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.

NLV Market Analysis

Garvey's Prospector 7C

In October of 2004, I attended the Space Frontier Foundation’s conference in Southern California on the Queen Mary. There, Masten Space Systems made a big splash announcing it was joining Armadillo Aerospace in developing Suborbital RLV’s.

I remember thinking at the time, how did Masten have enough market data to make that decision? Masten, Armadillo, XCOR, Virgin, Blue Origin – these guys & gals threw their hat in the ring long before there were significant studies confirming suborbital RLV’s made “market sense”. They had vision. They had guts. Or if the data did exist, at the time, I did not know how to find it.

And now, NASA is offering a prize for a Nano-satellite Launch Vehicle (NLV) – “launching very small things quite often”. And as candidate NLV teams consider throwing their hats in this ring, the market data is a little more available for an NLV service than there was for suborbital service almost a decade ago.

This post attempts to consolidate that NLV market analysis. Of course this will be incomplete, so I need your help. Add links to other NLV market data in the comments of this post to benefit the whole group. I will skip a discussion of NASA's NLV Challenge.  Here is NASA's NLV Challenge Page  for more details. 
I have broken the NLV market analysis down into the following categories:

• NLV Market Sources
• Market Overview
• NLV Market Differentiators 
• NLV Substitutes
• Interesting NLV Market Nuggets
• Potential Market Competitors
• Market Demand Graph
• NLV Pricing Discussion
• Market Impactors

NLV Market Sources.  The authors of these study deserve your business. Buy their papers. They are doing good work. Instead of at the end of this post, I wanted these links near the top!

• Foust, J. 2010. “Emerging Opportunities for Low-Cost Small Satellites in Civil and Commercial Space”
• Foust, J. 2008. “If you Build It, Who will Come? Identifying Markets for Low-Cost Small Satellites”
• Christensen, I, et al. 2010. “Market Characterization: Launch of Very-Small and Nano Sized Payloads Enabled By New Launch Vehicles.” This link will give you the first few pages, have to buy the full version.

Market Overview.  The NLV market can be dissected in at least two ways: (1) by payload size and (2) by payload type.

Payload Size. I have heard various naming conventions for small payload launch vehicles.  For this blog post, I will use “Nano”, “Micro”, “Small” as three payload sizes to consider.  However, I will group them all together and use the name NLV most of the time.

• Nano - Under 10kg
• Micro - 10-100 kg
• Small - 100-200 kg

NASA is focused on a 1kg payload for its NLV Challenge. The Army is interested in at least 20kg payloads. Even if first generation vehicles are only able to launch a few kg of payload, commercial NLV ventures would be wise to endeavor to grow to larger payload sizes over time. Current 200-400kg payloads launched currently on larger vehicles would surely be interested in "going on a diet" if an NLV launcher could carry 100-200Kg yet offer more frequent launches.

Payload Type. The second NLV market subdivision will be the option of (1) launching a functioning satellite or (2) delivering cargo to stations or depots. Of the two, cargo delivery may very well be the larger of the two sub-markets. It will take far less preparation to send the ISS an NLV-load of fresh apples than it would be to fund, develop, integrate, and launch a nanosat. Both satellite launches and cargo delivery will be sub-markets. Expect the satellite market to retain a diversified customer base. Expect the cargo delivery customer base to be dominated by station owners in the early days (ISS partners and Bigelow), but to expand to Space Station customers in the not so distant future (see: NanoRacks).

NLV Market Differentiators.  What makes an NLV unique? An NLV won’t be able to carry as much payload to orbit as its bigger cousins, why would any customers want to use an NLV?  Answer: Frequent launches, low integration time.

• Cost: Higher Cost per LB than larger launchers but lower Cost per launch
• Launch Frequency: Launch *much* more frequently than larger launchers (weekly? Daily?)
• Launch Lead Time: Integrate payloads in less time to take advantage of more frequent launches
• Payload Mass: a few kg (at first)
• Orbit Choice: Customers can choose since not a secondary payload
• Suborbit/LEO/GEO: Limited to LEO (at first) – Suborbital applications? Maybe.

