Kool-Aid of the Year, 2007

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.

10 thoughts on “Kool-Aid of the Year, 2007

  1. Maybe not a Netscape moment, but for a century or two, money invested in ships and goods was shipped out all across Europe, and while some percentage disappeared or didn’t return on investment, but a significant percentage returned HUGE numbers. I think that the hope is that we get to that point. With an infastructure in place, some day, one day, we will be to that point. A shiop will go out to an asteroid and return with refined materials that will return something huge over the investment. How long will THAT take?

  2. That’s going to take somewhere between 30-40 years, and most of the refined materials will never see Earth.

    For more on that and other things, I invite you to attend my presentation at this year’s International Space Development Conference, in DC, the end of May.


  3. For refined metals, I think 30 to 40 years is fairly optimistic too. Unless the engineering learning process gets remarkably cheaper I think the tech will take a while to build. Parts of the process around communications and automation tools are getting inexpensive. Some of the cutting, printing, and fabrication tools are coming down too. I think there are some hard hurdles still in there though that won’t tip so easily when we run into them.

    Volatiles might be within your horizon, though. Water is a whole lot easier to ‘refine.’ 8)

    I’m quite convinced regarding your point about related markets though. I’m wishing I had understood that 10 years ago.

  4. Anyone who claims there’s going to be a 100x space deal or a Netscape moment needs to really explain how the heck this is going to happen. We all hope for the best but the best that’s going to happen is that somebody doesn’t die in the pursuit of private access to space. Oops, I shouldn’t have wrote that!

  5. Unfortunately, there’s no evidence that “safe” investments will converge on core space technology progress, and considerable evidence to the contrary in other sectors. I think it less a way forward than a strategy of “wait and see” for ideal circumstances that are unlikely to ever occur without, paradoxically, massive investment. Rather than advising space-interested investors to choose companies of questionable relevance in order to secure a small return, I would recommend they pursue larger returns in any sector, build up their resources, and then make one or two massive investments in ambitious, market-creating enterprises with no expectation of return. This approach, also paradoxically, would produce the most aggregate return by pushing otherwise theoretical undertakings past the “sh*t or get off the pot” threshold, and doubtless a handful would succeed.

    On a tangential subject, I don’t think a “100x” return is that big a leap for a company at the heart of a new infrastructure. Bigelow Aerospace would only have to achieve market valuation similar to Dell Computer – an order of magnitude beneath Google, Microsoft, and petroleum companies – for all of Bigelow’s current and expected future investments to achieve a 100x return. Would that occur within a decade? No. Two? It wouldn’t be shocking. Three? Quite plausible by any standard.

  6. there would be, one day, a “100x” space deal.

    He did say “one day” here, and 30-40 years logically falls well within “one day”. Of course, such a timeframe is more appropriate for a science fiction convention than a VC conference, but that is what the guy said. The “Netscape moment soon” though is, I quite agree, at best silly and possibly dangerous.

    As for water and “one day”, I have been working on this, completely as a hobby, for a long time. I have described how ice mining will likely produce a tremendous bootstrap effect for patient investors in the future (not for investors today, to be sure). In physical terms, bootstrapping produces not just a 100x payoff but well over a 1,000x payoff. One can foresee 100x or more financial returns if a future company can get a big head start in this area, perhaps through patents and physical property rights. There will be a large number of potential markets for water, including making government manned missions and space tourism beyond LEO far cheaper, making military satellies far better shielded and maneuverable, and potentially making affordable some of the many gigaprojects that, if launched solely from earth, would even in the future be well within the “kool-aid” category (that trillion dollar asteroid, solar power systems, sunshades, etc)

    Nevertheless, I will freely admit that neither I nor anybody else has proven that this is on the brink of viability, and I don’t expect to be selling investors on it anytime soon. This is just to point out that one should not confuse today’s VC timeframes with “one day.”

    (Here I describe why future investors in deep space missions will be far more patient, with respect to equipment and payload floating in space, than today’s Silicon Valley VCs are with their capital. This doesn’t make R&D risks any smaller or “one day” projects any more imminent, of course).

  7. Starry-eyed space nut nailed it.

    “Rather than advising space-interested investors to choose companies of questionable relevance in order to secure a small return, I would recommend they pursue larger returns in any sector, build up their resources, and then make one or two massive investments in ambitious, market-creating enterprises with no expectation of return”

    If you want to get into space, start accumulating wealth. Warren Buffet’s donation to the Gate’s foundation would have gone VERY far towards getting a profitable return on some space related venture.

