#146 | Space Financing | Justin Stevens, Overlap Holdings

Five, four, three, two, one, zero. All engine running. Liftoff.

We have a liftoff. Is the space sector actually financed in the right way? That's probably the main question I'm discussing with my guest, Justin Stevens, founder and CEO of the investment firm Overlap Holdings. He spent 18 years at Apollo Global Management, a very prominent private equity firm. So he's a Wall street guy like me and I think qualified to voice an opinion on this question which we may not ask enough. Enjoy. My name is Rafael Rutkin. I'm the founding partner of e2mc, Earth2Mars Capital, a venture capital investor in dozens of space startups worldwide. Among other roles I have, such as being a part time podcast host. Just as a reminder, this podcast is for informational purposes only. It does not reflect any view by E2MC, and nothing should be taken as investment advice. Before we start, a quick favor. If you do enjoy this podcast, please leave us a five star review on your favorite podcast app such as Apple or Spotify. It does help other people find a podcast. Now on to today's episode. Welcome back, space enthusiasts. Time for another episode of the Space Business podcast. My guest today is Justin Stevens from Overlap Holdings. Welcome, Justin.

Thank you very much. Pleasure to be here.

Yeah. And so, Justin, why don't you start off giving us a little bit of summary background on yourself and on Overlap Holdings.

Sure. So I'm Justin, founder and CEO of Overlap. We're a team of five people. We've been in business for two and a half years. Our entire focus is in what we refer to as Frontier Tech. And that's companies doing true innovation with capital intensity. That means no pure software businesses solving some of the world's biggest problems. So climate, energy, life science, most importantly space, robotics, semiconductors, all the stuff that really moves the needle. Prior to founding Overlap, I was at Apollo Management, the big Wall street firm. For over 18 years. I was a senior partner on the private equity side, investing business, building every single sort of financial structure you could possibly imagine in the entire known universe. I touched Frontier Tech in a variety of ways when I was there, including as an angel investor. As an angel, I found myself very popular because as you know, Frontier Tech is very capital intensive. Most VCs understand tech and equity well, but they don't understand debt and scaling the way that Wall street people do. So when I came along, they were very happy to have it. And right off the bat, I was getting invited to deals led by top VCs. Over time, I came to appreciate that Frontier Tech was just a fundamentally broken financing market. Great companies were going out of business all the time because they didn't have the tools they needed to fund that growth. Thought it was a shame, but also an opportunity. Wanted to do something about it and found it. Overall, our whole goal is to get more frontier tech companies to the finish line. We do that through a very unique model with three lines of business that are all interconnected. I'll go into that in a little more detail a little bit later when we talk about financing the space ecosystem. But most importantly, I'm also an avid space geek. My first son's name is Leo, for what it's worth.

Do you have like, two other kids in there? Mio and Gio.

Our daughter's name is Mia, so that's pretty close. And then our third child, son is Nico, not George. That would have probably been the way to complete the series. But anyway.

But speaking of names, why overlap? Where does that name come from?

Sure, so a lot of overlap. Strength. Our superpower, right? So we don't lead deals, we only follow. But we follow the best of the best. And the reason we do is that we bring additional tools to the table to help our companies. You heard me mention those two additional lines of business before. Obviously, we're best known for our investing business. We have a $33 million fund, one that we closed at the end of last year. We've already made 14 deals in that fund. Two are direct space investments, one is a space component business, all of which are doing great and we're very, very happy with. But we also have two other connected lines of business, one being what we call capital solutions. Capital Solutions helps frontier tech companies raise debt. As you know, all frontier tech companies at some point in their life cycle are going to need debt to scale, whether they're building factories, increasing working capital, funding, acquisitions. The biggest shock to me of anything when I started spending time on this ecosystem was that even the biggest and best frontier tech VCs only have three or four lending relationships. They just kind of relied on Silicon Valley bank to be the proxy for the lending market. Now, that was inefficient, but nobody realized it until the bank blew up and then it was a disaster for everyone. Meanwhile, for my time at Apollo, my colleague Rob's time at ubs, and the friends we've made along the way, we have relationships with over 200 firms that in some way shape or form lend into this ecosystem. And so our capital solutions business leverages that by connecting frontier tech companies to those sources of scaling capital, primarily debt, to help them on their Efficient pathway. We don't lend money ourselves, we are equity investors, but we help people find those debt dollars and help them navigate their capital structure. We provide that service for the entire frontier tech ecosystem. If we're not a portfolio, if you're, we're not invested in your company, we charge a fee. But if we're investing in your company through our fund, membership has its privileges. You get all those services completely free of charge. And that's a big reason why we get we invited a lot of great deals. We're also really quickly in the process of building another business line called Government Solutions. We recently hired a great woman out of the Pentagon who was formerly in startup biz dev who's holding up a, a, a parallel business helping frontier tech companies build their strategy for getting the right government grants, awards, contracts, loans and so on and so forth. So this concept of kind of overlapping across these various ecosystems, bringing people together who you know, have in their Venn diagram, where their Venn diagrams overlap to generate value and make things better for people, it's kind of the, the conceptual reason for the name.

