jump to navigation

The “Money Cynic’s” View

The seeds for my space cynicism were sown back in early 2005. At the time I had already spent several years building on an idea I’d had regarding a new funding mechanism for space and space-related startups. While the financial boilerplate and business plan I and the rest of the CFI team had developed was sound on paper, and we were on the verge of gathering enough angel-partner investor commitments to pull the trigger, a series of events brought everything crashing to a halt. (Well, it didn’t HAVE to crash to a halt, but I am an ethical man, and didn’t want to take people’s money based on premises proven to be far less sound than originally believed.)

I had two challenges. The first was that the success of our endeavor was based on doing distribution deals with regional brokerage firms, allowing them to have the upfront “load” in exchange for the use of their established sales networks and marketing capability. Otherwise, we’d be forced to raise 3-1/2 to 4 times the initial amount of startup capital we’d originally projected, as we would need to build out our own sales/marketing organization and broker-dealer infrastructure from scratch.

The “wall” here was that the brokerages I approached all wanted a much sweeter deal than we were willing to reasonably offer – one that would not only limit corporate revenues significantly, but also surrendered much of our authority over key investment decisions, which, of course, defeated the entire purpose of the exercise. (I was reminded of post-WW2 disruptive carmaker Preston Tucker, a man who was convinced by well-meaning advisors that he needed to put retired Big 3 execs on his board in order to attract startup capital. These men then took over the company and tried to “redesign” the flagship Tucker Torpedo to a more “conventional” look and feel. I did not want to have a parallel experience!)

But the second and even more important challenge was the ETF investment strategy itself. After years of both developing this ETF product and looking under the hood in detail at the actual availability of compelling investment opportunities in the alt.space sector, I began to become more and more discouraged. Potential angel capital partners (including the OldSpaceCadet himself) kept hounding me with “What are you really going to invest IN, should this ETF be fully subscribed?” I found myself giving vague, non-committal answers that even I, deep down, found troublesome. By late summer, 2005, I had to reluctantly conclude that the original investment strategy, expounded upon in the business plan and elsewhere, was fundamentally flawed.
The types of firms that were being considered for the overall portfolio were found to (1) have a low/poor track record, (2) an inability to articulate a comprehensive business vision, and/or (3) the team was too thin (heavy on engineering and short on business) to engender confidence in the firm’s ability to make even a well-thought-out business vision a reality. I learned that “If we build it they will come” was the keystone of most business models presented to me, along with the ubiquitous PowerPoint slides and 3-D animated graphics. More sinking of the heart ensued. The kool-aid had finally worn off and I wasn’t ingesting any more. I realized that it might actually be years before the market would be ready for something like this, an even harder lump to swallow.

The rosy picture had faded, and simply because I understood basic business, economics, finance, and markets, and applied them to this industry the same way I would any other tech sector business. I needed to get back to the drawing board. I stopped everything cold.

Once I made that decision, I gained a great sense of clarity, and felt as though a great load had been lifted. I had decided to “see” instead of just “look”. The down side was a Cassandra-like sense of isolation from the community I had grown to care for, and wish to succeed. I found another cost of “seeing” as opposed to “looking”, can be marginalization and vilification, being called everything from “not with the program” to “a lost cause”. I lost friends over it – some were long-time friends. I ended up spending about three years “in the wilderness”. I also took on another project that came out of the blue, unintentionally.

Nevertheless, I still spent much of my time looking under the hood at space or space-related startups (mostly failed or on life support by that point), and began writing for the Cynic. I got involved with the Space Investment Summits, thus using my newfound “wisdom” to ensure the success of that program would not be tainted with smoke, mirrors, and kool-aid. I have continuously lamented about the throwing of good money after bad at this community (hence I got the nickname “Money Cynic”), and wish we could find ways to do better. Nearly five years after Burt Rutan and SpaceShipOne won the XPrize, I find the signal to noise ratio for space startups and proposals to be worse and more kool-aid laden than ever. While some alt.space cheerleaders have declared the Giggle Factor dead, they are either being extremely disingenuous or really out of touch.

