Acquired - Tesla

0:00Do you know the code name for the Model S? Uh, white star. Yeah. Yeah. Facing how cool you feel doing this and learning the code names of projects and you're like, ah, that was a code name, even though it has no, it's not secretive, it's not, it's just boring, but I think it's cool. Welcome to season three, episode one of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.

0:37Today we are covering a company that was not founded by Elon Musk. Tesla. Debatable. Depends who you ask. Tesla is an unbelievably complex and nuanced company to research. They're without a doubt one of the most innovative companies in the world right now. They've created the electric vehicle era that we're in. They've invented the most adored cars on the market through sheer force of will brilliant design and world-class engineering.

1:03In fact, the most recent US automaker to reach success before Tesla was Ford, and that was 111 years ago. Tesla is also a solar energy company, semiconductor company, autonomous vehicle pioneer. They're becoming the world's largest lithium ion battery manufacturer. They're a creator of large scale, charging infrastructure across the country. They have a car and orbit, and by all accounts their CEO appears to be the love child of Tony Stark and Steve Jobs. And they've also strong together, David, before you get too excited about this company, a series of miracles to stay alive and make this all happen. Both financial, engineering, PR, you know, you string the miracles together correctly and thread the needle exactly right and you get Tesla. And in fact, as we'll talk about in the latter half of the show, they're in a pivotal moment right now to see if the company can even stay alive. The public markets right now are made up of Tesla diehard never sellers and a tremendous amount of short sellers.

1:59And for those who pay attention to short ratios, which is the amount of money being shorted on a company relative to the number of shares outstanding, 27% is their current short ratio. So that's 27% of the amount of shorts.

2:13The ratio of the number of shorts to the ratio of the number of people who hold this number of people. Yes, it is 27%. So everybody's got an opinion. There's lots of incentives. Everything you read is probably charged with somebody that knows somebody or that actually represents somebody that has a lot to gain by Tesla moving one way or another and there's high risk and high reward everywhere.

2:35So David, can you feel it? Oh boy, can I ever? This is a word of caution to listeners. This is going to be a long episode. We wanted to really do this justice and give the full acquired treatment to Tesla. So we have gone very deep. I won't claim in advance for this to be the definitive take on Tesla, but it will be the definitive acquired take on Tesla.

3:00It's not like nobody's ever in the Slack requested, hey, you guys should do Tesla before. I mean, we've gotten a ton of this and I think we've been almost a little daunted by it because it's really, there's an incredible amount of nuanced corporate structure here evolving strategy. You could look like a complete fool by being two bullish on Tesla or two bearish on Tesla because something amazing is going to happen to this company over the next 10 years or six months and I think in retrospect you could either be looking like the guy that said the car wasn't going to be a thing or the guy that says that Enron was going to be the next big company. We really wanted to do our diligence to make sure that not necessarily that we took a stance one way or another but that we did the company justice in telling the story. Indeed.

3:43What are we covering today? It's Tesla. Tesla writ large. We're going to be talking about the IPO as sort of the way that we structure the episode, but then also doing sort of an extended take later in the episode on where's the company today, what's its future, what are key risks and opportunities for it. And so unlike other required episodes where it's purely centered around a transaction, this is loosely around the IPO, but really about the company as a whole. All right, a little bit of an administrative work before diving in. If you like the show, I guess if you don't like it, too, but we'd like it more if you like it. Leave a review on iTunes. It helps us grow the show. If you're ever wondering, how can I help the show review on iTunes is a great way. If you're new to the show, you can join the Slack at acquired.fm, where we are always chatting with the 1,400 strong and growing group of people that

4:32You know, talking about the most recent things that are going on, which David and I sometimes talk about the show, but don't always talk about it on the show. So if Amazon's buying whole foods, that's the place to be for that day where there's lots of hot takes and good insights on it. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGoura, the agentic operating system that is redefining how the world's best legal teams work.

4:58Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

5:24for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagores Bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

5:53And they recently launched LaGora agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers and that is the real test.

6:46Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. All right, David. You know, this is what we've all been waiting for. The main event of a little nervous.

7:15We'll do a justice. My pages and pages of notes here. Okay, let's kick it off. History and facts of Tesla. So a little bit of background to start. So one of the things that we did in preparing for this episode, we went back and listened to our PayPal episode, which was one of our early ones. And listeners may or may not know, but Elon Musk, the potential co-founder of Tesla, who we're gonna focus on a lot in this episode, was also a co-founder of PayPal. The series A Investor. The series A Investor. The current CEO of Tesla was a co-founder of PayPal. Re-listing to that episode, it was definitely the early days of acquired and we've come a long way since then. It was fun to go back and listen to it.

8:00we did not really get the story, right? So at some point we need to redo the whole episode on PayPal because there's so much there, but I'm gonna cover a couple things that weren't in that episode that's important to know about Elon and his personal history coming into Tesla. So even before...

8:17Elon co-founded the company X.com, which would morph into PayPal via a few iterations. He had started a first company in the US, I say in the US because he is, of course, South African was born there and then immigrated first to Canada and then to the US. But his first US company was a company called Zip2.

8:37And it was a start-up during the comm era in Silicon Valley. Elon was the founder. He was the original CEO and the VCs. More David Al was the main VC. After they invested, they brought in a quote-unquote professional CEO, which was all the rage back in the day. And they pushed Elon out of the CEO seat and into the CTO seat. And that really left a scar on him. And he resented it ever since and still resents it to this day. And I think you can see a lot of his behavior through that.

9:06light. Certainly after it happens at Zip2, he actually attempts a coup to regain the CEOC to attempt a board coup and fails. That was his first failure in the startup world. Zip2, shortly after that ends up getting acquired by Compack for about $300 million, Elon nets about $22 million out of that sale.

9:28And so he's kind of been burned through his experience there, but now he has $22 million. He doesn't really know what he's going to do with his life. He decides to basically become a playboy, live like the playboy lifestyle in Silicon Valley. And the media kind of gets wind of this and loves him. He's like this dot com wonder kid. So the first thing he does, and this is.

9:47gonna directly lead the Tesla here. And it's not the media in the sense that he's covered in the media today. It's amazing to even think about Elon five years ago, let alone 15, 20 years ago, of just not being the sort of global icon that we know of today. Yeah, this is a very, very different Elon and a very different kind of media coverage here. So the first thing he does, he buys a McLaren F1.

10:10for $1 million in cash. So the McLaren F1 was maybe still is, I think the fastest car ever made. There are only about 50 of them in the world. And then he gets CNN to live broadcast the delivery of the car to his house and him taking receipt of the car and then driving it around. Which is one of the best things on YouTube. Oh my God. Unreal. Unreal. And then he called emails Larry Ellison, the Oracle CEO. He doesn't know Larry, but he knows he that Larry also owns a McLaren F1. So he called emails in and says, let's get together and race these things. Which they do. This is the world that Elon is in. So he's blown a million dollars of his 22 million dollars straight off on this car. But he also wants to start another company and he wants to make sure that the VCs will never house him as CEO again.

11:00He starts a company, he calls it x.com. And the goal is he's really ambitious. He wants to become an online bank. He wants to bring banking online. He funds it himself. He invests $12 million directly into the company. He has a few co-founders, but this time he has problems with his co-founders. So one of his co-founders stages a coup and ends up taking most of the employees and going and starting a rival company doing exactly the same thing. Not good. Eliin keeps going with x.com.

11:29We didn't get any of this in the PayPal episode. X.com would become PayPal. Because they now have all this empty space in their office, they sublet some of that empty space to a plucky startup in Palo Alto called Confinity that was founded by Peter Tiel and Max Levchin and the rest of the PayPal crew. They're working on some crazy palm pilot stuff.

11:50But they see what Elon and X.com are working on, and they're like, oh, that's a good idea. We should just do that and change pivot and compete with these guys who were subletting space from. They do that, and they change their name to PayPal. Then a bunch of stuff happens. Elon kicks them out of the space. They go somewhere else. So David, the people that spun off to formal rival company, what would that end up being? Or that just fizzle? That just fizzled.

12:15Yeah, that didn't go anywhere. But now he's had like two major blows. So there was the initial blow. It's up to two major blows in the PayPal journey. They end up ex.com and confinity end up merging. They changed the name to PayPal. All that has been much has been written about. After the merger happens, the board decides the new board of the combined company decides to oust Elon, bring in a professional CEO again. So his worst nightmare has just happened.

12:40Again, he would be better suited by becoming one of these professional CEOs it seems he really would he really would so that that doesn't last very long Elon stages a cool again he comes back he becomes CEO but he's employees of the combined company are so unhappy with him that they then go behind his back on the day he's leaving for his honeymoon they go back to the combined board and asked Elon once again out of the CEO role of PayPal, bring Peter Tiel back as CEO again on the day that Elon is leaving for his honeymoon for his first marriage. Brutal. You know, again, it's the dot com crazy days. I guess it's actually after the crash as we covered in the PayPal episode. Shortly after that, the company gets acquired by eBay and probably a lot of that drama had a lot to do with why they decided to sell to eBay, which we didn't talk about in the PayPal episode. Anyway,

13:32Elan nets from that sale about a hundred and eighty million dollars after taxes so he is now rich at a whole nother level than he was from his zip-to acquisition one thing you sort of see with successful people is you know one time they're lucky twice they're good three times you know they're good and what you see with elan is is a pattern where people do the things that made them successful because they believe that that is the the way to do things and He has every data point so far to show that when something goes really well and you get a bunch of money, you should plow all that money back into your next thing because that will do well too. I think because that will do well too and he just has this complex that's deep within him from these early days of...

14:23I need this to be mine. I need control. He's been burned time and time and time and time again. Again, all that is just background, but I think it's really important to understand as we look at the journey of Tesla and what's happening today and why Elon necessarily behaves the way he does. Okay, so he gets $180 million after taxes. He decides he's done with the dot com playboy stick. He wants to actually have a really big impact. This is the summer of 2002 after the PayPal sale. He still has his whole life ahead of him. That leads to him starting SpaceX, which is a story for another day. We won't go into it. That will certainly be another acquired episode at some point in time. But that is going to be his next chapter. He's going to start SpaceX. He's going to make the human species a multi-planetary species. And that is his calling. Along the way though, he gets involved with...

15:13Tesla. And that's the story we're here to tell today. How did Tesla start? About a year later in the summer of 2003, Elon has moved down to LA and he's building SpaceX in LA where it still is today. And at the time, the biggest data symbol that you could have in the Hollywood LA ecosystem and also in Silicon Valley, but even more so in Hollywood was a Prius.

15:39because these were the days of the Iraq War, and of course, you know, Hollywood and all of California's very liberal, very against the war, viewed, you know, the US's oil interests and oil dependencies were terrible. And so all the big movie stars, I remember there was a whole series of curb your enthusiasm episodes with Larry David about buying a Prius, driving a Prius, having it be the status symbol, it was the thing to do. And so Elon kind of gets...

16:06swept up in this too. He gets really interested in alternative fuel sources for powering vehicles and reducing. Did Elon drive a Prius? I actually wasn't able to find that out. If he didn't, he certainly was living in a milieu where Prius is worth a thing. He also still had, I believe he still had his McLaren F1 at that point. Actually, I think he does because I think it'll resurface later.

16:29So meanwhile, back in Silicon Valley, a guy named JB Strabal. is hanging out. Well, actually, JB lives in LA, but he's spending a lot of time back up in Silicon Valley hanging out there. He's a Stanford grad. And while he was at Stanford, he had been part of the university's solar powered car team. And this was a intercollegiate competition that Stanford had a team for gone for years where engineers from different universities would build vehicles that were powered by solar power and then they would race them across the country. It was kind of like a alternative track to the DARPA challenge where university teams would create autonomous vehicles to navigate terrain. This wasn't autonomous, but it was powered by solar. And so, Strabal had been part of the team while he was at Stanford, and through a variety of ways ended up staying in touch with the current team members after he graduated, and spent a lot of time with them. He, along with some of the current members of the team, kind of came to this realization that they could use

17:30Laptop batteries, lithium ion batteries, in these cars to store the energy much better than they had been, I think. I think they had been maybe been using ultra-capacitors before. I'm not quite sure what technology, either that or lead acid batteries, they weren't using lithium ion. But this was, you know, 2003 laptops were really taking off replacing desktops as the primary way that at least college students, if not many people, did their computing. And so lithium ion batteries were getting much, much better. And they realized that you can string together a bunch of these and actually have enough power to power a car.

18:04He's working on this. He gets really excited about it and he starts looking around for people to fund essentially this team at Stanford and kind of like a passion project. He views this very much as a side project to develop a prototype of a car that would be powered by lithium ion batteries and electric vehicle. And in the fall of 2003, he gets introduced to Elon. Elon thinks this is a super cool idea and he's like, great.

18:29I'll give you $10,000 to help fund this. It travels like awesome. By the way, you know, you're like this, you know, the McLaren F1 guy, you know, you're really into cars. You might want to check out.

18:41Down here in LA, there's this kit car manufacturer, this essentially car enthusiast group of guys called AC propulsion. And they make this electric kit car called the T0. T0. Listeners, you got to Google this thing and look at it. It looks like a joke.

19:00It looks like a joke, but it goes zero to 60 in some five seconds. And it's powered entirely by, it's an electric drivetrain. Now, it's not using lithium ion batteries. I believe it's using lead acid batteries at this point in time, but Strabal takes Elon over to the AC propulsion garage, shows him this thing. Elon gets in, drives it, and he's like, oh man, you know, the acceleration on this thing is like as good as my McLaren F1, this is awesome. I want to find a way to...

19:30go all in and really turn this T0 into like a consumer car, and maybe this can replace the Prius as the status symbol in LA. The AC propulsion guys though, they're just like...

19:42car enthusiasts. They don't really have any intention or desire to start a company, turn this into mass production. They're making kit cars for other enthusiasts to get the part they sell the parts. The other enthusiasts put it together. That's what they do. And in fact, the car, while street legal, isn't a car the way that we think about a car that couldn't endure conditions. If left out in the rain, it will stop working. Nothing was ready for the element. So it's not like you could leave the thing in your driveway and go grab it in the morning. It'd be a huge risk.

20:10Yep, this is not the Tesla you know and love. It does kind of look like for people aren't who are not Googling it. Sort of like the goofy clown car illustration sketch version of the original Tesla Roadster. Yes. Well, there is the DNA of AC propulsion is very much within the Roadster as we will see. So Elon is like, okay.

20:35The AC propulsion guys aren't going to do this. Struggle is great, but like he's not really going to start a company either. He's doing this as like a, you know, safe humanity side project building batteries. He starts looking around for others who might be interested in building a real electric car company.

20:53And it just so happens that at the same time, there are two other guys back up in Silicon Valley who had also approached AC propulsion and tried to convince them to license their technology to them or become a real company or do something. They had the same goal as Elon. And those two guys are Martin Eberhard and Mark Tarpening.

21:14names that you probably haven't heard of. The two of them who are Martin and Mark, they had had a successful exit themselves. They were startup guys in the Valley. They had co-founded a company that was a really early ebook reader, so like a Kindle competitor before the Kindle. That ended up getting acquired for, I believe about just under $200 million. They had a successful exit and they were just like Elon looking to do something more meaningful with their lives in their next gig.

21:44line you can kind of draw here is one of the trends that led them to start an e-book company was that battery technology was getting better. And what can we do with smaller, better, more efficient, rechargeable batteries? Gosh, maybe e-books could finally be a thing. And so I think they sort of still had that bug in their mind when they sold the company.

22:02Yep. So unlike Elon, though, so they're basically in the same position as Elon. They're trying to get the AC propulsion guys to do this. They realize they won't. Elon already has SpaceX, though. He's already started a company ever hard and targeting their free agents, though. So they're like, great, we're going to do it. We're going to start this company. We're going to get the band back together on July 1, 2003. They incorporate the company.

22:26Everhard goes down on a trip to Disneyland in LA, ironically, with his wife. And he's walking around Disneyland and seeing all the history and how Disney's incorporated that into the lore and mythology there. And he comes up with the perfect name for the company.

22:42Tesla Motors in honor of Nikolai Tesla, the famous inventor who did much much work on electricity. And the goal that Eberhard had there, which is really similar to sort of Elon's later vision for the company is we cannot build something that screams electric car. We cannot scream something that says environmentalist or nerd or like it just can't be about that. The T0.

23:07That's what the T0 was. The name T0 represents the time on the x-axis where it intersects the y-axis. Time is zero and going on from here. It's for like math nerds and battery nerds. The whole vision of starting Tesla when they're thinking of what's the right name for it is really around how do we go mass market with this thing, yet still pay a loose homage to where the history of the industry is.

23:33they're on the same page, they just haven't met yet. They think that the best way to get this thing going and get it to market is to actually start with what AC propulsion is doing with the T0 and make it a consumer version. They do a bunch of thinking about where the technology is both with batteries and drive trains and everything and they realize that it's not like a big SUV they should be building, they should be building a sports car. That's what's going to best express the technology of electric vehicles at the time.

24:02and not a Prius and those sorts of things. So they take this business plan, and they actually, not just the business plan, but an actual T0 itself to Sandhill Road, and they go start pitching VCs on raising a Series A to start building this company, to start building Tesla. And of course, they've raised money before. They've had a successful exit.

24:23And everybody on San Hill is like you guys are nuts. You want to build a car company like your tech dudes like what are you doing? If you're a VC firm and a pair of entrepreneurs not just even a single entrepreneur but the whole team like the two co-founding team has had a successful exit for you made a bunch of money and then they start another company. It's almost like a blank check. It's kind of like Aaron in the rough episode like whatever you do like I want in. I'll lead it. It's so bad that their lead investors from their old company are like I mean, we'll give you $500,000, but we're not gonna lead because this is nuts.

25:00And it's sort of a fascinating case study, too, where like you don't know what wave is coming. And you know, Elon started this wave, or I guess Eberhardt and Tarpening may have started this wave, but Tesla started this wave of electric vehicles and then you sort of get into the overlapping wave of autonomous vehicles. And now like everybody's got a thesis on that, every firm's got chips somewhere along the value chain there. But it's very difficult when you're the first one to sort of brave the storm a little bit. It's as if they were going and pitching like you know, uh, the next step for VC back tech companies is definitely hot air balloons. Everybody will look at them like you're completely insane. That's I don't, I don't understand. No one else is making bets there. I haven't read anything about this. I haven't heard about this. My consciousness is not, you know, there's nothing leading me to believe that this is the next thing. And so it's super hard to make those bets. Totally. Well, and in their somewhat defense, the VCs work totally wrong. Like Tesla becomes a, you know,

25:54burning money pit for for well really still to this day really still to this day which we will discuss later so they get five hundred thousand dollars from their old bcs also funny in this is that they're effectively it's not quite a competitor but like they're pitching Pre-product using their competitors product like they're taking people for test drives in you know, it's like it's gonna be like this but like a commercial version of this yeah Now to be fair, I don't know if they had already agreed there are certainly discussions to license the drivetrain from the T0 and they ultimately end up doing that and that is the drivetrain for the Roadster for the first Roadster and interesting nuance to in that license is that they cannot raise money from any of the investors

26:40that that were in AC propulsion so AC propulsion so basically yeah you can totally do that you just can't raise money from people that we raise money from AC propulsion had previously pitched Elon and he had said no which made Elon eligible to be pitched. Yeah yeah it's interesting I didn't get that detail well that perhaps leads to ever hard interpreting they're like kind of out of luck they don't know where to go they think they need seven million dollars to get a prototype of what would become the roadster.

27:08built every VC in the valley has turned them down and the AC propulsion guys tell them about Elon they're like oh hey there's this other dude down here in LA he's got a bunch of money he's running the space company but he wants us to do this too maybe you get to chat they introduce them Elon meets them and within a matter of days typical Elon fashion from First meeting and hearing about these guys, something like four days later, he's like, I'm in, I'm personally going to lead your series A. I'm going to write a check for the rest of the $7 million you need. I'm going to invest $6.5 million myself. Now this is not like, you know, typically when you raise money as a startup, you know, as you do a CD or a series A or whatever, and you have individuals involved, they come in as angels. They're writing like 25K checks. It's...

27:54incredibly rare that an individual person would lead a series a let alone one who is the CEO of another company with a full-time job and that other company is actually how they had a chance run in before ever hard and targeting with Elon Musk did you do you find this at all I did I did yeah Yeah, in 2001, Tarpening, so the big space nerd drags Eberhard to a Mars Society conference at Stanford and sees Elon speak about SpaceX. The idea for what would become SpaceX? He hadn't started SpaceX yet. Ah, good call.

28:29Is it just fascinating? Like, hey, we saw this guy speak once and he's kind of a car guy. Yeah. Well, and the AC propulsion guys, it kind of reminded them and so I'm introduced. So, you know, again, typically long fashion, he's in. He's all in. But he also, you know, he's also given $10,000 to JB Strabal, as we talked about with the battery packs. And so he says to ever heard him type in. And he's like, hey, I know this other guy.

28:52who nominally lives in LA, but basically spends all his time up in the valley. Anyway, he's really into batteries. You're gonna need some better battery tech. You should go talk to this guy. They're like, okay, they bring Strubbel in. They hire him on the spot to come in and join Tesla as one of the very first employees and he leads battery engineering. Thus, between Everhard, Tarpening, Strubbel, and Musk as Chairman and Lead Investor.

29:19Tesla is born. So this is kind of end of 2003 beginning in 2004. They work for a little over a year. And at the end of January 2005, they have the first prototype car built. And it works amazingly. So they've taken the drive train from AC propulsion. They've taken the car body from the Lotus Elise. Lotus is a British car manufacturer, I think. And they made the Elise sports car. And it's the chassis.

29:48from that and they custom built their own sort of body and shape. I'm not sure actually for this prototype if it was maybe it was for the for the mule. Yeah. I think I think you're right for the prototype. They hadn't done their own custom body design and they were just stuff in it full of their parts. Exactly. I think it actually was the body of the Lotus Elise. So they have a board meeting as soon as it's done at the end of January and getting the board is like.

30:11Elon, because he's the dude who's the investor. There's no firm VC firm here. Elon drives it at the board meeting, likes it, and he's like, great, I am now going to lead your series B. And they're like, okay. So Elon invests $9 million more into the company, leading the series B. They raise 13 more million in total, the few other investors come in.

30:37So on top of the previous $7 million they've now raised $20 million and they're going to use that money to get the Roadster to production. Ha, we will see how that actually cost $20 million. Sure, you know, no, nobody deal. How hard is it to build a production car?

30:55And the plan was something along the lines of, oh yeah, the Lotus Elise, you know, we'll replace enough parts so it doesn't look like an Elise, like it'll kind of look like our own thing. We've basically got all the tech down and gosh, you know, we feel like if we have access to all these different suppliers that are commoditized at this point, you know, Lotus already has relationships, they can just get all the parts sent to them, they can do all the assembly and like it should be pretty much taken care of. Right. Except Elon now.

31:24owns a significant amount of the company. And if there's one thing that Elon is, it is opinionated. And he also happens to often be right. So that plan would maybe you could get a car built on $20 million with the plan, Ben, that you just described. But Elon's like, no, that's not what we're going to do. The Lotus Elise.

31:45is unacceptable to Elon. His vision is he wants his then-wife, Justine, a celebrity in her own right, which we won't get into here, to feel comfortable driving it. The Elise, like, you basically had to jump into the car. Like, this was not a car you were gonna, like, take to work, or you know, it's not mass market. And it's $100,000 car. So they're marketing it to people who would be comparing it against, like, oh my gosh, this is such a nice luxury vehicle to get into.

32:13You know, I mean, there are people who will buy $100,000 sports cars that are completely impractical, but that is a very, very, very small market. And Elon's like, no, no, no, this is going to be like a sports car, but it's going to be a sports car that's going to compete with, you know, a Mercedes sports car or whatever.

32:26And so he keeps pushing them to do that. That, of course, leads to tons of delays. Side, fun fact, during the summer of 2005, as they're working on it, they take one of the prototypes to Burning Man. They all, like, Elon goes to Burning Man every year. This will come back up again later. And they're like, well, let's, we're going to Burning Man. Let's take the Tesla prototype.

32:49So, they keep working on it. It's now summer of 2006. The company has 100 employees at this point working on the first production redstone candidate. They are out of money. They raise another 40 million dollars at this point.

33:04Elon invests 12 million personally, and they raise the rest from a group of VCs who are now finally like, okay, there's something interesting here and like clean tech is all the rage and, you know, for some reason, VCs have changed their mind, surprise. July of 2006, they think they're pretty close to production at this point. They hold a press conference where they announce the Roadster to the world. You know, this is the beginning of like the Elon Musk showmanship. They announce this car. They get a whole bunch of celebrities to come. They hold it in Santa Monica.

33:33swore sneaker who is at that point in time the governor of california he comes uh... i think larry and uh... sir gay from google there there are a whole bunch of people celebrities uh... they have it they have it like at an airport or something so that you can if you're in the room where it's being announced The way that it happened is basically, they unveil the car, someone gets in the car, drives it, does a lap around like a runway or some extended piece of road and then drives it back into the building. Yeah. But they announced that it's going to go zero to 60 in four seconds or less, which is pretty impressive. Elon also announces at the event that they're going to release a sedan for $50,000.

34:19Within the next three years, so by 2009. So begins Elon's early promises. So begin the Tesla promises at least. Yes. They start taking pre-orders for the roadster after the event and people go nuts. This is the talk of the town in LA, in Silicon Valley, in San Francisco, in the automotive press. People start showing up to the Tesla offices. I don't know if they're in Menlo Park or Palo Alto at this point if they'd moved to Palo Alto. People just randomly walk in and are like, I want to put my name in. At the event they were trying to sell the initial 100. There was a special club of people that were going to

34:59get the first 100, there was going to be a plaque, there was going to be signatures. It's like the Gavin Belson Signature Edition box. I think they sold like 116 or something. So they hit their goal there. Well, and it's even better than that. They weren't actually legally allowed to sell the cars because they hadn't made the cars yet. There's a bunch of regulations about this and selling cars and whatnot. And we won't really get into it here. But Tesla, of course, does not use the dealership model, which is very disruptive to the existing car industry. Anyway, What they decided to do is, you join a club for, initially it was $85,000 and then there is the price, $200,000. You join a club for $85,000 or $100,000. And as a benefit of joining a club, you get a free card. And nothing else. Well, you're also, you get the plaque and all the things you're saying. You get like a membership card and whatnot. You should say to, like, we've been saying Elon, Elon, Elon.

35:54He has appearances on stage, but it's really Aberhard's show at this point. Aberhard's talking to the press. Aberhard's doing that big announcement. He's subsequently flying around to do interviews with car magazines and go to car shows. And he's really the face of the company and he's being sort of heralded as a genius.

36:17in 2006 he was featured as the face of research in motions campaign for the blackberry pearl as as the guy who created the first electric sports car and really like like when you think about apples think different when they were like heralding geniuses like ever hard is is the guy that appears in that ad is like this is the face of innovation and so it's kind of amazing in three years into Tesla it's still not the musk show and he's an ever hearts really starting to get recognized for this That's so funny and I think says everything about rim that like their version of the Apple campaign they choose ever heard I mean who could have known at that point, but Anyway, this is yes, ever heard is very much the CEO and you know co-founder and CEO of the company Elon is the

37:07You know, series A and B and C investor. And I think at this point, probably largest shareholder. After this little road show, he's starting to make a little bit of a ruckus about this. He mentions in an email that he's feeling a little bit neglected. He'd like to talk with every major publication within reason. And that's a direct quote to sort of put his stamp on it. He says that the way that my role has been portrayed to date where I am merely an early investor is outrageous.

37:33that would be like Martin Everhart being called an early employee. Apart from me leading the series A and B and co-leading the series C, my influence on the car itself runs from the headlights to the styling to the door to the door sill to the trunk and my strong interest in electric transport predates Tesla by a decade. Martin should certainly be the front and center guy by the portrayal of my role today has been incredibly insulting. And he's talking to their PR guy. He says, I'm not blaming you or others at Tesla. The media is difficult to control. However, we need to make a serious effort to correct this perception.

38:03Well, this is why, you know, I wanted to spend the time talking about the background up front. By the way, a lot of this history comes from Ashley Vance's great book biography of Elon called Elon Musk. Elon is for all of his Tony Stark Iron Man, you know, much like Tony Stark. Like he's very sensitive and emotional like inside. Like he went through just terrible, you know, betrayals and, you know, heartache and burns with his first few companies. And like you can very much see that coming, coming out here and demanding this role, demanding this recognition. So all this is happening. There's personality clash starting to happen between Elon and never heard. And in the midst of this, as we get into early 2007, it becomes clear that there are major major problems with roadster production. It's not going to ship anytime soon. And there things are not good. So

38:57One of the new investors that came in in the series C was a firm called Valor Equity, and they had invested in other things in the automotive industry. They were more, you know, not a VC. I think they're based in Chicago. I could be wrong on that. But they're, you know, not a Silicon Valley VC. They have experience in this industry. They send in a fixer to kind of assess the situation of what's going on with production with the roadster.

39:22He comes back and he reports to the board at this point they're intending to sell the car for $85,000 and of course they would have to produce it for less than that to make a profit. That's how business works. That's not going to happen. He assesses the cost to make the Roadster model at about $200,000. So literally they're going to sell dollar bills for 50 cents. Yeah. And listeners, the places where this are going off the rails, I was attempting to try to chalk it up to something. It's everything. They've basically taken the vision of we are going to modify a Lotus Elise just enough so you don't notice that it's a Lotus. And, you know, they not only did they, they held a contest for a custom design, they picked their own custom design, they then basically gave those specs over to Lotus to start manufacturing, but a lot of it was

40:10Not only extremely difficult to do but constantly changing so Elon custom design some headlights which are awesome and give it a very iconic feel and you know the Tesla Roadster when you see it but created months and months and months of new parts that had to be created and suppliers that had to be sourced they dropped the bottom of the door frame so you can get your feet in by three inches and so they had to sort of re-engineer the whole bottom of the car to do that. Rather than having a few subassemblies, it's like four or five that they were planning on doing and then having the Lotus Company do the rest of it.

40:42Tesla has now decided that so much needs to be custom that they themselves having never produced a car before are responsible for over a hundred of the subassemblies of the car themselves. So rather than the initial vision, and it's kind of funny, you can look at the original business plan that Everhart was pitching around that says, oh yeah, the thing that's changed in the auto industry is you can just grab from the parts bin of you know, any of these suppliers now and throw them together, he wants to be a fabulous car manufacturer. And the same way that like a lot of these chip companies are fabulous chip companies and actually outsourced and made by someone else, Tesla and the initial vision wanted to be like a fabulous car company. And now they are a full-blown auto manufacturer with zero experience ever making cars before. Yep.

41:26That's basically what happened. Now, to be fair, again, like, if ever hard had had his way, I think they actually would have tried to be a fabulous car manufacturer and just use the Elise body and an AC propulsion drive chain and whatnot and slapped it together and called it today. Elon was the one who was like, no, this is unacceptable. We need to make a real car here. All this culminates in August 2007, the board As a vote, you know, board is controlled by Elon and they oust ever heard as CEO so And how they got there is nuts because ever hard brought up in the previous board meeting or maybe two board meetings before like hey

42:04You know, it's 150 people now. I've never managed something of this scale. We had to switch on to SAP that migration's going terribly. I don't understand how to do it. It's not in my wheelhouse. Maybe we should have a CEO. I'm amenable to that. And so he expects like there's going to be some discussion after that. The board sort of looked around on other heads and they were like, yeah, it does feel like maybe this is going off the rails and we should bring a CEO. So they call a private board meeting without him and take a vote and then call him and say, hey, you're out. And he's like, wait, wait, wait, wait.

42:33I just was sort of floating that, like I thought. And then he looks in the bylaws and realizes that they can't actually do that. So then they have another board meeting with him. They are just to vote and inform him. Totally the mature way to handle all this. Yeah. Yeah. Boy, fun times. So he's out. He becomes like an advisor to the company or something, but but December of 2007, he leaves all together and is very bitter. He ends up suing Elon and case gets settled. And so they still, I believe the two men have not talked since then, and yet they settled this case. So there's not disparagement agreements on both sides and everybody's at least financially said, I think at this point. So the board though needs a CEO. Elon still isn't contemplating yet that he would become the CEO. He's the CEO of SpaceX. So they bring in

43:26Michael Marx as interim CEO, he was never intended to be full-time CEO, but as interim CEO, Michael Marx is a legend. He is the founder and CEO of FlexTronics. At this point in time, all the way still through today, if you are doing something with hardware in the valley, like you want Michael Marx involved, he then later would found a private equity firm and growth investor that has done very well, but it was a huge cue to get Michael to come in and try and start to turn the ship around. He shows up, And he institutes the Marx list that it gets known as, which is a 10 point plan for getting all of the problems with production back on track as quickly as possible. He stays, he basically draws out the plan and is like, I'm not gonna do this. I have other things like you need to bring in somebody else to actually execute the plan.

44:16At the end of 2007, Elon and the board bring in a guy named Zev Droy, and maybe butchering that name is really named Zev Droy, to be the CEO. He was not their first choice. You know, he had some experience. He had started a memory chip company that he had sold to AMD, and he had been the CEO of a car alarm company. So new sort of something about cars and hardware, I guess. Bring him in to execute the Mark's plan. It doesn't go too well.

44:44Still lots of delays, Musk starts getting more and more personally involved. He starts showing up at the company. He demands that everyone at the company work 24-7. And eventually, later in 2008 and October of 2008, he makes it official and he fires Dory and just becomes the CEO himself. That's a pretty, pretty quick couple of years there. Well, it was a couple of years at Tesla, but Drury last less than a year before you landed. Right, but with with marks and you know that that rapid transition there. Yep. So Elon is now CEO of Tesla. He's you know focused on getting the roadster out the door in production. There's just one problem though. This is the fall of 2008 and Lehman Brothers has just gone under and the world is literally falling apart.

45:30Particularly the financing world, which is important for people who want to buy $100,000 cars. The automotive world where GM has gone bankrupt or is going bankrupt, the car industry is literally being bailed out by the US government. And all throughout all of this, Tesla has all the problems of any startup, let alone one is complicated as this. They're burning $4 million a month at this point. And things are not looking good.

45:57Yeah, Musk himself is 55 million deep into the company personally. Yeah, and between SpaceX and Tesla, Musk is literally out of money at this point. But So his Tesla, they need money by Christmas of 2008, or they won't be able to make payroll, and the company will go bankrupt. So he's desperate for money. He starts going around to all of his friends in the valley, and raising money from them in angel-sized chunks. So he gets a whole bunch of people, including Sergei Bryn, who invests $500,000 to scrape together just some money to keep the company going. Musk takes out a loan at SpaceX, like a SpaceX.

46:37loan, that he then takes the proceeds from and pours that into into Tesla. It was borrowed from a bank and it was. Securitized against his equity in SpaceX or something like that something but he ended up SpaceX at this point had gotten lots of contracts and loans from the US government And NASA ended up having to be approved by by NASA to do this crazily enough Yeah, and a quick derailment the way that they basically started SpaceX was that you on had enough money to buy I think it was two Russian rockets and this was like him personally funding the company and basically if they didn't have something successful with those two rockets then Elon would be both bankrupt and the company would shut down and like I think the first rocket blew up the second rocket actually worked so they had enough proof point to go and raise more money so Elon is sort of out of money from personally funding buying those Russian rockets for SpaceX and of course leading all these investments in Tesla and so is now

47:39Literally out of it. I think it was actually, it was even crazier than that at SpaceX. We will definitely tell that story someday. I think they were on the fourth launch. They had money for two. They didn't work. They blew up. Then the third one blew up. Anyway, it was bad. Musk somehow manages to scrape some money together. He does two other things to get the money. He sells some shares of Solar City, which he owns on the secondary markets. Solar City had just been started.

48:02that will come back into the narrative in a little bit. His cousins had, at some point, built a data center, also moved from South Africa to Silicon Valley, built a data center company called Everdream that was sold, I think at the end of 2007 to Dell. And so Musk was an investor in that. He used all the proceeds from that.

48:21Plasid into Tesla. We're approaching Christmas. And the other way that Elon extends the runway is as soon as he comes over, he lays off 25% of Tesla's employees. Yes. Yes. As soon as he becomes official CEO, we're approaching Christmas. Elon has now scraped together between like Sergey Brin and the loan from SpaceX, his money from proceeds from the Everdream sale and all this stuff, about $20 million. He goes to all the rest of the investors around the table and he asks, the investors to match it for a $40 million total round. Vantage Point Capital Partners, which was one of the investors, they block the deal. They had the right to block the deal. So they block the deal and they hold the company hostage. And that's normal. Like, if a VC leads around, I don't know how they would have this as not being a lead, but you have the right to block future. Do you have approval over future equity raises? So Musk is like,

49:13All right, fine. You're going to block this equity raise. I'm going to do this deal as debt. He puts the money in his debt and he convinces the other investors to do this as a debt deal. Is it convertible or is it a pure debt deal? I'm not sure exactly whether it was convertible or not. It ends up closing on Christmas Eve and the company is given a lifeline and thrives.

49:39debatably as we'll see, but survives. It goes on to produce amazing cars. Goes on to produce amazing cars. So 2008 was a crazy pivotal year for Elon and Tesla. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore.

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50:53which is exactly why more than 16,000 companies today run on Vanta companies like ramp cursor and snowflake all stay audit ready and catch the risks that crop up between audits across every vendor every AI tool the whole environment and that's the real value.

51:11Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here. And literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. The other thing that we have to talk about in 2008, I remember this.

51:41vividly. So I was working on Wall Street as an investment banking analyst in 2008. It was my first year out of undergrad and watching all this like destruction around me, you know, of banks failing, you know, first bear stones and then Lehman Brothers, it was just like unreal. But in the middle of all this, when things are so bad, a movie comes out and This movie like I actually can you I remember going with all my colleagues at UBS at the bank I was working at you know We were also depressed and we went out one night to go see this movie because it was getting so good reviews and it kind of sparked a glimmer of hope

52:15And it was this movie called Iron Man. And which was obviously the first Marvel movie of that we talked about in the Marvel episode. That would lead to Marvel in the acquisition by Disney and all that. That movie made me sure I wanted to be an engineer. I saw it freshman year when I was like in my first engineering classes. And I was like, all right, I'm in. Yeah. I mean, this movie, I mean, it's hard to remember now because it was 10 years ago, but like, it had a huge amount of cultural impact in the US. I mean, things were not good when it came out. And so why are we talking about this here? Robert Downey Jr., of course, who portrays Iron Man, as he's preparing for the role in seeking inspiration, he learns about Elon Musk and his story and he actually goes and seeks out Elon and spends a bunch of time with him as he's preparing for the role and uses Elon in his life as like...

53:07part of the inspiration that leads to creating the Tony Stark character. And so much so that Downey actually asks and makes a request that in Tony Stark's workshop in the movie, that a Tesla Roadster be in it. And not just that it be in it, but that it be the object that is closest to his work bench because it's closest to like his heart and like an example of like what's going on in the real world in America that's, you know, paralleling this movie. Whoa, I didn't realize they had talked before that. That's wild. Isn't that crazy? Yeah.

53:37I guess you when I wrote that stupid intro, I didn't even know. It's real. I mean, of course, like, you know, Tony Stark is not, you know, Elon Musk or vice versa, but like there is a, you know, actual thread of Elon and Tony Stark. So, you know, just like Iron Man and Tony Stark himself.

53:56Elon and Tesla do come back to life from the brink of death with, you know, a nuclear reactor heart installed in them. And over the next few years, you know, in 2000, I think it was, I think it was beginning of 2009 when they actually started shipping the Roadster. They sell about 2500 of them at this point, $100,000 a pop. That's a quarter of a billion in sales, 250 million in sales. And that is enough to keep The company going well that that enough 465 million dollar interest bearing loan We will get to that in a minute Okay That has to do with the codename white star project that we will get into in just a sec But just on the roadster like the company you know survives if the company were to stop at the roadster and not go forward like it is a you know

54:48self-sustaining business at this point, which is a major major accomplishment. They have produced a car. It is, you know, gets great reviews. They only sell 2500 of them, but you know, that's meaningful. Here comes the thread of Elon being the guy that doesn't quit. Like, reinvest it all all the time. I'm not resting on my laurels. This is not enough. No. So Elon, we've talked about on this show and Ben and I've talked about this is just like, I love this mantra and nobody Exemplifies it better than Elon but like Elon plays offense not defense Many people would play defense in this situation of like okay, we finally stabilize the company. Let's like take a breath and like not Elon So as things stabilize with the Roadster Elon is obsessed on making good on his promise that he made at the Roadster introduction of Introducing the sedan for

55:43fifty thousand dollars and the project codename for it is white star and so the first thing Elon does is as all this is you know it's kind of ended 2008 all this is happening he goes out and he recruits a superstar car designer from the automotive world he hires the chief designer from aston martin to come in and be the designer of the white star, what would become the Model S. A very, very celebrated man in the automotive industry, Henrik Fisker. Might ring a few bells for some people. Fisker, like the Fisker automotive company that is a competitor to Tesla. What was a competitor to Tesla? So Fisker comes in from Aston Martin. He comes over to the US. He starts working on the design and it's like,

56:32He and Elon do not get along the design is horrible within a few months. he bolts, he leaves the company and starts his own competitor, Fisker Automotive. Musk later learns that a van the well, who knows with Musk. Apparently Fisker had been thinking, it was his attention to do this all along, he just wanted to come to Tesla to learn what they were doing, steal some secrets and they go start his own company. Musk sews him later, ends up losing, Fisker wins the suit. It doesn't really matter though because Fisker, the company and Henrik Fisker, the founder, they decide to make the car a hybrid instead of a

57:05fully electric vehicle. Tesla's philosophy was that hybrid is too many compromises isn't going to work, so they just kind of ignore and Fiskar ends up going bankrupt, flames out massively burns tons of capital. Again, a story for another day. Tesla though, back to the drawing board on Project White Star, so they decided to kind of hack it together internally, just like they did with the roadster. Tesla ends up surveying the luxury sedan market and deciding that their favorite and best luxury sedan out there is the Mercedes CLS and they're going to start using that as their inspiration both designed and otherwise for the Model S listeners if you know what the Mercedes CLS looks like if you don't you can google it it actually bears quite a lot of resemblance to what the final Model S looks like so they go by one from a dealership in Palo Alto they

57:58Got it and they essentially just like they did with the T0. They turn a Mercedes CLS into what becomes the first Model S. At least the first prototype of the Model S. At the same time, you know, Henrik Fiskare is now left. Elon is still trying to recruit a superstar to come in and really leave the design for this thing. The first person he goes to try and replace Henrik is his friend, fellow Silicon Valley Luminary.

58:26Tony Fidel who of course we've talked about on the nest episode bringing it all back bringing it all back and this is when you know there's all the turmoil in the CEO role you know Elon has just come in as a CEO unclear and still you know debatable by different people have said different things whether they were whether Elon was recruiting Tony to be the CEO of Tesla it certainly was something that probably was on the table at some point. However, Steve Jobs counters an offer and does his Steve Jobs magic to keep Fiddell at Apple until he would leave and start nest in 2010. So they lose Tony, but they do end up hiring another guy from the automotive industry, Franz Van.

59:11holds a thousand. I think he was at Mazda at this point, but he had redesigned the Volkswagen Beetle in the iconic reboot of the Beetle in the 90s, kind of 2000s. He was super entrepreneurial. He bounced around in a bunch of traditional auto manufacturers because he was fed up with all their bureaucracy. Tesla ends up recruiting him to come in and be the lead designer for what would become the Model S.

59:35He moves to LA. Franz is now based in LA. They decided that they're going to set up the design office for the sedan in LA. And so the natural place to do that is where there's already a lot of office space, you know, the D-line controls, which is...

59:50the SpaceX office. So Franz and the design, what is now the design team for Tesla, they set up office inside the SpaceX offices and hangers in Hawthorne, California. And I believe that they are still there today, which is quite funny. And then they end up doing lots of press events at Tesla press events at...

1:00:11SpaceX. And of course, there's now the crossover with the new roadster being blasted off into space. Why not? Why not? Synergies. Synergies and a lack of corporate governance. Indeed.

1:00:23Musk and Franz, they kind of are, they become really kindred spirits during this time and still to this day. Musk decides the car body has to be aluminum to save weight, and this is like no car has ever, mass production car has really ever been made in aluminum before. And Franz's like, sure, we got this. They together decide on the design for the door handles, the iconic door handle design where there are no door handles. Apparently all the engineers at Tesla were like, live it and ripping their hair out at this is like why would we do this this is going to cost so much time and money and like it's a door handle but uh musk and fron's uh have their way and uh it's an iconic part of the model three that's very jobs in like when jobs insist that it has to fit in this specific

1:01:10form factor, and then everyone's like, what are you crazy? And then it takes like, you know, some engineer figuring out you can fold a motherboard over on itself in order to make the iPod shuffle. That was, uh, that was apparently what happened with the door handles. Once Franz comes on board, work actually moves super quickly on designing the Model S or codename white star at this point in March 2009. So like, real fast. They hold a press event at SpaceX and they unveil the Model S. When they unveiled it, it was completely glued together like basically non-functional. If you like touched it, it would fall apart. The car that they unveiled was still a Mercedes CLS chassis. The first Model S that was shown to the public was was still a Mercedes under the hood.

1:01:58people get really excited about it, and momentum starts to build. And actually, I don't know if it was on the back of this, or a separate relationship and introduction, but Daimler, the parent of Mercedes-Benz, the German company, they get pretty excited about what Tesla's up to, and they end up contracting with Tesla to build two prototypes of...

1:02:18a class Mercedes that are powered by Tesla electric drive trains and batteries. And they end up placing an order for a thousand smart cars that Tesla would manufacture the drive trains and batteries for to electrify them. And it's part of that order. So obviously there's revenue associated with that. They also invest $50 million into Tesla at a $500 million valuation for 10% of the company. This is summer 2009. And that gives the company a foothold of capital to start ramping up mass production of the Model S. Toyota does basically a similar deal, also invests into the company. And then the big coup in January 2010, Tesla lands a deal with the US Department of Energy.

1:03:02for, this has been, of course, where you were referring to earlier, a $465 million loan agreement with low interest loan from the US Department of Energy. And this is going to be all the capital between that. And I believe it was in total $100 million from Daimler and Toyota, all the capital that Tesla thinks they'll need to get model as production off the ground. In exchange, the terms of the US DOE loan are that Tesla will produce its own electric vehicle and produce it in the US.

1:03:32which of course they do, but that is one of the major reasons why the Tesla... plant and menu manufacturing facility is in Fremont, California. The other reason is that there was an existing very large car manufacturing plant already there in Fremont, former Toyota and GM joint venture plant that was completely abandoned after the recession when demand for new cars had fallen sharply in the US. Toyota and GM abandoned this plant. It was sitting there empty and it's a massive, massive plant Tesla was able to come in and buy it for $42 million. This thing had once it cost at least a billion dollars to build. And when Toyota was operating it, it was peaking at being able to produce 500,000 cars per year. Yeah. Crazy. Which of course, Tesla is still nowhere near that production figure. Right. Yeah. And where were they around this time? They had shipped

1:04:28In 2009, they had shipped in total across all the years that they were doing the Roadster 2500 Roadsters and like, you know, maybe a couple Model S's had been delivered at this point. So a lot of headroom in that plant. Yeah, indeed. On the back of all this news, they filed a go public. Which you know, it's funny. This is like a detail of the history here for acquired usually our main event is the IPO. It's actually pretty straightforward. They just need more money. Yeah. And this is a classic. We will see this theme over and over and over again with Tesla on the back of something very exciting and very speculative doing an equity offering. Yes. Everyone is as excited as possible. And every startup, you know, every startup does this and every startup should do this. It's the moment where you have the best story to tell. You go, you get the highest valuation. You can raise the most money with the least delusion. Tesla did it private and Tesla does it public. Yep.

1:05:24Summer of 2010, they filed a go public. June 29th, the IPO happens. They raised $226 million. The stock jumps 41% on opening day. And it is the first IPO of an American car company since Ford in 1956, which is crazy. Oh wow. Ford was private for a long time. Ford was private for a long time. Yes. And then of course, GM would re-go public later after it had been dealistic through the bankruptcy process and then owned by the US government and then was ultimately relisted a little while later. Crazy. So on the back of all this, they are hard at work, getting this new plant in Vermont, California online, getting the Model S out the door at production scale, but they're having some problems. So the Model S's start trickling off the line, the reviews and the responses amazing. I mean, it's really not

1:06:22an exaggeration, I think, to say that the Model S was like the iPhone of cars. It completely changed the game of what it meant to be a car. And really, people talk about it. Cars were cars before the Model S. The Model S is a computer on wheels. It's upgradable via over-the-air updates. The car companies just weren't thinking about all this stuff. I mean, it had...

1:06:45Crazy acceleration and handling, of course, you can get it configured to seat seven. It's got a touchscreen in the dash instead of all the knobs and stuff. I mean, even today, like, I handed up through a whole bunch of crazy circumstances two winters ago. I had to rent a car to drive in a snow storm. And the only thing they had were like the luxury Mercedes SUVs at the car rental place. So I rented like a new, you know, Mercedes luxury SUV. I couldn't figure out how to operate the stupid thing like the knobs and the like, it's just crazy where car companies have gotten to at this point, unusable. Tesla, by contrast, was like, let's put an iPad essentially in the dash. And an intrusive Tesla fashion, let's not put an iPad, let's custom build our own iPad. Yes, of course. And put that in the dash. There are no dealerships. So there's no haggling, like, buying a car in the US is such a highly stressful, like, awful process, haggling one. And Tesla's like, nope, you can buy it on the internet, you know?

1:07:42Yeah, it's worth taking a quick dovetail into this just because there's one thing that shows how deeply Tesla has created a community of people that love, love, love their vehicles and buy into the lifestyle. So in most states, Tesla has had to go through crazy regulation where they cannot both be the manufacturer and the dealership because...

1:08:02basically lobbyists and entrenched industry interests. So what they do is they have these showrooms and the showrooms have Tesla employees and they show you you can't actually buy it here but look how cool the car is and I'm happy to walk you through it and stuff. And sometimes in the stores if the states allow it you can actually buy it online and the store using their website or they recommend you you should go home and buy it at home with this exact configuration. There are states and I believe Texas is one of them where it is illegal to even do that.

1:08:28and so you cannot have employees in the showroom, even though it's a showroom and not a dealership. And so there are volunteer Tesla owners who are so passionate about owning those cars that they take shifts just hanging out and volunteering in the showroom with no employees. Tesla has created an unbelievable product with Apple-level fanboyism. Absolutely. It is no exaggeration to say it is the iPhone of cars.

1:08:57It is the unanimous 2012 motor trend car of the year. I don't know that there's ever been a unanimous car before. I mean, it gets all of the press accolades, all the reviews. It just is truly game changing for the car industry.

1:09:14There's just one problem, though, which is that they can't make them. So, like, you know, when Apple comes out with a revolutionary product, like Apple has Tim Cook and the supply chain and faxcon and everything, and like, you know, they can deliver it into people's hands. That's never been Tesla's strong suit.

1:09:30So, while all this is happening throughout 2012, production is like anemic. They're making like dozens per week, you know, and the backlogs it. Which is like, it's funny, the phrase dozens sound just high until you think about it in this context. Yeah, dozens. Like, it's like saying like, we should go out and we can make dozens of dollars, you know? That's literally what was going on. I mean, and again, remember, this, this plant that they bought in Fremont was making 500,000 Toyota's in GM.

1:09:58vehicles a year and Tesla is you know pumping out on the order of like hundreds not hundreds of thousands hundreds of Model S's at this point and we should say for a few reasons one it requires enormous capital expenditures in order to buy all of the right equipment and well just scope it to equipment to build these cars and so like if they're ever going to get up to 500,000 in that plant then they have to spend probably at least high single-digit billions, maybe tens of billions of dollars in order to put all the stuff in place. One quick thing, including in especially batteries, which is not a problem that, you know, traditional cars have. No, no. But Tesla has the giga factory for that, so they... Well...

1:10:38will have the gig, but at this point, the gigafactory isn't even a gleam in Elon's eye. So they're trying to source batteries that also Apple and Microsoft and HP are trying to source. Now Tesla has all their own IP and stuff, but their suppliers are still the same suppliers in Asia making these batteries as other.

1:10:56computers. The biggest thing here between Tesla and a regular car company is Tesla is born of tech and these car companies have been around for 100 years and are born of manufacturing and Toyota you know invented kaisen and lean and six sigma like anything that we borrow and tech and believe is like this new sort of like lean startup or the way that we think about our change in in the way that we do engineering and technology organizations is largely borrowed from the things that Toyota pioneered in order to have organizational efficiency and nimble this when you need it and the ability to know how many flaws could come up and allow tolerances for those things. I think we often paint car companies as big and slow, but they've created processes that work extremely, extremely well for this, that are going to take years to internalize both in the culture and in the capital to be able to institute them.

1:11:45Yep. It's also what makes Tesla and the Model S so revolutionary, right? Like, you can update the car over the air just like you get a new version of iOS. Like, you know, like they add autopilot to cars. Like, that's crazy. But, you know, they also have to get good at producing the things and they're still in that journey. All this is happening like on the one hand, it's a tale of two Teslas. Like, you know, motor train car the year, they've revolutionized the industry.

1:12:13things couldn't be better, but they also can't make them. And so they have these huge production problems, and it creates huge liquidity and cash problems at the cash cycle problems at the company, ends up a huge, once again, a huge short position builds up in the stock. People are like, Tesla's gonna go bankrupt. They're running out of money. They can't make these things. They can't sell them. They can't get the revenue. They can't keep the factory going. By early 2013, things are looking really...

1:12:39Really bad people start canceling their $5,000 deposits on the Model S because like the delays are just you know people are on the wait list for years at this point Musk Announces that he is going to backstop the resale value of Model S's as a way to like, sure up faith in the company. So like, if you want to sell your Model S, you know, you're not happy with it, must go buy it back from you. Which that, of course, does interesting things to a company's balance sheet, having made those guarantees on every single unit sold. Yeah, totally. As we've talked about on the show, well, alluded to, but haven't been clear about the line between Tesla financials and SpaceX financials and Elon Musk's personal financials.

1:13:18And solar city financials is blurry at best at best. The other thing that he does and we'll come back to this later is he actually like things are so bad and the company is so close to going bankrupt musk takes hundreds of Tesla employees that are doing other things in the company, like HR, engineering, customer service whatnot, and he recast them. He basically reassigns their jobs to be call center employees, to just start cold calling people. Anyone who has ever, the lead of anyone who has ever expressed interest in Tesla or the Model S that is in their database, he sets like the employees of the company to just start calling them and trying to convince them to

1:13:59pre-order a Model S. That's how bad things were. Now, this is, I think, the craziest part of the whole episode. I did not know this until I read the Elon Musk book. I'm curious, Ben, if you came across this, like, I think we're thinking of the same thing, but maybe not. If it has been reported, it probably has just so much news about Tesla. I glossed it over. There's one call that he makes that is not to a potential customer. Yes, there is one call that he makes. I think we're on the same page here. He's so desperate that he makes a call. I think he goes to see one of his very best friends in the world, a person that he routinely. So also Elon doesn't own a home in Silicon Valley. He only has his home in Bel Air in LA. So when he comes up and works at Tesla, he just crashes on friends' couches. And he often crashes on the couch, probably more than a couch, of Larry Page, the CEO of then Google Now Alphabet.

1:14:52Fun fact, this was right down the street from the garage that I lived in when I was a student at Stanford at GSB. My wife Jenny and I rented a one bedroom apartment in a converted garage in Palo Alto. We were like half a block away from Larry Page's house and Elon. While all this was happening, Elon goes to Larry and he's like, I don't think we're gonna make it. I need Google to acquire Tesla to keep this dream going. Larry is in and Google very, very nearly acquired Tesla during this period.

1:15:22for $6 billion. $6 billion. They hammered out a deal where Google would acquire Tesla. Again, this is the beginning of 2013 for $6 billion and commit two things. One that Elon would retain personal control of the company for the shorter of eight years or until they hit mass production of a mass market electric vehicle. What would become the Model 3? So Google would have no control. It would only be Elon. And Google would be willing to give Tesla up to five billion dollars in capital to accomplish these goals, just sort of, you know, under a capital expenditure at Tesla, five billion dollars. Which interestingly enough would not have been enough. Would not have been enough. Probably wouldn't have been anywhere near enough. Man, you know, those VCs way back in the day, they, they were not wrong that this was going to become a burning money pit. Then

1:16:17Basically a miracle happens so the deal is like done I believe Elon had presented to the Google board of directors Google was scheduled to come in and in return and present to the Tesla board of directors i.e. Elon There are other people on the board, but he controls the whole thing It's actually worth a quick quick detour to say what does the board of directors of Tesla look like at this point Because it's a little shocking if you haven't dug into this before so it's Elon Musk and I'm actually this is a 2016 board, but I think it was probably the same in 2013 Brad bus who was the CFO of solar city Maybe this was after the solar city acquisition Robin Denom who is a person with no ties to Elon, which is I think the only person on the board Ira

1:17:05And Freeze, I'm probably butchering that name, managing partner at DBL, which is an investor in Tesla, SpaceX, and SolarCity. Antonio Gracias, who's the board member at SpaceX, and SolarCity. Steve Durvetson, who's the managing director of DFJ, a significant SpaceX shareholder, or was a significant SpaceX shareholder. And of course, Kim Balmaski, Elon's younger brother. Of course. Anyway, the deal is done. It's about to happen. But like I said, Ben, a miracle happens.

1:17:31All of those employees that Elon had set to work basically manning the call center doing outbound tele sales of Model S's. It ends up working and Tesla sells a huge number of cars in the first quarter of 2013. So many cars that they post a profit. They do over half a billion in sales, 562 million in sales in the first quarter of 2013 and they have a net income of $11 million and the company is saved.

1:18:00Can they recognize that revenue? I guess they can recognize the pre-sales revenue. Yep. I'm not exactly sure how the counting worked, but while all this is happening, they do start to ramp.

1:18:10Model S production, they deliver just under 5,000 Model S's throughout the quarter. They announce all this at their first quarter earnings call in May of 2013. And the world is dumbfounded. The stock was trading about $30. It jumps immediately to $130. And all of the short sellers that had built up these short positions in the stock, they take huge losses, just a quick aside on short selling for people that don't understand how this works. When you sell short a stock, you're basically, it's a financial instrument to bet that the stock price will go down. Now, the beauty of venture capital and...

1:18:46equity investing in the stock market or anywhere else in general is it's, you know, and it seems telebrates about this. It's asymmetric upside and downside. You can only lose one times your money, but you can make an infinite amount of an infinite multiple on your money. There is no ceiling to how high a stock can go. When you start playing with short selling, that reverses. You can only make your money, but you can lose an infinite number of times your money, because you're betting that the stock will go down. It can only go to zero, but it can go many multiples higher than where it is when you take the short position. So the short sellers lose like five times their money that they put into the short positions, you know, bad for them, Elon.

1:19:28as a field day. Which which buys him years perhaps five years of people believing that gosh, I really shouldn't be betting against Tesla because liquid could happen to me. Liquid could happen indeed. And so on the back of that, they they end up repaying that Department of Energy loan early. I believe they of course end the Google talks. They don't need to be acquired by Google anymore at that point in time. We'll see now. And basically, you know, It's never smooth sailing with Tesla but they ramp up Model S production. How does the stock price going up positively impact them from a cash flow perspective? Do you know if they did another equity offering or if they sold some of the how does that work? So I don't have all the details you may have them but

1:20:14As this happens, then they start doing a regular drumbeat of secondary equity offerings on the stock market, bond offerings, various forms of debt, both convertible debt into equity and non-convertible debt, and they raise a lot more money over the...

1:20:28subsequent years. Yeah, I don't have anything from this era. I know in 2016 and 2017 they raised about two billion dollars from offering just more shares out to the public. Yep. Yep. But they are also doing dead offerings throughout all this time. So, you know, the stock price going up and people having faith in Tesla enables them to both sell more equity, but also be able to raise money in selling bond offerings to the investing public as well. Let's see. In the rest of 2013, they sell 22,000 Model S's at an average price of $70,000. So that's about one and a half billion dollars in revenue. Super impressive. In 2014, they unveiled the crazy, what is it like the P100D or something version with two motors? With ludicrous mode. Elon had some tweet. He's like, get ready for the D.

1:21:18When they're about to unveil the dual motor offering, but nobody knows what the D is. You just keep saying the D until you find out, oh, it's a dual motor. This thing, it's a lot of less. It's a sedan that you can get configured to seat seven people. It does zero to 60 in 3.2 seconds. That's insane. They also launched Autopilot in 2014. I don't know what level of autonomous they are at at this point, but...

1:21:44freeway, at least autonomous driving that continuously improves. The next year, September of 2015, they released the Model X, the SEV, which it's like the same chassis and they just bumped it all up a few inches. Yep. And at least judging by, you know, San Francisco and Silicon Valley is the new it car around here, replacing the Model S. And I should know, too, I meant to say along the way, basically the vision, you know, that Elon and Martin and Mark the original, you know, Founder's quote-unquote of Tesla, true Founder's Tesla had of replacing the Prius as the status car of at least the liberal population of the US completely happens. So with the Model X, they launched it in Q1 of 2016 and by Q4 of 2016, it was doing just about as many sales as a Model S and it was effectively continued like that until now. Yep, yep.

1:22:42All of 2015, they do 100,000 unit sales of the Model S. Then by the end of 2017, they've eclipsed 200,000 unit sales of the Model S. And in February of 2018, they announced that they've done over 300,000 units total across all vehicles. Now along the way, though, a couple other things happen that we should...

1:23:06for sure mentioned before wrapping up this. And let's give credit, totally amazing. They've produced a, you know, a third of a million of these cars, they ramped up to about 25,000 units per quarter and in the, sort of the most recent quarter before this one up to 35,000. So that's the number you should have in your head is what is Tesla capable of making? They bought this plant that Toyota was able to do 500,000 a year and they're now doing 25,000 quarters to call it, maybe 100,000 a year.

1:23:35in sort of their production velocity. Yep. Elon's state of gold. I think he actually tweeted it when they announced the Model 3 in March of 2016 that the super secret master plan for Tesla was that he was revealing to the public, which he had revealed to the public when he got involved was...

1:23:54make a sports car, electric car, use the proceeds from that to make a luxury sedan for the 1% use the proceeds from that to make a mass market electric vehicle that will compete with the Toyota Camry, if you will, and bring electric vehicles to the large part of the mass market in the US.

1:24:14That was the Model 3 that they of course announced in March of 2016. They originally wanted to call it, Elon wanted to call it the Model E, the letter E, and this is very Elon. He wanted that because they already had the Model S and the Model X, and so then there are three models would be SE and X. You can do the spelling. And of course the next announced model, the Model Y. The Model Y for SEX Y.

1:24:42They can't call it the Model E, though, because Ford blocks them. Ford owns the trademark to the name Model E. And Elon is livid. Elon calls up... I don't know if it's, I think Bill Ford is no longer the CEO for it at this point. I mean, Alan Mollie, right, is the CEO for it. He calls up Alan Mollie's like, dude, WTF, like, you're not gonna make a Model E. You're just blocking me from doing this. Like, you're ridiculous. And they're like, oh, no, no, no, we're actually thinking about releasing a Model E. Of course, they haven't released a Model E. So that's why it's the Model 3 because it's an E backwards. And of course, also Chessless Third Car. So there's a double entendre there. There was something

1:25:22with I think it might be because they had the Model T, they had also trademarked models for the founder, I think it's E for Edsel. I think it's related to the Ford family name. Anyway, they announced it and the world goes nuts. Once again, within a week, they have 325,000 reservations at $1,000 deposits each. Massive, massive demand. So demand for more Model 3s than they have sold of all of their cars in history at this point, the stock goes nuts, everything's great. Tesla and Elon are on top of the world. And so in August of 2016, they expand their ambitions for Tesla even further by acquiring Solar City for 2.6 billion in stock. Now, we had debated making, at the time, doing a whole acquired episode about the acquisition of Solar City. There's really no way to separate this out from all of the history of Elon and Tesla.

1:26:18Just a quick, you know, to talk about this here. Remember that data center company called Everdream that you know, this was an hour ago. Sorry, this is such a long history in fact, but like the story is too good. When Musk, his cousins, had started Everdream, they sold that to Dell in 2007. That gave him the cash from the proceeds of his investment there to help bail out Tesla. The first time turns out that those same cousins are the rive brothers and they were the founders and CEO and CTO of Solar City and that even before that happened in the summer of 2004, they of course went to Burning Man with Elon. And on the way to Burning Man, Elon was like, you know, I've been looking into the solar industry and I think there's something there. When you're done with every dream, I suggest that you pursue it in the way only Elon can. Of course, that's what happened. Elon invested and

1:27:13finance them in pursuing solar city along with their proceeds from their own proceeds from every dream. They built solar city. It was a publicly traded company, most successful solar company out there. Elon was the largest shareholder. Tesla then acquires it in August of 2016 for 2.6 billion dollars in all stock. And that raises some questions. I'm going to dive into here. What did Tesla actually buy when they bought that? And special thanks to Ben Rush, who is a Associate of mine at Pioneer Square Labs, who has done an incredible deep dive on Tesla, trying to understand the company and contributed significantly this episode in understanding Tesla's current position. He's got this great presentation, and part of his, what does Tesla buy? And it's $5.8 billion of least solar energy systems, $1 billion of property plant and equipment. So, you know, some serious catbacks there.

1:28:06$3.4 billion of long-term debt, which is now saddled up onto Tesla's balance sheet. A company that burned $500 million in operations from the prior year. So it's not like they're buying a cash cow by any means that's going to be able to pay back all that debt that they're buying. And of course, quick aside here that I think is important. Solar City was so successful originally and went public and was the one story of like a clean tech company that worked precisely because they didn't make the solar panels themselves. They were a finance company. They let other people make the solar panels and then they helped consumers

1:28:41finance the purchase of them and get them installed on their homes. Well, in some time around this, maybe like 2014, 2015, they switched their business model to actually making the solar panels. And that's why they took out all this debt and why they started burning huge amounts of capital. So Tesla's like, something that made them successful and built that brand of where actually a successful energy solar company is not exactly what they're doing. Tesla has to make cars.

1:29:10is having trouble making cars. Solar City now has to make solar panels is having trouble making solar panels and Elon's like, they're in there. Let's put them together. Yeah. Neither of us know how to do this manufacturing thing. So what if let's not know how to do it together? Are you also a struggling company for if we've been there? Anyway, start interrupt continue.

1:29:34Now, and the last thing is the synergies. You start to see Tesla doing the power wall and Tesla doing the solar roof, which is really cool, probably with some of the solar city stuff, but not materially contributing to their business. Maybe in a 10, 15-year roadmap and vision as a part of the company so that it more effectively allows you to effectively and efficiently and environmentally friendly charge your car at home, power the supercharger network, things like that, but really now, Now is the time where we're going to do this to our balance sheet? Well, you know, in 2016, again, Tesla was writing really high. They had announced the Model 3, but they had not yet started shipping them. They had very ambitious production goals for the Model 3 that they thought they could hit in part due to lots of automation at the new, well, then not so new at the expanding plant in Fremont. Unfortunately, though, that didn't work out too well.

1:30:32The production issues with the Model 3 have been like a return to the roadster days. They are having such a hard time getting these things off the line. It's all relative, right? Like relative to the roadster days, they're producing them in incredible quantities super quickly and very soon after they announced the existence of the car relative to what they need to do and what they've told, you know, what the, I'm foreshadowing a little bit, but the guidance that they've given, it's a tricky road ahead. Well, in relative to the 325,000 people that made reservations for them in March of 2016, the vast, vast majority of which still here in summer of 2018 have not received their cars.

1:31:10It's a little bit tough. I got a billion dollars in interest free loans. Indeed. All right, thus we have mostly concluded the history and facts. Thanks for bearing with us listeners, but this was awesome. All right, listeners. Now is a great time to thank our longtime friend of the show ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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1:33:02So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. Before we go into what would have happened otherwise, I think why don't we flip these sections and talk about the future of Tesla here? Yeah, I think so. And you can do what happened otherwise after. I think that makes sense. So listeners, for this episode, we wanted to do kind of an extended new section that's really...

1:33:27because the interesting thing to talk about with Tesla right now is not where they came from, although it's a fascinating, fascinating story, but oh my God, what's gonna happen? Because there's a chance that something happens in the next six months. If you look at Tesla, they've been in this position before where it's...

1:33:45Everything doesn't really add up and you don't know what Elon's gonna pull out of his sleeve but he manages to pull something out but we're sort of at an all-time high for that right now and I think what I want to do in this section is really break down sort of the what's scary about Tesla and what could be dare I say the end of Tesla or at least the end of Tesla in its current sort of structure and form or What's gonna be fine and how are they gonna pull out of this and and you know continue the magic that they've they've been creating?

1:34:14And so, I'm going to start with concerns and why you might think, gosh, the market cap right now is a little crazy and can they continue to operate given the conditions that they've created? So, we'll start with some facts. Elon Musk owns 20% of the company. There are lots of things and the rest is mostly institutional. There are lots of things that create sort of a tenuous position that they're in right now, and a lot of things are contingent on the stock price. So for one, there's a bunch of convertible notes outstanding, which at certain prices could convert to equity, but if the stock price doesn't hit that equity, then suddenly Tesla has got a bunch of cash needs to go and pay off these loans.

1:34:55The other thing that's sort of contingent on this stock price is Elon personally. Elon has borrowed 627 million from big banks, so think more instantly and Goldman Sachs against his personal holdings in Tesla to secure it. So it's secured against the changing, you know, something it's changing in value, which is his Tesla stock. And he's pretty much entirely used those borrowings to buy more shares in Tesla. Why would he do that, Ben?

1:35:25The loan is totally secured by the assets that are exactly correlated to the assets that he's buying. So it's not a line of credit. It's a secured loan. And so you could see if the stock price goes up, then good things happen. If the stock price goes down, then the thing securing the loan that he took out is itself going down.

1:35:48You know, you could imagine if the price drop significantly Elon personally could have a margin call where the banks could say hey the collateral on this loan is no longer valuable and you Need to pay us whatever a hundred million dollars or something and put up the cash in order to back the loan because they're saying these these shares are no longer backing the loan which I don't know how much cash Elon has personally, but if he really has done what he's done over the course of his life and sort of plow it all back in, if he goes personally bankrupt, then all of his Tesla shares, 20% of the company could go to the lenders that he's borrowed money from. And at 20% of the company, you know, if you start to see significant sell-offs of those in order to get cash for those big banks, the whole thing could start to spiral down. Yeah. It's turtles all the way down. It's Tesla all the way down.

1:36:39So that's one thing to know is the stock price can trigger all sorts of things. So that's why everyone's watching it so carefully. And another thing you might be about to get into this, but we said earlier that the line between SpaceX financials and Tesla financials and Elon's personal financials are very blurry. Elon's wealth, he's worth on paper about $10 billion. Much of that is Tesla stock.

1:37:06The other part of it is SpaceX stock. SpaceX is not a public company. There's no liquidity in SpaceX stock. Now there is a very active secondary market. Elon certainly could sell some of his shares on the secondary market, but it's not easy or immediate. Like if he has a margin call on his loans, securitized loans from Goldman and Morgan Stanley, and he needs liquidity to pay that off immediately, he's not going to be able to get that super quick from SpaceX. So other things you should know about Tesla.

1:37:35They have about $10 billion in debt, three and a half of which came from the solar city acquisition, and some of those maturity dates are coming up soon. I'll get to this later, but let's summarize by saying it's unlikely that a lot of that convertible debt will convert into equity, and so they're going to have to pay off a lot of this debt as a company, and so they're going to need cash to finance that.

1:37:59Let's look at sort of what have they been doing already just in interest payments let alone paying off the principal because they certainly haven't been doing any of that and if you look at their their financials in 2017 About 500 million dollars went to interest payments and in 2018 I actually don't know if this is so far or if this is over the total over the course of the year I think it's so far is that they've done 600 million dollars in interest payments so big, heavy interest payments that they're having to make in addition to. And that's just interest. That's not principal repayment. Yeah. And so you think, well, maybe Elon will sell some shares in order like there could be a scenario where Elon sells shares slowly in order to get like to make sure that the company's financials are not, you know, dependent on his personal financials. He's repeatedly said he's the last guy to sell shares. So that we know, we know that's not happening. Tesla is now tied.

1:38:51for the largest number of cell recommendations from analysts. So of all sort of the public companies where there's buy and sell recommendations are tied for analysts saying you should sell. We're also looking at a 27% short to float.

1:39:04tons of people that are, you know, chopping at the bit to benefit from Tesla's stock going down. So all sorts of interesting things could agitate to make that go down. The other interesting thing to know about that number is people obviously think it's going to go down. So that's the reason that people have sort of piled on in such great numbers. The other thing I was going to say about the banks and the cell recommendations as a refugee of Wall Street myself. I know how this works. Remember we mentioned that you know, banks like Goldman and Morgan Stanley and others have made loans to Elon to support the Tesla stock. Well, who are the equity analysts who...

1:39:42put out ratings on company stocks. It's banks, right? So there's like a massive conflict here, right? Like banks have large exposure to Elon and Tesla's stock, right? And they're massively incentivized for that stock to retain its value. And those are also the analysts that put out recommendations on stocks. Now, of course, there's a Chinese wall between different divisions of banks, but like, of course, right? Of course. Yeah, think about that for a little bit. That's why, you know, by ratings, Tesla had so many by ratings.

1:40:10one of the reasons, potentially, why Tesla had so many buy ratings for so long, that banks are now starting to break ranks and put sell ratings on Tesla. Just think about all the incentives that they're having to go against to do that. Yikes. Okay. So a few more things we should know. Now let's talk a little bit about delivery promises and production. Why should we be thinking so deeply about delivery promises and production? Well, it's likely that they're going to need two to three billion dollars of cash by the end of this year in order to pay off some of this debt and then also sort of to just finance a lot of the operating activities and catbacks that they need to do. And so if you look at their current capital expenditures in 2018, we're looking at 3.6 billion of catbacks that they'll need. We're looking at 750 million in catbacks for the first quarter of 2019. We'll need 1.15 billion to refinance all this debt that's maturing.

1:41:06So the estimates are that they'll need about 5.5 billion in cash from the beginning of 2018 through Q1 of 2019. Of course, they don't have that. And so we're looking at either we will need to get cash from another equity offering. And so the question then is sort of can will that work? Will they be able to dilute existing shareholders and issue new stock without doing dangerous things to the stock price by introducing a whole bunch of new liquidity. By the way news from the last 24 hours, a former employee is claiming to be a whistleblower to the SEC about fraud at Tesla and the nature of which that if that were proven to be correct, Tesla would be barred from issuing any further equity. Oh, unclear how much merit that case has, but the SEC is actively investigating.

1:42:00Ha, because I was trying to do some research a couple days ago because I had seen that there is unopened letters or letters that have not been disclosed to shareholders that Tesla has received by the SEC and some have speculated and I wasn't going to bring it up because it's like too speculative that an investigation has been triggered and that means that they are unable to do any equity offerings but the whistleblower thing kind of substantiates that a little bit more. We should look into that but so I'm not going to say that it's likely that they're barred from doing any equity offerings but it looks like.

1:42:28That road is a little fraught anyway with you can't do it in large quantities without risking destabilizing the stock or upsetting your investor base. It's all gravy when the stock is going up but if it's not going up significantly then people don't like delusion. So what could they do? The other things they could do they could access the bond markets and go and try and settle up some more debt but as we know Tesla is that now a junk bond rating. And their current bonds are trading below face value. And so it seems unlikely that they'll have access to bond markets to be able to borrow from big banks to get that done. So then if equities a little bit of a tough road, which they could do, presuming they're allowed, they could do by the end of this year. And they can't really access any more debt lines. Well, gosh, could they generate enough cash flow from operating? And maybe, the answer is maybe.

1:43:24And the way that they would do that is by producing highly profitable cars. Which they were doing when they were producing a bunch of the Model S and Model X super profitable. That was really great. But the attention has shifted to producing the Model 3. So they're actually, they've ramped down a little bit of the S and X production lines in order to be able to hit the numbers that they want to hit for the three.

1:43:47They're now producing the Model 3 at the rate of about 5 to 6,000 units a week, which after you're talking with Ben and other folks who've sort of analyzed this, it's believed that that is their break-even point. The amount they're producing, they don't make any money, but at least they aren't losing money by producing these cars. And that's because they're obviously making margin on the cars, but they have huge fixed costs in setting up all that production, and so they're basically just repaying the fixed costs right now. Nailed it.

1:44:16Okay, well, gosh, it seems like the option then is to produce a ton of these Model 3 cars, and that will generate enough free cash flow in order for Tesla to do what they need to do, both in investing in future CapEx and just paying off this maturing debt. Okay, are they going to do that? Do we feel good about them doing that? Do we feel like that's a reasonable thing?

1:44:42The 2018 delivery promise that they made to investors was 500,000 across all cars. They were doing like 25,000 a quarter. I think Q1, they did 35,000 a quarter. And to give you a sense of what's their history been over the last 13 quarters or so, they were producing initially 10,000 cars and then ramped up to 35,000 cars. So it's been changing but sort of like by a factor of three. In order to hit The ramp that they need to in order to produce 500,000 cars in 2018, they would need Q2 production to be over 50,000, which they hit. They came out last week and they hit that 53,000 cars produced in Q2.

1:45:26with great growth. Now, of course, lots of people talking about interesting things they did like pre-produce some of the cars except for the doors and then throw the doors on and call that done. There's also photos of them setting up a tent in the parking lot in order to push more cars through because they don't really have it fully set up in the factory in order to be able to do that. What do they need to do next quarter? Now that they've hit this. In the third quarter, they're going to need to produce like 150,000.

1:45:53So that's 3x what they did this last quarter. And then in Q4, because gosh, we're still nowhere close to that 500,000 across all cars, they need to do about 325,000. So they need to triple next quarter and then more than double after that. And this is not shipping software. This is making cars. It's a tall order. It's a tall order. It's a tall order. Mr. Tony Stark.

1:46:19I'm not here to say if they can do that or not. I just sort of hear to paint the picture of what they would need to do in order to hit sort of the promises made to shareholders. And what I don't know for sure is that that is that forecast the thing that allows them to generate enough free cash flow from operating in order to do what they need to do for all the capital needs going forward or buffer in there. Right. Right. I'm not totally sure.

1:46:45Let's continue playing this out a little bit. The stated goal for 2020, which we probably should just ignore because of what they've never had a three-year goal before. Because Tesla. Right. Is a million a year. So if they were capable of producing the peak that Toyota was able to produce, which my god, that would be incredible. If Tesla could suddenly become Toyota from a manufacturing perspective, they would need, by 2020, an entire second-free-mont factory Because remember the Fremont factory was $500,000. Yeah. Okay. They just signed an MOU for a factory in China. Maybe that will materialize in the next few years. That MOU of course is contingent on Tesla having the massive CapEx in order to build that factory, which we're already seeing them sort of struggles are produced. So one of the bottom lines here is Tesla could probably do this all if they stretched out their timelines a little more and had like $10 billion more to play with. But

1:47:42their access to capital seems to be lessening over time instead of getting greater over time. Another interesting thing that I realized in diving into this is people always talk about, oh, will the gigafactory be big enough? The gigafactory is definitely not the problem. The main bottleneck is the Fremont plant and the fact that they're just assembling these cars is tough and is a highly manual process despite the fact that Tesla and lots of other people wanted to be able to do it more with machinery.

1:48:10That sort of takes us to where we are today. You got to make as usual with Tesla, you have to believe they can really thread the needle and really do something that they thought was impossible on a time frame that I just can't figure out how to do. Yeah, in order to do all this. One way that they could slip out of this that could be okay is They probably won't hit all these production targets. They'll make an admirable effort. Stock price will stay high. This is now making the bull case. They do an equity raise. If you model it out and look at what they raise in equity, if they do $2.5 billion of equity raising at $250 a share, which is a little bit less than it is right now, but you want to do an offering at a little bit less than where it's trading publicly to get other available shares.

1:49:00they could sell ten million shares and it would only be six percent delusion so if the stock price states officially high they could do that it wouldn't it likely wouldn't tremendously destabilize. They kind of kicked the can down the road, but they do buy themselves a little bit more time to start paying off some of this debt, invest in CapEx, and thus increase the ability to produce more of these cars in the future. So if you wanted to bet against Tesla, one argument you would make is there's no way they're going to be able to hit these production targets, and I don't see how they're going to be able to get cash in the door otherwise.

1:49:32And if you wanted to make the bull case, you'd say, yeah, they'll be able to raise a little bit more money. These time frames aren't quite realistic, but they'll get there because they're superheroes, you know, to drew like literally a literal superhero. And they produce something with just tremendous incredible product market fit. And so if they can just actually produce it, then this delightful product will go out into the hands of all these people and really change the world. And so I think that's really what you're looking at if you work to bet on Tesla right now. Now, of course, it's tricky to bet on Tesla in either direction right now because buying the shorts is so expensive because there's already so many people doing it. It's a big risky bet to short the company normally. And now you're piling on with all these other people too. It's tricky to short the company right now. If you wanted to buy Tesla, one thing you could look at is the price to sales ratio because a price to earnings ratio would be not existent. And so we should just look at price to sales.

1:50:24What is their price of sales ratio? It's about 4.9, which is 18 times Ford's price to sales ratio. If you want to look at other car companies at Comps, you're like, okay, well, what does that put them at as a market cap perspective? It's $54 billion, which puts them between Ford and BMW as what people believe the company is worth. Now, Tesla produces, what, 53,000 cars per quarter?

1:50:52Ford does about 12X that. And so if you try and make any apples to Apple's comparisons with other car companies, it gets frivolous quickly because you're like, they're 18X, they're multiple on price of sales. They're producing one tenth of vehicles. You know, a lot of this is speculative. So it gets a little, you kind of feel like you might be buying in when it's already really expensive. So it's hard if you wanted to bet one way or another to make a bet on this company right now.

1:51:22Well, there we are. That's where the company. currently sits two hours later yeah there's two other things to be aware of one is nobody really talks about their competitors like as I was saying forward in my head I was thinking are you really comparing Tesla to Ford right now but these other car companies are are not as sexy of a brand and they didn't invent electric cars and they weren't the pioneer but they are really formidable competitors and so GM has sold somewhere around 30,000 volts And those are all electric vehicles. They know how to make cars. Once they decide to just put the pedal to the metal, they're able to really just ramp production because they know how to do this super well. And like, yeah, the lithium ion stuff is different. The drive train is different. But like, if it becomes a game of how fast can they ramp? And there's existing car companies with products that are finding traction.

1:52:16That gets a little bit scary if you're thinking about becoming a Tesla shareholder. BMW, of course, has the i3 and the i8 that just came out in sort of the sports car market. Ford spending $4.5 billion over the next five years to add 13 electric models to their product line. And so, where we previously were talking about, gosh, these really, these old car companies really make it into the electrical vehicle space, it's starting to materialize. And it's not hard to see that, that continuing.

1:52:44So that, of course, takes us to, well, these car companies need to get their parts from somewhere. How does that work? Well, for the most part, except for the drivetrain and the electric batteries, it's all the same parts that they've had access to before. If you look at Tesla's supply chain, they have 350 soul-source suppliers, which means they are the only people that make that product. And each one of those has to ramp up to meet Tesla's demand.

1:53:08As Tesla has their own problems and can we make cars quickly enough each of those 350 suppliers that they rely on that are the only person that makes that part for Tesla so they can't look elsewhere also has to be able to meet that demand. And so a lot of these things start to add up for Tesla where you're thinking wow not only is it the cash needs are a little bit scary thinking about their competitors their production targets.

1:53:33Then you start thinking about their whole supply chain and their supply chain versus the existing car company's supply chain and sort of who knows how to actually do that. Tesla's got a lot of big challenges in front of them. That's probably why Elon is sleeping on the factory floor. He's been tweeting. On the other hand, it's Elon. I think he probably could. It would take a little while, but I think he probably could liquidate some SpaceX stock and pump that into Tesla. We'll see.

1:54:05So, that's sort of Tesla's future or the different directions of Tesla's future. Yeah. Tech themes? Tech themes. Yeah, I think we'll skip what would have happened otherwise because we've painted so many branching paths here already. It's wrapped up in the speculation. Okay, tech themes. I have two real quick, I mean, so many throughout the episode, but two I want to highlight one. There's a saying in...

1:54:30Silicon Valley, or at least in VC, that hardware is hard. And on the one hand, it's a VC cop out, like all those VCs you passed on, you know, Martin and Mark way back in the original Tesla days. On the other hand, there's an element of truth to it. Like anytime you're working in the real world and doing production, like you really need to have people...

1:54:51Who know what they're doing and I think this is where Apple actually is so great like Apple makes hardware Apple has spent decades and this is really what Tim Cook did within the company before he became CEO building their hardware and supply chain muscle That's one the other one theme that kind of pops out to me here is like people tend to think of IPOs as the end point you know the destination for a company like Man, it is just a point on the journey like there is a lot of you know Still existential risk and challenges in Elon still sleeping on the floor, you know, at the company. Yep. All right. I've got one. So Tesla actually had probably two. Tesla was made possible by I think what Eberhard was calling slow Moore's law. They noticed that batteries and specifically lithium ion batteries were getting 7% efficient year over year. And so well, at the time they started the company, it felt like this is kind of silly.

1:55:44you can only go 120 miles or whatever on a charge and that's impractical. They knew that by the time they got to 2018, we'd be going between 300 and 400 miles on a charge for the Model S. I love the notion that if you can see a trend and you know where you want to be in a certain number of years, you should start the company X years ahead of time before other people sort of realize that the future has arrived. And my other one is that Something happened in like I don't know when it was sometime between the 60s and the 90s where car companies rather than entirely vertically integrating started to work with external manufacturers for components and so if you were to buy a Ford car in the 50s or the 40s you're buying a lot of stuff made by Ford if you're buying a Ford car in 2015

1:56:33You're buying something assembled by Ford, designed by Ford, but they worked with a design shop. They probably built the engine, they probably built the chassis, they probably built the drive train to like everything else is done by specialty people. And so that paved the way for Tesla to be able to enter the market because they actually...

1:56:52There were suppliers for all these things rather than going to one single competitor and saying, let us have access to your parts bin, which is kind of what happened to the DeLorean. In this era today, there's so much that has been outsourced because car companies believe it's not our core competency. We do marketing, we do design, we do whatever, that you chisel away, quote, non-core pieces, little by little, and then you actually do end up a little bit thinner than you wanted to be in creating your mode and there's opportunity for new entrants to use all these other horizontal businesses that you've created. And so that's been a sort of 50 year evolution over the car industry, enabling that disruption. They outsourced all the innovation and that left them in a spot where the model S could be so revolutionary. All right, greeting. As we said in our announcement for the trailer for season three,

1:57:43For recent events, we're going to move to rather than trying to assign a grade, we're going to paint the picture of what an A plus and what a C would look like. Even though the Tesla IPO happened a long time ago, and the solar city acquisition happened a long time ago, this is very much real time. So I think let's do that here, right? Yeah, I say looking forward from Tesla today, sort of what puts them in an A plus position versus what other outcomes are possible. Yeah, and I think actually, Ben, you basically already painted it in the speculation section. Like, yeah, if they hit 500,000 this year, a plus. Yep. Uh, and somewhere in between, but they still stay alive. Like, you know, a minus two, you know, yeah, there's, there's a, there's a b plus a minus thing where they, uh, don't hit production, but they do well. Stock price stays high. They're able to issue more equity. They do that. They raise the capital necessary. Yep. F is obviously the company goes bankrupt.

1:58:40C is the end of getting acquired, right? By Google or SpaceX or somebody else, somebody comes and bales them out, right? Yeah, you could imagine their stock, their market cap drops from 54 billion to like 20 billion. And then it's not a crazy pickup for, you know, people have talked about Apple over the years. We don't talk about Google like they're all doing car initiatives. Tesla's got a lot of the best car people. Not to mention Uber, Lyft, Google.

1:59:07It's so funny. I know we're already so way over long, but I can't help but thinking. Was it the Atlassian episode where Ben, you made the comment about how like, you know, Atlassian was like the IPO your parents want you to marry. Like it's so boring. You like the, you know, the James Bond going full speed towards a cliff. Pull the e-break. It's been like, this is that. This is literally a Bond movie or an Iron Man movie.

1:59:34to Star Trek and like James Tiberius Kirk is over like over the cliff already reaching back trying to figure out if there's something to grab on to while the car is spinning down with the river. Oh man, is it ever? All right.

1:59:48I think that they've been here before they've been here before yeah like I mean this is this is a whole not just a car chase scene. This is a whole movie of you know and and it one other the last thing is in discussing who could buy them it's striking to me that uh Teslas market cap as a public company is lower than uber yeah yeah like uber will probably go public between 80 and 120 billion dollars which will be twice the value of Tesla today Well, it's the power of marketplace business models, Ben. Come talk to Wave. All right. Carbouts. Carbouts? Yeah. So I have one. It's my new favorite podcast. It's so incredibly well done. It's called Dissect. It's every single season analyzes an album and it uses the album as an excuse to talk about an artist's life.

2:00:43And so the season I'm listening to right now is season two, my dark twisted, beautiful fantasy by Kanye West. And it goes song by song. And the guy who does it is a music producer and storyteller. And so he's able to really discover the samples that made up the tracks and sort of recreate some of the beats and pull it out. And you really get a new appreciation and understanding for the craft of producing and creating music.

2:01:11He really goes into the lyrics and really just paints an amazing story of if you like like rap genius, you will love this because you go in, you get a little snippet of the story and then he uses it as like let's let's take five minutes and go back and talk about this moment in the artist's life and then he finds interview clips with them and he finds you know family members they've talked to and it's almost like acquired for music but It done the right way for music where you're actually analyzing the sort of tracks and musicality itself. Having a whole season to dive into an album, you really start to understand the artist in a really deep personal way. I'm a huge Kanye fan so far listening to this. It's really fun. I'm excited to go into the next season too, which is Frank Ocean. I highly recommend the Disect Podcast. Nice. Actually, a different carve out that I...

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