What happened

Aerospace start-up Lilium (LILM 4.28%) is returning to the markets for yet more funding, and investors are worried about dilution. Shares of Lilium dropped more than 20% on Friday after the company announced it has raised $192 million in additional capital.

So what

Lilium is one of a number of companies racing to bring what are known as electric vertical takeoff and landing (eVTOL) aircraft to market. The so-called "flying taxis" are about the size of a van or small truck, and offer the promise to one day ferry passengers over city traffic or funnel traffic to airlines from outer suburbs.

There is a lot of potential here, but also a lot of competition. Start-ups including Joby Aviation, Archer Aviation, and Vertical Aerospace are advancing their own designs, as are established manufacturers including Embraer.

Bringing a new aircraft to market requires substantial capital, and Lilium late Thursday said it was adding to its coffers via a $192 million share sale. The deal includes a $75 million public offering of 57.7 million shares, as well as a concurrent $42 million private placement of 32.1 million shares and warrants for an additional 8 million from a group led by Earlybird Venture Capital.

The public shares are being sold for $1.30 apiece, a 23% discount to the company's $1.70 close on Thursday.

Prior to the offering, Lilium had about 380 million shares outstanding.

Now what

Investors tend to hate secondaries because they are usually priced at a discount, and they add extra shares to the market and can disrupt the balance between supply and demand. This reaction is likely more severe because, as Lilium notes in its press release, the fund raise is "incremental" to the $100 million it raised in May.

In the long run, if this funding is what is needed for Lilium to bring a product to market and begin generating revenue, it will likely be worth the short-term price. But that is no guarantee, especially with the number of competitors out there chasing the same goal.

The drop is a reminder to investors this is a speculative investment and should be nothing more than a small piece of a well-diversified portfolio.