Other than a handful of key players who are self-funded (Virgin, SpaceX, Blue Horizon), there has been very little new (major) independent investment capital infused into the community – hence one sees the “usual suspects” at every space conference and investor event, sniffing about for another potential sucker with more money than brains. They manage to scrape by somehow on $25k here, $100k there, with the continual cram-downs of previous investors at similar levels. They seem to spend more time whoring for money than they do bending metal.

That’s a long exposition, but I needed to purge my soul. I consider myself lucky. I could have lost a lot more than friends, and five years of my life, had I blindly attempted to soldier on and not take a hard look at reality.

But I remain, like the other Cynics, a firm believer in the promise of the high frontier. So how do we get from here to there? How do we get from where we are, a handful of small firms struggling to build capability on a dream, a prayer, and razor-thin budgets, to a robust, healthy, private-sector space flight and space services industrial sector profitably moving thousands of passengers, and tonnes of freight into orbit (and beyond) each year, ultimately leading to self-sufficient settlements on the moon, Mars, and the asteroid belt?

In the spring of 2008, I began to rethink the problem, and got a mild epiphany. The result of that epiphany was an effort leading to both a major presentation at ISDC in May of that year, followed with a paper submitted at the IAF conference in Glasgow the following fall. (And if you read between the lines, you just might find the seeds of an investment strategy that solves my previous problem with CFI! But that’s my future. Go get your own.)

So we finally get to the “positive” part. What can we do, as either investors or entrepreneurs, to make a real difference?
I began with The Goal, expressed three paragraphs above, and worked backwards. That Goal requires the solving of a LOT of problems, at many different levels. But, first and foremost, we all need to remember that entrepreneurs exist to solve problems. So in this context, I saw each “problem” presenting entrepreneurial and investment opportunities for somebody, somewhere, opportunities that would lead to near term profit on Earth, and ultimately extend into orbit and/or beyond.

In my various papers I broke down the “problems” of space enterprise and settlement into the following overall categories: Sustenance, Energy, Health, Resource Utilization, Communications, and Transport. There may be more. But under those core headings there are many, many subheadings that could lead to business opportunities, particularly in the areas of materials science, nanotech, biotech, agriculture, mining, resource imaging, information tech, electronics, and yes, even “transport”. Plot this out yourself on a blank sheet of paper, and see what you come up with. The possibilities are endless.
Advice? Well, to begin with:

  1. Make sure you are actually solving someone’s problem: The vast majority of New/alt space plans I see don’t solve any problems at all, except for the problem that the founders of the company have, which is “…get us into space, some way, somehow, regardless of who we have to bamboozle to get the cash to do it.”
  2. Get away from the “build it and they will come” business model:  I’ve seen very little real evidence that this model works, even in the tech sector. I see this most of all in the area of suborbital tourism. From straight up-and-down suborbital joyrides, proponents claim thousands of passengers will be taking trips in only a few short years. Of course, the next step will be point-to-point (P2P) suborbital travel, taking passengers or high-end freight halfway around the world in a couple of hours. I have yet to see an actual business plan that convinces me suborbital P2P has a market, especially in this economy.

But the real show-stopper with sub-orbital P2P may be development costs. Turns out physics is a bitch.

A paper I read recently – presented at a high-end tech conference awhile back – showed that going from up-and-down suborbital to long range P2P is not an incremental-steps development approach at all, as proponents suggest, but rather a huge leap. Since the presumption is that we’re going to use a ballistic, rocket-powered craft for P2P suborbital, as opposed to an air-breathing scramjet or something else, then the rules of rocketry still apply.

