Thursday, December 12, 2013

14 Ideas to Make Newspace Accelerators Better

Business accelerators in Silicon Valley (CA), Boulder (CO), and across the US have been gathering the best young entrepreneurs, providing them the time, resources, and business connections necessary to start successful software companies.  These accelerators have helped such success stories as AirBNB: now worth $2.5B and DropBox: now worth $8B

Can the lessons from software-focused business accelerators be modified to benefit commercial aerospace firms (referred to here as “Newspace”) that need to develop physical hardware (not just software) with correspondingly longer product development cycles?  Are hardware-based accelerators possible?  If possible, what would these accelerators look like?  Below is an overview what accelerators are and my fourteen recommendations for enhancing the capabilities of Newspace accelerators.

For many, YCombinator wrote the definition of what an accelerator is.  Located in the Silicon Valley, YCombinator helps software startups succeed.  Twice per year they bring in a bunch of startups (from thousands of applicants) and invest in each firm ($20K for 3-7%).  In the early days, only a few firms were funded, recent batches have included over sixty startups in a single batch.  Over the course of three months (the length of the “batch”), YCombinator helps startups mature.  Some firms need help with an idea for a product, others with introductions (access to the YCombinator Rolodex), still others need help navigating the pitfalls of a growing software startup. 

Each batch culminates in Demo Day where each startup pitches to venture capitalists (and occasionally, Ashton Kutcher).  Both Air BNB and DropBox (mentioned above) were accelerated via YCombinator.  Many of the companies in each YCombinator batch…FAIL.  But the YCombinator assumes this failure will happen.  The compensation from wildly successful firms more than compensates YCombinator for the cost of the failed companies.  Since YCombinator does not know who will be successful at the outset, if the entrepreneur team is accepted into the YCombinator program…they get funded. 
YCombinator combines:
  • an “accelerator” (the advice and maturing services) with
  • a “startfund” (the capital that gets invested in each firm). 

For simplicity, I will use “Accelerator” generically throughout this post to mean the combination of both advice and capital.

Is a startup - a startup regardless of industry?  Sadly, no.  Although the YCombinator/Techstars accelerator model can serve as a template, important work still needs to be done to modify the software accelerator model to better fit hardware startups, particularly Newspace hardware startups.  The table below highlights a few of those differences:

Organizations have already begun the good work of porting the software accelerator model over to Newspace hardware startups.  Two examples include: Silicon Valley SpaceCenter and Space Tango.

Silicon Valley Space Center is a Newspace accelerator in the heart of software country (Sean Casey, Managing Director).  They provide frequent events (Hackathons) and networking opportunities.  But although SVSC makes introductions to angel capital, they lack a startfund of their own.  Space Tango is a more serious attempt to mirror YCombinator.  Space Tango has three month “batches” where participants relocate to Kentucky for a 12-week training program.  Space Tango has a startfund ($20K for 5% equity), with follow-on rounds possible.  Space Tango offers mentoring and accelerator services, but is a young organization, having only raised a $100K startfund to date.  The announcement of Space Tango’s initial batch should be made in the next few weeks.  

Below are a few recommendations for ways to build on these efforts.  My recommendations are influenced by:

I posit that Newspace ventures succeed faster with four accelerants:
  1. Low Capital to Start
  2. Speed to Market
  3. Capital and Liquidity Opportunities
  4. Industry Awareness

1.  Low Capital to Start.  Reducing the Capital requirements necessary to successfully fund a Newspace startup is a goal that both focuses the mind of Newspace entrepreneurs and focuses the efforts of support organizations like business accelerators.  For most entrepreneurs, proposing the business plan that requires hundreds of millions of dollars to execute and needs only one starry-eyed billionaire to agree is NOT a good recipe for repeatable success.  Even when the entrepreneur proposes a manageable business concept, accelerators add value by reducing costs for infrastructure services (e.g. office space, etc.) or access to capabilities that startup would normally not be able to afford (e.g. vacuum chamber for testing prototypes).  YCombinator has brokered a deal with Comcast to provide each startup extremely fast internet connection for their three-month stay in Silicon Valley.  What are the services from which a Newspace startup would most benefit?

