The resurgence of human interest in space can be highly attributed to the rise of SpaceX. In less than two decades, SpaceX has evolved tremendously. From being the mere experiment of an established millionaire who wanted to reduce commercial space transportation costs to becoming the first private company to launch a spacecraft to the International Space Station.
SpaceX designs, manufacture, and launches advanced and innovative space rockets. It is among the list of multibillion-dollar start-ups that exist today.
There is no doubt that SpaceX is a force to be reckoned with now, but the company’s early years were lined with massive failures that threatened its existence. How SpaceX rose from the ashes is the stuff of movies. SpaceX had three unsuccessful attempts to reach orbit. Finally, on the fourth attempt, the company made history with its Falcon 1 rocket.
Now SpaceX is valued at over $74 billion and has more than 6,000 employees around the country. But how did such an out-of-this-world business model become successful? And is it profitable?
The SpaceX story started in 2001. An already successful entrepreneur, Elon Musk, was looking for his next big adventure after succeeding at PayPal and selling it.
He got an idea to attempt a philanthropic mission to Mars. Musk wanted to send “a small greenhouse to the surface of Mars” that would have dehydrated gel seeds meant to hydrate the land to grow plants. The project was called “Mars Oasis.”
For Musk, this project had multiple benefits for everyone. First, it would advance human exploration in space. Second, it would reignite government interest in funding NASA, and lastly, it would bring back public excitement for space exploration.
Musk, however, realized that even with a big budget, traveling to Mars and spreading life would be impossible without any fundamental breakthroughs in rocket technology. Abandoning his plans for Mars, he decided to focus instead on successfully launching reusable rockets into space first. For Musk, space rockets needed to be affordable enough for the kind of traffic he was envisioning.
In October 2001, Musk traveled to Russia with a few friends, Jim Cantrell and Adeo Ressi, to try and buy refurbished Dnepr intercontinental ballistic missiles, also known as ICBMs. These missiles could send the envisioned payloads into space.
They met with companies such as Lavochkin and ISC Kosmotras. But this first meeting didn’t go well. The Russians saw Musk as a novice who had no idea what he was doing and refused his offer. The group returned to the U.S. without any missiles.
Once again, Musk and a few friends headed back to Russia in February. This time Musk was joined by Mike Griffin. He had worked for several organizations such as the CIA’s venture capital arm, In-Q-Tel, and NASA’s Jet Propulsion Laboratory. They met with ISC Kosmotras again, and Musk was offered one rocket for US$8 million.
Musk felt it was too expensive and left the meeting without a missile once again. He was also now hesitant to purchase the missile. After the trip, he decided he could instead build rockets to accomplish his somewhat hazy vision of what SpaceX intended to do.
Admittedly, Musk did not have a concrete business plan and just decided to wing it. The first step was to figure out a way to cut costs of production for the rockets. He calculated that the raw materials needed to build his rockets were only 3% of the total sales price of rockets in the market.
Musk realized that the best business model that made sense for SpaceX to become profitable was to apply vertical integration. Which is where a company integrates and owns 100% of its supply chain. Under this business model, each part of the chain produces a different market-specific product that is combined to satisfy a common need.
So instead of sourcing and assembling parts from thousands of suppliers, SpaceX would build as much machinery as it could in-house. This included mobile launch pads and rocket engines. However, Musk soon realized that he would need external suppliers. SpaceX would need to adopt a high-breed business model that included making parts in-house and outsourcing others.
Wherever possible, SpaceX had to produce faster, cheaper, and better rockets. The aim would be to launch multiple rockets each month and profit from each launch without becoming dependent on government funds. According to his calculations, the cost of sending a 550-pound payload into orbit would be a minimum of $30 million. Musk wanted his rockets to carry a 1,400-pound payload for just $6.9 million.
Musk calculated that the raw materials for building a rocket were only 3% of the sales price of a rocket at the time. He could undercut existing launch companies such as Boeing by building a smaller rocket specializing in carrying smaller satellites and research payloads to space. He had the money necessary to begin the preliminary research needed to make his rockets.
Realizing that he’ll need highly skilled personnel, Musk sought out staff to help make his dream a reality. The first to join SpaceX was rocket engineer Tom Mueller. Musk looked for young overachievers, especially top students in aerospace programs, and recruited them over the phone.
As word of what SpaceX was trying to achieve spread within aerospace circles, several top engineers at rival companies like Boeing, Lockheed Martin, and Orbital Sciences migrated to SpaceX. The company started operations in a 75,000 square feet warehouse in El Segundo, California, to accommodate the growing staff.
Desks were eventually spread around the factory. The new computer scientists and engineers designing the machines could be in the same room with the welders and machinists building the hardware.
This was very different from the way traditional aerospace companies operated. Usually, the staff would be separated. But for SpaceX, the teams needed to be in constant contact with each other. Musk invested $100 million from his own personal money to fund the development of his rocket. Within a few months, they had a prototype.
