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Season 6, Episode 7

ACQ2 Episode

May 26, 2020
May 26, 2020

The Complete History and Strategy of SpaceX

On the eve of SpaceX's historic scheduled launch of its first human spaceflight mission — both the first ever by a private company, and the first to take place on American soil in nearly a decade — we tell the incredible story of its rise from ragtag rocket jocks to the most disruptive and advanced force in aerospace today. While much of the Musk spotlight has shone on Tesla in recent years, is SpaceX actually the company that will have the greatest impact on our world's future, and perhaps even other worlds beyond? All of a sudden that idea seems a little less crazy...

Playbook Themes from this Episode:

Thanks to listener
Preet Anand, president of Snug and founder of Risk & Safety tech at Lyft, for contributing these Playbook notes!

1. A truly world-changing, if not solar system-changing, mission attracts great people.

  • Before even founding SpaceX, Elon already had relationships with one of the world’s preeminent rocket engineers and the future head of NASA. This was because the mission, inspiring the public to get back to Space with the Mars Society’s rocket project, was that exciting.

2. Show, don’t just tell. This is especially true as a company building a technologically deep, out of sight, and literally out-of-this-world service. Figure out how you can weave a compelling story into everything you do (i.e. not just some blog posts).

  • SpaceX livestreams everything. Starlink launches, their first crewed mission, their attempts to successfully re-land rockets, and much more. While this takes a tremendous amount of transparency and vulnerability, there is no question it has captivated the public. This certainly fuels the cult of personality around Elon.

3. Great government policy catalyzes opportunity.

  • NASA’s new procurement policies enabled lower costs for taxpayers but also gave SpaceX the opportunity to get these contracts. They changed from merely sub-contracting rocket components, to contracting out entire launch programs, including complete vehicles. If not for this change in policy, SpaceX would not be where it is.
  • This theme has also held true for Tesla’s 2008 Department of Energy loan (repaid in full and then some) as well as KeepTruckin’s positioning in the safe transportation market.

4. The best companies are open-minded about their best customers and follow the market’s pull.

  • SpaceX thought its customers were going to be new microsat and cubesat companies. But it turns out, as observed by SpaceX President Gwynne Shotwell, that even NASA and the Air Force were interested (and came with huge-dollar contracts!) Being open-minded about this led to SpaceX’s contracts with NASA that would serve as the profitable engine to fund new innovations like the Starship, and new business lines like Starlink.

5. Build a bottoms-up cost model to cut the fat and unlock opportunity.

  • Elon’s cost model spreadsheet after his Russia trip unlocked one of SpaceX’s foundational insights: the cost of space travel should be much lower based on the cost of materials. It showed the incredible amount of fat from the cost + pricing structure and the many, many layers of subcontracting. This is one of SpaceX’s sources of competitive strength, and has also inspired cost-reducing innovations like rocket reusability. his ultimately results in lower costs for taxpayers and a low-cost launch vehicle via the “rideshare” program.
  • Additionally, being transparent about its pricing certainly furthers Tesla’s counter positioning.

6. A big, hard mission takes time and needs patient capital.

  • SpaceX has been around for 18 years now - longer than Facebook. And the mission is still far from accomplished. It has been a difficult journey, even with Elon’s huge personal $100M initial investment to do three launches, Founder’s Fund’s contrarian bet, and the U.S. government’s uncharacteristically quick decision to award SpaceX their first contract. Additionally, the company’s decision to avoid the day-to-day volatility of the public markets and instead to periodic secondary sales keeps its stakeholders focused on the long term.

7. Be your best customer and push the flywheel.

  • Similar to Epic Games, SpaceX is leveraging its strengths to unlock new opportunities. The rocket launch business is now powering Starlink to enable a new, huge recurring revenue stream with global telecommunications. This in turn will enable SpaceX to keep investing in its core technology capabilities and build out the Starship.






We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
May 26, 2020

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
May 26, 2020


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
May 26, 2020

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
May 26, 2020

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
May 26, 2020

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
May 26, 2020

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
May 26, 2020

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
May 26, 2020

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
May 26, 2020

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to Season Six, Episode Seven of Acquired. The podcast about great technology companies and the stories behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: And we are your hosts. Today, we are talking about SpaceX. The company that this very week will be attempting to launch humans into space as a private company and make the United States a space-faring nation for the first time since the end of the Space Shuttle Program which unbelievably was a decade ago. David, how crazy is it that it's already been a decade since the end of the shuttle program and also how crazy is that we haven't sent humans to space as the US since then?

David: So crazy. I remember when that happened, how disappointing that was, which makes what's about to happen so exciting.

Ben: Yeah. There was no date set for when it’s going to start again. We decided the Shuttle Program is coming to the end. It was expensive. It was dangerous. That it had it's mishaps and there are plans for stuff that's coming next, but there was no date. There was no plan. There was no mission. Now here we are almost a full 10 years later.

David: With a date, a plan, and a mission which we’ll get into.

Ben: Indeed. Listeners, here are the things that I knew about SpaceX (more or less) before we started researching. They're the first private company ever to launch a rocket to orbit, recover it, and reuse it. They can do all three of those things simultaneously where they bring two rockets back down on land and one rocket back down on a boat almost a thousand miles away. Pretty unbelievable.

They're (of course) led by the controversial genius, Elon Musk, or I should say, genius entrepreneur. Of course, he has a plan. Many would argue an incredible plan of getting a million human beings to live on Mars. But until I dove into this mountain of research, I didn't understand the company's truly amazing business model. The winds have changed going on around the company in the space industry at just this moment in time or really how they were actually going to pull any of this off.  

So what is the business? Who pays them? And for what? And what's with all these satellites that they've been launching recently? Today, David and I are going to dive into all of that in full gory detail.

David: Yeah, we are.  

Ben: A few announcements before we get into it. If you love Acquired and you want more, you can become an Acquired Limited Partner. Our most recent episode was a crash course in fundamental startup concept pricing with Patrick Campbell, the founder and CEO of ProfitWell.  

Patrick is literally the world's expert on the topic, so we brought him in to dive into how you should price software (because most people do it wrong), how you can raise your prices and still have that be okay for your existing customers, and things like what's the proper way to do a free trial.  

If you want to join, you can get access by clicking the link in the show notes or going to glow.fm/acquired and all subscriptions come with a seven-day free trial.  

David: And also comes with access to our monthly LP calls that we started doing. I don't know about you Ben, but they are super fun. We had a lot of awesome LPs joining us. Super great chat and just an amazing reminder of the incredible people that listen to this show, our LPs. I can't wait for the next one.

Ben: Great way to know so many of you. Before we dive in, I'd like to thank our sponsor for all of Season Six, Silicon Valley Bank. We have with us today, Ann Kim, who's a managing director at SVB and also the sector head for frontier tech, which makes her a perfect guest to join us today. Also, how cool it is that SVB has a sector head for frontier tech?

David: Seriously.

Ben: Ann, why has the last 15 years been a boom in the privatization of the space industry? Was this a natural point of maturity for the technology or did Elon Musk actually cause this to happen?

Ann: I do think it was a natural point. Elon Musk does not deserve all the credit. There's Elon Musk. There's Jeff Bezos. There's Richard Branson. There are several people that may have contributed to the attention that space tech has actually received, but quite honestly, there's been so much advancement with all of the cellphones that we have in hand.

We have batteries, antennas, radios, accelerometers, cameras. All of these fundamental components really contribute to the development of miniaturizing commercial satellites, making sure that space tech can actually become much more advanced at a much more compelling price point.

I think that a lot of these reputable tech billionaires have contributed, but really it's been more kudos to the advancements in the technology that have helped space tech really advance over the years.

Ben: All right. Thank you, Ann, and thank you SVB. If you want to learn more about SVB or get in touch with Ann, you can click the link in the show notes. Now, David over to you to take us into SpaceX.

David: Wow. Where do you even start? The place to start, listeners, if you haven't already, go back and listen to our Tesla episode, which was now a couple of years ago, which is just crazy. We got to revisit that because a lifetime has happened to Tesla since we recorded that episode. But in that, we talked obviously a lot about Elon and his background. He as a person, some of the crazy things that happened to him that have turned him and his personality into the unique brew, blend, vintage that it is.  

But just by quick way of background to catch everyone back up on it, Elon obviously was born in South Africa. He grew up with a pretty insane family and in an even more insane time to grow up in South Africa with apartheid and all the terrible violence that was happening there. He wanted none of it, but he wanted to come to the US. He thought that America was the land of opportunity. He thought it was where things could happen. He was particularly interested in space, sci-fi, and making the future the present.  

Basically at age 17, he hitchhiked his way from South Africa to Canada. Lands in Canada and then ends up going to the University of Pennsylvania. From there, he makes his way up to Silicon Valley. He started two very successful internet companies. One of which was a little company called PayPal, and somehow in true Elon fashion managed to get himself ousted as CEO of these two internet companies at least three and potentially four times, which is pretty impressive given that it's only two companies.  

Ben: Before this, this is Zip2 and then X.com which merged to become PayPal.

David: Yup. First company Zip2, got ousted as CEO. Second company, X.com, his employees staged a coup. That's the one you may or may not count, then the board removed him, then he came back quickly, then they merged with confinity.com which became PayPal, then the board removed him again.

Ben: Before you start your rocket company, have all of these experiences to form you, and then see what happens. Let's just play that experiment out.

David: Exactly. This unique brew of life experiences for this man whose only 29 years ago, he decides, after in October of 2000 being ousted for the final time from the newly merged PayPal, he's had enough. He's done with Silicon Valley. He's hanging up his spurs. He's walking away from it all at age 29 with about $200 million, some of which is a small amount coming from his Zip2 sales or earnings, and a large amount of that from his equity in PayPal, and a silver McLaren F1.

By the way, we didn't talk about this in the Tesla episode. Did you know, Ben, that he and Peter Thiel were driving said McLaren F1 up the road to go meet with Sequoia Capital one day. Peter asked him what this thing could do. Elon said essentially hold my beer and they end up spinning it around completely totaling it, being an amazing stroke of faith that they do not die and they end up going to the meeting afterward with the car totally wrecked.  

Ben: My God. I knew they totaled it. I had no idea it was with Peter or going to Sequoia. That's like they got away with their lives.

David: This is Elon we're talking about here. A lot of this history comes from the great, great Ashlee Vance's biography of Elon appropriately titled, Elon Musk, because what else are you going to title a biography like that.  

Ashlee is right to take this into SpaceX now and set the stage. Ashlee writes about what is going on with SpaceX. He says, “With SpaceX, Musk is battling the giants of the US Military Industrial Complex including Lockheed Martin and Boeing. He's also battling nations, most notably Russia and China.” Then shortly after, there's a quote from Elon. He says, “My family fears that the Russians will assassinate me.” And you thought online banking was rough.

Ben: No kidding. What do you think about Elon at this point in time? Is he a rich tech guy who now wants to get into rockets, much like the many billionaire types before him who wanted to start a rocket company? How do you—

David: You're referring to Jeff Bezos?

Ben: Well, I'm referring to the litany of people who have started a rocket company, bought one rocket, crashed it, and given up. There are people who have started all sorts of companies, have then gone and done this as their second act when they have a god complex.

David: It's interesting. Almost always it's men that do this. These little boys growing up wanting to be astronauts, make a bunch of money, then decide to go create some spaceships as their toys. That's what everybody thought Elon was doing here, including all of his friends (which we will get into now).  

It's October 2000, he's just been ousted. He's decided he's leaving Silicon Valley for good. Literally metaphorically leaving, but also physically leaving. He's going to move to Los Angeles because space is now what he's going to do with the rest of his life and the aerospace industry is primarily headquartered in the Los Angeles area. He's going to move there. He's going to make connections, and he's going to figure out what's next for him.  

Kind of amazingly through all of this—this also says a lot about Elon—despite having been ousted from PayPal twice, he retains a really good relationship with all the team there including Peter, Max, all of the PayPal mafia, and [...]. One weekend, PayPal is starting to really take off at this point. They're not public yet, but they're starting to figure things out. The whole team including Elon goes to Vegas for a weekend, and Kevin Hart whose an angel investor in the company is interviewed in Vance's book. He says, “We're all hanging out at this cabana at the Hard Rock Cafe and Elon is there reading some obscure Soviet rocket manual that was all moldy and looked like he bought it on eBay. He was studying it talking openly about space travel and changing the world.” Everybody was like okay, man. This guy has gone off his rocker.

Ben: He's not hiring someone to go do this for him and saying put my name on it. I'm going to flash way forward to today, but he's effectively and maybe entitled the Chief Engineer of—

David: I believe he is entitled the Chief Engineer.

Ben: Yeah. I think I've heard NASA directly refers to him as the Chief Engineer of SpaceX, Elon Musk. He was a sponge. He would go find resources on rockets and just go suck all of the information out of physics textbooks and physics professors. Exactly what you just pointed out, rocket manuals. I don't want my question from a moment ago to linger too long feeling like I'm mischaracterizing him.  

Elon is absolutely not an eccentric billionaire who now decided to get into space because there's nothing else to do. This is sort of the plan all along and online payments where this brief exit from the highway before he got back on to go and really run this big problem.

David: It was a way to get all of these resources. When he lands down in LA, he gets hooked up with a nonprofit organization called The Mars Society. Elon has been percolating on Mars. When he first started to think about this he goes to the NASA website. He's expecting on the NASA website to find all sorts of great plans about the future, exploring space, and then particularly Mars. It makes sense that people should go explore Mars. We've been to the moon and there's nothing there. He gets really disillusioned. He's like I've got some resources. I want to make a grand gesture. He's not thinking about a company. He's not thinking about a business. He's thinking about something to inspire people to get back into space exploration.