2.  Speed to Market.  Minimal Viable Product (MVP) is a term common in software startups thanks to the work of Steve Blank and Eric Ries.  Like the name suggests, MVP’s push a startup to get a product into the hands of customers as soon as possible.  The MVP joke is if you’re not embarrassed by your MVP, your MVP is too mature.  MVP’s give entrepreneur early revenue and, more importantly, they give startups feedback from customers.  Although you don’t hear pharmaceutical entrepreneurs or nuclear power plant startups talking about MVP’s very often, the advent of Cubesats, NanoRacks-based ISS applications, and greater use of Commercial Off-The-Shelf (COTS) technology on space projects enable the MVP concept to be added to the Newspace startup lexicon.  Two-year projects are preferred to five-year projects.  Are their ways the startup can commercialize a subcomponent of their “Two-Year Project” and get to market in one year?  As a general rule, faster to market is preferable.  Note that faster to market will reduce capital requirements also (linking #1 and #2).

3.  Capital and Liquidity Opportunities.  How do we get Angel investors in an industry?  Altius’ Jon Goff said something profound in a Thruster issue about a year ago that has stuck with me.  In other industries like tech, a good-sized portion of the industry’s Angels are created from successfully exiting entrepreneurs that now have experience and capital and still want to be involved in the industry.  However these successful entrepreneurs are not ready for the hard work of starting a second startup.  The profound part of Mr. Goff’s article is acknowledging how few exits Newspace has to its credit – thus the number of industry Angels may also be reduced compared to other industries.  While industry loyalists wait for the Angels to arrive, an accelerator could be very helpful here, introducing Angels from other industries to Newspace.  This work would supplement the good work the Newspace Global and many others are already working in this arena.  As discussed above, YCombinator not only offers capital from their startfund, but also brokers countless introductions between startup and capital sources.  With each introduction, YCombinator’s capital rolodex grows.  With each successful startup to graduate the program, YCombinator’s alumni network grows as well.  Both are important.

4.  Industry Awareness.  Newspace, focused on commercial aerospace projects, would greatly benefit from a higher industry profile.  Many still are unaware of the unshackling from Government contracts that is underway within the aerospace industry.  Accelerators can help significantly here.  By aggregating Newspace startups into a single effort, accelerators may be more influential to news organizations and those peaking over the fence into Newspace from the outside.  In the same way #1 and #2 are linked.  Note how #3 (capital and liquidity) are linked to #4 (industry awareness).

