A New Investment Idea: Hyperloop — Transportation of Tomorrow

United Traders continues covering projects worth investing in. Today’s focus is investments in what could become the transport mode of tomorrow, Virgin Hyperloop One.

Hyperloop is a project of high-speed vacuum train for passenger and freight transportation. The concept was first proposed by Robert Goddard as early as 1909; however, available technology and economic feasibility — the two necessary attributes — matured enough only now.

The Concept

Famous for his revolutionary projects, Elon Musk presented his vision of this new transportation mode in 2013. As envisioned by Musk, Hyperloop would revolutionize transportation and become the fifth mode of transport after ships, trains, cars, and aircrafts, while being faster than air travel and cheaper than train trips, independent from weather conditions, and producing zero emissions.

Hyperloop could also help even up housing prices and reduce overpopulation — residing in proximity to job location would not be as necessary as it is now.

Technology

Hyperloop is a steel tube on top of pylons; vacuum inside the tube reduces drag. The magnetic levitation technology elevating objects using magnetic field only and nearly-zero-friction allow a pod carrying passengers and freight to travel at a speed of up to 1,220 km/h.

These vehicles could make trips as frequently as subway trains, which means that passengers would not need to buy tickets in advance. The tube operation was supposed to be powered by solar panels installed on the tube itself, while construction costs should be times lower as compared to traditional high-speed railroads. In addition, excess solar power could be sold, which would create an additional funding source for the project.

Official Video

Journey Time

A route estimator is available on the Hyperloop website comparing time needed to reach a desired destination by different means of transport. A journey from Paris to Madrid would take 1 hour and 16 minutes, while Moscow to St. Petersburg trip would take 48 minutes.

Virgin Hyperloop One

The idea for a company was born after Musk discussed his Hyperloop vision with his friend Shervin Pishevar in 2012. It was Pishevar who prompted Musk to publish the idea. Initially Musk said he was incapable of managing Tesla, SpaceX, and Hyperloop simultaneously; after their conversation, however, he decided to skip filing for a patent and instead present the idea publicly inviting everyone interested to join forces in implementation.

Owing to the above, a few competing projects emerged: Hyperloop Transportation Technologies, Virgin Hyperloop One, SpaceX, Arrivo, and others. In this publication we focus on Virgin Hyperloop One.

Founders, Management, and Brand

Hyperloop Technologies was incorporated in 2014 by well-known Silicon Valley entrepreneurs and investors from Musk’s inner circle.

  • Shervin Pishevar, founder, first investor in Uber and owner of Sherpa Capital;
  • Joe Lonsdale, Palantir co-founder;
  • Peter Diamandis, founder of Space Adventures;
  • David Sachs, former executive at Paypal and founder of Yammer (eventually sold to Microsoft for $1.2 bln).

In 2015, two new shareholders joined the project: Caspian VC Partners, a fund owned by Ziyavudin Magomedov’s Summa Group, invested around $100 mln in the company, and the world’s largest port operator DP World invested $50 mln.

In June 2015, the company named Rob Lloyd, former Cisco executive, its CEO.

In May 2016, to avoid being confused with another related project, Hyperloop Transport Technologies, the company was renamed to Hyperloop One. With this move the management aimed at highlighting that the company was the first and only building a full-scale Hyperloop system.

In October 2016, a new member of the board of directors was announced, President of DP World’s Dubai division operating the third-largest port in the world; this move was expected to add important competencies for the company in logistics and implementation of large-scale projects.

In January 2017, the company named Brent Callinicos its new CFO. He, however, soon resigned and assumed an advisor role at the company. He was succeeded by Axel Martinez, senior vice president of finance, who previously worked with Callinicos at Uber and Google.

In October 2017, famous entrepreneur and billionaire Richard Branson became the largest shareholder of the company and member of its board of directors. The company believes this would accelerate commercialization of the project and make it easier to raise funding from new investors. Following this, the company was renamed to Virgin Hyperloop One.

In December 2017, the company’s founder Pishevar stepped down in the wake of sexual harassment allegations. He stated that he intends to focus on restoring his reputation and on litigations with companies that allegedly started an info-war against him. He was succeeded by Richard Branson as company’s chairman.

In June 2018, Ziyavudin Magomedov whose fund invested $100 mln in the company stepped down from the board of directors due to his arrest. This way, the company tries to mitigate reputational risks. The stake of Caspian VC is likely to be sold to other investors.

The company plans to use the IP (intellectual property) provider model in the first place selling rights to use its patented technology, which will be the main revenue driver, while financing for specific technology implementations will come from outside investors including governments. The first project is planned to be built in 2021.

Growth and Investments

Series A and B financing rounds

The company raised its first funding of $8.5 mln in February 2015. Pishevar’s Sherpa Capital was the lead investor in the series A round.

