Re: Getting Mega Projects Done

From: Larrison (larrison_at_my-deja.com)
Date: 11/28/04 

Date: 28 Nov 2004 02:38:16 -0800

I'm going to come in here and echo Henry on this, but with maybe a
slightly different perspective. Risk is the key factor in getting
financing. Availability and level of commercial investment runs
roughly inverse to the risk amount -- the lower the risk, the more
money there is available overall, plus the higher the risk, the lesser
amounts people will risk at one time. Simiarly, as the risk goes up
the potential return demanded by the investors go up as well.

Risk can be defined in multiple ways and treated in a myriad of
additional manners. The best model I've seen of risk treats it as
Technical, Market, Organizational, and Legal/ Regulatory.

Technical risk is the failure of the product to not perform
technically as expected. This includes technical performance (such as
pounds to orbit), but also cost (can you build and fly it for a set
amount of money?), schedule (can you build it, operate it, and fly it
the expected amount per year?) and risk of failure (blows up, crashes,
etc). You can treat most of these risks by doing up-front
demonstration and development and test -- but some of them may need
insurance, additional vehicles in the fleet, structural spares,
operational margin and reserve and other means.

Market risk is expressed as how certain you are that you will achieve
your revenues. (Note price is not the same as cost). This includes
how do you bind your customers to you, what your competitors are going
to be doing, what the market environment is going to do, risk of
substitute products, or competitors products coming on line, etc.
I've seen a lot of business ventures with a technically superior
product fail in the market, because they never dealt with market risk.

Organization risk is the risks related to the formation and operation
of the venture, and include the ability to raise funds, control
spending, operate the business, hire the right people, and find/
contract/ and manage your team members (including subcontractors and
suppliers). I've seen several business ventures fail in this area,
such as not being able to make critical decisions within the venture
organization, not able to make a second round of financing, or have
critical suppliers pull out of the venture due to external problems.

The last risk area is the legal/ regulatory area, and includes the
usual topics of making sure you have liability risks controlled, the
proper legal forms followed, and handle the usual regulatory regimes.
But this also includes such critical and lesser known areas as
political environment (I know of several space ventures that were
damaged or destroyed due to ill-conceived political actions in DC);
tax law and treatment (which may have billions of dollars of impact on
your venture business plan; and local, national and international
regulatory regimes (such as ITAR, environmental and workplace safety
regimes), among a host of others. You have to actively track and deal
with these issues as well.

Any one of these four risk areas can sink a venture, and I can give
examples of how these have influenced space ventures in each area.

I'll also note three more final things here, based upon the thread of
discussions I've read above.

No one is going to give you tens of millions, or billions at once.
Even if you write the world's greatest and most convincing business
plan, investors will insist on phased investments against measurable
achievements. As you accomplish phases in the project, or
progressively work your way through the business plan and risk plan,
they will incrementally fund you. So every project needs some
measurable milestones showing that you are working your way through
the known problems and fixing the new issues that come up. These
phased achievements will have to come in all the risk areas. The plan
has to show what these phased milestones and achievements are, and as
you achieve them, hopefully your investors will continue to up their
ante in your venture. If you can't achieve these milestones and
acheivements, then the investors won't put more funds in.

You also need to match the project plan to the market. That is,
within reason you can't overinvest in a thin market. For example, no
one is going to invest billions into a market that only has an
expectation of hundreds of millions in revenue.

While I am a believer in the overall market promise of space, I also
accept that the current total worldwide space transportation market
today is no more than maybe $6-8 B per year, including NASA, US DoD,
commercial payloads, the EU, Japan, China, and Russia. A large chunk
of that market is probably not addressable and capturable by a new
launcher, since for national security reasons countries will continue
to fly payloads on their own launchers -- and it will take time to
convince customers to start using a new system with no track record in
the market, even if it is priced low.

To get into the market, you need to figure out how to make at least
some money out of the existing market, and show your backers you can
make money in the today's market to give them some confidence on
getting a return on their investment.

And lastly, you need to be very conscious of two dictums -- "The
customer doesn't care what your cost is, only the price/value to
them", and "Revenue is not earnings". I've noted the first one
above, and from some of your writings, the second may also be
pertinent. For example, wanting to get $5 B revenues to cover 10%
interest on a $50 B investment doesn't cut it. Out of the revenues
(sales) you make, you have to pay your taxes, repay your loans,
maintain the system, pay general & administrative expenses, any
operating costs, fees or expenses, etc -- and also pay out a good
return to your investors in some manner and reinvest to stay ahead of
your competitors. You'll never have a 99% profit margin -- taxes
alone will eat up a big chunk of that. Depending upon the business
you can get varying margins overall (and can expect different margins
depending upon where in the product cycle you are...), but on average
profit margins of over 50% are hard to justify and sustain. (I'm not
saying that they are impossible -- just hard to sustain, since
everyone else sees you minting money and starts trying to come up with
competing projects ASAP.) So that notional $5B in sales per year
probably needs to be $10B or $15 B or more, to show your investors you
can sustain revenues long enough to pay them off. On past business
analyses, I've found as a rough rule of thumb, having annual sales
roughly equal to your investment level is reasonable... (and with the
caveat there are about a half dozen factors you need to look at other
than this +/- 50% rough rule of thumb to really determine if that's a
reasonable plan.)

- Wales Larrison -

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