Red Herring January 16, 2006
Investing in Space Tourism
Thinking about putting money in the nascent industry without making it your final frontier? One tip: know when to give up.
Find an inexpensive way to get passengers into low-earth orbit, and you’ll get rich feeding pent-up demand for space travel. At least, that’s the theory.
There are plenty of investors who buy that theory, judging by the approximately half-dozen space startups out there. The problem with rocket travel now is that it’s too pricey for all but a handful of wannabe voyagers.
The trick for investors in rocket travel is pushing costs below the current benchmark. That’s $10,000 per pound—just for orbited payload—but at least one space entrepreneur says there’s no scientific reason why costs can’t be shrunk to several hundred dollar per pound.
The small-fry space race, which has simmered since the late 1990s, was thrust back into the spotlight in October 2004 when Mojave, California-based Scaled Composites took the $10-million Ansari X-Prize for flying its reusable manned rocket plane higher than 100,000 meters twice in two weeks.
Suborbital flights of the sort that win the X-Prize involve several minutes of weightlessness on descent. Always one to exploit the possibilities for fun and profit in the heavens, Virgin Atlantic Airways founder Richard Branson immediately set up his spaceline, Virgin Galactic, to offer packages by 2008.
Mr. Branson plans to use a larger version of SpaceShipOne, the craft that won the X Prize. Resembling a shuttlecock with wings, it burns a mix of nitrous oxide (laughing gas) and rubber, which is easier to handle but not as powerful as more commonly used cryonic fuel. If Mr. Branson’s vision comes to fruition, a round-trip Virgin berth will sell for $200,000.
Amazon Founder Enters Space Race
Amazon.com founder Jeff Bezos is stepping up to the pad, too, and has started work on a launch facility outside Van Horn, Texas, about an hour’s drive southeast of El Paso. His company, Blue Origin, revealed plans to develop a vertical take-off and landing (VTOL) craft, and though officials wouldn’t comment, it looks very much like the company aims to build something along the lines of the Delta Clipper’s VTOL rocket, which was powered by liquid oxygen and hydrogen. The Clipper, the product of a U.S. Department of Defense-funded research consortium, had mixed results when it launched in the early 1990s.
And then there’s Armadillo Aerospace in the Dallas suburb of Mesquite, Texas, backed by John Carmack, the founder of id Software, which pioneered wildly successful games like Quake and Doom for the PC. Armadillo is developing a rocket that uses liquid oxygen and alcohol, and even its test craft looks like a small-scale model of the Delta Clipper.
The field attracts its naysayers, such as space and defense industry analyst John Pike, who believes longstanding benchmark launch costs will be hard to beat. “A half-dozen countries build rockets and a dozen firms have tried it, using different models, for half a century,” he says, “and they have all come up with the same answer—about $10,000 per pound.”
Doubter though he may be, Mr. Pike, who is the director of Alexandria, Virginia-based consultancy Globalsecurity.org, laments the apparent dearth of VC interest in the field. “These are not venture-grade investments, they are adventure-grade investments,” he says. “But if you can’t put five percent of your portfolio into an adventure-grade investment, then you are someone who knows the price of everything but the value of nothing.”
Jeff Graeson, president of XCOR Aerospace in Mohave, California, doesn’t have any angel backers but has raised about $2 million from “moderately wealthy” individuals who back XCOR’s rocket program. “I see no law of physics that says that the cost of getting something into low-earth orbit can’t get as low as hundreds of dollars per pound,” says Mr. Graeson, a veteran of the semiconductor industry.
XCOR also works on government contract, developing components such as rocket fuel tanks and pumps for NASA and the Pentagon’s Defense Advanced Research Projects Agency (DARPA). The company operates an experimental airplane powered by an XCOR rocket, though it can’t fly higher than 11,000 feet. Powered by liquid oxygen and kerosene, it resembles a stubby fighter jet.
However, Mr. Graeson says the commercial space travel race has barely begun. “Because of the accomplishments of cost-no-object government programs, people think that this is a mature field,” he says. “But part of the excitement of this field—which makes it different from the semiconductor field—is that for 40 years some of the best brains have been thinking of solutions and almost none of them have been tried.
“You can walk into a library and find five really neat ideas that have never been tried. We are just beginning to see what commercial spaceflight will be like—it’s a very exciting time.”
The fact that government space programs are astronomically expensive is irrelevant, says Mr. Graeson. The Apollo program was aimed at beating the Russians to the moon and keeping an industrial base going, he argues, not developing cost-effective consumer services. Cutting costs is not so much a technical problem as it is a question of adjusting mindsets. The trick now, says Mr. Graeson, is to conduct more launches.
Jeffrey Foust, a space industry analyst at Futron in Bethesda, Maryland, agrees, noting that there are about 60 orbital launches worldwide each year, so any individual rocket model can look forward to only a handful of launches over a year.
Assuming no government subsidies, space companies would need to schedule at least 10 commercial launches to recoup the development costs of one rocket, which can easily exceed $100 million, says Mr. Foust.
Vehicles now being developed for suborbital flights could potentially be refueled and launched daily, recouping development costs relatively quickly—and perhaps even generating a profit, says Mr. Foust.
