Strengthening collaboration among European space startups - McKinsey

Summary

An entrepreneurial wave is invigorating the European space sector and attracting funding for innovative products and services. Venture capital investment in space start-ups rose sharply from 2015 through 2020; simultaneously, public agencies and established space companies have been expanding their capabilities. “New space” opportunities—ventures designed to create better, more accessible, and less expensive space flights and activities—hold great promise both for long-standing companies and start-ups.

Sidebar Funding and innovation at European space start-ups Analysis of recent funding patterns clearly shows the challenges facing private European space start-ups. Although they attracted about €500 million in funding in 2020, US space start-ups received €4.4 billion—about nine times more (exhibit). Earlier in the decade, European investment levels also lagged far behind those in the United States. The result: investment in European space companies is still about eight to ten years behind US levels. (In the United States, annual investment totaled about €500 million a year, on average, from 2011 to 2014.) Many reasons exist for the regional funding differences, including the greater number of start-ups in the United States. The goal is not to eliminate the funding gap entirely but to narrow it. Exhibit We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

An entrepreneurial wave is invigorating the European space sector and attracting funding for innovative products and services. Venture capital investment in space start-ups rose sharply from 2015 through 2020; simultaneously, public agencies and established space companies have been expanding their capabilities. “New space” opportunities—ventures designed to create better, more accessible, and less expensive space flights and activities—hold great promise both for long-standing companies and start-ups.

Sidebar Funding and innovation at European space start-ups Analysis of recent funding patterns clearly shows the challenges facing private European space start-ups. Although they attracted about €500 million in funding in 2020, US space start-ups received €4.4 billion—about nine times more (exhibit). Earlier in the decade, European investment levels also lagged far behind those in the United States. The result: investment in European space companies is still about eight to ten years behind US levels. (In the United States, annual investment totaled about €500 million a year, on average, from 2011 to 2014.) Many reasons exist for the regional funding differences, including the greater number of start-ups in the United States. The goal is not to eliminate the funding gap entirely but to narrow it. Exhibit We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Adding to the momentum, the European Space Agency (ESA), which has 22 member nations, provides guidance and funding to help promote innovation. This direction, combined with the growing number of unique start-ups, could give Europe the opportunity to strengthen its position as a global leader in space. But future success will hinge largely on an element critical to all innovative space ventures: close collaboration among different organizations, from project design through completion.

What are the best strategies for encouraging and nurturing space collaborations? Although many leaders have attempted to answer this question, there is still little consensus on the right path forward. To provide more clarity, we reviewed the data and interviewed business leaders in the space sector and other innovative fields, including cryptocurrency and biotech, to determine which factors help all players in an ecosystem thrive. Our research identified four major success factors applicable to collaboration in the European space ecosystem:

a shared vision: a road map with common goals

geographical focus: a small number of excellent hubs with easy access to talent, capital, and industry expertise from established players

start-up centricity: customized support plans based on the maturity of a given start-up

access and value: diverse, sufficient, and transparent support

Of course, the need for better collaboration is not the only issue for European stakeholders. Funding is also a major concern because investment in start-ups is still one-ninth of what it is in the United States. (For more information, see sidebar, “Funding and innovation at European space start-ups.”)

The collaboration conundrum

The European space sector has a rich, complex mix of stakeholders that can be divided into four main groups:

Public agencies. In addition to the ESA, the EU Commission and country-specific agencies may sponsor space projects. In making decisions, these stakeholders often balance complex and potentially competing priorities, including the interests of individual countries versus those of the European Union as a whole.

Established companies. These large corporations share the same goal as their US peers: increasing shareholder value and otherwise enhancing their current business through growth and strategic advantages.

Disruptors. The number of start-ups in Europe has increased significantly since 2010, and they have big ambitions to build and scale their businesses in their current markets or new ones.

Private investors, incubators, and accelerators. This group consists primarily of venture capital companies—both generalists and space specialists—that aim to maximize returns over a cycle of ten to 12 years and to funnel any gains into additional investments in their current markets. Other organizations attempt to nurture promising start-ups by providing money and advice with no strings attached.

In an effective collaboration, these four groups work closely together and balance their interests to achieve mutually beneficial outcomes. Here’s how the four success factors can help them achieve their goals.

A shared vision: Creating a road map with common goals

The ESA faces a number of considerations in coordinating activities across Europe because many countries have their own space programs. The United Kingdom, for instance, announced the creation of its first national space strategy in 2022. Among other goals, the strategy calls for the United Kingdom to “shape the space environment and use space to help solve challenges at home and overseas.” On the continent, the France 2030 plan, which calls for €50 billion in total business investment, allocates €1.5 billion to space ventures. Half of that amount is earmarked for new space companies.

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To eliminate redundancies and accelerate progress in public programs, all European public stakeholders could identify a single set of shared goals and support them with a detailed technology road map and a list of required capabilities. A central team with representatives from all participating organizations could coordinate program management and rapidly adjust the plan to account for new developments. To create a shared understanding about important issues, leaders could also emphasize transparency in, for example, the criteria for awarding contracts.

Geographical focus: Establishing a small number of excellent hubs

Many space companies are now located throughout Europe, so most collaborations involve participants in widely dispersed locations.

