At the SmallSat Symposium,a panel gave a sobering message to space startups. They were warned not to chase defence dollars and sacrifice long-term sustainability. Why? Companies, especially in the space industry, may be tempted to focus on the money instead of producing valuable products and/or services with broader, long-term applications. It is true that a business should be cautious about “leaning in”too closely, to what appears to be passing fads. The warning, however, ignores a very important fact: the shift to defence investing is not just a trend. It’s an important transformation in the space sector and investment that will have positive, if unintended, consequences.
There has been a noticeable shift in the space sector towards pure defence investment. Companies that previously focused on commercial applications or maintained dual-use models are now focusing their efforts on defence. This is not a random move. Geopolitical changes such as the ongoing conflict with Ukraine and a belief that the world has changed have led to this. Michael Gove who served in the Cabinets four British Prime Ministersrecently said: “The idea of a rules based international order where multilateral institutions restrain countries pursuing their own self-interest has proven to be a faulty hope… We are back to a more Thucydides-like world where the strong do what it takes and the weak suffer whatever they must.”
In 2024, the global government expenditure on space programs will reach $135 billion (EUR119billion) — an increase of 10% over the previous year. The primary reason was the increase in defence budgets. A Recently Bruegel report concluded that, without the support of the United States, Europe could need 300,000.00 more troops, and an increase in annual defence spending of at least EUR250.0000 to keep the continent secure. As geopolitical tensions increase, governments around the world are investing in space-based defense technology. This is a recognition that this sector is the cornerstone for any modern military.
This shift in the startup scene has had a positive impact on the private sector. The increased defence investment is reviving aerospace and deep-tech innovations. Companies that struggled to find commercial funding now benefit from sustained government investments, allowing them the opportunity to work on cutting edge technologies. These include (among others) optical communication, which is needed for secure, high-speed data transmission from space; Earth observation, which is crucial for disaster response and resource management, and synthetic aperture radar, a high-precision imaging system that can be used in all weather conditions and at night.
Although there are many opportunities, the transition from the commercial to defence market is not without its challenges. Startups face many challenges. Smaller firms with limited financial reserves may have difficulty meeting their cash flow obligations due to government contracts that are often accompanied by long procurement cycles and delayed payments. Defence-related technologies face strict export controls and compliance obligations, which can be a burden for startups.
However, for companies that successfully pivot, the rewards outweigh the obstacles. Defence funding offers long-term stability, and allows companies to develop technology of the highest quality that can be commercialised later in other sectors. To pivot into space does not necessarily mean to leave behind the commercial sector.
While some startups are pivoting to defence, the sweet spot is dual-use technology – those innovations that serve the commercial and defence markets. Companies that maintain a balance in their business benefit from multiple revenue streams, increased resilience to market fluctuations and the flexibility to change focus as commercial demands evolve.
This dual-use approach has been a success for companies that have seamlessly integrated services across sectors. Take the SAR company ICEYE whose data are used in flood response and maritime activity monitoring as well as conflict areas like Ukraine. FibreCoat’s advanced materials protect satellites against the harsh conditions in space, no matter what they are used for.
The scale of government investments, as well the ongoing volatility of the geopolitical environment, make it highly unlikely that this shift in focus to defence is just a fad. There is a new world order and national security concerns will continue to play a major role in geopolitics in the years ahead.
The ultimate goal of the space sector should be a balanced eco-system where defence and commercial efforts complement each other. The current surge in defense spending is helping to accelerate technological innovation and funding infrastructure that will benefit commercial sector on the long term. Companies can ensure that innovations sparked from defence priorities will also drive commercial progress by continuing to develop dual-use apps. This is good news, because space affects almost every aspect of modern life. It is the backbone of world economy. It is vital for navigation, communication, connectivity and sustainability. According to a report by McKinsey, the space economy will reach $1.8 trillion by 2035. We may be entering a new golden age in the industry. Entrepreneurs have more access to capital, investors are willing to support high-risk ventures and technology development is advancing at an unprecedented rate.
The entire space ecosystem will benefit if companies can navigate the challenges posed by defence contracting, while also keeping in mind the wider commercial applications of their product. Startups will need to balance short-term defence with long-term growth in order to avoid a dead end tomorrow. If the shift towards greater defence investment is managed well by all parties involved, it could propel space into its most vibrant age yet. Defence tech is a hot topic for the
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