Jeff Foust has a summary of the legal, investment and insurance panels over at today’s issue of The Space Review.

And since no one seems to have blogged it in detail (and it’s hard for me to live blog while on a panel, though maybe I should try it next year, but with a net…) here’s the story that I told at the beginning of Saturday night’s wrap up, that I think is an interesting view of the change in the investment climate for this stuff.

When we look from year to year at these things, progress seems measurable, but slow. It’s only when you look to the distant past that you can see how far we’ve come. Here’s a tale of two space entrepreneurs. Or rather, two tales of one space entrepreneur.

Back about a quarter of century ago, in the age of Joan Jett, the beginning of CDs and the useful PC, and Winchester hard drives, some of which were as large as ten whole megabytes, a few guys (named Jim Bennett, Phil Salin and Bevin McKinney) were up in Palo Alto looking for money. To build commercial rockets. They went up and down Sand Hill road, pitching their plan. One investor looked it over, looked them over, and said, “You know, you fellows look like you know what you’re doing, and seem like a good team. But I don’t know anything about this rocket stuff. How would you like to start a hard drive company?”

Well, to make a long story short, they found money somewhere else, started a couple rocket companies in the eighties, and Bennett got out after the American Rocket SET-1 failure in 1989, at which point he decided to go make a large fortune doing something else, which he could turn it into a small fortune building rockets, but at least without having to deal with investors. Internet companies were founded, and died, in the bubble pop and with 911.

But in 2006, with the economic (and tech stock) recovery, it seemed like a good time to resurrect the IT ventures. So he went out once again looking for money. He went up to Wyoming, where seldom is heard a discouraging word, and showed some people the business plan. They looked at it, and said, “You know, this seems like a pretty good team. And IT is good, and we could use more of it up here. But when we see your resumes, we were wondering. How would you like to start a space company?”

Thomas James writes that he was smarter than even he knew.

This is the last of my conference blogging, probably, unless I do a wrapup tomorrow. I’m on a conference-ending panel in a few minutes. You’ll have to read Clark to find out what happens.

This is a concept that Paul Breed and his son are developing for the Lunar Landing Challenge. Showing a video of servos and valves. Demonstrating igniters, have flightweight tanks and motors. Built a 650 lbf ablative motor, which is demonstrated. Uses composite cylindrical tanks, wound on flourescent light tubes, with tube caps at ends. Leaked at fifteen hundred psi, failed at nineteen hundred. Most weight in the end caps. Mass ratio of 6. Failure mode was shearing of aluminum pins, not plastic failure.

Valves initially based on Mikita cordless drill, hooked up to a ball valve. Ultimately ended up with UAV servos from Tokyo Hobbies in Japan. Have valves, tanks, built aluminum igniter, using ideas from Carmack’s blog.

Basic vehicle layout will have four modules in quadrants, legs laced together with rope that stretches for landing gear. Has built a test vehicle. Has a blog, if we want to follow progress.

Name based on quote by George Bernard Shaw.

This should be a barn burner. I can’t imagine he’s very happy with NASA and Mike Griffin. As Jim Muncy said yesterday, the truce may be over. Talk starts in a few minutes.

Thanks Henry, says this is his favorite conference. Opens with a quote from T. E. Lawrence about dangerous dreams. Says that the people here are “dreamers of the day.”

It’s an interesting field right now, and he decided to get involved with a company called Orbital Outfitters, which is leasing space suits to the startups. Of all the things he’s been involved with in the not-for-profit industry, he enjoyed them, but he finally realized why they called it not-for-profit. Having the time of his life as an entrepreneur, and never has been as scared in his life. Has a holding company called Extreme Space, of which Orbital Outfitters is the first one. Suits are “get-me-down-alive” suits. Hope they’re never used, but they have to work. IS-3 “Industrial Orbital Spaceport.” First thing he learned starting a company was that he didn’t know a damned thing, but he’s hiring people who do, and are training him.

Press release coming out next week, hiring Jonathan Clarke, who’s a world expert in survivability (his wife, Laurel, died in Columbia).

Not exactly Levis to the miners, but there are niches out there. A second entity will manage human factors and physiology. A third one will be announced this summer. General Genius, which will handle legal issues, and others.

End of talk about his company. Next words are just Rick Tumlinson’s opinion.

Laying out a paradox. Best hope for humanity is opening up space. Worst enemy of that is the US government and its policies.

Chart says that NASA is killing US Space. Bureaucracies, tokenism, culture of broken promises, lack of understanding of “commercial,” Powerpoint Pioneering replaced Real Exploration. When cash gets short because they blew what they sold it yesterday. We are not going to the moon. That is done.

