Tesla's broke. Elon Musk, Tesla's CEO, is broke. Now Musk is traveling the country, hat in hand, begging for cash in a series of secret, closed-door meetings. One unimpressed insider shared this exclusive, behind-the-scenes look with us.
After selling just over 1000 cars since 2008 and recording its first — and only — profitable quarter in July of 2009, Tesla Motors is going public. The company will be offering 11.1 million shares to investors, at an expected valuation of $14 to $16 each, for up to $177.6 million in capital. It's a big-money step for a company that has until this point relied on hundreds of millions in funding from private investors and low-interest government loans.
In order to sell the company to institutional investors, Tesla CEO Elon Musk is going on an IPO roadshow, a common step in the process, and pitching his venture to interested parties.
Not everyone is coming away impressed. For lack of a better phrase, Tesla is a money pit. Since the company's founding in 2003, it's managed to incur over $290 million in losses on just $147.6 million in revenue. That revenue comes from sales of Tesla's sole product, the electric Roadster, engineering consulting work, and from Zero Emissions Vehicles tax credits the firm has sold to Honda. Tesla is also servicing a $465-million-dollar long-term loan from the U.S. Department of Energy, one targeted at the development of alternative-energy vehicles.
Tesla has a long history with Silicon Valley. Founders Martin Eberhard and Mark Tappening were Silicon Valley engineers, and many of the company's initial investors were tech giants, including Google founders Sergey Brin and Larry Page, former eBay president Jeff Skoll, and Musk (a co-founder of Paypal) himself. Given that, Musk has decided to target tech investors — heck, they're even listing on the tech-biased NASDAQ stock exchange rather than the industrially oriented New York Stock Exchange. An anonymous attendee to one of the IPO background meetings has spoken exclusively with Jalopnik about the event:
"I went to the IPO roadshow for potential institutional investors yesterday in San Francisco," he says. "They were hand-picked technology types. The investment bankers (the IPO is underwritten by Goldman Sachs, Morgan Stanley, JP Morgan and Deutche Bank —Ed.) are clearly aiming this IPO at the tech/Silicon Valley investor crowd, not at industrial investors, who would have laughed them out of the room. For that matter, the Tesla types are not car guys, either. They spent the time pounding their chests about [their] Sili Valley pedigrees. I doubt anyone there knew the difference between oversteer and understeer."
The targeting of tech investors seems overtly cynical, but given the insular nature of investing and the possibility of competitive concerns from industrial investors, it's probably a shrewd move. When discussing the actual viability of Tesla as a more mainstream manufacturer, rather than a boutique builder, things get interesting. The 258-page company prospectus features 42 pages of risks, risks associated with everything from Tesla's relative car-building inexperience to the public's perception of electric cars.
Our attendee: "Someone in the room asked about availability of service, given lack of dealerships. Blank look on Elon's face: 'Well, these cars don't really need service,' he said. 'You don't need, you know, oil changes and things.'" This is, of course, most concerning from a support and repair perspective. The company plans to have just 50 Tesla dealers worldwide by the time of the 2012 Tesla Model S launch — a vehicle that it hopes to sell some 20,000 examples of per year. Even without oil changes, the limited number of locations will mean trouble for regularly scheduled maintenance. Not only is the dismissal of regular maintenance items troublesome, but specialized service will likely be required for the high-powered controllers and battery packs.
As far as production plans are concerned, the company will be bringing everything in house, utilizing the the former NUMMI facility in California, the facility that Toyota essentially traded for an equity stake and subsystem/expertise sharing. "Most of the NUMMI factory will be empty," our insider says. "[Tesla plans to use] only a small portion of the floorplan, with the remainder reserved for future production and upgrades." There was some discussion of production plans, but it sounded like a Silicon Valley production mentality: Build a fab[rication shop], build pilot production at a loss, but expect production costs to fall dramatically as volumes increase and manufacturing expertise improves. That would sound ludicrous to industrial investors, but it makes perfect sense to Sili Valley types. (Think Apple iPhone v4, hard drives the size of a fingernail, etc.)"
Here's the kicker: If the plan to lose cash on the outset and make up the difference in volume and cost savings sounds familiar, it should — it's one of the practices that led to Detroit automakers losing money hand over fist and turning out lackluster products for decades. According to our insider, "they want to sell 20,000 units a year of the S Model (sic) at about $58,000 each, although fully optioned cars could boost that by as much as 50%. Break-even is said to be 12,500 units." Even considering the supposed pent-up demand among environmentalists for a car like the Model S, those are ambitious goals for a small company planning to launch a niche luxury product into a soft market.
Frankly, we're skeptical. We've seen how brutal and unforgiving the market can be, and other automakers aren't simply going to roll over and surrender that volume to Tesla. Nissan is leading the way with its bargain-priced Leaf, and the Chevy Volt, although a different breed of vehicle, will compete almost directly with the Model S at half the price. It may be that their plans are very carefully arranged and well thought-out, but that doesn't come through in the presentation.
If Tesla and Musk can pull their plans off, they'll have established the first new and major independent American automaker in a half century, and that's something to root for. But they're going to have to do a better job of convincing us that they're up to the task.
The entire, 258 page Tesla IPO prospectus can be downloaded here for your own consideration.