Well, it looks like Rand and Clark and Jeff are too busy blogging about the New Space conference to start synthesizing things yet, so I’ll just make some comments on the big news from yesterday. In case you don’t read Space Transport News every morning like most of the rest of us, it was announced yesterday that Northrop Grumman is buying out Scaled Composites. Unbeknownst to much of the alt.space world, Northrop has actually owned 40% of Scaled for some time now, possibly several years, so this move isn’t quite as surprising to me as to some others.
Now, while some of the comments I’ve seen about the acquisition seem to “get it” (particularly comments from Nathan and Ferris over on Hobbyspace, and surprisingly enough, Mark Whittington as well), there still seems to be a lot of people who are worried that this will become a case of a “big dinosaur company gobbling up a plucky alt.space mammal.” On the contrary, I would argue that not only is this acquisition likely to be a net win for Scaled, but in fact it may be one of the most important events this year for the future of commercial space development. Here’s some thoughts on why:
First off, lets talk about why this particular deal is likely going to be win-win for both Northrop Grumman and Scaled Composites. Unlike Lockheed Martin, who has Skunk Works, and Boeing that has Phantom Works, Northrop Grumman really doesn’t have an lean-and-mean R&D shop of the same caliber. Scaled comes with a reputation in that area that compares well with Northrop Grumman’s competitors’ secret projects shops, has the capability of doing important work very quietly, and has a longstanding relationship with Northrop.
With the size of Scaled’s existing revenue streams, I wouldn’t be surprised if the buyout was worth over $100M. Northrop isn’t about to screw with a system that works so well that it’s worth that kind of money, especially with how much Northrop would benefit from continuing to run Scaled the way it has been run.
The reality of Scaled is that Burt Rutan is eventually going to retire. Using Esther Dyson’s meme of startups being either “toys” or “children”, it is apparent that Burt is smart enough to realize that if he runs Scaled like his own personal toy, it won’t outlast him. He’s taking the probably painful step of letting his child grow up. By taking steps now, there’s a good chance that Scaled will continue on long past his retirement as one of the world’s premier aviation prototype shops.
I’m sure having a huge infusion of capital won’t hurt Burt’s aviation or space projects very much either.
Now, there are some real risks involved in such an acquisition process. Things don’t always go smoothly, and there are bound to be some clashes of corporate culture even if Northrop tries to take a very liberal approach with Scaled. Things may yet get botched, but if they do, it will be because the execution was botched, not that the deal was a bad idea from the start.
Selling out to “The Man”
One of the comments I’ve seen many make is that Northrop is just buying Scaled to squash the competition. This meme of big, bad dinosaurs trying to maliciously destroy their mammalian competition needs to die. But this meme is even sillier in this particular case. I mean, what business exactly is Northrop supposed to be protecting by squashing Scaled? In fact, if we’re talking about manned suborbital flight, none of the dinosaurs really have much to lose, because none of them are involved in that market.
More to the point, I’m not sure I’d even be worried about things if Boeing or Lockheed were the ones doing the acquisition. There may have been a time in the past where it was in the economic self-interest of some of the “dinosaurs” to squish their “mammal” competitors, but if there ever actually was such a time in the past, it doesn’t appear to be the case any more. I mean, it should be an eye opener when the head of Exploration Systems for a dinosaur company is singing the praises of a launch vehicle being developed by one of their competitors. More to the point, and I think this is going to be a theme to be developed over the course of many blog posts in the future, I think that most of the big aerospace companies are starting to see New Space companies not as threats to be beaten, but as opportunities for collaboration. I truly believe that we’ll see many examples over the next decade of alt.space and big.space companies working together to achieve things that would’ve been impossible to achieve alone. Heck, even some small parts of NASA are showing some positive trends in that regard.
Once again, the caveat has to be said that sometimes mammals can be squished accidentally even when the dinosaurs are trying to play nice with them. When you have firms of drastically different size working together like that, things have to be thought through carefully, because there are many ways the collaboration can be screwed up. But even with that caveat, I think that more often then not it is worth the risks to both sides to try and collaborate where common ground can be found.
But more on that at a future date.
Liquidity Events and “The Netscape Moment”
The last point I want to make about this deal, and the one that I think will be by far its most important impact, is what it means for investment in this industry. Investors typically don’t risk large amounts of money investing in startups with the intention to just hold the resulting stock indefinitely. As one investor put it, if they wanted dividends, they’d buy utilities, not invest in startups. What investors want is a realistic exit strategy–basically an exit strategy is some way that down the road they can get their money back out with a severalfold increase. Since most of these startups are privately held companies, in order for investors to be able to “exit”, there has to be some sort of “liquidity event.” Due to both SEC restrictions, and the typical form of resulting stock agreements for privately held companies, it is very hard to actually sell stock held in a privately held company. In order to easily convert that stock back into liquid assets, the easiest way is if the company’s stock becomes public. Which leads to the two main types of liquidity events that I’ve heard discussed for alt.space type companies: acquisitions by publicly held companies, and IPOs. Acquisitions being by far the most likely type of liquidity event for most alt.space companies.
Basically, as I understand it, when a private company gets bought out by a publicly traded company, the publicly traded company will usually buy the startup out using stock instead of cash. If an investor owns 10% of the privately held company after money, he’d get 10% of the stock in the public company doing the acquisition. That investor can then turn around and sell those stock to get his money back out to reinvest in other projects. [Note: if Steven or any other of the more investment savvy people are reading this and would like to provide clarification, I’d love to have your comments].
What this transaction shows investors is that there really is a realistic exit strategy for successful alt.space firms. When investors start realizing that they can put money into a promising alt.space startup, and that if all goes reasonably well the company has a good chance of getting bought up by a big, publicly traded aerospace company a few years down the road, you’ll start seeing more investors willing to make the plunge. When people start seeing that it really is possible for them to turn a small fortune into a bigger one in this industry (instead of the other way around as the joke usually goes), you’ll start seeing a lot more of them becoming interested. As it is, without valid examples of good exit strategies in and industry, its hard to attract much investment even if you have a rock solid business case and a top-notch team.
Now, I think this particular deal isn’t like our industry’s “Netscape Moment”, I think we’re definitely getting closer. I also doubt that this acquisition is going to lead in the immediate near term to wholesale buyouts of alt.space companies by big.space companies. However, I wouldn’t be surprised to find out several years down the road that this event led to several big.space companies starting to make small strategic investments in the more promising alt.space companies, opening the door for future acquisitions.
So, if a couple of months or years down the road you hear about XCOR or Masten or Armadillo or even SpaceX “selling out to The Man”, it might be worth reserving judgment for a while. You never know what might come of it.
Latest posts by Jonathan Goff (see all)
- An Updated Propellant Depot Taxonomy Part IV: Smallsat Launcher Refueling Depots - November 14, 2020
- Blog Links Updated - November 2, 2020
- Blog Migration Completed - October 26, 2020