NLV Substitutes.  Prices for NLV’s cannot be set independent of substitutes. Here’s a list of some big ones:

• Launch as secondary payload. Spaceflight Services (Andrews Space) offers a turnkey solution for your payload to fly on the BIG rockets as a secondary payload.
• Hosted payloads. Boeing just launched a new service to combine your payload with others on a single satellite bus thus reducing customer costs since they do not need to procure an entire satellite. Note: this would be a substitute only for satellite payloads, not for cargo payloads
• Commercial RLV suborbital spaceflight. Masten, Armadillo, and Blue Origin are stuck at 100km for now, but not for long. Watch as future generations of their vehicles climb higher and higher giving customers a greater flight-time, frequent launches, and very low costs.
• With COTS deliveries to ISS approaching, deliveries to station will be made by NASA several times per year with ISS partners also delivering cargo to station several times per year.

Interesting NLV Market Nuggets.

• Microcosm Inc, identified potential market-wide launch savings of more than $15B over a 12-year period, resulting from the development of a low-cost responsive launch vehicle focused on the SmallSat market (above 100Kg)
• In a 2008 presentation, Pete Worden said there were ~80 universities with active cubesat (nanosat) programs 
• A 2006 Futron Study identified over 30 markets in 6 principle areas for services provided by low-cost satellites in the 100-200 kilogram class
• The US Army is interested in Nano Launch and had put a price point of $1M per launch.
• My interview with the CEO of CubeSat component manufacturer Clyde Space revealed he thought $250K for a 3u is definitely too much for most customers.
• My interview with Professor Jordi Puig-Suari from Cal Poly and professors from MIT, and St. Louis University who are currently active in either university satellite development or active in space research of some kind show they are targeting a price point under $50K per CubeSat with $20K being preferred. Relooking at my notes from those interviews, at a $20K price point, these professors thought the US demand for CubeSat launches would grow to 50-100 each year. Interesting they thought the low flight opps of the current “secondary payload” system a bigger problem than the high cost. Prof Michael Swartwout said in my interview with him, he waits 5-7 years to secure a spot on a rocket to launch his CubeSats. This is longer than an undergrads college career – not too inspiring for young engineers!

Potential Market Competitors.  Non-exhaustive – From the Paper: "Market Characterization: Launch of Very-Small and Nano Sized Payloads" by Christsensen, et all. 2010.

Market Demand Graph:

This graph is incomplete but should convey the significant number of different areas where an NLV could gain market share. For an explanation of these categories I would encourage you to get a copy of the wonderful papers I list under the “sources” section of this post.

NLV Pricing Discussion.  A major portion of any market analysis is not just what the needs are but what are potential customers willing to pay to meet those needs. For the NLV market you have customers at different ends of a spectrum. Government customers like the Army have stated a willingness to pay $1M to place 20kg in LEO. Universities want to keep Cubesat costs (usually 1-3 kg) to under $20K per U.

Variable Pricing seems like the right answer, where Primary customers pay a premium to fly on their schedule to their orbit and others willing to fly “standby” get a much reduced price but operate on someone else’s schedule and flies to someone else’s orbit. Rather than rewrite the variable pricing details now, here is the post I wrote on variable NLV pricing a few months ago.

If you made me guess right now, I would assume the following prices per U would be acceptable by the market:

• Government: $50-200K per U (with discounts per U for larger payloads)
• Academia: $20K per U
• Commercial: ???, perhaps somewhere between

Market Impactors.  Any market has externalities to the market that can help or hurt the industry. Here are just a few:

• Of all of the substitutes available to the NLV market, the one that has most potential to steal market share is the second or third generation of suborbital RLV’s. As mentioned earlier in this post, a subset of the NLV market could be served with the extended micro-gravity offered by suborbital RLV’s flying to 500 or 1000 km. But the opposite is also true, a delay or accident affecting the un-manned portion of the suborbital RLV industry (primarily Masten, Armadillo, and Blue Origin) could make some customers consider launching on an NLV rather than waiting for the suborbital ride. 
• One of the two key sub-markets for NLV’s will be package delivery. More successful space stations, more package delivery. The proliferation of commercial space stations will be a major driver of this sub-market
• How the last mile problem gets solved will directly affect the viability of micro package delivery (one of my two submarkets). We need solutions for the last mile problem – the solution will be part technology, part policy, part management. If NLV packages can’t be routinely delivered to space stations, the NLV industry will be severely hampered and space stations will miss out on an enabling method to gain just-in-time deliveries.
• NLV’s only work as a market if they can launch frequently with low integration turnarounds. Even if low costs had to come later, the ability to launch frequently with streamlined payload integration will be the driving force behind early NLV success stories. The question operators will need to ask is, “How do I design and manage NLV operations in such a way to achieve the goals of frequent flight opps and low integration turnarounds?”
• Although depot development is still years down the road, the potential “match made in heaven” between depots need for frequent propellant deliveries and NLV’s ability to fly frequently should not be overlooked…but I would not build a business plan around depot assumptions just yet.