Getting tired of hearing we need to put together a NACA model. Wants to see someone do something about it. NACA Reformation Act of 2009, to be ready for the coming collapse. Long chart with lots of bullets. Going by too fast to capture. Points out absurdity of NASA’s latest offer of station for commercial. “What does that do to Bigelow?”

Wants to remove ITAR restrictions with closer allies, create White House Space Council, other ideas (I’ll try to get copies of the charts). Says that we need “commitment,” with long quote to that effect. Wants to start wikis about why and how to reform NASA. Sorry, just can’t type fast enough to transfer the firehose output to keyboard.

Applause.

If you want to lease a suit, rick@ricktumlinson.com

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.

Dave Masten is talking about their company, that’s now based in Mojave, just down the road from XCOR. Brief delay due to computer glitches. Meanwhile, here’s a good roundup of what’s going on in New Space in general from Alan Boyle, who unfortunately couldn’t attend.

Giving up on the A/V, and just started talking instead.

Nothing in the literature on building expendable launch vehicles tells how to build reusable vehicles. For instance, factors of safety don’t work, need more robustness. “Build a little, test a little,” is working fine, and making similar progress to Armadillo but behind their schedule. Six months ago, they were two weeks from flight, and still are. As far as he’s concerned, Armadillo won the LLC last year. They intend to give them a run for their money this year, but they may not, because they’re actually busy with potential contracts. Nothing signed yet, but the exposure of the X-Prize Cup was apparently good for business.

Question from John Carmack about selling engines: same answer as XCOR–liability issues are going to be a problem, they have some ideas how to deal with this, but it’s going to add to the cost of the engine. Cost of machining engine is tens of thousands of dollars, but sales price will have to be much higher. Have been looking at indemnification program with one of their insurance brokers. Thinks that some of the risk is reduced because users will likely be flying under FAA-AST review.

Noting that Mojave has been great for them, and when they need something done, people figure out how to do it, rather than telling them that they can’t.

What is needed for success. Start with large fortune, large ego, and confidence, or you won’t make it. Preparing for both Level 1 and Level 2 of Challenge, and hoping for both. Four people in Mojave, one business development guy (Michael Mealing) in Atlanta, and a few volunteers.

Applause as screen finally comes up.

Goal: aircraft-like operations of reusable rockets, quick turnaround, several flights per day. Spend a lot of time testing components, nothing except propellant changed between flights. Components seem to have almost infinite life. No single-failure modes, failures need to be graceful. Multiple failures don’t jeopardize payload or public. They’ve built a prototype to validate engine, controls and operations. Original design was a maintenance nightmare in terms of leaks, and they redesigned to eliminate it.
History: ’01, not just a hobby any more
’02, “Who’s this Mormon?” (Jon Goff)
’03, Founders in same room at same time, “We’re actually doing this.”
’04-’05, setting up facilities, igniter work, vehicle/engine design
’06, Engine works well, but need new injector, because hand-sharpened tools of manufacturer were giving inconsistent results, think they have the problem fixed now. Built first prototype vehicle.

Next steps, finish vehicle, initial flight tests, then next version that will be LLC capable. Plan two test sessions a week of flight tests, of various durations.

Goal is operable suborbital, operable, responsive vehicle to a hundred kilometers. Vertical takeoff, vertical landing. Three-legged vehicle. Planning pistonless pumps, retractable gear, increased thrust, with more or bigger engines, RCS, “space rating” components, then go to space. Running on isopropyl alcohol/LOX. They were close to having permit applications for LLC last year, and anticipate no FAA problems this year.

Further plans, orbit, probably two stage. Notes that they’re different from Armadillo in that their primary markets are research/education, rather than passengers. Wants to have system that can allow rapid reflight with experiments, a capability that the research community has never seen before.

He’s talking about the orbital prizes discussion on the Arocket listserv a couple years ago, and going to give an update on Centennial Challenges (Two competitions coming up in the next five weeks).

