Riding An Entrepreneurial Rocket To Financial success

How three Harvard grads formed an aerospace startup in a bedroom and six years later control a $45 million company FAIRFAX, VA.—David Thompson, Bruce Ferguson, and Scott Webster have boarded a rocket to success. The three young founders of Orbital’ Sciences Corp.—none older than 36—have created an aerospace firm that is playing David to the Goliaths of the rocket industry. After just six years they already have one viable product—a system for launching satellites from the space shuttle—and several promising ones on the drawing board. Last year, INC. Magazine ranked OSO as one of the 20 fastest-growing high-technology companies in the nation, and the company was NASA’s 20th largest contractor. Ferguson, OSC’s vice president of finance, projects revenues to hit $45 million this year and says the company will be in the black for the third year in a row. Only a decade ago, the thought of an aerospace scientist working for anyone but NASA or one of the aerospace giants such as Hughes Aerospace, McDonnell Douglas, or Lockheed was absurd. The industry was considered too high-tech, too expensive, and too risky to attract entrepreneurs and their money. Today, however, a new generation of aerospace scientists and engineers is finding that building their own company is a viable option—and they are aiming to make their mark in space as entrepreneurs. Some are still trying to raise the capital to get into the game; some are merely lone inventors trying to design a new rocket in their garage. But a few have money, brains, and commercial products, and should be considered legitimate entries in the business of space. Both Space Services Inc. of America (Houston) and American Rocket (Menlo Park, Calif.), for instance, have built ground-based, multistage rockets. And Space Industries Inc. (also in Houston) is working on its much-discussed private space platform The Scientist, June 27, page 13]. But perhaps the brightest young star in this firmament is OSC. For this firm, the sky doesn’t seem to be the limit. Just last month OSO announced it had formed a joint venture with Hercules Aerospace Corp., a 30-year veteran solid-fueled rocket manufacturer, to develop, build and operate OSC’s Pegasus Air-Launched Space Booster, the first all-new unmanned launch vehicle to be produced in the U.S. in the last 20 years. What was remarkable about the agreement was that Hercules, originally just a subcontractor on the project, was so impressed with OSC’s proposed rocket that the bigger company approached the smaller, wanting to buy into what it sees as great potential for long-term profits. Hercules’ confidence appears to be well placed, as the Defense Advanced Research Projects Agency (DARPA)—the Pentagon’s research arm—last month selected the Pegasus to launch a series of experimental satellites starting in the summer of 1989. DARPA’s selection of Pegasus is not only a milestone for OSC, but also for the commercial space industry, for it marks the first time a U.S. agency has contracted for launch services using a privately developed rocket. “DARPA’s actions vindicate our conviction that hungry, entrepreneurial companies can get into the aerospace business, contribute to this country’s space effort without drawing on the limited resource of the federal government, and make .a lot of money in the process,” says Webster, OSC’s 36-year-old vice president of marketing. Their company is indeed hungry It has already gobbled up $75 million in R&D and, Webster estimates, should require an additional $20 million over the coming year and a half. But for the three friends—each an Ivy League success story in his own right—hunger was never a serious concern. The key to the trio’s phenomenal success is probably 34-year-old engineer Thompson, who has been something of a boy wonder in the aerospace industry for more than 10 years. He graduated from MIT first in his class in 1975, received his MS. from Caltech in 1976, and was recruited by NASA as a project manager on the space shuttle project. The work was exciting, but Thompson felt frustrated by the slow pace of space development. “At heart. Dave’s a space pioneer,” says his friend Webster. “He’d been interested in space since he was a little kid, and he expected things to be further along than they were.” So Thompson quit NASA and entered Harvard’s MBA program with the idea of becoming a space entrepreneur. Meanwhile, Webster had been a senior engineer at Mytton Industries, but he grew tired of the humdrum existence of an engineer in a large company. “I wasa good engineer,” he says, “but I just couldn’t see myself spending the rest of my life designing the umpteenth improvement in some piece of equipment. I wanted a more managerial role, so I went to business school.” And then there was Ferguson, who, with a bachelor’s degree in government from Harvard, had continued on at his alma matter to get both a law and business degree. All of a sudden, all three were at Harvard at the same time. And, though they each knew of the others, their real acquaintance didn’t come about until the second year, when—guided by the capricious hand of fate—the professor of their creative marketing strategy class happened to assign the three to the same group project. Not surprisingly, given Thompson’s participation, their project was a NASA-commissioned study that assessed the market potential, financial feasibility, and business risks of private-sector ventures in space. “The risks were large, but the potential was larger and a private-sector effort in space was certainly feasible,” says Webster of the study’s conclusions. After graduating in 1981, the three went their separate ways: Thompson to Hughes Aerospace, Webster to Advanced Technology Laboratories, and Ferguson to the Chicago law firm of Kirkland and Ellis. They kept in close contact, however, and when their paper won the Houston Space Foundation’s National Prize the following year, the three decided to move forward with their plans to enter the commercial space business. In 1982, in a spare bedroom at Thompson’s Los Angeles residence, the three friends met to form what they called Orbital Systems Corp. At that time, Thompson recalls, the thought of becoming a significant player in the aerospace industry was little more than a bold dream. “We