Note the following chart (presented with permission of the author):
range

If all you need to do is go straight up and straight down 62 miles, you only need to reach a max velocity of 2,500-3,000 mph. SpaceShipOne handled that just fine. But as soon as you begin to “go horizonal”, as it were, other forces and energy requirements come into play. To go even one-fourth of the way around the world (90 degrees, or about 6,300 miles), the necessary delta-vee is 90% of orbital, about 16,000 mph, even if only for a few seconds of impulse.

This has huge implications for g-loading and re-entry thermal shielding, adding a lot of rest mass to the system. So the argument becomes that any useful P2P sub-orbital system will actually be an orbital system with a little less fuel, as opposed to some hypothetical 3rd-gen improvement to current suborbital systems being developed. That significantly changes the equation concerning capital requirements and costs.

But hey, here’s a way to avoid all that frustration entirely:

3. Get completely away from Launch, Tourism, and Spaceports.

If you attend a lot of space advocacy conferences, you might conclude from the presentations and talks that launch, tourism and spaceports are the only things out there that matter. They certainly have the Coolness Factor, and attract lots of True Believers. These are also, of course, the most capital-intensive efforts, with a very long time horizon to a return, if one can be said to exist at all. There are tonnes of other deals out there that will make you money right now, solving problems here on Earth, but may also solve a problem or two in space later on. It’s that sort of “scalability” that drives my present strategies.

An example I frequently use is a firm in the NW I’m working with, which is in turn working to commercialize a rather unique, and potentially very disruptive, electric motor. Commercial uses include hybrid cars, trucks, and motorbikes, commercial-vehicle regenerative braking, and wind-power generation. When I first saw the thing, however, I visualized it powering a Mars rover – simplicity itself, one moving part, lots of torque, no maintenance. Just the thing scientists and settlers alike will one day need.

Another example is the development of “microfiber nanogenerators,” designed to generate energy within a person’s own clothing by means of his/her body movements, to power personal electronics. In addition to giving the dying textile industry in NC a new lease on life, might this also end up a standard feature in spacesuits?

So to reiterate:
(a) find and develop a technology that both solves a problem on Earth now and can be scaled to solve a problem in space later – a product/service that customers will demand,
(b) make lots of money doing this, and finally
(c) invest a portion of profits from the established terrestrial ventures for the R&D to solve the space problem when the time is right and demand exists.

I would add as a cautionary note: (d) limit government contracting to no more than 20% of the total business. Staying in the rough and tumble of market competition keeps a firm lean, fresh, innovative, and profitable. Increasing government contracts, while great when you can get them, can become addictive, may ultimately create a dependency relationship, and change the corporate culture to something unrecognizable from the original vision. You’ll wake up one morning to find you have more lawyers, lobbyists and paperwork generators on the payroll than you have engineers and product developers.

Of course, I get a lot of pushback from new/alt space firms embedded in the launch/tourism/spaceport categories. Sorry. We’re not going to be significantly lowering launch costs until the fundamentals of rocketry themselves can be altered. For that, we’ll need higher ISP fuels, combined with core booster components made of something OTHER than metal (yet lighter and stronger) to seriously reduce the empty pad weight, thus increasing payload capacity. For that latter you’re going to need materials science, with a heavy dose of nanotech, probably. I don’t see any breakthroughs in that area for at least 20-25 years, so I don’t focus on it. Even Elon Musk of SpaceX can’t force himself to drink the kool-aid anymore, and admitted publicly at 2008’s ISDC that the only “economic efficiencies” he’ll be able to add to the industry will be “at the margins”, a reluctant admission that the Rocket Equation really, really works. So in the near term, expect no more from him than single-digit percentage reductions in launch cost – and that’s assuming that global demand for launch services doesn’t erode still further from its late 90’s peak.