The Mars Society, this is their charter, so he makes a $100,000 donation to The Mars Society. He joins the board and he starts meeting all of these aerospace people in LA. Not just in LA, of course back up in Silicon Valley there's NASA's Jet Propulsion Lab in Mountain View.  

Elon's mostly down in LA but he's going back and forth. He starts organizing these “Saturday salons,” he calls them, where he's just getting together industry leaders in aerospace and at JPL, both in LA and Palo Alto. There's no agenda, but he lets it be known to all of them that he's got some resources. He's a dot-com-rich guy and he wants to make a gesture. What could be done on the order of $10–$20 million.

They start to coalesce the group on this idea of building a “Mars Oasis” and the idea behind a Mars Oasis is that they're going to buy a rocket, and they're going to put a plant on it, and they're also going to put a robot on it, and they're going to shoot this rocket to mars. I can't remember if the Mars Rover had landed at this point. I think so.

Ben: The lander that I remember was a really big deal that I think found ice.

David: I remember that.

Ben: The Mars Phoenix lander was somewhere in 2008. That hadn't happened yet, but I think the rover had.  

David: Yeah, I think the rover was there. I know it was kind of crazy. Obviously, everything about this is crazy, but you could piece together how you could string along somebody that this could happen.

They were going to put this there and the idea was that the robot was going to create a greenhouse, was going to put the plant in the greenhouse, and let the plant grow on Mars. The robot would have a camera, and with a video feed, kind of like the whole earth picture that the first Apollo astronauts took of the earth from the moon, that this will be a live video feed of a plant growing on Mars. Beam it back over the internet onto a .com site and inspire the people of the world to explore space with this.  

Ben: Love it.

David: Love it. It sounds great.

Ben: The purpose being inspiration, a little bit of a philanthropy stunt.

David: Maybe even some kind of performance project, not to foreshadow what's going on in Elon's life today, but that's the idea.

There's one problem, though, and nobody in the salon group is really willing to tell Elon. He's thinking he's got probably $10-ish million left over from the sale that he made. He made about (I think) $22 million from the sale of Zip2, his first company. He's probably got about $10 million left over. He thinks he could probably scrape together maybe $20 million. Maybe take some loans out against his PayPal equity. That's his budget for this.

Ben: And David earlier you would say that number $200 million. That obviously would come later when he did get liquid on those PayPal shares. Now he's only got this $10–$20 million from the first company.

David: He will end up being over with $200 million on liquidity, but at this moment it's all tied up at PayPal. The thing that none of these space experts want to tell him is that he's off by a magnitude on the cost of this thing and $10–$20 million isn't going to cut it. He needed more $100 million, $200 million, $300 million.  

Musk is very singular in his focus, so he keeps pushing forward on this. He comes up with this idea. I think this was his idea that the way he was going to make this happen was he was going to get a deal on a rocket by instead of using a purpose-built space-launching rocket, he was going to go over to Russia. Remember this part. We're not that far removed from the dissolution of the Soviet Union. It's kind of the wild west days of Russia at this point.

Ben: 1989 to 2001.

David: Yeah. We're now in 2001 and Musk's idea is he's going to go over there to buy an intercontinental ballistic missile because the Soviet Union has disintegrated. You can do that in Russia these days.

Ben: Apparently, there's an open market where you can go and buy.

David: Maybe it's not open, but it's grey.  

Ben: That's right. Didn't he have some sort of a connection that helped him figure this out?

David: We're about to get into this.

Ben: We should also contextualize here. I think to be able to actually buy one of these in the US through more appropriate channels, if you could actually get your hands on one, I think it's $65 million. The reason to look elsewhere is there's no way you're getting one here for any reasonable amount.  

David: Yup. He thinks he's going to get a deal by buying a missile and converting it into a rocket. This is like cue the James Bond villain thing here.

He goes over there. He hears from his network that there's a guy who can maybe make this happen. That guy's name is Jim Cantrell. Jim lived in Utah; he's an American. He worked for NASA and also the French Space Agency, and ended up doing a lot of super classified collaborative missile defense projects with the Russians. I don't know if this was during the Cold War or just after where they were actually working together on missile defense, so he knows the Russians pretty well.

He tells the story. One day he's in Utah, he's driving, he gets a call on his cellphone. This is in Vance's book. This guy in a funny accent said, “I really need to talk to you. I am a billionaire.” This is Elon, by the way. Elon is not a billionaire at this point. “I am going to start a space program,” and Musk finally refuses to give Cantrell his cellphone number. Musk made the call from his fax machine line. He's starting to get paranoid what this is going to entail to go and try to buy a missile.  

Musk asks Cantrell if there's an airport near where he is and if he could meet the next day. Cantrell says, “My red flag started going off,” and he's fearful that one of his enemies is trying to set him up. He says, “Okay, I can meet you in the Salt Lake City Airport. But only behind security,” because he wants to make sure that—

Ben: That’s actually really smart.

David: He's used to deal with the Russians here.

Ben: Just like if I ever want a super high-security meeting, now I know how to do it.

David: Yeah, go to an airport. It's probably empty these days. Coronavirus, a very private meeting.  

Cantrell runs out of the conference room at the Delta lounge at the Salt Lake City airport. They end up hitting it off. Cantrell was like oh, okay. This guy is something, but he's not totally crazy. He says he agrees. He says okay. I'll get back to Russia with you and I think I can help you buy a rocket.

At this point, Elon's friends all basically try to stage an intervention. They create a compilation video of rockets blowing up. They come up with all of these stories. Ben, you were mentioning of everybody who’s lost all their money doing this.  

He goes for it, but one of his best friends from College, Adeo Ressi who started TheFunded.com and The Founder Institute, is a great entrepreneur in his own right says I'm going to come with you. The friends must have nominated him to keep tabs on Elon.  

The three of them, Cantrell, Elon, Ressi, and one other guy end up going to Russia and making a [...] to try and do this. The other guy who goes with them is a guy named Mike Griffin who they get introduced to.

Ben: Wait, Mike Griffin went on [...]

David: Obviously, Ben’s face right now.

Ben: No way.

David: We’ll come back to Mike Griffin later in the episode.

Ben: I have Mike Griffin in my notes listeners. I won't tell you where or what his title was, but wow. It's the same Mike Griffin?

David: Yeah. Ben and I were talking before the show and I was like there's going to be a thing. Just wait. Just wait, listeners. There's going to be a thing about, Mike.  

Ben: What's Mike's role in this?

David: He comes over to just be part of this entourage to make introductions and meet with people.

Ben: See how one would go about buying an ICBM from Russia.  

David: You could call it an ICBM. You could call it a rocket to get to space which is what the intention here is. Mike worked at NASA earlier in his career then he ran In-Q-Tel which is a part of the government but it's the CIA's venture arm for investing in commercial ventures that are going to be helpful to the government.

Who knows why Mike was coming with them. He's coming from the government. He's coming from In-Q-Tel. Maybe he's keeping tabs on everything that's going on here. He comes along and basically goes as you would expect listeners. They meet with a bunch of Russians. Cantrell and maybe Mike sets up some meetings and they go like this.

Vance describes a bunch of them in the book. They walk in, they sit down. The first thing that happens of course is vodka shots and Vance talks about one meeting where everybody in the room does vodka shots and the Russians are toasting to America. That probably should set some red flags off there for everybody just from the get-go there.

They chat for a while. They're not really talking about anything related to buying a missile. Lunch is served, a couple of hours go by, and then finally they get around to like so, the purpose of your visit.

Ben: And for anyone who ever met with any of Elon's companies, let alone Elon himself, this is not how you get to have a meeting with someone at SpaceX. It's quick. It's to the point. It's how fast, give me really good reasons for everything, and let's move on. Elon is the personification of that type of meeting.

David: Yup. He starts getting really frustrated by all these meetings and finally by the end he's had enough of this Russian way of doing things. He started coming out right after the vodka shots like, I want to buy rockets. Here's my offer.

He's calculated. He's willing to offer a meeting with one group, this is the last group to meet with. I think it's either two or three rockets. He offers them $8 million for the two of them. They're like how about $8 million each? Let’s just say they don't come to a deal. Everybody leaves the meeting. By the way, they're in the middle of Moscow and Russian winter, which is pretty depressing.  

Ben: It's awful. I've been in Moscow in February and it's ‘freeze your face off’ cold.

David: It's literally February 2002 when this is happening.

Ben: Let's recap dollars really quick because dollars are going to be an important thread through this whole story, not just because this is an expensive endeavor but because the scale of dollars to other dollars is important to think about how you would go about solving this problem. Elon basically got $170 million from PayPal of post-tax dollars.

David: Once the acquisition happens which is not for another five months.

Ben: It didn't happen yet, so he's got $20 million total now, but he'll eventually have $170 million. That number that I quoted buying a rocket like this from a US company that manufactures it, it's like $65 million. He's trying to buy it for $8 million for two of them in Russia. To keep those relative dollars around your head, of course the deal blows up. He doesn't actually end up buying them, but that would have been what it cost him.

David: Even if he were to put all that money into these, he couldn't do the $65 million launch because that's just the launch. Then you got to get the stuff there, you got to build the robot, you got to set up all the stuff.

Ben: I'm sorry, that $65 million I'm quoting you is literally to buy a rocket.

David: Oh, interesting. I didn't realize it. I guess you couldn't at that point of time just walk up and reserve a launch spot on a rocket. You actually have to buy the rocket.

Ben: This is 2001. Who can you just go in and say hey, I want to…

David: Imagine if there's a company that did that, offered that service.

Ben: I take that back. I think such a concept did exist, but I think it would have cost you $150 million to $500 million quoting some of my numbers that we're going to bust out later in our future cost comparisons.

David: Wow. So, back to February 2002 in Moscow, they leave the meeting, this motley crew. They get on the airplane and they head back to the US on the plane. Cantrell talks about this. He says whenever you get on a plane in Moscow, particularly in February heading back for the States, you always particularly feel good when the wheels lift off in Moscow. It's like, my God I made it.

He and Griffin are veterans here. They call over the drink cart and they start celebrating getting out. Meanwhile, Elon is sitting in front of them and he's just furiously typing away on his laptop silent. They can't figure out what's going on. About halfway through the flight, he turns to them and says hey, guys. I think we can build this rocket ourselves, and then he hands them the laptop.

They look at it and they're just dumbfounded. Elon has this spreadsheet on this laptop. It must have been Excel. Google Sheets didn't exist at this point. He got this Excel doc and it's like a hyper-detailed spec sheet with cost and all the materials needed to build a rocket.  

Not necessarily a rocket that will get them to Mars, but it's real. They're stunned and they say how did you build this? Well, it turns out Elon had been reading a lot of Soviet rocket manuals and he had also met as part of this group of advisors he's putting together.  

He met this guy named Tom Mueller. Tom had worked at Hughes Aviation. He was of course being Howard Hughes back in the day.

Ben: Speaking of billionaires who started rocket companies.

David: Indeed, and then went on to TRW Space. He was known in the industry as a real savant about engines. Probably the best, most impressive rocket engine engineer in the world. Musk had got in touch with him, met him, and started asking him all these questions about how rocket engines work and what needs to go into building a rocket. He'd helped him put together the spreadsheets. It was pretty damn good.

They get back to the US. Basically, a whole chain of events gets kicked off and ends up in SpaceX, an American company launching people into space.

Ben: Yeah. Just to keep the dollars thread going, I can't remember exactly which of the sources it is. David and I have 20 or 30 different sources that are in the show notes. I'm going to go and read more about this. I want to say this was originally from a SpaceX engineer but to point it out, if you calculate the cost of goods sold for aerospace-grade aluminum alloys, plus some titanium, copper, and carbon fiber on the open commodities market, it's about 2% of what rockets cost. I want to plant that seed because the question in your mind throughout all of these should be why is this expensive?  

Obviously, this is expensive. It's almost unfathomably expensive. Whenever you hear anything about this industry, contracts awarded, cost of emission, NASA's budget, which by the way, in the last 20 years, has gone from about 1% of our Federal budget down to about 0.5%, it was as high as 5% in the 1969 space race. It's interesting about that.

David: That's of the US government budget, by the way.  

Ben: That's correct. That's up the entire Federal government, yes. It's immensely expensive almost to the point where you can't even discern between the millions and the billions. I'm trying to paint the picture where you really should just try and figure out every single time you hear a high number, why is it expensive and where does the money go?  

Of course, you can't make a rocket just by throwing commodities at a wall. You're not going to get it all the way down to 2% of what that rocket costs, but 2% being the hard materials, I'm not someone who's in an industrial job. I have to imagine that in most manufacturing businesses, the actual hard materials are much more than 2% of the final sticker price of whatever's left on the line.

David: Yeah. The bomb versus the MSRP. Totally. Elon studied physics and undergrad in addition to business. He is a physicist. This is the question they ask themselves, yeah, this is hard but at the end of the day, these are atoms. It's a bunch of gas in a tube. That's what a rocket is. This is what he's putting together in a spreadsheet. They touched down back in the US and at the same time, PayPal finally goes public.  

We talked about this in our Adapting episode with Roelof at Sequoia, who was at that time the CFO of PayPal. They were the one bright spot in the Russian-like dot-com winter. The stocks pops 55% right after the IPO. Elon sees this. He's got the spreadsheet and something clicks in his mind. He says you know what? This isn't just a gesture. This isn't just an inspirational thing I want to do. I can actually disrupt this industry. I’m going to build a company. I can take all of these cost blows that's happening in this industry, use my spreadsheet, use my connections, and do this for real.

