Commercial Narrator (13:17)

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Elon Musk (14:18)

Anyway. So just to talk a little broadly about space and where things are today, obviously US government manned exploration is not in a great place. We've got the three Remaining shuttles are grounded. It looks like first flight and the might only be a year from now, if that. And we've got a vehicle that is incredibly expensive and really quite dangerous for reasons mentioned there. It's got a side mounted crew compartment, so if there's an explosion that's basically instant death. You've got solid rocket boosters which once you ignite them, you can turn them off. And there's something fundamentally dangerous about premixing your fuel and oxidizer, I think. And then you've got wings and control surfaces when you reenter. You've got to maintain a precise angle of attack. Even a momentary variance in that can break the whole vehicle apart. And then of course, it's got no escape system. So if anything does go wrong, you're toast. And you've got a cost that is really pretty hard to fathom. The shuttle program, where you add up all the pieces, is about 4 billion a year. And so you can divide 4 billion by the number of flights and that will tell you what the cost is. And if there's say four flights a year, which they haven't been for a while, then you're talking about a billion dollars a flight. The plans for the immediate future are obviously we've got to continue building the space station, so we're going to keep flying the shuttle, but, but I think it's probably going to be the minimum number of shuttle flights that we need to launch. The long term plans are to build something called orbital space plane. And I say plane in quotes because one of the options is a capsule. So it should be called maybe orbital space thing. But the basic idea is to have something that's hopefully a little cheaper and a lot safer than the space shuttle. So in particular it's going to have an escape system. So if something does go wrong, you can abort to safety. The downside is that it's still, while it might be a little cheaper, it's still going to be pretty darn expensive. The estimated cost per flight of orbital space plane is somewhere in the region of 300 to $400 million a flight. And of that amount, just $200 million alone goes to Boeing for the Delta IV heavy expendable booster. And it's a $15 billion development effort and expected to be completed in nine or 10 years. Now, typically things have not been under budget and under time, so it's unlikely, I think, given historical precedent, that it will stay within $15 billion and the 2012 timeline and a bit about what's going on elsewhere in the world in Russia. This is really the Soyuz is our only access to space station. It's considerably cheaper, considerably safer. The Soyuz has a very good track record. The crew is top mounted. It has an eclipse. There are no wings or control surfaces to go wrong. Overall, it's a pretty good system. And the estimated costs are about $60 million a flight, which is more than order of magnitude less than the space shuttle. The thing that constrains them, obviously, is the weakness of the Russian economy. It's very hard for them to embark on ambitious programs with an economy the size of Belgium. So China is probably the most interesting thing that's going on in space. This month. China is expected to be only the third is expected to launch their first person into space. That will make them only the third country ever to put someone in orbit. And they put a lot of money and effort into this program. If anything serves as a spur for human space exploration, it is likely to be China's ambitions in space and hopefully a sense in America that we want to at least keep up with China. And they have grand ambitions beyond just low Earth orbit. They're planning on setting up a space station, putting a base on Mars, and eventually sending humans to Mars. So what's happening in the US that I think might ultimately surpass all of that stuff is entrepreneurial space activities where things are led by the spirit of free enterprise. And I think there's perhaps an analogy here where just as DARPA served as the initial impetus for the Internet and underwrote a lot of the costs of developing the Internet in the beginning, it may be the case that NASA has essentially done the same thing by spending the money to develop some of the fundamental technologies in the beginning. And then once we can bring sort of commercial free enterprise sector into it, then we can see the dramatic acceleration that we did that we saw in the Internet. So there are several serious launch vehicle efforts underway. Talk about each one. There's Bert Rutan of Scaled Composites. Burt Rutan is one of the world's foremost aircraft designers, and he's developed a suborbital vehicle that they're actually flying out of Mojave. And this is an X Prize class vehicle. There's John Carmack, who wrote Quake and Doom. He's probably one of the best software engineers in the world, one of the best engineers that I know, period. And he's developing a vertical takeoff and landing vehicle. Jeff Bezos, who I understand was here last week, is a huge space advocate. And it's my understanding that he intends to spend something on the order of a billion dollars over the next 20 years on space exploration and then space, then my company SpaceX. And I think within the next several years these entrepreneurial efforts will actually be what drives space exploration. So a little bit about each one that's a picture of the Bertratan effort, it's called White Knight is the carrier plane and then Spaceship one is the thing that's held in the belly there. And this project is supposedly funded by Paul Allen. So there's quite a lot of capital also, I should