By Linqto Investment Committee, Updated: Nov 6, 2024
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The aerospace and defense industry is experiencing significant growth fueled by technological advancements, shifting market dynamics, and increasing geopolitical tensions. The industry can be segmented into three key areas: commercial aerospace, defense technology, and space technology, each offering unique opportunities for investors. According to The Business Research Company, the global aerospace market was valued at $308.7 billion in 2023, with continued advancements in drone technology and AI expected to drive further expansion. The defense technology sector, the largest within the industry, accounts for 65% of the market, according to The Business Research Company, and is rapidly evolving with innovations in cybersecurity, AI, and unmanned systems. The space economy is projected to grow from $630 billion in 2023 to $1.8 trillion by 2035, fueled by increased investment in satellite technology and space exploration. Investors are presented with a unique opportunity to engage in this next frontier, where innovation is set to shape the future of global economies.
The aerospace market consists of commercial aircraft sales, aircraft maintenance services, repair and overhauling services, and producing support and auxiliary equipment, such as radar and air traffic control towers for civilian purposes. According to The Business Research Company the global aerospace market was valued at $308.7 billion in 2023, making it the second-largest segment within the aerospace & defense market, accounting for 34.9% market share, and representing 0.29% of global GDP.
Commercial aircraft are the backbone of this industry, facilitating the transport of millions of passengers and vast amounts of cargo across the globe. A diverse range of aircraft is produced within the aerospace industry—including the sale of aircraft such as helicopters, gliders, and drones, along with essential components like turbines and engines.
The Aircraft Maintenance, Repair, and Overhauling Services segment encompasses companies that provide modifications, repairs, parts replacement, and comprehensive overhauling of commercial aircraft, with maintenance services being essential for ensuring the safety and efficiency of aircraft operations.
Aerospace support and auxiliary equipment include the production of essential equipment like radar systems and air traffic control towers for civilian purposes. These components are vital for the infrastructure supporting the aerospace industry.
Looking ahead, the commercial use of drones, rapid technological advances, and innovations in wireless technology and miniaturization are expected to drive further growth in the aerospace market. Technologies like 3D printing, artificial intelligence, and big data analytics will enhance productivity, lower operating costs, and increase profit margins, enabling companies to expand their product portfolios and scale production.
In response to growing geopolitical uncertainty and a rapidly shifting national security environment, countries worldwide are transforming their military capabilities, creating demand for new tools from emerging players in the defense industry. For years, defense was seen as a market dominated by major primes like Boeing, Lockheed Martin, and Northrop Grumman, but this is changing as the Department of Defense (DOD) embraces innovation. According to the Defense Innovation Board, the DOD is working to overcome the “valley of death” in technology development, with a focus on creating a true innovation ecosystem. As global conflicts intensify, fostering greater innovation within the DOD through collaboration with startups is crucial for protecting the U.S. and its allies.
The defense technology sector is the largest segment within the aerospace & defense market, accounting for 65% of the market. Defense technology is an expansive field that goes far beyond rockets, tanks, and aircraft carriers. It includes all aspects influenced by the DOD and the wider national security infrastructure. This encompasses systems infrastructure, communications and intelligence technology, cybersecurity, advanced manufacturing, and innovative solutions utilized both on the battlefield and beyond. The defense technology sector can be broken down into four segments: aerial, land, maritime vehicles, and software.
Aerial vehicles include a wide range of aircraft designed for military use, such as drones, fighter jets, and reconnaissance planes. These advanced aerial systems are crucial for modern warfare, providing real-time intelligence, surveillance, and precision strikes. Unmanned aerial vehicles (UAVs) are becoming increasingly important, offering the ability to conduct missions without risking lives. The integration of AI and advanced sensors in these vehicles is revolutionizing aerial combat and reconnaissance operations.
Land vehicles cover everything from tanks and armored personnel carriers to robotic ground systems. These vehicles are designed to navigate challenging terrains and provide critical support in combat situations. Recent advancements include autonomous and remotely operated vehicles that can perform reconnaissance or logistics tasks, reducing risk to human soldiers. With enhanced armor, mobility, and firepower, these land systems are essential for ground operations in modern warfare.
The maritime vehicles segment includes a variety of naval vessels, such as submarines, aircraft carriers, and destroyers, all designed for military operations at sea. These vessels are equipped with the latest technology to ensure dominance in maritime conflicts, including advanced radar, sonar, and missile systems. The development of autonomous underwater vehicles (AUVs) is also expanding, allowing for more efficient and stealthy underwater operations. As maritime security becomes increasingly vital, these advanced sea vehicles play a critical role in safeguarding national interests.
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Software is a pivotal component of modern defense technology, driving the operation of complex systems across all domains—air, land, and sea. Defense software includes everything from cybersecurity solutions to mission planning, communication, and intelligence systems. As threats evolve, particularly in the cyber domain, the need for robust, adaptable, and secure software becomes more critical. Innovations in AI, machine learning, and big data analytics are enhancing the capabilities of defense software, enabling more effective decision-making and operational efficiency.