    Getting into space in a big way will have to be driven by economics, and people willing to spend a lot before seeing dollar one. Most VCs aren’t in the game for that. It will take some very wealthy, very dedicated individuals willing to personally stake a lot to make this happen.

    The thing about generating wealth currently is that you can’t do it by belonging to space message boards. You have to do it by learning what you can about finance and business. Physics is, no offense, easy. Generating solid returns on money, THAT takes a whole other skillset.

  8. I find it amazing that somehow an “economic driver” has to be found or no space program. The moon is a NINE BILLION acre UNCLAIMED asset. Without property rights though it is a MOOT point. Lets say two companies plan on going to the moon and Company A gets there first and says “hey look, we found this 500 acres that has THEE HIGHEST percentage of titanium on the ENTIRE surface of the moon!” Well if I was the CEO of company B I would IMMEDIATELY send in the miners and get a share WITHOUT having to spend a nickel to find it, AND i get to move in on them because THEY do not get to OWN the land or the mineral rights claim they found. And you wonder why NO BUSINESS has went to the moon? Why would they? Gemstones, platinum, gold, silver, titanium, oxygen, hydrogen, it doesnt matter, WHY find it if you do NOT get to own it AND have your property rights enforceable by law? What major mining company does not have an ARMY of lawyers protecting their claims from other mining companies trying to HORN IN on their claims?

    Everyone keeps up the myth that whatever is found on the moon HAS to come off the moon or be manufactured into a finished product to be valuable. If I get the ownership rights to a chunk of lunar land that has 50000 acres of land that proves out at 40% titanium, as found by apollo astronauts, I do not have to mine an OUNCE of it. All I need to do is hire a CERTIFIED geologist, have it assayed at a certified lab and I now have THREE NEW INSTANT assets on the books. The land, the mineral rights, and the ore. If it is a subsiderary they can dig for three years piling up ore at a loss for tax purposes, file bankruptcy and firesale the assets to the parent company while the whole time their asset value is rising and I get to apply the losses against the terrestrial profits of the parent company. I would not even have to process the ore, unprocessed ore is a more valuable asset then raw land.

    If I did process just ONE TON of titanium how much value do I get to carry on the books? If I was the only one in operation on the moon I could, for accounting purposes, enter it at a “fair market value” for transporting and delivering a ton of processed ore to my doorstep on the moon from a company on earth. My ONE TON of titanium could be carried on the books at what, 40 million a ton? 5000 tons of unprocessed ore would be worth what? How much a loan could I carry against those assets? How much capital could I raise with an IPO? If I bring ONE sparkely rock home and it sells for 5,000,000 dollars a caret, how much are the 500 acres, with 5000 carets still laying around on the moon worth?

    If you start a diamond mine on earth you scrape off a half mile square to a depth of about 5 feet, sift it and sell it as topsoil or backfill. Then you dig down the lava tube.

    if you start one on the moon you will scrape off the same sift it and sell it to an oxygen processor or whatever the highest mineral content is. Dig down the lava tube and place habitats as you go.

    Oxygen and oxygen processing has to be considered as a SECONDARY good, in the same catagory as food and water, which, historically is supplied by merchants. Miners will buy the highly inflated prices with highly inflated NEW LUNAR DIAMONDS, I can already see the ads by DeBeers:

    Fade in on planet earth……
    “some men will goto the ends of the earth to show her he really cares, (show diamond ring) fade out of earth and fade over to the moon and zoom in to a wedding ring with a moon diamond)
    And some men will go to the moon.”

    People fail to realize, for TAX PURPOSES, you will get to use INFLATED lunar asset values AND losses against TERRESTRIAL profits because you get to factor in TODAY’S transportation costs, REGARDLESS when that ore, gems, ice, et cetera, actually gets USED in a finished product for an end user. Why in California in the early goldrush days was an egg “worth it’s weight in gold” ? Because you had to factor in the transportation costs OF THE DAY for transporting an egg. Once trains and local production started then prices reached the new equilbrium. Oxygen has to be considered a secondary good like food and water and will be supplied by merchants supporting the miners efforts and be paid for with the new found INFLATED valued resources: gold, silver, gemstones, shares of stock, secondary mining claims, land deeds.

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