With enough launches, mission outlays should be a matter primarily of personnel and fuel costs, says Mr. Graeson, adding that the fuel bill per suborbital flight wouldn’t run beyond $10,000. He reckons he could offer flights, probably through a third party, within three years of raising sufficient development funds—anywhere between $4 million and $10 million, depending on design goals.
With a foundation of suborbital revenue, he intends to press on and go into orbit, but he concedes it’s a large undertaking. “There may be several intermediate steps, such as launching small satellites from an expendable upper stage,” he says, meaning his suborbital vehicle would fire a smaller rocket upward after reaching its own maximum altitude, like a fighter jet firing a missile.
Amazon’s Mr. Bezos, id’s Mr. Carmack, and Virgin’s Mr. Branson are all expected to venture into orbit in due time. “They are doing it incrementally, which is the smarter way to do it,” says Phil Smith, a space industry analyst at Futron. “In the 1990s we saw people trying to leap straight to orbit. But by doing it incrementally the venture capitalists can see you in action, and you can develop a track record and reputation—that’s better than sliding a piece of paper in front of them and asking for $100 million.”
But to go into orbit, they’ll have to achieve much higher speeds, more than eight times the Mach 3 required of suborbital jaunts. They will also have to deal with the fiery re-entry into the atmosphere. Globalsecurity’s Mr. Pike says that achieving orbit involves more than making airplanes that go higher and faster, in the tradition of the Space Shuttle—a craft he sadly notes “has not been terribly successful.”
Science Fiction’s Believers
Mr. Pike dismisses talk of full orbital joyriding as pie in the sky. “Such people are not prepared to admit that getting into orbit is a revolutionary step, not an evolutionary step. [They] read too much Robert Heinlein when they were kids,” he says.
These are fighting words to someone like Mr. Graeson, who says he not only read the popular science fiction writer, but was inspired by him. “He convinced me to become an engineer in the first place.”
Mr. Pike’s principal objections don’t apply to companies with enough money to dispense with suborbital ramp-up and aim straight for orbital flight, as PayPal founder Elon Musk intends to do. His El Segundo, California-based company, SpaceX, or Space Exploration Technologies, is relying on the theory that the cheaper you make orbital flight, the more business it will attract.
SpaceX charges $6.7 million to launch a small satellite—or it will charge that if it ever launches one. That is supposed to cover logistics, insurance, range fees, and installation of the satellite atop the rocket. Its nearest commercial competitor—which Mr. Foust contends is Orbital Sciences in Dulles, Virginia—reportedly charges $20 million. Orbital Sciences won’t publicly confirm that, or any price.
At press time, SpaceX was scheduled to carry out the first launch of its first rocket, a conventional-looking, 21-meter-high Falcon 1, in December from the Kwajalein atoll in the
Mr. Musk, who reportedly has spent upwards of $100 million so far, was quoted in a space.com interview in August saying he was prepared to fund up to three failures. Simplicity of design and a lean organization help keep the SpaceX launch price low, explains a spokeswoman. So far, she says, the company has signed eight launch contracts without ever having launched anything.
One contract, with Bigelow Aerospace, calls for sending up a test module to prove the viability of inflatable space stations and spacecraft. Bigelow is backed by hotel chain Budget Suites of America owner Robert Bigelow, who has high hopes for space travel. If all goes well, SpaceX will deliver tourists to the hotelier’s orbiting hotel, according to a company insider who asked not to be identified.
Mr. Pike scoffs. “The best way to make a small fortune in space is to start with a large fortune,” he says. “The history of the space age is littered with people who wanted to start rocket companies. Most never actually fly anything, while the rest usually blow up one rocket and then go bankrupt. It’s been happening continuously for 25 years.”
The Cost of Reliability
SpaceX competitor Orbital Sciences constitutes the lone exception to Mr. Pike’s maxim of continuous failure in the commercial launch business. Begun with VC backing in 1982, the firm now has yearly revenue of about $700 million, performing about a dozen launches yearly (including suborbital test flights for the military). It makes no pretense of pioneering a cheap path to orbit, says spokesman Barron Beneski.
“The priority of the customers is reliability,” he says. “Developing a science satellite may take two or four years, so you are set back that many years if the launch fails. So our customers, who these days are often
Reliability comes at a price, though, adds Mr. Beneski. “There are layers of oversight and management, with testing and retesting, until over time you have repeatable, robust quality. It could be that a startup firm could develop an all-new rocket and launch the first one successfully, and maybe the second, but rockets early in their careers fail more often than later in life.”
Orbital Sciences was a prime example, he says. “The first few launches went well but then there were failures.” After that, the company did “a top-to-bottom scrub” of the program—and the success rate is now 96 percent, which Mr. Beneski says is the best in the commercial launch business.
There’s no avoiding the interplay of success and failure, he adds. “Reliability will catch up with you. There is no silver bullet in the propulsion world, and it has been that way for 20 or 30 years—since we are pretty much at the limit of what energy you can get out of chemical propulsion.”Like XCOR’s Mr. Graeson, Mr. Beneski says the only way to drive costs down is to have many more launches. But unlike Mr. Graeson, he does not think that will happen.
© Copyright 2006, Red Herring, Inc.