Okay, understood now. So now by virtue of asking for your name and you explaining that you mentioned like a lot of interesting things which I was going to delve into into a little bit later, but okay, we might as well do them now and jump right into the deep end of the pool. So one reason I like to have you on the podcast when your name first came up is sort of like I've spoken to other space investors before, many space investors, like former entrepreneurs or coming actually from the technology side, there's actually very few people I've seen like you or me for that sake who are actually for better or worse like former Wall street or current Wall street types. Right. So we're coming from the finance side. We have deep, well hopefully we have deep understanding of sort of like, you know, capital process, what financial instruments can be used to raise capital and the advantages, disadvantages. And so you mentioned a fact before which I've also seen very clearly oligodally that most of the financing in the space actor is equity investing. Now to some extent you'd expect that, right? Because most of the stuff is early stage. But even so, I think what you said, and I'd agree is that the usage of debt, it's probably underutilized as a financial instrument, right? Because you have some later stage companies, they have more. Well, they basically have things. I got to be careful now because we're saying we're a non technical podcast, right. So I Can't get technical on the finance side either. Usually we don't want to get technical on rocket science, but we can't get technical on finance side either. So all of the listeners, I just make sure I understand what we're talking about here. So usually debt holders, they need something that they, that makes them feel secure, right? That they will be repaid and that could be actual, actual assets, right? So maybe for space companies it would be like satellites or like a ground station or something like that. Or it could be just the fact that there is what seems to be recurring revenues and cash flows importantly. Right. So why keeping all of this in mind, why do you think that debt has not been utilized so much and do you see any specific reasons why it hasn't been utilized that much?

Yeah, it's a really funny, it's a really fun discussion for me to have on this, Rafael, because to your point, like, you and I come from the world of Wall street, you know, and I spent so much time in Wall street that my journey into venture was so much different than most VCs who come in as engineers or operators, right? There's very few long tenured financial structuring experts who spent two decades building a Wall street career. So my, when I think of the first time, the first probably half a dozen times I ever thought about satellite, it was from the debt side, right? It was the high yield bonds of companies like Iridium. Definitely dating myself with the Iridium reference, but intel set, you tell, sat right? Like a lot of these, the kind of what Was Space Economy 1.0? It was these massive geosynchronous communication satellites. Hundreds of millions of dollars to build, hundreds of millions of dollars to launch. But once they're up, incredibly predictable contracted revenue coming off of them. And the, you know, the, the debt structures on those companies is a wedding cake, right? There's so many different layers chopped every single way you can possibly think of, you know, as complex as, you know, a commercial real estate transaction. And so that is kind of what I think of the original way I approach space investing was through that, right? Exploring that whether the public debt prices of various bonds of space companies or, you know, their offshoots, you know, were priced appropriately and thinking about it in the context of contractual cash flow. So, so that's always the filter that I think of. And so to you, similar to you, like, I find it shocking when I meet some of these early to mid to later stage space companies that have still not explored the benefits that debt can provide to their company. Because for Me, it's second nature to think about that at the end. So now that we've talked about the way the very highly mature old school space companies, now let's bring that full circle back to early stage. We do like to fancy ourselves as the debt experts or the debt sherpa in the world of frontier tech where a lot of people need that skill set. But want to be very clear, we are not the people trying to push debt on companies early. Right. Like we are. We are making our money by investing in the equity. Right. Our port codes get all of our debt advice free of charge. We don't, there's no fee, there's nothing related to that at all. We just like using debt as a tool to help our companies with the most efficient capital structure journey possible. And what does that mean for an early stage company? As much Runway, as much flexibility with as little dilution as possible. Right. And that's what we're all solving for. So what does that typically mean? It typically means that debt at the seed or a stage is probably too early, maybe a little bit at your series A to kind of start building those relationships with the banks and speak that language and make sure you have good muscle memory. But the real time to get involved with lenders in a big way is around series B. Right. And to kind of have that, you know, and to kind of be able to approach that, that in a, in a sensible way and basically in our view, right, like what do we always say? Like debt is kind of a four letter word for some people, which I think is very incorrect. Like it's a very useful tool to, you know, build a business. I think some people, whether they have bad personal experiences, whether it was credit card debt or student loans or otherwise, you know, just shun at the, at the idea. And there's obviously startups that have got in trouble by layering too much debt on their company too early or at the wrong terms. And we see a lot of those companies and frankly we help them out of their problems a lot of times through our capital solutions business. But that doesn't mean that you throw the baby out with the bath water. Right? We always like to say the best way to think about is debt is an incredibly useful tool as long as you can pay it off. And if you use the head in the back of your head as the rule of thumb, then that's how you should think about it. And so what is the purpose of debt? To pay for assets or business, part of your business that you have confidence are going to Perform or repay or whatever and kind of use debt to kind of finance that stuff. The riskier, more exploratory stuff, use equity. And so I'm happy to in any way you want, kind of dive deeper into what exactly that debt journey looks like or how we think about or approach it. As you can imagine, we could do an eight hour podcast on this to go through all the nuances of debt.

And then, and then what if our listeners would be bored out of their.

