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Rise of Space Cynicism December 11, 2007

Posted by Robin in angel investing, hot air, investment, smack talk, venture capital.
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(Note: this is a guest post from a sometime cynic, sometimes tragic…)

Nosy Reporter encounters leading Space Cynic and other cautious Advocates of the spacefaring thing at Space Investment Summit 3:

Space entrepreneurs launch ideas at investors

Rocket racers and other concepts are received as mere flights of fancy.

By John Johnson Jr., Los Angeles Times Staff Writer
December 10, 2007

Such blue-sky imaginings drove investor Shubber Ali crazy.

“They’re smoking crack,” said Ali

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1. Starry-Eyed Space Nut - December 12, 2007

There’s a question that, for me, sums up why this is the wrong attitude: If SpaceX had been forced to hold itself to Cynical standards to get funding, where would it be today? The answer, of course, is nowhere – it would be a hobby shop with a little office in some obscure corner, like virtually every other hardware-centered alt.space firm, and it would be lucky to have built a small engineering prototype of the first version of Merlin. Cynicism may be a good strategy for the investors themselves, but for an industry at this stage it’s a self-fulfilling prophecy. To avoid wading through manure, you refuse to sow the fields, and then congratulate yourself on your foresight for not having wasted your seeds on such barren ground.

2. shubber - December 12, 2007

To avoid wading through manure, you refuse to sow the fields, and then congratulate yourself on your foresight for not having wasted your seeds on such barren ground.

Something smells like manure around here… methinks it’s your flawed analogy and pithy commentary.

If SpaceX had been forced to hold itself to Cynical standards to get funding, where would it be today? The answer, of course, is nowhere – it would be a hobby shop with a little office in some obscure corner

Interesting thing about that – SpaceX didn’t “get” funding – it was self-funded by a dot.com billionaire precisely because such ventures aren’t investment-grade by a long shot. And if you actually took a moment to dismount from the billionaire-worship merry-go-round that characterizes the current phase of alt.space delusionary behavior, you might take a close look at SpaceX and their business model and recognize that they are (if successful) going to be the Dell Computer of the ELV business – i.e., they can lower the cost of access versus Boeing, Lockmart, and their brethren, but the creation of the Falcon is not going to “open the frontier to the masses”, kool-aid and bad analogies notwithstanding.

3. TomsRants - December 12, 2007

…The answer, of course, is nowhere – it would be a hobby shop with a little office in some obscure corner…

Many so-called “new space” endeavors would love to claim even that, actually. More often than not, they are nothing more than a bunch of PowerPoint slide shows and fancy 3D animations, hiding behind a NV or DE C-corp or LLC for legitimacy.

Not that there’s anything wrong with that, to mis-quote Seinfeld. If you’re a raw startup, be honest about it and present to the folks who look at those for angel investment. It’s the smoke and mirrors firms who try to be something they’re clearly not that stoke the Cynic’s ire.

4. Starry-Eyed Space Nut - December 12, 2007

it was self-funded by a dot.com billionaire precisely because such ventures aren’t investment-grade by a long shot.

SpaceX is already profitable. Meanwhile, where are all those firms pushing satellite-guided vibrators and GPS-equipped salad forks that a cynical investor would consider “investment grade”? Whatever they’re doing, they certainly aren’t turning a profit, and likely won’t until a firm like SpaceX with serious objectives helps make their trivial, niggling business plans cost-effective.

5. shubber - December 12, 2007

SpaceX is already profitable.

Very impressive, with a rocket that has yet to have a successful flight. And by successful, I mean that annoying commercial world definition that relies upon actually delivering a payload to orbit as intended.

Meanwhile, where are all those firms pushing satellite-guided vibrators and GPS-equipped salad forks that a cynical investor would consider “investment grade”?

Wow, are you angry much?

To dismiss the $100+ billion segment of the commercial space industry shows your complete lack of a grasp of commerce, investment, and basic finance. Names like Garmin, DirecTV, XM Satellite Radio, all represent REAL companies that have millions of customers who pay for services – hardly your “vibrator” companies.

Thanks for playing, though.

Whatever they’re doing, they certainly aren’t turning a profit,

Wrong.

and likely won’t until a firm like SpaceX with serious objectives helps make their trivial, niggling business plans cost-effective.

Wrong again. Your inability to grasp the concept of companies whose business plans (and profitability) are not dependent on the cost of space launch is clearly demonstrated by your comments.

6. Starry-Eyed Space Nut - December 13, 2007

Very impressive, with a rocket that has yet to have a successful flight.

It’s called beta testing.

To dismiss the $100+ billion segment of the commercial space industry shows your complete lack of a grasp of commerce, investment, and basic finance.

