Valuation Discipline in a Space SPAC: Building for the Long Term — Rich Davis

Mike Blankenship here with The SPAC Podcast. I'm joined by Richard Davis from Xterax. Richard, how are you doing today? Why don't you give us a little bit of background about yourself and the and the company?

Sure. So my background, I have a my undergraduate degree's in astrophysics. I was an Air Force pilot. and then went to business school, went to work in investment bank and went to Salomon Brothers. so my background is mostly on the financial side, was an investment banker, and then jumped to the buy side. We raised a communications fund at Lehman Brothers and then worked at VantagePoint Venture Partners, also doing tech and telecom, a little bit of semiconductors. in about 2004, I guess, I made an investment in a satellite company. I was on the board. And I was always frustrated by the fact that when you are in private equity, you're kind of a mile wide and an inch deep. I could talk for five minutes about just about any industry on the planet, but I couldn't talk for eight. And I used to hate going into the investment committee and they'd say, Yeah, but what do you know about you know the paper industry? And you know, I knew that much about the paper industry, just enough to be dangerous. And I wanted to be an expert in something, and so I had made this investment in a satellite company. I decided to join it full-time, really to run business development, became their CFO, and we raised about a half a billion dollars, launched two satellites over Asia. And then in about 2009, I started an advisory business with a partner, Graham Shaw, who's PhD from MIT, very technical design satellites for a while. And we started an advisory firm called ArgoSat. and we advise you know big private equity funds, big lenders like US Export Import Bank or Government of Canada. as well as you know companies that are in the industry and try to help them you know with their business plans or we do some a little bit of design work as well rfps those kinds of things so kind of soup to nuts in the industry and have been doing that really for the last almost well I guess going on 20 years now. in the last few years we've started doing more on the principal side. Did make some investments

Yeah.

in a couple of Earth observation companies, one doing earth analytics. Graham and I actually ran that

Okay.

company, Descartes Labs, for a couple of years. so you know, have the advisory experience, have the investing experience, have the operating experience, sort of, you know, have run the full gambit and it it just felt like, you know, this SPAC product was kind of custom made for for us. So you know, we decided to dive into it and see what we could do.

Yeah, so you know, for listeners kinda hearing the the name Xterax for the first time, what what is the mission and what sets it apart from others?

So, you know, we're we're a special purpose acquisition vehicle, like you know, like like many others out there. and but I think we're really we're really focused on the space economy and you know things that are adjunct to that. this is our second SPAC. We did one several years ago with Antarctica Capital called Endurance, and we actually merged with a company called SatixFy, which is a fab-less semiconductor company. And so, you know, it's again, we're we're looking at that space at the space industry as where we want to do things. I think what sets us apart though is really because Graham and I have such a deep experience in the industry. I mean, between us, you know, it's kind of 50 years in the industry, 60 years when you include just, you know, the finance angle as well. plus we've got experience, you know, not just advisory capital raising, but also on the operating stand, you know, from an operating standpoint, we've actually been, you know. management of companies. And I think that kind of sets us apart from a lot of the SPAC sponsors, which are really, you know, they're PE guys, guys who know a little bit about a lot of industries and are looking more broadly. We have a really strong board, an advisory board. These are senior executives from the industry, guys who really know the industry. And then the last piece, which I think is really important

Some thing.

from a SPAC standpoint, is our sponsorship. Meteora is our is really our backing sponsor. And they really understand the capital markets and how they work with SPACs. I mean, they're you know, they they're typically a trust investor in a lot of SPACs. They were a trust investor in our first SPAC. and the the the minefield that is going public with a SPAC in terms of the capital raising and and all of the the arb opportunities that show up and and cause and allow people really to to crush a stock price, are all things that you need to really understand at a at a at a you know buy-side level, at a level of the guys who are making those investments. And I think Meteora brings that to us. So we think that we're much better equipped to manage that process in a way that doesn't result in a, you know, a dollar stock price.

Yeah, and you know, talk about space, which is amazing. I love the space, I love the new frontier, all all of it and it's it's big and obviously June of this year saw SpaceX go public as the largest IPO ever and certainly front and center. W what does that moment mean for the rest of the space economy and and where where do you see the opportunities beyond the one everyone already knows?

