Should You Invest in Space Startups?

The maiden flight of SpaceX’s Falcon Heavy rocket got lots of attention in February for sending a Tesla into orbit around earth. But while the sports car stole the limelight, the more innovative reusable rocket that helped get it into orbit is the real technological breakthrough—serving as a kind of worldwide signal boost for the ingenuity of the brave new world of commercial space flight.

SpaceX is just one of dozens of startups working to make commercial space travel a reality. Others include Jeff Bezos' Blue Origin, which hopes to bring tourists to the edge of space by the end of this year, along with several firms working to mine minerals from the Moon or even asteroids.

Known collectively as NewSpace, the sector is expected to grow from a $350 billion global industry in 2018 to a trillion dollar one by 2040, according to a Morgan Stanley report. The companies are working on everything from near-term goals like beaming the internet down from space and launching human cremains into deep space to eventually shuttling tourists around the solar system.

If you're a space nerd interested in investing in commercial space technologies before they blast off, you might be wondering how to get in on these companies before they go public. But before you dive in, it's important to understand the risks. “All early stage investing is super-risky, and if you couple early-stage investing with an industry that’s emerging, then it’s incredibly risky,” said Dylan Taylor, founding partner of the investing network Space Angels.

A good rule of thumb is to limit all individual stock purchases to five percent of your total portfolio to curb your exposure to any one stock or company. “I think there is a lot of important pre-work to be done before investing your first dollar in an individual stock,” said certified financial planner Roger Ma. “That means, having paid off any high interest debt, such as credit card debt, and having an emergency fund set aside (typically three to six months of living expenses) before investing.”

With that in mind, here are some tips for getting a piece of the action—without losing your shirt.

The easiest—and least risky—way to get in on NewSpace stocks is by investing in a space-focused exchange traded fund (ETF) like PowerShares Aerospace and Defense Portfolio or an index fund like the Fidelity Select Defense and Aerospace Portfolio. Here's a list of several other space ETFs, and more are in the works.

ETFs and mutual funds are great for new investors because they diversify your risk by letting you invest in a bunch of companies at once. “If one of the companies in the ETF performs very poorly or even goes out of business, the potential gains or outperformance of the other companies in the fund could help cushion any loss,” said Ma.

Take the SPDR S&P Aerospace & Defense ETF (XAR), which has increased in value by more than a third in the past year. Its 35 holdings include aerospace engineering company TransDigm Group Incorporated, the defense and infotech contractor Harris Corporation, and the defense and transportation company Cubic Corporation. These companies engineer and supply parts, services, and new technologies to a huge range of aerospace, defense, and aviation partners, so investing them is an indirect way to support the more aspirational side of NewSpace, like citizen Mars missions or hotels on the Moon.

If you want to buy a NewSpace stock directly, the very first thing to do is cool your jets. That may not be the answer you want to hear, but it’s what every expert worth their salt will tell you.

Most NewSpace firms are not publicly traded, and won't be for a while. One exception is satellite company Maxar, which is the rare public company that is almost entirely focused on space-related proejcts.

As for SpaceX, Elon Musk has said he won't take the startup public until it is regularly achieving trips to Mars—which will likely take at least another 15 years or so.

Another option is to buy old-school aerospace stocks like Boeing, Lockheed Martin, and Northrop Grumman. These established companies already have a toehold in commercial space, but also have much wider interests beyond that sector. Boeing is the prime private contractor for the International Space Station and competes against companies like SpaceX for NASA contracts to develop crewed spacecraft vehicles.

Another way in is through tech firms like Apple, Facebook, and Google, all of which are involved in establishing global broadband connectivity (that relies on satellites beaming the internet from space) and are therefore likely to profit from NewSpace.

If you want to invest directly in a NewSpace company that hasn't gone public yet, you do have another option in the form of equity crowdfunding, which allows you to give actual money in exchange for partial ownership of a company, as opposed to perks or other rewards with traditional crowdfunding sites like Kickstarter.

Some recent campaigns on WeFunder include satellite propulsion technologies and commercial space telescopes. There's even an equity crowdfunding site devoted entirely to space-focused companies called Space CrowdFund. Current campaigns include an asteroid prospecting mission and a company planning to provide support systems to manned missions to Mars.

Of course there is an even bigger risk to investing in companies that haven't gone public, since they aren't required to give the same financial disclosures as publicly-traded firms. With that in mind, “assuming that you will lose everything that you invest in a crowdfunding startup, I don't think is a bad assumption,” Ma said. “If you look at a lot of the venture capital companies that specialize in early stage companies, many of their investments are not financially successful.”

Finally, ask yourself what you can offer NewSpace companies besides capital. “I would tell these folks [interested in NewSpace investing] to think about what their own individual expertises are and how they might be able to contribute to a startup,” Taylor said.

“Maybe they have marketing expertise, or legal expertise, or geographic expertise. In addition to investing a little bit of capital, look for ways to reach out to the company and see how they could add value.”

NewSpace is still, well, new, so it’s natural to be psyched about getting in on the ground level. But as with rocketry itself, there is plenty of risk to watch out for, so be sure you understand both the risks and the rewards before you invest.