SpaceX — The Promise and Potential of U.S. Industrial Policy?
In an era of a diminished defense industrial base and VC preference for software startups, how does SpaceX exist?
Honestly, we take SpaceX for granted.
The aerospace company’s existence was unlikely, and its success was improbable.
Let’s rewind to December 2008.
Shortly after the initial fallout of the Great Financial Crisis, SpaceX is at the end of its runway. Out of the last four of its launches, only one succeeded. The upstart rocket firm was nearly out of money.
Thus, everything hinged on SpaceX being one of the awardees of the NASA Commercial Resupply Supply (CRS-1) contract.
Here’s Musk in his own words telling what happened:
15 years later, here’s where SpaceX stands:
The rest is history.
But let’s take a closer look at SpaceX during their moment of crisis. NASA’s Administrator at the time was Michael D. Griffin.
He held the final decision-making power over which companies were awarded the contract.
Why did Griffin select SpaceX as one of the awardees?
Maybe it had something to do with the fact that Griffin himself was present at the birth of SpaceX. We all know the apocryphal story of how Musk, Griffin, and Jim Cantrell went to Russia looking to purchase intercontinental ballistic missiles (ICBMs), getting rejected by potential vendors and leaving them to build what would eventually become the Falcon 9 on their own.
Musk even asked Griffin to be a cofounder of SpaceX back in 2002, but the latter wisely turned it down.
It would be roughly six years later that Griffin would be the one confirming his source selection official’s decision to award the CRS-1 contract to SpaceX and Orbital Sciences for $1.6B and $1.9B, respectively. (Prior existing relationships certainly help!)
If Griffin had said yes to Musk’s initial offer in 2002, SpaceX might not be alive today.
I don’t want to suggest that that is the sole reason for SpaceX’s continuing to be a going concern, but the more important factor is the philosophy behind Griffin’s selection, captured in his analysis of how the nation’s air mail service started.
From his X Prize speech in October 2005 (these are relevant sections I’ve copy-pasted here, bolded emphasis mine):
“Many of you have in the past heard me allude briefly to the story of how the U.S. Post Office Department, with the help of the War Department, helped spur our nation’s aviation industry when it started the air mail service routes in 1918. I very strongly believe that we can, and should, draw certain lessons from this event, that it can be a historical paradigm for how NASA might fill a similar role in spurring our emerging commercial space industry in concert with the goals of the Vision for Space Exploration.
“The idea of an air mail service in the United States was initially proposed by the Post Office Department in 1912. However, Congress refused to grant them the $50,000 appropriation needed to start. Undaunted and persistent, the Post Office Department kept requesting funds from the Congress for an air mail service. Finally, in 1916, some funding was received, but when the Post Office Department invited bids for air mail routes in Massachusetts and Alaska, no company took them up on their offer, because no airplanes then in existence could meet the stringent requirements. Revising its plans, the Post Office Department and the Army finally demonstrated the first air mail route between Long Island, New York and Washington, D.C. in May 1918.
“…Using initially the then-plentiful Curtis Jenny trainers, surplus from the Great War, transcontinental air mail routes were quickly established. By the mid-1920s, the Post Office Department’s fleet was flying 2.5 million miles annually, delivering 14 million letters. This air mail service was popular because delivery times were much faster than could be accomplished using trains.
“…In 1925, the Contract Air Mail Act (or Kelly Act) authorized the Postmaster General to contract for airmail services, and in the process spawned our nation’s nascent airline industry, as the airlines delivered both paying passengers and cargo.”
Griffin lays out the main lessons of the air mail routes leading to the genesis of the aviation industry (bolded emphasis added):
“First, the U.S. government acted through the Post Office Department as a major purchaser of potential air transport services, as opposed to being a technology developer…These investments in soliciting actual air mail service, rather than in technology development itself, spurred innovation in retractable landing gear, radio navigation aids, aluminum monocoque structural design for low weight, low drag airframes, air-cooled radial engines, vacuum gyroscopes, and a slew of other technologies, while also delivering the mail, which was of course the intended primary goal. Technology development was the byproduct of this investment; it occurred as a natural result of competitive entrepreneurs attempting to out-do each other in servicing a known government market.
“…But second, we should remember that even as the Post Office Department was stimulating the development of aviation by purchasing commercial service, another arm of the U.S. government was doing its part from a different perspective. Aviation technology development was extensively aided and abetted by the activities of the National Advisory Committee for Aviation, or NACA, the predecessor of today’s NASA…In my opinion, this private-public synergy achieved results both far better, and much faster, than either approach alone could have done.
“…My hope is that with the seed money we are putting into the COTS program, we can demonstrate the possibility of commercial cargo and crew transportation to the International Space Station, and that subsequently NASA will be able to meet its ISS logistics needs by purchasing these demonstrated services. If we can do this, we will be able to change the paradigm for transportation services to be more in line with the air mail service of the 1920s, meeting the logistics needs of the ISS, some 7,000 to 10,000 kilograms per year, after the Space Shuttle is retired in 2010. In the process, we may be able to spur innovation for low-cost access to space. This is a carefully- considered investment with known risks that we can all see and appreciate, but with a potentially huge upside that makes it well worth the risks.”
SpaceX’s success is the ultimate testament to Griffin’s philosophy of how the public and private sectors collaborate to generate new markets.
NASA served as the “seed money” via their purchasing of new commercial cargo transport services for the ISS.
The private sector, SpaceX et al., used this initial seed money to develop technologies (e.g., the Falcon 9, etc.) to meet NASA’s requirements.
The byproducts of the demand generated by NASA led to other private companies (outside of aerospace) who could leverage SpaceX’s commercial transport capabilities for their own needs, thus growing the overall space market.
Government R&D can help subsidize the overall growth of highly capital-intensive industries, as Griffin observes how NACA “sponsored much of the groundbreaking technology development and proof-of-concept work, providing a base of feasible technical alternatives upon which industry could draw with each new airplane design.”
Griffin’s astute philosophy leverages the best of the public and private sectors to generate economic growth and technological innovation for America.
It is his astute philosophy that is sorely missing within the venture capital industry and the U.S. government itself. It’s common to find VCs critique the federal government for its bureaucracy and inefficiency compared to the agility of startups within the free market. On the government’s side, they are quicker to regulate, slower to understand the latest innovation, and prefer to award procurement contracts to those they know rather than risk a startup being their vendor.
Griffin captures the limitations of each side succinctly in his 2013 interview at the Johnson Space Center:
“…Again I’ll repeat, I was trying to help stimulate developments which, when complete, could be taken advantage of by the government with an arm’s length commercial transaction. I was not trying to privatize existing government capabilities, I have not seen an experience in which that works well.
I’m a conservative. I’m a supporter of the free market and deeply value what the free market can do, but it has its limitations. I also deeply value what government enterprises can do, and they have their limitations. The two don’t mix well, in my opinion. The two don’t mix well, and it’s best to understand where a government enterprise is most useful and where a private enterprise is most useful, and then let them interact through — again — what in the marketplace are called arm’s length transactions.”
Griffin’s thinking can and should be leveraged as a core part of U.S. industrial policy to rejuvenate our defense industrial base going forward, which could result in new commercial markets.
And from his 2007 interview at NASA Headquarters (bolded emphasis added):
“What I’ve done with our Commercial Orbital Transportation Services agreements or COTS agreements, what I’ve done is to say that the Space Station logistics market is open to free enterprise, and oh, by the way, here is some seed money from NASA if you can get your venture started. But we’re not telling them how to do it. Of the two ventures we sponsored, one appears to be succeeding; one appears to be failing. We’re going to cancel the failing one and use the money to start a new one.
“I think that kind of activity on the part of government is essential if we want to have commercial space capability, and I think as a nation that we don’t want to have no government space activity, but we don’t want to have only government space activity, and we need to act in ways that bring about the commercial space development.
“The attitude should be to make available the power of government to offer its markets to commercial enterprise in a hands-off way to stimulate the development of that commercial enterprise. As the technology moves forward, the role of commercial provider can always increase, but not unless the attitude is right.”
Other organizations within our government can learn from Griffin’s success with NASA and SpaceX via COTS and CRS awards, such as the Department of Defense (DoD). For example, the DoD recently launched the Office of Strategic Capital (OSC), “with the idea that partnering with private capital could help new technologies bridge the gap between development and actual production, the “valley of death.”
SpaceX is a prime example of thoughtful and strategic investing and development between government and private industry. The OSC and other similar organizations should learn from Griffin and NASA to restore our nation’s defense industrial base and generate massive economic opportunities.
It seems like NASA has revived Griffin’s strategy: Inspired by SpaceX, NASA Built Missteps Into Moonshot Strategy
From the story (emphasis mine):
“Astrobotic’s Peregrine lander was created in partnership with NASA’s CLPS (pronounced “Clips”) program, which stands for Commercial Lunar Payload Services. The idea of the program is to help foster development of privately made lunar landers that can carry NASA payloads, while accepting that some partners get further than others.”
“Unlike other NASA programs, if there’s a failure in this program, it’s not a total loss,” Jim Bridenstine, the former administrator for NASA who oversaw the creation of CLPS, said before Astrobotic’s launch. “We modeled this after venture capital.”
“NASA has increasingly embraced this type of framework since the turn of the century. The thinking goes: Partially fund the development of a company’s hardware, then buy rides or services when the hardware’s complete.”
Griffin’s philosophy lives on!
