By BRIAN DEAGON, INVESTOR’S BUSINESS DAILY Posted 06/18/2010 06:34 PM EDT
For many investors, the the reality of commercial space tourism’s potential is grounded in its challenges.
True, some wealthy entrepreneurs such as Amazon.com (AMZN) founder Jeff Bezos, Virgin brand founder Richard Branson and Pay-Pal co-founder Elon Musk have poured millions into the emerging field. But venture capitalists who have fueled so many industries have stayed off the launch pad.
The problem is that VC funds aim to show profitable returns in a relatively short time.
While Musk’s SpaceX, Branson’s Virgin Galactic and Bezos’ Blue Origin plan to offer trips into space, the territory remains unknown.
It’s not clear enough people will get aboard to make the business profitable, says Paul Guthrie, an analyst at research firm Tauri Group.
“Consumer demand hasn’t been established in any public documents, from an investor’s point of view,” Guthrie said. “The venture capital firms won’t invest money without the perception of getting that money back. There’s some demand (for space travel), but some question if it can sustain the cost of the hardware.”
And usually left unsaid is another issue. One bad accident could put the brakes on the new industry.
“The industry will have to be prepared for how to deal with that,” Guthrie said.
The VC industry is unlikely to step in, agrees commercial space advocate Peter Diamandis — until the field’s first successful initial public stock offering.
“We’re looking for the Netscape effect,” he said, referring to the pioneering Web browser company’s 1995 IPO, which opened the Internet floodgates.
“Whether it will be SpaceX, Blue Origin or whoever, after one of these companies goes public and provides a significant return, we’ll see venture capital funds join in,” said Diamandis, chairman of the X Prize Foundation, which awards money for commercial space achievements. “It will be the birth of the Apples and the Googles of the space industry.”
There have been two VC exceptions. SpaceX, officially called Space Exploration Technologies, has received $20 million from venture capital firm Founders Fund, whose partners include another PayPal co-founder, Peter Thiel. And VC firm Draper Fisher Jurvetson also invested what a managing director says was $20 million.
“We look to invest in passionate entrepreneurs with unique ideas to change the world,” Steve Jurvetson, managing director of Draper Fisher Jurvetson, said via e-mail. “Apple (AAPL) set out to change the world. Elon Musk looks beyond even this world.”
Jurvetson says DFJ is mulling other space investments.
“We have met with several very interesting projects and have come close to investing in one more beyond SpaceX,” he said. “We have a very high bar, so it should not be surprising to see just a few investments given the available pool of opportunities.”
SpaceX is profitable and has more than $2.5 billion in contracts for launches, Musk has said. Most of that money is from NASA for delivery of cargo to the International Space Station, but SpaceX also plans to get into space tourism. And just last week it inked the largest single commercial space pact — a $492 million deal to launch satellites for satellite phone service provider Iridium Communications (IRDM).
The industry also got a boost in April when President Obama proposed a change in direction for NASA that puts more emphasis on commercial enterprise. He proposed a $6 billion increase in NASA’s budget over five years to dole out to commercial contractors for space missions.
There’s no question that big bucks are at stake.
More than $261 billion was spent on “space-related activity” in 2009 worldwide, private and public, according to the nonprofit Space Foundation. That’s up 40% in the five years the foundation has tracked this figure.
For now, the commercial space industry relies on the rich. Besides Bezos, Branson and Musk, spaceship developer Armadillo Aerospace is backed by veteran video game developer John Carmack, creator of “Doom” and “Quake.” And X Prize winner Scaled Composites has received funding from Microsoft (MSFT) co-founder Paul Allen. Three years ago, Northrop Grumman (NOC) bought Scaled Composites.
That people from the tech world “who grew up during Apollo and the shuttle missions” are leading the charge is no surprise, Diamandis says.
“They’re technology geeks who love this stuff,” he said. “They’ve seen (the computer) industry go through exponential growth while the space industry remained flat, and they’ve asked why.”
