Transterrestrial Musings

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Rocketplane's previous iteration also had a contract with NASA. Big cash flow boost. But afterwards I decided my new rule of thumb would be:

1 customer dollar = 2 investor dollars = 4 government dollars

Posted by Karl Gallagher at July 9, 2007 08:54 AM

Even if they do raise all the money they're suddenly dependent on the prime hardware contractors for the Project Orion stuff and the shuttle to build their actual physical vehicle.

(Insert picture of Admiral Ackbar here)

Posted by Phil Fraering at July 9, 2007 09:40 AM

Hi All,

Interesting, but not surprising about Rocketplane being forced to choose between the XP and Kistler as a result fo COTS. It was foreseeable as government money is very addicting and rarely in line with commercial needs - witness Orbital Sciences and Transhab.

I expect SpaceX is going through similar hard choices behind the scenes on the Dragon's design due to COTS. Should they optimize it for NASA's ISS resupply needs or for the commercial market? They may think they will be able to do both but history is against them, witness the DC-3/B18 or the Lancaster/Lincoln aircraft.

The funny thing is there are folks who are actually arguing for COTS funding to be expanded. I guess they feel more alt.space firms should get a chance to drink from the poisoned chalice. Or the result will be different then what Boeing or Lockheed delivers.

Posted by at July 9, 2007 12:04 PM

Oops I meant Spacehab, not Transhab in the post above.

Posted by Thomas Matula at July 9, 2007 12:11 PM

You're missing the point, Tom. They're not making a choice between the two. They don't have money to fund either. They are doing an investment round that will provide them with the funds they need to do both. I know you want to believe that everyone is trying to get out of the space passenger business, but it's simply not true.

Posted by Rand Simberg at July 9, 2007 12:32 PM

The problem with COTS is that NASA structured it as a "demonstration" contract rather than a service purchase.

No matter how well the demonstration goes, NASA is not committed to buying any actual cargo flights. So, COTS does not reduce the market risk.

What COTS does do is reduce the amount of capital that a company might lose. So, Company Y only has to raise $250 million before first flight, rather than $500 million.

Company Y now goes to an investor with the good news. Unfortunately, the investor tells them, "I wasn't planning to give you $500 million anyway. The most I might put into a deal like this is $100 million. You're still asking me for $100 million, all of which will be at risk. This doesn't reduce my risk at all."

Unfortunately, NASA does not seem to recognize this as a problem. They are now talking about how they can use COTS as a model for future programs, rather than looking at other models like prizes or service purchases.

Posted by Edward Wright at July 9, 2007 12:47 PM

OMG.

I completely agree with Ed Wright.

Alert the media.

Posted by Jim Muncy at July 9, 2007 02:33 PM

Rand,

But one, COTS, promises Kistler around 240 million if they raise 500 million. The other XP, only has some vague hopes they will make money if they are able to raise the millions needed. Your the CEO. You are only able to focus on fund raising for one. Which do you go for? The big contract with the clock ticking or the small revenue one, the opportunity for which, if there even is one, will still be there years from now?

Investors don't like uncertainty, they like predictable ROI. Which is why Xcor wasn't able to get major Angel funding until they got a substantial USAF contract with the potential for more. And like it or not Space Tourism is still a huge market gamble in the eyes of investors. Not to mention the perceived regulatory and technical gambles investors see. Remember VCs and Angel Investors didn’t make their fortunes by buying into hype, they know how to see through it.

And also this is no breaking news about Kistler/Rocketplane – they have been saying COTS will delay XP since they responded to the RFP. This is just more confirmation of it.

Posted by Thomas Matula at July 9, 2007 04:54 PM

Jim,

I also agree with Ed. COTS as its constructed is just a siren call to lure alt.space firms to their doom by distracting them from building systems with the characteristics actually needed for the commercial markets.

Posted by Thomas Matula at July 9, 2007 04:59 PM

this is no breaking news about Kistler/Rocketplane – they have been saying COTS will delay XP since they responded to the RFP.

Delay != Give up on

I've no reason to believe that they won't go back to XP once they're gotten funding for Kistler. Though I continue to be skeptical that this merger made sense.

