial supply chain needs.
The final Energy segment is for any company that aims to create or capture energy for use either in space or on Earth.
Space Fund has an interesting tool that LUF members might want to explore. It is still being built out but there is a Reality Rating database on the company website. This is actually a series of databases by category with sub-sectors still being built out. The firm’s experts rate on a scale where each company in their areas of interest are in such areas as technology, management, financing, and more. They produce a more or less objective rating system to identify who has a real shot at getting their plans in motion versus the dreamers who have a neat idea but no real infrastructure. The Venus Project might score 1 or 2 out of 10, while Boeing might score a 9. The firm uses this rating system to handicap whether or not (and how much) to invest in its universe of opportunities.
The database project has already produced three Rising Stars. These are Spacebridge Logistics, Axiom Space, and Orbit Fab. Spacebridge Logistics is a software company that helps companies leverage their investments in space technology. It isn’t as glamorous as building rockets but the margins are a lot better and the company puts a lot less capital at risk to earn revenue. With each added customer they gain additional valuable insight into what works and what doesn’t making their service more valuable to the community. Axiom Space has a good track record working with governments to get things done in space and have been involved in some of the early space tourist ventures. Axiom’s modules will be on-orbit facilities for national (sovereign) astronauts, space tourism (private astronauts), research and manufacturing in microgravity, testing of deep space exploration systems, and advertising. By serving these audiences, Axiom carries on the efforts the ISS began. First attached to the ISS as the Axiom Segment, and later composing the free-flying Axiom Station, the commercial space station will open life and work in space to the entirety of the global community. Orbit Fab is a company that is changing the paradigm of what it means to operate in space. Just as Musk is reusing rocket stages, they are designing many things in space for re-use and are a leader contender for on an on orbit refueling capability. Their services can bring costs down for their customers by an order of magnitude and their expertise is sure to be in high demand.
What do you think of Space Fund and Tokenization of space investing? Say something in the comments. And do me a solid favor by sharing, tweeting, posting, pinning, and more to promote this post and the Living Universe Foundation.