Numbers, lights and shadows of Elon Musk’s third startup, Tesla, from bankruptcy to the IPO, to becoming a giant. The world’s largest electric car manufacturer
Creating a car company is idiotic today. Making electric cars is total idiocy”, says Elon Musk . Impossible businesses are the terrain in which the entrepreneur knows how to “play” better than anyone else. In the third episode of our serialized story we left him while he built rockets for space and made concrete plans to conquer Mars . This fourth chapter will tell about another “mission impossible”: Tesla .
To fully understand the difficulties of the sector in which Musk is about to invest, a brief mention of history is enough: the last successful automotive “startup” is called Chrysler and was founded in 1925. If after that date no American has tried again to putting money and time into the business, is there even a reason? «When I told a friend in a pub about the plan to make electric cars, he asked me if I was joking».
It is not Musk who is speaking, but Marc Tarpenning , the engineer who together with another programming talent Martin Eberhard is studying how to apply rechargeable batteries, known as lithium ion batteries , to the automotive sector . The idea takes shape when their destinies intersect with the visionary talent and financial power of Elon Musk.
2003, Tesla Motors is born
On July 1, 2003, Eberhard and Tarpenning created a company, calling it Tesla Motors , in honor of Nikola Tesla , inventor and pioneer in the field of electric motors. To start doing things seriously, create the factory, hire workers, start a first prototype, they need an investment of 7 million dollars. Both know Elon Musk and followed some of his speeches at Stanford, where the entrepreneur presented the lines of the company that would later be named SpaceX.
Through a mutual friend, Tom Gage , they learn that Musk wants to put his capital into the electric car sector. On the other hand, he has already offered 10 thousand dollars to JB Straubel , now CTO of Tesla, who at the time was studying the evolution of lithium ion batteries.
Eberhard and Tarpenning meet Musk in Los Angeles to present their project , an experience that is not exactly a walk in the park. Musk peppers poor Tarpenning, who has just returned from a sleepless trip, with questions about the business model: “I just remember that I kept answering, answering, answering a storm of questions,” Tarpenning recalls in Vance’s book .
After a few days, the two are invited by Musk for a second meeting: “Okay, I’m on board”, are the words of the entrepreneur who puts 6.5 million dollars into the company. So he suddenly becomes the largest shareholder and takes on the role of president of the company. At the same time he calls Straubel and tells him to move immediately to Tesla’s offices in Los Angeles. The engineer joined the founding team in 2004 with a salary of $95,000. The entry of Ian Wright, the current COO of Tesla Motors, completes the team of brains at the helm of the new company.
The automotive industry is in Detroit, while Tesla is in Silicon Valley
The choice to leave the company headquarters between San Francisco and Los Angeles is already emblematic in itself. The automotive city is Detroit, while Tesla would have evolved in Silicon Valley following the development model of a startup. The first move, as always happens in companies led by Musk, is to hire the best talent. Stanford becomes the ideal hotbed for recruiting young “hungry and foolish” engineers who enthusiastically enter the startup that wants to revolutionize the automotive sector forever.
The factory is installed at 1050 Commercial Street in San Carlos, 930 thousand square meters, to build a research and development department and the first car prototypes. The first was born in January 2005, a new type of electric machine created by the work of 18 people. Musk is thrilled with the work done, puts another $9 million into the company , while Tesla raises a round of 13 million. The goal is to bring the first Roadster to the market in early 2008.
Things go less well with the second prototype. The doors are too high, the design of the car seems poorly proportioned (more space is needed to install the batteries). And even the carbon fiber used, instead of glass fibre, does not convince Musk that he wants a fascinating but also practical machine: «Musk was the perfect business angel for us. He had the engineering skills that allowed him to understand what we were building and the iron will to lead the United States towards oil independence,” explains Tarpenning.
In 2006, things seem to continue in the right direction. The company grows and hires more than 100 people, while work continues on the first Tesla Roadster which would debut in 2008. Musk invests again, another 12 million , while a venture group such as Draper Fisher Jurveston, Vantage Point Capital Partners, JP Morgan and the founders of Google (Larry Page and Sergey Brin) put in 40 million.
However, a year later the first frictions began between him and Eberhard , who has held the role of CEO of the company since the founding of Tesla. Deemed incapable of containing production costs and extracting the best conditions from suppliers, he was eliminated with a phone call from Musk. On the matter, Business Insider takes up the statements of Mike Harrigan , former vice president of Tesla, who has vitriolic words for the entrepreneur: «Musk is the kind of boss you work with and you don’t know whether the next day you will have a job or not. As soon as he convinces himself that you’re not suited to do something, there’s no way to change his mind,” he explains.
When Musk fires the founder (as happened to him at PayPal)
Eberhard is eliminated from the startup he founded overnight. Strange fate, that of Musk who finds himself from the role of the victim ( he was also defenestrated by PayPal ) to that of the executioner. Michael Marks is chosen as successor as interim CEO. Marks ran Flextronics, an electronics supplier, and knows how to handle relationships with other companies and logistics.
