Moonshots and Markets

On Spaceflight, & the Virgin Galactic / Social Capital Hedosophia merger

On July 20, 1969, the first manned mission to land on the moon, Apollo 11, marked a dividing line between the era of when humanity was confined to one world and when it began its first steps as a space faring civilization. It was also the end of a technological race between the world’s two largest nuclear powers’ space programs (which was the catalyst for the mission). That race, a footnote in history, is happening again - except between global scale corporations.

Investors can soon trade where no shareholder has gone before: the world’s first publicly traded space-tourism and commercial space-craft maker company - Virgin Galactic Holdings, Inc.

Social Capital Hedosophia Holdings, ticker symbol “IPOA”, founded by venture capitalist Chamath Palihaptiya, will merge with Richard Branson’s Virgin Galactic (est. 2004) to create a publicly traded $1.5B USD spacecraft maker and space-tourism company.

The public debut of the company, to be called “Virgin Galactic Holdings, Inc.”, involves Hedosophia’s acquisition of 49 percent of Virgin Galactic, which includes ship builder Spaceship Co. - Palihapitiya will invest $100M USD of his own funds. 

It’s comparable to the early days of a now essential transportation technology which was risky and expensive during its first few decades but has been around since the early 19th century: trains and railroads.

Back in 1828, when everyone traveled on foot, by horse, by boat, or by canal (which required enormous effort and expense to create) one of the first railroad companies, the Baltimore & Ohio (“B&O”), was funded, sparking a revolution in transportation. The last surviving signer of the Declaration of Independence, Senator Charles Carroll of Maryland, then 91 years old, presided over the B&O’s shovel opening ceremony on July 4, 1828. A then gigantic sum of $4 million dollars was raised for this venture, barely more than a year old, in just 12 days - one of the first transportation and tech investment deals of its kind in the U.S.

(Sen. Charles Carroll (Md.), last surviving signer of the Declaration of Independence)

(Image of “The Tom Thumb”, the B&O Railroad’s first train)

Today, trains continue to be provide reliable low cost long haul freight transport, and produces returns for investors including Warren Buffett’s Berkshire Hathaway. The investment runway for spaceflight as an industry could mature eventually and produce reliable & mundane returns for 23rd century investors. Now however we are still in the risky early days stage of spaceflight.

The two key figures in this story are Chamath Palihapitiya and Richard Branson.

Palihaptiya, after a career in tech (at AOL & Facebook), became a venture capitalist and founder of Social Capital. Hedosophia went public in September 2017, raising $600 million dollars, to help private startups bypass undertaking the IPO process with the pitch of “IPO 2.0”.

Hedosophia’s financial structure has been around for a few decades, colloquially known as a “blank check” company. The structure is also known as a special purpose acquisition company (“SPAC”), a company whose purpose is to look for and buy businesses. Shareholders would become investors in any business bought by it. An important detail is that a SPAC has 2 years to buy a business or else it must return its funds to its shareholders.

In this case time has run short for Hedosophia and almost two years have passed since its IPO.

One more caveat, via Techcrunch’s 2017 coverage of Hedosophia’s IPO to keep in mind:

In the Hedosophia prospectus, under the innocuous caption “Founder Shares,” we learn that the sponsors of the SPAC have granted themselves 20 percent of the equity of the company. At the time of the deal, that was worth $120 million. You read that correctly. For the investors who capitalized the SPAC, that is a pretty substantial haircut to net asset value, and for a target company seeking a route to the public markets and for the investors who bank-rolled it, the SPAC sponsors will charge it a nine-figure toll to get there.

With the deal clock’s time running out, and the opportunity for IPOA’s sponsors to get “20 percent of the equity of the company”, it’s no wonder this deal is happening.

Palihapitiya who will invest $100M USD in the Virgin deal will become the Chairman.

Branson presiding over a business empire of 60 companies with 35,000 employees and $21B USD in annual revenue, famed for his founding of Virgin Records and Virgin Airlines, started Virgin Galactic in 2004 with a prototype built to win the Ansari Space X prize.

Virgin Galactic is just the first of what could be many commercial spaceflight companies for us to invest in. The most famous of these competitors include SpaceX and Blue Origin, founded by Elon Musk and Jeff Bezos. Virgin Galactic may be the first publicly traded Space flight startup, it is likely to have company soon enough.

While investors can invest in rocket and spaceflight technology via defense companies such as Boeing and Lockheed Martin, among others, Virgin/Hedosophia will be a focused non-defense spacecraft builder space-tourism business.

Palihapitya has described Virgin as the space industry’s version of “Tesla” and we can see the analogy. This is a business that, like Tesla, could transform what was an expensive and uncommon product into a mainstream product and service, and forcing competitors to catch-up. Tesla began with a sport-car and Virgin Galactic will begin with rich astronauts. The use-cases will expand and then extend into new markets and users.

The strategy is to drive costs down with reusable spacecraft and promoting luxury tourism as the first use-case. In the language of the startup world we begin with a “toy”, a plaything of the rich, as the technology is made more affordable and commonplace, as the products move up the “utility curve” - as toys evolve into a work tools.

At this time there have been only 571 humans in total who have traveled into space (508 men, 63 women) since the dawn of the Space Age, and most were due to national space exploration programs. Virgin Galactic’s initial focus on millionaire astronauts may double that number soon enough since about 600 reservations, totaling at $80M USD, have already been made so far.

What will the flights look like? The recent filing explains that they will be launched at a company owned facility, “Spaceport America”, based in New Mexico, to commence during H1 2020. The spacecraft will take off and land like a plane, capable of reaching suborbital heights, for a 90 minute flight.

And what is the flight path for revenue? Take it with a grain of salt since it is truly early days.

This is one of the first publicly available investments rooted in The Big Stack theme “Children of Daedalus”, which traced the history of flight to its roots in mythology. The Daedelus myth is also a cautionary lesson about the risk of hubris. Daedelus was a genius who would have fit in today’s startup world but he was imprisoned in a prison tower and forced to be build for a tyrant. He invented an escape however: wings.  Icarus, Daedelus’ son, while escaping with his father from the tower prison, flew too close to the sun. The sun’s rays melted Icarus’ wings, and he fell to his death, with Daedelus watching helplessly.

Sadly, Virgin Galactic also experienced real and similar tragedy when a 2014 test flight went wrong, killing 1 of the 2 pilots (compelling Virgin to assume in-house control of spacecraft construction). Since then, however, Virgin recovered and was able to reach suborbital space in Dec. 2018 with the first crewed space vehicle for commercial service - which was also the first human crewed spaceflight to launch from U.S. soil since 2011.

The history of railroads included accident and death, especially during its early decades, but rail usage and infrastructure continued to grow. Looking ahead we must brace for both tragedy and triumph in private space flight, as it grows in size and importance within the global economy.  Hacking Finance reported that “analysts at Morgan Stanley think space commerce, a $350 billion industry, will triple by 2040” and noted that during the first half of 2018,  “private launches attract the most VC funding within space infrastructure—62 percent”.

Great risk and adventure, and an investment horizon that could run for centuries is a long distance and long term story.

Links include:
https://www.sec.gov/Archives/edgar/data/1706946/000114420419034053/tv524921_ex99-2.htm