Once the sole domain of government agencies, space is rapidly transitioning into a commercialized marketplace. SpaceX’s ambitious launch schedule — on track for about 90 launches in 2023 — serves as a potent symbol of this new era, with rockets transporting satellite payloads into orbit on a nearly bi-weekly basis. As SpaceX continues to pioneer strategies that dramatically reduce launch costs, the price tag of space-based operations has descended towards affordability. The cost to deploy a kilogram payload into low Earth orbit (LEO) has fallen 95% over the past two decades. The newfound feasibility of these ventures enables satellite operators and manufacturers to innovate at an unprecedented scale, unlocking a wealth of opportunities for value creation.

Satellites have transformed from science-first novelties into invaluable tools for industries across the public and private sectors by bridging gaps in broadband to connect those without Internet access, offering detailed observations of Earth to predict greenhouse gas emissions, and providing space situational awareness to help deter war. Many of these tasks are done today using smallsats — compact, fridge-sized systems that orbit in LEO. In reflection of this increased dependency, the number of satellites in orbit today has skyrocketed to nearly 10,000, with ~2,700 being added last year alone. Experts predict that this number will continue to grow exponentially, with forecasts indicating nearly 60,000 active satellites by 2030 as more companies seize the opportunity to participate in the new space economy.

Yet, as the industry matures, so too does the technology driving it. The previous decade bore witness to a trend towards miniaturization, with small, cost-effective satellites becoming the norm. However, the tide is beginning to turn as we expect satellites to expand in size once again. We are moving from a mass constrained world and into a mass abundant one. To capitalize on the burgeoning business of space, satellite manufacturers must embrace a simple mantra: Go big or go home — literally.

Why start small?

The push towards smaller satellites unsurprisingly has its roots in the staggering costs associated with space missions. Historically, the design and manufacture of satellites were both time-consuming and resource-intensive thanks to high-touch specifications and exotic supply chains. This means that each satellite is bespoke and designed for a specific customer’s payload. Large satellites used in civilian applications, such as weather monitoring, cost nearly $300M, while military satellites with sensitive payloads could cost an additional $100M. One-ton payload satellites still cost somewhere in the realm of $150M+ from reputable prime bus manufacturers. Costs can quickly climb with more complicated mission requirements. Some buses in this class include: Airbus’ Eurostar Series, Boeing’s 702, Lockheed Martin’s AS2100, and Maxar’s SSL-1300. Many of these satellites have heritage dating back to the 1980s and 1990s, highlighting their reliability, but antiquated design and fabrication process.

Adding to this cost was the exorbitant price of space launches, where every extra kilogram sent to orbit translated into tens of thousands of dollars in additional costs. United Launch Alliance charged the US government (and thereby the US taxpayer) $380M per launch less than a decade ago. These prohibitive expenses necessitated the development of leaner, lighter satellite systems.

To tackle this initial cost issue, manufacturers embarked on a journey towards miniaturization, creating a new generation of more compact, cost-effective satellites. This strategy not only brought down the cost of individual satellites but also allowed multiple units to be launched simultaneously via a service known as ridesharing, further optimizing launch costs. SpaceX’s Falcon 9 has brought total launch cost down to a more affordable $67M per launch today with customers charged on a per kilogram basis with online purchase available.

Smallsats, satellites with a mass of less than 500 kilograms, and cubesats, a type of modularized smallsat, became popular for their cost-effectiveness, quick turnaround times, and their ability to host a variety of instruments despite their small size. Thus, as microprocessors shrunk and solar panels became more efficient, more performance could be generated with less, and smallsats came into vogue.

Many companies, such as Earth observation giants Planet and BlackSky, developed successful business models utilizing smallsats. This was what we consider to be the first generation of new satellite companies. They were characterized by their ability to scale down and adapt to the technology limitations of the time to provide a gross profitable service. The early LEO mega-constellations, such as SpaceX’s Starlink, also adopted these smaller satellites and demonstrated the scalable validity of such an approach. By opting for a smaller, mass-producible satellite design, SpaceX is able to deploy hundreds of its vertically integrated satellites at once, creating a web of connectivity across the globe.

However, while the miniaturization trend serves an important purpose, it also has its limitations. The industry is now beginning to transition to a second new satellite generation, one defined by upsizing and fueled by the emerging opportunities and needs of our rapidly evolving space economy.

Size matters… and bigger is better

The consensus opinion in the space industry right now is that smallsats will be the defining satellite of the next decade and beyond. This line of thinking is flawed in that it holds all other innovation constant. We have strong conviction that large satellites will begin to replace smallsats.

SpaceX’s Starship is moving towards full commercial operations after its semi-successful orbital flight test in April. With the development of the heavy-lift launch vehicle, access to space will become dramatically cheaper. Starship removes mass as a constraint — with targeted launch costs as low as $100/kg to LEO vs. ~$3,000/kg to LEO today via the Falcon 9 — to become 30x more efficient. That’s not to mention the other commercial launch providers working towards heavy-lift vehicles, like Blue Origin’s New Glenn and Relativity Space’s Terran-R. As more providers come to market and compete with one another, launch costs will continue to fall, further incentivizing satellite manufacturers to go bigger. Because of this and increased payload capacity, non-government entities will be able to launch larger satellites and infrastructure into LEO and beyond, cheaper and more often.

Therefore, with mass no longer acting as the bottleneck factor, what looks “optimal” rapidly changes. Legacy large satellite bus manufacturers have historically relied on space-grade electronics, complex internal components, expensive energy systems, and composite structures. Now, satellite manufacturers can turn their attention towards commercial off-the-shelf components that may be heavier, but are also better performing and up to 10x more cost effective. For example, rather than buying lower-performance radiation-hardened electronics (few large transistors), payload manufacturers will have the option to opt for cutting-edge terrestrial chips (many small transistors) covered in heavy aluminum shielding. As costs drop and the need for mass considerations dissipate, customers will optimize for large, high-performance satellites.

Large satellites and improving technology also open up new domains, previously inaccessible to traditional systems. Satellites in Very Low Earth Orbit (VLEO) operate at an altitude under 450 km. The primary challenge is the increased atmospheric drag experienced at these lower altitudes, which can shorten a satellite’s operational lifespan due to orbital decay. Larger satellites, however, with their more substantial mass and enhanced propulsion systems, can counteract this decay more effectively, making them well-suited for VLEO operations. This ability to orbit in VLEO offers distinct advantages, such as improved resolution for Earth observation satellites due to their proximity to the planet. Furthermore, communication satellites in VLEO can offer lower latency, thus providing faster data transmission, which is critical for applications such as real-time remote sensing and broadband services. Thus, larger satellites not only enable, but also capitalize on the opportunities presented by the VLEO environment.

Placing our bets

The shift to large satellites is an underinvested thesis. The technologies and economics to make large satellites a venture-backable sub-vertical did not exist only a few years ago. As such, many space investments of the past decade have been allocated towards smallsat companies with the goals of creating LEO constellations. We believe that the next wave of satellite winners will be largesat developers, and we’ve allocated accordingly.

K2 Space aims to reset the large satellite category by delivering a platform with the power, mass and volume of today’s exquisite satellites at the per unit cost of today’s small satellites. To do this, it is redesigning the satellite from the reaction wheel up, taking advantage of the mass allowance provided by launch vehicles like Falcon 9 and Starship. K2 Space intends to be the platform for the next generation of space development, serving customers across Science (NASA), National Security, and Commercial (telecom) use cases. Republic Capital co-led the company’s seed round alongside First Round Capital in early 2023.

Albedo, another Republic Capital portfolio company, is developing VLEO satellites that are to capture satellite imagery at a resolution 9x higher and thermal imagery at a resolution 300x higher than anything on the market today. Albedo is capable of such resolution due to its large, proprietary satellites which are designed to fly very close to the Earth. Republic Capital invested in the company’s Series A, led by Breakthrough Energy.

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Certain information contained in this update has been obtained from sources outside of the Firm. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of the Funds or their affiliates take any responsibility for such information. The email is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third party sources and we cannot guarantee the accuracy or completeness thereof. Any opinions expressed herein are those of the authors’ and not necessarily those of Republic Capital or its affiliates. Do not forward or otherwise duplicate this information without the written consent of the sender.