They walk off the plane, he gets Cantrell, he gets Griffin, he gets Mueller, literally the rocket scientists, and a guy named Chris Thompson who is an aerospace engineer at Boeing. He says let's do this. Let's start a company. Nonprofit is dead. I'm going to start this. I'm going to fund this all myself. PayPal has liquid public currency. The lockup will be over soon. I can exit my stock and I'm willing to go all-in on this.

Ben: Almost all in.

David: Almost all in, indeed.

Ben: Greater than half in.

David: Greater than half in. Now, he hasn't yet met JB Straubel and got introduced to the electric car scene. At this point, he's thinking all in. Everybody's in except for Mike Griffin. He lives on the east coast. He's the former [...] guy. He says look, guys. I'm a little farther on in my career. I'm a little more senior. This is all a great adventure. Best of luck. I'm rooting for you but I'm not going to move out to California and do this. It ends up being a good thing for SpaceX that he did not do that, as we will see.

Ben: I'm learning in realtime from you this episode. It's a very good thing for SpaceX that this is how it should work out.

David: Great thing for SpaceX and the world that he did not do that. Everyone else though is in. Cantrell is in for a few months. He ends up leaving a few months later. In June 2002, they officially incorporated Space Exploration Technologies. The very next month in July 2002, eBay buys PayPal for $1.5 billion. Elon, now, doesn't just have a liquid public stock currency. He has $180+ million in straight-up cash that he gets out of PayPal.  

Remember, he's been ousted three or four times from the two companies he started in the past. This is going to be his life's work, his next company. He says I don't want any chance that anyone can kick me out here ever again. I'm not taking on any outside investors. I'm putting my entire fortune into this. I will fund it all myself. It's mine. The super interesting thing, Ben, as we're texting about this, all told over the life of SpaceX, I think Elon has only put in about $100 million into the company versus Bezos' Blue Origin puts in $1 billion a year and many other people that have entered into the space industry just became money pets.

Ben: Let's plant that seed because yes, SpaceX is very revenue-funded instead of equity funded. Of course, it's very equity-funded, too. This is a company that has a $35 billion valuation today and has over $3 billion invested in it from outside of Elon.  

David: Much of which is secondary.

Ben: Oh, interesting. Good point.

David: Yeah. I think much of it is secondary.

Ben: Okay. The point I want to drive home here is that SpaceX was founded. There's one thing that's known about that company at this point. One thing that's not super solidified, at least, as far as I can tell, the thing that is known is we're going to freaking Mars. We're figuring this Mars thing out and we're going to start by lighting a one-engine candle on fire. We're going to figure out how to take baby steps here. That part is figured out.

The part that's not figured out is what you'll find in the very first paragraph of the Wikipedia entry on SpaceX which is this sentence, "They're an American aerospace manufacturer and space transportation services company." It is very, very, important to understand SpaceX today is both of those things and they are different. They are a company that makes stuff for aerospace and may well one day run a business on that. They also have this business where they're basically a logistics company to ship stuff up to space. That latter business funds the former business. I think the missing puzzle piece that comes along, that lobbies for SpaceX to do that is not yet in place.  

David: Yeah. The business plan for this new company—Elon is very insistent that this is now a company—is that he's seen all these costs bloat in the industry. He thinks they can do much better and he realized, the hard part about launching things into space is the engine of the rocket. He has the best rocket engine engineer in the world, Tom Mueller, working for him. They're going to build their engine completely in-house. The initial idea is they're going to go to third party suppliers, come out with any folks, get all the rest of the stuff together, and work with contractors.  

You can imagine the business plan, ironically, is sort of the traditional Detroit automotive companies where they make the engines and they make the finished products but everything in between the engine and the final car comes from a whole network of suppliers.

Ben: Yeah. A horizontally-integrated company.  

David: Yeah, exactly. Exactly. The plan is—this is what they're going to do—they're going to build the engine and they're going to start launching in September 2003. It is now July 2001. That was some wistful Elon thinking.

Ben: Classic, Elon.

David: Classic. It may have been the beginning of the Elon timeline. In software, you can ship faster than in hardware.

Ben: We should also say—this I think is from the Ashlee Vance book as well—the way that Elon calculates these deadlines is he thinks about how long. He builds a Gantt chart in his head and tries to compress all the minutes together. He also tries to apply a speed acceleration there where he says it looks like I would work on this really fast all the time so anybody that I'd hire would also do that. He basically creates this ultra compressed Gantt chart that massively has the Elon multiplier on it. That's how he expects work to get done.

David: Yup. They decide that they're going to name this first rocket the Falcon 1 after the Millenium Falcon, of course. Since the rocket is named Falcon and the key is the engine, they're going to name the engine, Merlin, which is a type of falcon. Also, I wasn't able to find, I don't know if you were, if this was intentional or not, but the Merlin engine actually has a storied history as a different type of engine, which is the Rolls-Royce Merlin engine which powered most of the British air fleet during World War II in the Battle of Britain. It was storied for being in its power and reliability in helping the Allies win the war.

Ben: That threw me for an SEO loop. I was searching for information on the Merlin and kept getting these Rolls-Royce things. I thought SpaceX always makes their own engines?

David: Wouldn't that be funny if Rolls-Royce made the SpaceX engines?

Ben: That would be the ultimate irony based on where the company would end up today in their strategy and principles.

David: I know. They get to work building the Falcon and the Merlin. Working with all of the network of contractors and suppliers being horizontally-integrated companies and they pretty quickly find that it's not just Boeing, Lockheed, and everybody who is subject to cost bloat, time bloat, and project skill bloat in this industry. It's all the contractors all the way down. Elon starts asking questions of these guys pretty quickly.

Ben: This isn't just two levels of contractors. It's not like we’ll sub it out to Boeing, then they'll sub it out to someone. It's ‘turtles all the way down’-type thing. There's this crazy recursive loop.

David: Elon, of course, starts asking questions. People in this industry aren't really used to questions being asked of them. He starts figuring out that some of these components, whether it's part of the shelf, the fuel tank on the rocket, or some of the avionics in the components that contractors are charging multiple hundreds of thousands of dollars apiece, that they can just manufacture them either in-house—fab them in-house—or use off-the-shelf consumer-grade electronics and computers for 1% or less of the cost that these contractors are quoting them.

He says all right, it's good. Just like Tesla, we're not going to take the Detroit approach to this. We're going to vertically-integrate. We're going to make 90%+ of this rocket in our own factories.

Ben: Which is wild. SpaceX coyly talks about how raw materials roll in one side of the factory and rockets roll out the other side. They always talk about it. Minerals show up on the left side and rockets show... It's not quite that. They do have a network of suppliers. I think the number is 3000 suppliers and 1100 supply them products every week. The way to think about it is those suppliers are just way lower level. They're more the raw material. Think about sheet metal and wiring rather than fully assembled motherboards and fuselages.  

It's kind of a crazy undertaking. Really in business, the theory is only to take your core competency in-house and outsource everything else. Outsource everything that can be a commodity. There were so few players in this industry and such a limited number of customers on the demand side, there was a very specific way that it was done. That way just involved this wild scattering of subcontractors, each of which had to make their own profit margin. You end up with this stacked margin, margin, margin.  

As someone who will talk about here shortly, brings up in a speech, her quote is, "It's exponential GNA that you get when you have multiple layers of integration." I've never heard someone describe it aptly, that of course this is exponential. Every time somebody needs to make their 30% or whatever it is, that's on the previous person's 30% or whatever it is. I bet it's a lot higher than 30%.

David: Yeah. Let's think about who the end customers were in the space market, mostly pre-SpaceX. Even now post-SpaceX, they were governments. Primarily, the US government but also other governments around the world. These are entities like all these contracts are done on a cost-plus basis.  

By the way, side note, playbook theme, if you ever, as an investor or an operator, encounter a situation where there's a cost-plus contract as a way of doing business, you need to either, if you're an entrepreneur disrupt them as soon as possible, or if you're an investor run the other way. With the cost-plus, there's the cost of what it costs to make something, then the contractor makes a percentage profit on the cost. The incentive of the contractor is to make a cost as much as possible so that their absolute dollar profit as a percentage of the bigger number is bigger. It's nuts.

Ben: It's a great point, David. It's ambitious but it still seems silly that this is a company that is both best in class at creating motherboards for this purpose, best in class at writing software, and best in class at creating rocket engines or top three in class in creating rocket engines.  

David: And operating those rockets.

Ben: Right. That's the other thing. They are the operator of the final product.

David: Yeah. They vertically-integrate everything.

Ben: It's obviously a 7000 person company now but it is just shocking how many core competencies they need to be excellent at.  

David: Yeah. So, what's the business model for all this? What's the target market? Elon comes from this internet industry, PayPal, [...] new markets, lots of demand, highly rapidly growing markets, and all the folks that he surrounded himself with, who are instrumental at SpaceX are the bleeding edge of the bleeding edge folks in the space industry. The people who like Boeing and Lockheed are moving fast enough for them.  

They think there's this concept in the space industry at that time and has been for many years that small satellites are going to take over. There's going to be this big democratization of the space market whereas it was just governments and big satellite companies were launching big stuff into space, there's going to be smallsats and CubeSats. There's going to be this massive opening of the market, kind of like there was in PCs and cell phones. That's who SpaceX is going to try and serve.

Ben: Exactly like PCs and cell phones. If you think about it, the reason that a lot of these CubeSats can do what they do is because we've got a few billion smartphones out there and we can massively bring down the cost of the really innovative stuff that goes into creating something that fits between your hands outstretched.  

David: Yeah. It really amazed me doing the research. We've all heard this story about space and small satellites in recent years with venture funding in the space. This was the story even back in 2002–2003.

Ben: That's true. That's a fair point. This is five years before the iPhone and 8–9 years before smartphones had scaled.

David: People were always thinking about this. I think it will materialize in the future, but the reality is it didn't quite materialize for a long time, the big market there. At this point, SpaceX makes a critical, critical hire that, Ben, you're leading to earlier. A woman named Gwynne Shotwell. Gwynne is just an incredible force of nature in every dimension. Today, she is the President and COO of SpaceX and runs most of SpaceX today. At that time, she was the first salesperson. She had come actually interestingly—

Ben: Vice-President of Business Development, David.

David: It was sales which in Elon's world is a good thing. Gwynne started in the automotive industry earlier in her career but then moved into the space industry. She says hey, wait a minute guys. Everything around the company was architected to sell to the emerging markets of small satellites like the Falcon. The Merlin engine was incredible. It was the most highly-efficient rocket engine ever built but the Falcon 1 using one of these engines was a pretty small rocket and could get just small satellites up.

Ben: It’s like 70 feet tall? Does that sound right?  

David: I can't recall exactly.

Ben: When you think about walking up to a rocket and marveling at the skyscraper structure, that's not what the Falcon 1 was. When I made a joke earlier about strapping a rocket to a candle, it's tall but it's not that tall.

David: No, compared to Saturn 5, this is a little bean shoot. Gwynne says yeah, let's go pursue trans-[...]. But honestly, she knows the market. She says it's not there. I think she’s the one who says this. You guys are missing something. The big players, the governments, the big satelliteguys, the Department of Defense, NASA, they're also interested in what you're doing. They don't like it that they are paying so much money for all of these rockets and these launch operations that they need. If we can prove to them that we can actually do this, we can get some money out of the big boys.

Ben: Yeah. Gwynne importantly spent a decade at The Aerospace Corporation and in Microcosm. She knew the way that this industry did business, knew the way the money floated around, knew what the different total addressable markets were. I think Elon probably didn't have a pie chart on his computer of segments in the TAM for sending stuff to space. Gwynne lived in that pie chart.  

David: She was the second tab of the model.

Ben: Yes. When we were alluding earlier to (of course) my comment on Gwynne with the benefits, cost savings, and vertical integration but also to the dual business model of SpaceX. The owned and operated things that they sent up versus the ‘hey, we’re a shipping company.’ She's the force behind ‘hey, we’re a shipping company,’ and that's going to fund the rest of this operation.

David: Yeah. Like proof of concept of the Falcon 1. Let's load it up on a truck and let's take it to Washington, DC and just park it in front of the, I think it was in front of the FAA and not the Pentagon. The engineers were like what are we doing? This is crazy. This is just showmanship. But it works. They get the attention of DC.

Ben: That's crazy. I think I remember, too, it was a more shiny, nice, idealized rocket than the one they're actually designing, but it had this SpaceX logo on it.

David: Yup. Meanwhile, Tom and the team are working away at building the Merlin and the rocket. The original goal was to fly in 2003. That gets pushed to 2004. Finally, in 2005, they're ready to go. Gwynne has managed to land, not a small satellite deployer as the first customer, but the Department of Defense. They're starting to experiment with launching small satellites. They want to say okay, we'll take a fly on you guys. We'll put up a small satellite.

Ben: You've never sent a rocket to space? Let's take our satellites and we'll put that right there on the nose cone and the ferrying of your…

David: Of your rocket. So, they do. They believe they're going to launch out of Vandenberg Airforce Base just North of LA in California but typical bureaucratic red tape. Also, because there are some competitors that may or may not also have some launches going on at Vandenberg at that time. They have forced them out. They have to go find another site.  

They scour the world and find a not used currently space in the Pacific Ocean between Hawaii and Guam. The Kwajalein Island or Kwaj, which is part of the Marshall Islands.

Ben: Yeah. I think it was the Kwajalein Atoll.

David: The Kwajalein Atoll. They shipped their rocket. They shipped their company out there. They say all right. We're going to set up a rocket launch site there.