Major points:

Value of purse: bigger is better
– attracts more sponsors
– enables market transformation
Number: more is better
-attracts more competitors
-attracts investors, sponsors
Don’t specify reusability–specify high flight rate
Range of suggested payloads to orbit
1, 10, 300 kg
No docking needed
Showing graduated matrix for level of performance and number of flights

Now showing an NASA internal study based on conversation with Bigelow (June 2004)
After talking to Human Rating Board, major issue from Chief Medical Officer–would be unethical to allow other companies to take passenger risks (with training and conditioning) that NASA didn’t allow astronauts to take, so missed opportunity to team with Bigelow.
To maximize number of competitors and probability of winner, minimize number of crew, repeatability, duration.
To maximize commercial benefit with challenge outcomes, increase number of crew, then repeatability.
Did mass growth calculations using historical data, assuming 300 seconds Isp, recognized that government cost estimates weren’t reliable for figuring out what private entities could do.
Findings:
1-2 crew six hours
1 crew twelve hours
others far term, or too expensive
Suggested:
Two crew, launch to LEO 6 hours, safe return to earth. Bigelow wanted four crew, docking, higher altitude, etc. So no deal.
Had Paragon do an external study, with bottoms-up point design, using historic cost/capability relationships. Recommended well-defined goals from the beginning: strengthen industry? (sorry, charts and words flying by too fast to keep up).
$50M too low, $100M lower bound, $250M ideal (higher would encourage pot stealing by big boys). Suggested first and second prizes, prizes should be tax free. Estimated cost to compete was on the order of $200M. Net prize value should be at least $100M. Viable commercial market needed to really make it attractive.

Bottom line: no orbital prize.

Centennial Challenges Status
Benefits to NASA: looking for technology “spin-in” (leveraging off civil developments). New sources of innovation, leveraging of taxpayer dollars, increased awareness of science and technology.

Five allied organizations help manage the program for now fee, NASA only puts up money. All of taxpayers’ dollars go to purses. Their benefit is to get visibility by associating themselves with NASA, and they’re allowed to use the “meatball.”

May 2-3, astronaut glove challenge in Windsor Locks, Connecticut. Just testing the bladder restraints.

Regolith excavation at the Santa Maria fairground later in May, using eight tons of regolith simulant from Wisconsin.

Personal Air Vehicle is coming up in August (at AirVenture?)

Beam Power, Tether, and Lunar Lander coming up in October at the X-Prize Cup. Next year is a potential MoonROx competition in June, to get breathable oxygen (2.5 kg in four hours) from lunar simulant.

Had problems last year with people who apparently didn’t read the rule books.

No new appropriations from Congress for this. Had to figure out how to take the money they had in hand and distribute it for prizes. have a plan out to 2011, but doesn’t allow new prizes unless Congress comes up with more money (was in discussion for three new competitions for $7M, but broke them off until they get more money). Recognizes frustration of dealing with NASA when it reneges all the time. Many purses broken up into first, second and third place.

In future years, if they get money, the lunar excavation and oxygen extraction will be combined into a single competition.

In response to a question, he points out that private prizes have much more flexibility if they can raise their own money, because they won’t be hindered by all of NASA’s constraints. Notes that they were also looking for a lunar robotic landing challenge, with a purse of $45M. Ed Wright notes that there’s a Capitol Hill roundtable planned to discuss prizes on the 2nd and 3rd of June.

OK, this time for sure.

Starting off with a thank you. This was his first conference in a couple years that he’s had time at the conference to actually see the conference and talk with old friends, because he wasn’t consumed with meetings.

XCOR turned a profit last year. A small one, but they’re still actively involved in the development of product lines, so all that means is that the money temporarily came in faster than they could spend it. Had about $3.7M in revenue last year, probably about the same this year for reasons to come later. About 34 employees.

They are building vehicles to help us go, but because they are the largest company that isn’t well funded, they “flip burgers for a living,” in that they look for customers who need problems solved that they also need solved, and have managed to turn R&D from a cost center to a profit center, but it’s still useful R&D for their goals.

Nitrous oxide/methane thruster in the fifty-pound class for an attitude control thruster. Customer’s application is different than XCOR’s, but it’s still good.

Pump-fed fueled, pressure-fed lox engine for the rocket racer. They turned out to be ahead of the rest of the schedule for the rocket racer activity, and they were asked to slow down to let the rest of the things catch up. Ramping back up now, though. They will be mass producing engines (a dozen in the first order), with a ten-minute turnaround, which will be an eye opener for the military, particularly in the ORS world. Sixteen sorties a day may change minds and careers.

7500 lbf thrust LOX/methane engine is being developed with ATK (for NASA). Theory was that NASA would talk to ATK and ATK would talk to XCOR, to maintain Jeff’s blood pressure. Hasn’t always worked out that way, but working with ATK has been surprisingly good, and hopes that it will continue, as a model of how to work with the big boys. Thinks that ATK recognizes the value of the smaller companies, and view them as asset rather than threat. Opportunities for synergy. New engine with propellants no one has considered for forty years and high performance requirements, and so far, so good. Playing video that shows the scale of the new (large) mobile test stand.

