Entrepreneur Tries His Midas Touch in Space
In his native South Africa, science whiz Elon Musk struck his first business deal when he made $500 selling the code for a “Space Invaders”-style video game he invented.
He was 12. It took only another decade or so for him to make some real money: By age 23 Musk had his first significant company in Web software maker Zip2. He banked $22 million when he sold it in 1999 to Compaq Computer.
And last year, he pocketed about $150 million in EBay Inc. shares when the Internet auction giant acquired PayPal, the online payment firm he co-founded three years earlier in Silicon Valley.
Now, the tall, soft-spoken Musk is on to his third major venture, risking much of his fortune -- along with his reputation as an entrepreneur with a golden touch -- by setting his sights once again on space. But this time it’s no game.
Musk, who last year moved from Northern California to the aerospace hub of the Southland, is bankrolling an upstart rocket maker in El Segundo called Space Exploration Technologies Corp., or SpaceX for short, with a commitment of $50 million.
The boyish-looking 31-year-old vows to revolutionize the space industry with a low-cost, reliable satellite launcher that charges $6 million a flight -- less than half the going rate for small payloads.
Musk says SpaceX’s Falcon rocket could take off as early as December if the customer, a government agency he won’t identify, has its satellite ready and SpaceX clears regulatory hurdles. As the company’s chairman and chief executive, he wants the maiden launch to coincide with the 100th anniversary of the Wright brothers’ flight at Kitty Hawk on Dec. 17.
Ultimately, Musk said, he hopes to help make human space travel more affordable through new launchers and exploration vehicles.
“I like to be involved in things that change the world,” he said. “The Internet did, and space will probably be more responsible for changing the world than anything else. If humanity can expand beyond the Earth, obviously that’s where the future is.”
Besides, he added, “rockets are cool. There’s no getting around that.”
Whether Musk becomes a space industry visionary -- or the latest in a string of delusional Don Quixotes -- remains to be seen. Doubters call Musk’s vision pie in the sky, a gross underestimation of the technological and commercial challenges SpaceX will face.
“He’s a young, smart guy who has made a ton of money, but we have a saying in the launch business: The way to become a millionaire is to start with $1 billion,” said Marshall Kaplan, a former rocket engineer who is director of space programs for consulting firm Strategic Insight Ltd. in Arlington, Va.
What’s more, with the collapse of the telecommunications industry, few contracts are available even for small commercial satellites, noted Charles Vick, senior fellow at GlobalSecurity.org, a defense and aerospace think tank in Alexandria, Va. For the moment, the market is primarily driven by government contracts, particularly for military and NASA payloads.
Musk is undeterred by the odds. He figures he has beaten them before.
“Elon thinks bigger than just about anyone else I’ve ever met,” said David Sacks, former chief operating officer at PayPal and now head of an independent film company in L.A. “He sets lofty goals and sets out to achieve them with great speed.”
A few years after selling his video game’s code to a gaming magazine, Musk invested the $500 in a pharmaceutical stock he had been tracking in the newspaper in his South African hometown of Pretoria. The shares were later sold for “a few thousand,” he said.
At 17, Musk said he used the proceeds to help finance his move to Canada, where he started college. In leaving home, he went against the wishes of his father, an engineer, and his mother, a fashion model and nutrition consultant.
“If you wanted to be close to the cutting edge, particularly in technology, you came to North America,” Musk said.
As a cash-strapped college student, he said he learned about frugality. “I tried various experiments to live on less than $1 a day without getting scurvy,” he said with a chuckle. “You can cook spaghetti sauce with, like, a third of a green pepper, or buy a thing of sausages and a loaf of bread to make hot dogs for 25 or 30 cents apiece.”
After two years at Queen’s University in Kingston, Canada, Musk landed a scholarship at the University of Pennsylvania, where he earned undergraduate degrees in economics and physics before moving to California in 1995.
He enrolled at Stanford University with plans to pursue a doctorate. But he never attended a class, deferring to start Zip2 instead from his Palo Alto apartment at age 23.
With the Internet boom just beginning, the idea behind Zip2 was to allow media companies to establish Web presences through automated publishing and features such as maps and directions. Musk snared millions in venture capital funding, and Zip2 attracted publishing-company clients including Knight-Ridder Inc. and Hearst Corp.
In 1999, after Compaq bought Zip2, Musk formed X.com, which morphed into PayPal after acquiring the competitor that originated the brand name.
The original business plan focused on allowing people to transfer money electronically via the Palm hand-held computer. But Musk quickly saw that the “killer” application would be a system that allowed the secure e-mailing of payments using any type of PC, according to Sacks, the former PayPal COO.
As soon as PayPal saw that so-called early adopters were using the system by the thousands to pay for purchases on EBay, Musk developed a “viral marketing campaign,” Sacks said: The firm paid $10 to every new PayPal customer as well as anyone who referred a new user to the system. The campaign fueled exponential growth.
