Financing the European space sector

Air December 11, 2019

The European Commission has released a report looking at the future of Europe’s space sector. The report examines the space economy and recommendations for the future. It covers access to finance for the competitive space industry, the space sector and its business models, the funding landscape for space companies, key findings of access to finance conditions for space companies in Europe, and recommendations.

The report starts with an executive summary which looks at economic growth in the sector. The worldwide space economy grew by 6.7% on average a year between 2005 and 2017 and satellites represent the largest subsection, around 37% of the industry. The summary looks at different areas of the industry including commercial and security. The summary ends with a call for a ‘finance for space’ organisation to bridge the gap in understanding between the space and financial sectors.

The first section is an in-depth look into how the space sector can be financed. It details a study by the EU into the current investment sector, examining gaps and proposing solutions for the supply chain. The study looked at interviews with companies to examine space organisations’ experiences with the market. Recommendations were developed based on the findings of these interviews. The respondents agreed that a business model was needed to compensate for the fact that few people in the space sector have experience with business and finance. The section looks at financing behind the biggest industry within the sector, satellites. Commercial communications, government communications and Earth observation make up the majority of the industry. Earth observation is experiencing the biggest changes, according to the report, due to technological advancement and increased capability.

Organisations are making use of advancements such as smaller satellites, better processing capabilities, the build-up and replacement of Earth observation systems over a shorter space of time, cost-effective satellite constellations, and an extension of sensor capabilities. The report looks at technology trends disrupting the market. Advancements such as 3D printing, nanotechnology, and AI have made changes to the space sector. It looks at the possibility of exploring the solar system for resources that are rare on Earth. Another potential revenue is improved capability on existing satellites to improve communication services on the ground. This industry has become attractive to businesses and new services are being rolled out.

The EU Framework Programme for Research and Innovation, or Horizon 2020, provides funding for new projects mostly through grants. Horizon 2020 aims to fund SMEs through dedicated programmes. The European Space Agency offers to fund to companies working on research and development in space. In recent years the agency has given around €390million to support research and development.

The funding covers projects from basic research to application development. The InnovFin Space Equity Pilot (ISEP) funds SMEs and enterprises in the space sector with €50million from the EU budget. Other funding instruments include the European Innovation Council (EIC), Eurostars, and Fast Track to Innovation (FTI). There are also national and regional funds available in member states and sector-specific funding. The report details specific projects including objectives, funding available, and organisation.

OHB System AG was awarded €30million to develop an electric satellite propulsion platform. Government incentives have been set up to alleviate credit concerns for companies. Financing differs depending on the governments involved. Export-credit agencies mostly offer to fund up to 85% of a contract’s value with lower rates than banks. The report explores the quality of European funding frameworks. The report details the hurdles faced by European space companies. European star-ups often struggle to reach the same level as their peers in China and America. In a survey, European organisations said that there was a gap between their needs and the accessibility and availability of funding. The report looks at other results of this survey.

One issue proposed in the report is that there is a lack of individuals in the industry with both space and investment knowledge. In order to ensure proper funding, investors must understand the space sector, according to the report. This is especially true with modern space research which requires many different business styles. Many projects require a different approach to funding. Investment in the US is higher than in Europe. Start-ups rely mostly on public money for projects. Responders to the survey said they look to the US for investment and some considered moving their operation there. Most space experts work in space agencies and larger space organisations rather than seeking out smaller start-up enterprises. Non-US investment has risen, but the vast majority of money is still going to the US space industry. Space technology requires a longer development than other innovations, which require longer financial sustainment from investors.

The latest projects reduce the time needed for development, making investment more attractive. The report recommends that start-ups become more adept at dealing with bureaucratic procurement processes and long integration cycles. It suggests looking to established start-ups for guidance. The biggest issues in securing public funds are technology risk, business case, and market maturity. Respondents in the survey said that a bottom-up approach should be adopted and the process should be simplified. The landscape is improving, with more calls to fund innovative research in Europe as well as an increasing number of new organisations receiving Horizon 2020 research funds.

The report concludes with recommendations based on its findings. The first is to restructure and strengthen the ecosystem of public support mechanisms. To create a more flexible environment based on commercialisation, with a more integrated and less prescriptive system. It suggests European governments should create more initiatives to support start-ups. It says that reducing fragmentation and creating a more unified system would allow for more ideas to find time for development. The next recommendation is to create mechanisms based on the public sector. Initiatives such as Horizon 2020’s SME fund allows the EU to support developments that meet public sector needs. This kind of funding has been piloted in the space sector.

The third recommendation encourages investors to adopt a European Defence Policy as a driver for market development. The EU encourages dual-use space innovation that unites with defence plans. Projects that serve multiple needs in security and military environments will be more attractive to investors. Recommendation four says that organisations must increase the volume of risk capital and catalyse additional private investment in the sector. Suppliers and investors express concerns over market maturity and lack of exit opportunities, and a lack of understanding about space. The fifth recommendation emphasises the need to establish a ‘finance for space’ forum that brings together people from academia, policymaking, industry, and finance to develop financing solutions suitable for the space sector. The different levels of the space sector supply chain often do not fully understand each other, and a single financing forum could make the process more efficient.

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