Here are Fourteen Ideas for enhancing a Newspace hardware accelerator:
  1. Makerspace (free tools, supplies, and office space) run by the Accelerator.  Because the cost and time to develop a prototype, aerospace firms have a tendency to develop elaborate PowerPoint files, predisposed to take contract money before engaging in any significant prototyping.  And when the industry does build, they over engineer since “this has to work” and often the project lacks prior iterations to leverage.  Chris Anderson, in his book, Makers: The New Industrial Revolution  illustrates how accessible manufacturing technologies are to the average person.  Jon Goff reinforced this point when describing the makerspace Altius uses in Denver and the 3-D Printer they use in the office.  Make these tools available to startups within your Accelerator.  I envision a facility that combines co-working space with a common makerspace area to access shared tools for R&D manufacturing.  What would you do if a laser cutter were as accessible as PowerPoint?  The ethos of the startup changes from talking to doing, from PowerPoint to building hardware.
  2. Small product/service.  Accelerator advisors should HIGHLY encourage their teams to think smaller.  Less to develop – reduced capital requirements - faster to market – probably faster to exit.  I like the story Jon Goff tells. He wanted to develop an orbital propellant depot (gas station in space) so he focused on tugs which could be a major component of depots (depending on the architecture) and could be developed much less expensively than a depot.  But tugs were still too big, too expensive for a startup develop, so Jon evaluated what elements of a tug he could make better.  Believing rendezvous and docking technology was ripe for disruption, Altius invented Sticky Boom. 
    Accelerator startups should be asking the same “downsizing” questions.  
  3. Greybeard Mentor/Labor Team.  Unlike software startups where a coder could be one of the world’s best before age 25, it takes time to develop as an aerospace engineer.  And the aerospace engineers with real-world experience are highly prized.  Under most scenarios, this type of experience is not available to Newspace startups.  Accelerators could offer each batch access to a team of semi-retired “Greybeards” – engineers with hardware roving on Mars or orbiting Jupiter.  Greybeards could review/critique plans by joining a firm’s advisory board or even play a more active role on startups that interest them.
  4. Partnership with local universities provide low cost graduate work force.  Another cost-saving method would be to offer the batch access to competent part-time workforce to help move the MVP to Demo Day.  I am not necessarily saying these same students would build the flight hardware that flies on the International Space Station (although some could).  I am saying that free competent labor can help enhance a startup’s product offering by Demo Day.  Good for the student.  Good for the entrepreneur.
  5. Shared Admin Services.  Using my Makerspace/co-working space as a model, batch-mates could share the cost of an administrative assistant.  Jon Goff laments the number of hours he spent, in the early days of Altius Space Machines, doing “non-CEO activities.”  They had to be done and there was no one else to do them.  An admin assistant could help alleviate this problem and make Accelerator-empowered CEOs all the more productive.
  6. ZeroG Partnership – free/discounted parabolic flights.  If YCombinator gives Comcast Business-class internet service to their batch-lings, then a Newspace accelerator could offer services like those listed below to help Newspace startups: (1) Suborbital Partnerships (Armadillo, Masten, etc) – free/discounted suborbital flights (2)NanoRacks Partnerships – free/discounted ISS flights (3) Access to major aerospace testing facilities (Boeing, a major university, etc.) (4) Low cost business solutions offered at a discount – even Newspace startups would like to have Comcast Business internet.
  7. ITAR Lawyer services FREE.  Worth mentioning here, unlike most software startups, Newspace startups need to be aware of International Traffic in Arms Regulations (ITAR) and develop strategies to not run afoul with the State Department.  Many of these startups would benefit from lawyer services to help navigate the ITAR swamp.  An Accelerator can help facilitate this.
  8. Market Analysis and Biz Model Development Support (Newspace Analytics, Newspace Global, etc.).  Another service that would help young startups would be assistance in developing a business model with profit potential.  Firms like Newspace Analytics and Newspace Global or accelerator in-house services would be very valuable to the entrepreneur.
  9. Lessons from Clean Tech.  In preparing this post, I interviewed Interview Jeff Lints, Director of Operations, of the Energy Fellows Institute.  The Energy Fellows Institute looks to bring accomplished C-Suite executives or second-time entrepreneurs from other industries into Clean Tech.  Recognizing the challenge in attracting the best and brightest innovators to clean tech, the Energy Fellows are influencing the quality of the entrepreneurs in their industry through a similar accelerator-type program.  Newspace shares many of the same challenges to Clean Tech.  Newspace entrepreneurs may value greater participation from accomplished C-Suite executives and successful second-time entrepreneurs.  Imagine preparing for Newspace Demo Day where the entrepreneur is not only trying to woo potential investors but is also interested in attracting a COO/CFO/CEO from a stable of qualified candidates.  These C-Suite candidates have been watching each firm in the batch throughout the term.  Convincing one of them would, not only help your startup make better decisions, but also help close on the next round of funding.
  10. $200K up-front investment.  In the early days of YCombinator, they traded ~$20K for 3-7% equity.  Recently, they have increased their funding levels via a convertible note.  Space Tango is also talking $20K of capital offered to each startup (although Space Tango has hinted at the possibility of follow-on financing for those Newspace startups with promise).  So what is the appropriate capitalization level to enable startups to develop/test real products?  Jon Goff helped considerably here.  Mr. Goff recommended $200K for each startup.  This would cover early hardware R&D work and labor costs (the two largest expenses for early hardware startups) at least through Demo Day.  The $20K offered by several current accelerators is too small, if the intend of the capital was to truly produce a near-term MVP.
  11. Six-month Batches.  Both YCombinator and Space Tango offer an intense 3-month on campus experience for their batches.  A six-month cycle acknowledges that hardware takes longer to create then software code.  The six month batch also gives time to schedule testing via zero-g, suborbital flights, and local universities and large aerospace firms.  Such testing would be much more difficult to include if the program only lasted 3 months.
  12. Demo Day.  Without the lure and threat of a room of VC’s/Angels waiting for each startup’s presentation at the end of the batch, startups within the accelerator lose a strong forcing function.    A Newspace accelerator should put special emphasis here – the accelerator’s value to each startup will be heavily impacted by the quality of VC’s and Angels the accelerator can attract to Demo Day.  For most startups within the program – every decision should be made with Demo Day in mind.
  13. Newspace Accelerator for a better Newspace industry.  Although not required to be an accelerator, using the accelerator to promote the industry as a whole is strong way to grow the pie.
  14. TV Documentary/Reality Show for each batch.  Again, not required.  But with the success of ABC’s Shark Tank there appears to be an appetite for shows about entrepreneurs striving to make to succeed in business against all odds.  This may be one area where Newspace actually has an advantage over Silicon Valley and YCombinator.  Watching a startup team operate an welder, see a 3-D printer manufacturing parts and watch real hardware get tested on a suborbital rocket flight is much more satisfying television than overseeing a twenty year-old writing code in his apartment while eating Raman noodles and drinking Red Bull.

These ideas are expensive.  If an Accelerator offered $200K to five ventures per batch, that is $1M per year in equity capital investment.  Plus another $1M in operational costs to maintain the makerspace/co-working space, staff salaries, testing assistance for startups, etc.  $2M in annual obligations may be challenging to achieve.  However, an underfunded Accelerator loses much of its value and thus loses much of its appeal.