Ben: Let's talk about this. The launch site is on Omelek Island in the Kwajalein Atoll. If you work for SpaceX at this time and you have to go out there, here's how you do it. You take a five-hour flight from LAX to Hawaii. You stay overnight. You catch the 7:00 AM flight to the Marshall Islands, which of course, make several stops in that area of the Pacific because you don't just have an everyday back and forth single shot to the Marshall Islands. In fact, I think my high school Guidance Counselor went on the Peace Corp there. This is a remote location. Also, sadly, a place where we tested lots of weapons in World War II and I'm sure, many other times.  

Then, you get to the Marshall Islands. You then have another hour-long boat ride to actually get to Omelek Island. Every time you go out and back, it's like a multiday experience that you're putting up with. Changing time zones all over the place just to do your job which is a top 0.1% in terms of the cognitive requirement to do that job.

David: And spoiler alert, a good portion of the company spends most of the next 3½ years going back and forth to this island. They initially think they could launch in November 2005. There's a valve problem, the launch gets canceled. It takes them until March 2006 until they get all the systems to go again. They ignite the Falcon 1. It takes off. It starts climbing. Everybody's going nuts. About 25 seconds in, it blows up. Remember, it has the Department of Defense's experimental smallsat and it's ferrying up its payload. That gets blown up at the rocket and ends up falling through the roof of the building of the launch facility there.  

It mostly ends up surviving. A lot of the rocket ends up getting blown into the ocean. Elon notes in his postmortem from the event, “It is perhaps worth noting that those launch companies that succeeded also took their lumps along the way. SpaceX is in this for the long haul. Come hell or high water, we are going to make this work."  

They're not deterred. It takes them another year to attempt a second launch, March 2007. This time, they make it three minutes into the flight. The first stage of the rocket has separated. The Merlin engine did its job fantastically. The second stage kicks in. The smaller Kestrel engine that's going to take the rocket and the payload into orbit. Everybody's cheering, high-fiving, then, as it actually says in the book, it starts to wiggle. I can also imagine this. This must've been so demoralizing.  

Ben: Two things I wanted to point out here. I remember thinking about this the first time I watched Apollo 13 when I was a kid. They don't know exactly what's going to happen when it goes up but you can model a lot of it out with equations. You do. You run computer simulations and you do your best. What if you didn't think of one force that's going to be acting at one point during the journey? In this case, the one force that they either didn't think of or was miscalculated in some capacity is either the fuel or some kind of fuel was sloshing around causing it to spin.

David: It was the fuel. Yeah. It was that everything functioned perfectly as it was going up because the fuel tank was mostly full. Then, when they got to the second stage and the fuel tank was getting down towards empty, and there was all this empty space in there, it started sloshing around in the body of the rocket. That started it wiggling and moving around in a circle. Then, eventually, it sloshed so much that there was an air bubble. The air bubble got into the engine and exploded almost into orbit. That must've been so demoralizing.

Ben: Heartbreaking. Especially after just having it last year.

David: A whole year.  

Ben: I think this is a good place to do an all systems go on our terminology here. Listeners, as you know, David and I, neither of us are in aerospace but I'd say know enough to be dangerous here. It's worth just articulating some of the terminologies we're using and what are these rockets.  

The big main body of the rocket—I'm going to work my way up from the bottom—is called the first stage. This is where all of that liquid fuel is that gets it up, not all the way to the orbit, maybe all the way to the orbit. It basically gets it off the ground. It gets through the thick atmosphere close to the earth. It sets it off on a more horizontal journey to start orbiting. Of course, the engines are attached to that. In this case, on the Falcon 1, just the one Merlin engine.

That goes up. David, you mentioned the stage separation. The first stage sort of falls back to the earth. Nowadays, it can land, and then it couldn't and splashes down.

David: Just casually dropped that, yeah, nowadays it can land.

Ben: Doesn't it feel barbaric? I was thinking about this the other day. Some of SpaceX's competitors have rockets that the first stage when they come down, they splash down into the ocean, and then they're useless. Doesn't that feel barbaric?  

It was a few years ago where it was the most amazing thing in the world that we vertically-oriented a rocket, we can sort of clean it up, and then use it again. Now, you're like wait, I'm sorry. It's just wasted? It's just trash?

David: It's at the bottom of the ocean.

Ben: It feels like I just finished a La Croix and then threw it directly in a trash can.

David: You know that scene in Mad Men? I think it's in the first season maybe where the Draper family is out on a picnic in a park.

Ben: They just dump all the trash.

David: They dumped all, then they picked up the blanket and just shake it. All of it and just instead they just walk off like a happy family.

Ben: I take it back. This is finishing your Nalgene water bottle and then throwing it in the trash. It's amazing how your perspective changes. Anyway, I digress. We've got through that first stage then you've got the second stage of the rocket. This is the part that does something out in space. This has another engine on it, Dave. You just mentioned the Kestrel engine, that's the smaller engine that's better for little maneuverability out in space because there’s Merlin. What's the current? Remind me.

David: Raptor?

Ben: Yeah, the Raptor. These are powerful, freaking engines. If you're going to go try and dock it against something, that's going to create a problem.

David: Big freaking baseball bat.

Ben: Yeah, it's the Falcon punch. You've got this smaller stage that has a single smaller engine on it. That's the second stage that we're going to talk about. It does stuff in space. There's one more thing on top and that can be one of two different things. One is a payload that is contained within a fairing or maybe within a fairing, but basically the fairing splits into two. Those things fall back toward Earth and then it's got something in there. It's got, for example, a satellite or a bunch of satellites in there.

The other configuration is that it could have a capsule on there. That would be a spacecraft that humans could operate one day, who knows. That's the structure of the rocket and the terminology that, for a long time when people talked about the multiple stages of a rocket, my eyes would glaze over, but at least in SpaceX's case because it's a relatively straightforward design. It's good to just keep it in mind so you can go okay and follow along.

David: They were so close to actually doing this, being the first private company ever to launch a satellite into orbit. Right at the last minute, it failed. They're undeterred. In classic Elon fashion, he says, not only are we going for number three. This is the Falcon 1 which was both the first and one Merlin engine. Tom Mueller is a genius. He and Elon have been thinking about a modular system. You can have multiple of these engines put together and build bigger rockets with the same engines.

The idea initially was they're going to have the Falcon 1, then the Falcon 5 which was going to have five Merlin engines, and then the Falcon 9 with nine Merlin engines. Elon says not only are we undeterred by the second failure, we're going to go full steam ahead with trial number three with the Falcon 1. I'm killing the Falcon 5 to greenlight the Falcon 9. All systems go into development on that while we haven't even launched the Falcon 1. There was a big reason why he did that which we've been building up for the whole episode.

Ben: If one engine hasn’t worked, but when we add eight in an Octaweb around that engine, it will really work.

David: It will really work.

Ben: To be fair, the first stage did work. That second launch was a success by some measure, although they never could have delivered whatever payload was on the second stage and going into space.

David: Yup. The third try again takes them a year to the summer of 2008 when they are finally ready to give the third try at the Falcon 1 launch from the island to go. The first attempt on August 2nd, 2008, they had to abort the launch at T-minus zero seconds, but they've got a launch window. The weather is cooperating. They're going to try again on the same day. They go later on that same day. It all starts working well again and then there's another failure before the first stage is even finished.

Ben: Elon only has so much money.

David: I know. It's crazy.

Ben: Elon puts a total of $100 million into SpaceX. I think he said at some point that that was enough for three or four. I'm quoting the [...] here which was great, which is three or four launches.

David: That's cool because he's deep into this. He said they're going to do this Hell or High Water. He's put $100 million in, but he made close to $200 million from PayPal. He's good for it, right? No, he's not because this is 2008, and two things had just happened. This is the summer of 2008. (1) In the summer of 2008, Elon took over as CEO of Tesla. He's pumped almost all of the rest of his money into Tesla.

Ben: $70 million.

David: $70 million. And (2) Lehman Brothers is about to collapse and the financial world is about to go nuts, so good luck raising money. Externally, he keeps it cool as head of the company, but internally he is freaking out. What does he do? He calls up his old friends from PayPal who are now at Founders Fund.

Ben: Remember that time we were in a McLaren?

David: Yes. He calls up Peter and Peter's partners at Founders Fund and says I didn't want to raise outside capital, but I guess if I'm going to do it from anybody, I'll do it from you guys.

Ben: Peter, you replaced me as CEO once, so there's no way you would do it again. I don’t think that was Peter's choice to replace him at PayPal.

David: No, I don't think it was. Founders Fund in the summer of 2008, invested $20 million into the company. That is enough to very quickly turn around for a fourth and what would be the final attempt to do the first successful launch of the Falcon 1. The very next month, in September 2008, the same month that Lehman Brothers went under, they finally succeed in a launch. It's crazy. They only have a dummy payload. At this point in time, the only customer that trusts them, that Gwynne has been able to rustle up is I believe the Malaysian government to launch a communication satellite.

Ben: Yes, but that was not until the next one.

David: Yes. The Malaysian government didn't even trust them enough that it wasn't going to blow up so they said we'll let you take us up but on this one, you got to put a dummy payload on there. If this works, then you're going to do another one and you're going to take our actual satellite up.

Ben: Revenue for these Falcon 1 launches was pretty low. It was something like $10–$12 million.

David: The initial price was $7 million. I don't know if they'd raised it by this point in time.

Ben: They only ever did five launches of the Falcon 1 so couldn't climb too high.

David: They finally succeed. You don't give the speech afterward. In classic Elon, he says, well, that was freaking awesome. There are a lot of people who thought we couldn't do it. A lot, actually, but as the saying goes, the fourth time’s the charm. There are only a handful of countries on Earth that have done this. It's normally a country thing, not a company thing. My mind is frazzled so it's hard for me to say anything, but man, that was definitely one of the greatest days in my life.

To be fair, he has a family and five kids. Classic Elon. I think probably for most people here too. We showed people we can do it. This is just the first step of many. I'm going to have a really great party tonight. I don't know about you, guys. So Elon.

Ben: Was he on the Kwaj? Do you know where?

David: I believe he was there because this was it. Everything was riding on this. He'd taken out a loan against his SpaceX or he was about to take out a loan against his SpaceX stock to fund Tesla at this point.

Ben: That's a whole nother story. I suppose that's worth telling here, too.

David: We'll get into that in one sec. The quote on this is that finally in July 2009, they did do a fifth launch of the Falcon 1 to get the actual Malaysian satellite up into orbit, but by this point in time, they had already moved onto what was going to be the real business model here which is the Falcon 9 and government contracts.

Ben: And again, the real business model of the space shipping company. We're still very far from the hey, we own a rocket and we're our own internal customer. We also own things that were operating in space. We're very much a shipping company.

David: We're a shipping company indeed. Remember a little bit ago when Elon and Gwynne put the model of the Falcon rocket into DC and started [...] there? Remember all the way back to that trip to Russia where the guy Mike Griffin was along for the ride? Guess who's the head of NASA at this point?

Ben: Mike Griffin.

David: Mike Griffin. Just incredible.

Ben: He was a Bush administration appointee if I remember, right?

David: Indeed he was. I believe he resigned amicably when the Obama administration took over. This is right into the end of his tenure. Literally, the 11th hour we're talking here at the end of December 2008. Presumably, through Mike and other contacts, Gwynne and Elon had found out that NASA was going to bid out a new resupply contract for the International Space Station. This is going to be a big contract. NASA was maybe open to a new entrant in the space potentially taking on this contract.

Ben: Reflecting back. Now understanding who the NASA administrator was at the time makes a lot of sense how incredibly fast SpaceX was able to build and be awarded this contract. I'm sure they went through all the proper reviews and everything but that relationship has to help. I do want to give a little bit of context to listeners on what a big shift this was in space policy. If you think about the Apollo missions, NASA would design something. It was the NASA engineers, and then they would bid out these subcontracts to different people.

Ultimately, it was a NASA-owned and operated vehicle that they paid enormous amounts of money to someone else to build, and then they'd run their own missions on it. This is over many more decades than getting compounded. Things get more expensive. They're bidding out more and more and more. If you're Northrop Grumman or Lockheed Martin, you then have subcontractors under you and on and on. This is a huge policy shift where NASA is basically saying, instead of us just subbing out the manufacturing, let's just tell people, hey, our statement of work is we need to get this thing the ISS. We will pay you to do that for us. That's it.

David: Whoever can do it cheapest and best.

Ben: That's all we're asking here. That's a staggering shift in policy that enabled this to actually happen. The nuts and bolts of it are COTS (Commercial Orbital Transportation Services) that later led to other contracts for both cargo to go to the ISS and people to go to the ISS, but this is what they call a Space Act Agreement. It’s a contract that NASA has done a ton of these over the years. This timeframe we're talking about, this 2006–2008 timeframe, is when they really started to use them to say hey, can one of you be a shipping company for us? We'll fund you by helping to build your UPS trucks and figure out how to design those, but then you get a big contract for doing the shipping for us.

David: Was Mike the architect of this huge change in policy for NASA?

Ben: I don't think he was the architect, but it was definitely under his watch and a big shift for the industry that he's credited with kicking off.

David: This is so huge and incredibly visionary. Without this change in the way NASA operated, there'd be no SpaceX. There'd be none of all the innovation that's happened in space. It's incredible.  

The thing for SpaceX to bid on this contract, they got to be able to get a lot of stuff up to the ISS. That means you need a lot more than the Falcon 1. Remember when Elon canceled the Falcon 5 and said we're going straight to the Falcon 9? This is what it was all about. They needed the 9 to be able to get up to the ISS and bring enough stuff up there.