However, SpaceX was facing an arduous journey ahead. It was unheard of for a private company to venture into an industry saturated by exclusive government aerospace and defense contractors.
These contractors held the keys to the most valuable aerospace launches for the U.S. government and NASA. They didn’t take too kindly to this young, wide-eyed millionaire who seemed to be invading their territory with his low-cost rocket.
SpaceX began to show up at most aerospace shows with their small Falcon 1 prototype to get the word out in the industry. They had tiny booths compared to the major industry players such as Delta and Boeing.
Despite the cold welcome, SpaceX continued to market its idea, as the big players continued to ignore SpaceX. They thought that Musk’s idea was all talk and highly unfeasible. It seemed Washington and NASA believed this too.
SpaceX was struggling to get traction in the aerospace circles. All of the big contracts kept going to the major players. That’s when Musk came up with the idea to protest a new $250 million deal that NASA had awarded to Kistler Aerospace.
SpaceX argued that NASA had not allowed other companies to bid for the contract. In a surprising turn of events, the government sided with SpaceX. This opened the door for people to start taking the company more seriously.
In January 2005, SpaceX acquired a 10% stake in Surrey Satellite Technology, which manufactured and operated small satellites.
For the next three years, SpaceX employees engaged in a series of tests to ensure that their engine for the Falcon 1 rocket worked. They would work on improvements in the California factory, haul the engine to a Texas site and test the prototype. SpaceX staff were making the trip so often it became known as the Texas Cattle Haul.
By this time, SpaceX was starting to look like a real aerospace company. It had built and tested its engines successfully and had completed a whole rocket body. All that was needed now was to launch the rocket and see if it reached orbit.
Usually, any aerospace company that needed to test its rocket would have used nearby local Air Force Bases. For SpaceX, that would have been the Vandenberg Air Force Base. It had several launch pads to choose from. However, none of the current tenants at the base (Boeing, Lockheed, and the Air Force) were interested in helping SpaceX in any way.
SpaceX decided to try Kwajalein Island, the largest island in an atoll part of the Republic of the Marshall Islands. Gwynne Shotwell, SpaceX’s vice president for business development, looked up a Colonel’s name at the test site and sent him an email.
A few weeks later, she got a call back from the army, allowing them to use the site. The U.S. Department of Defense purchased this launch under a program that evaluates new U.S. launch vehicles suitable for use by DARPA.
Once the SpaceX team was shipped to the island, they worked clearing brushes on nearby Omelek Island for several months to create a launch site. They conducted various safety checks until they were satisfied that the rocket would work.
Finally, on March 24, 2006, Falcon 1 was launched. Unfortunately, it crashed right after, and the team had to start from scratch. Musk had an ambitious plan to launch a new rocket within six months, but this would require a lot of work and money. Money that SpaceX was quickly running out of. The company tried to launch Falcon 1 two more times, and both follow-up launches failed.
Meanwhile, SpaceX was working on another rocket, the Falcon 9. This nine-engine rocket would be a replacement for a NASA space shuttle that was being retired. Musk was positioning the company to bid and win a NASA contract. This project would later turn out to be life-saving for SpaceX.
The company prepared to launch Falcon1 for the fourth time in June, but it didn’t go as planned. They had placed the rocket in a cargo plane for transportation, but as soon as the plane started to descend, the rocket’s body began to give in due to the internal pressure.
The engineers on board tried to minimize the damage. They opened up valves so that the internal pressure of the rocket could match that of the plane. This seemed to do the trick and saved the rocket from complete damage. It took SpaceX three months to restore the Falcon1.
But there was one problem; SpaceX was now broke, and costs kept mounting. There was also an additional issue. Musk was involved with another start-up called Tesla that had astronomical costs as well. Tesla was burning about $4 million a month and needed to close another significant round of funding to survive.
Musk had to ask various friends just to make payroll every week as he negotiated with investors. Additionally, the world economy was worsening, and spacecraft and sports cars were the last things that the government, corporations, and people were thinking of in a time of near-record unemployment.
Musk only had $40 million left to invest in both companies. Fortunately, in August, SpaceX received its first outside investment of $20 million from the Founders Fund (a venture capital firm with several partners, including Facebook’s Sean Parker) and used this money to fix the final issues with the rocket and give Tesla a life-line.
In September, the repaired rocket was ready to launch. This time neither SpaceX nor the government wanted to see another Falcon1 rocket blow up with actual cargo. So on this fourth attempt, the rocket held a 360-pound dummy payload. Finally, Falcon1 reached orbit successfully after six years and three failed launches.
In December, NASA awarded SpaceX a $1.6 billion contract for its Falcon 9 rocket. This rocket would carry at least 20 metric tons of cargo to the international space station over 12 planned flights. This saved the company financially. SpaceX had finally managed to prove its value proposition to the government, potential investors, and NASA.
