The writer is a senior researcher at Harvard Business School’s Institute for Strategy and Competitiveness
As each year passes, calls for European space sovereignty — for space launches on European soil by European rockets or Earth-observation data from European satellites — grow louder. But at the same time the distance between US and Chinese aerospace and defence innovation and the European market gets ever larger.
Josef Aschbacher, director-general of the European Space Agency is right, therefore, to demand change. However, the change he is calling for — a Nasa-style model in which the ESA buys defined services instead of managing the development of systems that are then marketed by the private sector — is incompatible with current European funding structures.
Outsourcing innovation to the private sector worked for Nasa for two reasons. First, in the US there are large and mature private capital markets to outsource to. In Europe, the private capital market landscape is very different, in terms of maturity, size and, importantly, the willingness to move in such a direction.
Second, the US government is able to act as a large and reliable customer-of-first-resort for start-ups funded by private markets. In Europe, this is less often the case.
People frequently ask why Europe doesn’t have its own SpaceX. Consider the following. To date, Elon Musk has raised more than $10bn for the space launch start-up, while US investors have ploughed $330bn into industries including the space sector in 2021 alone. Outside America, and including the heavy spender that is China, the total for the sector is just $9bn.
The problem constraining European venture capital spending is twofold. First, the venture funds are too small to offer meaningful backing for large infrastructure projects such as space launch companies. Second, European venture funds are often unable to take on such large, risky defence bets in their portfolios.
As in the US, European VC funds are mostly backed by family offices. However, unlike the US, where the family office strategy is directed towards wealth creation, the European family office strategy is predicated on wealth preservation — a risk-return profile that does not mirror that of large technology bets.
When you consider that SpaceX started out with an initial seed round of about $100mn, which is nearly the entirety of the average European VC fund, and has since raised an amount much larger than the ESA’s budget for a single year, it’s easy to understand why European capital constraints have held back the space launch market.
Aschbacher’s desire to have governments act as a customer-of-first-resort for European space start-ups is admirable. But one forward-thinking man cannot bend an industry to his will.
The numbers speak for themselves. The US defence budget, which fuels growth in the space sector, is slightly more than $800bn. Europe’s is only slightly more than a quarter of that. And while Aschbacher and the ESA have expressed a wish to deal with risky early-stage contractors, the European Defence Agency, which controls most of the European budget, has remained silent.
As Aschbacher notes, Europe finds itself in a space launch crisis and a wider defence technology crisis. The current structures for early-stage financing, regardless of how well they have worked in the US, are not working in Europe. Yet innovative financing structures such as long-term, permanent capital holding companies are deemed too risky for family offices and pension funds.
If Europe is serious about establishing space sovereignty — and there is widespread agreement that it must do so — then it is time to think hard about the funding mechanisms that will make it possible.