Despite the tech-sector implosion, PayPal went public in February 2002 with a market capitalization of $1.2 billion. Just five months later, EBay snapped it up for $1.5 billion. Musk’s EBay shares now are worth about $200 million, thanks to the growth of the stock, which hit a three-year high Monday.
Musk’s payoff has left him with the ability to dream -- and live -- large. He owns a six-bedroom house in Bel-Air, which he bought early last year with his wife, Justine, an aspiring novelist. With no kids, they spend much of their free time at the movies, Musk said. (His recent favorites include “Chicago” and “Lord of the Rings: The Two Towers.”)
But can success on the Internet translate into success in outer space?
One early PayPal investor who enjoyed a windfall from that venture says Musk’s SpaceX faces huge challenges.
“It’s going to be a highly risky and capital-intensive business at the same time. That’s not a combination venture capitalists like to see,” said John Malloy, managing partner at Nokia Venture Partners in Menlo Park, Calif.
Still, he said, big investors with deep pockets and an interest in aerospace might be attracted to SpaceX, given Musk’s reputation as “a prototypical Silicon Valley entrepreneur with a knack for being in the right place at the right time.”
As he pondered his next project while the EBay deal came together, Musk said he wondered why space exploration hasn’t moved faster.
“Its peak of success came with the Apollo program in the late 1960s, and for the last 30 years it has moved sideways at best,” he said. “One of the major reasons is the launch cost.”
Musk said he and his team are holding down costs on the Falcon project by sweating every expense line -- which starts with keeping the design and technology basic.
“I had several other opportunities, but when Elon approached me I could see he was different,” said Tom Mueller, who joined SpaceX at its founding in June after 14 years at TRW and its new parent, Northrop Grumman Corp.
“The others always had a gimmick, like a helicopter blade or some miracle technology,” said Mueller, SpaceX’s vice president of propulsion. “Elon just wanted to take the best technology already out there, build a simple vehicle and use the right propellants.”
The 68-foot-long, 28-ton Falcon, designed to carry a payload of up to a half-ton into low orbit, will have no wings, will fire in two stages instead of the usual three and will use fewer moving parts than rockets of established competitors such as Pegasus from Orbital Sciences Corp.
In addition to its supposed cost edge, the Falcon’s streamlined design will mean less risk of malfunction, according to Musk.
A spokesman for Dulles, Va.-based Orbital Sciences declined to discuss his firm’s pricing structure or SpaceX’s plans.
“We don’t comment on competitors directly, but Orbital Sciences has a long and distinguished history of launching satellites successfully for blue-chip customers like NASA and the Department of Defense,” said spokesman Barron Beneski, “and we believe there will continue to be demand for high-quality launch vehicles such as ours.”
SpaceX’s headquarters, a converted 25,000-square-foot warehouse off Sepulveda Boulevard, feels like a throwback to the Internet heyday with its open cubicles, breezy camaraderie and a lounge offering free cappuccino and soft drinks. The building echoes with the sounds of welding, drilling and riveting. A half-built rocket sits in the middle of the factory floor.
Musk, who describes himself as “essentially chief engineer of the rocket,” said he spends his typical day delving into production details with his team. There also is time to think about SpaceX’s long-term possibilities.
“If we can be one of the companies that makes it possible for humans to become a multi-planetary species, that would be the Holy Grail,” Musk said. “It sounds a bit crazy but it’s going to happen, and only if people build the means to do so. We’re making progress toward a greater philosophical goal while building a sound business.”
Some industry experts say Musk has the vision and fortitude to make the venture work, if anyone does.
“At some point the rocket industry needs a Henry Ford, and maybe Elon will be that guy,” said Mike Griffin, an aerospace veteran who consulted for SpaceX early last year and now is president of In-Q-Tel, the Arlington, Va.-based investment firm funded by the CIA.
One thing almost everyone in the aerospace industry agrees on, according to Griffin, is that space launching is “an overpriced commodity.”
But Strategic Insight’s Kaplan said that “probably a couple dozen entrepreneurs have tried this in the last 10 years, and they’ve all gone out of business. It’s easy to say you’re building a cheap, simple rocket, but that and $2 will get you a cup of coffee at Starbucks.”
Licensing requirements and unexpected mechanical setbacks can turn a rocket project into a money pit not unlike a home-remodeling undertaking, except for the scale, Kaplan said. “One thing builds on another and before you know it, your cheap little rocket is really expensive.”
Despite the odds, Musk said he envisions SpaceX revolutionizing the industry in the same way Ford changed the automobile business.
“When Henry Ford made cheap, reliable cars people said, ‘Nah, what’s wrong with a horse?’ That was a huge bet he made, and it worked.”