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Angels flock to spaceflight

Spaceship-building used to be an exclusively government-funded game, but software billionaire Paul Allen changed all that when he put $25 million or so into the venture that ultimately won the $10 million Ansari X Prize for private spaceflight. Now a bevy of billionaires and millionaires are getting into the act, ranging from Armadillo Aerospace's John Carmack and SpaceX's Elon Musk to Bigelow Aerospace's Robert Bigelow and Virgin Galactic's Richard Branson.

But it's going to take more than lone tycoons to build the personal spaceflight industry, and many "NewSpace" firms have had to court individual angel investors who were willing to put their money where their outer-space dreams were. Now, however, there's a change in the air: Just today, California-based XCOR Aerospace announced that it's received its first money from a whole team of angel investors to support the development of a new suborbital spaceship. XCOR's new relationship with the Boston Harbor Angels hints at the next stage in the space tourism industry's ascent.

Two years ago, XCOR's Rich Pournelle told me that it was high time for the industry to make the transition from individual investors to institutional investors. But there's a chicken-and-egg problem: It takes tens of millions of dollars to build a spaceship ("No bucks, no Buck Rogers," as astronaut Gus Grissom famously said), but traditional investors aren't willing to put up all those millions until the spaceship is flying.

"Wall Street takes a cynical viewpoint, which is, 'Show me the bottom, show me what can go wrong, and the upside will take care of itself,'" Paul Schlosberg, chairman and chief executive officer of INCA Group LLC, explained during last month's Space Venture Finance Symposium in Dallas. "I want to be able to tangibly measure what's my risk, what's my return, what's my liquidity."

So how do you get from here to there? The investors (and investment-seekers) who attended the symposium highlighted the role of angel networks. Such networks, generally organized along geographical lines, can pool their members' resources into investment chunks that can exceed $1 million.

"Usually we will get deals ranging up to a million and a half, and usually three or four groups syndicate the deal," said Aleksandar Mollov, managing director for the Boston Harbor Angels.

Mollov said his group of 36 investors bought into XCOR's space effort after hearing presentations from Pournelle and one of the company's individual angels, Lee Valentine. "It was very revealing to us to understand that most of the parts of a spaceship [today] are thrown away after each flight. ... The prospect of having less expensive flights to space is what we're betting on," he said.

He said the group was also swayed by XCOR's development strategy, which focuses on going after government contracts that move the company closer to creating its own commercial space vehicle. XCOR has worked on methane-powered rocket technology for NASA, and was recently awarded an Air Force contract to design a rocket-powered supersonic vehicle that can reach altitudes of 200,000 feet.

"They have figured out a good way to fund the development of their company in a very capital-efficient manner ... picking the projects that will help with building their own aircraft," Mollov said.

The members of the Boston group make their own individual investments, but collaborate on fellow members' expertise in deciding who they'll back.

"We hope other angel groups and possibly institutional investors will follow the Boston Harbor Angels' example," XCOR's chief executive officer, Jeff Greason, said in a news release.

Like Musk and Bigelow, angel investors don't have to answer to analysts or stockholders about the return projected over the next year or two. But even Musk and Bigelow don't have unlimited forbearance. Neither do the lesser angels. "In general, we are looking for exit opportunities within five years, but we always understand that it can take more time," Mollov said. "The sooner the better, that is our hope."

That expectation squares with XCOR's hopes as well: "People who are looking for a return in two or three years aren't going to invest in this industry," Pournelle told me today. "But if we're successful as an industry, it's going to be by showing that kind of five-year business case."

Does that mean XCOR is aiming to fly passengers on its two-seater suborbital spaceship within five years? Some companies, such as SpaceX and Rocketplane Kistler, are committed to getting their orbital spaceships off the ground by 2010 in order to satisfy the requirements of NASA's $500 million Commercial Orbital Transportation Services program, known as COTS. But Pournelle resisted any invitation to play the timeframe game.

"We continue to raise money," he said. "We're probably one of the few companies out there that hasn't announced a deadline."

But Pournelle doesn't believe suborbital space travel will be subsumed by the orbital space race. "Investors need to look at both orbital and suborbital transportation industries," he told me. "There are significant opportunities in both. The COTS program isn't the only game in town."

That goes right back to the payoff for private-sector spaceflight. During last month's symposium, Schlosberg observed that "you see your money taking off, [but] you don't know if there's a return flight." Will investors really be able to earn a return, through acquisition, a public offering or some other means? Or will all this activity end up being little more than a monetary-ejection mission? Let the debate begin anew.