Well, I mean clearly, I mean that's that's the word opportunity, right? I think it does mean a lot of opportunity. I mean, one of the things that we were seeing for a decade is that there was large amounts of money going into the space industry, but 75% of it, 90% of it was going into SpaceX, right? All of the big money was going into SpaceX. now that SpaceX is public, and in advance of that, a lot of that money that was attracted to the industry is looking for new opportunities, right? They're looking for other companies to go into. the other thing that it is there are more exits now than there were in the past. You know, in the space industry, for a lot of years, there were a bunch of really large no-growth, slow-growth, utility-ish type companies like Intelsat or SES. And now you have a lot more excitement around it. There's a lot more capital coming into it. but people have exits, right? I mean, if you're you're gonna put money into these companies, you wanna know there's an exit. And there weren't real, there weren't acquisitive companies out there that made for good exits. And now you've got companies like Rocket Labs and Planet and SpaceX that you know have have market caps and and want to want to acquire these companies. And so you've got those exits. But the thing that I think people get hung up on the fact that it is sexy, right? Space is very sexy. And you see some of these companies and you think, wow, that is so cool. But it doesn't mean it's a business and it doesn't make it a good investment. And I think that that's one of the things where, you know, again, when I was in private equity, it was you could look around and see that people never invested in the industries they understood. They only invested in the industries they didn't understand. Because the ones they understood, they saw every mine, they saw every issue, they saw everything that could go wrong, and they couldn't pull the trigger on it. And the fact that this is an industry that that we understand so well, I think, you know, speaks to the fact that we're gonna be much more careful, that we understand where where things are just hype versus when they're real. I mean, there are there are opportunities out there that I love. I mean, I love hyperspectral, I love synthetic aperture radar. Great opportunities. But the question is, are there companies out there that are doing it right and have the right business model to really be good candidates? And there are some, but there are also a lot that aren't. And so you just have to be very careful about about where you go.

Yeah, and and speaking about that, you know, your CTO, Dr. Graham Shaw, holds a doctor in aeronautics and astronautics from MIT, so very smart. And has spent his career designing spacecraft, right? So that is an amazing expertise. And you know, I'm sure the slide decks are all fun to look at. a lot of space stuff or every little boy's dream to look at those. But how does having that technical in-depth in-house help you separate real technology from from the hype?

Yeah, I think it, you know, it allows us to really separate engineering from invention. when you look at, you know, I think it's honestly I think Elon Musk said it that, you physics is the law and everything else is engineering. And if you understand the physics and you understand the engineering, you know what's possible. And the art of the possible is important, but but when you for a lot of these companies, they will They will tell you we can do these things, and I need $50 million and I need two years, and I'm gonna show you how to do it. But if you know what you're doing and you really drill into it, you realize that, well, there's three different things they gotta invent to make that happen. And what's the likelihood of them doing that? And it's slim. So, you know, that's fine if you wanna make that bet. If you're an early stage venture capital investor and you wanna put a million dollars into something and make the bet that they can invent things. But for SPAC, that's not the right opportunity. And so, you know, having somebody with Graham's background who can really diligence those opportunities and diligence the technology and know the difference between engineering and invention, I think is critical. And it also means, look, just from a SPAC standpoint, we save a ton of money, right? Graham and I have done diligence for other SPACs, right? We we have for years we've had SPACs come to us and say, would you do the technical diligence on this opportunity or that opportunity? And so we can do it for ourselves. So we don't have to pay a third party to go do it. We do it ourselves. It also means that it happens much faster. So we can we can sort of churn through opportunities much quicker and get to the ones that really make sense.

Yeah, so if I'm let's talk about that a little bit. So if I'm a founder in space or or defense deciding how to go public, or investors looking their way into into your sector, what makes Xterax, you know, from a your operating investing advisory experience sort of the right partner for them to think about it in that in the cycle?

I think the the key is that we are, and I and this phrase gets so overused, so I I almost hate to say it, but we are value-added investors, right? We're guys that can actually help. you know, when we did our our deal with SatixFy, one of the requirements of closing the deal was that we agreed to consult for the company. And so we actually had a consulting engagement through ArgoSat with SatixFy for the I guess two or three years that we were there. because they wanted our help. We, you know, we know the people that they want to sell to. We talk to them all the time because we're involved in their businesses. And so we were much better able to direct them where to go. you know, or I was on the board of a company, a solar panel company for a while, and I was and I explained to them that there were certain contracts they shouldn't bid on, that they were better off letting their their competitors win those bids because they were going to be really low margin contracts. And then it gave them extra capacity to go after the high margin contracts later when everybody else was full. And so there are things that we can do that your typical PE investor can't do, a typical SPAC investor can't do, because they don't know all the players, they don't know the industry, they don't know who to talk to when it comes to getting a strategic relationship or an exit or whatever. And so we can do those things. We we know all these people. And the other thing that we know is, again, because we've been in this a long time. We know the different pockets of money that will do certain types of deals, right? There are some guys who who have money to do a certain kind of deal. Again, when when we did SatixFy, the company needed money prior to the closing of the de-SPAC. And they told us, you know, we need $50 to $70 million. Well, we went to a relationship that we had and talked to the that we knew was it was kind of in their wheelhouse. And that group put in the $50 million, which I think eventually became $75 million, into SatixFy. So we were able to bring capital even before the deal closed, just because we knew the pockets, right? We knew again, if you've been in this industry for 20, 30 years, you know all the people in it, you know the people that have been in it a long time. I mean, there's a lot of new guys coming in, but we know all those people and we know where the market is, we know where the where the money is and where the strategic relationships are. So I think we we bring a lot of value to these companies. I mean, people. pay us to do this every day, right? This is what I do the rest of my time. This is what I do for a living. And so with a SPAC, you kind of get us for free. So I think it's it's pretty valuable.