What you’re referring to are a miscellaneous assortment of industries that use space at some point in their supply or delivery chain, not “space industries.” And the vast majority of them contribute effectively nothing to the advancement of space infrastructure, technology, or business viability. Amazon.com is not an “aeronautical” industry just because its packages might end up on a plane at some point, and whatever they contribute to aviation in the process is marginal and indirect at best. By Cynical standards, it would appear that no actual “space” business should be funded.

Your inability to grasp the concept of companies whose business plans (and profitability) are not dependent on the cost of space launch is clearly demonstrated by your comments.

Companies who aren’t affected by the cost of space launch or other technologies directly involving space transport have no effect on it by their success, and are irrelevant. If anyone can tell me exactly what XM, Sirius, DirecTV, and the other companies you mention have actually contributed to space capabilities, I’ll be glad to hear about it.

7. shubber - December 13, 2007

Amazon.com is not an “aeronautical” industry just because its packages might end up on a plane at some point, and whatever they contribute to aviation in the process is marginal and indirect at best.

By your definition, Fedex is not an aviation business, nor is Starkist a maritime company.

By Cynical standards, it would appear that no actual “space” business should be funded.

Show me one that fits YOUR “definition” of a space industry business that does deserve funding. And by deserve, recall we are discussing investment-worthy, not because you are a space tragic who (cue 9-year-old voice) really really really wants to go to space, golly gee.

But I’m sure the folks at publicly traded aerospace firms like SES are glad to know they aren’t in the space industry, so they can stop attending industry conferences and save their money. Then the audience will be left to launch industry saps.

8. shubber - December 13, 2007

SpaceX is already profitable.

And I meant to challenge you on this bold comment – do you have any proof to back this up? Or are you just making an unsubstantiated claim?

(not that alt.spacers, especially ones afraid to use their real names, EVER do something like make unsubstantiated claims).

9. TomsRants - December 13, 2007

If anyone can tell me exactly what XM, Sirius, DirecTV, and the other companies you mention have actually contributed to space capabilities, I’ll be glad to hear about it.

Sure…they’re something called “customers”…and they DID contribute to space development activities by purchasing services. You think the government launched all those satellites for them at taxpayer expense? Some of the large fees they paid out for those services put profit in the launcher’s pockets, at least a little of which could have gone for additional R&D to improve their launchers and other services.

10. Daveon - December 13, 2007

By Cynical standards, it would appear that no actual “space” business should be funded.

And your problem with that is?

Seriously, the whole point of investing your money in something is because you’ll get more back. Anything else is charity work, or a hobby – I’m really happy that there are some billionaries out there who are willing to take this on, although, even Musk said in some interview there could come a point where his wife will tell him to stop wasting their money. I think he mentioned 6 or 7 consequetive failures.

I would love to be able to go into space myself, I’ve been on Concorde, I’m planning to do some fighter jet flights next time I’m in South Africa (www.thundercity.com) and if the prices come down to sport’s car (rather than super car money) I might go for sub-orbital. But I’m not deluding myself that many other people share my hobby. The wife certainly doesn’t.

11. Guy in trenches - December 14, 2007

He said three consecutive failures… at least, he did at one time, don’t know if he’s since backpedaled from that number. Given other statements of his, I wouldn’t be surprised.

Sorry, don’t have a link. I recall it was after the first failure. I think the same interview (or one in the same timeframe) had him saying he’d sell his house if his wife would let him. At the time I figured he was trying to scare off potential competition, or at least competition that wasn’t already funded (i.e. Bezos, Branson, etc.) by that point. Now I’m sure of it.

12. Eric Haynes - December 14, 2007

Musk has said in the past “If we have three consecutive failures, it’s not clear to me that we know what we’re doing and maybe we should go out of business” but I bet right now he’d accept more failures as he’s devoted to being the ONE American company that can resupply the Space Station since NASA won’t fly from 2011-20?? That’s probably why he got the Cape Caneveral Lauch Complex 40 too.

13. Starry-Eyed Space Nut - December 15, 2007

By your definition, Fedex is not an aviation business, nor is Starkist a maritime company.

Nor are they. If FedEx disappeared off the face of the Earth, there would be no appreciable effect on aviation or the ability of other companies to utilize it. And Starkist isn’t even a valid comparison to FedEx – they package seafood, they don’t own fishing fleets. You could just as soon call them automobile companies because their employees drive to work and their products are delivered by truck.

Show me one that fits YOUR “definition” of a space industry business that does deserve funding.

