Space, Aviation Startups Risk Crumbling As VCs Pull Back

As venture capital firms tell their portfolio companies to conserve cash ahead of anticipated economic turbulence, aerospace industry experts are warning that hundreds of startups are at risk of crumbling. Many young outfits working to deliver innovative new technologies — like electric vertical take-off and landing vehicles and commercial supersonic flight  — rely heavily on VC money to stay afloat, since they’re typically years away from generating enough revenue to keep themselves going.

Y Combinator, a VC firm that invests in a number of aerospace startups, including Relativity Space, Boom Supersonic, and multiple eVTOL startups, warned its portfolio companies in May to “plan for the worst,” according to Crunchbase. 

‘The day of the SPAC is over’

Aerospace startups that went public via

SPAC

, including urban air mobility startups Joby Aviation and Archer Aviation, are in an especially vulnerable position right now, said Brian Foley, founder of boutique aerospace consulting firm Brian Foley Associates. 

Many have seen their stock prices tumble, and a falling stock price makes raising future capital much harder. Archer, for instance, debuted at $10 when it went public in August 2021, and was trading at $3.04 at the end of June.

“The day of the SPAC is over, and some aerospace companies which were publicly listed in the last couple of years will wither away,” Foley said. 

Many VC-backed aerospace startups are “so cash flow-dependent that if it misses one investment check or the next round, it’s just done. There’s not enough resources to keep it going,” Foley said. 

‘Survival of the fittest’

Experts agree that the urban air mobility sector, which is made up of more than 250 heavily VC-backed startups, is likely to see the most fallout. 

“This will be the year of reckoning for the urban air mobility sector, as rising interest rates have turned off outside investment spigots,” Foley said. 

He expects to start seeing “some pretty significant fallout”‘ in the second half of this year and into next. 

“Particularly if there’s a

recession

too, investors are going to want to preserve cash and not be betting on designs drawn on the back of a napkin,” Foley said. “You’re going to be a lot more selective.”

Richard Aboulafia, managing director of aerospace consulting firm AeroDynamic Advisory, told Insider he expects a single digit number of urban air mobility startups to survive. 

“Is there room for startups and experimenting? Yes. On the scale, we’re seeing? No,” Aboulafia said. 

On the bright side, the startups that remain will be able to start taking some of the market share that’s been diluted by the weaker players. 

“It’s kind of a sort of survival of the fittest right now,” Foley told Insider.