Mind because like US 35, like, like hanging out every word and then the rest of the.

Yeah, but, but, but, but let me take you up on your offer and we'll kind of do a couple also questions to dive a little bit deeper. So one, I think what's interesting and I mean obviously tell me if you disagree, but I mean I know the type of debt you mostly mean, but just so I think it's useful pointing out there is a broad range of debt instruments. Right. And even early stage companies, you know, I think can access things. I mean ADA is certain government programs. Right. Of subsidized debt and frankly sometimes debt instruments, if they don't get repaid, it's not as, say punitive as private market debt. Right? Yeah. Secondly, there's things which are basically debt which I think even earlier stage companies can use, like vendor financing. Let's say you're a young company, you want to launch a satellite, somebody wants to sell you a satellite, they have an interest in selling you a satellite. They may give you basically like upfront form of financing. Right. And then if you have recurring revenues and receivables. Right. There's the receivables financing type things as well. Did I forget anything here? Do you think is worth.

Yeah, no, so very helpful point. And breaking down the taxonomy of different types of debt is important. Right. And like there's three big families and then I'll dive deeper into. Yeah. You know, one, one area. So the three big families are government, broadly defined and government, state, ngo. Right. Like, like, like non commercial stakeholders. Maybe that's the best way to think about it. There's just commercial debt, right. Which is investors looking to make a return. And then there is a vendor financing which you talked about. Right. Later in whatever flavor that, that takes its form. And so let's focus I think for now on commercial if you don't mind and happy to talk about the other ones but you know, we really like to. And there's actually a blog post on our website about this called the four Roads to Frontier Tech Venture Debt Financing. And there really are different 4 under 4 underwriting methodologies that lenders use, right. In the commercial debt world kind of universally, right. Not just for space. And this is a frame for people to think about. The first one is cash flowing debt. Right? Your company generates cash flow and people underwrite based on your cash flow and loan you money. That's the most traditional form of debt that people can think of. For most space startups, they're very far away from that. Right. If they're generating positive cash flow, they're popping the champagne and things are pretty great. And so there's plenty of people who can educate you on that, but not really the topic, probably the people listening right now. The second one is collateral baseline. So that is, you know, getting on the equipment you have or the machinery or your real estate or whatever and people underwriting that. The issue with collateral based lenders, they're usually underwriting to liquidation value. Right. So in other words, if your company goes bankrupt and we come over the next day and grab your assets and then sell them, how much are we going to get for them? Right. And for most startups that's not a lot because you are still creating the market that you are selling into. And so if you go under, it's not like they could take your incredibly custom bespoke products and you know, and push them out into a market. So you know, your metal, what's the, what percentage of the, of the market price of your, you know, satellite is the metal? Probably a fairly low amount. If you have very expensive precise batteries or controllers that are open market products with a lot of resellers, then yeah, you could probably get some on that. But you're probably also trying to figure out how to engineer some of that stuff out and make it the cheapest off the shelf things you can afford anyway.

Yeah, understood. And even if you have something, let's say like many space hardware companies have like sophisticated machinery, you're probably going to get less than you think because probably if you get into situation you're going to be a forced seller and it's just not going to be pretty. And we have seen specific examples, right. When Virgin Orbit went under, they basically sold off the assets and it was like a few million dollars from memory.

But yes, that's right, that's right. And they and the lenders need to make their return off of that. Right. Like there's like. So you have all that. Right. So I completely agree. Right. And that's, that's kind of not a lot of money. The next bucket is what we call total enterprise value based lending. Most people call this venture debt. We don't really like the term because we kind of think of all of it as venture debt. But this is, you know, the classic, you know, former SVB model that other, other banks and other lenders do as well, which is, you know, hey, I see that you just raised at series B at you know, 100 million valuation, $200 million valuation where some great smart top tier VCs came in and put money into the company fresh value at that round. And so lenders say, wow, like these are smart people who know what they're doing with strong track records of success. So the company is probably worth that value or somewhere around it. And frankly they also have skin in the game. So if things go sideways, they'll probably support the company. So all right, we'll give you a loan of in the market now, 10% of what that value is like a 10% LTV loan to value. And because we have high confidence that A, either the company is really good or B if things go sideways the equity will bail out. And that is the essential concept behind that venture debt unwriting. And so that's a great thing for startups to use like at their once they raise, like I said, their Series B because there's fresh money coming in validating the value of the company in today's market. There's nice long Runway and that's what lenders like to see. Right. A lot of people are of this mindset of oh, we just raised the round, we're flush with cash, why would we go get debt now? Let's wait 12 months and see where we are. But debt doesn't want to be the last dollars funding your last, you know, your three months of Runway left. They're not coming in that right. That, that's their view. That's an equity play.

Yeah.

One of the things we always say, one of the the kind of juxtapositions if you will, or quirks of debt is the less you need it, the easier it is to get right. So usually what we suggest companies do and we've helped the number of port goes with this is the second after you raise your series B or even almost on top of raising your B like when it starts coming together, start reaching out to those lenders and build that additional Runway for you. So the two, two and a half, three years of Runway you're getting from your equity round is goes to four based on the debt that you can receive.