make that point, quite a lot of capital that's entering this entrepreneurial space sector as well. The only drawback I think of this architecture is that it's not really scalable for something that would get to orbit. This is pretty good for suborbital, but I think the architecture would need to change for an orbital vehicle. And there's John Carmack's effort. He's a little irreverent. This is from his website. His vehicle is a vertical takeoff and landing vehicle. He's made really incredible progress for somebody who has no background in aerospace engineering and is also kind of doing it all himself with him and like three buddies. And I think they will make something that works actually if you check out their website, Armadillo Aerospace, it's pretty interesting stuff. But in order to get to orbit this would require a substantial improvement in the mass efficiency and the engine efficiency and probably be a two stage vehicle. Jeff Bezos, who I'm sure almost everyone here is aware of, he is a pretty huge fan of space. In fact, his high school valedictorian speech was about the necessity of humanity expanding to other planets. So it's pretty important to him. From what I understand, this is our effort. We're spending quite a bit more than the three prior entities that I mentioned. In some cases probably an order of magnitude more. Because what we're doing is really an order of magnitude more difficult. We're building an orbital launch vehicle. It's a two stage, very high efficiency engines, very high mass efficiency launch vehicle. And it's targeted to the satellite delivery market. So our approach is really to make this a solid sound business. And so I predicated the strategic plan on a known market. Something that we know for a fact exists, which is the need to put small to medium sized satellites in to orbit. And so that's what we're going after initially. And then with that as kind of a revenue base we will move into the human transportation market. So long term aims of the company are definitely human transportation. I think the smart strategy is to first go for cargo delivery, essentially satellite delivery. And our eventual upgrade path is to build the successor to Saturn V built a super heavy lift vehicle that could be used for setting up a moon base or doing a Mars mission. That would be the holy grail objective. On the upper right there you can see a test firing of our engine. And on the lower right you can see our first stage tank. This is an engine test of our main engine, which is called Merlin and that generates about roughly 75,000 pounds of thrust at sea level. This is our upper stage engine. It's about, it's about 7,500 pounds of thrust in vacuum. And this is an accelerated version of our launch sequence. Our first launch will be from the SpaceX launch complex at Vandenberg Air Force Base in approximately March of next year, basically early next year. And we will be flying a Navy satellite, Navy communications satellite. So it's notable because often launch vehicle companies are not able to get somebody get a paying customer on their first flight. But we've been able to do that. This is also the falcon development at SpaceX is the fastest launch vehicle development in history, including wartime. So that's actually Vandenberg Airport base, which is about two hours away from Santa Barbara.

Commercial Narrator (25:44)

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Elon Musk (27:24)

Common themes between Zip2 and PayPal? Well, I guess both of them involved had software as the heart of the technology. Even though Zip2 was servicing the media sector and obviously PayPal was servicing the financial sector, the heart of it was really software and Internet related stuff. So certainly that's a huge commonality. They were both in Palo Alto, where I live. I think we took a similar approach to building both companies, which was to have a small group of very talented people and, and keep it small. You know, I think PayPal had at its height probably 30 engineers for a system that I would say is more sophisticated than the Federal Reserve clearing system. I'm pretty sure it is actually because the Federal Reserve clearing system sucks. So what else is there? It generally, you know, I think the way both Zip2 and PayPal operated was really your canonical Silicon Valley startup. Pretty flat hierarchy. Everybody had a roughly similar cube and anyone could talk to anyone. We had a philosophy of best idea wins as opposed to the person proposing the idea winning because they are who they are. Even though there were times when I thought that should have been the way it goes. And obviously everyone was an equity stakeholder. Give us anything. If there were two paths that let's say we had to choose through one thing or the other and one wasn't obviously better than the other, then rather than spend a lot of time trying to figure out which one was slightly better, we would just pick one and do it. And sometimes we'd be wrong and we'd pick the suboptimal path, but often it's better to pick a path and do it than to just vacillate endlessly on a choice. We didn't worry too much about intellectual property, paperwork, legal stuff. We really were very focused on building the best product that we possibly could. Both Zip2 and PayPal were very product focused companies. We're incredibly obsessive about how do we build something that is really going to be the best possible customer experience. And that was a far more effective selling tool than having a giant sales force or thinking of marketing gimmicks or 12 step processes or whatever. I'm not super familiar with Friendster, certainly. I mean the essence of viral marketing Is do you have something that one customer is where one customer is going to sell another customer without you having to do anything. And, and there are lots of instances of that. Friendster might be one. Obviously Hotmail was one, PayPal was one, eBay was one. And in a situation like that, going back to what I said about product, product matters incredibly, because if you're going to recommend something to somebody, you've got to really love the product experience, otherwise you're not going to recommend it because you don't want to burn your friend to hurdles in the space industry. Entering the space industry. Well, you know, it is a very complicated regulatory structure, as you might imagine, when somebody tries to build an orbital launch vehicle, which is not really all that distinguishable from an icbm, there's a lot of regulation and they probably should be because, you know, you don't want to launch something and end up hitting la, where I live. So probably the regulatory stuff was very difficult. The environmental approvals certainly proven very difficult. Much more so than we expected. I mean, here in Silicon Valley. What I came to appreciate is in Silicon Valley, you live in a libertarian paradise. There's almost no regulation. And what can be very frustrating is that regulation is often irrational. It doesn't make any sense. But you've got somebody there who is simply executing a set of rules independent of where those rules make sense, and you can try to convince them that the rules don't make sense and they won't listen to you. So probably regulation is the most annoying thing I would say. Overall though, I'm very pleased because I think we've had a very smooth development process and on the whole, I can't complain at all. Yeah. Why is it so expensive to send something into space? Well, let me tell you what makes a rocket hard. The energy and the velocity required to get into orbit is so substantial that compared to, say, a car or even a plane, you have almost no margin to play with. Typically, a launch vehicle will get about 2% of its liftoff mass to orbit, and that's the case for Falcon. So if you can only get 2% of what your rocket weighs to begin with to orbit, if you're wrong by 2%, you're not going to get anything to orbit, come crashing down on the Pacific somewhere. So that means all of your calculations have to be right. If you miscalculate something, you get an answer wrong, it blows up. And it's very expensive trying to get all your answers right and then double checking that they're right and testing them all and Doing as much as you can on the ground. I think that's a lot of what makes rockets expensive. The low launch rate typically is also what makes rocket rockets expensive. If you had thousands of flights a year, then it would be a lot cheaper, although it's a bit of a chicken and egg because it needs to be cheaper in order to have thousands of flights a year. But at the end of the day, in the final analysis, I would say that rockets really should be a lot cheaper than they are today. And I think the way that they're both the way they're operated is just very inefficiently. And I think with SpaceX and Falcon, we're going to show that that's the case. Our vehicle will sell for about $6 million a flight. Our nearest competitor is the Pegasus from Orbital Sciences, which is about $25 million a flight, and that has less capability than our rocket. So Falcon will represent a pretty substantial breakthrough on the cost of access to space. Can you talk a little bit about difference in the customer base have to target with SpaceX versus experiences with like PayPal and how much more challenge that presents? Yeah, the customer base with SpaceX is just. It's dramatically different obviously from PayPal. PayPal is a consumer product, whereas SpaceX, we're selling rockets and the number of people who want to buy rockets is quite small. If Anyone here has $6 billion and wants a rocket, I mean, I'd be glad to sell it to them, but so it's much more of an individual selling process. There's a great deal more thought that goes into any purchase of a launch. Much more so than signing up a PayPal account, which doesn't really cost you much. So. Yeah. And there's not a lot of viral marketing that's going to happen with the rocket, I suspect. I'm hoping, but I'm not counting on it. So I think successful entrepreneurs probably come in all sizes, shapes and flavors. I'm not sure there's any one particular thing for me. Some of the things I've described already, I think are very important. I think really an obsessive nature with respect to the quality of the product is very important. So being obsessive compulsive is a good thing in this context. Really liking what you do, whatever area that you get into, given that even if you're the best, the best, there's always a chance of failure. So I think it's important that you really like whatever you're doing. If you don't like it, life is too short, you know, I'd say. And also if you like what you're doing, you think about it even when you're not working. I mean, it'll just, it's something that your mind is drawn to and if you don't like it, you just really can make it work. I think SpaceX is about 30 people. And what we do internally at SpaceX is we do all of the design analysis, integration of hardware testing and then launch operations. But a lot of the heavy manpower stuff like welding together our primary structure, the heavy machining and so forth that we outsource, so we'd be a much larger company for all of that internally and. Sorry, you had another part to your question? Oh, yeah. Actually we don't have any lawyers. The regulatory stuff that we deal with is very technical. It's really a lot like trying to get an airplane certified. With the faa, we're just getting a rocket certified. So our documentation, it's very. I wish we could offload it to some lawyers. They wouldn't know what the heck to do.

Commercial Narrator (37:45)

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Elon Musk (38:16)

How did the Wharton degree help? I think a business degree teaches you a lot of the terminology. It introduces you to concepts that you would otherwise. You know, there's terminology, there's something to be said for that introduces you to concepts you would otherwise have to learn empirically. I mean, I think you can learn whatever you need to do to start a successful business, either in school or out of school. School in theory, should help accelerate that process and I think oftentimes it does. It can be an efficient learning process, perhaps more efficient than empirically learning lessons. But really I think you. There are examples of successful entrepreneurs who never graduated high school and there are those that have PhDs. So I think the important principle is to be dedicated to learning what you need to know, whether that is in school or empirically. Well, I should point out that Falcon, our first vehicle, doesn't really have the same capability as either the Chinese, the Russian or the space shuttle vehicles that I mentioned. Falcon would be in the light class of launch vehicles, whereas the Space Shuttle would be a heavy class launch vehicle. So it's not quite an apples to apples comparison. However, the right comparison would be Falcon compared to the Pegasus from Orbital sciences. Falcon is 6 million, the Pegasus is 25 million. And the way we've gotten our prices low, our costs low, is we've really focused on every element of the launch vehicle. There's really no one silver bullet that has been responsible for a substantial portion of the cost savings. It's been really hundreds of small innovations and improvements. And so we've done improvements in the propulsion system, the structure, the avionics, and the launch operations, as well as maintained a very low overhead organization. And when you add up all the things we've done in those areas, that allows us to produce a launch vehicle at $6 million. As far as PayPal, there were a lot of back office relationships that we needed to establish and to attach to various heterogeneous data sources. We needed to attach to the credit card system for processing credit cards. We needed to attach to the Federal Reserve System for doing electronic funds transfers. We needed to attach to various fraud databases to run fraud checks. There was a lot that we had to interface with, and that took a while, but it all came together, I think, roughly simultaneously. I mean, developing the software and having it ready for the general public reasonably coincided with us being able to conclude those deals and interface with the outside vendors. And all that took about a year. I think one thing that's important is to try not to serialize dependencies. So if you can put as many elements in parallel as possible, a lot of things have a gestation period and there's really nothing you can do to accelerate. I mean, it's very hard to accelerate that gestation period. Gestation period. So if you can sort of have all those things gestating in parallel, then that is one way to substantially accelerate your timeline. I think people tend to serialize things too much. We did do a few patents on the PayPal system, although nothing that ever actually mattered. So patents are mostly useful in a defensive situation rather than offensive. It can be very difficult to actually offensively prosecute a patent. So I think in certain industries like pharmaceuticals and so forth, patents can be incredibly important. In software, particularly when you've got a very rapid life cycle where, you know, you made sure you got a patent, but now it's redundant, so who cares? It's less relevant when you've got a rapid life cycle. Well, I don't. You know, I've looked at the various. There are A couple things that I think are pretty bogus. One is space mining, another is space solar power. I mean, if you calculate how much it costs to bring either the photons from space solar power back to Earth or the raw material back to Earth, the economics don't make sense. You just can't close the economic case, not even by. It's probably off by three orders of magnitude. So I think probably the biggest thing that could happen is if we decide to establish a base on the moon or a base on Mars, and particularly if we attempt to make a self sufficient sustaining base, self sustaining civilization on the moon or Mars, that is enormous opportunity on probably the trillion dollar level because then you've got basically interplanetary commerce going on. I think that's pretty huge. But it's not going to be space solar power, it's not going to be space mining, I think. So let's see the government, you know, who knows, maybe we're being spied upon. I don't know, but certainly we are. There are some restrictions which are really annoying, such as that we are only allowed to employ people who have at least a green card or are a citizen of the us we're not allowed to employ anyone who does not have permanent residence agency in the U.S. basically, if they can't throw you in jail, they won't let you work on rocket stuff. And if we talk to any foreign nationals, we need a technology transfer agreement or something like that from the State Department. So our second launch is actually a non US governmental launch and it's taken us six months to get the same stake upon approval just to engage in a contract discussion with them. So that is problematic. We had several offers actually from a number of different entities for PayPal. And in fact the closer we got to IPO, the more offers we got. But we always felt that those undervalued the company. And subsequently when we went public, I think the public markets kind of indicated the value of the company. So I think that's one of the good things about the public markets is that they're an objective valuer of companies. When you're a private company, it's very hard to say how much you're worth because you have to basically think of some metric. Are you going to go off a multiple of future earnings? Are you going to go off something of revenue? What are your comparables going to be? There are all sorts of questions. It's really up for debate what sort of value your company is when you're public. It's whatever the market says you're worth. That's what you're worth. So, yeah, I think ebay made a number of offers prior to going public that were substantially below the value once went post public. And that kind of cleared up the disagreement and then we sold them. And what else? There was actually, you had a second part of the question. I was wondering if you were concerned that ebay's current solution was going to gain a traction so they didn't need another solution. Yeah, ebay had a. It was initially bullet point and there was ebay payments. And it was really a pretty tough, long running battle of PayPal versus eBay's payment system. And it was certainly a very challenging. I mean, I think it was, you know, there were times when it felt like we were trying to win a land war in Asia and, you know, they kind of set the ground rules or trying to beat Microsoft in their own operating system. It's really, really pretty hard. That took a lot of our effort to actually beat ebay on their own system. And one of the long term risks certainly for the company was that ebay would one day prevail. And one way to retire that risk, obviously was to sell to ebay. Writing software during the summer of 95, trying to make useful things happen on the Internet. And I wrote something that allowed you to get maps and directions on the Internet and then something that allowed you to do online manipulation of content. Kind of a really advanced blogging system. And then we started talking to small newspapers and media companies and so forth, and we started getting some interest. I mean, half the time be like, what's the Internet even in Silicon Valley? But then occasionally somebody would bite and we'd get a little bit of money from them. And then there was basically only about six of us. There were myself, my brother who I convinced to come down from Canada, and a friend of my mom's. And then three salespeople we hired on contingency by putting an ad in the newspaper. But things were pretty tough in the early going. I didn't have any money. In fact, I had negative money. I had huge student debts. In fact, I couldn't afford a place to stay and an office. So I rented an office instead because I got a cheaper office than I could get a place to stay. And then I just sort of slept on the futon and showered at the YMCA on Page Mullen, El Camino. I was in the best shape I've ever been. Shower workout and you're good to go. And there was an ISP on the floor below us just like A little tiny isp and we drilled a hole through the floor and connected a null modem cable that gave us our Internet connectivity for like 100 bucks a month. So I mean, we had just an absurdly tiny burn rate and we also had a really tiny revenue stream, but we actually had more revenue than we had expenses. So when we went and talked to VCs, we could actually. Well, like I said, there's no silver bullet that I can point to as to why our vehicle is a lot cheaper. We've really focused on reducing the cost across the board. Board. I mean one thing, our overhead in a 30 person company is, you know, an order of magnitude less than it is in Lockheed or Boeing, just for starters. So even if we did everything the same and built the same launch vehicle, we'd be considerably cheaper. And then every decision we've made has been with consideration to simplicity. And the reason for simplicity is because that both improves the reliability as well as it reduces your cost. If you've got fewer components, that's fewer components to go wrong and fewer components to buy. I think there's, I think a fairly significant innovation in our airframe which is semi pressure stabilized monocoque with variable skin thickness and a common bulkhead. Do you know what that means? I need a diagram to explain it all. But the net result is that it's very cheap and it's very mass efficient and I think easy to test and quite reliable. Our avionics system, I'll give you another example. Our avionics system, we use an ethernet on the vehicle to communicate. That may not sound like a great innovation, but it is in launch vehicles. All the other launch vehicles communicate in the vehicle by these serial cables that run the entire length of the vehicle. And so you've got these, these giant copper bundles as thick as your arm running up and down the vehicle makes it heavy, it makes it expensive, and there's. So there's things like that which when you add them all up, it makes a huge difference. No, that's a good question. That's a good question. No, I would not. I think SpaceX is not, this is advanced entrepreneuring and it may also, I can't tell you how many people have said that the fastest way to turn, the fastest way to make a small fortune in the aerospace industry is to start with a large one. So hopefully that doesn't work out. But I think space is a tough one for first time entrepreneurs. You're better off starting with something that requires low capital and space is a high capital effort. Sorry, last question.