Why SpaceX needs Starship
And why the future of New Space depends on getting a “Grain Silo” in Boca Chica to fly.
Last November, an internal SpaceX email from Founder and CEO Elon Musk was leaked that took the space world by surprise. Elon stated that SpaceX carried a “genuine risk of bankruptcy” if the company didn’t get its next-generation rocket, Starship, in regular operation by the following year. Pundits debated whether there was a legitimate reason to be concerned or if this was a signature Elon-style motivational technique to keep employees working over the holidays. Nine months later, the world is still waiting for Starship’s first orbital test flight, and I don’t think people understand how valuable SpaceX has gotten as a company and how much of the company’s value depends upon Starship being successful. Bottom line: if Starship doesn’t fly, the company could go out of business or, at least, stands likely to lose the majority of its current $127B in market value.
Alleged Leaked Email from Elon Musk to SpaceX Employees:
The consequences for SpaceX if we can not get enough reliable Raptors made is that we then can’t fly Starship, which means we then can’t fly Starlink Satellite V2 (Falcon has neither the volume nor the mass to orbit needed for satellite V2). Satellite V1, by itself, is financially weak, while V2 is strong. […]
What it comes down to, is that we face a genuine risk of bankruptcy if we can’t achieve a Starship flight rate of at least once every two weeks next year.
To appreciate SpaceX’s current precarious situation, one needs to understand a series of interrelated bets that the company has made over the past few years:
- How and why Elon went “all-in” on its burgeoning broadband internet service, Starlink.
- The economics of satellite constellations like Starlink.
- Why Starlink needs Starship up and running imminently.
Why should we (non-investors in the company) care? Anyone with a vested interest in the space economy (investors like us, entrepreneurs, governments, etc.) should be tracking this closely given SpaceX’s role as the face of the modern space economy — New Space¹. SpaceX’s ever-increasing technological and commercial success (and ever-increasing valuation) over the past 20 years has been the primary driver of the New Space flywheel. As I’ll cover, SpaceX needs Starship to be successful, but the entire industry will massively benefit if Starship can fly.
Starship is estimated to operate 10X+ cheaper than anything else on the market primarily due to it being the first fully reusable orbital rocket in history. For a given space company, that means its launch costs transition from being one of its most onerous costs to merely existing as a minor expense. This order of magnitude reduction in launch costs will transform business models for industries that already exist like earth observation and satellite communications and will enable never-before-possible business models like space-based solar power and private space stations, among many others. Q.E.D. We should all be rooting for SpaceX to make it through this crucible.
SpaceX is No Longer a Rocket Company
[Disclaimer: I’m not a SpaceX insider or investor, this assessment is deduced through the lens of viewing the manner in which the company is investing capital, the story that it has told investors, and how current investors are valuing the company.]
Sometime shortly after 2014, SpaceX made a bet to be more than just a “rocket company”. To understand why SpaceX made this decision, we need to look at its famed mission statement:
The Company was founded in 2002 to revolutionize space technology, with the ultimate goal of enabling people to live on other planets. — SpaceX Mission Statement
Elon has talked extensively about his goal to colonize Mars, thus, at least notionally, ensuring the long-term survival of the human species. It remains a bold and inspiring mission but one that is difficult to finance, given the current anemic Martian economy (prognosticators envision everything from mining to vacation homes as a booming industry on Mars by 2100). As a result, SpaceX has had to find intermediary commercial markets for the technologies it develops “en route to Mars.” The first market that SpaceX pursued was the rocket launch industry — sending cargo and humans into orbit. In 20 years, SpaceX has gone from a disparaged, under-resourced startup that no one took seriously to completely dominating the launch industry (as shown in the chart below).