Dream with me.  After months of interviews and intense deliberations, SpaceCombinator selected its latest batch of Newspace startups.  Co-locating to Boulder, CO was an issue for some, but in the end the value of the six-month program, the access to all of the major aerospace firms along the corridor to Denver (and the occasional trip to the mountains) made the co-locating rule manageable.  $200K for 15% equity stake gave each selected firm an immediate $1.3M valuation.  SpaceCombinator chose the majority of firms for their ideas, but a few firms were selected because the selection committee was impressed with the founders (even while the product idea needed to be rethought).  Over the six-month batch, the firms worked with staff to develop products customers will buy.  A few firms switched products after R&D efforts indicated a needed pivot.  

SpaceCombinator provided a steady stream of guest speakers from both small and large aerospace firms at the weekly dinners.  NASA spoke one night.  DFJ’s Jurvetson spoke one night.  The in-house makerspace enabled a quick validation of design assumptions, and made conversations with customers more productive with tangible prototypes to discuss.  The teams were constantly iterating (iteration has always been the best type of failure).  Hardware tests were conducted via partnerships with the big aerospace firms.  One firm even flew suborbitally (twice).  Another batch-mate is on the manifest for an upcoming NanoRacks flight to the ISS.  SpaceCombinator’s alumni list is growing.  With a handful of successful exits and several dozen going concerns, alumni firms share a special bond with the current batch and look for ways to help these startups in the same way they were helped by even earlier batches.  Greybeards, SpaceCombinator’s group of seasoned veterans, taught several founders to weld, helped two startups understand the complexity of ISS-based deployments and introduced at least one firm to those within NASA’s ISS-utilization office.  The separate group of C-Suite executive veterans made the rounds to each of the startups.  They gave advice, asked questions, listened to Pre-Demo Day pitches.  One exec did not wait for Demo Day, she accepted an offer to join one of the firms as CEO.  The firm’s founder was only too willing to move to the CTO role to make room for the more accomplished CEO.  An unforeseen benefit has been the amount of cross-fertilization of ideas and methods that has come from co-locating the startups at the makerspace.  Teams come out of their offices to see what their batch-mates are working on.  All are motivated to build more and do more when others are watching.

And it all culminated in Demo Day.  NASA, Angels, VC’s, Lockheed Martin, Boeing, Northrop Grumman, Ball, NanoRacks, and others were all there.  Each firm in the batch took turns sharing slides and demoing hardware.  One firm had only that – a vision and limited HW model to show for their six month effort.  But several had strong stories of flight-demonstrated hardware, paying customers, and a plan for growth and profits.  One firm could already announce true revenue with presales from an upcoming commercial rocket flight.  SpaceCombinator took the concepts pioneered by software accelerator and made them work for hardware startups going to space.

Monday, March 4, 2013

Revenue Ideas for Inspiration Mars

Last week, Inspiration Mars announced plans to send two human beings in 2018 on the 501 day trip around Mars and return to earth. 

Inspiration Mars is the brain child of the first space tourist, Dennis Tito.  Dennis has announced he will invest up to $100M into Inspiration Mars to fund the effort for the next few years while Inspiration Mars raises the necessary billions ($1-2B) to fully finance the venture. 

Although Inspiration Mars is a non-profit, here are a few revenue generating ideas to assist with financing.  Some of the ideas below won’t generate revenue until after the mission completes.

These ideas don’t matter if you can’t raise significant(!) investment/donations from rich individuals.  However, these ideas might help Inspiration Mars grow beyond a single success.

Ways Inspiration Mars can make money:
  1. Sell Human factors data to NASA and other space agencies (during and post mission)
  2. The mission may require Aerocapture on earth return.  If the first mission is successful, Inspiration Mars will become the experts in Aerocapture.  Market Aerocapture solutions for future missions.
  3. Sell access to the mission data set
  4. With spacecraft mass/volume/power surplus, sell hosted payload slots for small experiments and commercial payloads (could I get my dog’s ashes sprinkled in Martian orbit?  Are you listening, Celestis?)
  5. Post Mission, Expertise in HW, SW, and Ops could be packaged and sold through involvement in follow-on deep space missions.
  6. Sell Media Rights (already planned)
  7. Sponsorships of various types [this list could be very long from naming rights to company logos on the participant jump suits (think NASCAR)]
  8. Deals to license the Inspiration Mars Name/logo for toys/memorabilia
  9. Celebrity Events with participants
I am sure I missed a bunch of revenue ideas.  Send me your thoughts and we can add them to this list.  Good luck Inspiration Mars.  We are all rooting for you!

