Investors in space startups see hurdles in defense market

WASHINGTON — The Department of Defense has come a long way in procuring space launch services since a decade when SpaceX sued the Air Force to compete for national security launches. The Space Force now plans to open the next round of launch procurement to a broad spectrum of commercial players.

But in other sectors of the space industry, emerging technologies from startups don’t have much of a chance of being part of a DoD program because of institutional and cultural barriers, said Jordan Noone, co-founder and general partner of Embedded Ventures, a Los Angeles-based company involved in Launch -ups invested in the aerospace and defense sectors.

Amid venture capital injections into the space industry, US defense officials have called for faster adoption of commercial technology into military programs. However, due to ingrained barriers in the military procurement system, that’s probably not the case in the near term, said Noone, co-founder of Relativity Space. He founded Embedded Ventures in 2020 with co-founder Jenna Bryant.

Those hurdles remain, although the DoD and the Department of the Air Force have created several organizations — the Defense Innovation Unit, AFWERX, and SpaceWERX — specifically to work with startups

These facilities oversee startups and fund research and development projects, but are separate from Space Systems Command’s procurement offices, which manage key programs, Noone said in an interview.

DIU, AFWERX and SpaceWERX work almost completely independently of each other, which makes it difficult for new technologies to migrate into so-called programs of record.

A key obstacle for startups is that DoD procurements call for “prescribed solutions,” meaning they prescribe specific components or subsystems, he said. This prevents many trading companies from competing because they are optimized for “performance-based” contracts that reward the most innovative solutions.

Cooperation agreement with Space Force

Faced with these concerns, Embedded Ventures signed a five-year deal with SpaceWERX in 2021 to facilitate dialogue. One of the goals of this partnership is to solve the problem of “commercial integration,” Noone said. When a technology isn’t included in a program of record with a budget line, “that’s an Achilles’ heel of the whole commercial integration effort, where we put years of effort and nothing comes of it.”

The previous cooperation agreement has been helpful in enabling these discussions, Noone said. But the reality is that the big programming offices “still live behind the firewall that even SpaceWERX hasn’t been terribly effective at breaking through.”

Embedded Ventures announced its first $100 million fund in January, designed to support companies with dual-use commercial and national security applications. To date, the fund has announced investments in Akash Systems Inc., Chromatic 3D Materials, Inversion Space, KittyCAD, Slingshot Aerospace and Skyryse.

Businesses and investors need more than virtue signals, he said. Meanwhile, the US national security sector is missing opportunities to integrate innovative technologies.

To build his relationship with the Department of Defense, Noone hired Mandy Vaughn as an operating partner of Embedded Ventures. Vaughn, CEO and founder of consulting firm GXO Inc., is a past president of Virgin Orbit subsidiary VOX Space and a member of the National Space Council’s User Advisory Committee.

said Vaughn SpaceNews that she’s seeing signs of change in the space procurement business, albeit not as fast as VCs would like.

“Part of the problem is just inheritance,” she said. “It’s a lot of laziness. And the main recording systems and programs have not changed for a long time.”

Program managers aren’t necessarily motivated to bring cutting-edge innovation, he said. Their duty is to “deliver cost, timing and performance for these programs, which are tied to a Congressional budget line.”

As part of the collaboration agreement, Vaughn said, “we’re also trying to train program leaders” so they better understand the maturity of commercial technologies and find ways to fit them into ongoing programs.

Many of the top leaders in Space Force and Space Systems Command are committed to the adoption of venture-backed technology, she said. They tell buyers to think less about “recording programs” and more about “mission areas” that could be achieved with commercial products or services.

“But it’s a long process,” Vaughn said. “It’s all still quite formative.”

One example is a new Space Force initiative to use commercial space transportation systems and orbital logistics in support of military operations. This would include the use of rockets to carry cargo, the use of space tugs to launch satellites into non-traditional orbits, and in-orbit tankers to refuel satellites.

“That’s great,” Vaughn said. “But where is the budget wedge to close the story and the demand signal to calibrate the investment community?”

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