Yeah, and so just looking ahead, what does success look like for for you all and what would your you want investors and management teams to take away from today's conversation?

Well, I mean look, clearly success looks like a SPAC that trades up over the long term, right? I mean, and I know that that's a high bar because most SPACs don't trade up. And and I it it bothers me when I see people talking about the success that they've had in SPACs and you look at their track record and every one of them trades down trades down. So that's what successful looks like. I I can't promise we're gonna get there because you know how hard it can be. But what I want Management teams to understand is that a de-SPAC is not a liquidity event for them, and it's not a liquidity event for their shareholders. The valuation is only important to the extent that it makes sense. There, you don't get any price discovery, right? There's not a roadshow that you go on like you do with an IPO where you get this really strong price discovery and you know that the market will support the price. The price is a negotiated price. And so we have to do this a lot more carefully. But I think, you know, we're happy to put our money where our mouths are and our, you know, our founders share. and you know, we're happy to have, you know, things that look like earnouts and and vesting because we're we want to be in this with the company. But it means that the that the management team has to be realistic about valuation. There are deals getting done out there, and again, I won't I won't mention names, but there are deals getting done out there at valuations that just don't make any sense. And and it's clear to me that neither the founders nor the de-SPAC care. That they're gonna go public, the stock will trade down, and they don't seem to care. And and that's fine if that's their goal in life. But that isn't what we wanna do. and so you know, I would hope that when teams come to us, when when we're talking to companies and manager teams, they understand that you know we're there to help them, we're there to to see that they have a a you know a viable, strong public company going forward. We wanna do this right, and as long as they have the same attitude and outlook about this. It's going to be a very successful relationship. If they just want the highest valuation and they don't care, then we're not the right guys.

Yeah, look I I totally agree with you on that. I we see that all the time where it's overvaluations and you see a race to the bottom of the stock just 'cause there was no w no way to validate that. On that front, I mean, are are you guys looking at doing PIPE deals at the same time to sort of help validate the valuation and

Yeah, we have we have capital that we can tap from our founders, from our from our sponsors, as well as, you know, there are several groups in the trust that have asked that they be wall crossed and and you know brought in. I think that, you know, what I really like to see is that we do a deal in a way where we're keeping money in the trust. If we're keeping money in the trust, if that if we don't get, you know, ninety eight percent redemptions, then we know we've done it right. and if we don't, you know, and so and it it's almost, you know, it's almost bimodal, right? If you keep some money in the trust, you're gonna keep a lot of money in the trust, because it means you did something right. And for a lot of that, it's going to mean finding investors who we know and having them come in and sort of swap out trust holders, right? Because a lot of the trust holders are just arbs and they they don't really want to stay no matter what. But I think that, you know, what I would hope is that we're gonna be able to and for the right deal and the right price, we're gonna be able to find groups that wanna come in and own registered shares at the close and wanna swap out the trust. And so if we're keeping that trust, then you know, then we've won.

agree and tell that story as you go in public. So make that people see

That's the hope.

the the growth. So well well Richard, I I really appreciate you coming on today. I it's it's been a pleasure speaking with you about it. And then again I think space is fun, space is the next frontier as a huge Star Trek fan I I I I love it. I think there's a lot there and I certainly look forward to to hear more about your story as you guys get the yield ideal done and and and many to come. So

Yeah, well thanks so much.

really appreciate it.

Thanks so much for the time. I appreciate the opportunity and you know we're looking forward to this. This is this is something that we enjoyed doing the first time. it's been a few years since our first SPAC, but you know, I think that we've got the right pieces here to do it right and and hopefully we'll be successful.

Great. Well best of luck and and thanks again. Mike with The SPAC Podcast.