So just on the venture debt Tell me this, that for the lender has to be higher risk, right. Because there are no cash flows, there is no collateral. Right. So I assume the lenders have to be compensated for the risk and the rates would be a little bit higher on debt unless they're subsidized. Like is the case for example in Europe for European investment bank, like venture debt. But if they're normal market rates, I expect them to be a little bit higher than the other types of loans. Right?

Yeah. So there's two different kind of, it's almost a tale of two different types of people. You know, we keep, you know, you dive deeper and deeper into the detail and you get more and more. Right. We're peeling the onion here to kind of unearth more and more detail. So when you're in that venture debt world, first of all, once again they're taking a, you know, 10% loan to value on that company. Right. Because theoretically the company is worth whatever and they're coming in pretty low. When you live through enough of these situations, you see that people tend to, especially the big VCs tend to try to make sure that the bank is taken care of in those situations. And so, you know, they kind of live to make that investment another day. But you are absolutely right. Right. Like those do come at a kind of higher premium and there's kind of two different tiers. Right. There's like the commercial banks that are, you know, banking institutions that want your commercial banking business as well. Right. So for them this is a fee generation opportunity usually. They also say in addition to writing you this loan, you have to keep X percent of your assets at our bank with us and even have a minimum deposit requirement sometimes. Right. And so they're, you know, they're having those requirements. So that makes that either lessens the risk of their investment because of the money you have to keep there or increases their returns because they're getting the commercial banking revenue from you as well. So they're more willing to kind of offer you, you know, somewhere around prime, prime, plus or minus kind of loan for, you know, that sort of thing. But then there's also the private credit shops which are non banking institutions which aren't getting those extra, you don't have to keep your money with them. They're not requiring a minimum amount and they're usually giving you kind of a longer Runway, but they want more compensation for it. To your point, right. They're, they're taking on perceived greater risk, they want a greater return. So you kind of find those loans More in the kind of low double digits going up to the teens and high teens, depending on the risk of the company and all these other factors. Right. This is a constant sliding scale of people trying to balance risk return.

Yeah, understood. Okay, so let me throw one, Let me throw one other thing at you. Right. So we're still in the discussion sort of what can make lenders comfortable. And you mentioned cash flows, sort of assets, collateral.

Yeah. And also there's one more category. We could go back to that after. Sorry, I just wanted to put the pin in it.

Okay, just. Which is the other category? Maybe it's the same one I'm gonna.

Oh, hybrid based. We call it hybrid or revenue based debt. So these are lenders who say, okay, you know, you don't generate cash flow yet, but you have nice revenue trajectory or you have good contracted revenue. Right, we see. So we're going to do a full holistic underwrite of your, you know, revenues, your Runway, your burn, your investors, your collateral, and then we're just going to underwrite your loan and, you know, we're going to charge you a fair amount more money. Right. Those lenders are low teens, mid teens, high teens with warrants because to your point, they need to compensate themselves for the higher under. So those are the kind of the four buckets. Just one. Close enough.

Okay. And so my question fits actually into that fourth bucket. But you'll appreciate that because you just mentioned you're starting a government business line.

Yeah.

So as you of course are very well aware of a lot of space startups early on, some of them get significant government contracts. Right. And so in theory, that's great. I mean, could that be like a more credit worthy reliable customer than especially the US Government? Right. So I. And so you have these companies out there, right. Are getting like, you know, let's say for example, stratfires and like you get like 50, 60, $90 million. Stratify. And that's awesome. Of course. Right. I haven't seen much lending against that. And I sort of understand probably why. But I just wanted to ask you about that.

Yeah, absolutely. So, so much of it. And once again, government discussion is a whole, is a whole nother, like, you.

Know, world, not a podcast episode.

Exactly. And we got to do that. I can do the phone a friend and put my colleague Elizabeth on, who runs our government government solutions business, you know, to kind of dive into that more. But, but a lot of this is about like the repeatability of the business. Right. And like, what is that contract for? Right. If you have like if you're getting a sipper grant to do research and development, well that's very nice that you're getting money for governments. It's a great thing, right? And it's, it's great when your interests align with, with the governments and it's win, win and it's helpful for your company. But lenders are also thinking about like what's the ultimate commercial viability of your business, right. And how much is this going to help that if the government is the ultimate customer. Right. If you're making a dual use product and you're getting military, you know, sales or contracts or grants, that's nice. But they really want confidence that those grants are going to flip to something more recurring. Right. And so, you know, the sibber is less useful than the stratify is less useful than the program of record. There's kind of an order and a chain of things of you know, how you're going to go. And so with all those sorts of things like government money is wonderful and incredibly helpful to develop your company, lenders are still doing the okay, but then where do I go from here, right? And am I relying on somebody, somebody different in government to give you a new contract every year? Despite the fact that sometimes government timelines go sideways or people move around in seats, Am I relying on something that's hard to rely on or have you baked this into a program of record? And I can have a lot of confidence that you know it's going to be recurring. And so it's a lot of those dynamics. The other issue you have is some lenders don't have a lot of government experience, right. And so they are not sure about any of this stuff. It's an Alphabet soup to them. They hear a few horror stories and like they just don't have the time or wherewithal to figure it out. And so you're always better if you have a company that's a dual use company going with lenders who have a bunch of experience in that world and actually kind of asking that question up front.

