Tesla #2: Money Needed

Building a car company takes enormous money. When Elon Musk invested in it, it was just an idea of its founders, Martin Eberhard and Marc Tarpenning. Musk (correctly) told them that their estimates of how much money was needed to launch their first car was too low. But even Musk’s estimate, while higher, would still prove way too low, writes Tim Higgins.

 

Musk comes from a Silicon Valley background and mindset. He just assumed venture capitalists (VC’s) would invest in the company. Wrong! They were used to risking smaller amounts in startups that could launch a product quickly – in other words, VC’s only invested in software companies:

“A car company just wasn’t something most investors were conditioned to consider.”

 

When Tesla just had a working prototype of its sports car, the Roadster, Musk being Musk, decided to show it off, let people take a test drive. The pickup was awesome, the experience great. Folks who assumed an electric car would be worse in performance than its petrol guzzling counterpart were pleasantly surprised to being proven wrong. Publicity aside (which would make it easier to raise more money), Musk had other reasons for coming “out of stealth mode” – he wanted people to pre-book the Roadster, thus getting additional funds. The pre-booking amount? $100,000 (remember this was the sports car, with a pickup comparable to a Ferrari)! Multiply that by 100 pre-bookings, and the company had just raised $10 million. Many people within the company were not sure if this was OK – could pre-booking money be used for running the company? What if the company failed and shut down? Was it then obliged to refund the pre-booking amount? Musk didn’t care about such concerns… they’d succeed, and such questions would be moot, he said with his trademark confidence.

 

Unfortunately, such publicity also meant that the auto companies noticed.

“The goliaths had awoken from their slumber.”

Should Tesla partner with them? While it may bring in badly needed funds, it could mean that the company would be perceived as an ancillary of the bigger auto company. Worse, Tesla might need to prioritize the “patron’s needs over its own”. For those reasons, Musk wasn’t interested… for now.

 

Then the 2008 financial crisis happened – all the big American car companies were on the verge of bankruptcy. The US government had to step in. Obama used the opportunity to also push for and invest in environment friendly car companies – Tesla was a candidate. But was it too risky, wondered the government. The timing was fortunate for Tesla. Around this time, Musk had changed his mind about accepting funds from other auto companies and visited Daimler (of Mercedes fame). He convinced Daimler and the US government to invest in his company by essentially telling each of them that since the other entity was willing to invest, surely it was a sign that Tesla had a good chance.

By now, Tesla was well known, even if it wasn’t anywhere near production. And they still needed cash, lots of it. An IPO was the only way out. It worked to Tesla’s advantage that the big auto companies were nervous – what if Tesla succeeded? They decided to hedge their bets; both Toyota and Mercedes-Benz invested in it. In turn, this “seal of approval” was a great boost ahead of the IPO.

 

And finally, when Tesla eventually started producing cars, and even make profits, the US government thought to itself – if an electric car company can make profits, why should it be subsidized by the government? As the subsidy amount started to reduce, Tesla’s profits would again be at risk.

 

Through this entire period, Musk was often pumping his own money to keep the company running. He was even living off loans and credit card debt. Yet, despite

repeated calls by investors at various points that Tesla be sold or become a supplier to an auto company, Musk refused. Repeatedly.

“Musk wanted to turn Tesla into a global automaker… a company that could compete with the titans of Detroit and force the industry into the electric car business.”

 

Looking back, it’s a miracle how a startup could go on to become the face of electric cars. Not just because of the technical challenges, but also (the topic of this blog) the need for enormous money to create a car company.

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