We’ve become unbalanced toward a narrow and linear view of the world that paradoxically means the more we try to fix things the worse they become. Perversely, it is our very attempts to dig ourselves out of the hole that are making it bigger.
Thankfully, there is a better way that is lying dormant within us. This alternative approach has the potential to improve almost every area of our lives. For investors, it also happens to be the best way to identify the businesses that have the potential to generate huge, life-changing returns.
To understand what’s at stake, let’s start with the story of Chairman Mao vs. the sparrows.
Mao’s Tragic Mistake
In the late 1950’s, China’s leader, Chairman Mao Zedong faced a challenge. China’s population was growing rapidly and China needed to boost food production so that some farmers could be freed up to go work in factories. This would be the first step on the journey to becoming a major industrial power.
To boost food production, the government aimed to identify all the ‘problems’ that limited China’s food production, and eliminate them. One of the biggest ‘problems’ identified was nature itself. Sparrows—along with rats, flies, and mosquitoes—were targeted for elimination. The logic was simple: sparrows eat grain seeds, and so if we kill all the sparrows, we will have more grain.
The ‘Smash Sparrows’ campaign was stunning in its ambition and scale. Everyone from the age of five upwards was mobilised. School children built ladders to tear down their nests. Millions of people hunted sparrows with nets, guns, and sticks. Citizens were encouraged to beat pots, pans and metal drums to scare the birds from landing, forcing them to keep flying until they died from exhaustion.
Estimates are that the campaign led to the death of over a billion sparrows. Problem solved.
But sparrows don’t just eat grain.
Sparrows also eat bugs.
With the collapse in the sparrow population, locust numbers surged as their natural predator – sparrows – were no longer around to keep them in check.
The locust plague that ensued was one of the major contributors to the most horrific famine in modern history. Between 1958 and 1962 China’s famine saw an estimated 20-40 million people starve to death. To call it a famine understates the horror of what happened; it is better described as an apocalypse.
Author Yang Jisheng painstakingly documented the horrors in his 500-page book, Tombstone:
“People died in the family and they didn’t bury the person because they could still collect their food rations; they kept the bodies in bed and covered them up and the corpses were eaten by mice. People ate corpses and fought for the bodies. In Gansu they killed outsiders; people told me strangers passed through and they killed and ate them. And they ate their own children. Terrible. Too terrible.”
This was one of humanity’s darkest moments.
Underlying the horror was a fatal assumption. The famine was one of the most extreme examples of what can happen when we make the tragic mistake of assuming that a complex adaptive system is merely a complicated one.
Complex, not merely complicated
This is a jet engine.
A jet engine is extremely complicated. But a jet engine is not complex.
A complicated system has many interacting parts, but each of those parts behaves in a predictable way with a clear linear relationship between cause and effect. This allows us to predict what a complicated system will do if we change a single part. It is a miracle of engineering.
A complex system is a whole different beast, and beast is often the best way to think of a complex system – it is more like an emergent organism in its own right than a passive and lifeless system.
There are several characteristics that set complex systems apart.
The relationships between the parts of a complex system are often non-linear. This means that small changes in one variable can have large and unpredictable effects across the system as a whole. This is commonly known as the butterfly effect.
Complex systems are often highly sensitive to ‘initial conditions’ and exhibit vastly different outcomes from small differences in starting points. ‘Initial conditions’ means the state of the system at the time of interaction. If this concept is not clear, try asking your toddler to stop pouring juice on their plate to ‘see how much can fit’ when they are fresh after a great night’s sleep versus when they have just been dragged screaming from the Kia Carnival after a long internment at daycare. This experiment will highlight the sensitivity of a complex system to initial conditions.
Complex systems also typically display emergent properties that arise from the interactions of different parts, but which are not predictable from properties of the individual parts themselves. Worker ants are simple creatures individually, but at the colony level the ability to build complex structures emerges.
Complex systems are often adaptive, they evolve over time in response to changes in their environment and have feedback loops that enable them to self-organise to maintain system stability.
These characteristics combine to make a complex system inherently unpredictable, dynamic, and, in a sense, alive.
Going through this list can make complex systems seem like something magical and special. And they kind of are. But they also are not at all. Because complex systems are all around us.