My definition of a space industry business is one whose product or service directly facilitates access to, presence in, or travel through space. SpaceX, Bigelow, and Virgin Galactic are (or will be) examples of this, as are the firms that actually build and launch XM, Sirius, and DirecTV satellites. Firms that purchase these services are merely consumers of space access, not space businesses in their own right, and their contribution is both indirect and marginal. Not zero, but investing in them won’t do jack for the space industry.

And by deserve, recall we are discussing investment-worthy, not because you are a space tragic who (cue 9-year-old voice) really really really wants to go to space, golly gee.

According to you, SpaceX had to be self-funded because it wasn’t investment-worthy, and yet it’s the definitive case of exactly what type of business should be funded. The aggregate billions invested in XM, Sirius, DirecTV, and other space customers have done squat for the industry compared to what Musk’s $100 million + COTS will likely accomplish.

And if your only criteria for choosing between them is return, why invest in this industry at all? There are far higher returns in some other markets. The only reason to put money into space at this point in its development is to see the industry advance, in which case providing startup capital for customers to the exclusion of providers is simply daffy. That kind of thinking is why cars still run on gasoline and transcontinental aircraft are still subsonic – pour money into the tried and true, and blindly follow the maximum return curve right into stagnation.

And I meant to challenge you on this bold comment – do you have any proof to back this up?

“The company will have earned more than $100 million in 2007 after having become profitable for the first time in the fourth quarter, [Musk] said.”

http://www.reuters.com/article/AerospaceandDefense07/idUSN0344600420071204?pageNumber=2

14. oldspacecadet - December 15, 2007

The “profits” come from deposits for future launches, not for income generated from delivery of services or products. Thus, if these deposits are escrowed and exceed current expenses, a “profit” is artificially generated. They apparently do not include NOL carried forward.

15. Guy in trenches - December 17, 2007

oldspacecadet is right- for how many ventures has (the former) Hughes Space purchased options, in an attempt to sprout new competitors in the launch market? And how many of those options turned into actual satellites on station? Methinks the actual satellites got on station on Proton, Ariane 5, and Atlas III. (And possibly Sea Launch, depending on when you consider Hughes to have become Boeing.)

GM had similar (but inverse) issues, when it was found that they were counting as “sales” autos which were built, but sitting on lots in the middle of nowhere. Considering SpaceX will have GM-style payroll and industrial-footprint issues, a good share of rides will lose that gleam in the eye when the cost of Falcons are re-rationalized to actually cover ATC instead of marginal. Musk himself did not deny rumors of more-accurate pricing, when the issue was brought up… by him.

16. Starry-Eyed Space Nut - December 18, 2007

I don’t know the history of Hughes Space, but I don’t think there is anyone of significance in the space industry with serious doubts that SpaceX will ultimately be a viable low-cost launch provider. So the fact that their profits to date come from deposits is neither here nor there – they are not going to keep failing and fold up.

As for how realistic current prices are, they will never have to reflect development costs – Musk is retiring them out of his own pocket and through COTS. And when it comes to work force and industrial footprint, we don’t know how much of that is just ramp-up to get things operational, particularly for COTS deadlines. In other words, he may simply be front-loading expenses, which in the long-term would make prices even lower once volume catches up. They’ve already demonstrated efficiencies way beyond anything available through their competitors, and they could have fixed the issues with the last flight and easily flown a couple of months later if they hadn’t chosen to accelerate their plans and use the 1C for the next flight. Things are going swimmingly for SpaceX.

17. Starry-Eyed Space Nut - December 18, 2007

Correction: They could have easily flown a couple months later if they had merely corrected the problem that initiated the failure by making the flight software robust, rather than eliminating every single contributing hardware event that followed. The decision to add baffles and alter the staging to avoid collisions in sub-optimal conditions forced the date way out to January, and then the decision to use 1C pushed it out another couple of months. I thought those decisions were overkill, but I trust Musk.

18. Jonathan Goff - December 18, 2007

One quick note, from all the sources I’ve heard, SpaceX is still “only” cashflow positive–not yet profitable. It’s a huge step in the right direction, and they may well be profitable by some counts before they ever fly anything. But I figured it was a distinction worth making.

~Jon

19. Professor L - December 19, 2007

As has been stated on The Space Show by both Elon and Gwynne, all Space X launches so far have been successful as they have been test flights proving out concepts, systems, etc. So there have not been two failures as the test flights have worked, provided the information they wanted, and so on. Since its their game, we go with their definition. Being cash flow positive is not the same as being profitable. Here is a question for those who read and respond to these comments: If a company only gets money from NASA or the government for doing a, b, or c, and that is the only source of money for the business, is that really a profitable business? How would one assess the risk for that business? Who among you would be an investor in the business or would you want to see some diversity in the cash flow, product line, and customer mix? I’m curious as to how blog readers would evaluate this hypothetical business.
Professor L

20. shubber - December 19, 2007

As has been stated on The Space Show by both Elon and Gwynne, all Space X launches so far have been successful as they have been test flights proving out concepts, systems, etc. So there have not been two failures as the test flights have worked, provided the information they wanted, and so on. Since its their game, we go with their definition.

