Few Venture Dollars for Big Space Dreams –

One day soon Paul Allen will be able to hop into SpaceShipOne and take off for a zero-gravity board meeting. Unfortunately, he will probably find himself alone.

While many venture capitalists profess deep faith in space travel and exploration, few besides the independently wealthy are stepping up to the launching pad. Some say the space industry is still stuck in outdated ways of doing business that are’t conducive to venture capital investment. Most simply believe it’s far too early to invest. “Space is still looking for a business model,” says William R. Hearst III, a partner with Kleiner Perkins Caufield & Byers.

There are a few VCs and individual investors pushing the envelope. The most notable is Allen, a co-founder of Microsoft and founder of venture firm Vulcan Ventures. He’s the moneyman behind Scaled Composites, a Mojave, Calif.-based company that is building commercial spacecraft. Scaled Composites made headlines in June when its SpaceShipOne became the first privately financed aircraft to reach outer space, soaring more than 60 miles into the sky.

On the heels of Scaled Composites is Space Exploration Technolgies (Space X), which has been funded by Silicon Valley entrepreneur Elon Musk, co-founder of PayPal and Zip2. Space X plans on launching its rocket this year. Once the rocket’s viability is proven the company reportedly plans to seek between $50 million and $100 million in financing, possibly from venture backers.

Outside of Allen and Musk, few venture capitalists have warmed to the idea of investing in space travel or closely related technologies. VCs invested just $133 million in the space sector in the first half of this year, down from $285 million in the same period last year, according to Thomson Venture Economics (publisher of VCJ). For all of 2003, VCs invested just $416 million in space-related ventures, up from $328 million the prior year.

“I think [venture investment in space travel] is an absolutely wonderful idea, but my financial background tells me that venture capitalists are looking for greater returns on a shorter timeframe than space travel will allow,” says Ian Randal Strock, vice president of Lunar Resources Co.

Room with a View

Strock hopes to one day put hotels and retirement communities on the Moon. He claims that a commercial Moon base is only two years away from being technologically feasible, but he admits that getting financial backing for such an enterprise will take much longer. “If you’re investing solely for the return, you can get a better return elsewhere faster. It’s for someone who is looking for more than just a dollar return.”

A principal champion of private space flight is Peter Diamandis. He’s chairman and CEO of Zero Gravity, which provides of special airplane flights that produce space-like weightlessness. He is also the chairman of the X Prize Foundation. Diamandis admits that space tourism as an industry is far from taking off. “We haven’t had the Netscape-like successes that would cause additional resources to come in,” he says. “We hope those are just around the corner. The risk/reward profiles are different than people in the venture capital world are normally used to. But we’re at a stage where the market is demonstrable.”

Zero Gravity estimates that the cost of a private trip into space aboard a modified aircraft like SpaceShipOne will initially be $100,000. The company expects this to drop to about $20,000 within five to eight years. That’s when the market will be most attractive to venture investment, says Diamandis. “We’re in the period of time today when the Apple Computers and the Amazons and the Netscapes of the market are being created,” he says. “It’s going to take some visionary venture capitalist to step in and back a few of the players.”

Angels Yes, VCs No

Space investment so far is more of a playground for the wealthy than a proving ground for private equity investment. One individual investor who has been at the forefront of private space travel is Jim Benson, chairman and CEO of SpaceDev, which developed the rocket engine used by SpaceShipOne.

Benson has been very critical of the U.S. National Aeronautics and Space Administration (NASA) and the large contractors that serve it. “What I saw in 1996 was a $100 billion a year industry bogged down in the old mainframe paradigm that bigger is better,” he says. “[NASA and large contractors] have a term that they use called heritage.’ If the technology hasn’t flown before, it has no heritage and it’s too risky to fly. Well how are you going to advance if you don’t try to fly things?”

Benson’s view of the venture capital industry’s ability to help the space sector get out of this rut is equally dim. “I have seen absolutely zero venture capital invested in entrepreneurial space and I don’t really expect to see any in the near future. Venture capitalists seem to be more like sheep in a herd and they only start going in a certain direction when there’s critical mass and there’s safety in numbers.”

Not that he thinks VCs should be falling over themselves to invest in space ventures. “I would advise venture capitalists to be very careful,” he says. “It’s so easy to get burned in this business.”

Cooler than Space Ships

Others see opportunities for VCs to make selective investments. Howard Morgan, an investor and board member of Zero Gravity and former vice-chairman of Idealab, says the sector is now ready for some early stage investments. “There are lots of applications that can take venture type investments and more of them will be coming over the next five to eight years,” he says. He adds also that there are manufacturing investment possibilities related to space travel. Perfect spheres can be created in space and they would have commercial used in industrial manufacturing. There are also opportunities for the pharmaceutical industry, as applications for some drugs work better in weightless environments.

Nova Spivack, CEO of Radar Networks and an investor in Zero Gravity, also sees opportunities to fund spacer-related projects that turn into down-to-earth products. “Because of the constraints of getting things out of Earth’s gravity, there is a push to make things very light and easy to move,” he says. That’s spurring a lot of development that then spins out into commercial products. Spivack is an investor in a “stealth MEMS company” that is developing new forms of propulsion and has backed another company that has developed a polymer that can conduct energy at varying temperatures.

Gotta Have Faith

While he has a lot of faith in space-related technology, Spivack says that, “Until there are some very near-term revenue opportunities, you won’t see too many venture capitalists backing these companies. Once we can change the economics so that you can play in the space with a $10 million investment, that will make it much more interesting.”

Just how long that will take is anyone’s guess. The upbeat Diamandis of Zero Gravity cites a study completed in 2002 by Zogby International and the Futron Corp. that says the market for space tourism will generate more than $1 billion in revenue a year by 2021. That’s 17 years from now.

Looks like Allen will be floating around by himself in SpaceShipOne for a long time.

Email: matthew.sheahan@thomson.com