What I learned investing in China’s spacetech industry

China became the first country to successfully land a robotic spacecraft (named Chang’e 4) on the far side of the moon on January 3, 2019. The mission saw the first seeds to sprout on the moon.

According to The New York Times, China now plans to begin fully operating its third space station by 2022 and put astronauts in a lunar base later in that year. After that, it looks to send probes to Mars, including ones that could return samples of the Martian surface back to Earth.

What do these achievements mean for China’s commercial space industry? In this article, I want to share the lessons I’ve learned as a venture capital investor in the industry, as well as three technical considerations for investing in spacetech startups.

China’s “space first” policy

Startups should look to government policies for clues on future investment trends. For example, China’s new policy prioritizes the space industry. President Xi Jinping said, “Space is an important field of scientific and technological progress and innovation, and achievements in this regard are also important symbols of a country’s scientific and technological strength.”

The country’s national space launch site was first made available to private space companies in 2018, championing civilian-military integration. But even though China’s policies are very friendly towards spacetech startups, I believe there is a need for more detailed execution guidelines for various incentives and benefits.

Given the impressive growth of the global spacetech market, with US$4 billion combined funding from 2016 to 2017 and unicorns like SpaceX (valued at US$21.5 billion as of 2019), China is eager not to fall behind.

One thing that surprised me was the dedication of Chinese entrepreneurs and spacetech professionals. While I was doing some research on investment opportunities in the space, I met many inspirational Chinese professionals. I observed that there’s also a shift from state jobs to private jobs. Many have given up their secure jobs at state-owned institutions to join commercial space enterprises, ready to explore unknown areas.

This new era is not possible without China’s “space first” policy, marking an important turning point in the country’s contribution to civilization.

Technology isn’t the challenge

One of the main challenges in the commercial space industry is the lack of customer buy-in. Almost all the customers at this stage are state-owned enterprises, which are used to purchasing launch services from state organizations and not private companies. Although the customers are happy to see competition on the supply side, it still takes time to convince them about technology and reliability.

Another challenge is with the investor side. The space ecosystem is becoming a very dynamic market, and all of the top Chinese VC firms have started to place their bets. However, given the required capital expenditure, mainstream VCs are not the usual investors in this market. A typical rocket project on the state level requires an investment of 1.5 billion yuan (US$224 million) to 10 billion yuan (US$1.5 billion) for larger rockets. Therefore, VC investment is more suitable for early-stage projects.

Furthermore, there are a lot of state capital, provincial capital, and public companies providing funding because doing so has positive effects on the economies of their respective provinces. Entrepreneurs should then investigate funding opportunities and potential partnerships with Chinese provinces. They should also note that foreign VCs cannot invest in restricted industries, such as aerospace and autonomous driving.

China looks to the US

In China, the commercial ecosystem for space technology is still in the early stage. Currently, there are 80 commercial spacetech companies in China and counting. Almost all of them come from the same state space organization.

One key thing that China can learn from the US is building a competitive ecosystem. Many other foreign commercial space companies are springing up in the wake of SpaceX, such as Blue Origin (funded by Amazon’s Jeff Bezos), Rocket Lab, and Vector. Foreign companies have set examples for feasible commercialization and brought great returns to early-stage investors. The innovative and entrepreneurial spirit in the US is compelling Chinese launchers to respond.

A competitive market is essential for China to keep its leadership in space as it not only drives down cost but also significantly accelerates the development and adoption of new technology. This mechanism worked to China’s advantage during the internet and mobile revolution, and the country is still benefitting from it now amid the fintech wave and AI upgrade. A healthy combination of a market system with government purchases can assure China’s spacetech strength.

The US also offers a great example to follow regarding civilian-military integration, which started with Lockheed Martin and Boeing and is now made mainstream through SpaceX.

Technical considerations in investing

Conclusion