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Leaked Hyperloop One Docs Reveal The Startup Thirsty For Cash As Costs Will Stretch Into Billions

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This article is more than 7 years old.

By Alex Konrad and Alan Ohnsman

Despite announcing a $50 million investment in mid-October, Hyperloop One plans to raise as much as $250 million in its next funding round early next year and is already seeking tens of millions in new financing, according to an investment document obtained by FORBES. Meanwhile, according to another company document, internal estimates of the cost of Hyperloop One projects could greatly exceed predictions from the concept’s architect, billionaire tech industrialist Elon Musk.

The documents paint a picture of an “aggressive” expansion plan at Hyperloop One, the startup established by investor Shervin Pishevar, which has raised $160 million so far and is attempting to bring Musk’s vision to reality. Hyperloop’s One’s expansion plans reveal widely varying projected costs for systems that are expected to carry freight by 2020 and passengers by 2021. The company is also forecasting sky-high profit margins for itself and its partners by 2030, according to one of the documents.

In his 2013 paper that set the tech world abuzz with the promise of high-speed travel via vacuum tubes, Tesla and SpaceX CEO Musk projected a Hyperloop route from Los Angeles to the Bay Area would cost as little as $6 billion, or $11.5 million per mile, far less than the cost of high-speed rail. But Hyperloop One estimates for many projects are significantly higher, based on a promotional document for potential investors and real estate developers updated in July and in circulation this October, the authenticity of which was confirmed by the company. At the top of the range: a 107-mile loop around the Bay Area alone—either by tunnel or a mix of tunnel and elevated track—would cost between $9 billion and $13 billion, or between $84 million and $121 million per mile.

Hyperloop One has publicly set a target of 2020 for its first operational container-serving loop, with a system accepting human passengers to follow by 2021. The presentation deck confirms those forecasts. In it, Hyperloop One says it will have an additional three loops under construction when the first one launches. That grand opening would likely come in Dubai, the home of the leader of its last announced financing, port-terminal operator DP World Group. Such a loop, however, will not come cheap. The 93-mile route from Dubai to Abu Dhabi, which Hyperloop One would traverse in 15 minutes, is projected to cost $4.8 billion in capital expenditures, or about $52 million per mile, according to the deck.

A Hyperloop One competitor, Hyperloop Transportation Technologies, has long claimed it could build a loop closer to Musk’s costs, telling the Wall Street Journal in January it could develop a track for between $5 million and $20 million a mile. But that company is currently working on more conventional projects that more closely resemble a high-speed train; it’s unclear how close the company would be to proving those estimates with real tests. Hyperloop One, for its part, touted a study by KPMG of a possible Helsinki to Stockholm route that would cost $64 million per mile.

The Hyperloop One presentation deck makes one thing clear: the estimated cost of any project varies widely by location – presumably because of the cost of land, rights of way and labor. A cargo-only route from Houston to Dallas would cost $28 million per mile in capital expenditures, while perhaps the most ambitious project featured—a 6,200-mile route connecting Moscow to Vladivostok and the Pacific Ocean, a 15-day trip reduced to 12 hours—would cost about $22 million per mile in capital expenditures, assuming cheaper construction costs in Russia than in the United States.

The controversial California high-speed train, meanwhile, could cost as much as $123 million per mile at a budget of $64 billion for its 520-mile Phase 1. That project continues to experience setbacks, though some funds have recently been opened up for local segments of the overall project. But building costs for high-speed rail in other locales can be much lower: In Europe, for example, they range from $37 million to $53 million a mile, according to government studies.

In an interview with FORBES on Saturday, Hyperloop One CEO Rob Lloyd confirmed the authenticity of the projections in the promotional document and said its presentation was a version likely sent to tech or real estate developers who were prospective partners of the company. “These are high level estimates,” Lloyd said. They were established with the participation of outside accounting firms and financial experts familiar with such large-scale projects, he added, and include station construction and other associated costs in addition to construction of the loop itself. “I feel very comfortable in the view that we continue to state: That we are two-thirds the cost of high-speed rail and three times faster.”

Additional routes listed as “confirmed interest” in the Hyperloop One presentation suggest that the company plans to operate mostly outside the United States with its first generation of projects. Hyperloop One is looking at Ontario, the Swedish mainland and connecting Monaco to Nice and Paris to the Charles de Gaulle Airport in France, as well as previously disclosed routes like the Helsinki to Stockholm one and a project for the Los Angeles and Long Beach ports. The company is also in the process of “scoping studies” for potential projects in northern England, Switzerland and a range of shorter Russian routes, the document says.

Nowhere is Musk’s Los Angeles to San Francisco corridor mentioned. Asked whether Musk was overly optimistic with his initial projections, Lloyd replied, “I have a huge amount of respect for Elon Musk.” He said Hyperloop One isn’t interested in that route for the near term due to a “very complicated political environment.” “We do think the first routes, in the next three to four years, will be shorter and will be in important corridors.”