Right.

That's actually something that we filter for when we are making relationship introductions for companies is if you have a defense tech angle. We already know of the 200 plus lenders in our database who specifically does defense tech or has a government overlay. So we can kind of, you know, save everybody the time and headache of having calls that aren't going anywhere.

That's great. I was just going to actually ask you about that sort of 200 names in your database. I mean do you see enough supply in the market of potential lenders? Because I mean, again, if I come back to this example of lending against government programs, I mean, one thing I've run into in the past is a little bit, what you're alluding to with the Alphabet SOAP is that lenders were not comfortable. It's not only even the government side, but then the government contracts, typically the money is dispersed against milestones which very often are very technical. And the lenders were like, I have no idea.

Yeah, no, it's, it's some do and some don't. Right? Like, and that's the beauty of having a very detailed database. Is there a visual component to the podcast? Can I pull up a database and kind of show or is that. Probably not.

That's probably too intuit.

Right? All right, no worries. Yeah, no worries. So basically, just to give context, right, like the first thing we founded Overlap, you know, two and a half years ago was we put together a very detailed database in notion and we put a form attached to it that auto filled the database and then we reached out to all of our lending relationships and this is not, not web scrape, you know, nonsense, but a literal discussion with a partner level person filling out a form on a call and on each of these people, you know, for each of our lenders we know, right, like what stage companies they lend to, what industries and sub industries do they lend to. We have I think 6 or 7 different sub industries within space that we screen, right. Launch comms, you know, components, deep space Leo. So we have a very detailed view. We also have, like I said, defense tech and cybersecurity and other sort of things. Min max check size, minimum revenue, you know, deal structure requirements, which are the underwriting methodologies we mentioned before that you do. And so we have all this information so when we talk to a company, we can sort and filter and know exactly, you know, what their criteria are. We know exactly who to reach out to. Not only that, but because we're in this business all the time, my colleague Rob, who runs this business, has a good qualitative sense of which lenders would this be a good fit for. We have half a dozen lenders who almost exclusively or only do government lending. Right. Like there's so many different flavors of lenders out there and you just, unless you kind of actually catalog all them and have the dialogue, you don't really know, you know, what people are doing. It's also a nice reason why kind of, you know, we like having that business and opening it for third parties. And we actually offer our rates kind of below market in that, in that business. And we also don't require exclusivity because we want to win more business, because the more business we have, the better we are at. Right. You kind of want to be in market all the time with deals helping companies, showing that around it makes you smarter. You have a deeper knowledge of where the terms are. The lenders have more focus on you because they know that you represent deal flow. And so we found it really useful to have, you know, nice volume in that business. And it ignores to everybody's benefit, mostly our, most of all our port cos who get the service free.

Yeah.

Okay.

I think we've now thoroughly saturated the listeners with the discussion on debt. If you look at a broader sort of like, you know, toolkit of instruments. So equity is obviously happening right. At all stages. We've talked a lot about debt. Is there anything else you think is worth highlighting that you see is underrepresented or any other instruments that really.

Yeah, well, like you said, you know, government financing is really important and there continues to be a pretty wide disconnect between what companies think government can provide and what's out there. And you know, we have a lot of, there's not a kind of clear, you know, clearinghouse or center of information for people to kind of understand this. And this is part of what we're trying to build with our government solutions business. Right. First of all, you just have the geographical fact that most startups are based in the west, on the west coast of the US or in Europe. And the biggest funder, government funder is the US government which is based in Washington D.C. right. And if you've talked to a lot of space founders, frankly, Frontier Tech or startup founders in total, they're incredibly smart people who have a lot on their plates already. Right. In terms of making the product work, building out a customer base, managing their teams, being the cheerleader for the company, fundraising, all these sorts of things. Government interaction is, you know, you, unless it's a pure dual use or military company, government relations is what item number 8, 9, 10, 14 on the priority list. Right. There's just not much time. And in order to figure out the Alphabet soup of where all the people are and who would potentially fund your group within the Department of Defense or NASA or the intel community or another three letter agency, they're just people don't know where to go. Right. And the classic story is like, you know, oh, we had a board meeting and our board said we needed a government Grant strategy. So we went to D.C. we like went to like a party or an event and like we met two people and you know, we had a consultant kind of talked us up for a little bit and it never went anywhere. Right. Like that's kind of like the experience that people tend to see. Interestingly enough you have a parallel problem that people in government are facing. Right. Somebody in government, in all those kind of organizations I just mentioned have a mandate that they're trying to solve some issue for, you know, the U.S. government, for the military, for the taxpayer. Right. Like to make our country a better place, stronger, more resilient, to make the world a better place. And you know, similarly a lot of those people are in a windowless office. They have a small if non existent travel budget. There's so many different VCs, you know, and so many founders bragging about their company doing a million different things. It's very hard for them to kind of understand well which company is for real, who isn't? How do I get in front of them, how do they listen to me? How do I know if this is right? And so there's like both sides have this problem of like if they kind of connect in the right way, it's, it's kind of luck a lot of times more than anything.