The growing concern over energy independence and the need for clean, reliable energy sources has never been more pressing. Despite the advancements in renewable energy technologies like solar and wind, the world is still heavily reliant on fossil fuels, which accounted for 81% of total energy consumption in 2022. This reliance not only contributes to environmental degradation but also exacerbates geopolitical tensions. As we’ve examined in our previous pieces, energy nationalism is replacing globalization as the geopolitical chessboard realigns.

Amidst these challenges, there is a strong case to be made for a nuclear energy renaissance. Nuclear fusion, while the holy grail, is still decades away from large-scale commercial use. Fission, a technology which has existed for nearly a century, is a top candidate for generating clean energy in a safe, and scalable manner. By examining the economic benefits, the energy potential of nuclear power, policy failures of the past and present, and new technologies coming online, we can better understand the importance of embracing this technology as a critical part of our sustainable future — and see why venture investors are placing their bets.

The quick and (not so) dirty

Simply put, nuclear fission is a process in which the nucleus of a heavy atom such as uranium splits, creating a large amount of energy in the form of heat. This heat can be harnessed to warm water surrounding a nuclear reactor which creates steam, spins a turbine, and produces electricity for distribution. This process produces about 10% of the world’s electricity across 440 different active reactors worldwide.

Nuclear power plants provide baseload power, ensuring grid stability even when other sources, such as wind and solar, are intermittent. Nuclear plants have an average capacity factor of over 90%, meaning they generate power at their full capacity for more than 90% of the time. In comparison, solar and wind have capacity factors of around 25% and 35%, respectively. This is because it may not always be sunny nor always windy where solar panels or wind turbines are installed. In the case of nuclear power, the plant is capable of always running, regardless of environmental conditions. The ability to provide a consistent power output makes nuclear energy an essential component of a diverse and resilient energy mix, and one that can stand up to things like oil embargos or gas pipeline failures.

One of the most critical benefits of nuclear energy is its ability to significantly reduce greenhouse gas emissions. Nuclear power is responsible for a large portion of global carbon-free electricity, and increasing nuclear capacity can accelerate the transition to a low-carbon energy system. As of 2021, nuclear power plants worldwide prevented the emission of over 60 gigatons of CO2 (two years worth of global energy-related emissions) that would have resulted from using fossil fuels. This is key to global decarbonization efforts as countries around the world seek to meet their climate goals under the Paris Agreement.

Nuclear energy has the potential to revolutionize the way we meet our energy needs while minimizing environmental impacts, making it ideal for addressing increasing energy demands without contributing to land and resource degradation.

Furthermore, the construction, operation, and maintenance of nuclear power plants create long-term employment opportunities, providing a boost to local economies. According to the Nuclear Energy Institute, a single nuclear power plant in the United States generates 500 to 800 direct jobs, employing up to 7,000 workers at peak construction. Communities surrounding nuclear facilities often benefit from increased tax revenues and economic development. These factors make nuclear energy an essential tool for creating jobs and promoting economic growth, especially in rural areas where economic opportunities may be limited. A recent example of job creation in a rural area is the ongoing development of Bill Gates-funded TerraPower and its Natrium plant in Kemmerer, Wyoming. It aims to employ up to 250 people, 110 of which previously operated the town’s coal facility.

A series of policy blunders

One of the most significant barriers to the widespread adoption of nuclear energy has been policy failures and public perception. The historical fear of nuclear energy, rooted in high-profile accidents like Three Mile Island, Chernobyl, and Fukushima, has led to the politicization of abundant energy which hinder the development and adoption of nuclear. One of the challenges of using fission as a power source is controlling the nuclear chain reaction. If the chain reaction is allowed to proceed unchecked, the result could be a nuclear meltdown. To prevent this, control rods made of materials that absorb loose neutrons are inserted into the nuclear reactor. By adjusting the position of these control rods, the rate of the reaction can be finely controlled. However, there still is room for human error.

The Chernobyl disaster in 1986 resulted in a few dozen direct deaths and long-term health effects for many more, while the Fukushima incident in 2011 led to the displacement of over 150,000 residents. Notably, 1979’s Three Mile Island incident, the only major nuclear meltdown on US soil, resulted in zero deaths and no notable radiation increases in the surrounding area. These incidents have contributed to public alarm and skepticism (exacerbated by country-wide campaigns by figures like Ralph Nader), making it difficult for politicians to openly support the industry.

Overregulation and lack of political support have stifled innovation in the nuclear sector, causing projects to become delayed and more expensive than necessary. For example, the Vogtle nuclear expansion project in Georgia, has seen repeated delays and cost overruns, with the budget ballooning from an initial $14B to over $30B. While safety should always be a priority, the nuclear industry has been subjected to a level of scrutiny not applied to other energy sources, leading to an uneven playing field.

Public opinion on nuclear energy is often based on misconceptions and outdated information. Contrary to popular belief, nuclear energy is among the safest and cleanest sources of power. Recent studies found that nuclear power results in just 0.03 deaths per terawatt-hour (TWh) of electricity, making it safer than combined coal products (57 deaths per TWh), oil (18 deaths per TWh), and even wind (0.04 deaths per TWh).

There is reason for hope, however. In an April 2023 survey, Gallup found that American support for nuclear has reached its highest point since 2012. The Biden administration recently committed over $1B to keeping nuclear plants open (i.e. Diablo Canyon), considering it a key element to achieving 100% clean electricity in the US by 2035. Nuclear support is growing to become a bipartisan topic in the US.

Role models for others

Countries like France and Sweden serve as successful examples of the potential for nuclear energy to contribute to a clean, reliable, and affordable energy mix. In France, nuclear power provides over 70% of the country’s electricity and has allowed the nation to maintain low electricity prices and reduce greenhouse gas emissions. As a result, the country enjoys some of the lowest electricity prices in Europe and is the world’s largest net exporter of electricity due to its very low cost of generation, gaining over €3 billion per year from this. The French nuclear program has been successful due to consistent government support and a standardized reactor design, which has reduced construction costs and facilitated efficient operation.

Sweden’s nuclear power program has also been a success story, with the country deriving approximately 40% of its electricity from nuclear power. Sweden’s commitment to nuclear energy has helped the nation achieve one of the lowest per capita CO2 emissions in the European Union, at around 3.41 metric tons per capita in 2019, compared to 7.9 metric tons per capita in the same year by Germany, for example.

Germany has unfortunately caved to long-standing anti-nuclear pressure and closed its last three nuclear power plants in April 2023. While this was a highly anticipated decision and expected since 2011, it has left many confused. Germany found itself center-stage when the Ukraine conflict broke out as it imported tremendous amounts of Russian gas via the Nord Stream pipelines. In an effort to curb back that reliance, and with the shutting down of its nuclear facilities, Germany now generates more than a third of its electricity via coal-fired power plants, and burns more coal than any other country in the European Union.

The strategic decision is perplexing and highlights the growing reality that energy nationalism is quickly replacing globalization. Nuclear energy is an important piece to this transition and the decision to revert back to dirty fuels and dependence on other nations will likely (and already has) prove to be a huge mistake by Europe’s largest economy.

Energy nationalism as the best path forward

Structurally higher energy prices (via OPEC) will accelerate efforts to globally transition to renewable energy alternatives. The world is witnessing an era of unprecedented investment in clean energy, but securing the supply chain will be critical to ensure resilience.

Saudi Arabia has consistently been one of the largest oil exporters while US production has fallen due to declining productivity and higher drilling costs. In the last year and a half, the US Strategic Petroleum Reserve (SPR) has been depleted by 42%, or 267M barrels, as part of Washington’s efforts to counteract the OPEC production cuts from last year. The SPR no longer poses the same level of threat to oil prices.

China, on the other hand, aims to be the Saudi Arabia of clean tech hardware. In 2022, China accounted for over 90% of the investment in low-carbon manufacturing. Almost all electronics, including clean-energy technologies, require rare earth elements as essential materials. China produces over 90% of the world’s downstream rare earth products and technologies and even supplies 98% of the EU’s rare earth elements.

Transitioning to renewable energy demands substantial basic and critical minerals. The challenge lies not in mineral abundance, but in securing a reliable supply from countries with higher geopolitical risk. Resource nationalism, heightened environmental scrutiny costs, and mining and processing expenses pose significant hurdles.