2008 is winding down. We’re in December 2008. Elon is literally running on fumes. He's not going to be able to make payroll at either Tesla or SpaceX for the January 1st 2009 payroll. On December 23rd, two days before Christmas, they got the news from NASA. They have won. Two companies get the contract. They split the contract. SpaceX gets a big part of it. $1.6 billion payment from NASA to fund 12 cargo missions up to the ISS. It's just a game-changer. Remember, they were charging $10 million on the order of that for a Falcon 1 launch. This is $1.6 billion for 12 missions just completely changes the company.

At this point, Ben, Elon does a whole bunch of stuff. He's quoted in the Ashlee Vance book, as he says it's the flipping. He doesn't say flipping the matrix of the financial moves that he was making to stay alive at this point. This contract comes in. He takes out a loan against his SpaceX shares. He's an investor in a company called Everdream which is a hosting company. It gets acquired, he gets liquidity from that, and he's able somehow to make it out of this with both Tesla and SpaceX surviving. With SpaceX at this point, completely set up to transform from these ragtag guys that are launching rockets from an island in the Pacific to no, we're going to Cape Canaveral. We're launching out of the Kennedy Space Center. Completely incredible.

Ben: You say they make it out alive by the skin of their teeth and it was a near-death experience. That will continue to happen for Tesla over and over and over again in the coming years, the amount of financial engineering that it takes to keep that company alive, the number of spikes in production, and all that we've all watched them.

David: Funding secured.

Ben: It would be nice if you weren't triggering SEC investigations. That would make it easier. The point that I want to make here is to contrast SpaceX because there are places where SpaceX definitely puts it all on the line but they were out of the woods at this point. They didn't have the constant near-death experience after this that Tesla would have. SpaceX is a company that very quickly grew from this ragtag bunch of guys that smelled bad and we're all sleeping in a room in the Kwaj, to suddenly having guaranteed revenue if they could come through on some promises. They staffed up aggressively, they got huge, and they turned into a grown-up company. Of course, they kept a lot of the same culture.  

Elon famously has these weird interviews that he did for the whole first thousand people and all the engineers after that. It's a very different company that's still aggressive on vertical integration, that still has a lot of the same principles, but they weren't on the verge of dying constantly the way that we described Tesla in that last episode.

David: It's all step change at this moment. Again, I think it was all the way back to Gwynne saying, no, this is the market. We got to go after these contracts, having Mike as head of NASA, and having this come through. Now, they got to make the Falcon 9 work, but again, because Tom Mueller designed this module in a modular fashion, they know the Merlin engine works now. The Kestrel, second-stage engines, it's a lot easier.  

Even like you said, Ben, was stringing together an Octaweb which is the configuration that they have them in together, but it's a lot easier to go from that to building a whole brand new engine to take up a rocket the size of the Falcon 9. The other thing they have to do, though, is they have to make a capsule to go on top of it. They're not just taking satellites up, they got to take an unmanned spaceship up to bring cargo to the ISS, but a spaceship nonetheless.

Ben: Didn't know to poke fun to hear from it. In the Wait But Why article, one of the best lines is when he's describing the thing that I did with each component of the rocket. He’s like, of course, the thing that sits on top is a spacecraft or if you're nine, a spaceship.

David: That's right. I thought you were going to go with the other part of that post where of course these things all look like back to childhood here.

Ben: [...]

David: [...] basically we're all nine years old with everything that's happening here.

Ben: For sure. Is it worth talking about a little bit of context around the space industry around them at this point?

David: Yeah, go for it.

Ben: I alluded earlier that SpaceX has been heavily revenue-funded and lots of that by NASA. There's a great publication. The great thing about NASA is it's a government agency, so everything's public. There's this audit. It's called the Audit of Commercial Resupply Services to the International Space Station. This was published in 2018. This has a great diagram of money that flowed to different companies, SpaceX, Boeing, Orbital, Sierra Nevada, others, and what flowed for. All the different programs, be it commercial crew or shipping people up.

SpaceX has received $7.7 billion in contracts from NASA for launches, which is astounding compared to a company that would be trying to do as much as SpaceX has done without actually having a customer at the end of every rocket. It'd be impossibly hard. It would take so much more capital, it would change your priorities, and what SpaceX really has done here, I don't think I realized this.  

Every time I'm watching one of these SpaceX launches and getting all excited about a new piece of technology on that rocket, which by the way, there's a new piece of technology on every rocket. Every single mission they fly is different hardware than the previous one because they're constantly iterating. Every time they do that, save for 10 or so, there's a customer that's paying them money to send that thing up. NASA has been responsible for $7.7 billion of that.  

The other thing that NASA has put in money for, which has been really interesting, is when you mentioned the spaceship, David, which would ultimately be called the Dragon capsule. Developing the sum total, the Falcon 9, which we're about to go into the story of, and the Dragon, that cost about $400 million of NASA's money and about $450 million of SpaceX's money to go and develop that. At some point, NASA did an internal audit to basically say, how much would that have cost us if we didn't bid this out to SpaceX to go and do this? If we had built this the way that we built the space shuttle, how much would that have cost us? Basically, what they find is the number is about $4 billion.

David: Wow. So, it is 1/10 of the cost.

Ben: Absolutely. Say what you will about, wow, SpaceX really got in there and scored that NASA contract, but they're saving NASA an enormous amount of money by taking on the risk to vertically-integrate all of this and making much cheaper rockets.

David: I've thought about this until we're recording the episode. I suppose you could listen to everything we just said and say wow, what a case of cronyism. This dude, Mike was on the initial trip to Russia with Elon and then he's head of NASA. Of course, they get the contract. I don't think that's what's going on here at all. This is a combination of several people. All the folks at SpaceX and Elon, Mike at NASA, lots of other people in the government, and the DoD is coming together and saying the innovation has died and progress has died in this industry. We need to change the way it works. If we can do that, maybe we can get people excited by recording podcasts about a space launch again. Here we are, building a real industry.

Ben: This is an actual great example of a win-win where they're able to enable a company to bootstrap itself. SpaceX now owns and operates rockets that NASA is not paying them for and missions that NASA is not paying them for. On the one hand, you could say, hey, come on. That's taxpayer money that's now going to allow this company to generate profits and enterprise value on their own. It's a win-win because it costs the taxpayers a lot less to get these missions done. I think it's just a really interesting example where I don't know who loses here, probably just the congressman who represented districts where there was a subcontractor and they were winning on bureaucracy to be able to win those contracts. It's a great example of a growing pie.

This is probably a good time to give a little context on the industry around SpaceX because they're not the only people that NASA is trusting to go and send stuff up. They're awarding contracts to other people. There are big incumbents. What the heck? The startup isn't just going to come in and win the $1.whatever billion contract and everybody else goes home. That's not how this is going to play out.  

What's happening in the industry around them? In the space industry to date, at least for governments, the goal has really been build a really extravagant machine to do one thing, where the price is basically no object because either we're trying to win the space race, we're calling it a part of national defense, or that's the lineage of whatever we're currently working on. That's the only thing that we know that it costs so we're just going to keep going.

These things are funded by the military and NASA. All the stops were pulled out for reliability and performance. We talked about how it's very subcontractor-driven here. If you were a subcontractor and you could make your thing slightly more reliable or slightly more performant, even if that's not totally necessary for that practical purpose and for that mission, you do it anyway to win the bid. You can almost think of these existing space incumbents like United Launch Alliance, who we'll go into detail on as the Intel of this world and Intel today where SpaceX is a lot more the ARM.

The reason I draw this comparison is Intel made much more powerful chips for computers but notoriously lost in smartphones. Those chips were hotter, they were bigger, and they were more expensive, which is fine when we all had desktops. SpaceX brought these ARM chips especially early on and had this toy rocket with the Falcon 1 working under a very different set of requirements and it ended up building a completely different system, one that was cheaper and they could iterate on it very quickly, shipping up a different rocket every single time.

David: Especially because they controlled the whole stack.

Ben: Right, exactly. Initially, it didn't seem very useful for anything. I don't know for sure but this feels like it could be a case of disruptive innovation here.

David: The Falcon 1 definitely looks like a toy to a lot of people in the industry.

Ben: Absolutely. You don't look at the Falcon 1 and say, they're just a few years away from resupplying the ISS and probably sending people up to it too. It's not your natural inclination there. David, as you were mentioning, the design requirements around a lot of the other stuff that they would send up in the meantime was totally changed with these small satellites CubeSat commercial space developing.

Getting back to United Launch Alliance, who I mentioned there, and I think they're important to understand in the context of the story. Lockheed Martin and Boeing had both been longtime government contractors. They built amazing things to their credit, still build amazing things. A few examples, Lockheed made that big orange tank on the Space Shuttle that we all know and it's iconic. I think it is still one of the most elegant. When you see the Space Shuttle Launch videos, that still to me is this romantic version of space.  

In some ways, the SpaceX rockets aren't as beautiful and don't just sing space to me the way that shuttle design did. They also made the Hubble Telescope and the Mars Lander, the Phoenix, lots of really storied stuff that they manufactured. Boeing, on the other hand, made everything from the Lunar Rover back in 1971 to the actual Space Shuttle Orbiter itself, so long time space companies.  

Here we are in 2006, Boeing and Lockheed, I think it's important to understand their motivations because then you really get the context for what people thought the space industry was, Boeing and Lockheed had decided that the one real customer that they were both doing work for was the US government but the government didn't have enough business for both of them to justify their massive size.

By combining the manufacturing and research work of the two companies, this would be a cheaper and safer way to get the same stuff out the door. Boeing already had the Delta. Lockheed had the Atlas, these existing rocket programs. It sounds like a good idea unless you've heard the story before or a story much like it. The first thing I want to tell you is you don't need to look any further than the ULA logo to discover that everything was basically designed by committee, something where ULA had a massive advantage with all the existing contracts that the two companies had.

They actively continued to work on the Space Shuttle Program for another five years after this. They just had years of knowing how the industry worked. But what they didn't see was that the industry was undergoing this massive change, for one with other potential non-US government customers. There could be this real commercial industry. That was something that the US had basically lost to nations who could launch stuff cheaper like Russia and China.

David: We haven't touched China. I think Vance wrote the Elon Musk book. When it came out? 2014, 2015 maybe?

Ben: Some time there.

David: No, 2016. At that point in time, the Russians were still predominant in space but China was making a push. Now China and their Long March rocket, space today, Ben, correct me if I'm wrong, but it is a two-horse race between SpaceX and China. It's crazy.

Ben: In a lot of ways, and I think Elon certainly looks at it that way. Another thing that I didn't really realize was that there's this great talk linked in the show notes. It's a relatively under-viewed video on YouTube of Gwynne Shotwell giving up a small fireside chat to some industry insiders in 2014. She points out that the US was competitive in commercial space up till the 80s or in the 80s but has basically lost it since then. That was the case really until the reignition of a commercial space industry here.

Long story short, ULA was completely unsuccessful in capturing a commercial market in the US. If you think about it, it's actually a huge failing on their part because there were tons of commercial satellites starting to go up. You have DirecTV who owns and operates tons of satellites in order to provide their service. You have intelligence satellites. You have surveillance. You have researched concepts. You have startup companies.

David, you mentioned these CubeSat. ULA managed to capture basically zero of this because they were focused on winning contracts from the US government. There's more to blame than ULA themselves. International Traffic in Arms Regulations in the 90s built up barriers, but the biggest problem was Boeing and Lockheed Martin just didn't compete anymore. Everything got so bloated and expensive when they just combined into one big behemoth. You might see the opportunity here. If you do, then you are similar to Elon, Quinn, and everyone else who saw this gap and then decided we're going to go build a freaking cash cow of a business in the Falcon 9. We're going to go shoot that gap.

David: Ben, you mentioned a minute ago that I think over the life of SpaceX thus far, they've received just under $8 billion from the government. Now by our calculations, SpaceX is obviously a private company but you can tell by their launches and launch manifests in public. We think based on sticker price for Falcon 9 launches of which they've now been over 80 that they've done. I think over 80.

Ben: Eighty-six launches and somewhere around 55 on the future manifest.

David: And something like 22 of those are for government and the Dragon program. The rest of it, they probably made just about that same amount, another $8 billion, give or take, in commercial revenue from other governments launching satellites, from commercial satellites, from all sorts of stuff.

Ben: I don't think it's quite that much. I think it's probably about half that. But if the revenue mix will definitely start to skew toward commercial, as we see them fly out their backlog, there's all these committed launches that they haven't launched yet. You're right. I definitely don't think it's more than the US government right now.  

By the way, private companies, so who the heck knows? But if you just add up the sticker price of $60 million times the number of commercial launches that they've sent up which are probably 40, 50, 60, somewhere in there, you're right. You're in the single-digit billions.

David: It's funny to move quickly through all the amazing technical and engineering feats that SpaceX has accomplished since then. I think, Ben, you hit the nail on the head. This was the moment that made the company get that initial NASA ISS contract.

Ben: Real quick before we move on, because I know I just threw a bunch of shade and I always want to make sure I do right by someone rather than just blasting them on the show. ULA has since replaced their CEO. They're actually working with Blue Origin now and designing a new rocket called the Vulcan. I think they are going to use Blue Origin engines there. Blue is actually commercially selling those engines to ULA, which is amazing to take.  

One more digression on ULA here; I can't help but do this. The supplier that they have for the engines on the Atlas V, basically they’re competitors to either Falcon 9 or Falcon 9 Heavy. It uses Russian engines.

David: Oh, interesting.

Ben: This is the main US government contractor for sending up things like intelligence satellites. The current iteration of that uses Russian engines, of which the Russians have decided for the US, we don't want to keep supplying you with those ,so they've stopped. There's some number in the single digits or teens of those engines in the US that ULA can use. I think it's called the RD-180. It's the Atlas V. It's the rocket.  