Launch is important, obviously, but it’s only one piece of a Very Large Puzzle (think “Foundation Trilogy” large), a single problem to be solved in order to make a true spacefaring civilization a reality. There are a lot of other problems to be solved as well, problems that will make human lives easier along the way, right here on Earth, and profitable for entrepreneurs and investors alike. I know there may be less “coolness factor” in a factory making “smart fabrics”, or “labs on a chip,” but our grandchildren will come to depend on them, as well as lots of other necessary innovations, for living at a Mars settlement decades from now. We still have a generations’ worth of work to do. We have to regain our sense of patience, stop wasting energy and capital in a fruitless grab for brass rings, think very long term, and roll up our sleeves.

Comments»

1. Jim Davis - June 16, 2009

“How do we get from where we are, a handful of small firms struggling to build capability on a dream, a prayer, and razor-thin budgets, to a robust, healthy, private-sector space flight and space services industrial sector profitably moving thousands of passengers, and tonnes of freight into orbit (and beyond) each year, ultimately leading to self-sufficient settlements on the moon, Mars, and the asteroid belt?”

Mr. Olson,

I would add one more piece of advice:

4. Give up the arrogant notion that anyone can accurately predict what the future 50 or 100 years from now will be like. No one knows what the long term future will be like so abandon the idea that one has to act in a manner that will “get” one there from here. Predicting the near term future is fraught with enough difficulties.

2. Thomas Olson - June 22, 2009

Tell that to the SBSP proponents, who arrogantly assume they can predict national and global energy demand for the next 90 years! LOL

The real key is flexibility, regardless of where you’re coming from, but especially as an investor, but always with an eye on the prize.

And yes, I do have my own skin in the game.

3. nick - June 29, 2009

I concur with the strategy Money Cynic describes — call it the reverse spinoff strategy. I once wrote about chemical microreactors as a good example of a technology that could solve problems on earth today as well as those of developing a space based civilization in the future.

Another interesting pathway business is deep sea minerals extraction — already a multi-billion dollar per year industry for oil and a growing industry for diamonds. Furthermore, several startups to extract a variety of metals are currently developing technology and conducting exploration. Our generation need not bother with mining asteroids — we still haven’t mined the two-thirds of the surface of our own planet that is under the waves.

The underseas extraction industries are helping to create economical solutions to problems in automation, teleoperation, and reliability crucial to future development of space-based civilization. The business and legal issues they are tackling are also in many ways similar and will set precedents.

4. Bob Steinke - October 12, 2009

In thinking of my response, it helped me to try to combine and condense both the old space cadet’s view and the money cynic’s view to distill the main points. Here’s what I got. I did a lot of lumping together. Let me know if you think I missed a major point.

1) Stop personal attacks.

2) Progress in space launch will come through slow evolution of existing commercial orbital launch markets. You probably can’t have much of an effect here.

3) Reality check and tone down unrealistic rhetoric.

4) Get away from “build it and they will come”. You should not attempt to address currently non-existant markets.

5) There are currently no viable new space business plans out there that can provide market competitive risk-adjusted return. Key players that are making progress are self-funded.

6) Suborbital tourism is a niche not on the primary path.

7) Cannot get to suborbital point to point as evolutionary successor to suborbital straight up and down.

8) Scorpius is a good example of how progress in space launch might be made, but its success is not assured.

9) Don’t work on space launch, work on supporting technologies.

Here’s my response.

#1

Completely agree.

#2

Yes, if we left it alone the current orbital launch market would probably eventually evolve into the high flight rate, low marginal cost, successful, boring industry that we all want, and this might take 50 or more years. The new space vision is that we can somehow catalyze a revolutionary change that will shorten this schedule.

The specific mechanisms of how the change can come about are high flight rate and new markets. It is possible to make a significant shift in the economics of spaceflight just by going to high flight rates without any change in technology. This requires demand at those flight rates. I’ll talk about new markets in section #4. There’s no guarantee that it will succeed, but I think it’s at least possible, and worth trying for.