Posted by Rand Simberg at July 9, 2007 05:38 PM

Rand,

They received an 18 million tax credit from OKlahoma to build the XP and fly it from Oklahoma Spaceport - so they are not going to admit its dead until they have no other choice. It will "continue" at a low level for years.

But as the article also noted the original design team is gone and the company's center of focus has moved elsewhere. So don't hold you breath looking for XP to fly. NASA's CEV may well beat it into space :-)

Of course lightening may strike and some Angel they really aren't looking for may rain money on them specifically for the XP... But it will be a very low probablity event as they say in statistics.

Posted by at July 9, 2007 07:53 PM

I was about to post that COTS did not cause t/Space to propose a system that was inappropriate for commercial use. Then it hit me: *because* we kept to an affordable-to-develop system, we were passed over in the first round of funding. Saving development cost meant we had limitations in what our system could do. Every criticism of t/Space by the source selection panel could have been eliminated, if we had doubled the payload (and tripled the cost) of the system we were proposing. We thought trying to get the non-NASA portion of a $500-$700 million system funded commercially just wouldn't fly. NASA's leadership knows how to evaluate engineering risk, and will tend to pick the contestants with the least such engineering risk. NASA's leadership naturally doesn't have much experience raising money, so doesn't grasp the tremendous difference between needing to raise $70-$150 million commercially and the $500-$600 million required by systems like RpK. If you are trying show investors a 20x return on their investment in five years, it's the difference between needing to show you'll be worth $2 billion in five years vs. $12 billion. One can spin a scenario for $2 billion... but achieving a $12 billion company value in five years is, sadly, hard to prove with the data available today.

Posted by David at July 9, 2007 08:30 PM

David,

I agree that most non-entrepreneurs--and some entrepreneurs--underestimate ROI expectations. However, I find 20x return in 5 years to be overly, and perhaps unnecessarily, ambitious. Depending upon how long each funding increment is exposed and how much the amount risk is reduced with each increment, then something like fourfold might be attractive enough. After all, this corresponds to about 26 percent compound for six years--which some investors may find attractive in this era of low interest rates. Then your $500-600 million investment might require the company to be worth only $2-2.4 billion, when operational. This might be especially true, if the future growth potential of the company looks solid.

Trying to show a $12 billion worth in five years, I agree, is a rather tall order for any startup project.

AS for COTS, even with a different development strategy, the evaluators may have found some other reasons for rejecting your proposal. In our case, some of the technical objections were patently erroneous. We also found some of the business objections to be at least debatable.

Len

Posted by Len at July 11, 2007 11:47 AM

The problem with telling an investor that you can return 25% a year (after a 3-4 year delay) is that they are in a numbers game. 5 out of 6 of their deals go south. They know this. Only one in six makes it, so to pay for the losers the winner has to return 6 times a normal decent return. The long term public markets return 9-11%, so unless you can claim an ROI of 50% per year that you have the money, they are not interested. And they really don't want to be in the deal longer than 3-4 years. That makes sellng any kind of speculative long term development really hard.

The real proof is in the pudding. How many small space companies have gotten institutional investors? Zero, right? If the returns were there the deals would be closed. Even angel groups, who are mess motivated by ROI, shy away from anything other than seed rounds, which is all you can really call the XCOR investment. If there are groups out there willing to put 100's of millions into space ventures, I have not found them.

Posted by Earl at July 11, 2007 01:24 PM

Earl,

Good post and great explanation on investment finance and the need for high ROI. When it comes to investors, especially deep pocket ones and institutions its about the potential to beat the market return and returns from other competing investments.

The key point is the investors need to see is the potential for revenues from actual markets, not visionary ones, and a high quality management team, one with a solid track record, which is seen to be capable of implementing the plan successfully. Both are usually missing from the alt.space ventures where markets are usually more belief statements based on a vision then a reflection of actual extensive research and the management teams are usually mostly engineers with very limited experience managing firms of the size needed to close their business case.

In short investors look at both the market opportunity in the industry and the track record of the principles in successfully transforming similar market opportunities into profit margins when making an investment. And if one or the other is missing they past as there are many better opportunities in the market place.

In regards to investors willing to put hundreds of millions into space ventures, actually I would argue that they are out there as XM Radio and Sirius Radio demonstrate, along with several space commerce ventures involving the communication industry. However neither XM or Sirius Radio sees themselves as alt.space firms or even space firms. They see themselves as entertainment firms that just happen to use space as one means of delivering their entertainment product to their market. A key distinction.

And this illustrates the second lessons that alt.space firms must learn. Its about satisfying real customers needs and serving real markets, not just building technology for technology sake, or inventing markets, a la COTS, that could disappear with the stroke of a administrators pen.

Unfortunately the vast majority of alt.space firms seem focus first and foremost on an ideological crusade (using free enterprise to open the space frontier) and only secondary on identifying, qualifying and serving markets. In short they put the cart before the horse. Investors see this and steer clear as a result.

Posted by Thomas Matula at July 11, 2007 02:19 PM

the management teams are usually mostly engineers with very limited experience managing firms of the size needed to close their business case.

Tom, I know you attribute all the world's ills to engineers, but Robert Bigelow was a hotel guy, George French ran a sign business, Jeff Bezos was a book seller, Richard Branson was in the music business -- are they not liberal artsy enough for you? :-)

Unfortunately the vast majority of alt.space firms seem focus first and foremost on an ideological crusade (using free enterprise to open the space frontier)

So, when are we going to see a successful tom.space firm focused on your ideological crusade?

Which, by the way, seems to keep changing. A few years ago, you were all for Apollo II and the Bush Vision of Space Exploration. Last year, you suddenly became a VSE skeptic and started to like military and commercial human spaceflight. Apparently, that didn't last, either. So what is it now? You've told us what you're against, but what are you for?

Posted by Edward Wright at July 11, 2007 03:08 PM

Ed,

And note that Bigelow space, Blue Origins and Virgin Galactic have their plans fully funded. And don't forget Elon Musk who has a degree in finance from the Wharton School. I suspect he will have no trouble fund raising after the Falcon I is operational. So your point is?

As for Rocketplane, IF taking over Kistler allows them to become a solid government contractor and satellite launcher like Orbital Science then I would say George French did ok for the stockholders moving them well beyond the limited revenue potential of the XP and Space Tourism.

After all even the most optimistic estimates place space tourism at only a 700 million dollar market in 15 year IF every goes perfect and everything falls in place as the optimists hope.

http://www.flightglobal.com/articles/2006/06/20/207331/space-tourism-market-valued-at-700-million-a-year-us-consultants-futron-survey-reveals.html

Space tourism market valued at $700 million a year, US consultants Futron survey reveals

[[[By 2021 space tourism could be worth $700 million annually and launch 14,000 tourists a year, says a new market study. The survey, by US consulting firm Futron, is based on interviews with hundreds of high net-worth individuals.]]]

Divide that between 3 or 4 firms, add in the regulatory costs and liability risks and the profit potential is not anything to investors will get excited about.

By contrast the global satellite launch market is already in the billions NOW.

http://www.gisdevelopment.net/news/print.asp?id=GIS:N_htezocajgw&cat=Business%20News&subc=

Brazil-Ukraine joint venture space company eyes global satellite launch market; to start operations this year

[[[Brazil, 20 February 2007 - An agreement between the two countries establishes that Brazil will open up its space base in Alcântara, in the northern Brazilian state of Maranhão, and Ukraine will provide its rocket launching technology. The objective is to enter the competition for the global satellite launching market, worth US$ 10 billion.]]]

And its an existing market in the eyes of investors - as they say a bird in the hand…

However the jury is still out as it is a very risky move, especially after taking the tax credits from Oklahoma for the XP. And NASA is a very risky customer to depend on as your anchor, they need expand and get some DOD contracts lined up as well.

However IF they get the K-1 operational and IF it lives up to its potential as a satellite launcher then the gamble could pay off and they could have a viable company for attracting investors.

Their big challenge is the need to raise the 500 million for COTS. That is a huge hurdle and COTS does not make the investment case easier for Ksitler/Rocketplane as you pointed out. Their only hope is to demonstrate the K-1's potential for the satellite market, its original mission.

Also I am still for the VSE. What I am against is the ESAS which is the wrong way to do the VSE and violates the idea of making it a sustainable lunar return. But that is another thread.

Tom

Posted by Thomas Matula at July 11, 2007 07:27 PM

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