The Space Reviewin association with SpaceNews

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NewSpace ventures like Virgin Galactic don’t have the track record of tried-and-true space industry market sectors, like communications, making it difficult for potential investors to assess risk. (credit: Virgin Galactic)

Financial risk analysis for the space industry

While the total size of the space industry has been reliably estimated at about $251 billion in 2007 according to the Space Foundation’s The Space Report 2008, most of that represents parts of the industry that is well understood by the investment community, such as communications and navigation services. Only a small part of this sum is devoted to visionary and entrepreneurial ventures; the so-called “NewSpace” industry is poorly understood.

A good example of successful space risk management was the way the insurance industry coped with the failure of the SES AMC-14 communications satellite to reach the correct orbit after being launched by a Russian Proton. SES filed a claim for approximately $191 million, declaring the satellite a total loss. After the insurance firms took full ownership of the stranded satellite, they sold it to the US Department of Defense for $15 million for use in training.

It is hard to imagine how insurers or investors will be able to accurately and reliably judge the risks involved in Virgin Galactic’s SpaceShipTwo suborbital tourism venture.

The risks involved in this affair were well understood by all parties involved and while the insurance companies suffered a loss and thus may be reducing their exposure in this area, at least for a while, there is no threat to the broad satellite communications industry. The Proton will soon be back in the launch business and there is no reason to think that firms will have trouble finding coverage for future launch activities.

In contrast, it is hard to imagine how insurers or investors will be able to accurately and reliably judge the risks involved in Virgin Galactic’s SpaceShipTwo suborbital tourism venture. Certainly the three launches into space of SpaceShipOne are hardly enough of a database on which to make a judgment, and all indications point to the new vehicle being much more than just a slightly improved and enlarged version of the first one. The risks involved are being assumed by Branson and by his investors, a classic case of people putting their money where their mouths are.

Virgin Galactic is an example of entrepreneurship at its purest. The same is true for Blue Origin, XCOR Aerospace, SpaceX, and others. They are all taking part in the great rocket race of the 21st century. The prize is low-cost access to the riches of the solar system. The rockets that these firms are building all lack any kind of track record. By comparison, Russia’s Proton and above all their Soyuz have a record going back decades and have been subjected to a continuing improvement program. The reliability of the Soyuz is pretty amazing and, in spite of recent problems, the Proton has a pretty good record, too.

Europe’s Ariane 5 is establishing an excellent record, having just completed its 25th consecutive successful launch. In the US, the government has financed the Delta 4 and Atlas 5 EELVs which, in spite of their low launch rate, have both achieved reliability records approaching 100%. Retiring the Titan 4 has been one of the best things that ever happened to the US launch industry, but retiring the Delta 2 with its nearly flawless recent performance may not be such a good idea. It might be interesting to see if any studies have been done that show that this launch system could be made both more reliable and less costly.

All of the above mentioned systems have achieved their success thanks to heavy and sustained investments by governments. This money was only available because the states involved wanted to be able to independently launch national security payloads into orbit. As the saying goes, they “bought down the risk.” This has happened in other areas of the space industry. Communications satellites, for example, were developed and perfected with government funds. Commercial remote sensing satellites were developed with technology intended for military reconnaissance purposes.

Space solar power, if and when it is developed, is likewise going to be considered a national security space asset, the same way that any major energy source is. Investments by governments intended to buy down the risk, or to take on some of the commercial risk by agreeing to purchase the power at a fixed price, are made for essentially strategic reasons. What is often termed “industrial policy” is most often a cover for a military industrial policy.

Risk-taking entrepreneurs and investors are in the business most often for the money, but sometimes just for the glory. Unlike governments, they assess risk according to formulas and policies that may vary from firm to firm or from individual to individual. First of all, they want to get their money back. They may realize that in many cases they may lose it all, but this is pretty basic. They want to see that they have a chance of making a big return: 100% is a minimum for a venture capitalist, who needs a really big payoff on the ones that succeed since most of his or her investments will fail. For a high-risk business such as the NewSpace industry, the potential returns have to be on the order of 200 to 300% in order to attract serious venture capital.

Finally, there is the time frame problem, the greatest risk of all for entrepreneurial space firms. The failure of the Iridium communications satellite venture is an excellent example of how a good idea, implemented at the usual slow speed of the space industry, can be overtaken by newer and cheaper technology. Any large-scale ventures such as space solar power or Moon or asteroid mining will take decades to implement, and may be bankrupted by changes on Earth. Extraordinarily careful due diligence will be needed before such ventures can be financed by ordinary investors.

Risk-taking entrepreneurs and investors are in the business most often for the money, but sometimes just for the glory.

Some ventures, such as space tourism or pharmaceutical developments in space, could become profitable in time frames that risk-taking investors are comfortable with. Space tourism (or, to be more accurate, private human spaceflight) is already a good-sized business, and its growth does not depend on any governmental decision to buy down the risk or on any of then normal sources of entrepreneurial capital. (Full disclosure: I am doing some work with Eric Anderson of Space Adventures.) A few visionaries, such as Paul Allen, Richard Branson, Robert Bigelow, Jeff Bezos, and Elon Musk have decided to put parts of their fortunes into the pursuit of the dream. Without getting inside their heads it is hard to know how much their decision was based on hardheaded risk analysis and how much was based on the fact that they just had a gut feeling that this was the right thing to do.

Who knows what their payoff will ultimately be? There is a good chance, based on the history of technology and exploration, that for some it will be, as they said in the latest Indiana Jones movie, “Fortune and Glory!”