I agree. That's why like many later stage companies start actually start hiring specific government relations people. I mean we've, we've seen that across the board.

Exactly.

Like serious series B onwards. But let's take a step back and I want to talk also a little bit about the sort of the, the broader state or your view of the broader state of space investing. So in my mind let's call it the latest iteration of, or maybe the first real. No, that's not true to say the latest iteration of space investing is something like 10 years old. And I'm sort of starting from when companies like Rocket Lab and Spire and Planet kind of got their first VC checks. I'm kind of leaving out Founders fund going into SpaceX in 2008 I was sort of like at a time of a one off. So 10 years in we've arguably had sort of a bubble. About four years ago the SPACs were somewhere attached to that. Where do you see us now in sort of development of the space investing activity?

Excellent question. It's funny, I think the same way I kind of timestamp space whether you call this 2.0 or 3.0, right? Like the first day that the first SpaceX rocket successfully landed on a carrier to me that was like, okay, it's odd, right? Like the, the economics of the business have changed forever. Something that nobody thought could be done has been done and like we're off and running, right? And then to your point, there's been all these mini booms and busts even since then, right? And we get asked this question a lot about the state of the market. We often like to talk about the, the fear and greed meter, right? Like you've heard like be greedy when others are fearful and fearful when others are greedy. And like we have like, like a makeshift think about like a weather vane, right, like this old timey like contraption and like where are we in the market, right? Like if, you know, if the day after Lehman brothers collapsed in 2008 was pure fear and you know, the day, you know, whatever the, the height of the spec frenzy was pure greed. Like where are we today? I think honestly we're kind of in the 40, 60, 60, 40, 50, 50 spot right now. In general in the market. I think that, you know, silly things aren't getting funded. You know, great companies are having nice big rounds. You know, you're kind of probably spaced somewhat in the middle of the hype cycle now. You know, AI art, anything like generative AI is obviously way at the top of the hype cycle now and has been for a long time. I think you're seeing space kind of accelerate more, you know, obviously with kind of growing Department of Defense budgets and view of that, you know, being a kind of tailwind to kind of pushing additional space expenditure. And so I think you're probably seeing that come up especially over the past, you know, several months. But I think we're kind of, we're not in a place where silly things are getting unnecessarily funded, which is good, right? Like, I don't like irrational markets when the markets are irrational, either way too high or too low. I think it's better when people are doing real work, real underwrite, understanding companies and, and putting valuations on them. Now private markets are always kind of illiquid and can be quirky, right? And one person's overvalued as another person's undervalued. I think as long as the IPO market is closed, you're going to have these situations in later stages where you're going to see around get done at what somebody perceives as a way too high valuation. But nevertheless, the round was 10 times oversubscribed because a bunch of people want demand for that name, almost price indiscriminate. Right. And so I ask you, is that if a great company experiences that, is that a sign of an efficient and overheated and under heated market? I don't know. It's probably more of just like an illiquid market quirk. Right. But I do think it's good that like some of the nonsense we saw get funded in 2020, 2021 isn't getting funded right now because frankly those booms wind up hurting the market in the long run because the great companies that come in the wake of that have a really hard time getting funded. Even if their science and engineering is far superior.

Yeah, absolutely. And how about on the investor side? I mean, I assume like me, you, you have to speak to investors and do fundraising yourself. I mean, where do you see the state of the investors, their sophistication, sor on the market there? Or maybe even more interestingly, their concerns, like about the space market. Like what, what kind of questions do you get and then how do you answer them? With regards specifically to concerns about space?

Yeah, sure. Well, I'd say there's kind of like two different. Like the first question I always ask a potential prospective investor is like, you know, how much do you know about space? And like my dividing line is like people who understand that, like, you know, who understand the concept of like weightlessness through orbit, right. And then like, like that if you know that, that the difference between like just going right up in space and going down and going orbit and what that means, like conceptually, like people who know that tend to be pretty geeky about space. And I mean that in a really good way and kind of understand it and embrace it and people who don't, it's kind of like you have to bring them the primer from ground up of kind of, you know, what the industry means means I think whether you're in either of those fields, people kind of get that SpaceX is this big deal thing that has been really profitable and really good. And so like there's the ability to make money in space and that's the one they know of. Interestingly enough, most people who aren't sophisticated don't know about the many, many, many space failures, right? They just know about the couple success stories because that's what breaks through the zeitgeist. So there's not like a hesitation there, there's much more of a, like explain to me what it is and then when you explain to it, they understand. Now you know, we tend to like companies in like the near frontier, right? So companies working on you know, that are already generating revenue. Not like, you know, not the, not a business model that relies on a functioning lunar economy. Right. There's nothing wrong with those businesses, we just don't invest in them. And so we don't have to like answer questions from investors about those because usually for the stuff that we invest in, there's a pretty straightforward line of oh, okay, I could see how you're making money. You're going to make money, or most importantly, the company is already making money money.