That is a good dataset to start.  I will add some commentary in future posts.  Here is the spreadsheet containing the tables used in this post. 

Now I welcome your additions.  Use the comments section to your links to even more NLV market data.

Interview with the Founder of The NewSpace Business Group

Are you a NewSpace organization? Could you use a group of MBA’s at your disposal to complete company projects without the cost of keeping them on your payroll? Meet the NewSpace Business Group. Think of the NewSpace Business Group as a network for nearly minted passionate, space-minded MBA’s that gain valuable business experience by solving real world problems for the NewSpace industry.

So listen up Altius, Armadillo, Bigelow, Masten, XCOR, SFF, and NLV Challenge competitors. The NewSpace Business Group is available to assist with your:

• Market Research
• Competitive Analysis
• Pricing Strategies
• Business Development Strategies
• Business Plan Development
• Internships
• and more.

Here is an interview with the group's founder, Jonathan Card (another interview in the series from Space Studies Institute’s Space Manufacturing Conference 14).


Q: Describe the NewSpace Business Group.

Jonathan Card: The NewSpace Business Group is a student group for business students, historically at the MBA level, interested in space businesses. We are focused on bridging the gap between the space technical community and other specialties in business that are necessary to run a successful company. One of the most destructive things that our current space policy has done is that NASA has frequently had to act as the intermediary between the space companies and the public. NASA's goal has been to foment experimentation and technical advances that were necessary in the 1960s to get humans to space.

Unfortunately, it's not enough for the technology to exist, but it has to exist in a network of social institutions that manufacture it, improve it, and operate it and there has been limited success in forming these kinds of institutions. This is very difficult for the government to do in a democracy, but NASA has recently begun to rectify this. COTS, SBIR, and, I think, Obama's recent NASA budget have started to bridge this gap.

The NewSpace Business Group is a setting for people in the space community to apply what they are learning in school to the industry that needs to learn it and so that business people that specialize in Marketing, in Finance, or in other aspects of private companies can learn from the NewSpace Business Group members on their campus that space is a viable place to do business and make a profit. It's less and less true that there's only one customer (NASA), that you need to get money (from NASA) before you can build anything, that you need to structure your company around government contracting and procedures.

Q: There are many other campus organizations. Why do you think you will be able to attract top business talent?

Jonathan Card: Because space is awesome, of course! It's space! Seriously, though, space is the New World of our time. It's a place that is unsettled and full of riches, from solutions to the energy crisis to new IP that can only be discovered in space. It is what will keep our civilization alive when an asteroid comes to finish us off like the dinosaurs before us, when nuclear weapons finally get out of hand, and when some unknowable tragedy strikes our ecosphere. In the end, money is the way for the people to show what's important to them; since space is important, there must be money to be made and the one to figure it out, gets to keep it. Fortunes were made, lost, and made over and over in the transatlantic trade and in the mines and forests of the New World. It will happen again in space.

Q: How do you see the NewSpace Business Group benefiting the NewSpace industry?

Jonathan Card: I would like to see NewSpace alumni forming the next cadre of managers and entrepreneurs of space-oriented companies. There are a lot of exciting companies coming of age right now and there are still holes to be filled in. Companies are just learning to talk to each other, how to do business with each other, and what institutions other industries created for themselves that space companies don't have because the unrelenting NASA-focus of the past has prevented a mature industry from emerging organically.

There are opportunities here that we haven't yet dreamt, and they are problems that MBAs and other business school students study full-time. We are the leaders that will make this industry make money and will make money elsewhere and bring it to NewSpace and so into the future.

Q: What you like the NewSpace Business Group to grow into over the next few years?

Jonathan Card: I'd like to make it into a national campus organization whose members know each other, work together, and can learn to rely on each other. I'd also like to make it into a group whose name becomes a credential; that, with the NewSpace Business Group on their resume, business school students can be assured of at least an interview with investors, companies, and other firms in the space industry.

Q: How can the New Space Industry benefit from your group’s efforts today? Internships? Projects? Other?

Jonathan Card: We have done projects for NewSpace groups already; we helped organize some of the events at the NewSpace 2009 conference (it was this experience that led to me becoming Treasurer of the Foundation) and we did an industry analysis of the future of the CubeSat industry for a Google Lunar X Prize competitor applying modern industry theories of innovation to see if we can establish some insight into the future growth of that technology. Portions of that paper are being prepared for public distribution; stay tuned to http://www.newspacebusiness.org/ or our LinkedIn group for more information on that, probably in December. We are always looking for projects and internships for our participants. The benefits are subtle and more widespread than you may think.