In the first open air test of Hyperloop’s engine prototype in May 2016, the sled has reached 219 km/h in 2.2 seconds. That was also when the company announced series B funding round raising $80 mln and partnering with Aecom, Deutsche Bank, KPMG, and other companies to develop the global ecosystem for Hyperloop technology that would include the best experts in transport infrastructure, engineering, design, and architecture.

First Test

In July 2016, the company opened the first Hyperloop manufacturing site in the world, a 18,000 sq. m tooling and fabrication plant in North Las Vegas, which allows making and testing components in-house and thereby reducing technology development costs. The plant will also house equipment for highly-accurate measurements of many materials and subcomponents used in the propulsion engine.

Las Vegas Metalworks

In May 2017, the company completed the first full-scale test of the system at a new 500-meter-long track near Las Vegas. During the test run the pod reached 113 km/h. The 8.5-meter-long XP-1 passenger pod uses magnetic levitation technology reducing aerodynamic drag and can, theoretically, reach 1,223 km/h. Pishevar put it as follows: “By achieving full vacuum, we essentially invented our own sky in a tube, as if you’re flying at 200,000 feet in the air.”

System Test in Las Vegas

In July 2017, Virgin Hyperloop One managed to break another record accelerating the pod to a top speed of 310 km/h down the length of the 500-meter-long tube. The inside pressure was equivalent to air pressure at an altitude of 6,096 m above sea level. According to the company, all systems including the propulsion engine, electronics, vacuum pump and magnetic levitation mechanism performed well during the test. The company’s goal is to reach 402 km/h on this track, as a longer track would be needed for higher speed.

Passenger Pod Test

Series B-1 and C funding rounds

In September 2017, the company announced the closing of its Series B-1 round of $85 million. This round brought the total financing raised to $245 million, and startup’s valuation exceeded $700 million.

In December 2017, the company managed to accelerate the passenger pod to 387 km/h, a record level as of yet. The company also raised additional capital of $50 million (with the total investments reaching $295 million) and named Richard Branson Chairman of Virgin Hyperloop One.

Test Run

In January 2018, an app for passengers was showcased by Virgin Hyperloop One in partnership with HERE Technologies: using the app passengers will be able to plan, book, and pay for hyperloop trips and any other modes of transportation.

The app provides an opportunity for travelers to plan and optimize their entire multimodal journeys rather than just getting from A to B by hyperloop. With the app, users will be able to navigate through to specific gates at shopping centers and airports. Like navigation devices available today, one could select the fastest, the cheapest, and the greenest routes. The app will be presented to public this year.

Routes

In May 2016, the company announced the Hyperloop One Global Challenge where anyone could propose prospective regions for deploying the innovative technology. A year after, 10 winners have been selected with the following potential routes:

  • US: Cheyenne-Denver-Pueblo;
  • US: Chicago-Columbus-Pittsburgh;
  • US: Miami-Orlando;
  • US: Dallas-Houston;
  • UK: Edinburgh-London;
  • UK: Glasgow-Liverpool;
  • Mexico: Mexico City-Guadalajara;
  • India: Bengaluru-Chennai;
  • India: Mumbai-Chennai;
  • Canada: Toronto-Montreal.

The first route is in Colorado where the company has already partnered with local authorities and engineering company AECOM. A feasibility study will be performed to assess demand, economic benefits, proposed routes, regulatory environment, and alignment with other modes of transportation.

Russia

In June 2016, the company struck an agreement at the St. Petersburg Economic Forum for a feasibility study of deploying the technology to transport passengers between Moscow airports and to increase transportation options in the greater Moscow metropolitan area. Shortly before that Russian Direct Investment Fund provided financing to the company. Virgin Hyperloop One is also in talks with RZD regarding potential use of the technology in Russia.

Finland

In July 2016, Virgin Hyperloop One together with KPMG presented results from the study of building a 500-kilometer hyperloop network connecting Helsinki and Stockholm, with a trip taking only 28 minutes vs a 3.5-hour flight. Construction of mainland sections is estimated to take around 8 years and connecting these two sections with a sub-sea tunnel will take another 4 years. The mainland sections, however, will start operating prior to completion of the link between the countries, which would reduce risks for investors.

The costs of the entire project are estimated at $19 billion including the sub-sea tunnel via Aland Islands valued at $3 billion (36.7 million Euros per 1 km). Annual revenues are estimated at 1 billion Euros generating 814 million Euros in operating profits, with 42.7 million trips a year and a 25 Euro ticket.

China

At the Eastern Economic Forum in September 2016, a project for a 65-km Hyperloop track from Hunchun (China) to Zarubino port (Russia) was presented. The planned construction period is 5 years, and when completed the system will allow transporting up to 19 million tons of grains per year. The average speed of cargo pods will be around 740 km/h, and total investments are estimated at RUB 30–40 billion.

India

In February 2018, the company signed an agreement to build a hyperloop route between Indian cities of Pune and Mumbai. The company plans to perform a 6-month feasibility study, following which a demonstration track will be constructed within two to three years, and the full route construction will be completed within five to seven years. The journey between the cities will take 25 minutes instead of 2 hours by car now, with the total capacity of 150 million passenger trips annually. A hyperloop transportation system in this region could also reduce greenhouse gas emissions by 150,000 tons annually.

