Let's Start a Rocket Company!

by Jeffrey L. Cruikshank

Editor's note: The new book Shaping the Waves: A History of Entrepreneurship at Harvard Business School looks at the School's fifty-plus years of training entrepreneurs as varied as Tom Stemberg, founder of Staples, the Office Superstore; Arthur Rock, the legendary venture capitalist; and Paul Conforti and Kim Moore, founders of Finale restaurant.

This excerpt recalls the entrepreneurial efforts of Bruce Ferguson (HBS MBA '79), Scott Webster (HBS MBA '81), and Dave Thompson (HBS MBA '81). After working briefly with NASA on a research project—their paper won a Space Foundation prize—the team finds itself reunited and pondering the future.

So thanks to a fortuitous nod from the Space Foundation, Ferguson, Thompson, and Webster were together again only a few months after graduating from HBS. Along with the other members of the CMS [Creative Marketing Strategies] team, they crowded into a low-budget hotel room on that October evening for an impromptu celebration. In the midst of these modest festivities, Dave Thompson said that he had an announcement to make.

"Bruce and I have decided to start a company," he said. "A space company." He looked at each person around the table. "So, who's game, and who's not?"

"I'm game," responded Scott Webster immediately.

At the Space Foundation awards ceremony earlier that day, Webster had heard featured speaker Ben Bova quote from James Michener's novel Space, and in that moment, he knew he had to work in the space industry. "The quote was about how each generation is presented with a frontier," he says now. "And if you didn't find a way to work on your generation's frontier, you would miss the meaning of your own epic, your own age. Our frontier was, and is, space, and I wanted to be there."

Webster's alacrity was the notable exception (and even Webster gave the project weeks of careful consideration before he officially signed on). The other MBAs in the room engaged in some serious hemming and hawing. Finally, one of them asked the question that seemed to be on several people's minds: "Dave, are you crazy?"

Thompson and Ferguson did not feel crazy. They had been bouncing ideas off each other all summer, and they were convinced that they had hit upon an idea that could work. Winning the Space Foundation prize, traveling to Houston—this simply fanned the fires that were already smoldering.

True, their first concepts for a space company were mostly duds. One idea—the "gas station in space" concept, whereby they would recapture the extra rocket fuel jettisoned from space shuttles, store it in a tank, and make it available to orbiting spacecraft in need of refueling—had potential in theory, but wouldn't become practical until far more rockets were coming and going in the vicinity of the gas station. "That summer," says Thompson, "NASA was predicting that in a couple of years they'd be launching a space shuttle every two weeks. So our idea was a bit ahead of its time."

But a more immediate opportunity had surfaced. Through his connections at NASA, Thompson had discovered that a potential project was coming together: the development of a Centaur upper-stage rocket, adapted for the space shuttle, that would help kick the heaviest-category satellites into orbit. Why not form a private enterprise, and offer to take a crack at the project? This was the idea that Thompson and Ferguson laid on the table that night in Houston.

Ultimately, of the seven CMS team members, only Thompson, Ferguson, and Webster decided to go ahead with the idea. As the trio well knew, there were very good reasons not to move forward. Most daunting, moving forward meant challenging the generally accepted idea that any private space-related venture was doomed to be unprofitable. Staggering amounts of money would be needed. To date, the money that had backed each and every successful venture had come from government sources. The drill was well known: Congress set NASA's budget; NASA then contracted with its "regulars" to take on aspects of the project that could not be accomplished by the agency in-house.

Given these circumstances, none of the trio of HBS grads was prepared to quit his day job. Instead, they worked long-distance to come up with a proposal. Their plan was innovative, phased, and contingent: They hoped to get a commitment from NASA to buy their finished upper-stage rocket (or at the very least, win the agency's seal of approval). They would use that commitment to raise the private capital needed to finance the engineering and testing. In effect, they would serve as project managers for the development of NASA's new rocket.

In April 1982, the three men incorporated their venture, calling it Orbital Sciences Corporation (OSC). By that time, their proposal to coordinate the Centaur upper-stage rocket project was nearly done. Here is where a measure of luck—after preparation, the entrepreneur's best friend—seemed to come into play. In June, just as OSC was putting the finishing touches on its plan, the Reagan administration unveiled its new National Space Policy. In keeping with the administration's overall tilt toward the privatization of government functions, the government henceforth would continue to support the space shuttle program, but also would take steps to stimulate private-sector involvement in that program.

In particular, said the Reaganauts, entrepreneurship in the space field would be encouraged, and private investors in the space business would receive special tax incentives. The timing couldn't have been more perfect. During that same month, OSC made its pitch to NASA for the Centaur project. But despite their lucky timing, OSC's founders did not hear what they wanted to hear.

"The Centaur was a liquid-fueled, partially cryogenic upper-stage rocket involving enormous safety issues," says Bruce Ferguson. "Adapting it for the space shuttle probably would have been a $500 million program—in other words, huge. NASA listened to our proposal, and then they said, 'Thanks very much, boys, but why don't you try something a little less ambitious?"'

Despite the privatization push of the National Space Policy, NASA chose to develop the adapted Centaur itself. Perhaps to underscore its willingness to work with private-sector entities, though, NASA steered the founders of Orbital toward another potential project. This one, which would require funding in the range of $50 million, seemed to be of more manageable proportions.

The challenge, although smaller, was still formidable. With most of its budget already allocated to other programs, NASA had been unable to proceed with a new middle-range rocket—a "transfer orbit stage," or TOS—that would launch medium-capacity satellites from the space shuttle. Orbital was encouraged to find a way to get the TOS rocket designed and built in the private sector.

Thompson, Ferguson, and Webster considered the project. If they wanted to take it on, they would have to put together a proposal similar to the one they had conceived for the Centaur. That plan had always been a long shot; the TOS, it seemed, was far better suited to OSC's modest capabilities. And this, paradoxically, made the TOS a more daunting prospect. Orbital's founders, now faced with a project that might actually happen, knew they had to move very carefully. The stakes were still high—$50 million— and the visibility of the project potentially enormous. Orbital was not at risk of being the first company to fail at "privatizing space." But it was at risk of being the first to succeed at it.

In December 1982, Orbital Sciences Corporation made its second pitch to NASA. OSC would find private funds for the TOS project and would coordinate the project—providing, of course, that NASA would agree to buy the product, or at the very least, agree not to fund any competing projects.

"We told them we would start with their conception of the TOS, raise the capital, manage the project, and sell it on a commercial basis to all comers," recalls Scott Webster. "We told them we could get it done for less money than the government could, and we told them that our product would help them promote traffic on the shuttle."

NASA was impressed, but cautious. The agency first responded by seeking other proposals. "First they offered our idea to the big guys, like Boeing," says Webster. "Fortunately, nobody else was willing to come in. It seemed like a harebrained idea, and the big guys wouldn't touch it unless the government came up with the funding. To go ahead without the funding was inconceivable to them."

This attitude explains why Orbital ultimately got the chance to jump into the TOS game. It also defines the real contribution that OSC made to the larger field of space-related ventures.

"We reminded everyone of an old idea," Webster explains. "The idea is, you put up your money and you take your chances. Orbital applied this idea to an industry where nobody did that. We were ready to go about building this rocket as a private, commercial venture. Nobody else wanted to take the risk, and that gave us a straight, uncontested shot."

One week after OSC presented its proposal, NASA gave the company the green light. Suddenly, both the TOS project and Orbital Sciences Corporation were launched.

Excerpted from Shaping the Waves: A History of Entrepreneurship at Harvard Business School by Jeffrey L. Cruikshank. Copyright 2005 President and Fellows of Harvard College. All Rights Reserved.

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Jeffrey L. Cruikshank is President of the Cruikshank Company, Inc., and the author or coauthor of numerous business books.