Last spring, we arranged a campus talk by Dannie Stamp, the former COO of Iridium (you can watch this on our YouTube channel); bringing such a luminary to campus was important to the school and it was my understanding at the end of the year that the school was interested in building stronger ties with him. This kind of relationship can be an important way for NewSpace to be highlighted in publications and to be used as examples in classrooms. That kind of publicity, in the context of other topics, is an important way to mainstream what we're doing.

Q: How can the New Space Industry help you become successful? Where do you need help to take the New Space Business Group to the next level?

Jonathan Card: I don't really want to focus on "how can the NewSpace industry help me". It's important to me that this remains a group that comes together to help the industry. Even when we are looking for projects, it's important that those projects are not just make-work for the sake of a good idea. If we can't help NewSpace, there's no point is being a group. If NewSpace can't help humanity, there's no point in it existing. I firmly believe that for-profit businesses, and those of us that believe in the power of the private sector, exist solely to serve others and be others-centered; usually our customers. I guess the most the NewSpace industry can do for us is to remember that we are there for them, and our members are a group of people that will know something about their industry, and if they need something done or they need good people, we are here to help.

Q: If anyone reading this wants to get involved how can they get a hold of you?


Jonathan Card: jcard@email.arizona.edu will still reach me, even though I've graduated, as will any message through the LinkedIn group. This has been dormant for the last few months, but we're revisiting it and will be re-opening it for new members soon. We welcome industry members, students, prospective students, or anyone else that wants to keep up on our activities.

Q: What should I have asked that I didn’t?

Jonathan Card: What are you doing now?

The NewSpace Business Group has alumni at Sargent Controls, which manufactures parts for military and civil space and airplane parts, and we have several members that have started their own businesses after business school.

I'm working at a cloud software company, B50 Data, making software for tracking maintenance for commercial shipping fleets. We're finishing our first round of sales calls without any venture or angel capital, and we're very optimistic. In addition to polishing the paper on CubeSats for publication, I'm finishing a paper overviewing international property law and various means of resolving complex IP legal situations, like those in cloud computing, other than expanding the power of the UN.

I've also started inquiring about re-establishing the Serviceable Spacecraft Committee on Standards at the AIAA so that we can start work on docking, berthing, and refueling standards that we need in order to have things like orbital fuel depots. I've heard so many people talk about how NASA needs to start establishing industry standards, but that's not NASA's job. It's our job, and it's time we did something about it. I've gotten some interest in it from some good people, but it's still an infant idea. I'm also heading up several committees for the Space Frontier Foundation, and I'm investigating some interesting possibilities that may lead to a NewSpace company. Nothing definite yet, but I'll keep you informed.

The Power of Video to grow New Space

Do you remember the early updates Armadillo gave on their rocket development progress?  They were open about both their successes and failures.  First the updates were text based.  Then pictures were added.  And then, with flame in the machine shop, came Video.  And video. And Video.

We not only watched the Lunar Lander Challenge live via the web, but in the months leading up to the official attempts to win the prize, Masten and Armadillo both posted videos showcasing their progress.  These videos became bragging rights, milestones, marketing opportunities, insights into their technologies (you better believe Masten and Armadillo disected each other's videos looking for any advantage).  And even after the LLC, the videos continue (maybe not as many as we would like), but..

Armadillo to an altitude of 2,959 feet.  Video.
Masten first to do in-air restarts.  Video.
Armadillo second to do in-air restarts.  Video.
Armadillo first to use retractable landing gear. Video.

And the video is not poor quality.  These companies recognize the marketing power of these videos.
Multiple camera angles.  Video.
High Quality recordings.  Video.

Video has power.  Video connects a community in a way text and pictures cannot.  Below is a Ted Talk by Chris Anderson on the power of video to promote innovation in a community especially those communities whose finished product cannot be emailed to others (think software).  Chris's talk is 18 minutes.  Watch it and ask yourself, just like Masten and Armadillo, how can New Space use this medium to share more and push humanity out to LEO and beyond.  Thanks Chris.  Good stuff.

Altius Space Machines

I see today, Jonathan Goff announced the creation of the latest new space company, Altius Space Machines. Jon was one of the founding members of Masten Space Systems, winner of NASA’s Lunar Lander Challenge and Masten’s lead propulsion engineer. Now Mr. Goff is leaving Masten to start his own aerospace company.  Masten’s blog highlights their new talent they hired both to replace recent departures and arm the company with the talent to climb to 100KM and beyond.