Nuclear is a platform which enables clean energy without the burdens of global supply chain reliance. Advancements in domestic innovation, government support, and overall spending will help the United States (and other countries) migrate away from not only fossil fuels, but also economic foes. A nuclear renaissance is energy nationalism.

Venture taking notice

Over the past few years, there has been a surge of advanced nuclear startups focused on developing innovative fission reactor designs and technologies. These companies aim to address the challenges associated with traditional nuclear power, such as safety concerns, waste management, and high capital costs. Some notable startups which have received considerable venture funding include TerraPower (responsible for the Kemmerer Natrium plant, $750M Strategic Financing in August 2022), NuScale Power ($380M SPAC in May 2022), and Radiant Nuclear ($40M Series B in April 2023). These companies are working on novel reactor designs spanning traveling wave reactors (TWR) to small modular reactors (SMR).

In addition to investments into nearer-term fission technologies, venture capitalists are also turning their attention towards fusion. Fusion works in the opposite manner of fission reactors — rather than splitting atoms, fusion combines them. While attempts at fusion have been ongoing for decades, the first demonstration of ignition (net energy gain) happened only in December 2022 at the Lawrence Livermore National Laboratory in California. This is a major step in the path towards sustainable fusion, but years if not decades of research and development remain. Commonwealth Fusion Systems raised a $1.8B mega-Series B in November 2021, while Sam Altman-backed Helion Energy raised a $500M Series E the same month. Interestingly, Microsoft recently inked a deal, obligating Helion to provide it fusion power starting in 2028. Investors are clearly becoming more confident in the potential of advanced nuclear technologies to address the global energy challenges.

The time is now

The world needs a nuclear energy renaissance to address the challenges posed by climate change and the increasing global energy demand. By correcting policy failures, changing public perception, and leveraging the economic benefits and energy potential of nuclear power, we can embrace nuclear energy as a key component of a sustainable energy future. The examples of countries like France and Sweden demonstrate that with the right policy support and technological advancements, nuclear energy can play a significant role in meeting our global energy needs while minimizing environmental impacts. Meanwhile, venture investments in domestic innovation may prove to be the spark needed to catalyze a switch to nuclear. As we work towards a cleaner, more secure energy future, it is crucial that we harness the immense potential of nuclear energy and give it the attention and investment it deserves.

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Certain information contained in this update has been obtained from sources outside of the Firm. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of the Funds or their affiliates take any responsibility for such information. The email is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third party sources and we cannot guarantee the accuracy or completeness thereof. Any opinions expressed herein are those of the authors’ and not necessarily those of Republic Capital or its affiliates. Do not forward or otherwise duplicate this information without the written consent of the sender.

We first publicly discussed our views on the emerging multipolar world in our November 2022 piece We’re going back. In it, we examined the criticality of the Artemis Moon missions as they relate to American cooperation and progress. China’s rapid technological ascension over the past decade is directly threatening U.S. unipolarity. According to a State Department funded report by the Australian Strategic Policy Institute, China now leads the U.S. in 37 of 44 identified critical technologies, including nanoscale materials, artificial intelligence, and hypersonics. The U.S. has been aware of this and last month announced measures to choke off investments into advanced Chinese technology, specifically those that could pose military threats.

Since November, a number of new nuances in China’s insatiable pursuit of global influence have surfaced. It is positioning itself as a geopolitical broker, facilitating deals across the Global South. As such, defense has become a priority for the United States, and investors are taking notice.

Two dear friends

Chinese President Xi Jinping met with Vladimir Putin in Moscow this week, just over a year since Russia’s initial invasion of Ukraine. Western sanctions imposed on Russia have drawn Xi and Putin closer. China has increased its import of Russian oil and its export of key semiconductors to Moscow — bilateral trade turnover in 2022 between the two countries increased 29.3% year over year. However, the balance still heavily favors China as it accounts for over 30% of Russia’s total trade, while Russia accounts for only about 3% of China’s. The visit underscores Putin’s reliance on maintaining an economic alliance with Xi, who recently won an unprecedented third term as China’s leader.

While China positions itself as a mediator and possible peacemaker in the ongoing conflict in Eastern Europe, Chinese officials have insisted that the U.S.-led expansion of NATO is to blame. Herein lies the first of several concerns for the United States. Balance in the war could shift towards Russia should China supply it with some of its advanced weaponry. Evidence of China’s military stance isn’t helped by the December 2022 jet flyby over the South China Sea nor the spy balloon fiasco. Although outright conflict is unlikely for now, the surprises of China’s prevalence signal that the U.S. is underprepared for a potential ‘Great Power’ conflict.

With that said, China may have its own unspoken desires. A westward Russian breakthrough would definitely take a few American eyes off of Taiwan.

The $842B 2024 U.S. Department of Defense budget outlaid the following priorities:

1. “Defending the homeland, paced to the growing multi-domain threat posed by the People’s Republic of China (PRC),” and
2. “Deterring aggression, while being prepared to prevail in conflict when necessary — prioritizing the PRC challenge in the Indo-Pacific region, then the Russia challenge in Europe.”

The messaging couldn’t be clearer, but it does leave a gap.

A few new friends

On March 10, China brokered a deal to restore relations between Iran and Saudi Arabia. The two countries formally split ties seven years ago, but this new Saudi-Iran pact has completely reshaped the Middle East. China showed that it could complete a deal that the U.S. had avoided. A senior official of Israel President Benjamin Netanyahu substantiated this claim, saying the deal was born from a “feeling of U.S. and Israeli weakness.” Netanyahu’s U.S.-brokered foreign policy deal normalized relations with four Arab states in 2020 in a push to isolate Iran. Meanwhile, the relationship between the U.S. and Iran continues to deteriorate after a deadly UAV attack led to American retaliation against Iranian troops in eastern Syria last week.

There are hopes that this truce can alleviate tensions in Yemen, where a proxy-backed civil war between Saudi and Iranian supported groups has raged since 2015. Resolving the humanitarian crisis in Yemen is of paramount importance, and so the deal is something the U.S. cautiously supports.

The truth is, China has come over the top and told the U.S.: “Whatever you can do, I can do better.” Just as it did in Russia, China has cemented itself as an economic ally to the Middle East. Both Iran and Saudi Arabia count China as their top customer for oil.

Russia has also joined the fray, moderating talks between Saudi Arabia and Syria which negotiators say are close to restoring ties between the two countries. The Middle East appears to be setting aside its differences and integrating itself into a finally stabilizing super region.

The U.S. is still the region’s foreign military superpower, but regional clout is slipping while it stretches itself thin.

Show me the money

Addressing the challenges outlined above is the very ethos of venture capital. Those who invent and commercialize solutions to massive problems tend to win the king’s ransom. The decades following the Dot Com Boom led to the zero-interest rate, software-first darlings that venture investors came to expect. While important, they mostly solved easy problems. The pendulum is swinging back to hard tech.

In our opinion, the next Kleiner Perkins will make its mark by investing in the next Genentech. The next Sequoia will be birthed by an employee of the next Fairchild Semiconductor. The aerospace & defense sector may very well be where this potential of talent and engineering is perking its ears, ready to pounce. It’s time to get comfortable again with hard problems.

Investors are privy to geopolitical imbalance, pouring hundreds of millions of dollars into defense and national security startups as the tides turn from monolith defense primes to nimble startups. Small business programs and federal funding opportunities, like SBIR and AFWERX, have helped spur commercial innovation to stay in the race with China. This year’s DoD budget made R&D and procurement priorities, totaling $145B and $172B respectively — the largest in history.

We’re notably seeing this innovation in space, which is rapidly becoming a new battleground in of itself. The U.S. Space Force budget includes a $60M provision for ‘tactically responsive space’ to deploy satellites via commercial launch systems on short notice. American communications and observation satellites launched on American rockets have proven integral to aiding in the war in Ukraine (however, SpaceX did recently limit Starlink capabilities to Ukraine’s military after it used the constellation to operate lethal drones). We believe businesses like Republic Capital portfolio companies Firefly Aerospace and Relativity Space will be essential to American defense success.