Okay, got you. So yeah, I want to talk a little bit about more the type of space companies you would like to see come to overlap, but actually maybe as a first step, let us go even broader. So I was asking about, you know, the state of the space investing market in general, but I forgot to ask you at the beginning. You know, you told us about your own career history, that for many years you were a senior partner at Apollo and for non Wall street people like us, Apollo is a very seriously big private equity firm. I, I forget I was the tens of billions, maybe hundreds of billions of assets under management. You were one of the most senior guys. So for you to leave there, that's also serious, like personal opportunity cost probably what attracted you to start Overlap and engage in frontier technology and then of course specifically space, since we're the space business podcast.

Yeah, look, I have to admit I always had a personal enthusiasm when it comes to frontier technology and it was kind of grew, it kind of blossomed from a hobby to this kind of full time thing, Right. I was very fortunate to have a wonderful run at Apollo. I had not met amazing friends, had incredible mentors when I was there. You know, when I joined the firm, it was half of a floor when I left it at over half a trillion dollars of aum. And there's so much that I learned there about markets and capital structure and everything like that and, and it was just such a power. And the funny thing is when I started angel investing, like I said, right, look, we're at overlap. We are very serious investors. We do 30 to 40 hours of work on each name, 10 to 20 page memos and that's as a follower right outside technical validation, you name it, it's very detailed. When I was an angel investor though, like I was angel investing, right? Like it was, it was a hobby, right? Like a couple hours on each name. But like I just found that the skills and wisdom I built at Apollo were so useful in this world because once again is genius. Genius scientists and engineers, but nobody had the first clue about financial structuring and capital structuring and all this sort of stuff. I mean, I'd be like, you know, on a phone with a founder and like I said it was kind of a hobby, right? And I'd be like, you know, a little distracted and doing some work in the back of Texas and then kind of throw comment out there about their capital structure or waiting or whatever. And, you know, and they were super intrigued about it. And I was like, you know, the first thing I said is, like, well, I'm not really this smart, you know, like, so there must be just this disconnect in this market of just the sheer kind of wisdom and knowledge that people have about, you know, financial structuring. And I built up all this knowledge over so much time that it's so useful here in this industry I enjoy so much. And so, you know, put yourself in my shoes. I have been in Apollo for 18 years. It was amazing run. I had a wonderful time, had the ability to do whatever I wanted, always wanted to start my own company. And now here was this massive market opportunity just stare me right in the face, right? So I made the difficult decision to left Apollo, but I left on wonderful terms. They were very nice to me on the way out. They've been very nice to me on the way into. A lot of senior folks at Apollo are personally invested in the fund. We maintain a great relationship with everybody there in senior leadership. And like, you know, it's a wonderful place. I. I could. It's funny, like, when people say, like, I want to be a venture investor, what should I do? I tell them, go work for Apollo for 20 years. Because that's really what I feel makes us an amazing venture investor, as counterintuitive as it is.

And so specifically with regard to the space sector, how would you summarize your thesis on the space sector?

Yeah. So what I would say is there's like many different levels, right? Like, I think we have only begun to scratch the surface of. Scratching the surface of the potential human economic development potential of space, right? Like, what is Earth in low Earth orbit as a function of the size of the universe, right? Like, there's so much out there and like, there's so many different ways to think about that nobody ever thought about, right? I think before Sputnik, nobody thought about the benefits that satellites can have, right? I mean, if you've read the histories, I'm sure you have about like the couple scientists trying to like, squeeze together the dollars within the Soviet Union to get Sputnik up There, like it's amazing how little people perceived the importance of outer space. Then there's just amazing economies that will open up over time that we can even comprehend right now, right? And so I think that long term, you know that what, you know that there's so much to do up there. Now that's not a thesis for making an investment today, right? Because the bigger and taller and more brave you go, the higher the chance of failure or just as bad a recap on the way to success that flushes your investment, right? And so that's kind of like the North Star. So the next question is like, okay, well, who has the next, you know, leg of this kind of journey that we can't even comprehend that you have confidence is going to generate revenue and also push things forward a little bit. Like, in other words, I can see today's business plan, but I also see how this just opens up optionality for the next thing that I can't even envision. And that's kind of the way that we feel about the sector. Sector, right. And also like picks and shovels are great, right? Things that are going to be necessary for these companies as they grow or that you need is going to be important, right? Every spaceship that gets made is going to have to have flanges and brackets and bearings. And so these are kind of conceptual concepts. Propulsion is important, right? Energy management is important. Like understanding what is going to be important under any ecosystem is really critical. And so what I would say is, look, we're, we're very opportunistic investors. Like we, we do not trend people. We have a foggy crystal ball like, you know, I. Nobody can predict the future, right? Is kind of the best way to put it. But we like to kind of understand the specific founder, the specific technology, where it is in this place and how does that work? We're not like, oh, we have to have a LEO satellite bet. We do it, we make an investment in LEO satellite company. If it's great, we don't say we have to have a lunar bet. That's not the way we think. Right? So I don't have your, you know, a there's going to be a lunar colony in 10 years kind of thesis that I'm then trying to kind of, you know, answer to. So I would say it's more nuanced than that, but nevertheless, like a great business today that opens up optionality for whatever's going to come in the future, whatever that may be.

