M. Jurist, M.D.
National lobbying of Congress and the President in 2004 totaled $1 billion [Ref. 23]. That may seem like a lot, but it is a pittance compared to the $2.3 trillion in Federal outlays [Ref. 24]. Congress and the President also pass laws and make executive orders that implicitly subsidize through loan guarantees, forbid activities altogether, impose work and investment rules that implicitly tax certain activities, and establish through the courts and federal agencies how property rights are defined. Thus, it is possible that Congress and the President influence perhaps twice as much of the economy as the Federal Government spends. Given that, $1 billion to buy influence on Capitol Hill is surely a bargain. With 589 bills passing both houses of Congress (enrolled) in the 108th Congress, that works out to about $3.3 million of lobbying per enrolled bill. Adding in campaign contributions per enrolled bill (about $400 million per session for the President -- contributed to both parties -- and $900 million in Congressional campaign contributions) the total is $7.5 million per enrolled bill. This is a very reasonable strategy compared to spending more than that on Federal services. One concern is that lobbying and contributions are like an “all-pay” auction where the contribution is non-refundable even if someone else contributes more and seeks the opposite policy outcome. A more equitable system would give refunds to contributors who do not get their policies adopted (otherwise known as honest bribes). We wonder what would happen if people posted prizes that they would pay directly to the Federal Government if they adopted certain policies.
One interesting lobbying effort would be to get range and tracking costs specified as a tax per pound of payload instead of a flat fee. Until a few years ago, airline taxes were paid as a percentage of revenue. This was considered unfair by the high priced air carriers who were creating losses. A compromise was worked out so that now about half of the fees come from a percentage of revenue and about half come from a flat per segment fee [Ref. 25]. For space launches, new entrants with smaller payloads take the role of the regional and hub-bypass airlines and would greatly benefit from range costs being a percentage of what the customer is paying instead of a flat cost per launch.
should not get too much resistance from the Department of Defense and
NASA since range costs are really going from one Federal pocket into another.
They will be substantial beneficiaries of lower space access prices. It
behooves them to give range access away free like the interstate highway
system and the Internet -- at least until there is more to tax. Tackling
range costs would eliminate Ted Taylor’s third rule: “The
entire cost of the international airports at both ends of the flights
shall be covered by the freight charges.” To the extent that
lower access prices vastly increase the utilization of the ranges, fixed
costs at the range will be spread over more launches and more streamlined
procedures will be adopted. The net subsidy from the taxpayer will actually
drop considering that they will recoup their tax subsidy in lower launch
costs and lower subsidies to the major launchers to keep their production
lines open. The ranges have also shown willingness to negotiate range
fees so Congressional action may not be necessary to obtain some relief
from range costs.
Another opportunity is to seek regulatory relief from unrealistic disaster expenses associated with a maximum probable loss calculation. If there are only 100 flights in a program, the regulatory bar for insurance perhaps should be based on the disaster level that is 95 percent likely to be unseen. That is something akin to the worst disaster in 2,000 flights instead of 10 million flights as presently required by FAA AST. This will only be viable while flight rates remain low. If flight rates really are 500,000 annually, the rules should revert to the one in 10 million standard. The Outer Space Treaty of 1967 requires the Federal Government to pay for any damage in excess of the requirement. Launch firms will likely need to contribute toward a federal pool or identify a federal budget reduction to get the additional implicit liability subsidy into the budget.
goal of the lobbying should be to reduce flyaway cost for customers in
order to increase demand. Higher demand makes existing investments more
profitable which benefits firms that have hardware ready to fly. This
change will become self-reinforcing once demand becomes elastic (rises
more than one percent for each one percent decrease in price). To some
extent, favorable regulations allow easier entry which means that the
upside of lobbying success must be shared.
What does Boeing do if the XYZ Corporation starts making real progress and threatens to take significant market share? The aerospace majors will not sit idly by if a new, highly profitable segment of the launch market develops. They will surely introduce a new launcher that mimics the economic advantages of the market entrant or market leader. Russia is already considering such a response to SpaceX [Ref. 26]. SpaceX is also complaining that the U.S. government is hoping to reimburse only its competitors for R&D to produce rockets similar to its Falcon series. This means that entrants bear all the cost of entry, but only get a portion of the upside of success.
