The new space economy relies on two things: government contracts and venture capital funding. Neither provides the type of financing that could enable stable and sustainable economic development.
The folks in the U.S. military tasked with getting innovative technology think one of the solutions is better engineering — the kind of better financial engineering you find in the markets for agricultural commodities, oil, and others. basic products.
“Unless you’re in telecommunications, most of the space economy is kind of a false economy,” said Air Force Gen. Steven “Bucky” Butow, who leads the space portfolio at Defense Innovation Unit, says Quartz. “It is also mostly funded by billionaires or venture capital investments; it doesn’t really take advantage of the full range of other financial services or types of investment that are out there.
This problem led Butow to Bruce Cahan, a lawyer and former banker who runs the Urban Logic association and teaches finance and ethics to engineers at Stanford University. In 2012, a graduate student studying how lunar dust could be used to make a kind of concrete on the moon asked him how to finance a start-up in space. Cahan developed ideas for a space products exchange and space bonds to expand financing options for entrepreneurs, which would eventually find their way in Butow’s 2020 Space Industrial Base Report (pdf).
“I constantly link the vocabulary of engineers and finance,” Cahan told Quartz. “So I offered to use phrases like ‘financial engineering’ to prompt engineers to ask, ‘Where can the money for my space technology come from other than the government?
The problem with venture capital is that most funds operate on a three to five year horizon. It’s an understatement to say that most space technology projects take much longer.
“Space presents a classic time-matching financial challenge: We want and need to build infrastructure assets today that essentially pay for themselves and their technologies over decades-long life cycles,” says Cahan. .
One of the main reasons this problem has been avoided so far is the large, long-term government contracts with space contractors. But officials like Butow are eager to see private investment play a bigger role, in part because they believe such initiatives are more effective than big government programs.
So what is a space product exchange? It would operate like any other commodity market, allowing participants to place bets on the delivery of future goods and services. The “goods” in question could be rocket launches, payload delivery, spacecraft fuel, debris removal, data connections, or even moon rocks and space-manufactured goods.
In one hypothesis, a market for buying and selling futures contracts on rocket launches would allow satellite manufacturers to buy cheaper insurance against launch failures and delays, in the same way as a market for contracts Corn futures allow farmers to protect themselves against gluts and droughts.
“By commodifying risk that the space entrepreneur doesn’t control, they can retain their company’s limited risk capital to cover development and other risks that their technology can control,” Cahan says.
The key is to standardize the definitions of these goods so that they can be traded efficiently. One of the reasons that existing exchanges have not jumped into the fray is the challenge of unifying the industry around precise contractual language.
“At the end of the day, the commodity trading systems used by terrestrial economies can certainly be used by the Space Commodities Exchange,” Cahan said. “But the actual definition of what was traded, the contractual terms on which it would be traded, and the members of the network trusted to trade on the Exchange, are all details that the space community should come together to define for themselves. same.”
If it can, access to debt financing for space companies could become much more widespread. Borrowing can generate cheaper capital for companies than selling stocks, but few long-term investors are willing to lend to long-term space projects. A space products exchange can help solve this problem by reducing uncertainty through public and transparent supply and demand data, allowing for more reliable underwriting.
So the trick is to bring together space companies, non-space companies, from mining companies to Microsoft and Wall Street, to create a chamber of commerce. Cahan briefed executives, military officials and industry consultants, saying a swap would provide dynamic funding for a US space industry.
“Then we can have a grown-up conversation about how everyone is going to play their role in space and pursue the parts of the space economy that they enjoy with more certainty in 2030 or 2040,” he says.
A version of this story first appeared in our Space Business newsletter.