By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
What SpaceX is trying to do has “bankrupted other organizations,” it said.
SpaceX, the unicorn startup with a newly minted $30.5 billion “valuation” and dreams of sending humans to Mars shortly, will lay off about 10% of its employees, “a person familiar with the matter” told the Los Angeles Times on Friday.
The company says on its website that it has “6,000+” employees. TechCrunch reported that SpaceX “employed at least 7,000 people in late 2017 when COO Gwynne Shotwell last gave a number.” So somewhere between 600 and 700 employees will be out of a job. The Times reached out to SpaceX for comment, and this is how the company responded in perfect corporate-hype speak (bold added):
“To continue delivering for our customers and to succeed in developing interplanetary spacecraft and a global space-based Internet, SpaceX must become a leaner company. Either of these developments, even when attempted separately, have bankrupted other organizations. This means we must part ways with some talented and hardworking members of our team.”
And note the phrase, “…have bankrupted other organizations.” So how serious is this getting?
This reflects perhaps the money-raising fiasco SpaceX smacked into in November. SpaceX had tried to raise $750 million by issuing a leveraged loan. The leveraged loan market was red hot until October, and anything would go. But this era ended. By November, investors were getting jittery about leveraged loans. And in December, the leveraged loan market came unglued.
SpaceX will need many billions of dollars over the next few years not only to launch commercial and government satellites, but also to fulfill its dreams, including sending cargo to Mars by 2022 and humans by 2024, or whatever.
It marketed that $750 million leveraged loan only to a select group of investors, and they had no appetite for a risky loan of this magnitude. And here’s why, according to the Wall Street Journal at the time:
Some investors who were offered the loan expressed misgivings about the company’s record of burning through cash and its experience with high-profile accidents, which have previously led to dips in revenue. Other concerns include the company’s large investment plans and its connection to Mr. Musk, the founder and chief executive of SpaceX, whose volatile behavior has led to turmoil at the electric-car maker Tesla Inc., where he also is chief executive.
With that fiasco under the belt, and needing more cash to burn through, SpaceX tried in December to make up the difference by selling $500 million in equity, “to help get its internet-service business off the ground, according to people familiar with the fundraising,” the Wall Street Journal reported at the time.
SpaceX has not yet announced if it actually received the equity funding. In total, including the downsized leveraged loan and the December equity funding, if or when it goes through, SpaceX will have raised $2.7 billion.
To those of its employees who are now getting laid off, the company is offering a minimum of eight weeks’ severance pay along with other benefits and assistance, such as career coaching, according to an email sent Friday to employees by COO Shotwell, cited by the Times.
SpaceX launched 21 satellites in 2018 and 18 the year before. It has contracts with NASA to deliver cargo to the International Space Station and develop a capsule to send humans up there. The first unmanned test flight of the capsule is schedule for next month (NASA used to do that sort of thing itself in the 1960s).
The loan debacle SpaceX ran into in November is the beginning of a broader symptom: The rising difficulties for cash-burning companies to obtain new funds to burn through, after an era when just about anything went.
This is another piece of the puzzle of those “financial conditions” in the markets that the Fed has been discussing for a while. It was trying for three years via its monetary policy to tighten the ultra loosey-goosey financial conditions that resulted from years of QE and zero-interest-rate policy. And suddenly, starting in October the financial conditions in the markets tightened as investors became a tad more aware of risks.
When companies have trouble funding their cash-burn operations as financial conditions tighten, the next step is to be more prudent with their expenses and to try to reduce their cash burn so that they can hang on under these tighter financial conditions. And perhaps that’s what we’re seeing at work here.