Business Stripped Bare

by Richard Branson

  This tells me we're doing a pretty good job of it so far.

  The power of research and development is great – too great just to be let out to graze on the existing market. Governments and powerful philanthropists have understood this for centuries, and have tried, often quite successfully, to harness innovation to their own long-term purposes. I am becoming more and more involved in questions of how we can best direct capital investment to address the problems which we know are round the corner, but which are not yet driving the day-to-day responses of the market.

  Schemes to encourage advances in a particular field are not new, of course. The first recorded prize created by the British government was launched in 1714, offering financial incentives to the inventor who developed a device capable of measuring longitude within half a degree of accuracy. This was vital work at the time, because European seafaring nations, including Britain, were finding themselves caught up in increasingly violent skirmishes with each other – all because they couldn't agree on the location of borders and treaty lines in territories far away from their home shores.

  Fifty-nine years later the prize was won by John Harrison, a self-educated Yorkshire clockmaker. The prize – £20,000, a vast sum for its time – made his family's fortune.

  I've always liked the idea of prizes. Even if a prize isn't awarded because the competitors fail in their attempts to win it, the very fact that there is a target to aim for can drive an idea forward to early maturity. As focus points for venture capital, technical innovation and entrepreneurial ambition, prizes are hugely valuable. And as we've been discovering at Virgin Galactic, our space-tourism operation, prizes like the Ansari X Prize capture the public imagination, providing the commercial applications of the future with a firm foundation.

  Indeed, success in the world of aviation has been built on winning trophies. In December 1912 Jacques Schneider – a French industrialist and a fanatical balloonist – offered a trophy for a seaplane race. This was the Schneider Trophy. To secure it – and to pick up 75,000 francs in prize money – a pilot needed to win three races in five years. In 1919 Raymond Orteig, a New York City hotel owner, offered the $25,000 Orteig Prize for the first non-stop transatlantic flight between New York and Paris. It was eventually won by Charles Lindbergh in 1927 – while the Schneider Trophy was still up for grabs. In 1925 the UK's air ministry formed a racing team at Felixstowe, Suffolk, and commissioned the designer Reginald Mitchell to develop a monoplane to compete for the Trophy. The result was the Supermarine S5, which spawned successive improvements. The S6B broke the world speed record by flying at 407mph, a record that remained unbroken for fourteen years – while another direct successor, the legendary Spitfire fighter plane, probably saved Britain from invasion by Nazi Germany.

  Prizes are not the only way to encourage research and experiment. Tax breaks serve innovative businesses well. Various schemes have been rolled out by successive governments, with varying degrees of success. In the private sector, the new generation of entrepreneurs emerging from Silicon Valley and elsewhere in the world are keen to encourage new ideas to help them achieve their philanthropic goals. Some of their schemes are incredibly ambitious. You need to be aware of these developments, and I hope that, as well as offering a few lessons about innovation, this chapter will serve, in passing, as an introduction to some exciting and fast-developing areas of business.

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  Like so many leaders and heads of state, from Blair to Mandela, President Mikhail Gorbachev was a persuasive salesman. 'Richard, you are known in Russia as a very brave adventurer, surely you would like to be a cosmonaut?'

  In the aftermath of the Soviet Union's implosion, Gorbachev was sweeping away all the symbols of the inefficient and discredited communist regime. In the Kremlin, the free market was the buzz, with Margaret Thatcher its flag-waving hero. And it was Thatcher who told her new-found Russian friend that I was worth meeting.

  So here we were now, at the Livadia Palace, once the imperial home of Tsar Nicholas and his wife Alexandra, in Yalta on the Black Sea. This was the Italianate residence where Churchill, Roosevelt and Stalin met to redraw the map of Europe at the close of the Second World War. The Russians were very keen to persuade me to help open up this beautiful area for tourists – and earn them much-needed hard currency.

  A few days later, I was flown by helicopter to Star City at Baikonur in Kazakhstan for a VIP tour. As a Westerner, it was a privilege to be allowed into this secret world. Here were the creators of the Sputnik satellite, the Vostok, Voskhod and Soyuz manned missions, the Salyut space station – and of the ballistic missiles that had once threatened us. This was where Yuri Gagarin blasted off into space in April 1961 to make history. And now a new breed of Russians occupied this place, negotiating with all the entrepreneurial zeal of a Palo Alto deal-maker.

  These guys offered me a once-in-a-lifetime opportunity: to sit in a capsule on top of a Russian rocket and be blasted into space. They were giving me the chance to become the first ever space tourist.

  Of course, there was a price tag.

  Over $30 million.

  At the time Virgin had a high-level ballooning project called Earth Wings and a Soviet cosmonaut was coming to join our team. I was very keen to do business with the Russians – all good grounding for the future when I planned to start a low-cost Russian airline – but the price tag for this junket – $30 million! – was astronomical. It felt immoral to me, the idea of spending that much money on myself.

