Step aside, Elon Musk. There will be someone new on Wall Street soon with a flashier ride, and even loftier claims, than the braggadocious Tesla boss.
Taking Virgin Galactic public feels fitting in a year where the limits of the initial public offering process are being tested. If Wall Street can stomach the cash sink that is Uber, why not a space tourism company that has no current business at all? And why not bring it public through an odd back door that will avoid the scrutiny a normal IPO would bring?
Virgin Galactic is set to arrive on the stock market with not one, but two big characters at the helm. Between them, they replicate the two sides of Musk, who has shown how an outsized personality can be one of the biggest assets of a company as well as a major liability.
On the one side is the smooth-talking Richard Branson, a natural marketer who has been able to keep the believers in tow through years of setbacks. Musk may be famous for delays, but Sir Richard is 10 years behind schedule with his maiden space voyage.
On the other is Chamath Palihapitiya, a Silicon Valley financier with a loud mouth and a willingness to make enemies. It sometimes takes upsetting the apple cart to achieve big things. If so, Palihapitiya has always been ready to give it a shot.
The back door through which Virgin Galactic hopes to get to Wall Street involves a reverse merger with Palihapitiya's shell company, Social Capital Hedosophia. This raised US$600 million nearly two years ago on the vague promise of finding tech ventures to back and take public. Given its founder's record as a former Facebook executive and venture capital backer of software companies such as Slack, SCH's investors could hardly have imagined this is where their money would go.
Palihapitiya's unlikely justification for his space bet: "Under the hood this is just like a software business."
It sounds more than a stretch, and not least because of the stark differences in technology and risk profile. His main argument is economic: that, once all the development costs are out of the way, space tourism can generate the high gross margins of a software company.
But that depends on many factors that Virgin Galactic has yet to address. It still has to prove it can mould a routine launch business out of what at the moment are hugely expensive, one-off tests. And reaching the sort of size Sir Richard has talked of — a fleet of 30 to 40 space planes carrying thousands of people a year — presents operational challenges that are completely unlike anything in software.
There is also the question of how big a market this can be. By some definitions, the apogee to which Virgin Galactic hopes to lob paying customers — where they will experience weightlessness for a few brief seconds — is not even high enough to count as space. Jeff Bezos's Blue Origin is waiting in the wings with a promise to the same mega-rich that it can take them much higher.
Sir Richard has already said the first tickets will cost considerably more than the US$250,000 that Virgin Galactic once advertised, though he hopes to eventually bring the price within reach of a wider market.
But there should be room to boost price for the first enthusiasts for what will be marketed as the ultimate adventure holiday. Nasa last month opened the US sector on the International Space Station to tourists, for about US$35,000 a day — but to get there, they will probably have to pay US$50m or more for a rocket ride. That should leave a gap for the kind of rocket-ship thrill ride Virgin Galactic is offering.
In an interview with the Financial Times late last year, Sir Richard put his personal investment in Virgin Galactic at about US$1 billion so far, with another US$300m coming from outside investors. He and other investors will be taking US$300m off the table with the SCH investment.
That leaves about US$1b, for a 51 per cent stake in a company the partners say will have an enterprise value of about US$1.5b — not a disastrous picture, given the delays and setbacks (including, five years ago, a fatal crash — not the kind of thing to help the image of a new tourism company).
This valuation depends, of course, on the willingness of SCH's backers to go along with the plan, which needs their majority support. Palihapitiya and his partner control 20 per cent of the votes, so it would only take 37.5 per cent of the remaining shareholders to carry the day.
Even this level of support is not a foregone conclusion. Conjuring visions of space, as Musk has found, can have a halo effect for an entrepreneur, putting an alluring gloss on his other endeavours.
But a company that has to live or die in the public markets on the strength of its promise to create a space tourism business out of thin air will be an entirely new proposition.
Written by: Richard Waters
© Financial Times