Monday, May 29, 2006

Kool-Aid lessons from South Park

A truly classic South Park episode, aired a few years back, still offers valuable lessons for investors, not just in space, but really any industry.

In this episode, the boy's teacher assigns a report on current events. Being totally unschooled in such, they instead decide to write about mysterious "underpants gnomes" that have been spied stealing underwear from their dressers.

The boys followed the gnomes to a huge cavern, which was filled to the top with purloined undergarments and gnomes busily processing them. When questioned about their activity, the gnomes produced a business plan:

Gnome 1: Collecting underpants is just phase one. Phase one: collect underpants.

Kyle: So what's phase two?


Gnome 1: Hey, what's phase two?!

Gnome 2: Phase one: we collect underpants.

Gnome 1: Ya, ya, ya. But what about phase two?


Gnome 2: Well, phase three is profit. Get it?

Stan: I don't get it.

Gnome 2: (Goes over to a chart on the wall) You see, Phase one: collect underpants, phase two-

Gnome 2: Phase three: profit.

Cartman: Oh I get it.

Stan: No you don't.

Kyle: Do you guys know anything about corporations?

Gnome 2: You bet we do.

Gnome 1: Us gnomes are geniuses at corporations.

Does this sound familiar to readers of this column? It could be argued that the gnomes' underpants business is a lot like the way many firm's business concepts are expressed:

Phase 1: Develop cool new launch system for passengers or freight in Year 20xx

Phase 2: [intentionally left blank]

Phase 3: Make oodles of money (in Year 20xx + 2) flying 50-100 flights a year in a fully mature industry with lots of market demand.

This is where I see the greatest disconnect in the community. They skip Phase 2 - which is actually the hardest part - developing and following a realistic roadmap from engineering prototype to 50 flights a year. That market demand cannot be demonstrated to exist at present - one has to create it. Large serious investors are going to want to know precisely how that is going to be accomplished - and within that 2-3 year time frame that always seems to be part and parcel of the business plan.

For a decade or more I've seen a lot folks who say they'll be up and running in a couple of years - and they're still out there, and it's still only a couple more years down the road. One company, for example, made a big splash in 2004, coinciding with the Aldridge hearings, claiming they'd be flying by 2006. 2006 is almost half over, and I haven't seen any more press releases of late. Not that I was expecting any.

Point is, when you're doing due diligence on a company - and that could be any company, not just - make sure they've got all three phases nailed down. You don't want to lose your shorts.

Friday, May 26, 2006

The 5% solution

Hasty generalization

From Wikipedia, the free encyclopedia
Hasty generalization, also known as "fallacy of insufficient statistics", "fallacy of insufficient sample", "fallacy of the lonely fact", "leaping to a conclusion", "hasty induction", "law of small numbers" or "secundum quid", is the logical fallacy of reaching an inductive generalization based on too little evidence.

Examples with contradictions
"I loved the hit song, therefore I'll love the album it's on": Fallacious because the album might have one good song and lots of filler.
"This Web site looks OK to me on my computer; therefore, it will look OK on your computer, too": Fallacious because many computers present content differently.


So why did I post this seemingly random snippet from Wikipedia?

This comment was made in an earlier post, and i thought it deserved to be highlighted as a separate posting:

That's why over ninety percent of such startups fail. And that just doesn't apply to or In the early 80s, it was personal computers. Anyone remember the Osbourn?

Of course even knowing how to run a business is no guaruntee of success. Andy Beal is a great banker. His launch company failed when the market collapsed on the late 90s.

In the great scheme of things it doesn't matter. The five or so percent of companies that succeed will change the course of history.

So here is the issue i have with statements like this - it is the same fallacy that many VCs (and everyday investors who followed the investments of those VCs) made during the dot com bubble.

In the traditional VC world (you know, the guys who were around in the 70s and 80s, long before it was "hip" to be a VC and all you needed was an MBA from the right east coast school...), the venture capitalist was someone who had built and run one or more successful businesses, made a decent pile of money, and was looking to help the next generation of entrepreneurs build more great businesses.

These "Old School VCs" (OSVCs) would do incredible due diligence in the process of deciding whom to invest in - it was about more than JUST the business, it was about the management, too. But good management and a BS market was still BS. This due diligence was NOT, unlike today's New School VC (NSVCs) model, about waiting until another VC came in and then jumping in too, pretending to do proper analysis while blindly chucking in millions of dollars into a venture because "Benchmark Capital" or (insert big name VC here) had already agreed to invest.


