Space VC closes $20M Fund II to back frontier tech founders from day zero

Gone are the days when space and defense were considered fundamentally antithetical to venture investment. Now, the country’s largest venture capital firms are throwing larger portions of their money behind so-called hard tech startups at the earliest stages. This about-face has led some in the industry to question whether smaller investing shops will be able to keep up with firms armed with more dry powder.

Not so for Jonathan Lacoste, the solo GP of Space VC, an Austin-based micro-fund that invests in frontier tech. He just closed a $20 million Fund II on the premise that there’s still big opportunity for specialist firms at the earliest stages — in spite of the growing consolidation of multi-stage funds and their increased participation in industrial startups at pre-seed and seed rounds.

“We're investing at day zero, oftentimes when founders are just starting companies,” he said. “There's a lot more of an opportunity for a new fund that is specialist in nature to make an impact at pre-seed than to raise a Series A fund and compete against all of the well-known funds that may be investing in those categories.”

Going in very early, at "day zero," as Lacoste put it, is a cornerstone of Space VC’s strategy. To do otherwise — to wait for companies to get founded and then evaluate their seed rounds as a non-lead check, for example — is likely a recipe for failure, he said.

Space VC’s other moat is ultra-high conviction — that $20 million will go to only 15-16 companies, with check sizes between $500,000-$1 million. In some ways, this part of the strategy is more contrarian than anything else, given that VC is generally understood to be governed by the power law principle. But small funds simply don’t have the financial bandwidth to play the numbers game, especially when bigger funds can afford to bid up valuations.

Lacoste acknowledged that the fund is occasionally priced out of a round by a larger multi-stage firm, for whom a 50% price difference is inconsequential. Often, it's up to an entrepreneur to decide the size of their initial round, he said.

“There are definitely times when I think there are two paths a founder could choose: raising a $2 million pre-seed, closing government financing, getting initial customer traction, building an MVP in a really scrappy manner and then raising a much larger round -- and by doing that, avoiding more dilution early -- or raising the larger round out of the gate,” he said. “It's hard for me as a VC to say one is the right way versus the other way. But I just genuinely believe that being capital-constrained, being scrappy and being focused [...] generally leads to healthier habits, more companies and better outcomes.”

He pointed out that portfolio companies True Anomaly and Castelion both raised relatively small initial rounds, and that both went on to close larger rounds with major multi-stage firms in participation. (Space VC wrote Castelion’s first check, as well as the first check into Array Labs and U.K.-based Space Forge.)

Not everyone thinks this strategy will win. Jai Malik, the former solo GP of the small industrials-focused fund Countdown Capital, made waves at the beginning of this year when he announced in a letter his plan to return the remainder of his second fund to LPs. In the letter, he said he made the decision to wind down because the prospect for smaller firms to generate the returns they need is so low.

Lacoste clearly thinks this is not the case. While he didn't speak to Countdown in particular, he said his firm looks to provide value beyond a check: customer introductions, capital introductions to potential partners that could lead a Series A or beyond and a network of founders that are building a similar company. At the earliest stages, the firm can also be a “sounding board” for entrepreneurs, or even military veterans or people outside the sector looking to transition to space and defense, he said.

“I do see the opportunity for pre-seed funds to be at the ideation and inception-stage phase, to be a sounding board, to offer industry connections to entrepreneurs to help solidify those ideas. That is where we spend a lot of time and I think there's ample opportunity for specialist firms like ours to compete in those areas.”

Bigger bets three years in

Lacoste took an unconventional route to space and defense investing. He spent much of his adolescence playing for elite hockey teams, then founded a venture-backed enterprise software company called Jebbit with some classmates at Boston College. (He dropped out after three semesters to grow the startup full time.) They exited after being bought by billionaire Robert F. Smith’s Vista Equity Partners in early 2022.

The question of "what next?" loomed large.

“I think my honest assessment is, I was lacking impact, and I started to question, as I was on the back half of my 20s, how I wanted to spend the next few decades,” he said. “Intellectually, for me, even though I was in data infrastructure [and the] software world for almost a decade, that’s not where I would have crafted my career path. I was much more interested in government and foreign policy and defense and space and frontier tech.”

“When I had the time and the resources, I knew I was going to jump into the industry. The question was how.”

He saw a gap in the marketplace: a role for a former founder-turned-investor, who could invest very early in deeply technical fields that VC was only just starting to pay attention to. He raised his first fund in the beginning of 2021 and started deploying capital immediately.

Although Fund II is substantially larger than Fund I’s $3 million position, and the capital markets are much tougher, he said it was overall easier to raise funds this time around. Raising his first fund required asking limited partners to take a bet on his vision and on his person — he had no track record to speak of at the time.

“There were some questions raised of, why does this software founder think he can come and dominate early-stage space and defense venture? That was a fair question at the time. So Fund I was difficult, even with looser capital markets, it was difficult to be able to answer that question without saying, trust me and let my actions speak more than my pitch would.”

Fund II’s anchor LP is a fund of funds called Nomads, part of Hummingbird Ventures, which focuses on exceptional emerging managers. By this time, three years into his journey and public investments in 15 companies, Lacoste feels he's earned his place in the so-called hard tech ecosystem.

“I've spent four years in space and defense now and I genuinely don't feel like an outsider anymore. I've rolled up my sleeves. I work hand in hand with a bunch of companies … and have felt like an extension of those founding teams. I no longer feel like a software entrepreneur that's a fish out of water.”