ULA is in this position where the world is closing in on them from every direction. They're running out of the engines that they can use for these launches. SpaceX is massively undercutting them on price, which we'll talk about here in a moment. The clock is just ticking with basically their one customer looking at them and going, wait, I'm sorry, in what ways are you better? They're going to try and run out of the house before it burns down with the new Vulcan program and partnering with Blue. They're a powerhouse and will continue to win contracts for a while, but certainly SpaceX is their number one enemy.

David: Indeed. It's disruptive innovation is coming to launch the space shipping market. It was at the end of 2008 when SpaceX gets the contract from NASA for the ISS resupply. Pretty quickly within 18 months, they had a successful test flight to the Falcon 9 which again they'd already been working on. That was June 2010. Only six months after that in December 2010, they had a successful test flight of the Falcon 9 plus the Dragon capsule which they've engineered from scratch in-house at SpaceX.  

It takes a little while longer after that. But on May 22nd, 2012, the first real Dragon mission reached the ISS. They do the first of the 12 resupply missions. This is just incredible. I remember this happening. A private company has made not just a rocket but an entire spacecraft, operated it and sent it to the ISS. Again, like Elon said, with the first successful Falcon 1 launch, this is the stuff that countries do, not company. He said here's SpaceX doing it. It's just crazy.

Ben: Derailer onto that. The reason it's called Dragon is Elon named it after the Peter, Paul, and Mary song, Puff The Magic Dragon, where basically is to give the finger to everyone who said he could never do it. You're chasing the dragon and saying, look, here it is. I did it.

David: I think the ISS, as they were pulling in the Dragon, said something like, Houston we've got ourselves a dragon here, something like that. We got a dragon by the tail. The next year in 2013, to what we were talking about using all the technology they built for the government in the commercial sector, in September 2013, the first commercial Falcon 9 launch took place. They launched several Canadian satellites up into orbit just about a year later. In 2014, they completed six Falcon 9 launches. In 2015, they completed seven Falcon 9 launches including the first successful test of a new program with NASA for the Crew Dragon which is what's going to happen on Wednesday. The first step towards what's going to happen here takes place in 2015. At the very end of 2015, this is the other big thing we want to talk about, the one more thing, they land a rocket. Do you remember when this happened?

Ben: It’s just a Holy God moment. It is so unnatural. I remember thinking that when it was happening, it was like this moment of sci-fi. I was traveling. It was over the holidays. It was late December of 2015.

David: That's right, after we started Acquired.

Ben: It was on the drone ship.

David: I know. The first was on land. The drone ship didn't come until later.

Ben: The first was on land?

David: First was on land. Yup.

Ben: They had to do the boost back burn the first time?

David: They had done several attempts. Here's how it goes down. All the way back in 2011, Elon and the team had started thinking about this. It was the analogy we talked about earlier. It's crazy that you would build these massively expensive things and then drop over the ocean.

Ben: The analogy they used is every time you fly a 747 from New York to London, just throw it away afterward. Imagine how expensive airline tickets would be if that were the case.

David: They started working on the technology in 2011 to land rockets. People think this is impossible, like the laws of physics. People think it won't allow it. They called the program Grasshopper. In March 2013, Grasshopper was building these short rockets, shooting them up, not into space or anywhere near space. They're just trying to land them. They’ve landed their first Grasshopper in 2013. Ben, what you might be thinking of in 2014 in one of those Falcon 9 launches, they're pretty quickly getting this tech into production. They tried to land in April 2014 a Falcon 9 rocket on a drone ship. It falls over.

Ben: That one blew up.

David: That blows up.

Ben: They got really close though.

David: Got really close. Yes. The second attempt, January 2015, that fails. The third attempt fails. It's just like getting that first Falcon 1 up. Finally, the fourth attempt was on land because it's much easier than to land on a boat if it's on the ocean. The ship is bobbing up and down and moving around. They successfully land the first time on land in December 2015. They have two more fails in the ocean. In April 2016, they successfully land the 23rd Falcon 9 launch on a drone ship followed by a second successful landing. It's crazy.

Ben: Via Of Course I Still Love You drone ship. That's right. It was on land. It's interesting thinking about this because the way that SpaceX lands these looks really unnatural. I remember watching the first Blue Origin rocket that went to space, came down, and successfully landed back on Earth, which they actually beat SpaceX to. SpaceX was doing the Grasshopper stuff first, but Blue Origin flew a rocket, not to orbit, but 100 kilometers above the earth. It's the formal definition of space or I think it's the Karman line. I don't know exactly how to pronounce it.

David: Something like that.

Ben: SpaceX was the first then to beat them to that big milestone of getting to orbit and then landing back down. But if you watched Blue Origins rocket do this, it seems more natural. They decelerate and then it lands gently. The way that it works for SpaceX in the industry, the way they refer to it is as the Hoverslam or in a much less delicate way of referring to it. People call it a Suicide burn where basically what they do is they put just one of the nine engines. They turn one of those nine engines on. Even at the minimum thrust from one of those nine, if you just leave it burning, it will decelerate the rocket and then it will go back to the other direction. Those Raptors are so crazy powerful. I should mention, too, the Raptors flying today have twice the thrust of the Raptors they started within the original Falcon 9. Their iteration—

David: I think it's still the Merlins, the Raptor engines for the starship.

Ben: Oh, you're right. I was referring to the wrong thing. Yes, the Merlins have gotten twice as much performance. Anyway, they turned just one of their Merlin engines on as it decelerated. The reason they call it the Hoverslam is it comes in so fast and then just the exact right time. They have unbelievable centers on this rocket. They can fire it at the minimum amount of thrust just in time for it to decelerate and hit basically zero miles per hour or zero meters per second right as it's setting down. It's this magic trick every time they pull it off of unbelievable centers and unbelievable precision when they're firing that engine at minimum thrust.

David: Incredible. The point of all of this is that you're going to reuse the rockets. In 2017, they have the first successful Falcon 9 reuse in March of 2017. 2017 was just a banner year for SpaceX, 18 successful launches, no failures, and they landed every single one of them except the few that was the end of the useful life of the rocket where they were planning not to land them.

Ben: Coming out of 2015, this is a company that is firing on all cylinders. Perfect product/market fit on the business side, iterating super-fast, launching all their R&D stuff, actually into production super-fast. They're flying out their backlog at a remarkable pace. It's just impressive.

David: Totally. The next year in 2018, they hit their 50th successful Falcon 9 launch. They have 21 total launches in 2018 including the Falcon Heavy which is an adaptation of it. Folks have probably seen this and watch videos but it is amazing. It's just 3 Falcon 9 rockets wired together for 27 total engines burning that can bring up an incredible amount of payload. What they do is all three rockets go up and then they all land.

Ben: It's honestly like watching a magic trick.

David: It's a ballet.

Ben: Anyone that watched SpaceX fly Elon’s Tesla Roadster out with the Starman in it, this was on a Falcon Heavy. That ballet of the two come down simultaneously, land next to each other on pads on land, the third main booster, then goes and lands on the drone ship. That one ended up tipping over and not working with them.

David: That one's a lot harder to do because it's specially reinforced to be able to hold on to the other two boosters.

Ben: Which apparently in the Block 5, which is the most recent and I think final version of Falcon 9, they've actually figured out a way to fix that problem. They're going to be able to catch them much more easily out in the drone ship.

David: That brings us to now. There are a couple things we're not talking about here that we might mention at the end of the episode. In less than 48 hours now, the plan is one of these Falcon 9s is going to have a manned Crew Capsule Dragon on it. We're going to be sending astronauts up to the International Space Station. It's so funny. I’m saying ‘we’ like it's us. It's Elon, the company, SpaceX is.

Ben: It's a very patriotic thing. I know we're a little bit of a US-centric show but for a US company to fly US astronauts up to the ISS is compelling. It's cool.

David: It is. This goes back in September 2014. NASA bid out a $2.6 billion contract to do this. This was the point of all of Griffin's work to re-architect how NASA operated with their suppliers for a private company to fly humans to the ISS and SpaceX wins it. Last year in 2019, a big key step in this is they completed the first autonomous ISS docking with a Dragon capsule. It was a Crew capsule. There were no people on it. It was just cargo.

Ben: There was a little stuffed animal I think. The ISS astronauts went in there, showed, waved to the camera, and held up the stuffed animal of a globe I think.

David: That's amazing. On Wednesday, May 27th, they scheduled to bring US astronauts Bob Behnken and Colonel Doug Hurley up to the ISS.

Ben: It's astoundingly cool. What a time to be alive.

David: The items that people might think about in SpaceX that we haven't dove into here because we might talk about a little bit but there's so much to talk about, are obviously Starlink, their own small satellite broadband communications internet network that they're developing, the Starship which is the future. Ben, you alluded to this, they're going to be retiring the Falcon program and the Dragon program, merging everything into one giant spacecraft, the Starship, which will eventually go to Mars.

Ben: Rocket of some sort. It's the Starship, which I wish was still called the BFR.

David: I know. So cool. They've had a successful engine test for that. That work is well underway on that. There's a little thing called The Boring Company.

Ben: Which I think ended up spinning out. SpaceX is a minority investor along with Elon.

David: Yup. Elon owns about 90% of the company I believe, maybe a little less SpaceX than 6%, and then there's the employee [...]

Ben: The employees or the other minority.

David: There we have it, SpaceX as of May 25th, 2020.

Ben: I do think before moving out of history and facts here because we're ending history and facts with the events that are happening Wednesday, it is worth talking about this particular contract. There are lots of interesting skeptics of SpaceX, but one skepticism could be why is it so impressive what they're doing. Other countries have been flying people up to the ISS forever. Get off your high horse and get less excited. So what? It's a private company instead of a government So what? They maybe spend a little bit less money. Not that this is easy to do, but there are plenty of other people that could do it. Well, NASA doesn't solely source crap. NASA always awards multiple contracts.

This stuff is super hard. The second company that got this same contract was Boeing. Boeing has built a thing to produce. It's basically their version of the Dragon called the Starliner. In December of last year, it launched a test to dock with the ISS veering off course. They did manage to get it home but basically scrubbed the mission in order to do it. Boeing took a $410 million write-down on earnings last quarter as they prepare for NASA to potentially ask them to run another full test, do another full launch of the exact same thing, which is actually quite telling that for Boeing that's a $400 million expense because for SpaceX that would be somewhere between a $60 and $100 million expense. Maybe that's not fair because there's more reusability.

Anyway, the point that I want to make here is that this could be Boeing later this week, but it's not. It's SpaceX. They managed to do it better, cheaper, faster, safer, more reliable. Fingers crossed, everything goes well. You can throw shade at Elon in whatever way that you want or at this company in whatever way that you want, but you can't argue with results.

David: Should we talk about narratives?

Ben: Yes. Let's do it. There are at least three vectors that I can think of around bull and bear here. One is around Elon himself by people. You could call him the savior or you can call him an egomaniacal, work you to the bone, words we can't say on this show. David, any color that you want to add to narratives on Elon?

David: What else could we add? It is interesting, though. Again, really until recording this episode now, I'd obviously thought SpaceX and Tesla had very different situations but I think the Elon randomness factor in SpaceX is just so much less than in Tesla probably, (1) because he has Gwynne, but then also (2) because Tesla (I think) is in a very good place now, but six months ago, Tesla was not in a very good place and SpaceX is. There's just less. Even though SpaceX is in many ways in a more politically sensitive position than Tesla, there's just less for one person to mess up right now.

Ben: It's also a private company which is nice because if you could tune out all the noise around Tesla stock and only focus on the more intrinsic stuff, I think there'd be a lot less narratives period, 90% less narrative around Tesla. SpaceX has that. They also have the benefit of long term commitments with agencies and governments that can always come through on that cash to the extent that they can deliver. They have a guaranteed, stable, predictable revenue. The only thing that's not predictable is when you are going to crash that stage one into a drone ship and have to take a multi-dozen, if not $100 million, write off. That's the hard part that comes with the guaranteed contractual revenue.

The other narrative that I think is important to highlight—the Elon one is one that everyone outside of aerospace talks about—the one that's more internally debated is around reusability. A lot of the SpaceX bears will tell you, that's total BS, that those things are reusable. It's total BS that even if they are reusable that it's cost-efficient. In fact, some of these people include CEOs of competing companies who when someone flags the point well. SpaceX is able to do this cheaper because they've performed this miracle of engineering of reusing the rockets. They'll say things like you don't know their cost structure. You don't know that it's actually cheaper.

Examples exist in the past of the solid rocket boosters for example on the space shuttle, those white ones on either side of the big red tank. Those would fall back down to the ocean. They would be refurbished and then those would launch again. This thing theoretically has happened but the difference is with things like that is probably an order of magnitude more expensive where they basically cycle out every part, scrub it clean, and then send it back up. SpaceX is iterating toward this is the bulk case on reusability being able to just give a one or a two-day inspection on the rockets, then send them back without replacing anything, and only needing to replace things maybe every 10 times or so that you send it up.

Right now, I think the maximum that they've sent a rocket back up or a stage one that back up has been three times. There are very real cost savings that you have here from not having to produce what the cost of goods sold is on a Falcon 9 but $20, $30 million rocket every single time. I think in the coming years, we'll see SpaceX actually able to get to the milestone of you just need to give it a once over and 48 hours you can fly it again. There's massive debate over whether the reusability actually provides the type of savings that SpaceX claims.

David: Should we move on to what would have happened otherwise?

Ben: Yes. Let's do it.

David: Where do you even start here? There's so many moments where this all could have gone off the rails.

Ben: I think the biggest one is what if NASA hadn't changed their tune on how we bid stuff out?