didn’t even have a specific product in mind at the time, let alone any idea of how to raise money to get into the game,” he recalls. What they did have, though, was the shared vision that space was the next big arena for entrepreneurial success and the notion that they could accomplish with rockets what Steven Jobs and Steven Wozniak, the cofounders of Apple, had done with computers. “We knew that there was the potential to make a great deal of money in space, and we felt we had the drive and the brains to take advantage of that potential,” says Webster. In April 1982, they drew up the papers for incorporation, and OSC was born. The $5,000 prize that came with the Space Foundation award was quickly spent, but the award brought an additional dividend—a financial backer. At the Space Foundation’s awards banquet, Thompson had struck up a conversation with Sam Dunnam, the foundation’s president, and told him of OSC. Dunnam thought highly of Thompson, so he put him in touch with a Houston oil baron named Fred Alcorn. A meeting at Alcorn’s netted $30,000—”pocket money,” Alcorn called it—plus an option to invest $250,000 for a “small but significant chunk of the company.” The catch was that OSC had to get a commitment from NASA to use the company’s first product, an as-yet-unidentified entity. That’s when the game got serious, according to Webster. Thompson had been having long discussions with NASA officials and satellite companies about gaps in space technology, and they kept raising the point that there was no upper-stage booster available to launch medium-sized satellites into geosynchronous orbit from the space shuttle. Webster did a quick marketing survey and found that medium-sized satellites—those weighing between 6,000 and 13,000 pounds—was set to be the growth area in the 1990s and beyond. So the first problem was solved—OSC’s first product would be a transfer orbital stage rocket for medium-sized satellites. Of course, they still had to convince skeptical NASA officials that a small company with no staff and no experience could design the necessary equipment within a matter of a few years. “I knew these guys didn’t have a pot to piss in nor a window to throw it out of,” says Jack W Wild, former director of NASA’s upper-stage division. Thompson, however, made a presentation to Wild and his colleagues that in Wild’s words, “Blew [our] socks off. Each one of my guys did a 180-degree turn” on how they felt about OSC’s ability to get the job done. Basically, Thompson convinced NASA management that OSC could do the job with no cost to the federal government. This is in stark contrast to the typical aerospace company/government arrangement in which the government not only guarantees to buy a product but also funds the research and development effort. “Our philosophy is that the private sector should spend its own money to develop the next generation of space hardware,” says Thompson. “If we’re going to make the profits, we should risk our own money.” One week after Thompson’s presentation, NASA signed a memorandum of agreement with OSC to develop the transorbital rocket. Alcorn threw in his money, and the company was off and running. Ferguson, his combined business and law degrees coming in handy, designed a privately placed limited R&D partnership that raised an additional $70 million. OSC began adding staff, and design work began in earnest. The company lined up Martin Marietta, the Maryland-based aerospace company, to act as manufacturing subcontractor, and even this arrangement had an untraditional catch: OSC retained control over any subcontracting that Martin Marietta might want to arrange. “We wanted control over the entire product,” says Webster. The special booster was completed on time with few problems, and if not for the space shuttle disaster, it would have flown on several missions by now. As it stands, it is scheduled for two missions early next year. According to Thompson, this project epitomized good, solid engineering, but it really didn’t represent a new breakthrough in aerospace. He was still anxious to break with tradition, to develop something truly novel That something turned out to be Pegasus, a three-stage winged rocket that is launched from an airborne B-52. “This is a complete departure from all other launch vehicles,” says Webster. “With Pegasus, we can launch a small satellite into any low-earth orbit, at any time, and at very low cost.” Low cost in this case means something just over $5 million, about half of what it costs with traditional groundlaunched rockets. The company expects Pegasus to open a new era in space commercialization for several reasons. The ability to launch at any time—the craft is merely attached to a special pod on the B-52 and off it goes— should be attractive to industries that want to do R&D in space but have been reluctant to get involved with the space shuttle’s long lead time, such as the pharmaceutical business. Low price should also open the skies to smaller companies and novel applications. Today, OSC employs 75 people, most of whom are engineers, and harbors plans to add another 25 professionals by year’s end. Thompson says he hopes, too, to announce OSO’s third venture at that time. “We actually have a bunch of exciting projects that we would like to go ahead with, but we don’t have enough people to pursue them all at once,” he explains somewhat regretfully. At least one of OSC’s future products will probably be a new satellite of some type, but no company official will give any details beyond that. With revenue increasing, no debt / to speak of, and promising projects that will keep Thompson, Webster, and Ferguson busy looking for qualified engineers for many years to come, OSC’s future looks bright indeed. That’s good for the investors, to be sure, but the three founders hope it sends a message to other would-be space entrepreneurs. “We would really like to see OSC serve as a model for private commercialization of space,” says Thompson. “We think competition would be good, and we hope our success spurs others to get into the business. There’s lots to be done in space, and we certainly don’t have a corner on all the good ideas.” Joseph Alper is a Baltimore-based science writer.

Riding An Entrepreneurial Rocket To Financial success

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