🔑 Key Takeaways
- With over 600 pre-paid deposits for trips to space, Virgin Galactic's success in opening up space tourism could lead to a significant increase in the number of people who have been to space. This growth market is attracting more companies and making the space ecosystem one of the most exciting places in technology right now. Follow the developments in the space industry as the frontier of space continues to open up.
- Offering prizes for innovative solutions can be a cost-effective way to spur progress and achieve significant results. The success of the Orteig Prize and the XPRIZE demonstrate the potential of incentivizing innovation with rewards.
- The Ansari XPRIZE was funded through a combination of donors, including the Ansari family, and challenged teams to meet tight deadlines. Scaled Composites' innovative feather system for their spacecraft won the prize and continues to inspire new advancements in aerospace technology.
- Scaled's feather design and White Knight launch made SpaceShipOne the first private aircraft to reach supersonic flight and receive a private license to go to space, backed by Microsoft co-founder Paul Allen.
- The partnership between Burt Rutan, Paul Allen, and Richard Branson led to the formation of Virgin Galactic, offering civilians an opportunity to experience space tourism at an affordable price.
- Developing a new industry, especially in the space sector, comes with enormous challenges such as funding, setbacks, and safety concerns. Even with wealthy customers and investments, success is not guaranteed.
- Virgin Galactic's success and setback show that vertical integration and innovation are crucial in space travel, but challenges and risks still exist.
- Despite setbacks, Virgin Galactic continues to innovate and attract interest in space tourism, backed by major funding and recognized by NASA.
- Private companies staying private longer can lead to a raw deal when they eventually go public. Chamath Palihapitiya suggests SPACs, which are becoming increasingly popular, as a solution to the problem of liquidity.
- Chamath's SPAC approach offers a unique way for nontraditional tech companies to go public without the risk of mispricing usually found in traditional IPOs.
- Virgin Galactic, merged with SPAC, has yet to see revenue from flights but has generated excitement and potential for a large return from public market investors. Michael Coglazier, CEO with Disney parks experience, could align well with the goal of creating a new experience in space.
- Virgin Galactic aims to revolutionize space travel as a prominent industry player by offering Disneyland-like experiences. Yet, delays and competition from established players such as SpaceX are challenges. Meanwhile, the use of SPACs to finance space exploration efforts is a promising development for the space industry.
- Using a SPAC requires only one believer to make a high-risk bet compared to traditional methods and can provide huge potential revenue with impressive gross margins.
- Private market investing can offer greater benefits than public market investing, including proven business models, government contracts, higher valuations, diversified business strategies, and larger amounts of funding. It is important for investors to understand the differences between the two markets before making investment decisions.
- Investing in untested ideas and being comfortable with taking risks can lead to outsized returns. Balancing lower-risk investments with higher-risk ones is vital. Government support can also enable private enterprise to succeed.
- Advancements in technology and government support have made the space industry ripe for investment opportunities through special purpose acquisition companies (SPACs). The potential market for space travel is vast and profitable.
- Investors should consider the risks involved in investing in SpaceX's space tourism due to capital requirements, potential delays, and uncertain demand. Existing shareholders may face dilution, and building power and generating cash flow could be challenging.
📝 Podcast Summary
The Potential Impact of Virgin Galactic on Space Tourism
Virgin Galactic, if successful in opening up space tourism, will have a massive impact on the percentage of our species to go to space. Only 573 humans had ever been to space by August of 2019, and Virgin Galactic already has over 600 customers who have prepaid deposits on their trip to space. This shows that space tourism is a potential growth market, and we can expect to see more companies focused on space exploration and tourism. In addition, the space ecosystem is poised to explode over the next decade or so, and this is one of the most exciting places in technology to be right now. So, keep an eye out for the developments in the space industry, as more and more companies try to open up the frontier of space.
The Concept of Using Prizes to Encourage Innovation
Using prizes to spur innovation is a pretty cool idea that provides an amazing amount of leverage on your dollar. The idea was first realized by the $25,000 Orteig Prize which was won by Charles Lindbergh in 1927. Fast forward to 1995, Peter Diamandis puts forward an idea for a similar prize, this time for space that anybody who can launch a spacecraft up to the Krmn line twice in two weeks with the same vehicle will win a $10 million prize. It takes quite a while to secure the funding, but notable early donors include Tom Clancy and the Lindburg Family Foundation. This idea of incentivizing innovation with prizes has now gained much traction, as exemplified by the XPRIZE which is still active today.
The Ansari XPRIZE and the Innovative Feather System developed by Scaled Composites
The Ansari XPRIZE was funded by a combination of donors, with the largest contribution coming from the Ansari family. The remaining amount was raised through a hole-in-one insurance policy and credit card deals with First USA, which required the teams to meet a tight deadline. The only credible team that entered the competition was led by Burt Rutan and his company, Scaled Composites, who designed the unique feather system for their spacecraft. Scaled Composites specializes in innovative designs that push the boundaries of modern aerospace and physics, using lightweight composites to achieve new goals. Their success in the competition made them a legend in the industry and their design continues to inspire new innovations in space exploration.
The Revolutionary Design and Launch of SpaceShipOne
Scaled built a lightweight aircraft called SpaceShipOne with a design named feather that applies maximum drag to make the aircraft stable while coming back to earth slow enough, thereby eliminating any issues related to heat. The feather flips into the correct position that is required. The SpaceShipOne is launched through a mothership, the White Knight, which drops it at around 50,000 feet after which the rocket ignites and flies straight up. Paul Allen, the Microsoft co-founder, was a secret backer for the project with a funding of around $20 million. The SpaceShipOne achieved the first private manned airplane supersonic flight, and the US Department of Transportation issued Burt and Scaled the world's first private license to go to space.
The Formation of Virgin Galactic and Space Tourism
The partnership between Burt and Paul Allen led to the formation of a secret project dubbed Scaled going for the XPRIZE. Richard Branson took notice and offered to buy Scaled's intellectual property and formed a joint venture with Burt's Scaled and Virgin Galactic to form the world's first space line. Virgin put up over $100 million to fund this project and launched a revenue model to sell tickets starting at $200,000 per person. Demand was high, and tickets sold out quickly, including notable celebrities like Angelina Jolie, Brad Pitt, and Lady Gaga. This venture helped civilians have a more affordable way to experience space tourism which was previously limited to a select few.
Virgin Galactic's challenging journey to commercial spaceflight.
Virgin Galactic's path to commercial spaceflight was long and riddled with setbacks, tragedies, and funding challenges. Despite multiple delays and safety concerns, the company managed to attract wealthy customers, secure a $280 million investment from Abu Dhabi's sovereign wealth fund, and build its SpaceshipTwo and White Knight Two vehicles. The company's valuation may have been driven more by its funding needs than by its actual financial prospects. Virgin Galactic's pivot to a new CEO, George Whitesides, brought in a space entrepreneur who was also one of the first customers to buy a ticket for a Virgin Galactic flight. The story underscores the enormous challenges of developing a new industry and technology, especially in the space sector.
Virgin Galactic's Vertical Integration & Pioneering Spirit in Space Travel
Vertical integration was crucial for Virgin Galactic's success, allowing them to design, build, test and fly a rocket motor all in one place. George Whitsides, the CEO, played a crucial role in integrating the company and landing a deal with New Mexico State Government to construct Spaceport America. They also expanded into the small satellite industry and saw a surge in customer reservations, but tragedy struck during a test flight in October 2014, leading to the loss of a co-pilot and serious injury to the pilot. This highlights the pioneering nature of space travel and the challenges that still exist in the industry.
The rise of Virgin Galactic from tragedy to space tourism.
Virgin Galactic's 2014 crash was likely the result of pilot error, which led to a redesign of the technology and a new company called Virgin Orbit. The company's VSS Unity spacecraft finally reached space in 2018, marking a major achievement after 14 years. Despite the tragedy, 603 people have paid $200,000-$250,000 to reserve tickets, and the company has a One Small Step Program where customers can pay $1000 to indicate their interest. Virgin Galactic secured a billion dollars in funding from Saudi Arabia's sovereign wealth fund in 2017 to continue operations, after spending a lot of capital from Abu Dhabi. NASA awarded astronaut wings to pilots who flew Unity to space.
The Rise of SPACs and Chamath Palihapitiya's Solution to the Liquidity Issue for Private Companies
The murder of journalist JamalKhashoggi made startups wary of taking investment from questionable sources. Virgin pulled out of a deal with Saudi Arabia after the incident. Chamath Palihapitiya, former Facebook executive, now investing his own money in a converted Berkshire Hathaway-style holding company, identified the problem with companies staying private longer and not going public, leading to a raw deal for the companies when they do go public. Chamath started exploring SPACs as a way to solve the issue of liquidity for private companies. SPACs leave less money on the table for investment banks and have become increasingly popular as a way for companies to go public.