The aerospace majors are not the only threat in this context. NASA has demonstrated a history of attempting to maintain a monopoly in space launch capability. After spending an estimated $200 million of his own money on an alt.space startup, Andrew Beal made the following comments:
For years, it was difficult to get past the “my brother-in-law in NASA does not like your plan” problem. This attitude has improved after the Aldridge Commission deliberations, the President’s new national space policy, and NASA actually implementing the Vision for Space Exploration. The laugh test is easier to pass after the Ansari X-Prize has been won. Mojave Aerospace Ventures has demonstrated a low cost suborbital RLV with a fast turnaround between flights -- their Space Ship One. XCOR Aerospace has demonstrated a low operating cost rocket plane -- the EZ-Rocket -- at $900 per retank. At the end of 2004, HR 5382 became law and encourages suborbital commerce. All of these factors make it more credible that a company can succeed. Nevertheless, it will be difficult. Sean O’Keefe said, before he stepped down as NASA administrator, that if NASA tried to launch a plastic spaceship like Space Ship One, a government investigation would ensue the next day [Ref. 27].
In capitalizing a startup company, most people would like to follow the Willie Sutton philosophy of going where the money is. As a general proposition, the pool of available investors shrinks rapidly as magnitude of the minimum investment increases. There are very few people on this planet who can potentially write a check for tens of millions of dollars for a high risk investment. Many more could do so for perhaps a million dollars. The U.S. Securities and Exchange Commission has fairly stringent rules that regulate the number of private investors who can be approached for a startup company. Those rules also regulate the representations that can be made during the approach. Most state laws either follow the SEC rules by adoption or have even more stringent regulations. In general, other than people who either are or will be actively involved in the company at the management level, so-called “outside” investors must be “qualified.” Under SEC rules, a qualified investor must usually have a net worth of at least $1 million or income exceeding $200,000 the previous 2 years with an expectation of making the same or exceeding that threshold for the current year. If the potential investor files jointly with a spouse, the threshold is $300,000 for their joint income. About seven million of those households exist worldwide. Most high net worth people attained that position by carefully watching their spending and investing. They either have, or can buy, the skills required to evaluate a potential investment carefully. High risk or speculative investments tend to comprise a small percentage of the total portfolio of a high net worth investor. Such an investor will generally examine a host of factors associated with a startup before investing.
For example, careful planning by the startup is essential. Having a formal business plan is certainly helpful to the potential investor. A formal business plan also helps management since it forces management to engage in realistic and well-grounded thinking, planning, and decision making. The problems created by the lack of proper planning help foster junk business proposals that find their way to the investment community and thereby damage the credibility of the alt.space community.
The new NASA Administrator, Dr. Mike Griffin, recently spoke about this very subject:
The “coolness factor” isn’t necessarily enough to get significant funding. The current crop of investors has been burned on some sexy space projects. Unless the company has a rich benefactor who wants to spend tens to hundreds of millions of dollars on a cause that may or may not be profitable, space ventures may not be competitive in the current environment.
Sports teams and racing teams almost all lose money. Yet, year after year, they change hands for positive prices. The explanation of this apparent paradox is that owning a team is cool. Owners are getting substantial non-pecuniary benefits from owning teams. Seeing the way Burt Rutan was affected the coolness of what he is doing, it is not unreasonable to think a little of the coolness rubs off onto the owner.
A second factor at work is that an industrialist investing personal capital may be willing to accept a lower return than a venture capitalist or angel investor. The industrialist may be willing to settle for a risk adjusted eight to ten percent return versus 18 percent for venture capitalists. This implicit subsidy may be more important than subsidizing the losses for a long duration business plan.
What this means is that a propulsion company needs to either have a sugar daddy willing to contribute lots of money over the years or must have a competitive advantage so strong that it can participate in a market where many other firms could not survive without a patron. Southwest Airlines has done that. The Yankees make a big profit. There are plenty of chic restaurants that make a profit, but most of them do not. Our hope is that thousands will fly on suborbital flights so that there will be many profitable space firms to invest in, but that is not the case at present.
