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« Masten Space | Main | Rick Tumlinson »

Investment Climate Panel

There is a panel starting on the current investment climate for the New Space industry. It consists of Stephen Fleming, Joe Pistritto, and Esther Dyson. Steve and Joe were early XCOR investors (initial, I think other than founders), and have been coming to this conference for years (in fact, the investment deal with XCOR occurred here several years ago). Esther Dyson is better known as an IT investor, but she's recently gotten interested in space, having put together a space investors' conference of her own a couple years ago (though it was diluted somewhat with non-space ventures), attending this conference last year, and being at the X-Prize Cup last fall. (Note: she is the daughter of Freeman Dyson, and the sister of George).

Infinite amount of capital out there, but you have to find the right sources, with the right story.

Esther: trying to think hard about what's different this year than last, so she can offer new material. Companies are a year older. Biggest change is financial environment around it. More money this year, with hedge funds making multi-billion dollar deals. More excitement among investors, "more ready to be stupid." More attention being paid to space because China's doing something. Unfortunately, better for NASA and the military, but could still help.

Bad news: two meetings with XCOR and CSI this morning. "The fitness function is all based on NASA." Not on how well does it do, but what does NASA want.

Pistritto: The thing that changes year to year in the space create the reality. Every year that goes by with progress and success, and more people flying to ISS as private citizens, decreases the giggle factor, and it's almost gone now. This is good because even if investors do stupid things, they don't want to look stupid to their friends. Space is becoming cool to invest in now. Not as concerned about NASA--at least NASA's now willing to try to help. People are actually getting money from NASA to build useful things. Still not quite at the level where we get VCs to write checks, but getting close.

Fleming: Elon helped with his launch on Tuesday. Nice thing that has happened is that while NASA can step on the mammal by accident, or strangle the baby by rolling on it, but it's no longer actively trying to kill us. May be clumsy in how they partner, but they're trying, and don't minimize that. We don't have to live on their largesse, but don't have to hide from them either.

Dyson: We have to lay out the hard path that you have to tread to raise money. You not only have to pay attention to investors, but lawyers. Issues of international law, ITAR, insurance, liability, intellectual property rights. You may get VCs as investors, but they'll be concerned about the lawyers. Due diligence will be an issue.

Fleming: VC firms have a cadre of young people who will run models, chase legal issues, etc. You aren't ready for them yet. Most VC firms aren't ready, but individual VCs or their friends might. Need to have an exit strategy, because VCs really want cash, soon. There have been no exits in the industry yet. There will be. But for now, need to focus on folks interested in the long haul and building a company. Drive toward angels, holding companies, families, foundations. Not the best use of time or money to go after Silicon Valley VCs.

Dyson: To the extent that investors are interested, space tourism is a lot more attractive than rockets and technology. XCOR now talking about "user experience," and not just the engines. If you're doing something that can talk directly to consumers, talk to investors on that level.

Pistritto: Biggest difference between companies in this business and others is that many of them don't have business attributes. You have to be a businessperson first and technologist second. In this industry unfortunately, the technologists are high up the food chain and often founders. Hierarchy of investors: long-term long-holding period, all the way out to debt investors who will own your engines. There are angels, angels as groups acting as VC fund, thinking like angels, but acting systematically, VCs who are doing it with other people's money. We have the rich guys who started their own and some by angels, but none from an actual investment fund (other than Kistler, he's reminded).

Dyson: If you're a great technologist, you don't have to be a businessperson, but you have to find a partner who is, and find one you like and can work with. You can't do without it.

Fleming: Has to convince people at Georgia Tech that they don't want to be CEO of a company. CEOs get fired when things go sour. Chief technologist generally don't.

Fleming: Coming end of Shuttle has been good, because it has at last opened up a debate of what comes next, and opportunities.

Pistritto: Example of a company that is competing with the government that offers the same thing for free is Zero-G, despite the old dictum not to do that.

Dyson: In response to what investors will provide--money, contacts, common sense, political clout, helping outsiders understand us. Good investors will figure out what we need, and help us get this.

Pistritto: Don't just look to investors for money--they can provide other useful things.

What's the end game? Always IPO, merger/acquisition?

Fleiming: Short answer is yes. VCs aren't operating with their own money. They're operating with someone else's money who want their money back with a multiplier. If you take venture money, your shares have to be redeemable for it. Mergers generally better than going public (particularly since Sarbanes-Oxley). Once you've taken an investor, it's no longer "your" company. And VCs will want more of your company than angels or your brother-in-law, but they can also bring in more money.

What can we expect from the angel community?

Fleming: Need to do due diligence on investors. Ask other people in whom they've invested, ask what they're like sitting across the boardroom table monthly, ask them for their successes and failures.

Dyson: An approach to investors. Ask them if they remember when PCs were toys, PCs were a joke. They want to build new industries.

To question about risk aversion:

Fleming: Someone in this room will kill someone in the next five years. You won't hear that at most investment conferences.

Dyson: You've never been to a medical technology conference.

Pournelle points out that the most expensive tickets at NASCAR races are the locations that are most likely to be hit by a car gone astray. There is value to risk and danger for some people.

What would be the best thing that NASA could do for this industry?

Fleming: Pay money for tonnage of water in orbit. We need markets.

Pistritto: Key elements--good team, plausible business idea, plan to implement.

Dyson: Has to be coherent. Have to be able to explain to her. If they can't explain to her they may not be able to to customers either.

Fleming: Tell me a story. If you can't do it without viewgraphs, you may not have the story.

Posted by Rand Simberg at March 24, 2007 02:22 PM
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I was at this event and heard a great talk on venture capital. It was so good, I dusted off a business plan a small team of friends had written a year ago.

Question: There was some talk about an article Esther Dyson had recently written. Where was it published? I didn't hear the publication or exact date.

Nice reporting,

Rick Wills

Posted by Rick Wills at March 27, 2007 01:20 PM

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