While I mentioned this topic on my annual year-end Space Show appearance, last December, I’ve decided to expand on it here, in response to specific pleas by regular readers/listeners. (I also want to do this before 2008 gets completely away from me, as it’s beginning to do already.)
At last December’s Space Investment Summit (SIS-3), an event speaker made two positively jaw-dropping comments – in front of silicon valley investor-types, no less. I considered the comments jaw-dropping due to both their sheer audacity, and their sheer nonsense.
KOOL-AID# (1) The speaker’s first claim – with a straight face – was that there would be, one day, a “100x” space deal. I find this remark, by someone successful in his own right in the business (a rare thing, and hence he should be experienced enough to know better), is either beyond ignorance of market realities, or is simply sinking to gross, self-promoting hucksterism reminiscent of P.T. Barnum.
For those who don’t know, “100x” is venture investor shorthand for the potential return on a deal, “X” standing for the amount of the original investment. For example, VCs are always seeking potential “8x” or “10x” deals every time they evaluate a company. They do this because nearly 40 years of VC history in the tech sector bear it out. On average, they collectively strike this gold just under 20% of the time, that is, for every 10 investments they make, 1 or 2 of them will actually gain, upon exit, eight to ten times return on investment. The speaker, however, claimed that there would one day be a “space deal” that would earn venture investors 100 times their money.
Who knew? Google in space! Boo yah! But seriously, folks…
The fabled 100x return in the tech sector is quite rare, and presumably we’re talking about software or web services startups, as opposed to hardware (Shubber’s “Atoms vs. Electrons” argument). How many 100x returns have there been from hardware manufacturing? I’m not talking about that guy who invested $5000 in Coca-Cola stock in 1919, and got his grandkids a $600M return in 1995. I’m talking about someone who invested some tens of thousands (or millions) to build up a tech hardware firm from scratch, then took his money out again within a decade, via acquisition, IPO, or private buyout, and made 100x on the deal. Does anyone know? Probably a lot fewer than software companies, I would guess.
Is there any hardware tech under development in the fledgling space commerce sector which is really that transformational, disruptive, or could inspire positively insane market demand (think iPod) to land a 100x investor return? In a word…NO. Is there an 8x or 10x deal out there? Mmmmmaaaayyybbeeee….sooommmeeddddayy….but the investment community is virtually unanimous in its skepticism in that regard. We haven’t seen it yet, I’ll tell you that.
The only 8x or 10x deals that could even remotely be associated with space are what we call “crossover” technologies, i.e., tech that’s primarily being developed for good old-fashioned terrestrial markets, but could be scaled, long term, for use in space. To many, that sounds like a stretch – but focus on crossovers might be the best way to short term investor profit, while still pitching the “space” angle to bring new investors into the fold. A few successes along this line, might encourage them to dabble closer to the edge. I’ve been advocating this as a near-term strategy for about a year, now. (Of course the smoke-mirror-koolaid companies definitely do not want to hear this message, as it limits the pool of new angel-suckers that might be cajoled into coming in.)
KOOL-AID# (2) To add to the fun, there was the second statement by the speaker-who-shall-remain-nameless, who claimed that there would one day (soon) come what he called a “Netscape moment” in space commerce development. This was a reference to tech sector history. In the early-90’s, after the initial success of Netscape in defining “the Web” for millions, angel, venture, and institutional investors had a group epiphany and began throwing billions into web startups. The inference, of course, being that the same pattern would repeat itself for space startups one day soon.
All I can say, given what happened AFTER the “Netscape moment”, is: “I really hope that doesn’t happen.”
WHY? Because after the early 90’s Netscape moment, came another moment, in 1999, that we refer to as: “the peak of inflated expectations.” In those halcyon days of the Web, investors threw caution to the wind and plowed money into every conceivable (and half-crazed) notion that came across the transom. We’ve all heard the urban legends of millions in seed/startup capital being handed out to 19 year-old coders still living in their parent’s basements, on the basis of business plans hastily cobbled together on the backs of envelopes. After 1999, the term “burn rate” became etched into our collective consciousness. IPOs were ratcheting up prices within hours, the fever got so hot. On Dec. 9, 1999, for example, VA Linux began it’s IPO day at $30 par, and was trading at $320 by the close. They thought the party would never end. Until, of course, someone (I think it was Paul Contursi) finally realized you can’t have a P/E ratio with no “E”. By 2001, the NASDAQ had lost $2 trillion in paper value, and billions in hard capital investments were…well…”unrealized”.
While it is true that the firms with rational business models and good cash flow recovered from the shakedown and thrive to this day, the real money was made by brick-and-mortar firms that embraced the web as an additional sales, marketing and communications tool for their customers.
My point is: Is this a scenario we would wish on a future space commerce sector, or its investors?
The other side of the Netscape story is of course, the fate of Netscape itself. Once Netscape was established and more or less a household name, a certain BIG player in the tech sector realized that it had been blind-sided by this “internet thing”, and took steps, committing an insane amount of resources to turn things around. By leveraging its market dominance in operating systems, and bundling its own shiny new browser with each new PC sold, within a few short years, the Microsoft sleeping giant had not only awakened, but marginalized Netscape completely. Netscape was forced to sell to AOL, and it’s core code found its way into the Mozilla project. Browser innovation went back to the profitless “underground” for nearly a decade (but this was the group that ultimately came up with Firefox). This is also a potential scenario for certain players in the space sector, as evidenced by Scaled’s complete acquisition by Northrup last year (getting ahead of the game, perhaps??). Or course, perhaps this is the exit strategy of several “New space” companies – get bought out by one of the big boys. While that’s a great strategy for investors, I think few would believe that it is particularly “frontier enabling”.
But the final and true “Netscape moment” happened only a couple of weeks ago.
And that, dear readers, is why that phrase, and the “100x deal” ranks up there with the trillion-dollar asteroid as “Koolaid of the Year, 2007”. What might 2008 bring? There will always be something. Stay tuned.