It's betting that someone ELSE has done the homework, and just copying their answers.

So, back to the OSVCs. What they found, over time, was that if they were to invest in 20 companies, ALL of which had been grilled through the harsh cold logic of the OSVC due diligence machine, the performance would be something sort of like this:

  • 10 failed

  • 6 muddled along

  • 2-3 did ok

  • 1-2 were home runs

So out of 20 seemingly sound investments, 5-10% actually became winners. The rest were dead, walking dead, or just poor performers.

This statistic was regularly abused by the NSVCs (and still is) - in that they first deluded themselves, and then the larger investment community (including individual shareholders) that they actually understood how this model works.

It's not enough to just make 20 investments. you have to make 20 SOUND investments, and even then you can only hope to get a 5-10% hit rate. But if you invest in stupid businesses like and 19 similar ventures that show a fundamental inability to grasp what the WWW actually was (a distribution channel, not a manna from heaven), then you are likely to have a 0% success rate. 20 bad bets won't get you the distribution of wins/losses that 20 good investments will.

So, in the context - in isn't simply enough that there are lots of startup companies out there all seeking funding. There have to be lots of OSVC-ready companies - and even then, if we're lucky, 5% of them will be successes.

My other little quibble with the comment from above that i used to start this blog is regarding Andy Beal. His rocket company didn't fail because the market collapsed in the late 90s. That "market" was a paper one, based on fictitious satellites that would never see the light of day and the VAST majority of which were never funded. Building a rocket company on the late 90s launch industry market forecasts for satellite demand was a recipe for failure. As he found.

Wednesday, May 24, 2006

More on Dreams, Fantasies, and Kool-aid

I have to agree with Shubber that indeed this humble little blog appears to have ruffled some feathers here and there. Some offline criticisms - gleaned via internal e-mail threads passed around among ourselves - indicates we're still not being clear enough in our definitions of what constitutes a "dream" company, versus that of a "fantasy" or "kool-aid" firm. Allow me a chance to effect some clarification.

Over a year ago, I, my business partner Paul Contursi, and the good "Professor L" on these pages joint-published an article in The Space Review entitled "The 'signal-to-noise ratio' in financing new space startups". Within that piece were some succinct "gotcha" bullet points making our arguments - what we think of as the "top eight warning signals" of a fantasy or kool-aid enterprise. There are no doubt more...but I'll list the abbreviated version here, and direct you to the original piece for further explanation. You are probably a kool-aid company if you exhibit one or more of the following characteristics:

1. Unwillingness or inability to identify the team. Most often, a serious space enterprise needs technical experts, managers, financial specialists, marketing people, and other skilled professionals to succeed. That team is essential, and any space entrepreneur who won’t discuss the identity of their team or the skills that its members bring to the table is suspect.

2. Nebulous funding sources. Be wary of space enterprises that rely on exotic sources of capital that they try to explain away with unintelligible legalese, or, even worse, refuse to specify their sources of capital or guidelines for obtaining it at all. Make sure their fundraising mechanisms are in line with federal and state securities regulations, when necessary, before going any further.

3. Any combined mention of the words “billion” and “dollars” with a straight face. Startups looking for eight- or nine-figure capitalizations in the currently embryonic state of the commercial space sector are extremely questionable. The reality is that the total private capitalization in the “New Space” companies to date is probably somewhere close to $200–300 million. This is a nascent industry with little to show so far in the way of an overall track record.

4. Rampant cluelessness about the target market. Constantly ask the questions, “Who are your customers? How much are they willing to pay for your product or service? How do you plan to attract and retain those customers? What are the opportunities for repeat business?” For example, we certainly look forward to the day when solar power satellites are a viable enterprise, but not while customers can easily today acquire electricity at a fourth of the kilowatt/hour rate suggested by the current promoters of space-based systems.

5. Large quantities of “unobtainium” in the business plan. Dependence upon technologies or exotic materials that do not yet exist is often a sign of trouble. The same is true for speculative propulsion claims that fly in the face of the laws of physics or “get around” the rocket equation.

6. Dismissal or denial of regulatory considerations. If entrepreneurs dodge the question of how they will deal with the constraints of federal and/or state regulatory requirements they are at best naïve, and at worst might have something serious to hide.

7. Playing the conspiracy card. Be wary of people who claim that their business plans have been impeded in the past by a grand conspiracy on the part of Big Business, Big Government, etc. “Evil forces” working in the background are far too convenient scapegoats, as opposed to poor planning, unachievable goals, and lack of research.