The weather is a complex system. The economy is a complex system. Your backyard is a complex system. Your dog is a complex system. Your family is a complex system. Your workplace is a complex system. Your after-work volleyball team is a complex system. Your body is a complex system. Your bloodstream is a complex system. Your eye is a complex system.
You are a complex system.
Complex systems are everywhere around us. Almost everything, and indeed everyone, that matters to us, is a complex system.
And yet.
And yet, we are all guilty to varying degrees of making the same mistake as Chairman Mao. We treat these complex systems, with all their vast depth of interconnectedness and emergent properties, as if they were merely complicated.
Once we understand that the world around us is mostly complex, and not merely complicated, it becomes clear that we need to change our way of interacting with that world.
Each type of system, complicated and complex, is best served by a different mode of attention.
A complicated system can be accurately analysed by a narrow and focused attention on each of its individual parts. This is because a complicated system is equal to the sum of its parts.
A complex system by contrast is more than the sum of its parts, it cannot be understood by breaking it down to its parts. A complex system requires a mode of attention that is broad and open, and that looks at the relationship between parts as they connect together into an integrated whole.
We need a narrow focused attention, but we also need a broad and open one.
Lucky for us, nature has provided us with both.
Your forgotten brain
As outlined by Dr Iain McGilchrist in his masterful book, The Master and His Emissary, evolution has provided us with two modes of attention, a narrow focused attention that is primarily associated with activity in our brain’s left hemisphere, and a broad open attention that is primarily associated with activity in our brain’s right hemisphere.
The evolutionary driver for both forms of attention can be simply explained by our role as both predator and prey. We evolved a laser-sharp narrow focus so that we could zero in on hunting our prey. Meanwhile we also evolved a broad awareness of our environment so that we could sense danger and avoid becoming someone (or rather something) else’s lunch.
If we used our brains as evolution intended then we would inherently understand the nature of the complex adaptive systems that surround us, and how best to interact with them.
The problem is that we, both individually and as a society, are now massively over-indexed to use our narrow left hemisphere mode of attention without engaging our broad right hemisphere mode.
One way that this imbalance toward narrow-mode manifests itself is our adoption of a ‘problem-solving’ mentality where we focus on a single part of the system that we consider to be a ‘problem’ and attempt to eliminate that problematic part at all costs.
This was the madness of Mao’s approach.
The problem with problem-solving
If we were only dealing with complicated systems, a narrow fixation on problem-solving would be fine.
If a jet engine has a faulty component, you remove that problematic part, and replace it with a new one. This works great. Problem solved.
But complex systems are just built different.
The interconnected feedback loops, non-linear outcomes, emergent properties, and sensitivity to initial conditions mean that when we narrowly focus on eliminating one problem in a complex system, we almost always create another problem in another part of the system. Sometimes those other problems are small. Sometimes they are monstrously large.
Problem-solving squeezes the balloon, only for it to bulge out somewhere else.
This problem-solving approach is failing everywhere around us. We invent a GLP1 pill to eliminate food cravings, in a system that is built to encourage people to crave processed food. We build prisons to lock up troubled youth alongside career criminals, while we leave the social structures that grew them untouched. In finance we create esoteric synthetic derivatives in an attempt to eliminate risk while laying the foundation for the next crisis.
In all these cases we are assuming a simple linear cause and effect relationship between the problematic part that we are targeting for elimination and the result we want, while ignoring that in a complex system, everything is connected to everything else.
The result is a patchwork of band-aid solutions stacked on top of band-aid solutions, as the solution to one problem creates another problem to be solved.
Even at its best, problem-solving, by its very nature, can only ever remove something we don’t want, it can’t create something we do want.
A Whole Brain approach
There is no single answer to how to nudge a complex adaptive system towards the outcomes that we want. And that is kind of the point. Each system is both unique and itself constantly adapting and changing.
The optimal approach requires understanding the whole system and its current state, in its own right. Like tending a garden we cannot force the system to grow in the direction we want, but with the right care we can nurture it to flourish to its highest potential.
This system level thinking is the domain of our brain’s right-hemisphere. Millions of years of evolution gave us the broad and open mode of awareness that holds the key to building the systems that we want.
We urgently need to return to a whole brain approach, and yet we have forgotten how. If we can do so we will have the best shot of reaching our highest potential in our lives, in our businesses, in our investing, and in our communities.