For the first time, defense technology startups are poised to disrupt the traditionally slow-moving incumbents, thanks to key reforms in defense procurement, such as the expansion of the Defense Innovation Unit (DIU) and flexible OTA (Other Transaction Authority) contracting, according to Bessemer Venture Partners. These changes, along with increased support through Firm Fixed Price contracts and targeted funding initiatives, have created a more level playing field, making the defense sector one of the most exciting areas for innovation and venture investment.
The space industry is progressing rapidly, with each week bringing significant developments in rocket systems, satellite launches, and robotic exploration missions. McKinsey & Company projects that the global space economy will grow from $630 billion in 2023 to $1.8 trillion by 20351. This expansion includes both essential applications like GPS and broadcast services, as well as innovative technologies that drive revenue across various industries. The public sector is expected to play an increasingly significant role in fostering this expansion, with governments worldwide beginning to dedicate more funding to their space budgets. In July 2023, the United States Senate passed the National Defense Authorization Act (NDAA) for fiscal year 2024, which includes ~$29 billion in funding for the U.S. Space Force alone, a 15% increase from fiscal year 2023. Overall, the space economy can be categorized into the following layers: infrastructure, distribution, and applications and services.
The infrastructure layer, comprising the hardware and software necessary to build, launch, and operate space-based assets, serves as the foundation of the space economy, providing the critical support and framework for all subsequent activities and advancements. The launch market refers to the industry focused on sending payloads, such as satellites and spacecraft, into orbit or beyond, prioritizing reliability, efficiency, and cost-effectiveness. The turning point for this industry came with the reduction in launch costs, making it a viable and attractive target for venture capital investment. The manufacturing of rockets and satellites demands precise engineering. While vertical integration was once crucial for companies like SpaceX, the growing space economy has led to the emergence of specialized suppliers, turning spacecraft and advanced propulsion systems into major industries supported by a network of essential part, module, and component suppliers.
The distribution layer refers to the hardware and software that connect, process, and manage data from space-based assets. This layer mainly consists of satellites, which have received a large portion of venture investment. Since the launch of the first satellite in 1957, space technology has evolved drastically, with the past decade seeing the rise of small, standardized satellites and reusable launch capabilities that have fueled the growth of new space-based infrastructure. Today, thousands of specialized satellites like GEO (Geostationary) and LEO (Low Earth Orbit) orbit the Earth, enabling a wide range of applications, from in-flight telecommunications and high-speed networks in remote areas to precise location-based services and comprehensive earth observation across various industries, driving global connectivity and modern economies.
The application and services layer comprises specialized hardware and software that utilize data and deliver services from space-based assets. With the dramatic cost reduction to access space, more can be accomplished in orbit than ever before, leading to a proliferation of assets that not only require specialized services but also serve as crucial catalysts for further space exploration. This layer includes essential logistical support for objects in orbit, such as last-mile transportation, mission extension, and orbital debris removal, which is increasingly significant. It also encompasses the development of space habitation and infrastructure for sustained human presence in space. Additionally, advancements in space travel are key components of this evolving ecosystem.
Space technology has become deeply embedded in our daily lives, powering everything from weather predictions to navigation services like Uber. As the global space economy continues its rapid expansion, it is poised to address some of the world’s greatest challenges, from climate change mitigation to reducing economic disparities. State-sponsored investments, particularly from leading nations like the U.S. and China, will continue to underpin this growth, driving advancements in national security, intelligence capabilities, and civil space applications. With the potential for the space economy to significantly expand in the coming years, the continued reduction in costs and increased access to space will be crucial. This emerging ecosystem presents investors with a unique opportunity to be part of the next frontier, where space technology is set to drive significant advancements and shape the future of global economies
The Aerospace and Defense industry will continue to be shaped by geopolitical issues, innovation, market demands, and technological advancements. Companies will need to prioritize adaptability, quick prototyping, and technology integration to navigate long product development cycles and complex supply chains. Digital technologies and the use of artificial intelligence will be crucial for accelerating product development. With increased demand from defense and commercial markets, the market remains poised for growth, and companies must strategically address customer needs, stay ahead in technology, and enhance cybersecurity to thrive in this evolving landscape.
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Linqto Investment Committee
The Linqto Investment Committee brings over thirty years of cumulative experience in investment management, covering the spectrum of global private investment firms and investment banks. Their expertise spans M&A and capital markets transactions, deal execution, portfolio management, investment research and analysis, finance, and business development. This extensive background enables a high level of proficiency in areas such as investment analysis, research, and strategic partnerships. With a strong foundation in private equity and venture capital, the team is passionate about identifying high-quality investments. They are committed to Linqto's mission of delivering exceptional value to customers by securing prime investment opportunities at attractive prices, spearheading diligence efforts for primary offerings, and facilitating access to growth-stage companies.