The challenge with the launch industry is that it’s not very big and, unsurprisingly, colonizing Mars will be quite expensive ($100B-$10T according to Elon). The launch industry today, in its entirety, is roughly only a $14B-$17B industry. And Musk has previously stated that he expects SpaceX’s portion to “tap out” at ~$3B in revenue per year². If company profit margins hover around 20%, then on $3B of revenues, it would produce some $600M of operating profits (ignoring taxes…will there be taxes on Mars?). If the company is “topping out” at this level, then growth would be modest and the company would likely trade in a “normal stock market” at 12–15x that number, giving it a total market value of some $7–10B. A great outcome for most startups but not a business that will make it to Mars (or validate its current $127B valuation). SpaceX likely did the math here and realized that it needed another larger and more lucrative market to pursue. In 2014, the company found that market with Starlink.
Satellite Communications (SATCOM) 101: THE BASICS
Before delving into Starlink, it’s important to understand the basics of the satellite telecommunications industry or “SATCOM” in industry jargon. The simplest way to frame the industry comes through looking at companies based on how they fall against two axes:
- What type of signal is being transmitted? (i.e. TV, Radio, Cellular, Internet, etc.)
- What is the orbital altitude of the satellite? (i.e. Low Earth Orbit (LEO), Medium Earth Orbit (MEO), or Geosynchronous Orbit (GEO))
The reason orbital altitude is important to understand is that it drives two key factors for any satellite: performance and the number of satellites required.
At “high” altitudes like GEO (35,785 KMs), you only need 3 satellites to cover the entire Earth versus needing a constellation³ of hundreds to thousands of satellites when operating at LEO (500–1200 KMs). The further a satellite gets from Earth the higher its latency — the time it takes a signal to make the trip from Earth to the satellite and back. At GEO, latencies can run as high as 700 milliseconds which is the reason you see the awkward delay when a reporter is on location beaming their signal from their truck to a GEO satellite. However, at LEO you can have latencies below 50 milliseconds, which is low enough to offer broadband internet to potential customers on Earth.
(See our SATCOM white paper for a much more comprehensive introduction.)
Starlink and the Siren Song of Satellite Internet
Satellite-based broadband internet– the big breakthrough– the $100B+ idea that could then resolve the distance between the reality of SpaceX’s launch business and the capital requirements it needed to achieve its interplanetary ambitions. With the quick flip of the proverbial multi-billion dollar switch, Elon could leverage SpaceX’s infrastructure advantage to populate space with thousands of satellites to then deliver an “infinitely fast and nearly infinitely free” (John Doerr of Kleiner Perkins insight) internet service to literally everyone on the planet⁴. At least that’s the idea.
In 2014, SpaceX started exploring a LEO-based satellite constellation that could deliver high-speed broadband internet to Earth. Given Elon’s grand ambitions for SpaceX, it was just a matter of time until he came to this conclusion as satellite-based broadband internet remains far and away the largest potential market you can access from space for the foreseeable future. Today the global broadband internet is hundreds of billions of dollars and that’s with only roughly half of global households connected to broadband. Satellite-based broadband has a credible claim to a meaningful portion of the existing and yet-to-be connected market vs existing technologies like fiber or wireless ISPs or cable-based broadband. Satellite internet is particularly compelling in rural areas where costs remain too expensive to trench fiber and for customers that “move” (planes, boats, RVs, etc.)⁵
As opposed to the $10B launch market, SpaceX has stated that they view the total addressable market (TAM) for Starlink to be $1T — 100x the size. They haven’t shared the math on that estimate but other industry reports list today’s existing broadband internet market at $385B. Whichever TAM you use for Starlink, it is bigger than any other tangentially-related market that the company could hope to pursue.
SpaceX has made tremendous progress with Starlink over the past 7 years. Here’s where it stands today:
- SpaceX has launched ~3,100 Starlink satellites, ~2,400 of which are currently in operation (See a live view here.) Starlink represents over half of all active satellites in orbit.
- Reportedly Starlink has close to 500,000 customers across 32 countries paying $110 per month, giving total notional revenues to Starlink of $55M a month or almost $700M a year.