Friday, September 7, 2012

Would a Reusable Falcon Hurt SpaceX?

What happens if SpaceX is successful at achieving its Falcon reusability goals.  Here is the video of SpaceX’s plans to recover and reuse the majority of its Falcon launch system.

Let me make some assumptions about a Reusable Falcon (R-Falcon) to make my point that such a system may pose challenges for SpaceX.

On the surface, an R-Falcon would be great.  If my assumptions below are accurate, only $16M per flight, a flight every 30 days, only two thousand dollars per KG.  From a consumer perspective this would be great!  SpaceX is adding reusability to the large rockets they already have.  And they will probably be successful at it.  They do seem to achieve what they put their mind to, however, could there be an easier road to reusability?  Let’s explore the possibility.  First what could a large reusable system like SpaceX’s look like (dollars values in millions)?

I am still amazed we can’t build Saturn V’s today.  We built them before.  We went to the moon in them for goodness sake!  We knew how to build them…why don’t we know now?  Two major reasons:
  1. We don’t have the tooling/plans – long since destroyed or lost
  2. We don’t have the knowledge – the NASA/contractor engineers have retired/passed away
 Surely such a reusable system like the R-Falcon could avoid these Saturn-V pitfalls…right?  If you look at the table above you see I estimated SpaceX builds eight initial R-Falcons.  This high number addresses the unknowns about number of flights per R-Falcons.  Will it really be 10 flights per vehicle as I estimate?  And how long will it take technicians to refurbish and integrate the next payload? 6 weeks?  8 weeks?  With flights every month and 6-8 week refurbish and integration windows, multiple R-Falcons will be needed.

So here is the problem.

After the initial push to develop the R-Falcon fleet, at the usage rates outlined in the table, you would NOT NEED TO BUILD another R-Falcon for 6.5 years!

So SpaceX could avoid throwing away their tooling (unlike the Saturn V), but could they keep a knowledgeable team around ready to build the next R-Falcon 6.5 years after the first fleet was completed?

And even if you believe eight R-Falcons in the initial fleet is too many and want to reduce the fleet size, demand rates of one per month means SpaceX would only need to make approximately one R-Falcon per year to keep up with demand.  Not exactly mass production – 1 vehicle per year.  Can you keep the production team “sharp” on 1 vehicle per year?

How can it be, as a consumer, I love the R-Falcon (yay $2k per KG), but as a business, could the R-Falcon be a bad way to prove a reusable launch vehicle?  Could the R-Falcon launch too much payload and launch too infrequently?

Let’s talk about an alternate business approach that could address some of these challenges.  I said above that my hypothetical R-Falcon has two problems:
  •  Launching too much payload
  • Launching too infrequently
How could a new hypothetical company do reusable launch better?  What if you launch less mass but launch more often?  So let’s make up a hypothetical launch system – the “Kinglet.”  Since this is a business blog, let’s not get bogged down into the technical details except that instead of launching 7,000KG per flight, the Kinglet will launch 100KG.  And instead of paying the R-Falcon’s $5M for range access per flight, the Kinglet pays $200K per flight for its range or range-like services (airport, spaceport, other?).  Here is the table for such a system (dollars values in millions).

The Kinglet is a smaller launch system but aims for a higher flight rate, targeting weekly flights instead the R-Falcon’s monthly flight rate.  As a potential customer, I do not like the 10x higher price I pay to use Kinglet ($20K per KG vice the Falcon’s $2K).  But flying weekly may be attractive to some customers.  Overall though, this appears to be bad for customers (most customers could wait a month to fly).  But from a business perspective, all things being equal, a small reusable launch system like Kinglet has a much higher probability of success because it starts small.

Where the Falcon struggled to keep its production line open with only one new vehicle per year, the Kinglet will need to produce five systems per year to keep up with demand.  Now five launch vehicles per year is still not mass production, but those volumes will, not only keep the production team sharp, but provide five times the opportunities to roll in product and production improvements into the newer vehicles than would be possible on the R-Falcon production line.

Could a smaller reusable system avoid R-Falcon's hidden pitfalls?  Maybe.

So the last question to ask is, what needs to be launched at least weekly with a mass of under 100KG? 

Here is the excel file with tables from this post if you want to change the assumptions.

Thursday, April 19, 2012

Tribute to Space Entrepreneurs

I stay connected to several young space CEOs trying to tap the ideas, relationships, and dreams to the financing necessary to produce a successful business.

My wife introduced me to this short video of a boy in East LA who embodies this entrepreneurial spirit.  The video is 10 min long.  My five-year old has watched it seven times in the last two days!