I will be writing a series of articles, both here and at wholebraininvesting.com that will be using investing as the lens by which to understand how we can shift to a whole brain approach in understanding the world.
Investing is a good lens, to invest well requires understanding the most complex systems that mankind has created. Investing is also a domain that gives us loud (though noisy) feedback to tell us over time whether our understanding of reality is correct. And yet, today, finance and investing, like most of our world, is dominated by the kind of narrow linear thinking that is causing most of our troubles. We’ll be working to change that.
For those that love investing, shifting to a whole brain approach is also the best way to identify the extreme outlier performers that I call Monsters. The small group of companies that generate insane, life-changing returns for shareholders. As Tom Morgan presented at Sohn so brilliantly, this mindset shift is the difference between analyst and PM, and between satisfactory and legendary. In future articles we’ll be digging into the practical and applied steps to implement a Whole Brain approach to understanding business and investing.
For those of you that just want to understand the world and how we can encourage its flourishing, there’ll be plenty for you too. And you might even pick up a few investing ideas along the way.
We need a Whole Brain approach more than ever. It starts with each of us developing a holistic approach in our own thinking. This allows us to avoid Mao’s tragic mistake and begin to build the world we want.
Let’s do this.
Subscribe to receive an email when a new update is released:
Processing…
Success! You're on the list.
Whoops! There was an error and we couldn't process your subscription. Please reload the page and try again.
References:
This piece would not have been possible without the work of several others that I would strongly recommend you check out if this interested you.
Tom Morgan, founder of The Leading Edge has done more than anyone I know to put the hemispheric theory on the map in the world of finance. Tom’s radical openness and vulnerability has opened doors where there were only walls.
Dr Iain McGilchrist and his incredible body of work on understanding the brain’s two hemispheres forms the foundation of much of what is discussed here and what we’ll be talking about in future articles.
William Oliver, co-founder of InPractise. Will is an exceptional human that has helped connect so many dots for me personally and to navigate what can be a treacherous path of openness while remaining level headed.
Kat Koh intuits the right hemisphere approach in her substack writings so well and was particularly helpful in putting this piece together.
Robert Fritz, author of Path of Least Resistance along with many other books outlines the problem with Problem Solving and structural dynamics. In future pieces we’ll be exploring how well his work integrates a whole brain approach.
Dr. Daniel Siegel’s work on integrating multiple fields resonates deeply with our Whole Brain approach. If you are looking for a path to be more Whole Brained in multiple aspects of your life, and particularly as a parent, his body of work is a must.
A few months back I wrote about an incredible kiwi start up Rocket Lab: The Kiwis Winning The New Space Race. As part of researching that article I had the pleasure to interview Rocket Lab’s Founder and CEO, Peter Beck.
Peter is a pretty incredible guy. When he was eighteen he built a rocket in his garden shed, strapped it to a custom-built bicycle, and took it for a spin in a local parking lot (and hit speeds of over 150km per hour). If you don’t know much about Peter, this quick four minute video gives a great overview.
With plenty of other news outlets already asking about Peter’s extraordinary background, I instead focused my attention on the company’s business model. Due to size limits, most of our conversation could make it in to the final article. So for the folks that have asked, here is the full length interview:
I know your story pretty well. I am keen to hear in your own words, your story, and why you decided to start Rocket Lab?
Peter Beck: So, for me it was always very obvious that Spacecraft were going to shrink. So when you analyse what is in a spacecraft there is a bunch of electronics, batteries, solar panels, and a sensor . And all of those things are on rapid trajectories either down in size or up in performance. So it was always really obvious to me that small spacecraft were going to become a key element to building a space infrastructure in the future. So really their limiting factor and enabler for that future was the ability to get those spacecraft up in orbit regularly, affordably and frequently. So there is a good reason why we’re currently the only small launch vehicle delivering spacecraft to orbit and that’s because we saw that before others did. And also we were able to rapidly develop the capability. That’s what it is really all about.
It’s a super exciting time in space right now when you think about it. The best way I try to explain it to people is go back to when the Internet was brand new and somebody had just sent their first email. It was obvious that was pretty handy as a messaging tool. But if you went and sat beside that person at that time who sent the first email and explained to them all of the things the Internet was going to create it would largely seem like fantasy. And really with space, we have just sent that first email. That’s pretty much where we are at. Because space has been a domain that has been so hard to get to. So closed. So expensive. That it’s a domain that’s very hard to innovate and do these things in.
It’s an incredibly, incredibly,- exciting time. The biggest thing to be done in space is yet to even be thought of. People often ask me what do you think about are the various aspects of what is going on in space. What do you think of earth observation, and all these things. I think they are great. But the application of what they are providing is going to be dwarfed when we have full access to the domain of space.
I am keen to talk to that, and the economics that go with it. What do you think has sparked the small satellite revolution. What are the big enablers that have come together to allow Rocket Lab to work, and cubesats, and everything that goes with it?
There are a number of things that have combined at the right point in time. First there is the technology. That’s obviously a key enabler. That’s kind of a no-brainer. But technology by itself doesn’t necessarily enable a revolution. There are all kinds of different aspects.
Silicon Valley really saw it very early that space was something that was right for disruption. If you think of all of the domains where you build infrastructure: in the sea, on land, in the sky. Those have all gone through all their major disruptions. And its very incremental from here on in. But space is one of those things that hasn’t had a giant disruption. You could draw a line on a piece of paper that could show where you could create a disruption that didn’t require development of crazy new technologies or the usual billions of dollars that governments need to shell out to do these kind of things. So you had a perfect storm of technology that was ready to be used, investors that could see the opportunity and were ready to take the leap in to space, and a new generation of engineers and entrepreneurs who weren’t afraid of the space. Who broke out of the mold of space as a domain for governments to be in. it was kind of like, screw that, we can go there too. So I think that’s pretty much what has resulted in this industry.
So the Silicon Valley guys started investing in spacecraft very early on and in the very beginning it was earth observation because there was really only one giant monopoly company that was providing earth observation services, that was a printing press for money. So it was ripe for disruption. A number of companies started down that road, and build space craft. And then they tried to launch them. And that’s when it all fell to bits.
So when all the investors in Rocket Lab had [previously] felt the pain of launch. They all invested heavily in to small satellite companies. Only to have the satellites sit on the shelf for years. So when we turned up and said, hey look there’s a really big problem and there is a really big pipeline of spacecraft coming, and they go I know! We’ve got some of them. So it was a very very short line to draw to a launch vehicle that provided regular and rapid service to orbit.
What was your pitch to Venture Capital investors? You have been very successful targeting some top end VC firms. Was it ‘this is the world in 40 years’? Or was it, we have the technology now, and you already know the problem?
I was very targeted with who I wanted to invest in the company. It just so happened that the VCs I wanted involved in the company had big aspirations for large companies and large projects. But they also had felt the pain of launch. So that bit of the pitch didn’t need explaining. But you also have to realise that I had turned up, a New Zealander, from the country that had no space heritage. We had obviously done a lot at Rocket Lab, and we were going to build a small orbital launch vehicle. It was going to be using materials that nobody had ever used before, technologies that nobody had ever used before. From a launch site that required a bilateral and a whole regulatory framework to come together to make happen.
Launch vehicles are an enormous challenge. We often joke that the medical guys think they have a hard time getting a product in to market, boy you want to try a rocket. You’ve got everything against you from physics to regulation.
How do you think being from New Zealand and something of an outsider to what was happening in the States change the way you approached the problem?
Something that we did that was very different was we looked at the problem holistically. We said, it’s not just about the rocket. Basically I wrote two requirements on a piece of white paper: must be launched weekly, and must be affordable. And the affordable bit is relatively simple to model and understand. The launch regularly bit is the bit that everybody misses. So the only reason why we have operations in New Zealand even though we are a U.S. company, is because of the launch site.
We went to every single launch site in America and said look we want to launch ever 24 hours, and while everybody agreed that’s what needed to happen, they also reminded us that every time you launch a rocket you delay national air travel. So when Elon’s Falcon Heavy flew earlier in the year, there were 562 commercial air flights that were delayed or cancelled. So people get a bit antsy about that kind of stuff, and when you are trying to do it every 24 hours, ironically it was one of the few things that didn’t scale in America.
So I tell everybody that Rocket Lab is a third the rocket, a third regulatory, and third infrastructure. And the infrastructure and regulatory bit aren’t as romantic and sexy like a rocket, but they are actually more the enablers than the rocket itself.
Thinking through segmenting your customers, who is the typical Rocket Lab customer, and what are they trying to accomplish?
Yeah, look, I wish there was a typical one to be honest with you. It is very varied. We have at one end of the spectrum a high school student with a 1U* cubesat which we are flying on this next mission, through to a government trying to build a sovereign capability, and everything in between.
*[Matt’s note: Cubesat’s are the new generation of tiny satellites. As you might guess they are cubes, and 1U here denotes one ‘Cubesat unit’ which means a satellite that can fit entirely within a box with the dimensions of 10cm x 10cm x 10cm. Rocket Lab is taking bookings for cubesats of all sizes, with one rocket ride containing up to 82U worth of cubesats. A single launch can carry 20 different cubesats, each ranging in size from 1U to 12U. In addition Rocket Lab also offers bespoke flights for just one satellite with a typical payload capacity of 150kg. ]
So what are the current use cases today? Is it mostly imaging? Experiments? Without going in to the specifics for any particular customer. What are the use cases that you are seeing?
Sure. I think statistically based on the manifests next year we have a majority of weather spacecraft. So you know weather is something that has typically needed to be done by governments, at a pretty low government-type level of technology sophistication. So its one that is really ripe for disruption. So the high-fidelity that you can provide, not only am I get married today. They will make decisions like, am I going to build this infrastructure project this month. So really big decisions get made on weather data. So statistically speaking weather is probably next year, our biggest flight rate. Imaging is definitely there. Also a lot of technology development. So we have got a NASA payload that has 13 payloads on board, and all of those are basically technology demonstrators and sensor experiments and things like that. And that’s probably the vast majority that would be one of those three things.
Okay cool, and putting the Sci-Fi hat on, do you have any sense of where you see it ten or twenty years? Or are you trying to avoid any crazy predictions? Where do you see it could potentially go? I think you talked about a space Internet previously?
I am not even going to care to guess because like I said at the beginning, I think the most significant thing that is going to be done in space is yet to be even thought of. The most interesting thing for us is we see ourselves as the enablers of this. We already see it now. People are designing spacecraft for the Electron environment. It’s a very very smooth ride to space. Smoother than any of the other rides out there. It’s a big fairing volume and they can design spacecraft in a totally different way. And we already see that occurring and we see some really really unusual missions. So another example is that the traditional way that spacecraft are getting to orbit right now is that they are ride-sharing on the side of big rockets. But those big rockets only go to certain orbits. Now with our launch site we’ve got a huge range of orbits. So all of a sudden totally new missions are being developed. Totally different weather missions are being developed. Different earth observation and comms missions are being developed. Because all of a sudden you have access to all these different trajectories and all these inclinations to provide different services to different countries. So it’s already starting to happen. And that to me is one of the most exciting things is to see payloads that have been designed specifically for Electron, and those payloads would not have existed without the vehicle.
Absolutely. I think you mentioned that a lot of people are designing to the Electron specifications now which is pretty cool to see. What do you think are the top say 3-5 most important factors for a Rocket Lab, in rough order of importance? I’m guess frequency is pretty high up there, but what do you think is number one most important roughly and then down the list?
It’s control of destination and timeline. That’s the number one thing. “I’m going to this orbit on this day” because that’s one thing that [traditional] ride share can never offer. Because you just don’t know where you are going to go, when you are going to go. So that’s pretty much the order of conversation when someone comes and sees you is “I have got this spacecraft that requires to get to this orbit on this day, is that good?” Then other discussions occur later, like the environment of the vehicle and price, and all of that kind of stuff. But really that’s the number one thing that people need.
For us its a huge responsibility because a lot of these, especially these early stage guys, they are building their business plans off the back of us. They’re building their business off the back of us, to get them in to orbit and to get them generating revenue quickly.
Morgan Bailey (Rocket Lab’s Communications Manager): Just to point out too, those two factors are something that we offer a wider range of than anybody else. Not to mention that we are the only ones that have made it to orbit so far, but if you are looking at launch schedule, as well as where you want to go in orbit, we’ve got the widest range of orbital inclinations that you can reach from one site in the world. We also have the most launch frequency out of any site in the world and we are upping that and developing more schedule freedom by developing a U.S. launch site. So we have heard the market and really responded to that.
Peter I’d be keen to hear your thoughts on Rocket Lab’s ‘Master Plan’ thinking ten, or twenty years in the future, where would you like the company to be at that stage?
Well the first point here is that everybody thinks we’re going to build a bigger launch vehicle [rocket]…
I wasn’t going to ask that question… I think you’ve been asked that one too many times, and might be sick of answering it…
No, good, good, good good good. Yep. So the definition of success for me is that we are able to enable these companies to get on orbit to do the things that they want to do. And the things that they want to do are going to have a huge effect on everybody down here on earth. So you know, we don’t have aspirations of going to other planets, or taking humans in to space. Where I honestly believe we can move the needle for the human species in the most significant way, is actually to create space as an accessible domain for people to innovate. So if everything has gone well in 5-10 years, the world will be a totally different place. And we’ll be able to trace some of the origins at least, back to our program.
I’m keen to ask about the economics. So you have Space-X going in the opposite direction building a very large rocket. Do you see that [Space X] being the option if someone was looking at a launch and not worried about frequency and control of destination for whatever reason, it might be the low-cost option, versus Rocket Lab’s [more premium option]. You once talked about a freight train vs. a Fed-Ex truck. Do you see Rocket Lab more serving the more frequent and more targeted end of the market? Is that how you see the market breaking out?
The ironic truth is that we are pretty much the same price. You know the cost of a ride-share. We targeted the cost of the vehicle to basically equal the cost of a ride-share. So there is not a whole lot of advantage…
So there’s not that much price difference in it is what you are saying?
No! There wouldn’t be a whole of advantage for anybody to do that. And we are reaping the rewards of that decision right now.
Have you ever had contact with Space X or Elon Musk? You’re often compared to Elon. Is there a Space Club that you guys all hang out at?
A Space Club?! (laughing) No, no, there’s not a space club. Obviously the community is relatively small so we all kind of know each other, or know of each other.
[Matt’s note: Clearly it was foolish of me to ask about Space Club. As a good friend later pointed out, the first rule of Space Club is ‘Don’t talk about Space Club!’]
How have you found it building a lot of the R&D in New Zealand. How have you found that process? Was there a pool of engineers waiting for something like Rocket Lab to come along? Did you bring in a lot of expats? How was that recruiting process?
Yeah I don’t think it’s unique to New Zealand, but any company that grows at the speed that we have grown at struggles with that. We have recruited from all around the world, and New Zealand, and in our U.S. operations. It’s three to five new starters a week for us, pretty consistently. So its always a struggle. And I can say that operating both Rocket Lab USA and Rocket Lab New Zealand. It’s not unique to either one of those sites. There is a lot of competition for the talent up in the U.S. with Space X and Blue Origin. So it doesnt matter where you are in the world, it’s always a challenge.
How would you describe the culture at Rocket Lab? What kind of culture are you trying to build?
This is a place where you come if you really want to see what you are capable of. This is not a biscuit factory. This is a place where we try and attract the very best talent in the world, we give them all the resources, and the most amount of time that we can, and ask them to go and do incredible things. And the wonderful thing about Rocket Lab is we are at a size where you can still come here and own a really significant thing and be in charge of it and responsible for it. Once you get up to Space X and Boeing and those kind of sizes you end up being very siloed on one particular project or outcome. The one thing here is people can come here and own as little or as much as they want to, and really reach their full potential as an engineer.
I’m keen to dig in the economics. The price of a launch at the moment is around USD$5.7 million. When you are at scale, what kind of gross margins do you expect to generate?
Generally as a private company we don’t talk too much about that. But the starting price is $5.7 and depending what service you want service you want that changes. Like we said before it’s pretty competitive to rideshare. And we are anticipating being cash flow positive this year. So that should give you an indication of the financial footing of the company, and the financial performance of the product.
Something that is interesting about Rocket Lab is how much work you have done on the foundations. It’s not just vertically integrated, you’ve got your own monitoring sites around the world, you’ve built your own launchpads. So I am keen to hear more about that strategy? I imagine you have got a lot of fixed costs but after that you are able to pump out as many [rockets] as you can?
Exactly. There is nothing like owning it in my experience. Once you have got to ask somebody to borrow theirs, or rent theirs, then that gets a little more difficult. So the strategy is always to be as vertically integrated as possible. Owning that infrastructure is a key element because we have complete control over our launch windows, we have complete control over, basically everything. Whereas when you go on to somebody else’s launch range, and there is other people there and other customers there, and other activities there, you are always in a compromised position.
But like I said its from the vision from the beginning, which is, how can we get to a launch every 24 hours, or more. Really that comes down to, you have to own it all, you have to have these dedicated assets that serve your business and nobody else’s.
And once you are at scale, what do you think most of the cost of each rocket launch would be? Is there a lot fuel component there, is it a lot of man hours going in to construction? Whats the biggest driver of your costs once you are at scale?
Great question. So, fuel is irrelevant. So basically the cost of fuel is a rounding error. That’s because liquid oxygen is cents per kilogram. The kerosene we use, we use almost, bugger all of it. So that’s kind of in the weeds. The way we have designed the vehicle, its designed for manufacture. So while we use very expensive and exotic materials such as carbon fibre, and inconel superalloys and things like that, we don’t use very much of them. And the processes that we use, like the 3D printing of the rocket engines, means that while the material itself is very expensive, because we 3D print them, there is no wastage in the material. It’s additive manufacturing rather than subtractive manufacturing.
So the cost of the vehicle is pretty well equally broken up between raw materials and labour. Labour would be the higher cost component to the vehicle. But the great thing about that of course is that because the vehicle is designed for production, there are just huge automation opportunities just designed in.
I think you mentioned somewhere else with the batteries, you have already seen a 2X improvement in the size and cost over time. So that’s a driver for Rocket Lab as well, you are positioned to benefit from all those scaling effects in different technologies.
Yeah exactly. We stood back and said well what are the technologies that are either going to reduce in cost or improve in performance. Composites is one of them. 3D printing is another one. And batteries is another one. So there is no coincidence why a lot of the solutions we have chosen align with the trajectories of those either materials or technologies.
Something you’ve addressed elsewhere that I am sure our audience is interested in is the idea of [rocket] re-usability and why doesn’t that work so well for Rocket Lab, and why you haven’t pursued that to cut costs?
Yeah so the vehicle has been designed for manufacture from day 1. So to re-use a vehicle you end up making a lot of trades with propellant and mass. So some things scale very well, a reusable on something like a Falcon 9 scales very well. It’s important to note though that on a Falcon 9, the average payload mass that vehicle lifts is 3 tonnes. Yet it’s capable of a 13 tonne lift. And when you re-use a launch vehicle it takes about a third of all of your payload capacity to do that. Which is fine when you have a very large vehicle that can lift a lot and you are not lifting very much with it. But something like a small launch vehicle, that doesn’t scale very well.
Yes and as you say there is one third [of the business that is] infrastructure, all the other stuff that potentially goes with it if you have a robotic drone-ship out there trying to catch it [the rocket] and that probably doesn’t scale too well either.
Yep, exactly.
This is a tough question because it is likely so varied, but what do you think the cost that Rocket Lab presents to your customers as a percent of their total costs. So if a customer is trying to put a satellite up, how much do you think Rocket Lab represents of that? Is it half the cost of the program for what they are trying to do? Is it a quarter? I’m trying to get an idea of Rocket Lab’s position in the economics of the business.
Yeah, you’re right Matt it really depends on the spacecraft. So if you’ve got a 3U cubesat that costs nothing to build, then you’ve got the launch element that is a much larger section of it. But when you are talking a government payload you are a small fraction of the cost of the development of that payload. Simply because of the cost of doing business as a government, or the complexity of the payload itself. So I am not sure where that would sit on an average. I would just say that it varies quite widely. So if you are an early-stage startup, then we’ll probably represent a significant portion of your costs. If you’re an established large Corporation or a Government that is flying one-hundred to two-hundred million dollar payloads, then we represent a relatively small section of the cost.
Something I noticed while browsing your website [www.rocketlab.com] which is very cool and lets me imagine I can buy a cubesat slot itself, it looks like you are significantly booked out already. I’m curious to hear, is sales much of a role at your company given the demand that you have now? What is the sales process like for Rocket Lab?
Not surprisingly this has been talked about and dreamed about, this capability, for many many years in the community of small spacecraft. So when something turns up, it’s greeted with much [excitement]. And there are so many people out there that have promised it for so long and never even made it to the pads, let alone to orbit. That it’s like pulling the path on a bathtub. We’re very busy and next year we’ve had to put more rockets on to try and meet the demand of our customers. And going out to the later years as well its still incredibly busy for us. But this is not surprising to us. This was always, this is the plan. For us it’s just about scaling up as fast as we can to service those customers. So that they can do the incredible things that they do on orbit.
You’ve made a lot of improvements that others are now following, with 3D printed engines, carbon fibre. What’s next in tech? Are there any other big step changes that you see? Or are these the main things and it’s just refining and cutting costs as it goes?
Oh look we’re not done yet. Not by a long shot. So, you would have seen the kick-stage which we announced on the second flight. That is hugely enabling for a lot of our spacecraft customers, we can deploy multiple spacecrafts at different orbits. So expect to see a steady stream of innovation from Rocket Lab. That’s what we’ve built ourselves on.
Great, one techie question I wanted to ask about. I was reading up on cubesat propulsion so once a small satellite is up there, there is actually a lot more opportunity than I realised. I am curious to hear your thoughts on that in terms of use cases. I saw that NASA was looking at doing a cubesat that was going to go all the way to Mars after getting to earth orbit. How do you see that, is that something that is happening already, or more going in to the future?
[Matt’s note: you can watch a video about the epic Mars cubesat project here]
Oh yeah look there is a lot of growth in that field right now. I just came back from the small satellite conference in Utah last week, and there must have been a dozen companies doing cubesat propulsion systems. Either electric ion thrusters, or chemical. And look it makes perfect sense. You put an asset up there, that assets lifetime is determined by how quickly it re-enters so you can increase its life by doing station keeping burns but then all of a sudden you can do all this other stuff, you know, like go to Mars. So this is kind of what I am talking about at the beginning, that the biggest thing is yet to be done or even thought of. Because we are just now seeing some of those innovations. Even five years ago if you would have said to me that you are going to put a hall thruster on a cubesat and take it to Mars you would just think: what!? But now that’s just like, oh ok, that makes sense.
On funding, do you have any plans in the future for an IPO, or are you quite happy not having to deal with all that side of things right now?
Oh well never say never. Right now we are fully funded and on a great trajectory. We’ll see what the future brings. It would be interesting to see a rocket company IPO’d for sure. I’m not sure if Space X is no doing that any time soon.
Peter, what’s been your proudest moment with Rocket Lab so far?
Oh jeepers…well the cop out answer is going to orbit. When we put that spacecraft in orbit, there were a lot of firsts there , first carbon fibre rocket, first private launch site, first 3D printed engine and blah blah blah. That was a defining moment for the industry. You know to do it out of New Zealand was great. You can imagine that not many people ever thought that the first one ever was going to be coming out of New Zealand. If you were a betting man ten years ago, that one would have been long odds. But that certainly is [a proud moment] but there are so many highs and lows that it’s hard to say. But really I guess I am proud for the team is the real answer there, because you know you take a couple of hundred of the brightest people on the planet, jam them in a little room, and feed them pizza and coke, and watch the magic happen.
I guess the humanity star was potentially quite a full circle moment given your origins as a kid looking up at the stars and deciding to get in to it?
Yeah that was bitter-sweet because not everybody liked that.
Yes that was a bit of a bizarre reaction.
Yeah but for every negative comment we saw on that, we got probably two positives. It makes a better story to have some tension there. But still I maintain I would do that again in a heartbeat. That was a great mission. And to see just the thousands that wrote in and actually that overview experience where they looked up and it was like ‘oh okay I am on this rock in the middle of the universe, maybe some of these things aren’t as big of a deal as I thought’. So that was a wonderful project.
Last one from me. What do you think is most misunderstood about Rocket Lab?
It depends if you are in the industry or out of the industry. If you are in the industry then we are pretty well known and understood. The easy one is that we are actually a U.S. company, not a New Zealand company. The New Zealand bit is really about launch. But out of the industry you’ll see Space X and Blue Origin and Virgin Orbit and those companies really talked about a lot. But out of all those companies it’s only Space X that has ever been to orbit. So that’s probably the one thing. There are two private companies in the history of this planet that have been to orbit and it’s Space X and it’s Rocket Lab and that’s it.
Subscribe to receive an email when a new update is released:
This website is the new home of my latest thoughts on investing, technology, and business. I’ll be covering everything from the mindset of investing, to the traits I look for in big winners, as well as digging in to specific examples from interesting companies I have come across.
If that interests you, subscribe to receive an email when a new update is released:
