What went wrong with Richard Branson’s company

Not long ago, Virgin Orbit was in the air among American rocket builders, and executives were in New York to celebrate its public stock debut.

The scene was true to the marketing pizazz that has helped Sir Richard Branson build his Virgin empire of companies, with a model rocket in the middle of Times Square.

The deal, facilitated by a so-called blank check company, gave Virgin Orbit a valuation of nearly $4 billion. But that moment in December 2021 — when the craze for public offerings centered on special purpose acquisition companies, or SPACs, was dying down — foresaw the pain to come.

Now Virgin Orbit is on the brink of bankruptcy. The company stopped operations on Thursday and laid off almost all employees. The stock traded around 20 cents on Friday, leaving it with a market value of about $74 million.

When Virgin Orbit closed its SPAC deal, it raised less than half of the nearly $500 million expected due to high shareholder redemptions, shortening its runway. As the broader markets turned to riskier but unprofitable assets such as many emerging space stocks, Virgin Orbit shares began a steady decline, further limiting its ability to raise significant outside investment.

Branson, Virgin Orbit’s largest shareholder, was unwilling to further fund the company, as CNBC previously reported. Instead, he began to hedge against his 75% stake through a series of debt rounds. That debt gives the flamboyant British billionaire first priority to Virgin Orbit assets in the event of its impending bankruptcy.

While Virgin Orbit touted a flexible and alternative approach to launching small satellites, the company was unable to achieve the launch rate necessary to generate the revenue it desperately needed.

Virgin Orbit’s technical staff acquitted themselves well over the company’s short existence, but were ultimately undone by their managers’ financial mismanagement. It’s a story too often told in the history of the space industry: Exciting, or even innovative, technologies don’t necessarily equate to big companies.

It became one of the few American rocket companies that managed to reach orbit with a privately developed launch vehicle. It has launched six missions since 2020 – with four successes and two failures – through an ambitious and technically difficult process known as “air launch”, using a system that uses a modified 747 jet to drop a rocket midway and launch small satellites into space .

But Virgin Orbit had dug a hole of almost $1 billion, but flew missions only twice a year while wage costs rose. The company’s management was aware of the deteriorating situation and lack of progress, and even considered changes last summer to make the business leaner. But no clear or dramatic plan was realized – which led to Thursday’s fall.

This story pulls together insights from CNBC’s discussions with business insiders and industry investors over the past few weeks, as well as from regulatory disclosures, to explain where Virgin Orbit went wrong. These individuals requested anonymity to discuss internal or competitive matters.

A spokesperson for Virgin Orbit declined to comment for this story.

Virgin Orbit was spun off from Branson’s space tourism company, Virgin Galactic, in 2017, after a team at the latter’s sister company saw the potential in using an airplane as a platform to launch satellites. While “air-launch” satellites were not a new idea for Virgin Orbit, the company aimed to outperform the air-launched Pegasus rocket — developed by Orbital Sciences, now owned by Northrop Grumman — at a fraction of the cost per mission.

Headquartered in Long Beach, California, Virgin Orbit flew most of its missions out of the Mojave Air and Space Port. The exception to that was the last launch, which took off from Spaceport Cornwall in the UK. Virgin Orbit had worked with other governments to provide launches by flying out of airports around the world, signing agreements with Japan, Brazil, Australia and the island of Guam.

The announced flexibility and potential of Virgin Orbit’s approach attracted much attention from leaders in the US national security community. After meetings with top Pentagon brass in 2019, Branson proclaimed that Virgin Orbit is “about the only company in the world that can replace [satellites] in 24 hours” during a military conflict.

At the time, Air Force acquisition chief Will Roper said he was “very excited about small launch” after meeting with Branson. He said the US military had “big money to invest” in buying rocket launchers.

The company had hoped to launch its debut mission as early as 2018, but that goal kept moving every six months or so. Finally, Virgin Orbit launched its first mission in May 2020, which failed shortly after the rocket was released from the jet. It entered orbit successfully for the first time in January 2021.

Given the company’s burn rate of close to $50 million a quarter, Virgin Orbit was aiming for profitability once it hit a launch rate, or cadence, of a dozen missions per year. When it went public, Virgin Orbit CEO Dan Hart told CNBC that the company aimed to launch seven rockets by 2022, building on that momentum.

