Institutional Investors Seek Profit Potential in Commercial Space

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MOUNTAIN VIEW, Calif. — While space industry proponents and a handful of wealthy investors are willing to risk fortunes on commercial space ventures, institutional investors will follow suit only if they are convinced that the potential profits are likely to surpass those of other opportunities.

That was the conclusion of a study conducted for NASA by executives of Near Earth LLC, a New York investment bank focused on the aerospace, satellite and telecommunications industries. Hoyt Davidson, Near Earth managing partner, said July 29 at the NewSpace 2011 conference here that a yearlong analysis of the opportunities and obstacles inherent in attracting private capital to commercial space ventures could be summed up with a line from a “Star Wars” movie: “‘Your Jedi mind tricks won’t work on me.’ Only money works.”

In other words, institutional investors who have access to vast sums of private capital will not be persuaded to pour that money into space projects simply to leave a legacy for future generations. “Just talking about the great future and the vision won’t really make the sale,” Davidson said. Instead, investors need to be convinced that the risks and rewards of commercial space investments are in line with their overall investment goals, he added.

NASA officials attending NewSpace 2011 said they are working diligently to expand the space agency’s involvement in public-private partnerships as a way to stretch increasingly scarce federal funding. “We want to take the money we spend in the private sector and help companies leverage that to bring in more private investment,” NASA Deputy Administrator Lori Garver said July 28.

Charles Miller, NASA senior adviser for commercial space, said NASA is seeking to use public-private partnerships to help to spur innovation and encourage entrepreneurs to devote their energies to space enterprises. “We need to understand how to work with entrepreneurs,” he said July 28.

NASA already has taken important steps to establish public-private partnerships, Miller said, citing the Commercial Orbital Transportation Services and Commercial Resupply Services contracts, two programs that support private industry efforts to develop space transportation services. In addition, NASA is offering prizes for innovative technology demonstrations, Garver said.

Davidson applauded those efforts but cited additional steps NASA officials should take to make commercial space ventures attractive to cautious investors. “The space industry has all the same risks of any other business and a whole set of unique risks other industries don’t share,” he said. Rocket program are inherently risky because creating and testing launch vehicles is time consuming and expensive, he said.

As a result, space companies will have more success luring investors if they develop business plans that include incremental steps toward a goal. Space Exploration Technologies, for example, developed the Falcon 1 rocket before building the Falcon 9 and starting the Falcon Heavy. Investors appreciate companies that take “baby steps, achieve milestones and move on,” Davidson said.

Another significant obstacle to private investment in commercial space is the uncertain market for new space-based technologies or applications. “For many of these applications, the government is going to have to be the early, primary market,” Davidson said. The space agency can help to build a market by serving as the first customer for a new space-based product. Or NASA can serve as an anchor tenant by agreeing to buy enough goods or services to make commercial businesses viable, he said.

In addition, NASA seed money and Centennial Challenge programs have been so effective in bringing private investors into the space arena that the space agency should expand those programs. Centennial Challenges often attract more than 100 entrants with clever ideas for improving space technology, Davidson said. Under the current structure of those programs, only one team wins.

Instead of a winner-take-all competition, Davidson suggested that NASA award prizes to more than one team. Prizes could be structured in tiers like those of poker tournaments in which winners can use their initial awards to help finance their efforts to compete in further competitions with increasingly challenging goals. “Perhaps those bigger challenges could attract some midsize or larger aerospace companies to join winning teams,” he added.

The Near Earth study also recommended that NASA create a clear, written statement or roadmap identifying the types of jobs NASA would like to turn over to industry. That roadmap would describe the goods or services NASA wants companies to supply. It also would include an agreement by the space agency not to compete with private industry to develop those goods or services. That roadmap would be something every NASA field center could see and abide by, Davidson said.

NASA also might pay for innovative technology by copying a Central Intelligence Agency program. In 1999, the CIA established In-Q-Tel, an independent, not-for-profit organization that provides money for commercial technology to meet intelligence community needs. Through In-Q-Tel, the CIA typically invests in technologies alongside venture capital firms. Venture capitalists are eager to participate because the CIA selects the most promising technologies and provides firms with contracts to buy the technology once it has been developed, Davidson said. “This is something NASA should take a hard look at,” he added.

Loan guarantees also would enable private space companies to borrow money at low interest rates, Davidson said. However, loan guarantees should be used only for programs that have reached a certain level of maturity so the risk of default is low, he added. One promising model is the Overseas Private Investment Corp., an independent U.S. government agency that issues loan guarantees and co-invests with private equity firms to achieve U.S. diplomatic goals in developing countries. By creating a similar entity, the Space Private Investment Corp., NASA could support private space ventures, Davidson said.

NASA officials declined to comment on the specific recommendations of the Near Earth study. “NASA is reviewing the Near Earth LLC reports, which capture and analyze a great deal of information relevant to energizing and enabling a commercial space industry,” NASA spokesman David Steitz said in an Aug. 3 email.