It isn’t surprising that more and more space companies are pivoting to defense. Defense budgets are rising across the board, and rising quickly. In fact, the sum of money set to be available is eye-watering. Now that NATO has pledged to spend 5% of GDP by 2035, McKinsey thinks that annual defense spending across the European NATO member states could reach €800 billion ($928 billion) in the next five years. If we add the non-European NATO countries, we are looking at total spending of €3.6 billion in 2035. But how should space companies see this shift? And how should investors respond?
Space for defense
Robert Brüll and Air Marshal Andrew Turner painted a vivid picture of the many threats now facing satellites. Satellites provide the precision and coordination that makes those on the ground more effective by orders of magnitude. That’s why space technology is viewed as a strategic asset, and why government defense agencies are turning to commercial space companies to fill critical gaps. Why commercial space? Because they’re faster, more agile, more scaleable, with better technology and more creativity than government programs. They’re better value for money too.
The architects of Germany’s €650 billion defense push have explicitly stated that for this and other reasons they want to use private space companies to rearm. The Pentagon’s Commercial Augmentation Space Reserve (CASR), too, will involve turning to private space companies. The White House’s widely reported $175 billion Golden Dome project is opening up to ‘non-traditional’ space firms.
The opportunity
For investors like me, this represents yet another exciting chapter in the story of space. It’s true that space was already a massive market, full of companies addressing major, even existential human problems from the climate crisis to collapsing economic productivity in the developed world. But it’s now indisputable that space has become an asset class on its own. And investors — including large institutional investors — can’t afford to ignore it. Space tech is essential, not speculative. Because of this, even more traditional or risk-averse investors, such as pension funds, must take note.
But space companies should be wary. Big government contracts can be lucrative and therefore tempting. There’s also the imperative for private sector operators to support national defense if they’re in a position to do so. But space companies would do well not to put all their eggs in one basket. What they offer is tempting: governments want it. But governments lack deep institutional knowledge of space. They move in a very different culture, with very different mindsets. The lack of understanding leads to an inherent lack of trust. On the other hand, space companies pursuing growth should recognize that government procurement processes are slow and laborious. Yes, they are speeding up, but for now defense contracts can mean delayed purchasing orders, cancelled deals and unexpected dependencies.
Dual-use is the sweet spot
There are many more customers — and there’s much more money — in the commercial sector. So the key for space companies is to manage the pivot, which means resisting the temptation to turn their back on commercial markets. The companies that do that will benefit enormously, because that drip-drip-drip of defense funding can bring longer-term upside to the companies. Commercial is foundational; government business is the cherry on top. Another way to say this is that the sweet spot is dual-use. Companies whose innovations have both civil and defense applications are in the best possible position to enjoy the benefits that lie in both markets. Those benefits include diverse revenue streams, greater resilience to market volatility and the ability to shift emphasis with the ebb and flow of market demand.
Is anyone doing this well? The short answer is: yes. Of course, Starlink and SpaceX are the outstanding examples. But there are lesser known companies making a huge impact, too. Consider the enormous success of ICEYE, owner of the world’s largest constellation of synthetic aperture radar satellites. The team has unfussily integrated its solutions across multiple sectors to the benefit of all. Their satellites are now used for maritime activity monitoring, flood detection and response and support in conflict zones like Ukraine. Another great example is FibreCoat, which has a highly inventive materials development process that has eliminated the historic need for companies to set qualities like weight, resilience and cost against one another. The trade-offs are gone: FibreCoat’s materials are low-cost, lightweight and ultraresilient. Simera Sense, too, has used its high-tech satellite imaging cameras and optical payload solutions to great effect in multiple domains. The French deeptech firm Cailabs are doing the same with its optical ground stations, which preserve the integrity of laser communication —nearly impossible to intercept or jam — even through atmospheric turbulence.
The message here is that for defense ministers, commercial space provides the innovation, agility, precision and efficiency that all modern armies need. For space companies, defense presents a lucrative opportunity — but they must maintain a commercial focus at the same time.
Bogdan Gogulan is CEO and Managing Partner at NewSpace Capital.
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