Interview with Aaron Burnett, CEO and Co-Founder of Spaced Ventures
For SpaceDotBiz this week, I'm talking with Aaron Burnett, founder and CEO of Spaced Ventures. Started in 2020, Spaced Ventures is a crowdfunding platform and community that allows for individuals to invest and take equity ownership in private space companies. Spaced Ventures is available to accredited and non-accredited private investors and has over 10,000 individual investors, having so far crowdfunded over $1M in capital to private space companies.
Equity crowdfunding is a fairly novel form of fundraising, only introduced after new SEC regulation that was codified in 2016. Spaced Ventures is the first platform applying equity crowdfunding specifically to the space industry. In the interview, we chat about the regulations that enable equity ownership in crowdfunding, what types of investors are coming to the platform, how markets are changing in real-time, and much more. Let's dive in!
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Typically to invest in private companies, an individual has to satisfy the requirements of the Accredited Investor status, as defined by the Securities and Exchange Commission. However, Spaced Ventures is using a model in which non-accredited investors can still participate in private funding rounds through crowdfunding. Can you explain how that works?
It's actually a misconception that non-accredited investors are prohibited from making private investments. While it is possible, the regulations and requirements for enabling those investments are much more intensive and so companies are often not interested in bringing on non-accredited investors because of the extra hurdles involved. At Spaced Ventures, we've taken on that more demanding regulatory process to protect and support non-accredited investors, enabling them to make investments in private space companies.
For me this has actually been a personal pain point for quite some time. When I was very young, even around the age of 12, my mom encouraged me to save what little money I had by putting it into the stock market. At that time I had an awareness that there was little opportunity for an individual small investor in public markets to really "outperform" the general market. I was taught that the best path is to just kind of set an investment and walk away for ten years because there was little I could know in public markets that others didn't.
That side of active investing was always interesting to me and it felt that it made much more sense to try and "outperform" in private investing than in public markets. However, generally private investments were closed off to me as a non-accredited investor. That stuck with me even into my adult life.
What changed to enable what we're doing at Spaced Ventures was the introduction of what was called Regulation Crowdfunding in 2016. Originally, "product crowdfunding" came along in the early 2010's, but that was in the form of pre-purchasing products from companies. A great example of that was the Oculus Kickstarter where the development was funded through pre-purchases. In 2012, the Obama spearheaded Regulation Crowdfunding becoming law so that crowdfunding could actually take the form of investing into companies and taking equity ownership. It took four more years for the SEC to code the financial regs involved with Regulation Crowdfunding and so in 2016 is when that form of investing actually became usable.
I don't have clarity into the Obama Administration's thinking for introducing Regulation Crowdfunding, but my understanding is they saw the success of companies like Oculus and felt that there should be a path to where the consumers funding that development could have a chance to be rewarded for the potential upside. This was in the days where crowdfunding was particularly "hot", so that's why they even named the regulation to be called "Regulation Crowdfunding".
Regulation D on the other hand is the exemption that is used for almost all private company fundraising. The SEC requires companies to register sales of their shares but there is a list of exemptions for particular private investments. Regulation D and Regulation Crowdfunding are examples of those exemptions that describe forms of private round investments. Regulation D applies to most venture capital financing rounds for example.
Regulation Crowdfunding (Reg CF) was particularly focused toward non-accredited investors. It was designed to make investing more broadly accessible, but as a result, there are more regulations and protections for investors because those investors might have less familiarity with private investing than accredited investors would. For example, there are limitations on the amount of investment an individual can make in crowdfunding. The aim of that is to avoid an investor putting a disproportionate amount of their net worth into this type of asset. A lot of the work we do at Spaced Ventures is in the regulation to support both investors and company founders through that process, given that it is far more involved than a typical Regulation D investment round.
Beyond that, we also had to get a funding portal license, which I'm proud to say that we were able to receive in record time.
What is the typical role that you play in filling out a private funding round? For example, are you typically a lead investor setting terms for the round or does a company usually have a lead when they allocate funding for Spaced Ventures investors?
Legally we are an intermediary between the founders and the investors. The reason that matters is because of the requirements of crowdfunding. The intermediary does a significant portion of the work upfront in order to essentially protect the public. That means making sure that the claims made by the companies are real, making sure that there's nothing misleading, and having a gut check on the terms of the funding round.
With regard to funding round structure, for a lot of pre-revenue companies, we actually prefer convertible notes so that there's no explicit pricing determined at the time of the round. If there is a priced round, and we've had one, we find that the valuations are actually more conservative than some of the Regulation D, venture-funded priced rounds you may see announced. Part of that reason is that we have a responsibility to the investors to ensure that the terms are reasonable.
As a result of those requirements, the upfront paperwork and regulatory process take up to 4 months. While that might seem long, it can actually be shorter than trying to run a Regulation D funding process where you might be looking to assemble 30 angel investors to put together a pre-seed or seed round. Some people have an established network and background to assemble those checks, but many others don’t. I’ve seen these timelines extend beyond a year and dramatically limit the pace of innovation.