Thank you space entrepreneurs.  Enjoy. 

Tuesday, November 22, 2011

SpaceWorks Nanosat Market Study

SpaceWorks Commercial today released their latest nano/microsatellite market study.  You can download it here.  The study is quite bullish on the growth of Nanosatellites over the next decade with over 20% growth per year through 2014. 

If you are a regular reader of this blog, you know I am a big advocate for Nanosats and Nanosat launchers .  But I do want to caution us that the authors of this analysis are also developing the Generation Orbit Nanosat launch vehicle.  Some may doubt how unbiased their nanosat market study can be when they are developing a vehcile to launch them.  However, the counter argument could also be, it was reviewing this same market data several months ago (now made public) that led som of the folks over at SpaceWorks to start Generation Orbit in the first place.

Here are a few highlights from the report.  Note many of these comments are direct quotes from the SpaceWorks study itself:
  • 180 known future nano/microsatellites to launch by 2014
  • Range of 100-142 nano/microsatellites (1-50kg) that will need launches globally in the year 2020 (verses 23 in 2011)
    • 32 are estimated to be 11-50kg satellites
    • 68 are estimated to be 1-10kg satellites
    • 75% expected to be foreign or academic payloads
    • Military growth accounts for the majority of the delta between the 100 launch estimate and the 142 launch estimate for 2020
  • New Program list of Known NanoSats:
    • QB50 – 50 Cubesats to be launched between 2013 and 2014
    • NRO Colony I – 12 Cubesats to be launched over next few years
    • NRO Colony II – 20-50 Cubesats to be launched following Colony I
    • ALASA – 36 mirosatellites to be launched beginning in 2015
  • The number satellites launched may not equal the  number of launches since many satellites are multiple-manifested
  • 4.38% growth in Nano/microsatellite launch demand since 2000
  • 22.5% growth (!) in Nano/microsatellite launch demand expected from 2011-2014
  • Market saturation point was set at 150 launches per year (the projected 2030 value) (however SpaceWorks admits that some estimates project CubeSat launches at over 600 per year – well above their 150 launch ceiling)
  • For a fee, Customers can license SpaceWorks more detailed database of nano/microsatellites

Additionally, the SpaceWorks estimates in this market study are based on growth in popularity of Nanosatellites and Microsatellites on existing launch vehicles (with the possible exception of the launches connected with ALASA).  As soon as you CAN launch every week or day on board a new generation of quick response Nanosat launchers, many new uses will be found for this class of satellite.  And many new customers, yet to be identified, will be taking advantage of such frequent access to space.

Thursday, October 20, 2011

Investing in Virgin Galactic

Abu Dhabi’s Aabar made a second investment in Virgin Galactic in July, increasing its stake in the company to roughly one-third ownership.  This marks the second investment by the Abu Dhabi based fund in the last three years. 

Bottom line:
  • 2009 investment for $280M equaled a 31.8% stake.  Post Money valuation of $900M.
  • 2011 investment for $110M increased its ownership stake to 37.8%.

Based on this data I estimate one of two scenarios:

Scenario #1: The 2009 investment was a down round with prices per share less than what Virgin had previously valued the company, and the 2011 was an up round.  An example of this scenario is provided below.  Note the percentage change between share price is valid but the share price itself is not publicly known, so I am using a simplified $1 per share for example purposes.

Scenario #2: The share price has not changed since the company's founding.  In addition to the two Aabar investments Virgin has brought in $21.5M from other outside investors.  An example of this math is below.

Both of these scenarios match the data provided by Aabar for the last three years. 

Reasons for Virgin taking additional investment range from:
1.       Preparations for new growth (Nanosat Launch vehicles or other new products)
2.       Paying for the delays in reaching commercial operations for its suborbital product
3.       Building up a war chest for a rainy day (when money is available sometimes you just take it)

Monday, October 17, 2011

Risk Pricing for the Reusable Falcon 9

In my last post I explored how the SpaceX's reusable Falcon 9 (rF9) could threaten those companies offering suborbital launch services.  

Discussion has focused on the risks preventing the rF9 from reaching the optimistic breakeven price point of $130 per kg (discussed in my last post).  Here are a few of the risk categories you have raised:

  • Increased variable costs: Elon may claim only $200K of propellant per flight, but the variable costs of an rF9 flight will surely be higher
  • Reduced number of flights: When you factor in the complexities of reusing a launch vehicle and the potential for a crash or loss of vehicle
  • Reduced payload capacity: Adding reusability will increase the mass of non-payload components – reducing the payload mass

What rF9 breakeven price points might we expect if we take these concerns into account?  In the table below, I explore these risks and their impact on breakeven price per flight and breakeven price per kg.  