8. A tendency for monomania. Be cautious of anyone who tries to convince you that his or her proposed product or service is “the only way” to solve a particular space business or technology problem. Common sense alone suggests that is a false premise.

I hope this sheds some light.

Belated ISDC Notes

My own experiences at ISDC - kool-aid or otherwise - were mixed.

The first presentation I attended was a bit haunting - it was by Klaus Heiss, seeking apparently to purge some personal demons from his own early involvement in development of the Shuttle. At one point, when reminiscing over a key engine decision in the early 70's, the bullet point on the slide said, in bold letters: "I SHOULD HAVE LIED". His belief was had key decisions gone in a different direction, the history of the last 30+ years would have been very different. (He told me later, "The truth is sometimes painful.")

I spent a lot of time in Mike Mealling's business track. There were some very valuable presentations there, including a "seminar" from Art Dula that was a classic, and I highly recommend as a "must-see", if you can get hold of the tape.

But...there was also a guy who wanted $4 Billion to set up mining ops and bases on the moon, along with the ubiquitous lunar mass driver to feed a fuel dump in LEO - the unobtainium, of course, being paid for by an unnamed consortium of 10 large corporations who would kick in $400M each for the development costs. I must admit I snapped like a rubber band at this guy, to the great delight and entertainment of the 6 or so people in attendance that afternoon.

Earlier, I had spent the morning in a track on space medicine, much of which was very enlightening. But then there was the Brit architect who showed off his design for a Mars base, apparently on a grant from the British Interplanetary Society. It had six discrete modules, each simulating a different earthly environment (from the mountains to the prairies to the oceans white with foam, etc. etc.). They would be launched separately, land in the same place, and built-in robotics would assemble them before the first human crews set out. However, there was no thought to actual program planning, costs, or real-world contingencies.

Clearly billions of public dollars would have to be committed to a project like this, and there was no failure factor. So I asked him, "What if one of the modules fails to land properly and is destroyed on impact? Can you make do with 5 or even 4 of the modules and save the mission?" He clearly did not expect a question such as this, and replied nervously, "Well, we just wouldn't launch the crew." $100+ billion project on the line and you just "wouldn't launch". I kept thinking of Robert Scott and the ill fated British Antarctic Expedition, with their stockpiles of sherry and fine china, in contrast to all the things Roald Amundsen did right, and on half the budget. I wished at that moment Bob Zubrin had been in the room to give the guy an earful. The BIS should ask for its money back.

"If I were a rich man..."

I also got 2nd-hand flack at ISDC from some people who were apparently offended and shocked by my assertion that, if serious funding (i.e., $500M+) were raised tomorrow, via a mutual fund mechanism or something similar, that there weren't sufficient investment opportunities in alone to justify a major commitment of VC dollars. There would have to be serious diversification of investments in technologies 'around the margins' of space to ensure a good return. The criticisms were of the type "He doesn't know what he's talking about - I know how I'D invest...blah-blah-de-blah, huff-huff-huff", followed by a laundry list of either fantasy/kool-aid firms, or firms that may have some customers and an income stream, but whose financial dealings and/or business ethics may be mildly suspect.

Right now, truth be told, I would only put money down on three or four firms if I had it available to me - and I don't recall hearing any of their names on the critic's lists.

What my critics fail to appreciate is a very important term to those of us who have ever passed a Series 7 exam, and that is "fiduciary responsibility". When you take other people's money to invest on their behalf, you become responsible for doing proper due diligence and performing your utmost to give those investors the best possible return in exchange for their trust. This is how investment managers earn their living. And the hard raw truth of it is that there are too few realistic, feet-on-the-ground, businesses to justify potentially tens of millions in VC dollars. Remember also that VCs don't pay for R&D - they pay only to get developed products to market. Also, the supply of investment capital is limited, and therefore very competitive. Alt.spacers need to be able to show a strong value proposition, a path to profitability, and workable exit strategies that are competitive with nanotech, biotech, and It doesn't happen very often.

Now, if I was independently wealthy, with lots of $$ to burn, and no one to answer to but myself, my standards might be a little more relaxed. I would be able to afford the additional extreme risk levels - but make no mistake, that's considered "angel investment", not VC. There may even be a success or two, by total serendipity. But realistically, I would probably lose most of it in failed ventures. This is why the number of angels and deep-pocket independent startups are limited.

But hey, the critics can always put their own cash where their beliefs are, can't they? And boast to me later about the great returns they're getting. Oh, but that's right, you have to be a "qualified investor". Oops.