David: Without that, the smallsat market, I think it probably will materialize in the future and is materializing now. But during the time period that SpaceX needed to do it, just wasn't going to. This is actually I think a big point related to. We didn't really talk about Starlink at all in this episode thus far, but I think one of the reasons besides Starlink, providing satellite internet access being a big market and attractive in and of its own, that SpaceX decided to launch this division internally was to stimulate the smallsat market and demand for it. Now they are going to be their own first and best customer for smallsats and the Rideshare program that they launched when they're sending up big stuff having space available for little seats as well.

Ben: I want to give a little bit of detail on both of those things that you just described now that we've tipped our hand a little bit. For people who don't know what Starlink is, which is me probably two months ago and mostly me even a week ago, SpaceX is going to put 12,000 satellites in low Earth orbit. so way closer than the DirecTV satellite that needs to be out in geosynchronous which is 22,000 miles away. These things are on the order of 200-ish miles away. It takes a rocket to get it up there but it's not as far away as the old stuff is or as a lot of the fixed geosynchronous stuff. SpaceX was going to launch these 12,000 satellites and they are all going to have a line of sight to each other. They are all going to be able to provide broadband internet anywhere on Earth at any time to anyone in a cost-effective way.

The way that it works is a miracle. The fact that all of them have this line of sight to each other and can communicate in high bandwidth between one another, it means that the latency can be way less. Since they're way closer right now, the problem with using satellite internet is it has to round trip all the way out 22,000 miles and back. Even at the speed of light, that's still time. You're getting dog crap slow speeds on satellite internet. If you have a whole bunch of them pretty close here and they can all communicate with each other, it's okay if there's not a single same one above you all the time as long as there's something above you all the time and they can communicate with each other.

David: This is the Wi-Fi mesh network of satellite broadband.

Ben: Totally, it's genius. You might think, oh, my gosh, that's so many satellites. That must be really far in the future. They’ve launched 60 at a time and they've done this I think 3 times now. They literally stack them real tight. They jammed 60 of them in a fairing in the nose cone of a Falcon 9 and they shot them up. They all make a little string in the sky and they go right behind each other. It works. Elon Musk has sent a tweet from Starlink internet.

David: Oh, no way. I haven't seen that.

Ben: He has. He tweeted something like I'm tweeting this from Starlink. He replied to himself a minute later and it was like, got it. It's these publicity stunts but that you can see turning into this very interesting owned and operated business. There's a huge fixed cost to send them up there. It would cost me $62 million to send something up on a Falcon 9 and it would cost the government maybe $90 million, because they have additional regulatory stuff, but for SpaceX, I don’t know what their costs are, call it $40 million. It’s that sort of big fix cost of investment to get them up there, but they can run a profitable business and a lot of people get their internet from Starlink and that can be a cash machine that they can bankroll future endeavors. They're not just getting paid every launch, but they can get pain in perpetuity for a subscription to something that’s already in the sky.

I know I'm dipping all over the place in analysis and business modeling, but when you dip in the Starlink there, I think it’s important to sort of like what the heck that is, how real it could be, and how soon it could be—two, three, or four years—before that starts to be meaningful.

David: Yeah, because the satellites are already up there.

Ben: Totally. They’ve got competitors there, too. Amazon's got Project Kuiper, and Softbank funded a company called OneWeb that's doing it. It's futuristic stuff that’s actually happening now.

David: Back to vertical integration, they have the advantage of it benefits all sides of the business. (a) They're building this business internally, (b) they're stimulating more demand for launches, of which they are the primary provider. It’s going to lead to more launches, more vertical integration, cost comes down farther, and then the flywheel’s just going to keep spinning.

Ben: 100%. You mention Rideshare, too, which is a funny word to use in space, but it’s the thing that they put on their website in the last year. By the way, you can put in a credit card to them to take a deposit on this and they will charge your credit card, but you can basically pay as little as $1 million to hitch a ride. It's exactly what you said. David, you’re sending a big satellite up, take my little one up, too. You can go to the website and say I want to send up something that's 100 kilograms by 2024 and quote me. It’s a crazy thing.

David: I didn’t realize they take orders. This is the equivalent of an Apple Pay down payment on a Tesla on the website.

Ben: Absolutely.

David: Do you know if Shopify powers it, like Tesla?

Ben: I don’t know.

David: That would be amazing.

Ben: I don’t know, it’s a good question.

David: The design is pretty similar between the Tesla website and the SpaceX website.

Ben: Yeah.

David: I wonder if it is Shopify.

Ben: Yeah. Just because I don’t want to talk about this twice, I'm going to pull forward my playbook thing now about the pricing there. It is a massive disruption to the entire aerospace ecosystem that SpaceX has a pricing page. It is the craziest thing that you can go to. There's the Rideshare thing, but then there's also literally just a PDF that you can click and pull up. It's like, do you want a Falcon 9 at $62 million, do you want a Falcon Heavy? It's more expensive and I don't know what it is, but this has never been an industry with price transparency and by bringing that, it freaks everyone in the industry out for them to be that transparent.

David: Yeah, plus the Uber pool.

Ben: Right. Okay, so that was what would happen otherwise. I dipped us into playbooks, let's get going. If someone wanted to do something like this, what is the playbook they should run and what are some of the themes that we noticed here?

David: Oh man, well. Okay, I'll run you some of the ones I jotted down quickly. When I started thinking about doing the research about what Hamilton Helmer would say about SpaceX. Does SpaceX have power? If so, what is it? I think this is basically what we've been banging the drum on all episode is, they came out with counter positioning, like the vertical integration and the whole approach that they've taken with price transparency everything to the industry, if UAL and other competitors matched that, it would destroy their whole organizational structure and business model because there’s no way they can match it.  

I think there's another interesting thing here and I'm not quite sure if this is a power or how many other industries this is applicable to, but I started thinking about vertical integration. In so many industries, you see the disruption happen when you go from vertical to horizontal. This is what happened in the PC industry. I started thinking about why. I think it's often if you think about when computing was vertically-integrated in the deck days, it’s when you have mainframes and you had pretty few units shipped at a very high price for each of them, that's when it makes sense to vertically-integrate.

As volumes grow and you get a lot more units shipped and goes up and the price goes down, then horizontal integration makes more sense because you can be more nimble, you can define layers of the stack where there's more power versus another, and you can have more profitability and outsource commodity parts. What's interesting here is that you had this industry structure where you had this extremely small number of units shipped, the number of rocket launches around the world was extremely small and because of the way most of it being government business, you had these horizontally integrated players that were competing with it.

SpaceX came in and said like, oh, no, there's actually an anti-scale economy here, we should be vertically-integrated. I can't think of any other markets that exist like that where you have a really small number, but you have this bizarrely horizontalized industry, but it distracted me though, this was a major key to how SpaceX was able to disrupt it.

Ben: That's interesting, because in some ways, I'm trying to think if the analogy holds in the other direction. Has Apple vertically-integrated the iPhone?

David: Well, they’ve started it vertically-integrated.

Ben: Boy, I think there's actually a [...] post on the fact that this is not vertically-integrated, that they make the things that they view as differentiable to tightly-coupled, so CPUs, the OS.

David: It’s actually interesting, they don't make them, they design them.

Ben: That's true, but then they outsourced thousands of [...].

David: Right, They have in a lot of ways really. I mean if anything, Apple is kind of like the Detroit auto manufacturer model, where they designed it. They make the core engine and then they have a ton of suppliers for all the other parts.

Ben: Yup, but they have so much power over those suppliers that they're able to squeeze margins on those, whereas there was nobody squeezing margins and aerospace. Everybody was happy to let their downstream partners have fat margins.

David: Yup because again, from the Lockheeds, the Boeings perspectives, the higher the total price, the better, the more money they made because they were just getting a straight percentage.

Ben: Yeah, so interesting. It's funny, I didn't articulate it quite the same way you had, but I tried to write out the bullet points of the business model, which is one, get paid exorbitant fees but not as exorbitant as everyone else for every launch. NASA's willing to pay this because the Old World competitors had crazy high-cost structures and importantly no reusability, hasn’t been apart yet but will be. I think they're gross margin-positive on every launch now on the first try even without re-use, I'm not totally sure but that's what some estimates suggest.

Two is take those profits to fund the development of more usability and lower-cost systems. Three, make even more margin from doing that and getting paid for those contract launches of satellites et cetera. Four, enjoy these fat margins while everyone else is trying to catch up to reusability and trying to vertically-integrate or squeeze all their suppliers. As a data point here, SpaceX charges less than their competitors but obviously well above their cost basis. If they're actually able to harvest all this margin, they would have been giving away by vertically-integrating.

The data point is that the Falcon 9 missions even took the US government with the additional $30 million in cost to go for under $100 million, and ULA's contract that was, I can't remember which one but basically has all of the launches at $400 million. There's just so much margin in there. Then component five, use the funds from these fat margins to fund their own, owned and operated businesses like Starlink or like the Mars stuff that I think we'll talk about here, basically, SpaceX themselves will be able to charge for those owned assets on an indefinite basis. They're able to bootstrap the production of rockets using NASA and then bootstrap their owned and operated business with all this margin that everyone lets them play with. It’s like this two-step bootstrap.

David: Yeah. It’s pretty awesome. A couple of quick ones I want to hit on. One, we've alluded Blue Origin a little bit on this and that's probably another episode for another day, but with different strategies, different approaches, but it strikes me as interesting back to the whole fun analogy I use with ‘mo’ money, mo’ problems.’ Bezos is putting $1 billion a year into Blue Origin.

Ben: Bezos is selling $1 billion in Amazon stock that could be used for [...].

David: Certainly a lot more than $100 million has gone in, in terms of equity funding into Blue Origin. It's interesting that SpaceX, in terms of equity funding, has raised so much less money and Elon from the beginning was focused on, this is going to be a revenue-generating profitable business. On the one hand, you think naively, they have so much fewer resources, but I think in many ways it's precisely because of that resource constraints and having to build this profitable business that they figured out how to disrupt the industry, and accomplished so much.

That's just such a theme we see all the time on this show and in startups. Sometimes you think when you're out of the gate, you see these companies raise tons of money, and think they're going to clear out the industry and have all the success, but it ends up hurting them because they're not forced to build a real business.

Ben: Yeah, I hadn't really thought about it in those terms.

David: The last one is related to that. It’s Elon across SpaceX and Tesla. Is he just the living embodiment of the [...] to have skin in the game. This guy absolutely puts his money where his mouth is. You can say many things about Elon but he's been quoted on so many occasions saying, if either Tesla or SpaceX goes bankrupt, I will personally go bankrupt, and that is as it should be.

The number of near-death moments they've had and pulled through, if that weren’t the case, if he were like I'll be fine, I’ll still have my McLaren if this goes bankrupt. Would they have had the fortitude and he had the fortitude to pull through? I don’t know.

Ben: I do think so. I think you're reversing the chicken and the egg there. That's why it’s the chicken or the egg thing. The way that I would think about this is Elon’s drive to make this thing a success is the reason. It's not any monetary skin in the game. He cares if he goes bankrupt, but not really. If he really cared about not going bankrupt, then he wouldn't have doubly leveraged himself across two companies.

Clearly, the thing he cares about is succeeding in this mission. That is what drove him to put all of his money in. It's not like he's locked into succeeding now because of the fact that he's so invested.

David: Yeah, but he definitely burned the bridges behind him.

Ben: Yes. Now there's a way out because he still owns probably 40% of SpaceX and there's so much equity value there. There's a way out for Tesla purely by Elon getting out of SpaceX.

David: Yeah, at this point.

Ben: It's such a good business. Making $100 million a pop if he can do that twice a month, especially if he could reuse those rockets.

David: Yeah. Go for your themes.

Ben: I've got a couple of fun ones. I want to talk about a different type of vertical integration which is SpaceX assembles their rockets horizontally. Most other companies assemble their rockets vertically. As you can imagine, when you lay them on the ground and you build them that way, you don't have to take really expensive and crazy hydraulic machines and move around. You don't have to construct a skyscraper around your rocket. I'm using this as an example, but it's super illustrative of how SpaceX problem-solved every single component of building their company in a cash-constrained environment, into finding a more innovative, more inexpensive way of doing something.

I think Elon has this interesting quote, actually the Russians, I don't know if it’s Elon or Gwynne. The Russians actually manufactured them on the ground. Mostly these US companies actually manufacture them vertically, but the number that Gwynne cites is that, she says SpaceX's rocket factory is $0.50 a square foot. If you vertically-integrate your rocket—no pun intended—stand it up and assemble it that way, space ends up effectively costing you $12-$18 a square foot because you're moving people up and down to build these rockets way the heck up in space. It's just a great illustration of the incredible constraints that SpaceX was under, that no other player that's ever reached the scale that they're at has been under.

David: Man that's crazy. It’s more than an order of magnitude difference in the cost.

Ben: Absolutely.

David: And why the F wouldn't you do that then?

Ben: Absolutely. It's really amazing. The other one that we talked about is a sort of new market. This is from the Elon Musk book, but they built a Honda Accord instead of building a Ferrari. Everyone else thought only Ferraris would be wanted, but it turned out there's an emerging market for Accords which is unexpected and cool to see. I think we’ll see the innovation compound now that we’re having all these CubeSats and things like that up there, much faster than we saw with only shipping a Hubble up once a decade.

David: Yup. It turns out, even the people who drive Ferraris or McLaren's don't want to drive those every day.

Ben: Right. At some point, SpaceX did exactly the same thing Tesla did which is hey, we know how to make Accords really cheap, so now we're also going to make a really cheap Ferrari. Sorry existing Ferrari people, but you're also going to want ours.

David: I was looking at this the other day, what is some the performance Model 3 which, granted, is still a very expensive car.

