Scaling—and funding—next-gen satellites for the coming commercial boom

So far, governments have been the biggest customer for low-Earth orbit imaging, and uncertain macroeconomic indicators have not slowed them down. But the next decade will likely see a wave of new use cases from commercial players, and Capella Space is getting ready now.

Payam Banazadeh was a graduate student at Stanford University when he founded Capella Space in 2016. It was the first US company to build and operate small satellites using a radar-imaging technology called Synthetic Aperture Radar (SAR), rather than a typical electro-optical system. SAR offers a unique capability that optical systems cannot because it can pierce through darkness or any weather condition to gather images of Earth. Capella Space broke new ground by miniaturizing and optimizing this technology to make it faster, more powerful, cheaper, and easier to use.

Funding has followed since that initial innovation—$157 million in the past year alone, which is enough for Capella Space to grow its satellite constellation, increase its talent pool, and start branching out with strategic partnerships and new technologies to accelerate scale across government and commercial markets.

Will Gangware, an associate partner in McKinsey’s Miami office, and Dale Swartz, a partner in the Bay Area office, interviewed Banazadeh about SAR’s future and its efforts to scale up to prepare for the onslaught of commercial applications expected in the next decade. The following is an edited transcript of their conversation.

McKinsey: Can you share with us your founding story and an overview of your business?

Payam Banazadeh: In 2014, Malaysian Airlines flight 370 went missing, and everyone was unsuccessfully searching for this large Boeing 777. One of the questions that came to my mind was, “What are we doing to monitor the Earth?” Back then, our capabilities were fairly broad but quite limited in certain ways.

It turns out, at any given time, about 50 percent of our planet is covered with clouds. And then, of course, nighttime limits visibility for half of the day. Thanks to these two factors, 75 percent of Earth is inaccessible to optical-imaging sensors in space at any given time.

So we started Capella Space in 2016 with a vision of providing reliable imaging of our planet in all conditions and at all hours. We do that through a very specific sensor called synthetic aperture radar, or SAR. SAR provides imaging in all conditions, day or night, cloudy or not cloudy, and in other conditions where optical imaging cannot work. That gives us much greater reliability than optical imaging. But we’ve also taken SAR a step further and have radically improved the accessibility and delivery speeds with a self-serve, on-demand platform and API [application programming interface]. This gives our customers fast, direct access to mission-critical insights.

As of today, we have launched nine satellites with SAR capabilities, and we’re launching more this year into new orbits to meet growing customer demand.

At a high level, we are a fully vertically-integrated American company. We design and build the satellites and SAR sensors out of our two US manufacturing facilities, operate those sensors in space, and bring the data back down to Earth. We monetize the imagery and associated data, providing 24-7 access to global customers who want fast and frequent access to highest quality SAR information. We’ve also built some analytics and software layers to extract and sell additional insights from our data.

As of today, we have launched nine satellites with SAR capabilities, and we’re launching more this year into new orbits to meet growing customer demand.

McKinsey: Can you tell us more about SAR? What are some use cases, and where do you see the most potential for growth?

Payam Banazadeh: Prior to Capella Space, SAR wasn’t widely available commercially. It had been used by the government for a while, so initially we focused primarily on US and international government use cases tied to defense and intelligence.

We have been super active in Ukraine, for example. When the invasion started, it was cloudy over Ukraine a lot, so optical sensors were not usable a large portion of the time. As a result, SAR became one of the most important tools for monitoring the situation in real time.

We also see a lot of opportunities in commercial markets. Companies that own infrastructure worldwide need regular, reliable monitoring of critical operations and facilities. SAR can address that by providing imagery and data that are not available through optical technologies. Our customers can see changes in the Earth’s surface to a millimeter level of accuracy, which opens up new applications such as monitoring the health of bridges, dams, buildings, ports, pipelines, and other infrastructure.

McKinsey: You mentioned that you’re building analytics capabilities. How is your team approaching the data and analytics layers? What capabilities exist today, and what is in the future?

Payam Banazadeh: We have two focus areas tied to analytics. One is our Analytics Partner Program, where we work with innovative companies with expertise in building software and analytics with geospatial data. These companies access our data and create value for specific commercial verticals.

The other is our own internal analytics program, which uses AI and machine learning to automatically detect and classify objects we see in our data, such as naval ships, airplanes, and other vehicles, or to identify changes on the ground.

Our approach is to build what we’re best positioned to do and partner with others who have deep subject-matter expertise. We think that’s the right way for us to scale into the commercial market.

McKinsey: You mentioned both government and commercial markets, which is a consistent theme with many new space companies seeking to scale. What are your plans for a dual-use growth road map, and where are you on this journey?

Payam Banazadeh: Today we’re primarily focused on government markets because they’re mature, they are supply constrained, and they face problems that are often existential, which creates an urgency to move fast on products that can help solve them. They are also massive markets growing at a pretty high rate because of geopolitical tensions. So we will continue to focus on our US government and international defense and intelligence customers as a top priority.