According to preliminary calculations, the economic effect from over 30 years of the route operation could run into $55 billion in socio-economic benefits (less travel time, lower emissions and accidents, operational cost savings, etc.). This is the most economically viable project of all studied so far.

According to the most recent data, the feasibility study will be completed by November, and the test route construction will start as early as in late 2018.

Freight Transportation

The hyperloop technology can transport passengers as well as cargo. Notably, transporting freight may be much easier owing to lower security requirements.

In April 2018, Virgin Hyperloop One and DP World, a global port operator and investor from United Arab Emirates, have introduced DP World Cargospeed, a new brand for hyperloop-enabled cargo systems with a focus on high-priority and on-demand goods: fresh grocery, medical supplies, electronics, etc. The company claims that delivering freight at the speed of flight and at the cost of trucking will revolutionize the logistics industry.

Currently, air freight accounts for only 1% of the global trade shipping weight and 35% of total shipping costs. Any further expansion of this segment is limited by airport capacity. Hyperloop will supposedly be able to take a market share from air freight as well as become part of the existing transportation models. A new delivery mode could reduce goods inventory and warehouse space by 25%.

Cargo Transportation by Hyperloop Technology

The Pod

The Roads and Transport Authority of the United Arab Emirates has unvealed a prototype of the future hyperloop pod in February 2018 in Dubai. This capsule will transport passengers on a prospective route between the capital city Abu Dhabi and Dubai, the largest city in the country. Authorities plan to transport 10,000 passengers per hour in both directions. No specific plans have yet been announced as to the prospective timing and ticket prices. There will be no windows in the pod, but passengers will have interactive entertainment screens at their disposal. The pod will have to classes: the gold class with five passengers seated and silver class with 14.

Commuter Pod Prototype

Criticism

As any new technology, Hyperloop is being studied from all possible angles: cost efficiency, environmental impact, and, certainly, technical feasibility. Some researchers question the very possibility of project implementation.

The biggest questions regard the almost-vacuum inside the Hyperloop track. The current specifications propose maintaining vacuum over the entire tube distance. In the case of a 600-km long and 2 meters in diameter track, on the inside it will be 50 times as large as the largest existing evacuated chamber (Space Power Facility NASA) and 100 times bigger than the Large Hadron Collider. It is still unclear how Hyperloop engineers plan to pump so much air out of the tube.

One of the most profound skeptical questions to Hyperloop refers to security. A near perfect vacuum tube represents a perfect target for terrorists who would need to depressurize it in a single location to trigger a cascade system failure followed by a catastrophe for all passengers and a totally disrupted infrastructure. Employing security measures along the entire track is a challenging task. In addition, the onboarding security will not be much different for Hyperloop than the current measures at airports, which would offset any advantages in speed vs traveling by air.

Simultaneously another question arises whether the use of vacuum in Hyperloop is justified. In theory, vacuum would reduce the aerodynamic drag to almost zero. However, the very drag problem arises through existence of multiple stand-alone pods inside the tube. Of all the existing transport modes, railroads have the lowest effective aerodynamic drag, which is made possible by connecting cars together into a set whereby only the locomotive effectively faces air pressure.

And finally, there is no answer to thermal expansion of steel tubes caused by atmospheric temperatures. A 600 km long tube would expand by 300 meters if the temperature rises from 0 to 40 degrees Celsius. And in this case, we disregard deformations caused by uneven warming across tube periphery.

Considering the above, it is very unlikely that Hyperloop will operate the way it is now described. The project will much more likely be refined and updated going forward. This, however, does not downplay the importance and disruptive nature of the technology, and investors have a chance to make money from the increase in company’s capitalization.

Technical Feasibility Study of Hyperloop Technology

Conclusion

Initially, many were skeptical about the Hyperloop idea questioning economic feasibility, passenger security, and human ability to withstand hyperloop acceleration. Today the skepticism voice is not that loud, which does not mean, however, that doubts fell away. On the contrary, questions remain unanswered, and demonstrating a model interior is no proof of the idea’s technical feasibility.

Supporters, in turn, point to successful test runs and compare Hyperloop criticism to aviation in its infancy: back then, many doubted that a heavy aircraft could ever fly.

Regardless of who is right in this technology dispute, Hyperloop as a company can create value for its investors subject to reasonable capital investments. Investing in a company that has not yet generated any revenues and has no viable product is very risky, but its success, at the same time, would revolutionize passenger and freight transportation markets, with the company securing a solid share of the potential market and its capitalization increasing tenfold.

If the company’s idea, however, proves to be out of reach for currently available technology, only those investors will be able to make money who sell their shares prior to any serious difficulties, e.g. during the next funding round in one or two years, or after a dramatic update of the technology.