- SpaceX hasn’t disclosed how much it has invested in Starlink to date but Elon has disclosed that they intend to invest between $20B-$30B into Starlink over time.
SpaceX is not the first, last, or only company to pursue this market given the expected payoff, but it hopes to be one of the first to not go bankrupt. As I’ll cover in more detail in Part 2 of this post, the economics of LEO-based constellations are difficult because they require billions of dollars in upfront CAPEX investment before they generate meaningful revenue. It’s a high-stakes bet — 10/10 degree of difficulty, 10/10 payoff –and guaranteed bankruptcy if the investment targets fail to execute. SpaceX’s only chance of succeeding where others have failed will revolve around whether it can double down on its unique edge — having its own low-cost and high-cadence launch system.
Starlink has the potential to fund Elon’s “mission to Mars” but it comes with great risk and, at this point, it’s too late to change his mind. From what I can tell, the fate of SpaceX is now tied to the fate of Starlink.
Elon’s Big Bet
From a financing perspective, Elon’s big bet on Starlink has already paid off. SpaceX has raised roughly $10B over its 20-year life, and close to $7B of that was over the past 4 years.
SpaceX’s valuation has skyrocketed over that same time period, going from $33B in 2019 to $127B in 2022, making them likely the most valuable private company in the world. At a $127B valuation, SpaceX is also more valuable than most public market aerospace companies as well — higher than Lockheed Martin and Boeing, and just slightly below the market cap of Raytheon.
There is simply no way to justify anything close to SpaceX’s current valuation without believing that Starlink will be magnificently successful. The chart below is outdated but illustrates the “Starlink story” that SpaceX has been communicating to investors.
I think the upside case for Starlink is clear and well understood by the market. My motivation in writing this post was driven by my confusion in how little discussion was had regarding the risk of Starlink failing and how it could be a contagion taking down the entire $127B company. Were this to happen, there would presumably come an “echo boom” investment virus that would extend to the myriad other companies trying to build a fragile new space economy. To be clear, this is not what I or any space market participant should be rooting for as the contagion would likely extend to hundreds of much less bold but equally intriguing space pioneers.
As I was writing this post, a Bloomberg article was published that highlighted the suspension of disbelief (or perhaps better described as “faith in Elon”) that many new SpaceX investors have displayed in accepting the “Starlink story”. Here’s a quote from the article referencing SpaceX investor Spyridon Mentzas, co-head of equities at Mizuho Securities.
One major near-term risk is when the rocket giant will spin off its Starlink enterprise — Musk recently told employees it could be another three to four years. Mentzas said he relies largely on Musk’s Twitter account for updates on Starlink, which inform his projections.
“We don’t have the full financial info and details about the company,” he said. “Some investors think it’s not enough information to invest.”
“That’s just the way he operates,” Mentzas said of Musk.
Elon has made his bet and investors have made their corresponding bet alongside him. For all intents and purposes, the future of SpaceX is now linked to the future of Starlink. In an upcoming Part 2 of this post, I’ll explain why the economics of Starlink require SpaceX’s next rocket, Starship, to be viable. And why as a result, we should all be watching for updates from Boca Chica (where Starship is being developed) with bated breath, as the future of SpaceX and perhaps the foreseeable future of New Space lies with getting this 400’ “grain silo” to fly.
Footnotes:
- I’ve found that New Space is a controversial term. For us, it refers to the recent generation of space startups starting with SpaceX in 2002.
- SpaceX COO, Gwynne Shotwell, later increased their maximum revenue from launch to be $10B but the point remains that launch is not big enough to sustain the company’s greater goals.
- Multiple satellites that are part of one system are referred to as a constellation.
- As highlighted by SpaceX’s unique ability to provide internet to Ukraine during the Russia-Ukraine.
- Another portfolio company, Tarana Wireless, will also play a key role in connecting the disconnected by providing long-range “wireless fiber”.
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