Hyperloop One’s own projections suggest the loops will be highly lucrative once operational. The company pegs the total addressable market for the combined passenger and freight business at $4.7 trillion in 2020, and rising to $9.3 trillion by 2040. Were Hyperloop One and partners to capture 10% of their serviceable opportunity (the portion of that global overall business within geographic reach) in 2020, they’d take in $300 billion, the company projected in its estimates; by 2040, it would hope to reach 35% and capture spend of $1.9 trillion for it and its partners.

The individual projects themselves would also see profit margins of at least 35%--and often much higher—by the year 2030. Hyperloop One’s presentation estimates that the Russian loop would be earning $32.9 billion in profit, on revenue of $43 billion, by that year, suggesting a 76% profit margin. The smaller Houston line would be making $1.2 billion in profit, on revenue of $1.9 billion, for a 65% margin; the Dubai loop would yield $523 million in profit off combined passenger and freight revenues of $1.3 billion, a 37.5% profit margin.

The margins Hyperloop One is projecting are achievable as long as Hyperloop One can find a niche between air freight and traditional trains and open up new demand to ship perishable products, says David Vernon, a senior analyst at Bernstein covering transportation. Railroads typically operate in the 30% to 35% margin range today, according to Vernon, with the potential for better in the years leading up to Hyperloop One's 2030 projections. Hyperloop One could find its most lucrative profits in countries with high labor costs, where there would be the greatest savings for customers taking trucks and drivers off the road. "Running that type of margin wouldn't be impossible, it would probably be required to get back the capital," the analyst says.

Much of that profit, of course, would go to Hyperloop One’s business partners who will foot most of the bill for the multi-billion dollar projects it envisions. But Hyperloop One is a far from having a working prototype and will still need to bear considerable cost of its own for its development, proof of concept and more. That helps explain why in just two years Hyperloop One has raised $160 million, and why it is seeking tens of millions more just weeks after it announced its most recent $50 million cash infusion.

Hyperloop One has publicly said it plans to raise a Series C funding round in early 2017. In its presentation, the company set a target number for that round: $250 million.

The investment document obtained by FORBES reveals that Hyperloop One is already offering additional convertible notes to investors to join that mega-round early, providing 5% annual interest and a 15% discount off the eventual share price of that Series C. (The round announced in October will also roll into that raise.) The additional financing would come with a conversion cap of $400 million, ensuring a meaningful benefit for investors for giving over their cash early even if Hyperloop One’s valuation were to soar. Hyperloop One’s valuation hasn’t been publicly disclosed. Research firm PitchBook estimated its most recent valuation, following its Series B funding round, at $238.9 million. Hyperloop One declined to comment on its valuation.

Hyperloop One did a similar convertible note before its last raise, when it announced $25 million from Khosla Ventures, Pishevar’s Sherpa Ventures and more, before rolling that into its $80 million financing announced in May, when it also conducted a public initial propulsion test and rebranded itself from Hyperloop Technologies.

Circulating additional term sheets for convertible notes so soon after announcing a cash infusion is unusual, according to several venture capital experts who spoke with FORBES. But, the experts say, it could signal that Hyperloop One is entering a phase in which it’s continually seeking more cash for what Pishevar has called a “capital-intensive business.” The company recently hired Brent Callinicos, the former chief financial officer of Uber, another Pishevar investment that’s amassed a prodigious amount of cash, as chief financial advisor to Hyperloop One CEO Lloyd and the company’s board.

Lloyd says the company and board haven’t yet set a fixed size for the fundraise next year. “It would be very reasonable to expect that the Series C would be in the hundreds of millions of dollars in funding,” he said. What Lloyd would say: the round is intended to get the company through its “Development Loop” test in Las Vegas and into commercialization.

In its presentation, Hyperloop One called its approach “demonstrated performance against aggressive milestones.” On one target, the opening of its Las Vegas factory, Hyperloop One appears to have met its internal targets when it opened in July.

But ambition has stretched the company’s capabilities in the past. A recent examination of the company and its legal troubles following the departure of one-time CTO Brogan BamBrogan by New York Magazine reveals the company had not yet leased its office space and had to race to buy computers and schedule job interviews to appear bustling at the time of a FORBES cover story in early 2015. Hyperloop One disputes that account and says a lease was already signed. [Disclosure: the author of that FORBES story, former technology editor Bruce Upbin, joined Hyperloop One in May.]

While experts have noted that Hyperloop One’s plan to start with commercial freight is scientifically more feasible, not everyone is convinced Hyperloop’s rosy revenue projections will materialize. Shorter shipping times are only more valuable in freight when there’s high and constant demand, says Dr. Barry Prentice, professor of supply chain management at the I.H. Asper School of Business, University of Manitoba. Passengers pay for speed and would ensure the loops actually see constant use, Prentice adds. “If I were an investor, I would never consider freight.”

Passenger or freight, none of it matters until Hyperloop One can prove its technology works in a full-scale test. That demonstration, called “Devloop Kitty Hawk” in the presentation deck in reference to the site of the Wright Brothers’ famous first flight, was once scheduled for Q4 2016. Hyperloop One now says it’ll be sometime in early 2017.

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