Tuesday, May 23, 2006

The Space Cynic Challenge to Alt.Space


It appears we seem to have ruffled a few feathers out in the community by creating this blog.

We've been accused of being snarky, condescending, and judgemental.


But here's a chance to prove to us that you (and you know who you are) have an business that is a "dream" business (which we DO like) as opposed to a "kool-aid" business (which we, um... don't like).

Space Cynics will gladly review your business plan/case/whatever, and post our findings on our website. We will allow you room for rebuttal, and will respond to any substantive criticisms (but this will not become an open-ended he said/she said - we will stop the dialog if it becomes unresolvable).

The cost? $2500.

We all have paying jobs and families/friends (no, i mean we have families and friends, not that they pay us), so if we're going to take time out of our schedules to do a due diligence of sorts, you have to put some skin in the game.

If we DO like your business - and I daresay I am personally a big fan of quite a few companies, believe it or not - we will be happy to endorse your project when you go to talk to other investors. We may even make some introductions for you, free of charge - and/or invest ourselves in your business.

Operators are standing by.

Sunday, May 21, 2006

Notes on a Monday Morning

It's monday morning, i've got heaps on my desk to take care of as the week begins, and so of course i start off by a quick surf through Cyberspace.

War still on in Iraq? Check.
War drums beating for Iran? Check
Chinese IPO flying off the shelves? Check
Immigration friends/foes fighting over the border troops? Check
DaVinci code still front page news? Check

So, not much has changed.

Except... what's this? Space Cynic, and myself, were mentioned in another blog (not too flatteringly, i might add) and I totally missed it.

I, of course, had to go read what was written by Mr. Goff.

I think Jonathan was being a bit unfair, to be frank. First off - why should we be held to higher standards than the average cracksmoker's website that promises fantasy technologies are just over the horizon? At least we aren't trying to sell something - in fact, we're trying to get people to be LESS gullible before their good money is lost to another BS cause.

Still, some valid criticisms.

Yes, this blog can be a stand-out contrarian voice to the echo-chamber that normally defines the kool-aid drinking community.

Yes - i will accept that sometimes we are flippant and shallow in our commentary on specific concepts/projects. But the 23rd or 145th time i have to explain in great detail why a particular concept is flawed, i get lazy and just slam the project.

Yes - we will try to write more substantive posts, or maybe just answer questions posed by interested readers.

No - i will not give up on the occasional bit of humour. If i think it's funny, and others don't - well, it's my blog. Get your own.

The truth, though, as with all things, is really somewhere in the middle.

All of the bloggers on the Space Cynic have regular jobs that are VERY time consuming. What this means is that we don't have the luxury or bandwidth in many cases to write out the full extent of what we'd like to on a particular subject. Does this mean we shouldn't mention something unless we can put out a dissertation on the subject?

Of course not.

If that were in fact the case, this blog would end up like the book on space commerce i've been attempting to complete for 2 years now - half finished and therefore unread by anyone.

Some of these posts will be longer, some will be shorter. Some will be content rich, some will be vacuous. I make no promises otherwise.

But, in the spirit that all discourse is positive, i will even add a link to Jonathan's blog on the Space Cynic blog.

Calling all REAL Journalists

So one of the great things about living here in Sydney is that life is a lot more civlised and less rat-race like than the normal big city i'm used to from the US. This Sunday morning, around 9 am, i heard the usual shrill whistling sound that comes every sunday morning, blasted out from the little metal whistle that our local paperboy uses to let us know he's walking down the block, in case you want to buy a newspaper ($1.60).

Shuffling back into the house, coffee mug in one hand, newspaper under my arm, i looked forward to a few leisurely hours of reading what passes for news in the Sunday Herald (Australia has a different view of the world than I'm used to getting from the LA times or Washington Post...).

So imagine my surprise when I opened to the COVER page of the travel section.

Big picture of planet Earth, as seen through the window of a 747, with the caption "3... 2... 1... the Countdown to Tourism in Space"

"Oh, no," i thought to myself. The Kool-Aid has made it to Australia.

Now, granted, this is not the first Kool-Aid inspired project to get support in Australia (the Christmas Island Spaceport/Internment Centre comes to mind).

So, with a bit of trepidation, i plowed into the article. After flipping past the intervening pages filled with the requisite ads for exotic travel destinations (as if Australia isn't exotic enough...) and articles about real tourism features, i found it:

"Dawn of Tourism's Final Frontier: Notch up your frequent flyer points, because suborbital tourism is the next chapter of the space age."

