Investing in Elon Musk's Hyperloop

Let's talk about distance for a minute.

At 38 miles apart, Baltimore and Washington DC are essentially twin cities. The actual twin cities Minneapolis and St. Paul are just about one third of that distance with just 13 miles between them.

Being that Baltimore and DC are so close, how long do you think it takes a train to get from one city to the other?

The fastest, most expensive train --Amtrak's Acela Express-- takes 35 minutes.

Now let's shift to the other coast and think about the distance between Los Angeles and San Francisco.

There's approximately 400 miles between them; a good six hour car trip. If you've never done the trip, it feels like you're passing through different worlds.

Could a train tackle that huge trip in 35 minutes?

A group of visionaries says it's possible with Hyperloop, a different kind of bullet train.

As crazy as it sounds, a low-pressure tube could fire a capsule full of passengers across California at 800 miles per hour.

Hyperloop could be built in as few as ten years.

However, with no concrete proof that it works, no infrastructure or manufacturing in place, and a massive $6 billion forecasted pricetag, it's extremely ambitious to think a built-from-scratch 400 mile next-gen transit project could be ready in such a small amount of time.

Yet that's what Hyperloop Transportation Technologies (HTT) is saying. The research organization tasked with creating Hyperloop recently said progress on the project is already underway.

You've probably already heard about the project. When rockstar entrepreneur Elon Musk first revealed the bullet train alternative in 2013 after more than a year of hype, the media reacted with an unusual degree of optimism. Maybe this project wasn't so outlandish after all.

Optimism seems to follow Musk. The dot com-era millionaire turned his fortune into a transportation revolution based on nuclear age dreams. He founded SpaceX to build next-gen commercial spacecraft; and he co-founded Tesla Motors (NASDAQ: TSLA) to make electric sports cars. With Hyperloop, he could pull off a transportation trifecta.

This optimism is a major part of the two key elements to the success of Hyperloop which we're going to talk about today.

Open Source

In June 2014, Elon Musk made an unprecedented move for Tesla Motors. He open-sourced all of the company's patents.

I'm a big fan of using intellectual property as a cornerstone of investing strategies. The more fundamental patents a company has for a certain technology, the better I feel about that company's security in the market.

However, tight control of patents and aggressive licensing sometimes has a chilling effect on innovation.

Musk knows this, and in order for electric cars to usurp the dominant gas-guzzlers, the patent reins must be loosened.

“Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.

We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform,” Musk wrote in the Tesla blog last Summer.

Since Hyperloop has to compete with nearly 200 years of rail incumbency, it goes a step further and is a fully open source concept.

By making all parts of the project accessible to anyone who wants to help, Musk and HTT are hoping to speed up design and development.

This will be one of the key elements to Hyperloop's success, and it appears that HTT is so far doing everything right.

Open source projects almost unilaterally fail. Researchers from the University of Massachusetts studied every open source project from 1998 to 2005, and of the 174,475 projects that were started, 145,575 were abandoned.

That's right, only 17% were successful.

However, these successful projects all shared the core characteristics already exhibited by Hyperloop.

They are:

1. A clearly defined vision for the project
2. A clearly defined audience that needs the project to succeed
3. Clear milestones and goals
4. Good project communication
5. Modular architecture

So far, Musk has clearly laid out the vision in a 58-page “alpha” document, and HTT has done a good job of providing goals and progress updates in the meantime.

The audience of users is not clearly defined yet, and the modularity of the project (ability for components to be separated and recombined) is still unknown.

This last characteristic is extremely important because the other key to the project's success is a component.

Air Compressors

Hyperloop is compelling is because it works around a limitation in fluid dynamics.

While it looks like those pneumatic tubes that drive-up bank tellers use, those systems are very limited because the air inside the tub has nowhere to go. When the capsules inside the tube move, they're met with a wall of air resistance. To do this at scale would make hyperloop so energy-hungry as to be useless.

Or as Musk said:

“The friction of a 350 mile long column of air moving at anywhere near sonic velocity against the inside of the tube is so stupendously high that this is impossible for all practical purposes.”

Hyperloop's principal innovation is that it works around something known as the Kantrowitz Limit.

By mounting an electric compressor fan on the nose of the capsule, high-pressure air is sucked through from the front to the back.

We might not know what will be used to make Hyperloop's tubes and capsules, but we know that air compressors will be singly important to the success of this project.

When the project gets into the phase where some actual physical prototyping begins, we'll be able to start moving into air compressor investments. We should at that point have a better idea about sourcing and know at least the scope of the first deployment. It's a huge undertaking, and city ledgers are often littered with failed mass transit projects.

Yet the open source concept could prove to be a key driver of Hyperloop's success. It certainly doesn't hurt that it's being done under the leadership of someone like Elon Musk.