#3

Yes, people should try to have realistic expectations. However, I think there is a little more nuance here. I think it was John Carmack who said, “Building rockets turned out to be harder than the new space people thought it was, but easier than the traditional aerospace people thought it was.” In trying to make a revolutionary change new space people started with the vision that it was possible to be much cheaper and started trying things.

It would have been better if they had taken the attitude that this is going to be a money-losing learning experience of indefinite duration rather than thinking it would be a money-losing phase of no more than two to three years before profits start flowing. But it seems like the space cynic view goes beyond, “go in with your eyes open”, to be more like, “they shouldn’t have even tried”.

When you know there are lots of unknown unknowns then I think it’s a valid strategy to dive in and try the naive thing expecting to fail and learn something. There are situations where that is the best way to learn.

Another problem with unrealistic expectations is when you are looking for money. This is a valid criticism of the new space community. However, there are people willing to contribute money (notice I say contribute, not invest) to a project that isn’t a good investment on a purely financial basis in order to achieve the non-financial goal of advancing the new space vision. This, to me, is the key trait of angel investors. Not just an investor who is interested in a particular industry, but an investor who is willing to accept smaller or even negative returns to advance some non-financial goal.

As far as people who thought they were investing to make money and felt misled about the realism of expectations, I don’t have any visibility to say how often that happened.

#4

New markets are probably the hardest piece of the puzzle to implement the new space vision. You can’t know for sure what the market will be until the product is available. So the existence of new markets and the idea that they will be big enough to support a new product has been taken to a certain extent on faith. There are ideas of what those markets might be, and work to try to characterize the potential markets, but we really can’t know for sure until after developing the product.

However, we can know for sure that new markets are a necessary requirement for the revolutionary change we want to see. They might be there, or they might not. And if they are not there we are doomed to failure. And there’s no way to know if they are there or not except to make the product.

The existence of new markets is definitely a big risk factor for new space. But there’s only two choices, don’t try, or try and probably accept less than market competitive risk-adjusted returns for your money. There are a lot of people who feel the non-financial goal is important enough to choose choice two. The space cynics don’t feel that way, but they shouldn’t disparage people who do.

The situation is also rapidly changing. There is more and more concrete evidence that there are people willing to pay for suborbital tourism or suborbital science. I would be curious to hear if the cynics feel this is progressing toward the level where they could take it seriously, or if they still think it is just as much a fantasy today as it was ten years ago, and if that’s the case what do they make of the Virgin Galactic deposits and suborbital science workshops?

#5

If you are looking at new space business plans from the point of view of a traditional investor who just wants a financial return, then you are probably right at this time. But I think for an angel investor who looks at non-financial goals as part of the ROI there are organizations that will give you good value for your money.

And, with several groups getting closer and closer to revenue flights they could soon become attractive as traditional investments.

#6

It’s clear to me that a two stage (or even three stage) orbital rocket can be built where the first stage has performance requirements similar to an up-down suborbital tourist rocket. It would be bigger than the vehicles currently being developed, and there will be additional hurdles to overcome, but the technology and expertise should transfer. This is the technology evolutionary path from suborbital to orbital.

There’s also a business and regulatory evolutionary path. by going through the mill once and starting to get revenue suborbital companies will be much better prepared to deploy an orbital launch product.

#7

You are right that suborbital point to point is basically as hard as orbital. I think this was meant as a counterargument to people who say that point to point can be a stepping stone between suborbital and orbital. It doesn’t matter because there is a direct path from suborbital to orbital.

#8

I really like Scorpius. Low part count expendables are a good way to achieve low costs, but not the only way.

#9

Also good advice. We could use a lot more people working on supporting technologies, but I wouldn’t have people currently working on space launch abandon what they are doing.

5. We’re Letting Carl Sagan Down « FocusedFire – Targeted Common Sense - February 24, 2010

[...] (as a lot of people with disagree me about the value derived from either), there is significant opportunity and reason to invest in the aerospace industry and begin building the technology to begin our real [...]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: