Interview with Essential Capital (元航资本) on the Perspectives of Commercial Space in China

Essential Capital (a.k.a 元航资本 in Chinese) is a Chinese VC firm founded in 2015 and based in Beijing. Essential Capital considers itself an early-middle stage investor, with a major focus on “hard tech”. 

As an early mover within the VC world into the burgeoning Chinese space industry, the company’s founders gave some interesting insights on the topic in an interview to the Chinese media Iyiyou 亿欧 in December 2018 (see [1]). This article sums up the main takeaways and adds further comment along the way. Please note that the interview was not realized by The China Aerospace Blog.

Some Background on Essential Capital

founders group pictureFig. 1 – The founding partners of Essential Capital (image from Iyiyou [1])

A significant part of the interview focuses on going over the corporate history of Essential Capital. While this is not directly on topic, it does give a nice illustration of the new VC companies behind the NewSpace surge in China.

Essential Capital’s human resources are typical of China’s NewSpace, meaning top-notch university credentials and a lengthy experience in aerospace: nearly all of its founders and partners coming from Beihang University, the country’s first-rate university for aeronautics and space. The company also claims to have strong links with players like the Chinese Academy of Sciences, CASC, CASIC, CETC, CEC, as well as related universities like Tsinghua, BUPT, Beijing Institute of Technology and UESTC.

Essential Capital has two investment focuses:

  1. New Information Technology (AI, Industrial IoT, Industrial Software, New Telecommunication Methods)
  2. High-tech Manufacturing Industries: which includes launcher and satellite manufacturing, satellite-based operations and applications, as well as robotics, new generation medical equipment, and additive manufacturing. As one of the early investors in China’s NewSpace, it has for example invested into start-ups like Galactic Energy (light launchers), MinoSpace (microsats), and Satellite Herd (TT&C services).

portfolio companiesFig. 2 – Essential Capital’s space start-up portfolio

Investment Trends in China

What’s more of interest is the insights on investment trends. Investors in China over the past years have mainly focused on the consumer internet industry and business model-driven innovation, according to the founders of Essential Capital. However since 2017, opportunities in the consumer internet have shrunk and with the government encouragement for more technology-driven investment, there has been a gradual move towards more “hard-tech” ventures.

Defined by founder WANG Xinhe as “innovation linked to the idea of cyber physical systems” (a definition and overview of CPS is given in [2]), a hard-tech venture implies highly qualified and multidisciplinary teams, and usually sees development cycles over a longer period of time due to strong technical barriers. One of the most notable characteristics emphasized by WANG X. is the higher levels of risk and the much higher costs required to foster R&D and technological maturation. Another distinctive feature is that market trends remain more constant, and can be evaluated in a more objective manner than consumer internet tech.

Assessing and finding “hard tech” opportunities

How does one assess hard tech opportunities in China? Other than the usual criterion for start-up evaluation, WANG X. states four essential points:

  1. If the start-up is evolving in a sector that is considered as a technology priority for the Chinese government & policies (“一是项目是否来自于国家重点科研项目”)
  2. If the technology is part of  Western export restrictions or embargo, or if it faces high competition with potential foreign counterparts (“二是项目的产品是否属于西方国家禁运、国内不能生产或者有很强的的进口替代性”)
  3. How advanced the technology is, compared to domestic and international competitors (“三是项目本身的水平是否达到国内领先或者国际领先”)
  4. The level of maturity, and especially if the technology has reached the prototyping stage (“四是这类项目是否已取得实验室成果”)

Special attention is also payed to the team behind the start-up, notably the level of scientific knowledge and experience.

According to WANG X., Finding “hard tech” opportunities early requires (as it’s often the case in China) to have a strong established network with leading universities and research institutes/academies in order to have early access to information regarding new projects. This relates well to the relative lack of transparency and spotlight given to many “hard tech” start-ups which tend to remain low-key compared to Western counterparts.

Chinese commercial space investment window to close within the next 2-3 years

ZHANG Zhiyong is another founding partner of Essential Capital. He points out that other than being a typical hard tech sector, commercial space in China has the particularity of being very strongly linked to the government for historical, political and financial reasons. The consequences are that the whole value chain, technology, and human resources of the sector are strongly intertwined with the state, creating a closed-off/isolated environment.

ZHANG Z. divides the commercial space industry into spacecraft manufacturing,  launching services, and spacecraft operations & applications. The rapid development of commercial space in China has so far mostly been about the former, especially light-medium launchers and microsats. Although opportunities for new start-ups and VC companies are still very real today, ZHANG Z. sees a weakening of these opportunities within 2-3 years, and a progressive switch of the focus to launching services, satellite operations and (data-based) applications.

The eventual slow-down of the current (very) fast-paced development of Chinese commercial space boils down to the following reasons:

  1. the amount of qualified human resources in the space industry in China is limited, and the recent upsurge in commercial space has already strongly strained recruitment and exacerbated competition. New players will have more and more difficulty hiring and matching the soaring salaries of qualified personnel. The closed-off character of China’s space industry also hampers hiring people from outside the industry or the country to ease the shortage.
  2. Investment cycles are long in space: very important sums have already been invested into China’s commercial sector, and further investments at the current pace aren’t likely until the first and second generations of investments begin to pay off. (for further info on investment: see my previous blog post on China’s NewSpace [3], or alternatively read Space Angels’ 2018 Q3 Investment Quarterly [4])
  3. The Chinese space market is unlikely to be able to sustain many more players (especially in launcher and satellite manufacturing). The current Chinese commercial space landscape has yet to mature and consolidate.

Essential Capital’s interview with Iyiou ends with a positive note on the development of commercial space in China, and that many future opportunities lie with the upstream (satellite payload, design) and downstream (satellite operations & applications) of the industrial chain.

The interview gives us a very interesting insight on China’s commercial space, in confirming trends discussed among foreign analysts, as well as giving us insights on how investment trends are shifting, some windows closing (launchers, satellite manufacturing) while others are opening up (satellite applications notably).
The only eccentricity would perhaps be the constant (and almost obsessive) comparison with the United States, while totally neglecting what’s going on elsewhere (see comment [5]). This is however a common trait in China, in sectors where Chinese players are technologically advanced.

References

[1] 元航资本:航天器制造领域投资窗口期将在三年内关闭, 亿欧网, 18/12/2018
[2] Cyber-Physical Systems, Radhakisan Baheti and Helen Gill, IEEE Control Systems Society
[3] China’s New Space: a deep dive into the world’s fastest growing commercial space industry, The China Aerospace Blog, 12/12/2018
[4] Space Investment Quarterly: Q3 2018, Space Angels, 2018
[5] In the Chinese version of the interview, suggestive statements like “目前,民营商业航天的发展已初步形成了中美双雄的格局,已把欧盟,俄罗斯,印度,日韩等其他航天大国远远甩到了后面.” (The current level of development of the commercial space industry shows a undeniable leadership of China and the US, leaving Europe, Russia, India, Japan & Korea far behind.)

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