Recent defense-related venture deals include: Republic Capital’s co-lead investment into K2 Space’s $8.5M Seed, Vannevar Labs’ $75M Series B led by Felicis Ventures, and Machina Labs’ investment from Lockheed Martin Ventures. Other marquee, venture-backed names in defense include Anduril, Hadrian, and Shield AI.

Our firm is striving to remain well-positioned to execute and seek out attractive investments in companies focused on forwarding American defense and national security. We believe that this will be the secular tailwind to drive the next decade of hard tech venture investing.

We’ll let Warren Buffett cap us off. In his 2021 Berkshire Hathaway annual letter he said, “Never bet against America.”

We agree.

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This memo is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any trading strategy with any Fund. All figures are based on information provided by third party sources and we cannot guarantee the accuracy or completeness thereof. Any opinions expressed herein are those of the author’s. Certain information contained in the presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Do not forward or otherwise duplicate this information without the written consent of the sender.

Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.

Over the last few years, America’s shift towards clean energy and electric vehicles has birthed a new region dotted with scores of high-tech manufacturing facilities. Legislation and business incentives have turbocharged the development of the country’s new economic powerhouse: the Battery Belt. The need for domestically-sourced rechargeable batteries is causing the Battery Belt to become the epicenter of the clean energy transition.

Batteries 101

The world is going through a renewable energy revolution. The switch from fossil fuels to clean energy through electrification has taken hold of policy and business initiatives. Billions of dollars are pouring into the development of transportation and energy generation and storage, two mega-industries whose decarbonization will have a significant impact on slowing climate change.

The increasing demand for electrification has made batteries the most important technological advancement in the pursuit of net-zero emissions. The most crucial systems rely on lithium-ion batteries due to their superior energy density and rechargeability. Lithium-ion batteries work by releasing positively charged lithium ions from a negatively charged anode which is carried via an electrolyte through a separator to a positively charged cathode, often made of critical elements like cobalt and nickel. This creates free electrons in the anode and a charge at the positive current collector which causes an electrical current to flow through a circuit, powering a device. When charging, the ions flow in the opposite direction, resupplying the battery for its next use.

Lithium-ion batteries are ubiquitous and found in mobile phones, computers, and notably electric vehicles (EVs). The World Economic Forum predicts demand for lithium-ion batteries for EV and storage applications to grow to 9,300 GWh by 2030, 17 times the demand from 2010. This increase is driven by consumer demand for EVs and the goals of countries and corporations to achieve net zero emissions. China currently commands the EV battery market, making up 56% of the global market. A single Chinese firm, CATL, produces one-third of the world’s total supply.

Batteries are also used for mass energy storage of renewable-powered grids. Solar and wind energy are not always reliable as they both depend on specific natural factors to capture energy. This can lead to an inability to service energy demand, especially at night or when the wind is not blowing. Large-scale battery systems can capture energy during low demand and release it onto the grid when needed.

Rechargeable lithium-ion batteries are clearly important to further America’s shift towards a sustainable future, and given China’s domination of the supply chain, the government has taken notice.

Legislation Driving Change

In 2022, President Biden passed the Inflation Reduction Act (IRA) which prioritizes the push for a “Made in the USA” supply chain for critical materials. The Bill includes a $369B earmark for energy security and climate change spending over the next 10 years. Included in the provisions is a revised $7,500 tax credit for consumers that only applies to EV manufacturers that have a portion of their critical battery materials extracted or processed in the U.S. or by a free trade partner. The previous EV tax credit did not have a domestic battery sourcing requirement. The threshold for eligibility will be 40% of materials sourced in the U.S. in 2024 and 80% by 2026. With the goal of half of all new car sales being EVs by 2030, there is a coordinated effort by the government and automakers to invest in and develop a domestic battery supply chain.

Since 2021, more than 15 lithium-ion battery factories have been announced. These gigafactories are all in a region newly dubbed the Battery Belt, a stretch of land spanning from Michigan to Georgia through most of Appalachia. Not coincidentally, many of the major automakers have manufacturing facilities in this part of the country, so having battery factories nearby simplifies an already complex automotive supply chain. Planned investment from the IRA to support these factories and ensure the supply of EV batteries is expected to be north of $40B.

The push for electric vehicles is further supported by the recent passing of the Bipartisan Infrastructure Law which includes a $7.5B investment for a nationwide EV charging network and the CHIPS and Science Act which will onshore semiconductor manufacturing used in EVs. With this help from the government, the private sector is preparing to rapidly scale capacity and production of electric vehicle fleets.

Progress through Joint Ventures

The American auto industry has poured billions into new EV and battery manufacturing facilities over the last few years, and that investment is expected to increase given the federal tax credits of the IRA. To qualify for these benefits, U.S.-based auto companies are forming joint ventures with existing battery manufacturers to bring their capabilities and supply chain onshore.

Ford pivoted to EVs with the release of its Mustang Mach E and F-150 Lightning. To service high demand, the company is working to source raw materials, already sourcing 70% of its expected four-year run rate. Ford is further expected to spend up to $50B on its EV initiatives through 2026, and the IRA will help further these initiatives. For example, Ford is planning two battery factories in Kentucky via a joint partnership with South Korean firm SK Innovation. The facilities could be eligible for a $3B tax break.

General Motors meanwhile plans to spend $35B through 2025 on battery technology for their EVs. In December, the Department of Energy granted a $2.5B conditional loan for Ultium Cells, which is a joint venture between GM and LG Energy Solutions, another South Korean battery company. The loan will be used to finance the construction of three new lithium-ion battery facilities across the Battery Belt. Notably, the factories are set to create over 11,000 new jobs across Michigan, Ohio, and Tennessee, aligning government spending, corporate initiatives, local communities, and the United Auto Workers.

Progress also extends upstream to battery component manufacturers. Redwood Materials is investing $3.5B into a Nevada facility to process cathode and anodes, another process that is primarily done overseas. Redwood’s production of materials in the U.S. makes them eligible for a 10% tax credit under the IRA. It is worth noting that Redwood is also known for lithium-ion battery recycling where discarded batteries can be stripped of their components and refabricated into new ones. Battery recyclers are expected to be critical stakeholders in the circular clean energy value chain.

The Market Opportunity

Venture capital and growth equity investors are no strangers to battery technology companies. According to TechCrunch and PitchBook, the last decade has seen 1,700 battery deals worth nearly $42B. With legislative tailwinds and a renewed commercial interest in innovative battery technologies, venture investment in particular is picking up. EV battery startups raised $3.6B across 26 deals in 2021. Chinese battery cell manufacturer Svolt raised $3B, but even subtracting that amount from the total leaves a total investment amount nearly triple that of 2020.

Global Battery Tech Funding

The landscape around battery investing is also changing alongside the technology. With evolving ecosystems, deal flow is increasing into areas such as battery design, supply chain management, and charging capabilities, not just manufacturing or recycling processes. That isn’t to say these areas have not continued to receive funding, however. In 2022, Northvolt, a lithium-ion manufacturer from Sweden raised $2.8B, Redwood Materials raised $750M, and Washington-based Group14 completed an oversubscribed $614M Series C.

Furthermore, investments are being made into new high-energy density solid-state batteries, instead of technology around lithium-ion batteries. However, such science-based investments have longer R&D cycles than companies with products ready for commercial use, a potential deterrent for shorter-term investors.

Despite a venture slowdown in 2022, climate tech (which battery tech is a subset of) has continued to receive the lion’s share of funding. Funding for climate tech companies represented more than 25% of every venture dollar invested in 2022. With climate change showing no signs of slowing, investors are taking note and putting their money to work.

A New Future in a Non-obvious Place

The IRA has essentially shifted the incentives for electric vehicle adoption from the consumer to the manufacturer. The consumer still benefits from lower costs and an ability to skip the gas pump, while automakers are now federally rewarded for using materials in the U.S. This is why Ford and GM have expanded on their core capabilities and partnered with battery manufacturers to onshore while investors have sought out opportunities to take advantage of.

We can expect a race for control of domestic materials supply chains through more joint ventures and verticalization as automakers ensure their vehicles are American made. With this activity, new partnerships will form and new startups will emerge to address increasing demand. Investment dollars will continue to flow into the Battery Belt, developing the heartland that will be critical to America’s future success.

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This blog post is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third-party sources and we cannot guarantee the accuracy or completeness thereof.

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Dig, baby, dig

Infrastructure and utilities systems across the world are failing. In recent years, aging infrastructure combined with increased storms and wildfires has led to a rise in utility-related disasters. According to a report coordinated by the U.S. Water Alliance and the American Society of Civil Engineers, the United States would need to increase its investment in water infrastructure by $2.2T over the next 20 years, or roughly $109B per year to close the water industry’s current investment gap.

In 2022, the combination of the American Rescue Plan Act (ARPA) and Infrastructure Investment and Jobs Act (IIJA) delivered a potent one-two punch for the water and sewer sectors, providing more than $350B in financial assistance, with water and sewer projects. According to the American Society of Civil Engineers and U.S. Army Corps of Engineers, the average age of our sewer and water pipes is 45 years old, with some cast-iron pipes more than a century old. A relevant example of the scale of this problem was recently featured in KQED-NPR: to fix the underground sewage pipes in just three neighborhoods of our sewer infrastructure in San Francisco will cost $600M.

Traditionally above-ground utilities, like power grids, are also fragile and vulnerable to man made threats. In 2021, a series of winter storms triggered a failure of the Texas power grid resulting in nearly $200B in damages and hundreds of deaths. The Texas grid is notoriously disconnected from the rest of the United States which made redirection of power from other states impossible. A few years earlier, equipment owned and operated by PG&E caused 2018’s Camp Wildfire in northern California, leading to many deaths and ultimately a multi-billion dollar settlement.

Power consumption in the U.S. is on pace to set a record in 2022 as the economy demands more electricity and average temperatures continue to rise. Back in November, the EIA projected power demand to hit 4.04T kWh by the end of the year — an all time high. This snapshot of the situation in the U.S. is not an outlier — Exxon projects power demand to grow 50% by 2050.

These trends of aging infrastructure, climate change, and global power reliance point towards the fact that utilities are fragile and vulnerable to natural and man-made threats. The solution? Move everything underground.

The value proposition of bringing power grids underground and overhauling aging water and sewer tunnels is clear. Utilities will be significantly more protected from climate-related disasters reducing the risk of failures like we saw in Texas.

But in order to bore new underground utility tunnels, the world needs new tools. Trenchless tunneling machines have been around for decades, and the industry struggles with the reality of installing critical infrastructure through disparate geologies. When construction teams encounter geologies they didn’t anticipate, especially geologies that are difficult to bore through like rocks, sands, and high water table soils, project costs skyrocket. The biggest risk in boring utility tunnels is encountering a nightmare geology you didn’t anticipate.

Put simply, in order to underground the world’s infrastructure, we need more flexible tools that can excavate all geologies. We need an integrated tunneling method that can bore through all geologies at a variety of diameters, especially the geologies that are a “nightmare” for traditional trenchless teams. For example, think of the greater Denver metroplex which is experiencing massive population growth. New communities are expanding into the Rocky Mountain range from the plains and the reality for trenchless contractors is that they can expect to encounter soft soils, cobblestone, boulders, and even intact rock in a single project.

As a result, the boring business has become a fragmented industry because there is no single technological solution in the market capable of boring through all geologies. Most of these players operate a single machine and drill head, making each project dependent on a machine that is effectively a “one-trick pony.” Changing ground conditions can lead to damaged equipment in the millions of dollars and as a consequence, increased time for project completion and increased project cost.

Enter Petra

Petra is transforming grid infrastructure to make undergrounding more accessible for all.

There has yet to be an operational company that has built an all-geology utility tunneling tool that is flexible enough to accommodate a wide range of diameters to bore through all geologies in a single integrated machine.

Petra’s integrated robot bores critical utility tunnels — it is the first electric-powered trenchless multi-tool on the market. These microtunnels are the ideal size to service different types of utility applications. Petra’s new methodology enables utility installations through the hardest rocks and softest sands on earth, faster and cheaper than conventional methods. These conditions are often located in fire and wind prone areas as well as challenging coastal regions. This technology enables Petra’s “core” business in the construction of water and wastewater lines, and its “near core” business is the construction of power lines, as well as pipe rehabilitation.

Petra’s machines are especially performant in the types of nightmare geologies that traditionally drive up the cost of utility tunneling with conventional methods. Petra’s multi-tool robot can bore through difficult soft soils and softer rocks between 8 and 72 inches with the flexibility to be powered electrically. The hard rock module is non-contact and utilizes a thermal drill cutterhead, removing thrust and consumable cutting discs as a requirement for excavation. Its various modules for different geologies can be swapped in as little as 15 minutes versus the days or weeks it could take the one-trick ponies.

The value that Petra’s machines bring isn’t theoretical either. To date, Petra’s system has completed 18 jobs in LatAm and is on track for use on various job sites across the United States with dozens of more customers lined up in early 2023. Petra is working with regional trenchless contractors through strategic partnerships in order to get their machines out on a variety of jobs in 2023 and is already bidding on jobs with several North American contractors. Through these partnerships, Petra plans to provide exclusive access to their systems. Petra is equipping existing trenchless tunneling teams with more sophisticated technology, giving them a competitive advantage when it comes to winning contracts while keeping costs low.

In an impressive early demonstration, Petra’s machine bored through 20 feet of Sioux Quartzite, considered one of the hardest rocks on Earth, and a separate tunnel through 40 feet in granite.

Earlier this year, Petra acquired and integrated with Zilper, a Bogota-based manufacturer of its own boring machine capable of digging through high water tables, cobbles, boulders, and watery sand and mud. This combination of Zilper’s trenchless machine with Petra’s hard rock module presents a solution to address the trenchless market and grow market share in geologies through which others weren’t able to previously bore. Petra’s service addressable market dominates that of the vast majority of niche competitors.

At first glance, a full-stack tunneling service would require expensive machines whose costs are passed down to the end user. But Petra’s costs are considerably less, at times up to 90% less, on a per-job basis. An average job today can take millions of dollars as initial proposals balloon once you factor in backup machines and potential complications in the process. Sometimes, a contractor will hit unplanned geology, either breaking the machine or requiring a new part to be brought in. Petra eliminates these headaches because of its integrated system for tunneling needs. Petra allows contractors to complete a job in less time, for less money, and without worrying about the unknown.

In the past year, the company has achieved important milestones::

1. Non-contact cutterhead
2. Trenchless machine remotely operable via Petra’s software platform
3. Fully vertically-integrated trenchless company (R&D + Manufacturing + Construction Services)
4. Multi-tool in the trenchless industry
5. Hybrid-powered trenchless multi-tool
6. Machine to bore through all geologies, including the world’s most difficult geologies

In addition to this, Petra has a patent portfolio of 23 patents issued or pending, two products currently in the market and one in the final stages of R&D. The company will be scaling out its commercial services in 2023: boring-as-a-service.

The San Francisco-based company has some of the grittiest founders we have ever met at Republic Capital — and they have to be. Working in a field like construction or digging utility tunnels requires you to walk the walk and talk the talk.

You can get an idea as to why they’d want to tackle such a difficult problem from their founding story:

“For years, Petra CEO and Co-Founder Kim Abrams watched her home state of California crumble under the pressure of natural disasters. After running air purifiers 24/7 for months at a time to keep her home air breathable in the face of unprecedented wildfires, and watching hurricanes tear through her parent’s home on the eastern seaboard, enough was enough; she had to do something. She founded Petra to keep communities lit, safe and connected in the face of natural disasters and climate change. To do this, she resolved to figure out a way to bury the world’s critical infrastructure. What Kim learned was that while burying critical infrastructure protects communities from natural and man-made threats, the world didn’t have the right equipment to do so at scale.

With Petra, Kim founded her second robotics company to build technologies to bury infrastructure at scale. Petra is solving one of the biggest challenges in underground construction: how to bore utility tunnels through all geologies with a single method. After initially backing Petra as an early seed investor at Lemnos Labs, Shivani Torres joined forces as an early co-founder and Chief Product Officer to lead engineering and help Petra build the future of utility infrastructure.”

Kim and Shivani’s backgrounds in mechanical engineering, technology, and finance make them the ideal founding team. They both have what it takes to understand the machinery and market, allowing them to solve a pressing issue while making a viable business out of it.

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We are incredibly grateful to work with Kim and Shivani and lend a helping hand to build out Petra. The business is helping solve climate change in an effort to make the world better for all of us. If you have any questions about Petra, please feel free to reach out to us at [email protected]. And leave us feedback if you enjoyed this piece or would like to see another Republic Capital portfolio company highlighted.

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This blog post is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third-party sources and we cannot guarantee the accuracy or completeness thereof.

Over the past year, the crypto industry has faced unprincipled management, financial fraud, and avaricious behavior. Do Kwon, SBF, 3AC, and centralized lending operators’ careless oversight paints a false narrative of blockchain and decentralization. Despite this, crypto today still has some of the brightest developers building on this novel technology. Unfortunately, certain centralized operators have manipulated crypto assets to a point of near extinction, causing the retail market to lose trust.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” — Warren Buffett

Macroeconomic headwinds persist in a rather dire environment. We expect interest rates to remain high while liquidity is sucked out of the market. We expect interest rates to remain high while liquidity is sucked out of the market and retail investors choose to hold cash in their bank accounts as they have given up on investing. The economy cannot inflate away its problems and such a strategy would leave an overwhelming majority of Americans worse off. According to Hoisington Investment Management’s Q3 2022 review, “[f]ailure of the Fed to achieve its inflation target would also have the consequence of allowing an emergent money/wage spiral to become entrenched. The Fed’s mettle will be tested because over-leveraged institutions will fail as they have in the past.” We hold a similar sentiment, with the latter having already played out in crypto over the past year.

It took the S&P 500 12 years to return to its Dot-com Bubble high from 2000. This was during a historic period of technology growth and the introduction of quantitative easing, a monetary policy that is not out of play during this economic cycle…

Source: Factset, S&P 500 | (accessed) November 2022

We believe that the business of venture is to bet in emerging sectors before the flow of institutional funds reaches that sector. That being said, we still hold a strong belief that smart contracts and decentralized systems represent a long-term pervasive investment theme in venture capital. Our thesis on crypto remains the same — R/Capital’s multi-faceted investment approach focuses on blockchain-enabled gaming, emerging market financial infrastructure, and decentralized ecosystems with application-specific purposes. In our opinion, autonomy, openness, and transparency are all facets of decentralized technology and the two crashes of 2022 were the opposite of those characteristics.

While the crypto market has significant headwinds in store, R/Cap has two thesis-driven narratives that we believe are staples in our venture investing practices.

Blockchain-enabled Gaming: Interoperable value transfer enables when projects build their technology stack on a blockchain and gaming is a prime use case for this. While blockchain infrastructure facilitating consumer-facing experiences is still maturing, blockchain-enabled gaming creates a form of bi-directional value transfer. In turn, tokens within games can incentivize loyalty and create sticky customer retention through shared ownership and governance. Financially aligned user bases through a decentralized marketplace is a sub-use-case that we predict will be prominent in most Triple-A games moving forward.

By launching games where the players cannot tell that there is blockchain technology in the background, crypto could onboard millions of users without them even knowing. Once gamers start to get curious about how much their assets are worth, they will begin to explore blockchain technology via ramps and other chains as well.

Gunzilla: R/Capital led Gunzilla’s seed round with a $2M check into the private token round. Gunzilla’s Off The Grid is a Triple-A gaming studio that plans to launch Off the Grid in 2023. Off the Grid is a cyberpunk battle royale game compatible with all platforms built using Epic Games’ Unreal 5 engine.

Gunzilla plans to build an Avalanche (another portfolio company of R/Capital) subnet within the game. Since Avalanche subnets give web3 games complete control with their customizable networks, without sacrificing security or decentralization, we remain confident that Avalanche is the most suitable blockchain partner in our opinion for Gunzilla. Thus, this builds on our wider thesis of creating “spider webs” within our portfolio companies here at R/Capital. Our main focus is to create ways to marry portfolio companies that are building alongside the same mission and goal.

Emerging market financial infrastructure: We expect crypto prices to remain down as retail liquidity is low and retail confidence has withered. However, there is still a strong utilization of crypto present in emerging markets. Due to the desideratum for financial infrastructure present, we believe these markets will drive crypto demand Emerging markets with high inflation and no banking services can use crypto financial rails to process P2P transactions at a significantly cheaper cost than ACH or Western Union.

Busha: Busha has given us hope in terms of its resilient management style. R/Capital invested $400K into the Nigerian-based crypto application’s Pre-Series A. Busha is a vertically integrated crypto application that provides a suite of products and solutions that enable their customers to onboard easily into the crypto economy, thereby accessing financial opportunities that they would have otherwise been closed to. Generations of Africans have grown up with aggressive wealth erosion due to the devaluation of their local currencies. The financial borders make it difficult to access more stable global assets, condemning people to poverty.

Low levels of liquidity, lack of institutional fund flow, and austere regulatory guidance are issues that crypto will face for years to come. However, the asset price is not a fundamental metric to value the developer activity happening in the space.

Source: Alchemy Web3 Development | 2022

We expect to see a continuous talent migration from web2 to web3. Developers will flourish during a cold winter as they continue to build applications on decentralized technology stacks. In fact, we believe that this downturn benefits developers. Additionally, the crypto developers’ continued maturity gives us hope that the necessary infrastructure is now present to use any coding language for smart contracts. Compatible software development kits (SDKs) across multiple layer-1 platforms give developers access to infrastructure that wasn’t present two years ago.

Our team at Republic Capital will continue to work with our portfolio companies to take a more strategic and hands-on analysis of the evolving situation so they can come out stronger than ever.

This blog post is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any strategy with any Fund. All figures are based on information provided by third-party sources and we cannot guarantee the accuracy or completeness thereof.

Source: DALL·E 2

After months of delays, NASA’s Artemis I mission is set to finally kick off. The Space Launch System (SLS) plans to lift off from Kennedy Space Center on November 16, 2022. Artemis is a successor to the Apollo program and aims to land humans back on the Moon for the first time since 1972. A permanent presence in cislunar space and on the Moon’s surface will prove out technologies for future missions to Mars and jumpstart commercial activity in the new space economy.

As the U.S. stands at the cusp of a new lunar frontier, it is imperative to understand the specifics of the missions. In doing so, we can strategize for the coming age — for all mankind.

Here at Republic Capital, we have our finger on the pulse of the entire space industry. Please reach out to [email protected] if you would like to read our 2022 Space Report.

Apollo flexed American might

Today, we are discussing Artemis, not Apollo. However, we would be remiss to not highlight the program that first landed a man on the Moon.

The Apollo program was the most significant step forward in the technological innovation of the space age at the time. It was the third United States human spaceflight program carried out by NASA (after Mercury and Gemini), and succeeded in landing the first humans on the Moon. The United States spent approximately $260B (in inflation-adjusted dollars) on the Apollo program. It was, and still is, the most expensive R&D project of all time.

Powered by the Saturn V, Apollo 8 put the first humans in lunar orbit in December 1968. Less than a year later on July 20, 1969, the first man walked on the Moon as a part of Apollo 11. Apollo 17 launched in December 1972 and was the last time that a human has set foot on the Moon. Altogether, six Apollo missions resulted in a crewed lunar landing.

The Apollo program won the U.S. the Space Race over the Soviet Union, establishing it (and global democracy) as the clear world super power. America won because of the willingness of policy-makers across the aisle to coordinate and work towards one goal. Kennedy committed to landing a man on the Moon by the end of the decade in 1961. Six years later, the Saturn V rocket was functional. Two years after that, Neil Armstrong stepped foot on the lunar surface. And for nearly 50 years to the date, we have not been back to the Moon.

America was losing the Space Race before aligning its resources in one direction. We need this sense of awe, coordination, and drive if we want to do it again.

Source: Pulitzer

Losing unipolarity

Over half a century has passed since the U.S. cemented its position as the leader of the bipolar world, before becoming the unipolar power with the fall of the Berlin Wall. Since 1991, Americans have enjoyed an era of relative peace and prosperity.

Then in 2016, China’s GDP eclipsed America’s on a PPP basis. Over the next few years, it became clear that China was relentlessly focused on bridging the technological gap versus the U.S. in all industries, including (and especially) space. The first Chinese astronaut went to space in 2003. Since then: China has become the first country to land a probe on the far side of the Moon, the second nation to land a rover on Mars, the third nation to successfully bring lunar soil back to Earth, built the world’s largest telescope, deployed Beidou (a next-gen competitor to GPS), signed an agreement with Russia to jointly build a lunar research base (originally schedule for completion in 2036, but now reports say 2027) and is second only to the U.S. for the number of satellites in space.

Source: Aerospace Security

Just last week, China launched its final module and began orbital assembly of the Tiangong Space Station which will be operated by the China Manned Space Agency (CMAS). As the ISS begins to wind down this decade, China is positioning itself to lead the cislunar economy which it believes will generate $10T per year on economic return.

As mentioned above, coordination towards a single goal was what won us the Space Race. Policy missteps have splintered a singular priority as the U.S. spreads itself thin across the myriad plans it has. Across the Pacific, Xi Jinping just secured an unprecedented third term in an authoritarian regime. For the CCP, there is no losing focus. What Xi says is what Xi gets — and he wants to show the world that his method of rule works.

Great ambitions cost significant capital

The decade-plus long Artemis project will culminate by boldly returning Americans to the surface of the Moon. A consortium of commercial and international partners will then establish the first long-term, human-robotic presence on the Moon and in lunar orbit. This infrastructure will be used as the launch pad to bring astronauts to Mars and beyond.

These objectives do not come without their fair costs, however. It is estimated that since development began in 2011 through 2025, the combined components of the Artemis Program (SLS, Orion, etc.) will cost NASA $93.1B. The RS-25 engines supplied by Aerojet Rocketdyne cost NASA $146M per unit. Each SLS has four of them.

The bloated cost-plus structure of NASA and its prime contractors has created a very expensive rocket, however there is hope that this can change. Milestone-based contracting is a new shift advocated by NASA Administrator Bill Nelson. It hopes to do away with the cost-plus model which has created misaligned incentives on cost and timing. Much of this has been clearly reflected by the Artemis program, and SLS in particular.

The rocket is expendable, meaning that it is discarded after each use. Thus, the combined SLS and Orion launch costs $4.1B per attempt, equating to ~$31,500 / kg to LEO. For reference, the Apollo-era Saturn V, which first launched in 1967, was capable of reaching LEO for just $8,800 / kg in inflation-adjusted dollars. This is attributed to the complete policy coordination of the United States to put a man on the Moon before the Soviet Union, something we lack today.

Source: NASA, SpaceX

The future of Artemis, near and far

Next week’s Artemis I mission will be the first integrated flight test of the SLS and Orion. Artemis I will be an uncrewed flight, providing the proof-of-concept for future missions. After a successful launch and detachment from the SLS, the Orion spacecraft will be powered by a European Space Agency service module and travel 280,000 miles from Earth, completing multiple lunar orbits before returning home after three weeks.

In the event of a successful first mission, a roughly seven year proposed window will open in which NASA plans to complete five more Artemis missions.

The second mission is scheduled for 2024 and intends to bring a four-person crew on a lunar flyby. This would be the first crewed spacecraft to travel beyond Earth’s orbit since Apollo 17 last landed on the Moon in 1972.

Artemis III then aims to land two people, including the first woman, on the Moon’s surface to conduct scientific experiments. The 2025 mission intends to again utilize the SLS and Orion, but land on the lunar surface via SpaceX’s Starship. NASA awarded the $2.9B firm-fixed, milestone-based contract to SpaceX in 2021 — a benefit of new commercial suppliers.

2027’s Artemis IV intends to deliver the first module of the Lunar Gateway, a human-tended space station which will orbit the Moon. Gateway will be critical in developing the technology needed to support lunar and Martian exploration and habitation. The current plan has SpaceX again providing service, using both the Starship and Falcon Heavy to deliver modules over time. International partners include: the European Space Agency (ESA), Canadian Space Agency (CSA), and Japanese Aerospace Exploration Agency (JAXA).

Source: NASA

A year later, Artemis V expects to deliver the ESPRIT Refueling Module to Gateway and land the new Lunar Terrain Vehicle (LTV) on the Moon’s surface. ESPRIT is ESA’s contribution to the lunar station and will provide refueling infrastructure and telecommunications. The LTV is a Northrop Grumman-led program to develop the next generation of transportation on the harsh surface of the Moon while providing life support for astronaut drivers. The LTV will eventually be reworked for use on Mars.

The sixth and final planned Artemis mission will include another lunar landing and delivery of the Gateway Airlock Module which will be used for performing extravehicular activities outside of the station. It will also include a docking station as a stop before eventual deep space exploration.

The Artemis mission doesn’t end there, however. There are five more proposed missions which will focus on the delivery, fabrication, and maintenance of the Habitable Mobility Platform and Foundational Surface Habitat, the first ever permanent Moon base. These missions are dependent on the success of the already planned Artemis I through Artemis VI and would occur in the early 2030s.

The importance of the commercial sector

In order to accomplish Artemis, the government needs support. These are large goals and the political bureaucracy that NASA has to navigate makes success difficult. But there is hope in the commercial sector. Manufacturers and contractors have been the backbone of American progress since the country was founded. This perseverance has led to innovation and this innovation is starting to metamorphosize into a new Space Boom, spawning new categories in which to invest.

Launch providers like Firefly, SpaceX, or Relativity are capable of putting communications or Earth observation satellites, like Hedron or Albedo, into orbit.

Once in space, we need stations like Axiom to establish a permanent space presence, and platforms like Privateer to warn us about potential orbital debris which may put lives in jeopardy. Such companies ensure the security and development of other commercial space assets.

And eventually, we believe that what was once considered science fiction, i.e. mining asteroids and building interplanetary infrastructure, will soon become a reality as SpaceX’s Starship helps companies rethink the mass and volume constraints that have historically prevented viable business models in economies beyond Earth’s orbit.s

A final rally cry

Artemis represents the next chapter in NASA’s storied history. It showcases the willingness of the U.S. and its allies to continue the development of space alongside commercial endeavors. Despite its hefty costs and delays, the mission will happen. But it is worthwhile to analyze its issues and understand the implications it has for the private sector and for us as Americans. We didn’t have these issues during Apollo and if we want to beat China to the Moon, we must address them.

Space is the next frontier, with plenty of countries all vying to be its leader. It is up to all of us to rally around the collective mission, Artemis and beyond, and win this new Space Race.

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Republic Capital has previously invested in the companies listed and linked above.

Graphics for illustrative purposes and not to scale.

This blog post is for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security or instrument in or to participate in any investment strategy. All figures are based on information provided by third party sources and we cannot guarantee the accuracy or completeness thereof. Any opinions expressed herein are those of the author’s. Certain information contained in the presentation discusses general market activity, industry or sector trends, or other broad‐based economic, market or political conditions and should not be construed as research or investment advice. Do not forward or otherwise duplicate this information without the written consent of Republic Capital.

DeFi-ning the Future of Finance with Acala

Acala is a decentralized finance (DeFi) hub and stablecoin platform allowing for cross blockchain liquidity and applications. Built as part of the PolkaDot network, the Acala Network’s native currency, known as the Acala Dollar (aUSD) is a stablecoin, which means that users can always exchange one Acala Dollar for a US Dollar. Eligible users can stake their Acala Dollars and earn rewards.

Acala Co-Founder Ruitao Su has been an engineer and entrepreneur pretty much his whole life, only working one “job.” Before he jumped into the blockchain space he had been an independent app developer, focusing on creating mobile applications, almost all of which were featured in the Apple app store. “I like to create stuff,” Su put it simply, and being an engineer meant he knew how to “create stuff” pretty well. One of the featured apps included Powderly, an app for tracking skiing and snowboarding, which Su created out of his love for snowboarding.

Su fully committed to the crypto space about 6 years ago, but he knew about Bitcoin when it was less than $100. He had discovered the whitepaper (initial technical description) on Reddit, read it, and decided it wasn’t going anywhere. He was glad however, to have been proven wrong, and doesn’t feel too beat up about not joining the Bitcoin train back then. “Even if I had participated back then, I would have probably mined Bitcoin, sold it, and regret bitterly now.”

Su mentioned that it is commonly said that “for Bitcoin to go from $0 to $100 was considered impossible, but for it to go from $100 to $1,000,000 is inevitable.” He is fully convinced that if the “impossible” has already happened, that things are looking good for the future.

Su got involved once people started to get excited about the applications of blockchain in tech, specifically creating products useful in the finance world. By then, he was fully convinced that blockchain would disrupt the world of finance. “The revolution was coming and I wanted to be part of it.”

He met his Acala co-founders in New Zealand and China. They aligned on their mission, setting out to create something useful that can also add value to its token holders or anyone. “Blockchain is a solid technology but there’s so much speculation,” and Su emphasized they wanted to have a solid product, not just contribute to the ICO craze that was happening a few years back, when everyone and their uncle was selling a token all of sudden.

When setting out to create, they had one rule: create something finance related with a real use case. They explored a variety of potential infrastructures — Ethereum 2, Cosmos and Substrate among them — and compared their features and communities. Taking an educated guess on how the blockchain developer will evolve, and thinking that Substrate was “super cool and promising,” they decided to build on top of the Polkadot network. Polkadot is a newer decentralized platform, focused on security, scalability and innovation.

Now, Acala is almost ready to launch.

As Polkadot has been gaining popularity recently, I was curious to dig into more detail on the decision behind becoming part of the network. Su said for them it was less of a technical question, moreso based on how they see blockchain technology evolving.

“We believe the future is going to be focused on multi-blockchain, interconnected networks and interconnected money levels. Ultimately, the blockchain network is going to turn to specialization; more and more networks will be fine-tuned for one particular purpose or domain, and not handle everything, just it’s own domain super well.”

The team felt that Ethereum 2 was more of a general computational layer, and wanted to see a network more fine-tuned for a particular usage; in the case of Acala, the usage is finance. After looking at some options, they decided Substrate was the best choice for what they wanted. Su explained that Substrate is the first purpose built framework, comparing it to a React or Node.js (JavaScript) on blockchain where you can pick and choose what module you want. Examples include a staking module, currency module and a smart contract module.

The team is excited to be part of the Polkadot network as they strongly believe in the framework behind it, and according to Su, “framework always drives the ecosystem.” Polkadot allows the applications built on it to utilize its strong security layer, is truly decentralized and also allows for interoperability for the different applications on the network. The applications are no longer constrained to themselves or siloed: they are part of a larger network where they can “communicate” and work together.

As we get more involved in the cryptocurrency and blockchain space, Republic Labs is excited to see how the industry is evolving. With more efficient, interconnected and user-friendly use cases, it’s awesome to see the decentralized space becoming more and more mainstream.

Republic Labs is the advisor to clients which have invested in Acala, nothing herein should be construed as investment advice.

By Elizabeth Olshanetsky ([email protected]) for Republic Labs.

Dapper Labs leverages blockchain technology to create highly accessible entertainment and games apps for retail user adoption, with unparalleled brand partnerships such as those with the NBA, UFC, Dr. Seuss and more.

I had the privilege to speak with Weilei Yu, Head of Marketing at Flow. Created initially as a side project at a venture studio, Dapper Labs saw raging success with their first product: CryptoKitties. Since then they have released other projects such as NBA Top Shot — passing CryptoKitties as #1 in all-time transactions volume — which allows anyone to own basketball moments as collectibles, and Cheeze Wizards, “the world’s first blockchain battle royale.” However, it is the virtual felines that originally took the internet, as well as the Ethereum blockchain, by storm. Cryptokitties garnered so much traffic that it slowed transaction speeds across the entire Ethereum network during its boom back in 2017. This showed a point of weakness, and as Weilei Yu said, “no matter how good your dApp design or product is, if the underlying infrastructure can’t meet demand, you have almost an automatic break.”

Aside from latency issues, one of the other biggest grievances the Dapper Labs team had was the barrier of entry for users. Although simple compared to most blockchain based projects at the time, there were still quite a bit of steps to get set up with CryptoKitties and other decentalized applications (dApps). Users had to install the MetaMask plug-in, generate a seed phrase (usually a sequence of words for safe keeping — a common part of blockchain security, but also very easy to lose), make a CoinBase account to fund the “kitty” and more. All of this combined with worries of Ethereum “sharding” (the initial blockchain splitting into pieces) made the team ready to look for some kind of alternative solution. Weilei emphasized that as dApp developers, they knew “what the experience should be to sustain momentum and keep talent,” and that of course unhappy developers plus unhappy customers was a recipe for disaster. It was time for a new blockchain: Flow.

Weilei explained that Dapper Labs was the original creator of Flow, and they set out to make it with three goals top of mind:

1. Build a scalable blockchain for mainstream consumer adoption
2. Make it very developer-friendly and centric
3. Offer smooth user onboarding

After months of hard work, the Flow main network (mainnet) launched in the summer of 2020 and saw glowing results. Weilei mentioned that the developers using Flow have generally been impressed with the infrastructure — one cool feature of Flow is that it allows developers to pay “gas” (processing power) fees on behalf of the users on the protocol level, without having to leverage complex and expensive workarounds (which are often necessary on the Ethereum blockchain).

On the user side, onboarding friction has been greatly reduced. You can create an account and use it right away, and if there are any additional steps that aren’t essential right away, they can be completed at a later time. This is a great feature for developers, as Weilei explained, because they can create experiences with gradual access to the users:

“If a user is completely new [to the space] they might require a bit more hand holding, and once they’re ready they can be granted full control. If it’s too hard right off the bat, it might chase a lot of people away from the space.”

The team strongly believes in straying away from the conventional difficulty of getting into the cryptoverse and is focused on being able to attract a mainstream user base to finally open up mainstream blockchain adoption. Speaking of mainstream adoption, how is Flow going to compete with Ethereum if there are already so many dApps and developers in that community? The way Weilei puts it, “Ethereum is heavily focused on DeFi (Decentralized Finance) but there’s a lot more that crypto can offer.” Most of the projects the Dapper Labs team works on and Flow revolves around focus on bringing blockchain empowered entertainment apps to mainstream consumers. Plus, in terms of competition, lack of users or developers has not been an issue for Flow — when TopShot launched on the Flow mainnet this past summer, they saw over $60M in marketplace transactions, and there are currently over 100 groups of developers building on top of the Flow blockchain. Additionally, according to CoinList, a record breaking amount of people (over 12,000) participated in the public sale of the Flow token (native currency of the Flow blockchain) — and Weilei was actually the one who led the campaign for the sale.

One of the special features of Flow that Weilei told me about is the ability for developers to not only receive grants, but also to get support with go-to-market strategy and user acquisition. “It doesn’t matter how many dApps you have, if the teams just build them and leave, and nobody uses them, their worth is 0.” It’s awesome to see the Dapper Labs team already delivering on their goals of creating a user and developer-friendly blockchain. As Weilei also said, there is “no one as powerful of a marketer than a community that really trusts and believes in the project,” and so they will continue to put people in the center as they build out Flow.

Even on a personal level, Weilei mentioned a passion for accessibility within the blockchain and cryptocurrency space. Prior to his work with Flow and Dapper Labs, Weilei worked as the Head of Developer Relations at Streamr, a crypto project dedicated to decentralizing accessibility of content. Two years later, he joined the Flow team, leading marketing across the globe. Aside from the successful Coinlist campaign, he focused a lot of his energy on the Open World Builders, a comprehensive free bootcamp open to anyone to learn about building blockchain empowered applications (that had over 400+ applicants, 20+ universition, 10+ professional fields, from 4 continents) and Open World Summit, the annual Flow summit (which offered panels hosted in 4 different languages). These events are meant to empower regional communities, as Weilei explained that “many global events are English-based, so it doesn’t benefit local communities as much, but only addresses the privileged few who know English well.”

As Christian Sullivan of Republic Labs often says, “Access and Inclusion is the new A.I.” so we are excited to see the Dapper Labs team making an effort to increase accessibility to information and technology that once seemed only available to an elite few. We look forward to seeing what progress they make with Flow and excited to see what 2021 will bring!

Republic Labs is the advisor to clients which have invested in Dapper Labs, nothing herein should be construed as investment advice.

By Elizabeth Olshanetsky ([email protected]) for Republic Labs.