While we take excellent care of our government customers, we’re also excited to be working with a growing group of commercial partners to address the rapidly growing commercial market.

Ultimately, we believe commercial and government customers will benefit equally from our services.

McKinsey: Do you see commercial markets eventually matching or exceeding government demand?

Payam Banazadeh: It will probably exceed it eventually. We see government being a key customer for a very long time—in fact, forever—but the commercial market is picking up quickly and will be a significant growth driver in the coming years.

McKinsey: How has your growth looked over the past year, and what have been its key drivers?

Payam Banazadeh: Our first four or five years were spent building the technology and testing the hardware. Our first fully operational satellite was launched at the end of 2020, and we went into commercial operations in 2021.

We’ve tripled our revenue since then and doubled the imagery we collect. We’re feeling good about our focus, go-to-market [strategy], and product–market fit with our anchor customers and as we branch out to other markets.

McKinsey: Will Capella remain focused on SAR, or have you thought about acquiring or developing another phenomenology or additional analytics capabilities?

Payam Banazadeh: We’re absolutely interested in going beyond SAR. SAR has been our focus because there’s significant demand and a significant supply constraint. Now that we’re on track to meet the demand for SAR, the next source of value is the fusion of multiple sensor types.

SAR is one of the most difficult sensors to build, operate, and collect. The satellites require unique capabilities, including lots of power and complex antenna sizes. So, once you’ve mastered SAR, other sensors are relatively easy to implement. And because we’ve built the company with full vertical integration, we see many opportunities to move into other sensors, by ourselves or with partners.

McKinsey: You raised $97 million in your Series C round and another $60 million in January 2023. Where has the company been deploying this capital?

Payam Banazadeh: We used some of this capital to grow our satellite constellation. We’ve also invested in our technology and in our people. We plan to continue these investments to support the trajectory of our business growth.

McKinsey: What aspects of the business were most exciting to investors in your recent successful fundraising rounds?

Payam Banazadeh: Our focus on government customers is key. Government spend is not decreasing despite the global macroeconomic situation. In fact, the demand has gone up significantly across the board for our SAR capabilities, in part because of what’s happening in Ukraine.

We’ve been able to show both existing and new investors that the market is growing, our revenue is growing, customer appetite for SAR is growing, and that Capella Space is preferred over competitive offerings. The unit economics of the business are attractive and only getting better.

And so we’ve got the right focus and the right financial and market trends. All of that gets investors excited.

McKinsey: Capital markets overall have cooled from the highs of 2021. How do you see earlier-stage space disruptors navigating these uncertain market conditions?

Payam Banazadeh: I think if you’re just starting and raising an angel round or a seed round, you’re less impacted than if you’re in your “valley of death” phase, that is, the gap between an initial seed round and raising a larger Series A or B round. There’s still a lot of appetite to deploy capital into early-stage, smaller rounds. If I were starting a space company now, I would not raise capital until I was absolutely ready because the clock starts ticking. You can’t get a hall pass anymore in this market, so I would focus on derisking the technology and business case before raising significant capital.

McKinsey: Is the government doing enough to help defense and space start-ups get over the valley-of-death phase?

Payam Banazadeh: No, I don’t think it is. The government is saying the right things and picking up on the problem, but we’d like to see more execution and implementation of meaningful solutions that help at scale.

There are a lot of Small Business Innovation Research programs and early-stage matching funds, but none are scalable long-term. They all have a flavor of early-stage R&D and don’t indicate a willingness to transition tech into at-scale production. Until they do that, there won’t be significant traction or matching from private investors.

McKinsey: A lot of industry insiders are confident about the long-term growth prospects for the low-Earth-orbit space. Are we past the tipping point where a robust space ecosystem is here to stay? If not, what is still needed?

Payam Banazadeh: It really depends on which part of the space ecosystem you’re talking about. The communications segment is very well established with Starlink. It’s growing quickly and has a large established market. The launch business has seen success with governments, but commercial success will depend on more downstream demand for remote-sensing capabilities.

The remote-sensing layer, where Capella Space plays, has succeeded on the government side, and the commercial market is starting to take off. It will take a few years to match the maturity of government markets, but this growth will cause the broader space ecosystem to advance because all of these pieces are intertwined. Commercial remote sensing demand will drive demand for additional launches to put up satellites. This will fuel demand for satellite suppliers and manufacturers. It ripples throughout the entire ecosystem.

I think we’re getting there, and I expect the broader ecosystem to mature over the next decade.

McKinsey: What are the areas of focus for you internally as you continue to scale the business?

Payam Banazadeh: For me, it’s making sure that we’ve got the right talent, so recruiting for key positions is big. The second important focus area is having the right partnerships for the company on both the sales and supply sides, and then focusing on growing sales and the product offering.

These areas are where I spend most of my time. I think the challenges of finding the right talent to grow a space company still remain, because this is a new sector, to some extent, and there aren’t many space engineers to hire. And we need a strong team of folks that can build stuff at very high reliability. It is hard to bring in talent with the right expertise for the environments we’re operating in, so we often recruit people from other industries and train them.

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