Other subjective motivations for making relatively small investments in alt.space startups might include helping interesting projects to develop in the hopes of an eventual acquisition of the technology, supporting an individual or small team for a period of time in the hope that an adequate business plan will evolve or in the hope that gaps in the management skill set will be filled.
If a potential investor is very prudent and allocates his or her investments along rational lines, the alt.space startup must demonstrate how it intends to create a return on investment. That demonstration must include a defined market, a plan to exploit that market, and a cash-flow analysis that supports the anticipated return. The projected return on the potential investment must compete with the opportunity costs of alternative investments. This component of the capital acquisition process is often ignored by the alt.space industry and it shows up in business planning, marketing, financial, and money raising plans. Despite the statistics and what we hear or read in the media, investment capital is a finite commodity! There is competition for financing from countless investment opportunities offering different returns on investment (ROIs), different sets of risk factors, and, of course, different types of investments. For every decision an investor makes, opportunity costs are evaluated and they substantially influence investment decisions.
Briefly, the opportunity cost is nothing more than figuring out what the likely cost of not making an investment would be for making one. For example, were an investor to make an investment of $100,000 in an alt.space rocket company promising mature industry results in about five to seven years, a return on investment (ROI) of 4:1 over the life of the project estimated at 20 years, with a discounted rate of return annualized at 12 percent, that investor would have to examine other opportunities that could match or out-perform the alt.space investment. The opportunity not taken is the investor’s opportunity cost. Unless an investor is absolutely wedded to the specific investment for a variety of subjective reasons, most likely the money will be placed with the most promising opportunity when risk, management, industry, and all other factors are considered. For every decent alt.space investment available today, most investors have multiples of high quality and more likely better performing opportunities for their money in the terrestrial business world. Therefore alt.space companies face extremely stiff competition for investment dollars from multitudes of high quality alternative investments. However, to the very sophisticated investor, the venture capitalist, the professional financier, what constitutes a quality investment opportunity is far more limiting than what the average wealthy investor considers or acts upon. In the end, competing for the “smart” money is even tougher than competing for the “accredited investors” money.
To be specific, a potential investor can simply buy shares in an indexed stock mutual fund and expect to reliably realize long term gains averaging around 10 percent.
That same investor could assume more risk in the expectation of a higher return by buying shares in specialized stock funds, in a diversified set of stocks, or in various real estate transactions.
A concrete example exists in the health care industry. An investor in a closely-held ambulatory surgical center can realize dividend returns on investment averaging 25 percent the first couple of years, 50 percent thereafter, and end up a decade later with a 10 to 15 fold capital gains return on the initial investment. In the latter illustration, the competitive market and regulatory risks are higher, but there are numerous examples of results similar to the above and the demographics of the United States support the market concept.
There are no examples of alt.space startups creating this kind of return. Therefore, the alt.space startup must make a convincing case that it can pull off such a feat if it wishes to attract rational investment money. The alt.space case would have to be even better than a comparable case in a new industry with no negative track record.
What about venture capital (VC) as a source of investment funds? Many alt.space companies hope that they can readily obtain VC capital. An alt.space company will assume that it can readily access this capital pool only if its principals do not understand opportunity cost and the necessary foundation of venture capitalism.
While VC pros may take financial positions in companies that they might not normally consider, the alt.space company must still face competition from an extremely large pool of competitive terrestrial opportunities. Furthermore, terrestrial investment opportunities have a long and established history of working with the VC industry. Alt space companies do not.
Typically there is potentially a high cost to pay when accepting VC money and support. If things do not go according to the business plan, or as it is said, they “head south,” company management may have their lives made miserable by the active involvement of the VC. This may even lead to the forced break up of the alt.space company. To take VC money and support, company management must willingly allow the participation of non-space industry team members, a change in the company vision, and VC representation on the board of directors. In extreme circumstances, the company must accept replacement of management and the board of directors as well as other restrictive and possibly dramatic changes. How many alt.space company management teams are open to VC management influence and takeover if the alt.space company does not perform as promised? How many alt.space management teams understand the true scarcity of capital due to opportunity cost analysis and otherwise competitive market forces among terrestrial business ventures vying for the same dollars? How many alt.space management teams really understand that it is not usually about the rocket science or space objective, rather it is about the return on investment (ROI), payback period, risk assessment for both business and political risks, and internal rates of return (IRR)?
To focus on space and space objectives rather than the fundamentals that make a business venture attractive for capital acquisition is to delay alt.space industrial development. After all, as important as wealthy players and benefactors are, a handful of them with their private investments do not constitute an industrial development program.
An interesting, and temporary, aspect of venture capitalism came to light in February, 2005. National Public Radio’s Robert X. Cringely points out that “right now, there is in the U.S. venture capital community about $25 billion that remains uninvested from funds that will end their life spans in the next 12 to 18 months. If the VCs return those funds to investors they'll also have to return $3 billion in already-spent management fees. Alternately, they can invest the money -- even if they invest it in bad deals -- and NOT have to cough-up that $3 billion. So the VCs have to find in the next few months places to throw that $25 billion” [Ref. 29]. Many of the VCs’ covenants prevent them from investing outside a specific industry, but even if one percent of that money flows into alt.space, it could perhaps double the capitalization of the industry.
Most forecasts and projections used by those raising capital and promoting “the cause” use mature launch industry statistics to make their business and investment case. They report this information as if it exists now or that it would exist were it not for an abusive regulatory system, NASA, pig-headed capitalists, or possibly the full moon on October 31st! The reality is: We do not have a mature industry although we are almost 60 years into orbital rockets -- considerably longer if we include the Chinese development of rockets for fireworks. Yet, we are not at the point where we have the spaceship analog of the DC3 when discussing the aviation industry. A reasonable and plausible plan to move from where the industry is today to the mature industry we all desire is omitted from the common and usual claims. This omission can lead to problems in accepting performance, cost, and flight rate assumption parameters for any proposed space vehicle.
A specific example can readily demonstrate this disconnect between the theoretical future and the attainable present. Consider the Japanese space tourism RLV, the Kankoh-Maru. The Kankoh-Maru is a hypothetical SSTO VTOL passenger vehicle that would be capable of orbital operations leaving from routine airports around the world. It would have commercial airplane-like economies of scale and safety. To understand how this vehicle can accomplish these impressive results, it is necessary to look at the model used, paying particular attention to the underlying assumptions. Kankoh-Maru was selected for this analysis over others because it clearly demonstrates the challenge facing entrepreneurial and new rocket engineers and builders. Since virtually everything about the new rocket design is speculative, unknown, or untested, the variables supporting the underlying assumptions can be difficult to accept. Any of the potential new rocket designs could have been used for this model but so much information was available regarding the assumptions used for Kankoh-Maru. We use it for discussing the need to have a solid foundation underlying the assumptions for any business plan, not just a new rocket or launch vehicle.
Most of the information available about the Kankoh-Maru -- its design, specifications, economics, and flight characteristics -- can be obtained from the excellent Spacefuture website [Ref. 30]. For this analysis, data come from a 1997 paper by Collins and Isozaki [Ref. 31]. We thank the researchers for making this information public.
The successful flight and operations profile for the Kankoh-Maru is to be realized at a growth rate of 2,400 flights per year per year with eight Kankoh-Maru vehicles manufactured per year up to a fleet of 50. Each vehicle would have a 10-year or 3,000 flight useful life. The program would fly an additional 100,000 passengers per year over the 8-year growth phase. To facilitate this outcome, the production growth rate of cryogenic propellants would be approximately 1,000,000 tons per year per year, the number of engine spare part replacements kits would increase by 288 sets per year per year up to 1,800 sets per year. At that time, there would be a fleet of 50 operating Kankoh-Maru RLVs. It is further assumed that the motors will need overhauled after every 100 flights. If or when operations attain this level, the desired operational cost goals would be realized.
We will examine the assumptions that support the claim that Kankoh-Maru can dramatically lower the cost to orbit and providing orbital flights to space tourists for $20,000 per passenger.
Despite the Collins and Isozaki paper being written in 1997, we are no closer to having an orbital RLV, let alone having any vehicle approaching the operating profile cited in this paper. In fact, we have no orbital RLVs currently flying at any price. We have no large rocket engines that can fly 100 times without an overhaul. We have no space vehicles of any type capable of using commercial or passenger airports now that Space Ship One is headed to a museum. There are a few planned vehicles of this type in various stages of initial development and flight testing. We have no vehicle or class of vehicles capable of anything close to achieving 300 flights per year per vehicle. Despite general space tourism market surveys, it is not certain we have demand for 2,400 orbital flights annually of any type. We are not confident that we have a demand for 2,400 suborbital tourist flights even though they seem to be almost around the corner. So how do we go from where we are today to something on the order of the Kankoh-Maru program? That is, how do we go from the beginning stage of space transportation vehicle development, which is where we are today, to the projected Kankoh-Maru program or one similar to it, which suggests a mature industry with sustainable, growing markets and demand?
Collins and Isozaki do provide a basic path to enable the results that they suggest are possible with the Kankoh-Maru. Their multi-phase plan as outlined in their paper is still speculative. The end results of a successful development and operational program for this RLV program are equally speculative. So while the results suggested by a successful development program, which could lead to a mature industry capable of supporting a fully developed and tested Kankoh-Maru RLV are promising, we are a long way from showing substantial progress leading to creating such a vehicle or vehicles of its class, let alone realize its suggested commercial benefits.
Any proposed orbital RLV development plans are still based on favorable speculative assumptions because that is the nature of this or any other nascent industry. Evaluating the plausibility of assumptions is required. Since we are still engaged in speculation to a large degree, this is not an easy task. One approach, which could reduce questioning of RLV assumptions, would be for engineers and rocket designers to work hand and hand with financial types in an interdisciplinary approach. This would function the way an architect has to pay attention to and work with a builder or contractor in an iterative process to develop realistic cost estimates. It does the architect little good to have a fabulous design that is so costly it never gets built or exhausts the construction budget before completion. In our opinion, many of the activities now supporting various vehicle designs and concepts require additional financial discipline. Such discipline will certainly lead to more credible assumptions, even in this developing industry where so much remains unknown and unable to be verified.
The bottom line is that programs like the Kankoh-Maru and virtually all planned orbital RLVs rely on assumptions based on assumptions that are based on more assumptions. At some point, one has to ask the question, “Where is the foundation in this process?” What is lacking is a solid, reality-based, plausible scenario to take us all the way from today to the flight and market goals and objectives projected for the Kankoh-Maru at some point in the future. Without a credible program to do this or to even point the way, we are confined to wanting to believe, but not certain of the foundation supporting our belief. This same argument can apply to the rhetoric used in much of what today passes for the claims of business ventures, rocket concepts, or startups going for the brass ring in rockets or space transportation vehicles.
Space enthusiasts often cite the expectation that launch cost to LEO can drop below the magical value of as little as $100 per pound. That implies a fully mature industry in which large RLVs have lifetimes of thousands of flights and short turnaround times between flights. Such airline-like characteristics simply do not exist. Given the lack of demonstrated development of such vehicles, the present regulatory environment, and the large capital investment required, creation of such a fleet of RLVs in the relatively near term is not likely to occur without a strong national imperative and government participation in funding.
The current demonstrated technology in which multiple burn high thrust rocket motors have lifetimes of a few tens of minutes of burn time and few tens of starts compares to the very early jet engines that were replaced after a few hours of operation. Until we see reliable reusable rocket engines, our 4th law will apply, “Jet engines will have narrow safety margins and will not run more than a few hours without major overhaul.” Spacecraft structures capable of thousands of flights have not been developed. We do not see a rapid direct path to such a mature launch industry other that via a relatively slow evolutionary process similar to that of the aircraft industry over the last century.
Many in the alt.space business, including the startup and entrepreneurial management teams and those raising money for their ventures, come close to preaching that there are no scientific or engineering limitations that prevent the development and operation of cost effective RLVs. The often-unstated assumption is that this is based on current off the shelf technology. The focus here is on the need for those working to develop the alt.space industry to become comfortable with reality so that efforts to move forward, through either evolution of existing technology, or the development of completely new and different technology can occur. The industry is not helped by denial and posturing that there are no systemic limitations with chemical rockets. To do so seems to be working for the status quo or even supporting a backward stepping industry rather than facilitating its efforts to move forward. While this is not intentional, it is the likely result of accepting an outcome that is not grounded in reality.
An efficiently run private sector rocket company can achieve cost reduction with chemical rocket systems over that of a large aerospace company working off of government contracts. We are nearing the point of reaching the marginal cost with chemical rocket engines. In economics, the term marginal cost refers to cost of producing an additional unit of output, which is a function of the costs of the additional units of input needed for the production of that additional output unit. As the more efficient company realizes savings, the company moves rapidly toward the marginal cost point for developing a cost effective chemical rocket. It has not been possible to demonstrate that incurring marginal costs with chemical rockets will achieve low cost LEO. It does no good for this developing industry and would-be startups to promote as possible, that which is not. Furthermore, to invest irreplaceable and invaluable assets such as time, management skill, and finite capital into what is not plausible is to squander precious resources. This leads to failure at worst, and excessively costly success at best. It would be wiser to understand the realities of what the industry faces and undertake the production of goods and services that can achieve success notwithstanding the limitations. One could then invest the skill, time, and capital into finding plausible ways to accomplish the stated goals of low cost LEO access. In fact, revenue from businesses that can be sustained despite the limitations can be used to fuel R&D for the new products that can actually spur the development of the new space industries that are cited as possible once low cost space access is achieved.
to the degree that resources and rhetoric remain unrealistically committed
to that which has real physical, engineering limitations or political,
economic ones such as range cost and insurance, the development of new
space industries is adversely affected.
To further illustrate the need for a solid foundation for the assumptions used in reaching a conclusion, Michael Crichton recently used the famous Drake Equation for estimating the potential existence of extraterrestrial life in the solar system in a lecture delivered at the California Institute of Technology (CalTech). Although Dr. Crichton’s point was to illustrate the difference between science and speculation, it also applies to business. Crichton explains that the Drake Equation “can have any value from ‘billions and billions’ to zero. The problem, of course, is that none of the terms can be known, and most cannot even be estimated. The only way to work the equation is to fill in with guesses. And guesses --just so we’re clear -- are merely expressions of prejudice. Nor can there be ‘informed guesses.’ If you need to state how many planets with life choose to communicate, there is simply no way to make an informed guess. It’s simply prejudice” [Ref. 32]. Thus, guessing or estimating all the variables does not lead to science. To apply this concept to business, guessing will lead to whatever numbers are put in the pro forma or ROI forecasts, but will not necessarily lead to reality.
In business and finance, using information that is not grounded in reality, that is speculative at best, or that is exaggerated, while possibly producing a desired result and conclusion, does not make the result or the conclusion accurate, useful, or valuable. However, if the person being presented with the information does not know the weakness of the underlying assumptions, then the end result is skewed toward the irrelevant end of the spectrum even more. As these conclusions, without being based on a sound foundation, circulate through various aspects of the alt.space community, the financial markets, specific business and industry sectors, damage is done. This damage is felt the most by those that are striving for accuracy, reality, and high quality business and strategic planning for their ventures. As investors get burned by having bought into the rhetoric, the word spreads and other investors become sensitized to the fact that much of what may be said about alt.space business investments and opportunities is nothing more than speculation at best, garbage at worst. To the degree that junk and inflated rhetoric filters into the traditional banking, venture capital, and investor domains, the odds of the damage showing up as difficulties for those seeking capital and higher capital acquisition costs for the legitimate business opportunities in alt.space multiply demonstrably. Until the industry does a better job of toning down its rhetoric and extravagant business assumptions, it will continue to be bound by our 5th law:
“Aviation management will consistently avoid high quality business planning and will ignore the technical and financial realities related to their industry.”