Our research on collaboration in other innovative sectors shows that a more strategic approach to site selection is beneficial. The organizations more likely to accelerate growth considered the impact of geography—they looked for the best access and regulatory environment, for example. Consider cryptocurrency as an example of a new industry. In 2018, Swiss regulators were the first to issue guidelines for initial coin offerings, so local companies would understand exactly how they could operate. Other beneficial aspects of the Swiss ecosystem include local access to a large talent pool, investors, and financial-services companies. Zurich, which rapidly became known as Crypto Valley, is now home to 14 cryptocurrency unicorns.

A potential solution to increase the chances of project success could involve having European public agencies identify a small number of locations to serve as space hubs. Ideally, the selected areas would offer growth-promoting regulations and tax incentives, as well as strong academic institutions that can contribute to the talent base. By consolidating in a few locations, established industry players and start-ups can share resources and know-how more easily and obtain network effects more readily. Analysis shows that both of these activities are essential in complex, hardware-heavy sectors such as space. Proximity to investors can also help boost growth.

The potential of microgravity: How companies across sectors can venture into space

Space hubs may encourage a virtuous cycle of collaboration. If an innovative project succeeds, others could be tempted to explore further or to investigate adjacent areas, especially since they might find many appropriate nearby partners and resources, such as testing centers or launch systems that can move their inventions to space.

By creating a strong geographic strategy and a critical mass of companies clustered together, stakeholders may encourage stronger collaborations that focus on a shared European road map and capabilities, rather than having each country create its own. Many space hubs may eventually have 50 or more start-ups, similar to the pattern seen in other innovative sectors. Crypto Valley, for instance, now has more than 500 relevant companies.

Start-up centricity: Creating customized support plans based on the maturity of start-ups

Some of the most successful collaborations in our analysis are support programs that consider a start-up’s maturity level. For instance, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) programs are offered by NASA to companies with fewer than 500 employees. Companies receive initial funding to work toward a clear goal, such as the creation of a software or hardware package. During the next phase of the program, about half of the companies receive funding to develop their innovations further and demonstrate additional benefits. In the final phase, companies receive funding if their technology is mature and already in use or is being paid for by someone who needs it or wants to refine it further.

Currently, most support programs in Europe focus on start-ups in the earliest stages. But both private and public investors have recently begun to funnel more money toward companies that are gaining scale, which is a step in the right direction. For early-stage start-ups, the critical factors are expertise, initial funding, and education (including basic business courses). With more mature start-ups, the most important support may involve additional funding or a contract for goods or services. Since these companies want to expand, an active contract with an anchor customer, such as a space agency, will give them more credibility. Mature start-ups might also benefit from advice on running efficient organizations and on processes for scaling up companies.

Although support programs will be tailored to individual companies, partner organizations still need some common criteria that apply across the board. Some stakeholders may pursue a funnel approach: they begin by working with a large set of similar start-ups and then give increased or extended support to those that perform best. The resulting healthy competition could even turn into a collaboration between two or more start-ups.

Access and value: Providing diverse, sufficient, and transparent support

The best form of support may vary. For instance, partnership contracts may specify that one company can access the other’s expertise and technology or that both companies will work jointly on-site. Still other collaborations involve multiple elements, including funding, the exchange of data and knowledge, and scale-up advice.

Participants that offer their partners diverse forms of support, with different options for funding, sharing expertise, and working together, may be the most successful in promoting innovation. Consider the Creative Destruction Lab, a Toronto-based nonprofit that offers a program to help science and technology start-ups gain scale. It provides partners with various forms of support, including business guidance, access to investors, advice on technology road maps, and an entrepreneurship boot camp. The Creative Destruction Lab has already helped multiple companies across sectors (including healthcare, energy, space, and quantum computing) to meet their goals and gain scale.

Collaboration partners that offer one another diverse forms of support, with different options for funding, sharing expertise, and working together, may be the most successful in promoting innovation.

Whatever the support model involves, access to sufficient funds—either from venture capital or other space organizations—will likely be essential. And because location often determines the amount of capital available, funding is related to another success factor: the creation of a few excellent hubs. A hub that specialized in quantum computing failed to grow because there were insufficient venture capital companies nearby, and investment in start-ups remained low.

In tandem with offering diverse support models, collaboration partners could help increase their level of transparency. Several European organizations, both public and private, offer various combinations of funding, technology access, expertise, and entrepreneurial support. To expedite collaborations, European space leaders could choose to create a matchmaking program that helps companies to find partners—investors, public agencies, or other companies—with complementary capabilities and services.

European space stakeholders could benefit from new strategies for creating and managing the complex network of relationships essential for innovation. Although the diversity of countries and companies poses some challenges, it could also become Europe’s greatest strength if private- and public-sector leaders can develop shared goals and make more nuanced decisions about locations and support for collaborations. Space stakeholders that are able to improve their approach to collaboration may gain an advantage in dealing with nontraditional businesses that want to enter the new space economy. From advanced industries to healthcare to entertainment, more sectors will be looking for opportunities in orbit—and those space companies that understand how to develop mutually beneficial relationships may be the partners of choice.

Strengthening collaboration among European space startups - McKinsey
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