At this point, SpaceX’s Business Model Canvas looked like this:
This new decade saw SpaceX beginning to work on Musk’s early vision to commercialize space travel and increase the back and forth traffic. In July 2009, SpaceX commercially launched Falcon1 into orbit. The rocket was carrying the first payload cargo from paying customers. This was when investors started paying attention to the company, and their valuation took off.
SpaceX accelerated its work on Falcon 9. They were designing it to be a reusable heavier lift vehicle. Meanwhile, NASA gave the company the green light to start construction of the Dragon capsule. This capsule would take supplies and, one day, humans to the International Space Station.
Usually, both projects would have cost more than $1 billion to complete. Still, SpaceX had to find a way to build both machines simultaneously for a fraction of the cost. To cope with the increasing workload, SpaceX doubled the rate at which it hired employees and moved into a much larger headquarters.
In June 2010, the Falcon 9 achieved its first launch into orbit. Six months later, in December, the cargo Dragon capsule successfully launched into orbit. It was official, SpaceX was now a viable business.
Finally, in May 2012, the cargo Dragon capsule made its first successful trip to the international space station.
From 2013 onwards, SpaceX continued to redesign and improve the Falcon 9 rocket. It slowly took over government contracts from the old aerospace companies that could not compete with the faster and cheaper rockets that SpaceX was producing.
SpaceX had proved critics wrong who thought that Musk’s rockets were made of rubber bands and sealing wax.
However, there were two giants that SpaceX still needed to slay. Boeing and Lockheed Martin were two of the most formidable forces in the aerospace industry. They had a joint venture called the United Launch Alliance (ULA).
In May 2015, SpaceX’s Falcon 9 rocket won the U.S. Air Force certification for national security space missions. This broke the monopoly held by the United Launch Alliance. Contracts for military launches included satellites that let troops communicate on battlefields; these contracts were worth billions of dollars.
That same year SpaceX finally managed to prove that their idea of reusing rockets worked. In December, the first Falcon 9 rocket was able to land back in one piece. Following the successful landing, Google decided to invest $1 billion into SpaceX in exchange for a 10% share.
Still, the ULA was getting more contracts and more money than SpaceX. It was understandable, given the bureaucracy that governed NASA. In 2018, Boeing was the world’s largest aerospace company, with a market cap of $210.06 billion. It was seven times larger than SpaceX and had a $28 billion estimated valuation.
Lockheed Martin, the other partner, was almost three times larger than SpaceX, with a market cap of $90.56 billion. It made sense for NASA to continue awarding the majority of their contracts to the ULA.
However, the tide began to shift when SpaceX debuted the Falcon Heavy in 2018. This new rocket was a partially reusable launch vehicle. It was a significant improvement from the Falcon 9. The Falcon Heavy completed its first orbit around the sun in February. Musk’s personal Tesla Roadster sports car and a dummy payload nicknamed “Starman” were strapped on top of the rocket.
Now the race to send humans to space using U.S. rockets was on. NASA had been paying Russia $ 80 million for each astronaut they wanted to send to the international space station after its space shuttle program ended in 2011.
SpaceX won a $ 2.6 billion NASA contract to develop a commercial crew capsule to send U.S. astronauts to space. NASA also awarded $ 4.2 billion to Boeing under the same commercial crew program for the same amount of work. This didn’t bother Musk and SpaceX went to work building the Dragon capsule.
The SpaceX Dragon capsule was in direct competition with Boeing’s Starliner capsules. Both companies were now racing to bag more NASA contracts for transporting astronauts to and from the International Space Station.
While Boeing was still clearly the leader in the aerospace industry, SpaceX had one advantage over the giant. You see, NASA had a firm-fixed-price contract that forced contractors to be efficient within the budget.
SpaceX had been making cost-effective rockets from its inception. This gave them an edge over Boeing, allowing the company to continue getting contracts from NASA despite Boeing’s attempt to push them out.
Building a rocket that transports humans is an enormous challenge. Both Boeing and SpaceX suffered setbacks and delays that pushed back the original launch date by a few years.
SpaceX had two Falcon 9 rockets explode and struggled with various safety and operational issues. Additionally, one of its Dragon capsules was utterly destroyed during a test. Meanwhile, Boeing also struggled to get its capsule to work correctly. They lost control of it for 11 hours after the onboard computers turned off.
Eventually, in May 2020, SpaceX beat Boeing and successfully launched two NASA astronauts (Douglas Hurley and Robert Behnken) into orbit on a Crew Dragon spacecraft. Meanwhile, Boeing began losing credibility with NASA after the fatal crashes of two of its 737 Max airplanes. NASA announced that they would perform a full safety review of Boeing. For now, victory is firmly in the hands of SpaceX.
SpaceX Business Model Canvas: Disrupting the Aerospace Industry
At this point, SpaceX’s Business Model Canvas looked like this: