How Richard Branson Has Been Funding Virgin Galactic
Sir Richard Branson speaks to a group of future astronauts at the FAITH Hangar of Virgin Galactic in Mojave, CA September 25, 2013 in Mojave, CA. (Credit: Virgin Galactic)
For anyone wondering how the Virgin Group has been funding Virgin Galactic over the past decade, the Financial Times had an excellent overview back in early November just after SpaceShipTwo crashed.
It seems that Virgin Galactic had sucked in up to $600 million in investment by that point, with nearly two-thirds of it from Abu Dhabi. The Virgin Group also has been funding the rest using profits from other parts of Sir Richard Branson’s empire.
For Galactic’s business model, Virgin followed a well-worn route. The group’s favoured start-up model relies on private investment for financing, with generally a co-investor sharing equity, and therefore the financial risk, often with a large amount of debt to the parent company loaded on to the balance sheet, a model it has followed at most of its businesses since the group’s brief but painful experience as a London-listed company in the 1980s.
So far, Virgin says, Galactic has sucked in up to $600m of investment, $380m of which was provided by Aabar, Abu Dhabi’s state investment agency. The Aabar money has now been spent, but Virgin says its partner is not expecting a swift return on its money nor pressing for an exit.The structure of the Virgin Group allows cross-subsidisation of its different businesses. Now that Virgin Galactic has burnt through the Aabar investment it is being financed from cash held by VGH itself. Virgin will not confirm that this has diluted Aabar’s equity, suggesting that the bulk of the additional financing is in the form of debt. [Virgin Group Holdings CEO Josh] Bayliss says Virgin is not seeking an additional equity injection from Aabar, nor a new equity partner for the venture….
If Sir Richard did decide to abandon Galactic, repaying Aabar’s $380m investment, the $89m in advance ticket sales and the hit to its own balance sheet of $220m-plus, would not be overwhelmingly onerous for the group, given VGH’s portfolio is valued at more than £5bn. Continuing with it, though, is a rather different matter.
Because VGH [Virgin Group Holdings] is run like a private equity company the question is how secure are the cash flows to bankroll Galactic and other Virgin businesses, which are at varying stages of development and profitability. How long can VGH sustain the cash drain?
Sir Richard told the FT last month that the group was “in the strongest position it’s ever been in”, “cash-rich” with no net borrowings. It is also pressing ahead with the initial public offering of Virgin Money, which owns the “good bank” assets from failed UK mortgage lender Northern Rock, and of Virgin America, the US airline in which it has a 22 per cent stake, lodging its prospectus with the Securities and Exchange Commission on Monday.
The Virgin Money and Virgin American IPO’s were done within a day of each other less about two weeks after SpaceShipTwo crashed. The Financial Times says the IPO’s would provide the Virgin Group “some useful cash in hand” to support other ventures that are not making money.
The newspaper also reports the Virgin Group has been focusing a lot of its recent expansion in the North American market, where Branson has struggled to establish himself and his brand. Virgin Galactic was an integral part of that strategy, with Branson attempting to use it to create a “halo effect” on the rest of the company. That will only work, however, if Virgin Galactic recovers from the SpaceShipTwo accident and succeeds in establishing a space tourism business.
41 responses to “How Richard Branson Has Been Funding Virgin Galactic”
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They will need to sell an awful lot of seats to recover $600m and turn a profit. Not sure about the running operation cost, but likely above 75% of the ticket price. That could mean something like 10.000 passengers just to cover investments (without interest). There is no real indication VG will be able to sell that many tickets and fly that many passengers, unless we are looking some 15-20 years into the future.
Anyone care to guess on the service life of a SS2? I would be surprised if it last more than 10-15 flights between major overhaul; possibly less than 100 flights total service life. So, to fly 10.000 passengers they would need 16 vehicles.
It kinda looks like VG is trying to dig themselves out of a hole…
Why do you think above 75% of the ticket price?
