simb…@ix.netcom.com(Rand Simberg) writes:
>Having know him well for many years, there are few people in this
>business for whom I have more respect than Mr. Larrison. If I don’t
>refute his facts or figures, it is because either I agree with them,
>or (rarely) I don’t have the time to do the painful amount of
>research that would be necessary to do so.
Thanks Rand. And let me also add, that Rand is one of the _very_
few people I know who walks the walk, as well as talks the talk, about
new market commercial space ventures. We have had occasion over the
past years to exchange a lot of views on these markets, and I may not
agree with him on all points — but I respect him and his opinion very
highly. I always learn something from talking with Rand.
>But I don’t have to disagree with his facts and figures to disagree
>with his conclusions. One reason is that one can have all of the
>facts and figures that one wants, but in business planning, it still
>doesn’t provide a unique solution. There are too many other factors,
>such as risk tolerance, greed, other motivators, that go into a
>business decision. The other reason is that even if all of his facts
>and figures are right, they are not all encompassing–as he would be
>the first to admit, he doesn’t have sufficiently good facts and
>figures for the new markets. This is partly because they’re hard(er)
>to come by, but it’s also because the industry as a whole apparently
>isn’t sufficiently motivated to look for them.
Yep. The art, and the science, of business analysis is in dealing
with uncertainties. No piece of data is ever perfectly exact and
accurate — and the environment and future events and other
intangibles may dramatically affect the shape and outcome of a venture
mid-course.
I don’t have good enough data on the new markets for space
transportation to take them to investors for a major (billion dollar
range) new investment, and I’ve spent quite a few years studying them.
Rand also has done the same, and has done some very interesting and
useful work with his own investments — which is part of why I highly
value his perspectives.
Where we differ in opinion is in "honest man" differences. That
is, with two honest and rational people looking at the same set of
data — can there be more than one conclusion drawn from the data?
Yes, in this case because of the high levels of variabilities and from
the level of precision and accuracy of the data — Rand and I can come
to differing opinions, based upon various assumptions. But I think I
can understand his logical chain of thought, and compare it to mine to
see where the differences are. And that is *very* useful to both of
us.
>Our biggest point of disagreement, as I’ve pointed out in another
>post to him, is the degree to which new markets are necessary to
>justify what I’ll call a "traditional" RLV (in the sense that it is
>on a path leading from NASA’s X-33).
True. I’ve been getting a force-fed indoctrination in industrial
and corporate decision making and venture structuring. That’s more of
an traditionalist view — but is very important in understanding how
large commercial space ventures like satellite telecommunications
ventures and launch vehicles and the like are being done. And I think
that’s going to be important to put together the deal which makes some
of these type ventures happen. Rand on the other hand, is steeped in
the entrepreneurial/ small start-up venture culture. A different way
of doing business — but no less valid as a way of getting into the
market in other circumstances than I am assuming.
I don’t think we need new markets to make a RLV venture work —
that is, justifying the venture to investors to get the venture up and
running. But we want to energize the new markets as that is where we
will become "sick rich".
On the other hand, I recognize Rand’s point, that breaking the
traditionalist paradigm (as seen in the entrants for the X-33
competition, for example), will also break my assumptions and chain of
logic. If that happens, then all of my bets are off.
We disagree in some of the details of markets, and obviously
disagree on the details of some of the strategies which can be
pursued. And over a few beers we can argue for hours as to which
strategy might work best against which market.
>My sense, from talking to many of those involved, and from the CSTS
>study, is that new markets have never been taken sufficiently
>seriously by any of the major players to really understand them. I’m
>not going to speculate on the reasons for this, except that
>traditionally, the aerospace industry has always been extremely risk
>averse (from a business, not a technology perspective), and it’s
>inculcated a culture which is far from (shall we say?)
>entrepreneurial. They don’t want to get "sick rich," as Tom Rogers
>would say, they just want to see a reasonable return on their
>investment at a risk commensurate with some other investment of the
>same return. This is not a criticism–simply a statement of fact,
>with which I suspect that Wales would agree.
Hmmm… rather than saying the aerospace industry isn’t
entrepreneurial, I’d point out there are multiple methods of
entrepreurialism (as was hammered into me in my MBA program). And
different strategies can be used for different circumstances.
Aerospace investments, at least up into the 1970′s or so, were rather
large bets against a company’s bottom line. While the percentage bets
against net worth are not any larger than that found in small
electronics firms, for example — the sheer scale and magnitude of the
dollars and risks has forced certain risk-coping mechanisms in place
which are encountered when such ventures are developed, analyzed,
approved, and executed. Other industries have similar mechanisms,
with variations dependent upon the scale and industry specifics.
Part of these mechanisms have to do with the size of the venture
and consequences of failure back upon the stakeholders in the venture.
For a small company (say 50 employees), betting $10 M equity against a
$100 M payoff — that’s a huge $2M/employee payoff, against a $200 K
per employee risk with a pretty short time scale (typically less than
5 years). Stakeholders, such as VCs and start-up principals accept
that risk and usually have risk coping mechanisms (ie, VCs spread
their investments over many startups, start-up participants share
costs, etc.) And given an up-front buy-in by the participants —
people will gamble big against that.
However for a 100,000 employee company, that same equivalent amount
of reward would have to be around $2e11, or around $200 Billion. And
there are very few ventures which can generate this level of return in
the same time scale. And the same equivalent level of risk would be
for $2e10, or $20 B — which would not only be more than most companies
net worth (Boeing for example has a net worth of around $8B, MDC around
$4B), but if that venture failed would probably take downs several
major banks and financial institutions as well as a major Fortune 100
level company. Moreover, with 100,000 employees, you will get a
smaller percentage willing to risk their incomes for 5 years, and you
also have stockholder and financial backers not willing to gamble large
chunks of their equity on such a risky venture.
This, through corporate boards of directors and shareholder
meetings and from major institutional investors starts to limit the
amount of risk a major company can take on. Yes, companies will still
gamble big time — investments in the Billions of dollars are made
every day — but the pure risky "swing for the fences" ventures are
_very_ hard to justify. The number of dimensions of risk start to get
limited — and ventures with multi-dimension risks including technology
_and_ market _and_ cost _and_ regulatory risks have a hard time.
This starts to shrink the pools of money available for "swing for
the fence" gamblers. For example, the largest first/second round
venture capital investment last year was a pooled investment in the
$25-30 M dollar range — for a health care startup in managed care
(not with huge amount of market, or technology or cost risks). As you
increase the dimensions and magnitude of risk from technology, market,
regulatory environment, etc. the amount of "swing for the fence"
gambling money decreases.
At the other extreme, there were hundreds of billions of dollars
available in the industrial capital markets used for such things as
expanding production lines, and financing additional products for
existing markets. Lots more money available for a venture to tap
into, but you have to show lower risk to attract the funds.
Scale and nimbleness becomes an issue — and is one which is
wrestled with on every major venture. It’s not the companies don’t
want to become "sick rich", its rather that they can’t find the funds
to go out and gamble on "swing for the fences" without having huge
consequences from internal and external stakeholders if they fail. So
they will attempt to risk limit the consequences.
But if you risk limit too much, you not only never get anything
done, you become very vulnerable to more nimble competitors.
Therefore you want to gamble more, but you are limited to the scale
you can employ without limiting your nimbleness in the venture. This
becomes a very interesting and dynamic issue in multi-dimensional
optimization — and one in which there is a lot of art, as well as
science, in structuring the executing the venture.
I disagree with Rand’s implication that a good investment will be
overlooked — with the caveat, the investment must be structured within
a reasonable risk consequence portfolio. (As an aside, I know first
hand that several of
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