What really gets me is that people get paid for writing this drivel. The article, first off, had factual errors - three (not two) people have paid to go to ISS (and the fourth, Dice-K, is getting ready, with a backup/fifth candidate, from the Ansari family, next in line). Second, the author lumped together a whole range of companies that aren't all in space tourism, a notable example being Space X. Last I checked, the Falcon 1 is for satellites, not tourists.

While i'm tempted to go paragraph by paragraph through this overly long article (i'm fairly certain the author was paid by the length of the article, which would explain why she filled it with such enjoyable fodder as "Canadian company PlanetSpace is developing craft based on the World War II German V2 rocket." - does the autopilot attempt all autolandings in London, i wonder?) the article just pisses me off so much i have to put it away.

I've got better things to do with what's left of my Sunday.

Thursday, May 18, 2006

No Love in an Elevator

Sorry for the short hiatus in posting, folks....

(cue Maxwell Smart voice) would you believe, I was trapped in an elevator waiting for the technicians to get the doors unstuck and me back safely on terra firma. (uncue voice)

Actually, i was just traveling to Japan and Hong Kong and am now back in Sydney and will begin catching up with all of the easy pickings that came out of the ISDC. Man am I sorry i missed that!

(apologies to aerosmith for the title of this posting)

Sunday, May 07, 2006

NASA Announces Plan To Launch $700 Million Into Space

In the Art Imitatating Life Category (courtesy of The Onion - because i'm not that funny):

CAPE CANAVERAL, FL—Officials at the Kennedy Space Center announced Tuesday that they have set Aug. 6 as the date for launching $700 million from the Denarius IV spacecraft, the largest and most expensive mission to date in NASA's unmanned monetary-ejection program.

"This is an exciting opportunity to study the effect of a hard-vacuum, zero-gravity environment on $50 and $100 bills," said NASA Administrator Michael Griffin, who noted that prior Project Denarius missions only studied space's effect on fives and singles. "Whether the money is immediately incinerated because of hard radiation, or freezes in the near-absolute-zero temperature and shatters into infinitesimal pieces, or drifts aimlessly through the cosmos before being sucked through a black hole into another dimension, it will provide crucial information for our next series of launches, which will consist of even greater sums of money, in larger denominations."

Friday, May 05, 2006

Breaking News From ISDC!

Virgin Galactic announced yesterday that they will not, repeat, will not, have hostesses on their flights when they are inaugurated. Richard Branson is firm on this.

More breaking news will be reported in this space as it happens, live, from the International Space Development Conference, Los Angeles, CA.

Thursday, May 04, 2006

Logos on the Moon?

Yes, I know Heinlein wrote about it. Now it appears to have made CNet News:

"Logos to Replace Man In The Moon, Ad Man Predicts"

I wonder how long until the moon is "tagged"?

On a serious note, however, this does open up a whole range of issues related to space property rights, etc. After all, who gets to decide which ad(s) get placed on the moon? What's to stop someone from superimposing their ad over a rival's ad?

For example, imagine Microsoft pays to have the Windows 2044 (codename "Vaporware") logo beamed onto the moon for everyone on Earth to see. Then imagine Google pays to have a big red circle and slash beamed over it...

What is a Cynic?

Source: Roget's New Millennium™ Thesaurus, First Edition (v 1.2.1)

Main Entry: doubter

Part of Speech: noun

Definition: nonbeliever

Synonyms: agnostic, cynic, disbeliever, doubting Thomas, headshaker*, questioner, skeptic, unbeliever, zetetic

Antonyms: believer, worshipper

Copyright © 2006 by Lexico Publishing Group, LLC. All rights reserved.

* = informal or slang

Wednesday, May 03, 2006

Asteroid Mining vs. Cloud Mining

Many of you already know my views on the claims of asteroid mining proponents - in particular the "I've never taken an Econ 101 class and don't know the most fundamental concepts of supply, demand, and market-clearing prices" claim that many asteroids have TRILLIONS of dollars of precious metals just waiting for a smart VC to fund Company X to go extract.

Well, i've found a much more achievable mining opportunity, courtesy of this brilliant website:

Cloud Mining

Because, you know, every cloud has a silver lining...

...and that silver has a market value.

Monday, May 01, 2006

Stupid Space Tricks

Thanks (i think) to Monte for forwarding the link to this website. Hours of endless fun filling in the sign in the astronaut's hand.

Just a shame they can't spell outer space...