It’s a (wild) guess from various articles about the VG business. Industry guesses on the launch cost was some $600.000 a few years ago. Insurance will also be sky high. Then there is the business side. Naturally it depends on the number of passengers they manage to fly each year (the business cost is fixed). By all accounts the number of PAX is now down to 5 (the business plan was originally based on 6). I also don’t expect them to make 4-5 vehicles and operate them. They will need to keep production running to replace worn out vehicles (if passenger numbers go into the +5000 range).
I’ve heard from reliable sources it is down to four passengers. Big hit to bottom line if that holds.
Your sources have come up trumps before…4 pax is hardly a business.
I think the article’s main message is that VG doesn’t need to make a profit; it simply has to maintain a positive image.
As long as no one is seen to be offering an alternative service, they can keep this up indefinitely… which begs the question: what will they do once XCOR start flying fare paying passengers?
I think it’s a bit of a stretch to suggest a >$600m project doesn’t need to make a profit. I can assure you that Aabar will be looking for a positive return, and so will Branson (no matter how his team is spinning it).
I’m not suggesting VG doesn’t have a lot of advertisement value, but it was never a non-profit project.
Depends upon where you draw the line. As long as Virgin Group Holdings (VGH) makes a profit, Branson may be content as long as VG helps promote the ‘brand’… estimated to be £1bn of VGH’s overall value of £5-5.5bn.
I would not use SS2 as a passenger even for free, if they not provide at least some kind of proved rescue measures.
Tauri’s 2012 report estimated baseline total “Commercial Human Spaceflight” market demand for suborbital flights as 3,600 seats over 10 years, with a growth scenario of 11,300. Revenue estimates were $45m/$140m pa for the baseline/growth scenarios.
They also estimated another 500-900 seats for research and 100-300 for education.
To me, this feels like something that *could* turn a profit, but there’s huge downside risks in terms of vehicle capex and opex uncertainty, competition, regulation, and the impact of in-operation vehicle losses on market demand.
On the other hand, if these suborbital vehicles are precursors to orbital vehicles, and Bigelow gives people a place to go in orbit, that’s a different story.
Unfortunately, they have no evolutionary path to put people into orbit… unlike other ventures, VG’s propulsion technology is a dead-end for launching large payloads.
Do you work at VG or are you just speculating?
Neither… it’s just that they’d need to change to an all-liquid motor to get the performance required for orbit, especially if they want a fully reusable system in order to best amortise their costs.
Launcher 1 engine, LOX/RP-1?
Yes, but how much serious effort are they investing in it?
I’m not saying they couldn’t eventually field an RLV capable of flying humans into orbit. It’s just that I don’t see any serious effort to move beyond hybrids… especially as the necessary technology skills are available, literally, on their doorstep.
This change would mean a complete redesign of SS2. It would quesitioned also th whole SS2 “safety” concept.
As I have stated in the past, VG and it’s sub-orbital circus has never appeared to be a sustainable business model.
VG has never even come close to knowing what an operational tempo will look like and can only provide engineering guestimate’s as to what kind of service and
maintenance turn around times will be required BETWEEN flights, let alone
establishing periodic maintenance requirements that will require an unknown
amount of downtime in the future. (And by the way these requirements must be
known before an operational certificate would be issued)
VG will need many flights and multiple vehicles in order to achieve a flight tempo just to overcome the loss of SS1 and its $380 to $500 million in perceived program losses so far.
Many visionaries and manufacturers have touted vehicle reusability and its supposed cost savings, but so far, no one has been able to make it work.
VG’s problems don’t only lie with building a vehicle and getting it to fly, the whole circus HAS to be successfully packaged and sold to the FAA before it will ever be issued an operating certificate….and that battle hasn’t even come close to being won yet.
So, even if VG gets SS2 up and running, that is not synonymous with being operational and additional downtime while waiting for certification means additional loss of revenue for VG.
Tick, Tock, Tick, Tock.
Add on additional ITAR regulation headaches regarding SS2 or its siblings or their technologies proposed use in other countries and I think we can see where this is heading.
SS2 will look nice mounted on a post in front of some building somewhere in the future.
Perhaps VG/Spaceship company can add a debt clock to it’s homepage?
Good article Doug!
Sorry to be pedantic, but remember its a licensing regime, not certification. Important in terms of regulatory costs, test flight regime, and also risk assessment/insurance costs.
The article seems to suggest that Virgin don’t need to make a profit from Galactic, at least not from SS2. It’s basically a glorified advertising campaign for the rest of the North American investments. The potential for profits from those other investments must surely be presumed considerable. Of course, Richard Branson himself may also be happy to piss a few hundred million up the wall for the sake of a “hobby”.
I really don’t see the need to worry so much for these unfortunate super rich financing this project. They must be perfectly aware of the financial risks, indeed, far more so than the rest of us. Obviously we do not know, but the economics of SS2 may be of no particular importance to them.
Don’t forget New Mexico taxpayers.
New Mexico, just like any regional or state government is in the business of promoting their region as a home for business and jobs. Shit happens.
Don’t go to Dona Ana county and say that.
That is a good question: what DO you get the man who has everything? Once you have uncountable amounts of money, what does a person desire? If you like a sport, you can buy a team. There’s no car you can’t drive. You don’t just have a private jet, Branson has entire FLEETS of jets. He owns an island. Once your and my NEEDS are fulfilled, what do we WANT? Once all of our WANTS are fulfilled, then what? If you have billions in the bank, why NOT have your own personal space program? It’s something he doesn’t have, and it would be pretty cool to own. Carnegie wanted everyone to read (my city’s old library was one of his), Gates wants to help Africa. Musk, Bezos, Allen and Branson want space programs.
Sierra Nevada worked out the problems with its rubber engine sufficiently where it would have taken four passengers up to 50 miles. A Wall Street Journal story reported that Virgin Galactic wasn’t happy with that from a financial standpoint. Couldn’t make money at that point.
The nylon engine was cheaper for Virgin Galactic to obtain. However, I understand it has some performance issues, and it’s not clear that it could take any more people or match the altitude performance of the rubber motor.
The interesting element in terms of profitability of the system is LauncherOne. Once they get it finished and operating, it could add to profits. The OneWeb deal helps, although given LauncherOne’s payload capacity and cost, I can’t see it launching that many satellites. Most of them will be launched in bulk on other boosters. That would be the only way the economics would work.
Well what if they reach some sort of regular operation and the “halo effect” leads to billions of additional business in the north american markets. Certainly it can’t be quantified easily, but not everything is black and white, regardless of WSJ articles.
Also, do you know anything of LauncherTwo ??.
SpaceShipTwo has been better as a branding and marketing tool for Virgin Galactic than it ever was as a spacecraft. At least up until the crash.
Virgin tried to distance itself as much as possible from the accident, saying it was a Scaled flight test. That’s hard to do when you’ve got your name all over the ship.
Not sure what LauncherTwo is supposed to be. Maybe it’s connected with SpaceShipThree. I’m not really sure what that is. I’m sure they exist in some form, but until there’s an actual funded program and some hardware, they are probably vaporware for the time being. But it all sounds good.
So, are you saying that after all this time, money, effort and heartache, they still don’t have an engine that can get the advertised job done?
Work is continuing on the engines. So, maybe that’s bearing fruit. There was a test just last week that I saw.
Also, the advertised job keep changing. Six passengers above the Karman line seems to be some number of passengers above 50 miles.
Until Sierra Nevada publishes performance data, vibe specs,
weights, C*, etc,,, it’s always a little sporty to say
the engine was “Sufficient”. Sometimes instability comes in and just gets you, when you least expect it. Without a test program that pushes the engine out of spec, and sees how it handles it, you never know how ‘robust’ the engine is.