In the second column are the breakeven prices today for an expendable Falcon 9.  This is the upper end of cost.  Weight any of these risks to the point you get price points beyond $5K per KG and customers will prefer the current Falcon 9 over the reusable version.  The third column shows the optimistic assumptions from my last post.  Columns four through six:

  • Increase variable cost per mission from $200K to $2M
  • Reduce reusability from 47 missions per vehicle down to only 10 missions per launch vehicle
  • Reduce payload capacity by 50% from 10,450KG to 5,225KG

These risk values give us a range we can talk about.  Even variable costs of $2M per flight, only 10 flights per vehicle, and half of the payload mass consumed with reusability hardware, SpaceX should be able to reach breakeven price points of about $1500 per KG and $7.5M per flight. 

And the great thing about risks…they get retired.  Be as pessimistic as you want to be about the capabilities of the initial versions of the rF9.  Variable costs will drop over time.  Flight rates per vehicle will rise, and payload mass will creep back up.  The key has been (and will always be) flight rates.  I wouldn't be surprised to see SpaceX subsidize their first generation rF9, offering first generation customers prices SpaceX won’t be able to satisfy profitability until the second generation rF9 – all in the name of increased flight rates.

How optimistic or pessimistic are you about rF9 capabilities?  Here is an interactive spreadsheet for you to explore your own risks and their effects on breakeven prices.    

Saturday, October 1, 2011

Will the Reusable Falcon 9 Kill the Suborbital Launch Industry?

With SpaceX’s announcement this week that the company would not only develop a reusable first stage for its Falcon 9 family of rockets but would make a completely reusable rocket system (I will use Clark Lindsey’s nomenclature: "rF9" for reusable Falcon 9), I have been wondering about the future of the young NewSpace companies developing reusable suborbital rockets.  Will companies like Masten, Armadillo and to a lesser extent XCOR and Virgin Galactic, survive this incursion from a well-funded NewSpace Cousin?

(the youtube video via Clark Lindsey's youtube channel.)  
SpaceX has announced the company is developing the “Grasshopper,” a 100 foot-tall suborbital Falcon 9 first stage that SpaceX’s cadre of young, talented engineers will use to test this initial piece of the rF9.  SpaceX has NOT announced any intention to commercialize the Grasshopper.  But if Masten, XCOR, and Armadillo continue to delay bringing a product to market that can reach 100KM, and SpaceX continues to develop products in its typical rapid fashion, might customers ask to buy payload space on an upcoming Grasshopper test?  

Or would SpaceX be willing to sell Grasshoppers to operators who then provide a suborbital launch service to users using the Grasshopper all before Masten has reached 100KM?  Could the unmanned Grasshopper be modified to carry passengers and compete with Virgin and XCOR?  If an operator came with funding, wouldn’t SpaceX take their money to make the modifications to "manrate" Grasshopper?

But the big money is the orbital market.  Most of the suborbital companies have expressed interest in using their suborbital experience and even their suborbital vehicles to expand current offerings to include an orbital system.  XCOR has published this image of an orbital capability.  

Virgin Galactic even took investment money from the Middle East to jump start their orbital program.  Could an rF9 meet all market demand for both suborbital and ultimately orbital launches as well?  And if they do, are the current suborbital companies doomed? 

It all comes down to money.

How cheaply could SpaceX really launch their new rF9?  We don’t know.  SpaceX does not even know yet.  But we can make some interesting estimates.   The heart of these projected orbital price reductions stems from reusing the rF9 like Southwest reuses its 747’s (which can fly commercially for 30 years with proper maintenance).  How many reuses is SpaceX planning on? 

At this point, the best data I have is a nugget SpaceX's CEO, Elon Musk, said this last week that he is targeting $500K trips to Mars as a market for his reusable craft.  

Let’s make some assumptions so we can approximate SpaceX’s reusability assumptions:
  1. A price for a Dragon/Falcon 9 trip to Mars will be equal to the price SpaceX is currently charging NASA for ISS visits ($130M per trip) - optimistic assumption
  2. 5 paying passengers per Mars Trip - optimistic assumption
  3. 10% profit per launch
  4. All maintenance and between-flight costs are included in the launch price - optimistic assumption

SpaceX breaks even after 47 flights (but that is a lot of assumptions).  here is a table to help visualize the math:

 Assuming a 47-flight amortization, what could be SpaceX’s breakeven price per KG to LEO?  Or to say it another way, how low would the suborbital company’s prices have to be to beat SpaceX?  