I actually prefer a market-based definition of success. If they were test flights, then fine – but let’s be fair and agree that they have not had a single successful commercial launch of the Falcon to date.

Being cash flow positive is not the same as being profitable.

100% agreed. Furthermore, simply writing off the initial investment does not make the business a “good investment” as some would believe – in fact, it further supports the point that absent of private funds, such a venture would never happen because normal investors would not accept a write-off of their investment, and equally, if that investment were incorporated into the ROI calculations, the denominator would become so large as to make the investment unattractive and thus drive away such investors.

Here is a question for those who read and respond to these comments: If a company only gets money from NASA or the government for doing a, b, or c, and that is the only source of money for the business, is that really a profitable business?

Sure it is – as long as you have a stable, predictable customer, the market doesn’t care too much if it is government or private. Lots of very profitable companies have huge volumes of contracts with the Federal government, especially in the defense environment. That doesn’t make them “unprofitable”. Profit is simply the excess return above and beyond all appropriate costs allocated to the delivery of a good or service.

How would one assess the risk for that business?

There are a number of criteria (this is by no means exhaustive):
* length of contract (years, # of units procured, funding commitment)
* degree of “need” of the customer (is it a nice to have vs. a need to have procurement)
* political sensitivity of the procurement (how safe is the appropriation..? can it be canceled easily due to a shift on Capitol Hill..?)

Who among you would be an investor in the business or would you want to see some diversity in the cash flow, product line, and customer mix?

I have been a prior shareholder of a number of aerospace firms, as well as non-aerospace firms, that have had major government contracts. As an investor in a startup, though, it would be a much harder sell as the sales cycle into government is a long and arduous process and not one investors like to see as a critical path item to success of the investment.

21. Professor L - December 19, 2007

Shubber and others, while I said we go with their definition, that is only because Space X calls the shots for Space X. You could not count high enough to record all the emails I got after that was said on air saying that Space X et al had figured out a new way to count to three! Lots of people were having fun with this new math. But again, Space X is in charge of Space X and if they say the count to three has not started yet, who am I disagree? I really hope for their success be it on their third Falcon 1 flight or the first or however its counted. Remember, I have a personal connection to a payload on that flight so for sure, it needs to make it to the right orbit and not go take my payload for a swim or deep dive. I really want them to be successful for personal and well as business and industry reasons. Plus they are great people. Among the many guests that I am fortunate enough to have on my show, Space X is great. And also with my UND class. Now as to the balance of my note and Shubber’s superb analysis, I heard today that the gov. cut the intended COTS funding for 2008 from what it was supposed to be. From my perspective, anybody living off the government and relying on it as sole source customer has a huge political risk. As Dr. Zubrin said last night on The Space Show, Trent Lott got the flex fuel engine requirement out of the new energy bill because of his association with Nissan and their lobbyists. Barney Frank hates the space program and Mars and a few months back got restrictive language put into the NASA bill that says no money can be spent on anything specific to a manned Mars mission unless the funding also applies to something else. How many military contracts with the government have been stopped or altered? Were I looking for investment opportunities, I would be extremely cautious about a company that was 100% dependent on government projects and revenue. I would evaluate it of course, but it would have more political and other risks associated with it than a company standing on its own in the private sector market place.

Professor L wishes all you Cynics out there and those of you that are closet cynics a Merry Christmas, Happy New Year, and a safe, productive and space-faring year for 2008. My special thanks to Shubber who started this blog and invited me to be one of the Cynic posters. My time and patience with computers limits my posting but Shubber, you are providing a terrific service to the community. Thank you for doing so and thank you for having invited me to participate with you. Now to honor Cynics for coming into the New Year, I hold my 8 oz class of chilled, diet, zero calorie grape flavored Kool Aid high to sky (space) and drink to us all!

22. chiyapike - December 23, 2007

Actually, there was this global warming thing a few weekends ago, where we went outside and had free hot chocolate and listened to some people talk.

One of them, a professor at the university who did his PhD on something to do with the environment, said something like “if the politicians want to bury their heads in the sand like an ostrich on crack…”

The next day it was in the paper, and that quote was in the middle of the article… haha this reminded me of that 🙂

23. anon - December 24, 2007

there really area lot of bad space companies
and even the firms shubber likes haven’t been big
hits.

XM lots of losses

and SpaceX will be a loss


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