The gap in NewSpace business plans
by Jeff Foust
|The demise of Rocketplane is not surprising to many observers of the entrepreneurial space industry.|
While many companies in the space industry over the years (including Kistler Aerospace, whose assets were later acquired by Rocketplane) have filed for Chapter 11 bankruptcy protection, allowing the company to continue operations while it restructures, the Rocketplane filings—one each for Rocketplane Inc., Rocketplane Global, and Rocketplane Kistler—were for Chapter 7, or liquidation, bankruptcy. (Also filing for bankruptcy was Rocketplane’s principal owner, George French.) That means the companies’ remaining assets will be sold, leaving nothing left of the companies.
There’s not much of Rocketplane now in any event. According to the bankruptcy filings (included in the Gazette article), the three companies combined claimed less than $400,000 of assets, most of which—$275,000—is for four used F-85 jet engines intended for the company’s XP spaceplanes. (The company also has a number of patents, including some from the former Kistler Aerospace, but did not put a dollar value on them in the filings.) Against those limited assets the companies had $13.6 million in liabilities, ranging from lawsuits and legal fees to unpaid credit cards and rental car charges.
The demise of Rocketplane is not surprising to many observers of the entrepreneurial space industry. Several years ago the company’s future looked much brighter. After acquiring Kistler Aerospace’s assets, the company put in a proposal for NASA’s Commercial Orbital Transportation Services (COTS) program, offering to complete development of the K-1 vehicle Kistler had spent years, and hundreds of millions of dollars, developing before it filed for Chapter 11 in 2003. In August 2006 Rocketplane Kistler (RpK) won a COTS agreement valued at $207 million, one of two such awards the agency made (SpaceX received the other.) At the same time Rocketplane Global, the subsidiary assigned the suborbital vehicle development that had been Rocketplane’s original focus, was gradually making progress, with a former NASA astronaut, John Herrington, working for the company as its chief test pilot.
By late 2007, though, the tide was turning against Rocketplane. In a redacted version of the RpK business plan included in its COTS agreement with NASA, the company said, “With a combination of strategic partners, strategic investors, and NASA investment, RpK has the right mix of investors to attract additional investors moving forward.” But by late 2007 it had become clear that RpK had not been able to attract those additional investors, at least in sufficient number to fulfill the financial milestones in its COTS agreement. In October 2007 NASA terminated its Space Act Agreement with RpK and put out a new competition for the unspent COTS funding, about $175 million, later won by Orbital Sciences Corporation.
That effectively ended RpK as a going concern, although the company unsuccessfully protested the termination and remained alive, if in stasis, until last month’s bankruptcy filing (at the Space Access ’09 conference in Phoenix in April of last year, Rocketplane vice president Chuck Lauer said that the company could have the K-1 ready to fly in three years of receiving sufficient, if unspecified, funding.) The suborbital side, meanwhile, also struggled to raise funding—“well north” of $100 million, Lauer said at the same conference—required to develop its XP spaceplane. Rocketplane Global looked to a wide variety of opportunities outside of Oklahoma—which had provided the company with $18 million in tax credits in 2004 to set up operations in the state and fly from the state’s nascent spaceport—to try to attract interest and funding, from Hawaii to Japan.
|Rocketplane’s failure, though, may be illustrative for the NewSpace industry in general.|
Most recently, Rocketplane Global looked to Florida—but not the Space Coast region around Cape Canaveral and the Kennedy Space Center—as the company’s latest hope. At the Space Access ’10 conference in Phoenix this past April, Lauer announced that Rocketplane had signed a letter of intent with the Jacksonville Aviation Authority, which operates Cecil Field, a former naval air station that received an FAA spaceport license early this year. Rocketplane would be the centerpiece of a tourist attraction at the spaceport that would also feature mass-market attractions, like virtual reality spaceflight simulations, to draw in a larger audience. Lauer also said that the company was “really close” in lining up funding for the company, claiming at the time that a new round of funding would be closed “in a matter of weeks.” That round of funding, presumably, never came through.
There are any number of reasons why a company, in the space industry or elsewhere, can fail. Certainly the inability to raise sufficient funding to carry out its business plan can be fatal to a company. But companies can also falter for a number of other reasons, from unforeseen technical challenges to a smaller-than-projected market to strong competition to the simple inability to properly execute its business plan. Thus, even if Rocketplane had managed to raise the hundreds of millions of dollars it needed for its suborbital and/or orbital vehicles, there would have been no guarantee of success.