The business model was conceived back when space was ‘easy’. So was Spaceport America. Now space is ‘hard’, perhaps a re-think is in order?
One can only imagine how many people have gone to the UAE to ask for investors to fund a grease and wrench satellite launcher. Some of them probably well engineered and making no promises beyond what is reasonable. But Branson shows up promises sub orbital Emerites pearl class, and the cash flows to the tune of 0.6 thousand million dollars.
Abu Dhabi hosts an aerospace summit once a year. It was originally called the “Global Space Technology Forum”. The weeks after Aabar announced its investment in Virgin Galactic, literally every worm came out of the woodwork and headed to the UAE to fish for funds. I know about this because I managed a LinkedIn Group and monitor space activities in the UAE (https://www.linkedin.com/gr….
I had a little chuckle at that because I attended the first forum and literally none of the major decision makers attended this event. So, the presenters ended up preaching to people they see at every other conference. I believe the Aerospace Summit (in terms of attendance of decision makers) is different but even so, the Emiratis engage in due diligence and typically identify potential investments that have been poorly managed and are loss making, invest heavily and make them in to profit making entities thus capitalising in return-on-investment.
This is why I was literally shocked when Aabar invested in Virgin Galactic because there were buying into an unproven product. As part of the deal, the idea was that Aabar would also establish a Spaceport in Abu Dhabi (at Al Bateen Airport) which was a major coup because in the years prior to this agreement, Space Adventures was discussing setting up a spaceport at another Emirate, Ras Al Khaimah, which never came to fruition.
Thanks for your real world insights to my cloistered speculation. 🙂
Actually Andrew – you were spot on with your speculation! I just thought I’d add my personal observations to your comment.
Thanks. All I can do is read books, history, and skulk the internet. Would love to travel one day and soak up local realities and opinions to really see how the rest of the world works.
“literally shocked when Aabar invested in Virgin Galactic because there were buying into an unproven product.”
Is there a proven suborbital craft they could have bought into? Maybe some surplus X-15s?
You missed my point. Typically they (the Emiratis) would wait until the vehicle had finished its testing, had flown dozens of people to 62 miles and perhaps if, after due diligence, it was found to be a potentially profit making venture, they’d aim to buy a majority share in the company; just as Mubadala (another multi-billion dollar arm of the Abu Dhabi Government) did with SR Technics, Piaggio Aero and many other aerospace companies so they can develop their in-house capacity for developing aerospace technologies.
However, Mubadala isn’t Aabar so perhaps the latter’s philosophy is different. I personally think Aabar didn’t conduct a proper study and got caught up in the Virgin hype – but that’s just speculation.
I understand, my point is only that if nobody takes a chance, nobody will ever reap any rewards.
Granted I don’t know much (anything) about the history of Emirati investment, I’m just happy they were willing to take a chance.
Well, that’s what was so bizarre for me. The Emiratis don’t take chances. They weigh up the the pros and cons and only invest if it benefits them. Actually, I need to clarify. The UAE consists of 7 Emirates. Dubai, which is the most well known, has this ‘can do’ attitude and in the past they’ve blindly invested in ridiculous projects which is why Abu Dhabi had to bail them out in 2008. Abu Dhabi, on the other hand, are a lot more pragmatic. If Aabar were owned by Dubai, I would have thought – “yep, that’s Dubai for you” – but it isn’t. It’s owned by Abu Dhabi. I mean, just have a look at their sister organisation, Mubadala Aerospace, portfolio (https://www.mubadala.com/en…. They only invest in what will help them develop their own aerospace strategy and right now, they’re focussed on aircraft structures. I don’t know what Aabar were thinking or who was advising them.
VG is bound to fail. Let’s guess the time when this will happen.
I have been told repeatedly by people that “Branson never puts his own money into a deal”. From reading the article and comments it seems as though that is true.