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"LOIs are usually non-binding and contingent upon the company actually delivering what they've promised, which means Virgin can back out if Boom can't actually

by timr 11y ago

"LOIs are usually non-binding and contingent upon the company actually delivering what they've promised, which means Virgin can back out if Boom can't actually deliver on the promised specs. But the money is still flowing from Virgin to Boom." ...unless the deal is an LOI on something so far in the future than it's (effectively) meaningless, coupled with an agreement to pay the LOI-signer for real-world engineering services, today. Then the money is flowing the other way, as the OP said. The finances aren't actually clear from this announcement, but the TechCrunch headline (and some of the reaction here) is certainly credulous. A LOI for an unbuilt airplane is essentially just validation that airline companies would like to have an cost-effective supersonic airplane, if it's possible to create one. I think most reasonable observers know that's true -- they just disagree on whether it's possible.

nostrademons 11y ago
That's exactly what it is. And now they're going to take these LOIs to Kleiner Perkins, Sequoia, a16z, Fidelity, and any other money manager, say "We have $5B in signed LOIs for a Mach 2.2 airplane. Would you like to help us build it?", raise a few hundred million in capital, and then hire a lot of bored aerospace engineers out of Boeing, Lockheed, and Airbus to actually make it a reality. Or try, at least. If they can't build it, the financiers are out their money, but that's a risk they willingly bet on, and by getting the LOIs Boom has de-risked the other serious problem. Before the late 1970s, this is how most businesses were created: big-talking entrepreneur promises something awesome to customers, signs them up, uses that promise to get money from financiers, uses that money to recruit the specialized talent that will actually build the product. Software threw a monkey-wrench into that, because having more people is actually a disadvantage when building v1 of a software product. But in many industries, the only way you can make progress is by lining up a number of commitments from people, all of whom bring something different to the table, and then hoping you can work out all the details later.
- deleted 11y ago
  [deleted]
- timr 11y ago
  Yeah, I agree that it's smart marketing. It might even work. It's still quite a long-shot that raising VC-scale money will get you to a working supersonic jet. But hey...better (for society; not necessarily the fund LPs) than investing in the newest SMS-based, on-demand food delivery service for dogs! That said, I don't agree with your second paragraph. Investors didn't suddenly lose (or gain) the ability to evaluate technical risk in the late 1970s. There have probably always been big-dream pitches as long as there have been investors, but most businesses started small, and grew. If anything, the throw-money-indiscriminately-at-a-dreamer style of investment probably became more popular since the rise of Silicon Valley, not less. In this particular domain, all of the big players started tiny, grew off of government largesse, or both. The risk is entirely on the execution and feasibility side of the equation. And a statement from an airline that they'd like an affordable, practical supersonic jet is of nearly zero information. I, too, would like a goose that lays golden eggs.
  - colah3 11y ago
    As an industry outsider, it wasn't obvious to me that their business plan was viable, even if the technology panned out. They want to charge $5,000 for a round trip between NYC and London. That's at least 5x the cost of getting a normal economy trip, if you buy early. Certainly, there are people who would pay that much to save time (~$600 per hour saved), but is the market big enough for many planes, running 24 hours a day? Most people aren't willing to pay a couple hundred extra dollars for first class, let alone a few thousand. The LoI means investors don't have to trust their market judgements. An airline is going to buy the planes and bear the risks regarding how much customers will pay. The remaining questions are technical. I'm sure the technical side is the vast majority of the risk, but it seems like a nice simplification for them.
    - timr 11y ago
      "The LoI means investors don't have to trust their market judgements. An airline is going to buy the planes and bear the risks regarding how much customers will pay." You're dramatically overstating the power of a letter of intent. It's fairly routine for purchase options to fall through in the world of big jet purchases. The Concorde program itself had over a hundred options after announcement, from a bunch of big airlines, but ultimately sold only 14 jets. These are just options, after all. This announcement is probably most useful in that it gets them some press on demo day, indicates that there's still customer demand (however tentative) and that these guys aren't total chumps, and last but not least, makes a bunch of credulous investors think about the big-B number and see dollar signs blinking in front of their eyes.

by timr 11y ago

nostrademons 11y ago

That's exactly what it is. And now they're going to take these LOIs to Kleiner Perkins, Sequoia, a16z, Fidelity, and any other money manager, say "We have $5B in signed LOIs for a Mach 2.2 airplane. Would you like to help us build it?", raise a few hundred million in capital, and then hire a lot of bored aerospace engineers out of Boeing, Lockheed, and Airbus to actually make it a reality. Or try, at least. If they can't build it, the financiers are out their money, but that's a risk they willingly bet on, and by getting the LOIs Boom has de-risked the other serious problem. Before the late 1970s, this is how most businesses were created: big-talking entrepreneur promises something awesome to customers, signs them up, uses that promise to get money from financiers, uses that money to recruit the specialized talent that will actually build the product. Software threw a monkey-wrench into that, because having more people is actually a disadvantage when building v1 of a software product. But in many industries, the only way you can make progress is by lining up a number of commitments from people, all of whom bring something different to the table, and then hoping you can work out all the details later.

deleted 11y ago
[deleted]
timr 11y ago
Yeah, I agree that it's smart marketing. It might even work. It's still quite a long-shot that raising VC-scale money will get you to a working supersonic jet. But hey...better (for society; not necessarily the fund LPs) than investing in the newest SMS-based, on-demand food delivery service for dogs! That said, I don't agree with your second paragraph. Investors didn't suddenly lose (or gain) the ability to evaluate technical risk in the late 1970s. There have probably always been big-dream pitches as long as there have been investors, but most businesses started small, and grew. If anything, the throw-money-indiscriminately-at-a-dreamer style of investment probably became more popular since the rise of Silicon Valley, not less. In this particular domain, all of the big players started tiny, grew off of government largesse, or both. The risk is entirely on the execution and feasibility side of the equation. And a statement from an airline that they'd like an affordable, practical supersonic jet is of nearly zero information. I, too, would like a goose that lays golden eggs.
- colah3 11y ago
  As an industry outsider, it wasn't obvious to me that their business plan was viable, even if the technology panned out. They want to charge $5,000 for a round trip between NYC and London. That's at least 5x the cost of getting a normal economy trip, if you buy early. Certainly, there are people who would pay that much to save time (~$600 per hour saved), but is the market big enough for many planes, running 24 hours a day? Most people aren't willing to pay a couple hundred extra dollars for first class, let alone a few thousand. The LoI means investors don't have to trust their market judgements. An airline is going to buy the planes and bear the risks regarding how much customers will pay. The remaining questions are technical. I'm sure the technical side is the vast majority of the risk, but it seems like a nice simplification for them.
  - timr 11y ago
    "The LoI means investors don't have to trust their market judgements. An airline is going to buy the planes and bear the risks regarding how much customers will pay." You're dramatically overstating the power of a letter of intent. It's fairly routine for purchase options to fall through in the world of big jet purchases. The Concorde program itself had over a hundred options after announcement, from a bunch of big airlines, but ultimately sold only 14 jets. These are just options, after all. This announcement is probably most useful in that it gets them some press on demo day, indicates that there's still customer demand (however tentative) and that these guys aren't total chumps, and last but not least, makes a bunch of credulous investors think about the big-B number and see dollar signs blinking in front of their eyes.