  It's certainly far too much for one individual to fork out for a trip into space. Yet that remains the going rate if you want to spend your annual vacation at the International Space Station. It seems a fortune to pay when there are other priorities in life. It made me question the ridiculous economics of putting people in space – and it sparked my search for the big-business breakthrough that would make space travel a more realistic proposition for many, many more people and be able to get crucial science and technology into orbit at an affordable price to really make a difference to life here on Earth.

  I passed up my opportunity, but others were more than willing to pay the price. Dennis Tito (who actually has a scientific background working as an engineer in the Jet Propulsion Laboratory in Pasadena) became the first civilian to go into space in 2001. Tito was followed by Mark Shuttleworth in 2002, Greg Olsen in 2003, Anousheh Ansari in 2006 and Charles Simonyi in 2007. All said the experience surpassed their wildest expectations. As I write this, English-born Richard Garriott, the son of an astronaut, is expecting to fly into orbit in late 2008. He will be only the sixth paying customer. Half a dozen people in space, at a total cost of nearly $200 million – that isn't very good, is it?

  Thirty million dollars isn't space tourism. It's private exploration by rich individuals subsidising a Russian mission. The chances of a tourist going into space are currently one billion to one. I want to shorten those odds drastically. I want to see if taking people into space could become a working business proposition and also create a new technological platform for science, satellites and other human activity in space. There is no doubt though that tourists need to be the first stepping stone on our journey.

  Our initial task has been to establish the likely demand for what we have in mind. In a new field, this can be hard. What questions should we ask, and how should we interpret the answers we get back?

  Market consultancies are a mixed bag, on the whole. You should definitely see what they have to offer, but please, never neglect your own reading and thinking. Consultancies, like any group of experts, are best given something to chew on, and the more insight and detail you can provide about your needs and questions, the more useful the advice you will get back.

  I can't deny that, in our hunt for sound advice, our passage has been smoothed by the fact that space has such huge commercial potential. Apart from Virgin Galactic, there are others anxious to become involved in commercial space: there is Jeff Bezos, who made billions selling books and other goods in cyberspace with Amazo
n.com; the Las Vegas hotel magnate Robert Bigelow, who is now developing a large inflatable space-hotel; John Carmack, the computer-games creator behind hits such as Doom and Quake; Elon Musk, the founder of PayPal, who has set up SpaceX, a commercial orbital transportation service.

  Such is the demand for high-quality research in this sector, consultancies have grown up dedicated to encouraging and shaping its emerging markets. In 2002, a survey performed by Zogby International for Futron, one of the leading space consultancies, began to look seriously at the market for space tourism. Their reports suggest that from 2011 there will be 2,000 tourist astronauts a year, and that by 2021 as the cost comes down, there will be around 15,000 a year, by which time the potential revenue from this business is $676 million per annum.

  Zogby arrived at these figures by interviewing thousands of very wealthy individuals. My vision is to make the experience of suborbital flight open to many more people. Virgin Galactic only needs two flights per day at three different sites to break through the Futron survey barrier and, with all things going well, this is a highly conservative estimate. My own prediction is that by 2019 the price of a trip into suborbital space will drop to a level that will enable hundreds of thousands of people to experience and enjoy a flight into space. For someone in Europe or America it will be as simple as a decision of whether to go on holiday to Australia or up into space. A figure of under $100,000 is eventually achievable. But even if Futron's survey is correct, Virgin Galactic will still be a successful business.

  Virgin is ideally placed to move into the space industry. We have the expertise and experience of moving millions of people around the globe, safely and securely. What the Virgin brand will do – unlike any other in the commercial space market – is establish in the public mind that space tourism is for them: a service industry that's going to be a lot of fun, while being as safe as people can make it. The brand also helps to give the team global credibility as they build out the business to include environmental science work in space, satellite payload launching and astronaut training.

  In March 1999, Will Whitehorn registered Virgin Galactic as a company – and our hunt for technology to get us into space relatively cheaply began in earnest.

  For years, however, I had been keeping tabs on anything and everything to do with the vexed business of getting off the ground and into space. I wanted us to be first in this sector, in the same way that I wanted us to be first in the biofuels market. And just as we've toyed with some very unlikely biofuels over the years, we've witnessed the launch of some pretty crazy prototype spacecraft!

  This is the unseen part of business, the part that nobody ever discusses because, to be fair, there's not a lot to discuss. The secret to success in any new sector is watchfulness, usually over a period of many years. It's hard to spin waiting and watching into a vibrant business lesson, but if there's one thing you take away from this chapter, let it be this: that Virgin's sudden emergence as a leader in cutting-edge industries was decades in the making. You need a huge amount of sheer curiosity to make it in a new sector.

  Our search for a way into space led us into a brave new world of exotic materials and untried designs, bristling with spin-offs and business opportunities; a thriving community of small companies and driven individuals, motivated by prizes, supported by engaged and well-informed philanthropy.

  It was a strange experience. Having considered myself a small entrepreneur all my life – all evidence, airlines and the rest of it, to the contrary! – it was dizzying for me to find myself looking at business through the other end of the telescope. Yes, I was looking to set up my own business – a small commercial space company – but at the same time, I could see that the capital I had to hand could make a real difference in this sector, encouraging other small businesses to develop.

  I was now not merely innovating in an existing market; I and people like me were actually helping to create the market. This posed the old question in a whole new light for me – how could we best make a difference?

  The tipping point for commercial space travel came during the millennium with the announcement of the Ansari X Prize by space entrepreneur Peter Diamandis. The X Prize set a simple challenge to contestants: carry three people 100km above the Earth's surface, twice within two weeks. Peter had come to England to pitch the idea to me several times since 1997, and we thought a Virgin X Prize was a good idea. However, rather than sponsor a prize, we wanted to take the technology forward ourselves and build a business.

  We made the right decision. We were playing to our strengths by developing our own company. That said, I don't think we'd be sitting here preparing for the launch of our first spaceship if it had not been for Peter's idea, his determination, and the huge generosity of Anousheh and Amir Ansari, who were the ones who ultimately donated the $10 million prize.

  The Ansari X Prize had twenty-nine entrants, but only three serious contenders. Of these, just one had managed to acquire serious funding – SpaceShipOne.

  Burt Rutan's company, Scaled Composites – based in Mojave, California – unveiled the existence of its space programme on 18 April 2003. Burt's SpaceShipOne was to be carried into the upper atmosphere by a mother ship – a lightweight plane called White Knight – and launched in flight.

  On 17 December 2003, we finally got confirmation of what had become an open secret in aviation circles – Paul Allen, a reclusive billionaire with a passion for science fiction, was Burt's financial backer for the SpaceShipOne project. That day, SS1 broke through the sound barrier during its first manned test flight. On 21 June 2004, Mike Melvill flew SS1 above 100km altitude, and this was a significant breakthrough, dispelling the myth once and for all that manned space flight was the sole domain of huge government programmes.

  I calculated that Paul had spent about $26 million to achieve winning the $10 million X Prize. So I wrote to him in January 2004 proposing a fifty-fifty joint venture.

  Dear Paul,

  May I congratulate you on the latest flight. From the footage I saw it looked magnificent. I should be delighted to work with you on taking the project forward and helping turn it into a serious space-tourism project. I'm hopeful that with the strength of the Virgin brand and our team's marketing skill and your technological skills we can not only get your investment back but earn enough to take the project forward into even greater heights. Our suggestions are these: 1) that initially we together spend the necessary funds to create a three-man craft (along similar lines to the test craft) but with large windows. We spend these funds to make it safe but don't apply (at this stage at least) for FAA certification. This craft should be ready to take passengers in 18 months. We put aside $100 million each over three years to achieve this. 2) We start marketing in a major way to coincide with the last flight before the X Prize flight. We offer 1,000 trips at $200,000 per trip. This would result in $200,000,000 and should be sufficient to get our total investments back plus have a fund left over to take the project to the next stage (possibly a six-seat craft at more affordable fares).

  I suggested the name Virgin Galactic Airways and thought we could start taking deposits in the summer. I said: 'We have a team which I believe can manage this well.'

  While running an actual airline in space didn't appeal to Paul, he loved the idea of developing a six-seater commercial space plane. Will Whitehorn and Alex Tai, a former Virgin Atlantic captain, flew to Seattle to meet Paul's advisers. Jon Peachey, Virgin's investment director and a Galactic board member, went with them. Peachey was the moneyman, with strict instructions to keep Will's and Alex's enthusiasm under control!

  The first deal didn't work for Paul's company, but we resumed discussions a little while later and this time things progressed well. Both sides were conscious that the Ansari X Prize was looming, and we needed to complete the deal quickly if the new company was to get the benefit of the publicity. Eventually Virgin negotiated with Paul Allen to buy the rights to use his technology – just three weeks before the X Prize! It was a terrific
deal for us because the Virgin Galactic branding would now be on SpaceShipOne during the ceremony in the Mojave in October. This would give us worldwide exposure – and it would deliver a message that we were now a serious player.

  The last week of September 2004 is one I will always cherish. We launched our 125mph Pendolino tilting service in the UK. We gained plaudits from the President of Nigeria for the launch of Virgin Nigeria. And I was on the platform at the Royal Aeronautical Society in London with Burt to announce the launch of Virgin Galactic. We signed a historic $21.5 million deal for the use of the technology with Paul Allen's company, and announced that we had developed a $100 million investment plan to develop a prototype commercial six-seater spaceship at Burt's factory in Mojave.