Again, let’s make some assumptions:
  1. A price for an rF9 to LEO is the same as current LEO Falcon 9
  2. Falcon 9 payload to LEO is unchanged
  3. 10% profit per launch
  4. All maintenance and between flight costs are included in the launch price.
  5. Propellant Cost per Launch = $200K
  6. rF9 breaks even after 47 flights

Based on these assumptions, SpaceX's breakeven Price to LEO for rF9 is $130 per KG or ~$1.4M per flight.  Again, here is a table to summarize how I came to this conclusion.  At the end of this post is a link to an interactive spreadsheet where you can modify these assumptions to create your own analysis.

These SpaceX prices are surely the most optimistic for the near term:
  1. What if the rF9 doesn’t get 47 flights per vehicle?
  2. What if between-flight maintenance costs for the rF9 are significant?
  3. What if payload capacity has to be significantly reduced to accommodate rF9’s reusability elements?
  4. What if near term launch demand is not high enough to fly as often as they need?
Even with the identified risks, this analysis would indicate:
  • Yes, rF9 could compete against suborbital companies for suborbital market share (especially if SpaceX sells the Grasshoppers to entrepreneur operators)
  • Yes, rF9 could compete against suborbital companies for orbital market share through extraordinarily low prices

So how can XCOR and Masten compete?  

I continue to be bullish regarding the utility of Nanosat-class launch vehicles.  When suborbital companies start offering orbital services (a second generation service), their initial orbital offerings would probably be within this Nanosat class - broadly speaking, payload space significantly under 100kg.  Is there still a market for suborbital companies to offer this type of orbital service?  Even if SpaceX may be able to now match (or beat) them on price?  

Yes.  Here is why:

Sometimes smaller is better.  The smaller vehicles these suborbital companies will eventually offer on orbit should:
  • Be easier to "fly full"– to get the $130/KG price on an rF9, you have to wait for the manifest to fill.  Not so with a smaller vehicle.  XCOR was talking about a payload of 12-20KG initially.
  • Be easier (and cost less) to maintain.
  • Be launched with less integration or preparation – this advantage is the BIG one.  XCOR talks about multiple flights on the same day, taking off and landing from existing airports.  Even if the rF9 could launch that often, it will be some time before regulations allow SpaceX to fly that often - especially if they are still flying from the Cape or Vandenberg where ops tempo is measured in "launches per month" not "launches per day".

Nanosat launchers are the future, but only if their ops tempo is fast enough to justify paying a premium for preferential launch windows.  

This advantage of the small won’t last forever.  SpaceX will keep improving its initial RLV offerings.  Spaceport operations will grow to allow for more airline-like ops tempos.  So Nanosat launch operators (today’s suborbital companies) will have to keep improving too.

But there is a market for Nanosats and it hinges now on ops tempo.  There is hope.

The bigger worry…

…is in the near term.  I mentioned earlier, I doubt SpaceX will pursue commercializing their Grasshopper suborbital vehicle.  But they may be open to selling this suborbital vehicle for others to operate.  Such a suborbital operator flying the Grasshopper would have tremendous suborbital market advantages and could be a major competitor to those suborbital companies focusing on suborbital research (Masten, Armadillo, etc.).

Suborbital companies should be worried, but not panicking.  If the reusable Falcon 9 hastens the development of viable Nanosat launchers, the industry will be doubly blessed – low launch costs from the rF9 and high ops tempo from Nanosat launchers.

Here is the interactive spreadsheet so you can build your own rF9 assumptions.

Tuesday, August 23, 2011

The Outside Insider

ASM "D2S" reaching out from ISS
In my last post, I talked about the business lessons applied in developing the Altius Space Machines Business Plan.
Jon Goff, Altius’s CEO, thanked quite a few people in his post here.  On the business side, recommendations and advice came from a host of valuable people including:

  • Friends and Internal reviewers of drafts 
  • Online Resources like Venture Hacks
  • Business Plan Judges (post-pitch feedback)
  • Company Advisors and Investors

One person that fills the dual-role of Advisor and Investor for ASM is Richard David of NewSpace Global. Richard David has been a great asset to Altius providing that critical opinion,

“How does this look from the eyes of an investor?”

If you don’t have such a person for your venture – get one! You need an Outside Insideron your team. Someone that believes in you/your Company and understands your business plan/market/technology but still can bring fresh eyes to how you explain these themes to the uninitiated.

Richard is also bullish on the new space industry and will be rolling out New Space Global in the coming weeks at which time I will post a more formal interview with Richard and let him explain his new venture first hand.

But for now, let me thank all of those people that contributed business ideas and recommendations that got swirled together into the Altius Space Machines business plan win.