Ben: It’s a $55,000-$60,000 car.

David: Yeah, still way too expensive. I'm not going to buy one but for let’s say $60,000, you can get 0-60 time or it's down like below 3 now.

Ben: I don’t know, something like that.

David: You used to have to spend a couple hundred thousand to get that.

Ben: Yup, that’s a great point. My last playbook here is customer diversification. They are not reliant on one customer or even one type of customer. They have all these different sectors. Within the government, they have defense and they have civil. NASA's resupplying human contracts, but in the defense, they have these Air Force contracts among other things, and then they've got the commercial business with telecom, with media. At this point, it's a robust and diversified business that was not true in space largely before now. It's going to be defensible for that and it's going to help them weather storms in different markets.

David: We’ll get to this in grading in minutes, so hold off that, but the question is how big is this market going to get.

Ben: Yes, let’s hold off for grading. Lastly, the thing that I want to point out, I think as of May 2019, Elon owned 54% of SpaceX. They did just raise something like $550 million since then. Holy God did that guy hold on to equity in this company. Elon is a master of many things. He's the chief engineer, he's lots of things. He is a master of raising capital.

David: Well, it's interesting the way he didn't raise that. He put his own capital in, but I think what's interesting is we didn’t talk about this in history and facts. After they got the NASA contract, and after the successful Falcon 9 and Dragon, after the successful Dragon rendezvousing with the ISS, I think there was a lot of pressure internally from employees for the company to go public because they were like, look, we just did this massive step of change in evaluation, and we've been killing ourselves here. We want some liquidity.

Elon actually wrote a memo, an email to the company with the reasons why he thought going public isn't as good as you think. He needs to live through all these at Tesla, but in the wake of that, they started doing these regular fundraises. Some of the capital may be primary, but I believe most of it was secondary for employee liquidity. I think Elon was pretty outspoken about this. He said, I'm going to do this, this is going to be a much better solution for SpaceX. We won’t have to be a public company, we can get employee liquidity, we've got this massive long-term vision of getting to Mars. I actually don't think that the money was raised for the company mostly.

Ben: Interesting. Well, that speaks even better to the profile of the business than they’ve been able to fund with at least the gross margin profit dollars rather than funding the business with all new equity capital. I don't think SpaceX is a profitable business, but I do think they're profitable on a unit basis.

David: I believe Gwen has said they have operated profitably in certain years.

Ben: Wow. I'm sure they're not now that all the R&D is happening in both Starlink. First of all, they lose money every time they do a Starlink launch because that could have made them $90 million bucks from someone else.

David: They've estimated it's going to take $10 billion dollars in capital to get that all built and up.

Ben: The other thing, they're spending tons of money on this R&D for the Starship. Interesting that those are mostly secondaries.  

All right. Value creation and value capture. I'm going to be very brief on this. This is a two-part segment that we usually do. The first part, covering all the value that they created in the world, did they do an effective job of capturing it? People who do a good job of this are Google. People who do a bad job of this are Craigslist.

The second piece, did they actually do value creation in the world at all? Did they maybe either destroy value like we've talked about on many episodes with SoftBank-backed companies, or did they perhaps just shift value from one person's pockets to another person's pockets? It's just an absolute no-brainer that it was new value creation in the world, enabling new markets, accelerating markets, and they're doing a banged-up job capturing value from it.

David: Yeah, totally. A little opaque because they’re a private company to know on part one but it seems like yes. Oh my God, if they were ever a no-brainer on part two like you said on this show, there is no reasonable argument. I'm sure there are some arguments, but to my mind, there's no reasonable argument to be made that having SpaceX exists is not good for the world.

Ben: Especially as we get to grading here and we talked about that. Before we get to grading, we want to thank Wilson Sonsini who's our official legal sponsor for season six of Acquired. Wilson Sonsini is the premier legal adviser to technology, life science, and growth enterprises worldwide as well as the venture firms, private equity firms, and investment banks that finance them. Thank you to Wilson Sonsini.

All right, grading. There's never been a transaction, which is normally what we would grade. If you are new to the show, the way this section works is a big company buys little company, we grade, in hindsight, how good of a use of capital was it for a big company to buy a little company? Was it as good as Instagram or as bad as AOL and issue a letter grade.

The way that we do that in this world, where there hasn't been a transaction yet, is talk about what would an A+ be, what would an F be, and maybe what would a C look like. In this case, because I don't think we're talking about it IPOing or somebody buying them, we're basically just going to talk about what an end-state looks like for this company in each of these scenarios.

David, you asked the question earlier, which I wish I could reach through Zoom and slap you for, which is how big is the market?

David: Ben, it's called foreshadowing.

Ben: Sure, we could talk about a market for how many of the people without broadband would pay for broadband. Sure, we could talk about both the commercial and the government market for launching satellites, but how big is the entire Mars economy going to be in 2300? There is some future where what we're talking about here is the GDP of Mars and the GDP of Mars with a productive capacity of a million people on it. I know I sound like a nut job for throwing that out, but that is Elon Musk's A+ case here. That's the whole goal of this thing. It is nothing shy of figuring out a multi-step process to get people to Mars reliably, cheaply, safely, and build a society and economy there.

David: The interesting thing, though, is usually when we do this—it's so funny with SpaceX, the usual rules don't apply—we provide a time frame, a time horizon of five years.

Ben: That's fair.

David: The interesting thing about SpaceX versus a lot of other new-age space companies, not all of them by any means, but certainly there have been many new-age space companies in the past several years that have had a similar A+ case of something like the Mars economy, planetary resources, gas stations in space, or mining asteroids. The problem with those companies was it was a binary. We get to that A+ in some far future state, there's nothing along the way.

What's amazing that Elon and SpaceX have done is they've stair-stepped up to it. It’s like okay, first we're going to build rockets, then we're going to become, essentially, a space shipping company, then we're going to be a satellite company and provide satellite broadband, then we're going to spin off the boring company because actually if we're going to be on Mars, we need tunnels to live on Mars. We're going to need that anyway, and actually, that's useful on earth. Then, we're going to supply the ISS, and we're going to do the Dragon program with NASA. Every step along, you can hit an A+ in each five-year time horizon.

Ben: Yeah, that's a fair point. I also shouldn't have said 2300. I said that because I couldn't think of Elon’s timeline to actually get a million people up there, but it's much sooner. You're right. There are potentially incremental A plusses. I don't know—I actually should know this—what the goal of Starlink is, how much internet do we intend to provide to how many people and at what price? There’s some business case for just operating Starlink is a really good business to be in and might be a $30 billion enterprise value thing on its own. I don't know if that's true, I suspect it's not.

David: They might be, it might be more. We know that they expect to put $10 billion worth of CapEx into it, both from that's CapEx funded by cash flow from other projects within SpaceX. A lot of the primary capital that they've raised recently has been for Starlink. I don't know. Would it be reasonable to put $10 billion of CapEx into something if you didn't think you could generate $30 plus billion in revenue out of it?

Ben: That's a good point. I haven't seen the pitch deck, but I'm sure it says something like that. Not to mention, they'll continue to pull away in the launch market. Falcon 9 is just a workhorse and an amazing business of doing these launches. For the next 3-4 years until they really have Starship humming, if they can actually take up to a month, they'll do $1.4 billion a year in revenue just from the Falcon 9 launches. I don't know what kind of multiple you want to apply to that or if we should figure out actually what the EBITDA margin is and do it that way. Yeah, it's good business.

David: All right. We should move to the F case.

Ben: There are some F cases that I don't want to say so I'm not going to, but one would be that factors outside of SpaceX is control because more than one launch to go poorly or in fact an important launch to go poorly and basically make it so that they don't get orders anymore. This business is incredibly a bit brand-dependent in a way that other businesses that are not this high-risk are not. Their revenue could go to zero much more easily than other businesses because of that risk factor.

David: Yeah. It's interesting, though, at the same time because a private company has never really been doing this kind of stuff before, but that risk factor has always existed in this industry. This is a dangerous industry. In fact, there have been terrible accidents in the history of the industry made by governments.

Ben: Yeah, but we canceled the shuttle program.

David: Right. But that wasn't because of Columbia, was it?

Ben: I don't know for sure. It feels like a compounding factor though, and it was both expensive and unsafe.

David: Yeah, for sure. Hopefully, we don't face that particular case, but it's a good point. As Elon makes the point, we've made the point several times in this episode, typically this stuff is the domain of countries, not companies. There might be all sorts of unforeseen factors that pop up here.

Ben: Totally, yeah. You could have governmental problems. You could have problems where foreign governments aren't able to do business with American companies. The risk factors that would go on this company’s X1 are just at such a bigger scale than you would ever see for most companies.

David: Here's one. I guess this is sort of an F scenario. It's an interesting lens to look through grading here, which is if they're ultimately successful in everything that they're talking about here and they get a million people to Mars, what does that actually mean? There's a lot of questions they're going to have to figure it out. Is SpaceX like the government of Mars?

Ben: I was wondering this too.

David: Is this a company or is this a country? We're starting to sound like pretty sci-fi dystopian future here.

Ben: If Columbus makes it to the US, does the Dutch East India Company own North America, or does Columbus, the Spanish government?

David: It's a good question.

Ben: Over time, whoever has the army that's able to conquer it probably owns it. Just looking at history as a guide.

David: Again, this sounds sort of crazy, but Elon talks about this. He hopes the same type of analogy with Mars is like it's been 300 plus years since there was a new world. If this happens, there will be a new world. Who owns that world?

Ben: If you've thought about this question or you know the answer to this question, please reach out. Join us in the Acquired Slack, acquired.fm/slack, or email us at acquired.fm@gmail.com. This goes with everything else in the episode, too. I'm sure there are lots of people here who are more aerospace-native than we are and certainly lots of sci-fi geeks. We'd love to think more about this with folks.

David: I suspect this won't be our last SpaceX episode.

Ben: Or space episode broadly.

David: Totally.

Ben: All right. Carve-outs?

David: Let's do it. It's been a while since we've had a carve-out. So much good stuff has been going on. Among much great content I've been consuming during quarantine from books—both fiction and nonfiction—to podcasts, to TV shows, to movies. I think The Last Dance takes the cake for me. I wrapped it up earlier this week. Have you finished it yet?

Ben: I haven't yet.

David: Oh, it's so good, so good. Especially remembering growing up watching. I remember it being a kid and watching a lot of these games on TV, especially the ’98 run for the Bulls and then just getting this super deep behind-the-scenes look at all of it. The portrait, not just of Jordan, but of everybody on that team, so, so great. I enjoyed every single second of it.

Ben: I’m on episode three. All the best parts are spoiled because I saw all the memes, but I am still looking forward to finishing all of it.

David: The memes are just… the Isiah Thomas meme, I met all the criteria.

Ben: I don't know why I wasn’t…

David: Was not selected. So great.

Ben: That’s right. So good. Mine is, I think there's some chance that this may have already been a carve-out because I've recommended this so many times to different people, but it’s a five-year-old talk by Michael Mauboussin. This one at Google for his, I think, book tour or at least discussing the book The Success Equation: Untangling Skill and Luck. It is one of the best hours you could spend with your time where he lays out games of skill and games of luck—most things are both—and understanding where a lot of the different sports that you love or that you love are on that continuum.

Also thinking about competitions in your life of what's more skill-based and what's more luck-based. Doing this really analytical and theoretical analysis of it is just a privilege to watch because he uncovers weird paradoxes like this one: the more skill and activity required, the more luck will play a role in the outcome.

David: Yeah. The paradox of skill, right? It’s called.

Ben: Yeah. It's so interesting. If you're a sports fan, if you're an investor, or if you compete in anything at the highest level, it is wildly clarifying to watch this and understand what game you're in. I can't recommend it enough.

David: So good. He wrote a book about this, right?

Ben: Same title.

David: Yeah, with the same title. I should go back and reread that or at least rewatch the video. I remember it being fantastic.

Ben: It's awesome. Before our usual wrap up here, we have one more fun announcement. That is that David and I are going to be speaking at an aerospace industry conference in November called ASCEND. That's something that, obviously, based on both of us getting to go deep on the research here, I'd call ourselves aerospace novices but curious and love diving into this stuff. We were fortunate enough to get to attend and do some talks at ASCEND.

If you're like us where this stuff is interesting to you, you think space may be the future, or you're interested in getting into a space adjacent industry, ASCEND should be a great event. Hopefully, we’ll get to do it in person, but folks should check it out. We'll put a link in the show notes if that tickles your fancy.

David: I can't wait for it. I really hope it'll be in person. In many ways, this time for us at Acquired, personally and for many of our listeners, too, forced us to grow and obviously adapt. Folks may know, we used to do all of our episodes with guests in person. We would fly to go see our guests. Obviously, we haven’t been doing that now, which is on the one hand been great, but on the other hand, I miss it. It'd just be great to hope that happens in person, be there together and just have our community together.

Ben: Yeah, for sure. One talk I'm really excited about is Jim Bridenstine who's NASA's administrator who was sort of overseeing everything about what's going to be happening this week. He'll be speaking there, and it's high up as the sort of folks go in the aerospace industry. One other person, who I'm sure will be a fascinating one to hear is the president and CEO of ULA is going to be there. For all the shade I just threw, I think it'll be really interesting to hear how they're navigating SpaceX and other competitive threats. All right. That's ASCEND. Check it out, ascend.events.  

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If you just want to hang out and chat, you should join the Slack. We've got over 4000 people in there talking about different topics of company building, news of the day, acquisitions, and discussing previous episodes. I'm sure we'll be chatting there after we dropped this episode. With that, thank you to Silicon Valley Bank and Wilson Sonsini, and we will see you next time.

David: See you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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