The nice thing about Reg CF rounds is that they can be very flexible in how they are used. For example, they can comprise the bulk of a funding round. In addition, We’ve seen some large companies tack a CF round on the backend of a large traditional (Reg D) round. Mercury Bank did this in mid-2021 calling it a “community round”.
That's starting to happen more often where people are adding CF rounds to the back of a traditional Reg D round. Structurally it's actually two separate rounds but you do them right after each other. So the idea is you might see an announcement of a company raising a round from a traditional venture investor and in that press release there might be a passage that says, "We'd love to have you participate as well and we have an allocation on a crowdfunding platform." Included would be a link to that investing platform. So while they're technically different rounds, they might broadly have the same terms.
What types of investors do you find are most drawn to your platform? For example, are they individuals working in the space industry? Are they retail investors that were more recently introduced to individual stock investing through low-fee brokerage platforms?
What we're seeing right now is a pretty healthy mix of those groups. It's hard to know what is standard since the industry is so new that platforms are so guarded with this information.
What we're trying to do which makes that breakdown even more interesting is that we're looking to add strategic value to founders, so that means learning more about our investors' backgrounds and giving them a chance to add value to the companies beyond just capital.
What we're seeing now is that 30-40% of our investors are from a "value add" industry of some kind. We'd consider that to include for example professionals in aerospace, defense, technology, or finance. We know from our investors that most coming onto our platform are doing so because they love the space industry and want to have access. So we will have people investing who work on space systems and we'll also have people who drive trucking cargo. That's the nature of space, it's such an exciting industry and there's a broad spectrum of people that have different levels of access and have been enamored with space their whole lives. So again, that's what we're trying to do, help people have access to this industry.
Spaced Ventures recently passed 10,000 users on its site. Do you have any near-term or long-term goals, either for users, or capital invested through the platform?
We crossed 10,000 users almost the same time we crossed $1M raised on the platform. I think it's probably safe to say that at 10,000 users we're the world's largest community of space-focused investors, just by the sheer volume of individuals.
What we're really aiming for is to bring 1,000,000 investors onto the platform. Our hope is that it will have a real impact on the public support of space because it will be a personal and financial matter for so many more people.
This is part of what "democratizing space" means to us. That term gets used a lot but it can sometimes feel a bit shallow when even the cheapest rides anywhere close to space are in the hundreds of thousands of dollars. So what is real democratization? We believe that real democratization is low-cost access to being personally involved in these types of projects. We hope that we're providing that in some way as well. You don't have to be a billionaire or anywhere close to that to own a part of a space company through our platform.
As a platform for early-stage investing, you’re probably well positioned to see how capital markets are evolving in real-time. Have you seen changes in early-stage funding rounds as a result of the declines in the public markets?
Well markets are pretty actively changing at the moment so by the time this comes out, things might have moved. I'm very optimistic about this industry, probably more so than most. If there's anyone more optimistic than me about this industry, they're probably going to be hard to find.
We have certainly seen a slight tightening in investment, beginning with later-stage rounds and to a much lesser extent, early rounds are being impacted as well. There's always been a bit of a challenge around Series A deals in the space industry, which is typically the "valley-of-death" where you might need a lot of money but potentially are still showing little revenue. So raising that kind of round gets a little harder in this market. Primarily the challenge is in later stage rounds though. The very early raises, typically less than $10M valuation caps haven't been hugely impacted.
I'm actually seeing the effect of this play out in interesting ways for our platform. We're speaking with companies that typically might not have come to our platform but because of the broader tightening in markets, they're interested in adding a crowdfunded round to the end of existing rounds or they're showing interest in the strategic value that our investors might be able to offer.
One thing we don't know is what crowdfunding looks like through an actual recession because it has only been around for six years. There was a Covid dip, which was really only a couple of months and then things bounced back very quickly and crowdfunding actually grew after.
I believe that crowdfunding is going to be one of the lesser impacted means of investing. The check sizes per investor are already so small and the audience is much larger, so at the end of the day I don't think the raw number will be too roughly hit. Plus you're still having so many more people being introduced to the platforms every day so there's a ton of room to grow.
What are you most excited about the future of the space industry?
In the near-time I'm excited for the On-Orbit Servicing, Assembly, and Manufacturing market maturing. It's the real first stage of substantial commercial infrastructure in space. For example, there are I think four unique private space station projects. Those organizations may each choose to vertically integrate the systems to operate those stations, but many of the relevant services for those facilities will instead be purchased outside of the companies building them. That means a more robust demand for all of the infrastructure components necessary to develop a system like that in space.
In the next five or ten years, I'm really excited to see projects involved with cis-lunar space starting to become a reality. We've been hearing about those projects for a while now and there's exciting stuff developing. In the very long term, I want to visit Mars myself on vacation. It would be great to do that when there's real infrastructure, like a hotel. I'm not saying I need a five star hotel, it would just be nice to visit and not be in survival mode the whole time.