Chamath's Clever Use of SPACs to Take Tech Companies Public
The SPAC approach used by Chamath was a clever way to take tech companies public without the mispricing aspect of traditional IPOs. SPACs were initially seen as a way to get bad companies public, but Chamath saw their potential for nontraditional companies that retail investors wouldn't invest in traditionally. Chamath's $700 million SPAC vehicle with $700 million in a trust merged with Virgin Galactic, bringing the company to the public market. In the deal, $674 million from the SPAC went into Virgin Galactic, along with an additional $100 million invested by Chamath. This method allowed Virgin Galactic to go public without the risk of mispricing found in traditional IPOs.
Virgin Galactic Goes Public Through SPAC Merger
Virgin Galactic is a publicly traded space company after being merged with a Special Purpose Acquisition Company (SPAC). The deal included Virgin Galactic and The Spaceship Company and brought in $450 million in new cash to the balance sheet. Although the company has yet to see any revenue from flights, public market investors have been enthusiastic about its potential for a large return. Asymmetric upside from the public market investment, driven by the lack of access to venture capital as an asset class, generates excitement for the stock. Michael Coglazier has been appointed CEO and his experience in the Disney parks business could align well with the goal of creating a new experience in the space industry.
Virgin Galactic's Launch to Space Delayed Due to Covid-19 Regulations
Virgin Galactic is on the cusp of launching passengers to space, with the first test flight scheduled for November 2020 and Richard Branson set to be the first passenger. However, delays have plagued the company in the past and the latest delay, due to Covid-19 regulations, has caused the stock to drop by 10%. Despite this, the promise of Virgin Galactic is immense and if they can execute on their vision of making space travel feel like Disneyland, they could become a major player in the space industry. It remains to be seen whether they can hit their targets and compete with established players like SpaceX. However, the use of SPACs to finance these types of endeavors is a promising development for the industry.
Why SPACs are a smart way to fund companies
Using a SPAC can be a great way to raise money and provide liquidity to shareholders. Unlike the traditional IPO process, a SPAC only requires one true believer to make a moonshot bet, instead of having to run a traditional book making process. Virgin Galactic's upside is huge and shareholders will be appropriately compensated if it works out. The company's future potential revenue is impressive, with the possibility of making close to $50 billion in revenue if 10% of the 1.8 million humans with over $10 million in net worth buy tickets. Additionally, if they can get to 1000 people per year, they can generate $160 million in gross profit with software-like gross margins, which can cover a lot of overhead, R&D, and G&A.
Advantages of Investing in Private Markets vs Public Markets
Investors prefer investing in private markets in SpaceX rather than buying retail shares of Virgin Galactic in public markets due to the former's proven business model, government contracts, and satellite launches. SpaceX's valuation is also 10 times higher than Virgin Galactic's due to its proven track record. While Virgin Galactic is focused on space tourism which is a market that doesn't exist yet, SpaceX is working on various additional business models like Starlink and future exploration of Mars and moon. Another difference between the two companies is the amount of funding they have received, with SpaceX receiving over $10 billion in non-dilutive revenue funding from government customers while Virgin Galactic has raised only $80 million from pre-orders. SpaceX's strategy of laddering up and stair-stepping into their current position has also contributed to its success.
The Power of Prize Competitions and the Importance of Balancing Risk in Investing
Running a prize competition can be a great way to stimulate innovation and attract capital to a market. Being willing to take risks and invest in new, untested ideas can lead to outsized returns, but requires being comfortable with looking like a moron and taking the heat. It's also important to have a barbell strategy in your portfolio, balancing lower-risk investments with higher-risk ones. Finally, sometimes it takes government support to enable private enterprise to succeed, as seen with the funding of Spaceport America in New Mexico, which was essential for Virgin Galactic's success.
The Potential and Profitability of SPACs in the Space Industry
The space industry is full of SPACs. Space companies are quick and efficient in raising capital to maintain speed and efficiency in keeping up with industry leaders like SpaceX and Blue Origin. Virgin Galactic's A+ scenario is a strong gross margin business with a fully reusable design, capable of generating $1.25 million per flight and making 65% gross margins. There is a potential market of 1.2 million people in the 10+ millionaire club who could afford a trip to space. Governments like New Mexico are enabling private sector innovation like the spaceport, which could be the center of the space ecosystem and benefit the government shareholders over time.
Potential obstacles for SpaceX's space tourism venture
SpaceX's plan to launch space tourism may face obstacles such as insufficient demand, delays in launch, and high capital requirements. Despite the potential for a profitable business, the high margins needed to make it sustainable may be challenging. There is a risk that existing shareholders may not see a significant return on their investment due to increasing dilution. Additionally, the horizontal disintegration of the core business could make it difficult to build power as a business and generate free cash flow. While the idea of space tourism may be novel and cool, there is a possibility that demand may not be sustained over time. Investors should weigh the risks involved in investing in SpaceX's space tourism venture.