Rocketplane’s failure, though, may be illustrative for the NewSpace industry in general. The company followed what might be considered a conventional pattern for space startups from the 1990s: propose a project like a new launch vehicle that required significant upfront investment, on the order of tens or hundreds of millions of dollars, then try to raise that funding from outside investors. In more mature, well-understood industries such an approach might make sense; in fact, satellite communications ventures from the ’90s like Globalstar and Iridium needed even higher levels of investment to manufacture and launch their satellite constellations. (The fact that these original investors got back pennies on the dollar, at most, when these companies went though Chapter 11 proves the point above that raising money is a necessary but not sufficient condition for success.) However, such large sums of outside investment typically come from institutional investors like venture capital (VC) firms and investment banks, who are generally quite reticent to put their money in uncertain new markets with unproven returns such as space tourism, which is why there has been markedly little activity from such investors in NewSpace.
An examination of the NewSpace companies that have made significant progress in recent years shows an interesting dichotomy. On one hand there are some companies that have raised large amounts of money—one hundred million dollars or more—but that money has come almost entirely internally from founders, be they companies or individuals. In an interview earlier this month, new Virgin Galactic CEO George Whitesides revealed that the Virgin Group had invested $175 million to date in the space tourism venture, with a total investment “at least twice that number” by the time the company enters commercial operations. (Virgin Galactic also raised $280 million nearly a year ago by selling a one-third stake in the company to Abu Dhabi-based fund Aabar Investments, one of the few institutional investments in the industry.) Amazon.com founder Jeff Bezos has put an unannounced but sizable investment into his space company, Blue Origin. On the orbital side, Elon Musk’s investment into SpaceX is well known, while Robert Bigelow has invested $180 million of his own money into Bigelow Aerospace, and is willing to make a total investment of as much as $500 million into the company.
|“We were looking at a ‘swing for the fences’ home run approach as opposed to the one base at a time” strategy of companies like Armadillo, Masten, and XCOR, Rocketplane’s Lauer said earlier this year.|
Being able to tap a wealthy founder is a powerful asset for any company, not just in the space industry. Avoiding institutional investors, and the considerable time needed to line them up, allows the company to focus on building up the company. Moreover, internal investors will likely be far more patient than VCs and banks, who will be looking for a specific return on their investment in a relatively short time, a challenge in an emerging, uncertain industry.
Yet there are companies making progress without huge investments from either institutional investors or founders. Companies like Armadillo Aerospace, Masten Space Systems, and XCOR Aerospace have all built and tested hardware in recent years with investments far smaller than the likes of Virgin or SpaceX. These companies have managed to make more progress than Rocketplane—which never flew even modest subscale prototypes of their proposed vehicles—through a combination of self funding, individual “angel” investors, revenue from government and commercial customers for various projects, and even, in the case of Armadillo and Masten, prize money from NASA’s Centennial Challenges program.
This suggests that, at least for the time being in NewSpace, there is a “no man’s land” for new ventures between the companies with large internal funding sources and smaller companies that can thrive on much smaller funds. That is to say, if your business plan requires hundreds of millions of dollars of investment, and your founders don’t have that money available themselves, it may be wise to reconsider that plan in favor of an effort that can bootstrap itself with much less funding.
Neither approach is obviously better than the other. Having more money available sooner would seem to be better, and some approaches, particularly those that require immediately developing orbital vehicles, may require that greater level of funding. However, the number of individually wealthy people interested in putting large sums of their own money into space ventures is small, and for now may be completely accounted for through existing companies. Smaller efforts may take longer, but can also support a larger number of more diverse efforts.
It’s certainly possible that at some point in the future the current no man’s land will close as institutional investors see opportunity in NewSpace and show a willingness to invest tens or hundreds of millions into new companies in suborbital and orbital projects, as Rocketplane was seeking. However, those investors may never come unless there are successes first by companies that either can tap their own considerable resources or can build themselves up with smaller investments and other funding sources.
That, though, will come too late for Rocketplane, a company that had been attempting to develop vehicles to go after suborbital or orbital markets since Lauer, Mitchell Burnside Clapp, and Robert Zubrin founded Pioneer Rocketplane in the mid-1990s. In an interview at the Space Access ’10 conference this April, Lauer acknowledged a degree of frustration over the lack of progress the company had made. “When I see other companies that have taken a kind of a different tactical path to get to something flying or have actually gotten a lot of hardware up and running and flying, there’s a certain frustration there,” he said. “We were looking at a ‘swing for the fences’ home run approach as opposed to the one base at a time” strategy of companies like Armadillo, Masten, and XCOR.
At the time, though, he also expressed confidence about Rocketplane’s future. “One of the character traits of people that found companies is that you have to have an eternal optimism, you have to have a never-give-up attitude,” he said. Unfortunately, that attitude, while important, is ultimately not enough to help pay the bills.