Marks will be at the helm for a short time. His defensive strategy, aimed at containing costs and reducing investors’ losses, does not embrace Musk’s vision which aims to change the face of the automotive sector forever. Added to these are other more concrete problems, the product is late, the budget is running out. There are two paths that are looming, either the sale of the company or a partnership with a large industrial group (this is Marks’ plan). Musk doesn’t want to go down either path. Marks also skips. In his place goes Ze’ev Drori , who is in fact more an executor of Musk’s will than an independent CEO.
Musk, the “tyrant”
Musk works hard to improve the company’s image in the press. He promises that the first Tesla model would go on the market in 2008, at an affordable price ($50,000), while revealing that Tesla is about to open a new factory. But he is far too optimistic, and he knows it.
To carry out his plan, he raises his voice in the company, “Saturdays and Sundays at work”, strict rules in the company on results, those who are not in line can pack their bags: «You have to choose whether to see your families more or helplessly witness the failure of your company” is what he would have said to his staff one day, according to the statement of a former employee, contained in Vance’s book. Musk is focusing everything on cost containment and solutions to make it achievable. If the engine costs $6,500, you need to lower the price to $3,800. An attitude considered tyrannical by many employees, while “right” by others because it reflects the reality of the facts. Musk spends his days typing Tesla’s name into Google; if he sees a bad story, he asks the marketing team to try to fix it.
And it is precisely in “marketing” that the greatest “purges” begin, a grammatical error in an email was enough to make the “culprit” lose his job. The climate in the company is not the best. In meetings Musk does not want to listen to problems (which he already knows), but only solutions: «If you told him that a choice had been made because it reflected the standard we had followed so far, he would kick you out of the meeting, repeating that “he didn’t want to hear any more phrase like that.”
Musk knows that hard times are approaching. The Roadster cost the company 140 million, instead of the 25 calculated in the first business plan. In a normal situation, Tesla could have asked for more money from investors, but with the financial crisis, which affects the automotive sector most of all, it is not easy to convince venture companies to put in tens of millions of dollars to keep the company from dying. agency.
2008, the annus horribilis
2008 is the annus horribilis for Musk. The first failed launches of SpaceX’s launchers , the nine million dollars that remain in Tesla’s coffers, and the personal problems with his wife, from whom he later divorced.
For the first time in his business career, Musk ran out of money. He then calls the main investors in Tesla around the same table and asks for a further effort to guarantee the company’s future: Bill Lee invests 2 million, Brin of Google, 500 thousand. Also participating in the round are a group of Tesla employees who write checks to keep the company, their dream, alive. Musk uses money from customer pre-orders to cover huge expenses. He takes a risk that could have landed him straight in jail.
At the same time he resorts to his money. Dell buys a startup in which he invested, Everdream, and this allows him to raise almost 15 million, while he sells some shares of Solar City, another company in which he owns shares. In total he raises 20 million and asks for an equal effort from the ventures that have not yet put their hands on the wallet. Musk’s commitment convinces venture capitalists. Tesla is safe: «What happened in 2008 would have killed anyone. But not Musk who didn’t just survive. He continued to work and stay focused. Precisely the ability to not lose focus in the midst of a crisis is the advantage that Musk has over his competitors”, writes Vance in the biography.
The golden years and the IPO
To overcome the moment of crisis, Musk becomes CEO of the company and sees the release of the Roadster on the market in 2008. In four years, he sells over 2 thousand models in 31 countries, at a price of 108 thousand dollars. The car goes down in history as the first electric car with a range of 300 kilometers.
The street is now on the rise and in 2010 the company lands on Wall Street and raises over 200 million in financing. With the recapitalization, we are preparing for the launch of Tesla Model S, the second model created by the company (145 thousand units sold as of September 2016) and awards such as World Green Car of the Year, in 2013. The autonomy increases up to 390 km, while the 85kWh version can also reach a range of 502 km.
The third model is the Model 3 which promises to be the first mass-produced electric car, 200 thousand reservations in the first two days , a 9 billion dollar bet. The car will be released in 2017.
The merger with Solar City, the future of Tesla
Tesla’s future is called Solar City, the company specialized in the production of solar panels , of which Musk holds 22% of the capital. Already last summer Musk talked about his plan to merge the two companies . The project was recently approved by the company meetings. The operation is worth 2.6 billion: “That the two teams with similar origins and objectives are still separate is an accident of history,” Musk wrote. The merger has divided analysts. There are those like Wall Street who see it as an attempt to save Solar City which has long been at a loss with 6.24 billion in financial liabilities. And those who instead praise Musk’s vision which thus creates an integrated energy system in which the house and the new photovoltaic tiles , presented in recent weeks, create an environment that naturally recharges the car, in what is a real revolution energy.
To this we must add today the specter of Donald Trump’s energy policies threatening Musk’s companies. According to Reuters, subsidies on electric vehicles could be drastically cut by the president-elect.
Musk’s new plan
Today Musk owns 22% of Tesla shares which are currently valued at 5.7 billion. Despite the doubts we have raised, he seems to have very clear ideas about the future of the company.
In his four-point plan, he talks about the key points of the company’s future : such as the projects to expand the production of truck buses, the automatic driving systems to be implemented especially after the controversy over the first fatal accident with a Tesla . The desire to “uberize” the Tesla model, creating a car sharing fleet to allow drivers to also have sources of income. And above all the dream of democratizing electric cars, lowering the price and making them accessible to all.
