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Do 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. You're like, ah, that was a code name even though it has no. It's not secretive, 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. Today 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. In fact, the most recent US automaker to reach success before Tesla was forward and that was 111 years ago. Tesla is also a solar energy company, semi truck 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 strung 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 die hard never sellers and a tremendous amount of short sellers. And 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, the ratio of the number of shorts to the ratio of the number of people who hold the set 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. So David, can you feel it? Oh boy, can I ever? This is 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. It'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 to bullish on Tesla or to 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 where the guy that says that N Ron 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 boat that we did the company justice and telling the story. Indeed. So what 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 like it more if you like it. Leave a review on iTunes. It helps us grow the show. If you're ever wondering sort of 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 1400 strong and growing group of people that you know talking about the most recent things that are going on, which David nice sometimes talk about the show but don't always talk about 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. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders so we knew there's a natural fit. We know the host of founders well David Senra. Hi David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is we use your show for research a lot. I listened to your episode of the story of a few of Rita before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders until acquired because all of history's greatest entrepreneurs investors they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence Steve jobs talked about him over and over again if you do the research. I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired we focus on company histories. You tell the histories of the individual people you're the people version of acquired and where the company version of founders listeners the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin land from a biography that David did David. It was the third fourth time you've done Polaroid. I've read five biographies of Edwin land and I think I've made eight episodes of them because in my opinion the greatest such a print or ever do it my favorite entrepreneur personally is Steve jobs and if you go back and listen to like a 20 year old Steve jobs he's talking about Edwin lands my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die but the ideas never do. And so Edwin land had passed away way before the apex of apple but Steve was still able to use those ideas and now he's gone and we can use this idea so I think what requires doing what founder trying to do as well is find the best ideas in history and push them down the generations make sure they're not lost history. I love that well listeners go check out the founders podcast after this episode you can search for it in any podcast player lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders go check it out. All right David you know this is what we've all been waiting for the main of all nervous. We'll do it 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 I we did in preparing for this episode we went back and listen 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 were going to 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. Realisting 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 we did not really get the story right so you know at some point we need to redo the whole episode on paypal because there's so much there but I'm going to 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 Elon co founded the company X.com which would morph into paypal via 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 Zipto and it was a startup during the dot com era in Silicon Valley. Elon was was the founder he was the original CEO and the VCs more David Ow 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 push 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 light certainly after it happens at zip to he actually attempts a coup. To regain the the CEO seat attempts aboard to and fails that was his first failure in the startup world zip to shortly after that ends up getting acquired by compact for about $300 million Elon that's about $22 million out of that sale and 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 into this and loves it is like this dot com wonder kid so the first thing he does this is going to directly lead to 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 F one for $1 million in cash so the McLaren F one was was maybe still is I think the fastest car ever made there 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 and then he he called emails Larry Ellison the the Oracle CEO he doesn't know Larry but he knows that Larry also owns of a Clare and F one so he called emails and says let's get together and race these things which they do this is the world that 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. He's will never else to miss you again he starts a company calls it X dot 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 you like keeps going with X dot com we didn't get any of this in the paypal episode X dot 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 start up in Palo Alto called confinity that was founded by Peter teal and max left chin and the rest of the paypal crew they're working on some crazy palm pilot stuff but they see what Elon and X dot com 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 you like it's the space they go somewhere else so David the people that spun off to formal rival company what what that end up being or that just fizzle that just fizzle yeah that got anywhere but now he's had like two major blows so there's the initial blow it's up to two major blows in the paypal journey they end up X dot com and confinity and emerging 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. The new board of the combined company decides to outst Elon bring in a professional CEO again so his worst nightmare has just happened again he would be better suited by becoming one of these professional CEOs it seems he really what he really would so that that doesn't last very long Elon stages the 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. He's honeymoon they go back to the combined board and outst 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 to a lot to do with why they decided to sell to eBay which we didn't talk about in the paypal episode. Anyway, Elon nets from that sale about $180 million 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 Elon is is a pattern where people do the things that made them successful because they believe that that is the way they are. That is 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 to be I think because that will do well to and like he just has this complex that's like deep within him from these early days of like I 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 is we look at the journey of Tesla and what's happening today and why you're on the sale 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 space X 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 space X 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 Tesla 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 space X 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 because these were the days of the Iraq war and of course you know Hollywood and all of California's very liberal was very against the war viewed you know the US's oil interest 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 swept up in this to he gets really interested in alternative fuel sources for powering vehicles and reducing did you on 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 at one at that point actually I think he does because I think it'll resurface later so meanwhile back in Silicon Valley I got named J. B. Strabal is hanging out actually J. B. 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 you at university teams would create autonomous vehicles to navigate terrain this was an autonomous but it was powered by solar and so Strabal had been part of the team while he was at Stanford and do a variety of ways to stay 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 laptop 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 is 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 realize that you can string together a bunch of these and actually have enough power to power a car he'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 I'll give you $10,000 to help fund this and it's just like awesome by the way you know you're like this you know the Bacchlear and F1 guy you know you really the cars you might want to check out down here in L.A. there's this kit car manufacturer this essentially car enthusiast group of guys called AC propulsion and they make this electric car called the T zero zero zero listeners you got to Google this thing and look at it looks like a joke it looks like a joke but it goes zero to 60 and sub 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 struggle 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 Maclair and F1 this is awesome I want to find a way to go all in and really turn this T zero into like a consumer car and maybe this can replace the Prius as the status symbol in L.A. the AC propulsion guys though they're just like car enthusiasts they don't really have any intention or desire to start a company turn this into mass production they're making kit cars you know for other enthusiasts to get the part they sell 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 like endure conditions like if left out in the rain it will stop working nothing was ready for the elements so it's not like you could leave the senior driveway and go grab it in the morning it's it's a it'd be huge risk. Yep this is not the Tesla you know in 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 the AC propulsion guys aren't going to do this. Strabal 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. 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 ever hard and Mark and Mark are pinning names that you probably haven't heard of the two of them who who are Martin and Mark they had had a successful exit themselves they were start up guys in the valley they had co founded a company that was a really early ebook reader so like a you know kindle competitor before the Kindle that ended up getting acquired for I believe about just under $200 million they successful exit and they were just like Elon looking to do something more meaningful with their lives in there. Next gig and the dotted line you can kind of draw here is one of the trends that led them to start an ebook company was that battery technology was getting better and what can we do with smaller better more efficient rechargeable batteries gosh maybe ebooks could finally be a thing and so you know I think they sort of still had that bug in their mind when when they sold the company. Yep 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 space X 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 can get the band back together on July 1st 2003 they incorporate the company ever hard goes down on a trip to Disneyland in LA with his wife and he's walking around Disneyland and seeing all the you know the history and how Disney's incorporated that into the lower and mythology there and he comes up with the perfect name for the company. Tesla Motors in honor of Nikolai Tesla the famous inventor who did much much work on electricity and the goal that ever hard had there which is really similar to sort of elons 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 T zero that's what the T zero was you know the name T zero represents like the time on the X axis where it intersects the Y axis time is zero and going on from here so it's for like you know math nerds and battery nerds you know 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 up. Yes still pay a loose homage to sort of where we were the history of the industry is yep and so they again the new on our on the same page they just haven't met yet they think that the best way to get this thing going and get a market is to actually start with what AC propulsion is doing with the T zero and make it you know a consumer version they do a bunch of thinking about like where the technology is both with batteries and drivetrains 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 and 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 T zero itself to San Hill road and they go start pitching VCs on raising a series a just our building this company to start building Tesla and of course they've raised money before they've had a successful exit and everybody on sand hill is like you guys are nuts you know you know you're going to be like a little bit more if you want to build a car company like your tech dudes like what are you doing if you're a VC firm and pair of entrepreneurs not just even a single entrepreneur but the whole team like the two co-fanning 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 out of $1,000 but we're not going to lead because this is nuts and it's sort of a fascinating case study to where like you don't know what wave is coming and you know Elon started this wave or I guess ever hard 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 bring the storm a little bit it's as if they were going and pitching like you know the next step for VC back tech companies is definitely hot air balloons and 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've 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 there and so the VCs were totally wrong like Tesla becomes a you know burning money pit for for well really still to this day really still to this day which we will discuss later so they get $500,000 from their old VCs 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 and so they're going to 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's 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 in that license is that they cannot raise money from any of the investors that 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 and so they had previously pitched Elon and he had said no which made Elon eligible to be pitched yeah yeah interesting I didn't get that detail well that perhaps leads to ever hard and targeting their like kind of out of luck they don't know where to go they think they need $7 million to get a prototype of what would become the roadster built every VC in the valley has turned them down to the sea 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 to maybe you guess a chap 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 seven 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 you do a C or a series A or whatever and you have individuals involved they come in his angels they're writing like 25 K checks it's incredibly 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 to run in before ever hard and targeting with Elon Musk did you did you find this at all I did I did yeah in 2001 targeting so the big space nerd drags ever hard to a Mars Society conference at Stanford and sees Elon speak about space X the idea for what would become space X he hadn't started space X yet good call is 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 it's an 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 Strabble as we talked about with the battery packs and so he says to ever hard and type and he's like hey I know this other guy who nominally lives in LA but basically spends all his time up in the valley anyway he's really into batteries you're going to need some better battery tech you should go talk to this guy they're like okay they bring Strabble 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 ever hard targeting Strabble and Musk as chairman and lead investor Tesla 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 drivetrain from AC propulsion they've taken the car body from the Lotus Elise Lotus is a I believe a British car manufacturer I think and they made the Elise sports car and it's the chassis from that and they custom built their own sort of body in 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 get the board is like Elon 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 so on top of the previous seven million they've now raised $20 million and they're going to use that money to get the roadster to production we will see how that actually cost $20 million sure no no no big deal how hard is it to build a production car and 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 owns 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 Lotus Elise is unacceptable to Elon his vision is he wants his then wife Justine 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 going to like take to work or you know it's not mass market and it's $100,000 car so they're 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 you know I mean there are people who will buy a hundred thousand dollar sports cars that are completely impractical but that is a very very very small market and Elon's like 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 I'm Mercedes sports car or whatever and so he keeps pushing them to do that that of course leads to tons of delays side fun fact during the summer of 2005 is 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 so they keep working on it it's now summer of 2006 the company has a hundred employees at this point working on the first production Redstone candidate they are out of money they raise another $40 million at this point Elon 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 announced this car they get a whole bunch of celebrities to come they hold it in Santa Monica Arnold Schwarzenegger who is at that point in time the governor of California he comes I think Larry and Sir Gay from Google are there there a whole bunch of people celebrities and 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 unveiled a 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 within 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 you know in LA in Silicon Valley in San Francisco in the automotive press people start showing up to the Tesla offices I can 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 like randomly like walk in or like I want to put my name in at the event they were trying to sell the initial 100 there was like a special club of people that were going to get the first 100 there was going to be a plaque there was going to be signatures it's like the Gavin Bells and signature edition box I think they they sold like 116 or something so they hit their goal there well and it's even better than that they're 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 like you know selling cars and whatnot and 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 eighty it was eighty five thousand dollars and then there is the price two hundred thousand dollars you join a club for eighty five or a hundred thousand dollars and as a benefit of joining a club you get a free car and nothing else nothing else yeah well you're also you get the plaque and all the things you're saying you get like a you know a membership card and whatnot you should say to like we've been saying Elon Elon Elon he has appearances on stage but it's really Aberhard's show at this point Aberhard's talking to the press Aberhard's doing that that big announcement he's subsequently flying around to you know 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 as a genius in 2006 he was featured as the face of research in motions campaign for the Blackberry Pearl 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 Aberhard 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 Aberhard's 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 Aberhard instead of you I mean who could have known at that point but anyway this is yes Aberhard is very much the CEO and you know co-founder and CEO of the company Elon is the you know series a and B and see 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 that would be like martin Aberhard being called an early employee apart from 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 but 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 well 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 Ironman you know much like Tony Stark like he's a very sensitive and emotional like inside like he went through just terrible you know betrayals and you know heartache and burns with his 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 ever 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 their things are not good so one 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 he 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 you know 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 not 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 you know created months and months and months of new parts that had to be created the players that had to be sourced they dropped the bottom of the doorframe so you can get your feed in by three inches and so they had to sort of reengineer 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 the rest of it Tesla 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 ever hard was pitching around that says oh yeah you 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 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 that'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 and AC propulsion drive chain and whatnot and slapped it together and called it today Elon was the one who is like no this is unacceptable we need to make a real car here all this culminates in August 2007 the board has 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 you know it's 150 people now I've never managed something of this scale we had to switch on to SAP that migrations going terribly I don't understand how to do it it's not my wheelhouse maybe we should have a CEO I'm a menable 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 I just 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 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 the case gets settled and so they still I believe the two men have not talked since then yet they settled this case so there's not disparagement agreement on both sides and everybody's at least financially set 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 Michael 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 coup 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 you know as which is a ten point plan for getting all of the problems with production back on track you know 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 know you need to bring in somebody else to actually execute the plan so at the end of 2007 Elon and the board bring in guy named Zev Droy and maybe butchering that name is Israeli names 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 sold 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 into execute the Marx plan it doesn't go too well still lots of delays must start getting more and more personally involved he starts showing up the company he demands that everyone at the company work 24 seven and eventually later in 2008 in October of 2008 he makes it official and he fires Droy and just becomes the CEO himself is a pretty pretty quick couple of years there he well it was a couple years at Tesla but uh Droy last less than a year before you learn right but with with Marx and you know that that rapid transition there so Elon is now CEO 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 particularly the financing world which is important for you know people who want to buy a hundred thousand dollars cars the automotive world where you know GM has gone bankrupt or is going bankrupt the car industry is literally being bailed out by the US government and all throughout all this Tesla has all the problems of you know any startup let alone one is complicated is this they're burning four million dollars a month at this point and things are not looking good yeah mosque 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 is Tesla they need money by Christmas of 2008 or like 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 like angel sized chunks so he gets like a whole bunch of people including so gay brin who invests five hundred thousand dollars to like scrape together just some money to keep the company going musk takes out a loan at SpaceX like a SpaceX loan that he then takes the proceeds from and and for this unbelievable and pours that into into Tesla it was borrowed from a bank and it was secured ties 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 and 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 Elon 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 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 literally out of I think it was actually it was even crazier than that at SpaceX we will definitely tell that story so big I think they were on like the fourth launch like they had money for two they didn't work they blew up then the third one blew up and then like so anyway it was bad musk stuff 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 that will come back into the narrative in a little bit his cousins had at some point built a data center come 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 plows it into Tesla we're approaching Christmas and the other way that Elon extends the runway 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 dollars he goes to all the rest of the investors around the table and he asks the investors to match it for a 40 million dollar 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 is you know 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 of a future equity races so musk is like all right fine you're going to block this equity raise I'm going to do this deal is debt he puts the money in his debt and he gets 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 and so closing on Christmas Eve and and the company the company is given a lifeline and and thrives goes on to thrive debatably as we'll see but survives at least goes on to produce amazing cars goes on to produce amazing cars so 2008 was a crazy pivotal year for Elon and Tesla the other thing that we have to talk about in 2008 I remember this vividly so I was working on Wall Street as an investment banking analyst in 2008 it was my first year at undergrad and watching all this like destruction around me you know of banks failing you know first bear stones and then lean my 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 spiked a glimmer of hope and it was this movie called iron man and which was actually 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 at 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 it's it's harder 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 down in junior of course you know 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 part of the inspiration that leads to creating the Tony Stark character so much so that down he 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 I didn't realize they had talked before that that's wild isn't that crazy yeah I guess I you when I wrote that stupid intro I didn't even it's real it's really of course like you know Tony Stark is not you know Elon Musk or vice versa but like there is a you know actual threat of Elon in Tony Stark so you know just like Iron Man and Tony Stark himself Elon and Tesla do come back to life from the brink of death with you know a nuclear reactor heart installed in the next few years you know in 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 a hundred thousand dollars 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 to $25 million interest bearing loan we will get to that in a minute 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 self-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 it comes the thread of Elon being the guy that doesn't quit like reinvest at 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 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 redster introduction of introducing the sedan for $50,000 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 super star 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 as a very very celebrated man in the automotive industry Henrik Fiskar might ring a few bells for some people Fiskar like the Fiskar automotive company that is a competitor to Tesla was was a competitor Tesla so Fiskar comes in from aston martin comes over to the U.S. he starts working on the design and it's like he 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 Fiskar automotive Musk later learns that a panel well who knows with musk apparently Fiskar had been think it was his attention to do this all long and he wanted to come to Tesla to learn what they were doing steal some secrets and they go start his own company musk sues him later ends up losing Fiskar wins the suit it doesn't really matter though because Fiskar the company and Henrik Fiskar the founder they decide to make the car a hybrid instead of a fully 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 decide to kind of hack it together internally just like they did with the red star Tesla ends up serving 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 design 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 got it and they essentially just like they did with the T zero they turn a Mercedes CLS into what becomes the first model S or at least the first prototype of the model S at the same time you know Henrik Fiskar 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 Tony Fidel 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 and 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 that Steve Jobs magic to keep Fidel at Apple until he would leave and start nest in 2010 so they lose they lose Tony but they do end up hiring another guy from the automotive industry friends van holes housing I think he was at Mazda at this point but he had redesigned the Volkswagen Beetle in the you know the iconic reboot of the beetle in the 90s you know 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 he moves to LA franz is now based in LA decided 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 that you know that the new car is the new car which is the space X office so so franz and the design what is now the design team for for Tesla they set up office inside these the space X offices and hangers in in Hawthorne California and I believe that they're there today which is quite funny and then they end up doing lots of press events at Tesla press events at space X and of course there's now the crossover with the new roadster being blasted off into space why not synergies corporate governance and did musk and franz they they kind of are they become really kindred spirits during this time and and still to this day musk decides the car body has to be aluminum to save weight and this is like no no car has ever mass production car has really ever been made in aluminum before and franz 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 and then 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 musk and franz have their way and it's an iconic part of the model that's very jobs in like when jobs insist that it has to fit in this specific form factor and that everyone's like what are you crazy and then it takes like you know some engineer figuring out you can fold a mother board over on itself in order to make the iPod shuffle that was 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 a 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 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 people 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 dimelar the parent of Mercedes Benz the German company they get pretty excited about what Tesla is up to and they end up contracting with Tesla to build to prototypes of a 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 fifty million dollars into Tesla at a five hundred million dollar valuation for ten percent 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 for this is Ben of course where you were referring to earlier a four hundred and sixty five million dollar loan agreement with low interest loan from the US Department of Energy and this is going to be all the capital between that and the I believe it was in total a hundred million dollars from dimelar and Toyota all the capital that Tesla thinks they'll need to get model S 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 which 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 you know demand for 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 and buy it for forty two million dollars this thing had once it costs at least a billion dollars to build and when Toyota was operating it it was peaking at being able to produce five hundred thousand cars per year yeah crazy which of course Tesla is still nowhere near that production right yeah and where were they around this time they had shipped in 2009 they had shipped in total across all the years that they were doing the roadster 2,500 roadsters and like you know maybe a couple model S has been delivered at this point so a lot of headroom in that plan yeah indeed on the back of all this news they filed a 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 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 summer of 2010 they filed a public June 29th the IPO happens they raise 226 million dollars 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 of course GM would re go public later after it had been deal listed the bankruptcy process and then owned by the US government and was was ultimately re listed a little while later crazy so on the back of all this they are hard at work you know getting this new plant in free month California online getting the model s out the door you know at production scale but they're they're having some problems so the model says start trickling off the line the reviews and the responses amazing I mean it's really not an exaggeration I think to say that the model s was like the iPhone of cars like it completely changed the game of what it meant to be a car and really you know 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 like in the car companies just weren't thinking about all this stuff I mean it had crazy acceleration and handling of course you can get it configured to see seven it's got a touch screen in the dash instead of all the knobs and stuff I mean even today like I ended up through a whole bunch of crazy circumstances two winters ago had to rent a car to drive in a snowstorm 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 and in true Tesla fashion let's not put an iPad let's custom build our own I pass of course and put that in the dash there no dealerships so there's no haggling like the 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 yeah 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 buying to 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 basically 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 actually buy it here but look how cool the car is you know 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 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 and 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 shift just hanging out and volunteering in the showroom with no employees. Tesla has created an unbelievable product with Apple level fanboyism. Absolutely it is it is no exaggeration to say it is the iPhone of cars it is the unanimous 2012 motor trend car the year I don't know that there's ever been a unanimous car before like I mean it gets all of the all of the press accolades all the reviews you know it just is truly game changing for the car industry there'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. So while all this is happening throughout 2012 production is like anemic they're making like dozens per week you know and in the backlogs. Which is like it's funny the phrase dozens sound as 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. And again remember this this plant that they bought in Fremont was making 500,000 Toyota's and GM vehicles a year and Tesla's you know pumping out on the order of like hundreds not hundreds of thousands hundreds of models 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 and 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 they will. We'll have the giga but at this point the giga factory isn't even a gleam in Elon's eye so they're trying to source batteries that like also Apple and you know Microsoft and HP are trying to source like now Tesla has all their own IP and stuff but they're still their suppliers are still the same suppliers in Asia making these batteries as other you know computers. 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 a hundred 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 and Toyota pioneer in order to have organizational efficiency and nimbleness when you need it and the ability to know how many flaws could come up and allow tolerances for those things it's 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. It's also what makes Tesla so 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 Tesla's like you know motor train car the year they've revolutionized the industry things couldn't be better but they also can't make them and so like they have these huge production problems and it creates you know huge liquidity and cash problems at the cash cycle problems at the company ends up like a huge once again a huge short position builds up in the stock people like Tesla's going to go bankrupt like 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 really bad people start canceling their five thousand dollar deposits on the model S because like the delays are just you know people are on the wait list for years at this point must announce is 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 is in or city financials is blurry at best at best the other thing that he does and what will 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 one up 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 just start calling them and trying to convince them to preorder a model S that's how bad things were now this is 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 benefit you came across this like I think we're thinking of the same thing maybe not if it has been reported it probably has is just so much news about Tesla 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 you know routinely so also Elon doesn't own a home in Silicon Valley he only has his home in 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 fun fact this was right down the street from the garage that I lived in when I was a student at Stanford a 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 pages house and Elon while all this was happening Elon goes to Larry and he's like I don't think we're going to 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 for six billion dollars six billion dollars they hammered out a deal where Google would acquire Tesla again this is the beginning of 2013 for six billion dollars and commit to 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 three so Google would have no control it would only be on 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 expenditures at Tesla five billion dollars which interestingly enough would not have been enough would not have been enough probably would have been anywhere near enough and you know those vcs way back in the day they they were not wrong that this is going to become a burning money pit then basically 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 rad 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 and freeze and probably butchering that name managing partner at dbl which is investor in Tesla space X and solar city and Tony Ograceus who's the board member at space X and solar city Steve Jervitson who's the managing director of dfj a significant space X shareholder or was a significant space X shareholder and of course Kimball Mosque Elon's younger brother of course anyway the deal is done it's about to happen but like I said that miracle happens all of those employees that Elon had set to work basically manning the call center doing outbound tell a 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 you know net income of $11 million and the company is saved can they recognize that revenue I guess they can recognize the pre sales revenue yep I'm not exactly sure how the county work but while all this is happening they do start to ramp model 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 in May of 2013 and the world is is dumbfounded the stock was trading about $30 it jumps immediately to $130 and all of the short sellers that had built up those the short positions in the stock they take huge losses just a quick aside on short selling for 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 equity investing in the stock market or anywhere else in general is it's you know and it seems to be rates 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's 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 into the short positions you know bad for them Elon has 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 and so on the back of that they they end up repaying that department of energy loan early I believe they of course ends 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 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 you may have them but as this happens then they start doing a regular drum beat of secondary equity offerings on the stock market bond offerings various forms of debt both convertible debt in equity and non convertible debt and they raise a lot more money over the subsequent 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 up to the public yeah yeah but they're also doing dead offerings throughout all this time so you know the stock price going up and people having faith in in Tesla enables them to both sell more equity but also be able to raise money and 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 unveil the crazy what is it like the P 100 D or something version with two motors with Chris mode Leon had some tweet he's like get ready for the D you know is like when they're about to unveil the the dual motor offering but nobody knows what the D is he just keeps saying the D until you find out it's a dual motor dual motor this thing you know it's a it's a lot of less it's a sedan that you know you can get configured to seat seven people it does zero to 60 in 3.2 seconds like that's insane they also launch autopilot in 2014 there I don't know what level of autonomous they're at this point but you know freeway at least autonomous driving that continuously improves the next year September 2015 they released the model X the SUV which it's like the same chassis and they just bump it all up a few inches yep and at least judging by you know San Francisco and Silicon Valley is the new Ick car around here replacing the model S and I should know to meant to say along the way basically the vision you know that Elon and Martin and Mark the original you know founders quote unquote of Tesla true founders of Tesla had of replacing the Prius as the status car of you know at least the liberal population of the US completely happens so with the model X they launch a queue on of 2016 and by Q call Q4 of 2016 it was doing just about as many sales as a model S and I's effectively continued like that until now yep yep in all of 2015 they do a hundred thousand 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 of the things happen that we should for sure mention before wrapping up this and let's give credit totally amazing they've produced it 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 had 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 a quarter so call it maybe a hundred thousand a year in sort of their production velocity elon stated gold I think he actually tweeted it when they announced the model three in March of 2016 that the super secret you know master plan for Tesla was that he was revealing to the public which he revealed to the public when he got involved was make a sports car electric car use the proceeds from that to make a luxury sedan for you know the 1% use the proceeds from that to make a mass market electric vehicle that will you know compete with you know the Toyota canry if you will and bring electric vehicles to the large part of the mass market in the US that was the model three 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 S E and X you can do the the spelling and of course the the next announced model the model Y the model Y for S E X Y they can't call it the model E though because Ford 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 this point that you're not going to make a model E you're just blocking me from doing this like you're ridiculous and they're like 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 three because it's an E backwards and of course also third cars is a double entendre there there was something with I think it might be because they had the model T they had also trademarked models for the founder like I think it's E for Edsel I think it's related to the you know the Ford family name. Anyway they announced it and the world goes nuts once again within a week they have 325 thousand reservations at a thousand dollar 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 just a quick you know to talk about this here remember that data center company called ever dream that Elon this was an hour ago sorry this is such a long history and facts but like the story is too good when Musk his cousins had started ever dream 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 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 ever dream I suggest that you pursue it in the way only Elon can of course that's what happened Elon invested and finance them and pursuing solar city along with their proceeds from their own company their own proceeds from ever dream they built solar city 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 dollars of leased solar energy systems a billion dollars of property plant and equipment so you know some serious cat backs there 3.4 billion dollars of long term debt which is now settled up on the Tesla's balance sheet a company that burned 500 million dollars 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 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 finance 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 capital Tesla is like something that made them successful and you know built that brand of where actually a successful energy solar company is not exactly what they're doing Tesla you know has to make cars is having trouble making cars solar city now has to make solar panels is having trouble making solar panels and he lines like they're in there in their life together either of us know how to do this manufacturing things 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 now and the last thing is this energy is in you start to see like the Tesla doing the power wall and Tesla doing the little solar roof which is really cool probably with some of the solar city stuff but like not materially contributing to their business maybe in a 10-15 year road map and vision as as a part of the company so that it more effectively allows you to effectively and efficiently and and environmentally friendly charge your car at home power the super charge network things like that but like really now now is the time 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 three but they had not yet started shipping them they had very ambitious production goals for the model three that they thought they could hit in part due to lots of automation at the new at the well then not so new at the expanding plant in Fremont unfortunately though that didn't work out too well and the production issues with the model three have been like a return to the road to 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 an incredible quantity 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 foreshadowing a little bit but the guidance that they've given it's a tricky road ahead well and relative to the three hundred twenty five thousand 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 it's a little bit of a billion dollars in interest free loans so indeed indeed all right thus we have mostly concluded the history and facts thanks for bearing with us listeners that this was awesome before we go into what would have happened otherwise I think while we flip these sections and talk about the future of Tesla here and I think so happen otherwise after I think that makes so listeners for this episode we wanted to do kind of an extended new section that's really because 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 going to happen because there's a chance that something happens in like the next six months if you look at Tesla you know they've been in this position before where it's everything doesn't really add up and you don't know what Elon's going to 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 going to be fine and how are they going to pull out of this and you know continue the magic that they've they've been creating and so I'm going to start with sort of concerns and why you might think gosh the 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 so 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 if the stock price doesn't hit that equity then suddenly Tesla has got a bunch of of cash needs to go and pay off these loans the other thing that sort of contingent on the stock prices Elon personally Elon has borrowed 627 million from big banks so think more can Stanley and Goldman Sachs against his personal holdings and 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 use those borrowings to buy more shares in Tesla why would he do that then the loan is totally secured by the assets this that is 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 things securing the loan that he took out is itself going down so you know you could imagine if 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 to the banks. It's a lot of the time he has 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 selloffs of those in order to get cash for those big banks. The whole thing could start to spiral down. All the way to pump. So 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. Not to that as Tesla stock, the 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, they 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. Well, let's look at sort of what have they been doing already just in interest payments. Let alone paying off the principle because they certainly haven't been doing any of that. And if you look at their financials in 2017, about $500 million 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 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 principle repay. Yeah. Well, maybe Elon will sell some shares in order like that. 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 for the largest number of cell recommendations from analysts. So of all sort of the public companies where there's buying cell recommendations are tied for analysts saying you should sell, we're also looking at a 27% short to float. So tons 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, you know, support the Tesla stock? Well, who are the equity analysts who put 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 are 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, you know, 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. One of the reasons potentially why Tesla had so many by ratings for so long that banks are now starting to break ranks and put cell ratings on Tesla. Just think about all the incentives that they're having to go against to do that. Yeah, it's okay. So a few more things we should know. Now, 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 capex 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 capex that they'll need. We're looking at 750 million in capex for the first quarter of 2019. We'll need 1.15 billion to refinance all this debt that's maturing. So 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 we're proving to be correct. Tesla would be barred from issuing any further equity. Undinclier how much merit that case has, but the SEC is actively investigating. Huh, 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're unable to do any equity offerings. But the whistleblower thing kind of substantiates that a little bit more. We should look into that. So I'm not going to say that it's likely that they're barred from doing any equity offerings, but it looks like that road is a little fraught anyway with you can't do it in large quantities without risking sort of destabilizing the stock or upsetting your investor base. It's all gravy when the stock's going up, but if it's not going up significantly, then people don't like delusion. So what could they do? So 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 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 equity is 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. And the way that they would do that is by producing highly profitable cars, which they were doing, you know, 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. They're now producing the Model 3 at the rate of about five to six thousand units a week, which after they'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 and setting up all that production. And so they're basically just repaying the fixed costs right now. Nailed it. Okay. 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, you know, 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? Well, the 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 like 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 with 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. So 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. It's a tall order. It's a tall order. Mr. Tony Stark. I'm not here to say if they can do that or not. Just sort of here 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 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. Let'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 hit a three year goal before. Because Tesla. Right. It 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 freemont factory. Because remember, the freemont factory was 500,000. 500,000. Yeah. Okay. They just signed an MOU for a factory in China. Maybe that will materialize in the next few years. But MOU of course is contingent on Tesla having the massive cap ex 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 their access to capital seems to be lessening over time and sort of 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 freemont 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. Okay. So that 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, you know, one way that they could slip out of this that could be okay is they probably won't hit all these production targets. So they'll make an admirable effort. Stock price will stay high. This is now making the bull case. They do an equity raise and if you model it out and look at what they raise an 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 kind of want to do an offering at a little bit less than the where it's trading publicly to get other available shares, they could sell 10 million shares and it would only be 6% delusion. So if the stock price stayed sufficiently high, they could do that. It wouldn't 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. And 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 do it 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. What is their price to 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 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? Ford does about 12X that. And so if you try and make any apples to apples comparisons with other car companies, it gets frivolous quickly because you're like, they're 18X, they're multiple on price to 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. It's hard if you wanted to bet one way or another to make a bet on this company right now. Yeah. Well, there we are. So 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, Ford in my head, I was thinking, are you really comparing Tesla to Ford right now? But these other car companies 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, that gets a little bit scary if you're thinking about becoming a Tesla shareholder. BMW, of course, has the I-3 and the I-8 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. So that, of course, takes us to, well, these, these car companies need to get their parts from somewhere. How does that work? Well, for the most part, except for the drive train 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 sole 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. So as 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, then 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. 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. So 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. Let's wrap 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 Silicon 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 who 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 who 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, 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. You know, you 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 three 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, you'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, there 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, you know, there's so much that has been outsourced because car companies believe it's not our core competency. You know, we're we do marketing, we do design, we do whatever. But you kind of 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. The outsourced all the innovation and that left them in a spot where the model S could be so revolutionary. All right. So, we're going to be doing, as we said in our announcement for the trailer for season three, for 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 in the solar city acquisition, happened a long time ago. This is very much real time. So I think let's do that here, right? Yep. 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. Yeah. If they hit 500,000 this year, A plus. Yep. And somewhere in between, but they still stay alive, like, you know, A minus two, you know, yeah. There's a B plus A minus thing where they 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. C is the end of getting acquired, right? By Google or SpaceX or, you know, somebody else, somebody comes and bails them out, right? Yeah. You can 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'll have talked 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. It's so funny. I know we're already so way over long, but I can't help but thinking, um, 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 like, this is that. This is literally a bond movie or an eye-bid movie. To 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 onto while the car is spinning down with the river. Oh, man. Is it ever? All right. I think that's it. But they've been here before. I mean, yeah. 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 one other last thing is in discussing who could buy them. It's striking to me that 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. Carvouts. Carvouts? 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. And 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. He 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 so he's like, 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 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 music quality itself. You know, having a whole season to dive into an album, you really start to understand the artist in sort of a really deep personal way. And I'm a huge Kanye fan so far listening to this. So it's really fun. I'm excited to go into the next season too, which is Frank Ocean. So I highly recommend the dissect podcast. Nice. Actually, a different carve out that I was going to talk about, but I want to spend more time talking about it and we're already over two hours. So I'm going to hold that for next time, but inspired by podcast for you. My new favorite podcast introduced to us by friend of the show and head of the acquired fan club. Meet Anand, Big Shoutout to Pete is Harry Potter and the Sacred Text. It's amazing. It's like two Harvard Divinity School graduate students going through the Harry Potter series chapter by chapter and reading each chapter through a spiritual lens. And it's really, really cool and fun. If you haven't already heard of it and you're a Harry Potter fan, check it out. Listeners, thank you for coming on this journey with us. It feels good to get it off our chest. Really fun to dive into Tesla. I'm sure we will get email. I'm sure we messed some stuff up. I think we probably got the plot, but missed some of the details. Come join us in Slack, acquire.fm. We would love to keep the conversation going. And if you are not subscribed and you want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined, we would love a comment on Apple podcasts. Thanks so much and have a great day. We'll talk to you soon.