At the same time, Virgin Orbit was already in a deep financial hole – with a total loss of $821 million by the end of 2021, due to steady losses since its inception. While Virgin Orbit aimed to launch seven missions last year, that number was steadily reduced quarter after quarter, ending 2022 with just two completed lunches – the same as the year before.

Some people at the company who had been critical of Virgin Orbit’s execution pointed to several executives’ backgrounds at Boeing, which has had its share of space-related problems over the years.

Virgin Orbit CEO Dan Hart had spent 34 years at Boeing, where he was previously vice president of its government space systems. COO Tony Gingiss joined Virgin Orbit from satellite broadband company OneWeb, but had previously spent 14 years in Boeing’s satellite division. And Chief Strategy Officer Jim Simpson had also spent more than eight years in Boeing’s satellite division before joining Virgin Orbit.

As one person pointed out, the company launched the same amount of rockets in a year with a staff of 500 as it did with a workforce of over 750 people. Others complained about a lack of coordination across departments, with projects and spending done in silos of each other – leading to a disconnect in schedules.

Two people mentioned the waste of ordering materials. For example: The company would buy enough expensive, limited-life items to build a dozen or more rockets, but then only build two, meaning it would have to throw away millions of dollars worth of raw materials.

When Virgin Orbit announced a furlough on March 15, people familiar with the situation said the company had about half a dozen rockets in various states of production at its Long Beach factory.

As the lack of a financial lifeline made the situation increasingly desperate, several Virgin Orbit employees expressed frustration with how Hart communicated the company’s position — and even more so with the lack of clarity following the furlough.

On the day of the first break in operations, people described company management running around frantically while many employees stood waiting to be told what happened. One person emphasized that the tumultuous and sudden leave occurred because executives were trying to keep the company alive as long as possible. Several employees expressed disappointment that Hart held the March 15 meeting virtually, speaking from his office rather than face-to-face, and did not take any questions after announcing the pause in operations.

That frustration continued after the break, with employees confused by the lack of details about which investors were talking to Virgin Orbit management. Thursday’s update that a deal went through came as little surprise to a workforce largely in limbo. Many were already looking for new jobs.

A pivot in Virgin Orbit’s strategy became clear and necessary soon after it went public.

Virgin Orbit aimed to raise $483 million through the SPAC process, but significant redemptions meant it raised less than half of that, yielding $228 million in gross proceeds. The funds it raised came from the minority of SPAC shareholders that held firm, as well as private investments from Virgin Group, Emirati sovereign wealth fund Mubadala, Boeing and AE Industrial Partners.

Unlike sister company Virgin Galactic, which built up its cash reserves to more than $1 billion through equity and debt sales after going public in October 2019, Virgin Orbit did not build up its cash coffers. And that meant management should have buckled down and made changes to run the company in a leaner way, one person stressed, to rebuild momentum.

And then Virgin Orbit’s apparent strength in the national security sector began to falter. Despite half of its missions flying Space Force satellites, the company lost out to competitor Firefly Aerospace for a launch contract under the “Tactically Responsive Space” program. Awarded in October, the mission seemed right up Virgin Orbit’s alley, especially since the previous mission under that Space Force program flew on the corresponding air-launched Pegasus rocket.

As the economic situation worsened, a few bankers who spoke to CNBC wondered why the search for a deal dragged on. According to a banker, Virgin Orbit could raise anywhere from $10 million to $15 million quickly to stop the situation while it found a larger buyer. Another investor estimated that Virgin Orbit had about $270 million in net tangible assets, further increasing the potential for a wholesale deal despite its declining market capitalization.

A white knight appeared to emerge last week in the form of Matthew Brown, who discussed striking an 11th-hour deal with Virgin Orbit to reportedly inject as much as $200 million into the company. But within days the talks fell apart. The company continued discussions with another, unnamed investor over the past week.

But in the words of Hart on Thursday, Virgin Orbit “was not able to secure the financing to provide a clear path for this company.”

And while the 675 employees laid off Thursday likely have good job prospects, Virgin Orbit looks set to go bankrupt.