Showed the engine burn with a beautiful set of shock diamonds. Now showing a three-piston propellant pump, which runs for hours reliably. Finally showing lox/kerosene engine for rocket racer, in typical burn durations for racing.

“Barring some unforeseen event, by the time I come back next year, I will finally have my first ride.” Can’t say much about suborbital vehicle effort, but it’s progressing, and they’re past stage of wondering how they’re going to solve various problems. No schedule, but feeling good about it. Seeing some signs of interest from government customers, but can’t say much more than that right now. So much contract work, hard to keep track (which is a good thing).

Admires Masten’s public posture in terms of communicating technical road ahead without getting too deep in the technical weeds. Have to make it clear to the public that suborbital is by no means the last step on the road. Last year, they ran out of technology problems to solve, so are doing strategic thinking, refilling their plate of problems for getting to orbit, and will be looking for customers to solve those problems, so that they’ll be able to move on to the next step.

NASA is a challenging customer for XCOR. The reason is not that they’re stupid or incompetent. Have been impressed with competency and experience of the people they’re dealing with. The unpleasant surprise is that they’re like an alien race so alien that there’s no point of contact or ability to communicate, in terms of their culture. Fortunately, ATK acts as an interpreter. XCOR producing engine results that NASA didn’t expect to get. Instead of a technology hobby shop that they expected, there is now a place on the NASA product roadmap for methane to go, and all of a sudden this is becoming real (for lunar ascent stage). They have real hope that this engine will have a descendant that will lift astronauts from the moon, but this reality is putting new players in the game, and reexamining results to date.

Taking question now. Will NASA reports be publicly available? Not his department, but much of the high-risk work was done prior to NASA contract and is proprietary.

How about selling rocket engines to the private sector? Opens up lots of issues in terms of maintenance, ITAR, warranty violation, liability, etc. Not to the point of selling them off the rack, even if they were in production, and price can’t be estimated until insurance costs can be known.

Asked about relative virtues of various pumps (piston, pistonless, turbo, etc.). Saying that XCOR doesn’t subscribe to “magic bean” theory to space–that technologies have to be evaluated in context. Don’t see a path on their roadmap for pistonless pump, but that doesn’t mean that it’s wrong for someone else.

What kind of results were NASA surprised to learn about methane performance? Can’t be specific without clearing room for ITAR. They set a high bar for performance to beat hypergolics, and XCOR exceeded them, along with smooth starts and stops. NASA was having trouble believing the data, because it is perceived to be too good. Original application for vehicle was backup for CEV SM, and was pressure fed for reliability, but now looking at a smaller engine for for lunar. However still, pressure fed, again because it has to start.

Ken Davidian asks which parts of NASA they’re working with. Langley propulsion, Marshall and another that I missed. Ken wants to make the point that NASA is not a monolith, and Jeff strongly agrees (says that even a center isn’t one). We have to consider that NASA seems to be seriously considering putting an entrepreneurial company on the critical path of a safety-critical system for their flagship program. If someone had told him that they would do this two years ago, he would have thought they were smoking something.

Asked about differences between NASA and Air Force. Answer: each customer has their own idiosyncracies and challenges. No one shows up at the door with a big pile of money and says “call me when it’s done.”

Has some comments on policy, because leaving and will miss policy discussion later. ITAR sucks, but reminds of Jerry’s comment about “building a golden bridge.” National security is critical: we live in a dangerous world. It is essential that US maintain technical advantage over our adversaries. ITAR is not currently doing that, it slows us down, and does nothing to hurt our adversaries. Alternative approach is to provide a new system that offers the State Department as they have right now, but will actually work. (Devil’s in the details, of course).

Second issue: what do we want NASA to be. Doesn’t know, but he does know what we want NACA to be. We want it to be existing: dual-use technologies of value to government and private sector. NASA is out, out, out of that business. The entire office that they used to work with on advanced technology is gone. Over turning ever couch cushion called “research” and pulling it out to feed the monster. Air Force and DARPA developing space technologies, but not necessarily dual use. No conscious decision to get out of the civil space R&D business, but that’s where we are, and Congress has never actually been confronted with that choice. It’s our job as constituents to make the choices clear. Retask NASA with that job, retask someone else with it, or create a new entity, but someone should be doing it, and Congress should be made explicitly aware that this has happened.

Jerry Pournelle pointing out that this situation won’t pertain forever–someone will figure out that we’re doing no long-term technology planning, and we’ll have more leverage if we know where we want to go, and can get them thinking about it early. Jeff points out that Congress does push back on a piecemeal basis (e.g., aeronautics) but not as part of any grand strategy of concern.

Talk over. Ken Davidian next.