But in principle it sounds like you're pretty like myself. You're pretty open minded and so people can pitch you from various space activities and stage wise as well. I think you mentioned you look seed A, B.

Yes, seed A and B where there's a great VC leading the round. And so that, and it's got to be non pure software. Right. There has to be some sort of physical real world component and solving a world scale problem, which I feel like all space exploration is doing that. So everything in that box we'll look at and underwrite. Right. And we may have one call and lose interest. Right. Or not feel like it's a fit. It's always, always good as a VC if you can get to know fast for yourself and for the founders. But everything in that box we'll look at and you know, the, the few rare deals that get through we feel really excited about.

Okay, terrific. And I was going to ask you to sort of like whether there's any areas you're specifically excited about, but I'm going to actually do that in a little bit of a different way since we are coming towards the end of the episode anyway and there's usually two questions we ask at the end of every episode. And I'm going to take the first question which usually I ask to entrepreneurs like, hey, if you weren't doing your startup, which other startup would you do? So for you I'm going to ask basically, well, if I forced you to be an entrepreneur rather than an investor, you have to, you have to start a space startup.

Yeah.

What kind of space startup would you do you think you may start?

It's an excellent question. Well, I guess it breaks down in two questions. If it's like if it's my sec, if I already made a. But if I'm already rich, then there's a different answer than if I'm trying to make money. But no, nevertheless, I joke. I think that, you know, it's that whole thing of like the further out you go on the continuum, the harder it is to get confidence in, you know, and doing something that's going to have a strong return.

And you can answer that in any of those two ways you described. So you also, I'm also happy for you to answer. Sort of like it's kind of like the Jeff Bezos Elon Musk type answer. Sort of like I have a lot of resources but this needs to happen and I'm going to make it happen.

Yeah. Yeah. Well, you know, there's, there's kind of two different ways to look at it. Right to your point. Like, like it's almost look, this is a fantasy exercise, so let's just have fun with it, right. I think the, there's something that we would not do in the overlap fund but is a fun way to talk about and hypothetical and somebody else should do that. Like, I don't know how exactly it's going to happen, but at some point the moon is going to be very valuable. Right. I think we're already kind of seeing that there's national security implications that, you know, compared to the space race in the 60s, there's, you know, it's a, it's a great gas station for getting to Mars and other places and launching off into deep space. And like, we're starting to see that picture come together more and more pressure gardenists, however you want to have it, like additional kind of booster orbital transport capabilities, you know, so on and so forth. So doing that early land grab and infrastructure grab on the moon ahead of time and, you know, being the person who's establishing that is a really interesting angle for somebody to take if they are very, you know, frankly, you know, feel strongly about it, strategic and tactical and also willing to kind of roll the dice. Right. Because the issue with something like that is you may have missed the timing by 3, 5 years, in which case you're probably gonna get wiped out and somebody will buy you for pennies and, and benefit from that. But there's going to be the need, whether for military reasons, you know, space exploration reasons, commercial reasons for, you know, there's a high likelihood there's going to be a need for many dozens of people to be inhabiting the moon at some point in the, in the next decade. And the person who is responsible for the toilets flushing and the air being purified that they're breathing in somebody or some people are going to make a lot of money whether they make that bet today or five years from now.

Understood. And then our last question is always the same, which is about science fiction and favorite science fiction. So if you do like science fiction, do you want to tell us some favorites? It can be anything. Could be book, TV show, movie.

Sure thing. So I'm actually going to ruin anybody who's interested next year by signing them up for a 26 book list.

There's.

My favorite sci fi series is called the Vorkosigan Saga. I know that's a mouthful, but it's by Lois Buhol, Lois McMaster Bujold. It's an incredible, you know, space saga really about kind of like interplanetary politics and diplomacy and war and how that's filtered through one ruling family and one small backwards planet. That kind of is a function of a victim of history and a bunch of other things. It's an incredibly well written series of books. Shards of Honor is the first one if my memory serves me correctly. I highly recommend people pick it up. If you're like me, you'll get hooked and then you'll have great books to read for the next year. That book, fortunately carried me through one of my children's first year of life. So it was a lot of late night rocking sleep sessions where I got to read that book and also be close to my loved ones.

How many of the other 25 have you read?

Oh, all of them. I've read all of them.

There you go.

Wow. I can't wait till she writes the next one.

Good stuff. Congratulations on that, Justin. It's been a pleasure to have you on and yeah, very interesting to hear your opinions on space financing and maybe we'll do this again in a couple of years or so and see how the market has been evolved. But thank you.

Thanks so much for having me, Rafael.

And that's it for another nominal episode of the Space Business Podcast. And once more, if you enjoyed this episode, please leave us a five star rating on your favorite podcast platform such as Apple or Spotify. You can follow us on Twitter odcastspace. We're also on LinkedIn under the Space Business Podcast. Lastly, if you have any feedback, including ideas for guests and that may even include yourself. If you have an exciting space story to tell or interested in becoming a sponsor or really. For any other suggestions, you can drop us an email@sparebusinesspodcastmail.com thanks so much for listening and see you for the next episode.