After reading of these developments, here are a few thoughts:

1. I can’t wait to read more details of what Jon Goff has planned for Altius Space Machines. Jon’s blog, Selenian Boondocks, has long been a source for innovative space commercialization ideas. I look forward to Jon implementing many of his innovative ideas at his new company.
2. I mentioned in a past post how much the new space industry, as a whole, gains by having an increase in the total number of firms. I have described how an increase in the number of new space firms should increase liquidity opportunities for new space investors. In Jon Goff and Altius Space Machines we see a second industry advantage for an increased number of firms – experience in the employee base for the industry. Those employees that were on Masten’s winning team – some are still with Masten (inspiring the next generation of engineers), some are now with Armadillo, and some are starting new firms - all have leveraged their LLC experience for the future benefit of the industry. I love it.

Good Luck Masten.  Good Luck ASM.

5 out of 100 - Deal with It!

If you invested in 100 start-up companies, how many would you expect to be “winners”?  A recent study by Right Side Capital Management consolidated seven recent Angel Investment reports to ask that very question. RSCM's consolidation shows interesting trends:

• Only 5-10% of a portfolio’s investments provided the majority of the returns (most of the remaining firms were a total loss) – 5% winners/95% losers.
• Average IRR (Internal Rate of Return) was 27% across the portfolios (in spite of the fact 95% of companies within the portfolio were losers)
• Portfolio size: at least 100 investments to mitigate risk.

What about space firms? So if you were managing a Space Angel Fund, could you find 100 quality space firms in which to invest? In an earlier post, I encouraged young space firms to develop their companies less like defense contractors and more like Silicon Valley startups by establishing separate companies for each product/service.

For example, New Space Ventures (NSV) invested $$ millions in their micro-launch vehicle system and a year ago also started work on low-cost TPS solutions. With the micro launcher now complete and flying successfully, NSV has attracted several interested buyers for the technology. NSV partitioned the firm into two separate companies, one continuing to pursue micro launch vehicles and one investing in TPS solutions. NSV eventually sold one company and used the proceeds to fund TPS research with additional cash in reserve.

This multi-company approach will grow investment/liquidity opportunities in the industry, but is such an approach really feasible for firms so heavily influenced by their contracting cousins?

Attractiveness:

• Liquidity events generate cash for the business selling allowing them to reinvest in future projects (providing an alternative to additional outside investments or loans).
• More frequent liquidity events are good for investors, and as such make the industry as a whole more attractive.
• More interest from investors encourages entrepreneurs to start companies within the industry further enhancing a virtuous cycle.

Challenges:

• This approach assumes firms have a second product/market they wish to pursue which they believe attractive enough to forfeit a cash payout to their investors and instead reinvest their funds in a subsequent effort (doubling down effectively)
• With many young space firms under-capitalized, they supplement their income through Government contracting. Such an income stream delays the development of even an initial product/service because through contracting you are largely developing the Government’s toys and not your own. 
• Do date, the value of young space companies is arguably the experience and knowledge base of its people and less in company products or IP. If this is true, buyers will want to keep the core team intact when making a purchase. Internet startups often begin this way. Many of Google’s acquisitions over the last few years are companies with an interesting technology demonstrator and a small core team of employees. Google bought the companies’ potential – the product potential and people potential. For example, if a suborbital provider like Masten or Armadillo were purchased right now by Boeing or Northrop Grumman, I assume these industry giants would want to purchase both the IP and the engineers behind the IP. Both firms have demonstrated interested technology, but their real value (since none has yet reached 100KM) is in the risk-taking innovators at both firms. I hope to see this “people-focus” change over the coming year as suborbital firms reach 100KM and begin the switch from R&D shop to operations. At this point, the IP becomes much more valuable as a stand-alone (and marketable) item.

To grow the industry, we need to help new space firms overcome these challenges:

• Guard against income streams too heavily polluted with Government contracting
• Cross-train to ensure the loss of a person to sale is not the loss of a company skill-set
• Develop more than one product line (perhaps not all at first) to prepare for the eventual sale of the company. 
• Start companies with the sale in mind (stop starting firms intending them to grow and prosper for a century!) – this is one of the top questions investors will ask: “where is my liquidity event?”

For the New Space Industry to grow, we need more firms in which to invest. Only 5-10% will be successful. Deal with it. And then start another company…