Tesla: how a near-bankrupt startup created the electric car era

Executive overview

Tesla was not founded by Elon Musk. Martin Eberhard and Mark Tarpening incorporated it in 2003, raised a series A from Musk, and spent years trying to ship a production sports car. Every stage — Roadster, Model S, Model 3 — nearly killed the company before the next miracle arrived.

The pattern is consistent: impossible production targets, critical cash shortfalls, last-minute rescues, and a stock price held aloft by faith in Elon Musk. As of mid-2018, the company needs $5.5 billion in capital through Q1 2019 and must triple quarterly production to survive without diluting shareholders or accessing debt markets it has largely exhausted.

Tesla's entire existence is a series of sequenced miracles — any one of which failing would have ended the company.

Founding and early years

• Eberhard and Tarpening incorporated Tesla on 1 July 2003, inspired by AC Propulsion's T-Zero electric kit car
• Musk led the series A ($6.5 million personally) within four days of meeting the founders
• JB Straubel joined as battery engineering lead; the AC Propulsion drivetrain became the basis for the Roadster
• Series A, B, and C combined raised $20 million — intended to be enough to reach Roadster production
• Eberhard was ousted as CEO in August 2007 after cost-to-build the Roadster was assessed at $200,000 against a $85,000 sale price
• Two interim CEOs (Michael Marks, Ze'ev Drury) followed before Musk took the CEO role in October 2008

Surviving the 2008 crisis

• Musk had personally invested $55 million and was out of cash alongside the company
• Tesla burned $4 million a month; payroll was at risk by Christmas 2008
• Musk scraped together $20 million from personal assets, a SpaceX-secured loan, Everdream sale proceeds, and angels including Sergey Brin ($500,000)
• Vantage Point Capital blocked an equity raise; Musk restructured it as debt, closing on Christmas Eve 2008
• 2,500 Roadsters sold at $100,000 each — enough to stabilise the business

Model S and the IPO

• The Model S ("White Star") was conceived from a gutted Mercedes CLS chassis
• Designer Franz von Hülshausen joined from Mazda; the design studio was set up inside SpaceX's Hawthorne facility
• Daimler invested $50 million for 10% at a $500 million valuation; Toyota made a similar investment
• A $465 million US Department of Energy loan (January 2010) funded production scale-up at the former Toyota–GM Fremont plant, acquired for $42 million
• Tesla IPO: 29 June 2010, raised $226 million, stock up 41% on day one — first US car company IPO since Ford in 1956
• Model S named unanimous 2012 Motor Trend Car of the Year; described as the "iPhone of cars" for its over-the-air updates and touchscreen interface

Near-acquisition by Google and the 2013 rescue

• By early 2013, production was anemic (dozens per week), deposits were being cancelled, and Tesla nearly agreed to a $6 billion acquisition by Google
• Terms: Musk would retain full control for eight years or until Model 3 mass production; Google would commit up to $5 billion in capital
• A last-minute telesales blitz — Tesla employees cold-calling every lead in the database — drove Q1 2013 revenue to $562 million and an $11 million net profit
• Model S stock jumped from ~$30 to ~$130; short sellers took large losses; the Google deal was abandoned
• The Department of Energy loan was repaid early

Model X, Model 3, and SolarCity

• Model X (SUV) launched Q1 2016; reached parity with Model S sales by Q4 2016
• Model 3 announced March 2016 with 325,000 reservations at $1,000 deposits within one week
• Tesla acquired SolarCity for $2.6 billion in stock (August 2016), adding $3.4 billion in long-term debt to the balance sheet
• SolarCity had shifted from a finance model to manufacturing solar panels — burning capital with no clear path to profitability
• Model 3 production ramp replicated Roadster-era delays; as of mid-2018 the company is producing ~53,000 vehicles per quarter

The 2018 position: risks and scenarios

• Tesla has ~$10 billion in debt; $500–600 million in annual interest payments alone
• Convertible notes may not convert to equity, requiring cash repayment
• Musk has borrowed $627 million from banks secured against his Tesla shares; a significant stock price drop could trigger margin calls
• Elon's personal wealth (~$10 billion) is largely illiquid Tesla and SpaceX equity
• 27% short-to-float ratio; analysts at the banks holding Musk's secured loans have a conflict of interest in issuing buy recommendations
• Capital requirement through Q1 2019 estimated at $5.5 billion (capex + debt refinancing)
• Model 3 breakeven is approximately 5,000–6,000 units per week; 500,000 units for 2018 would require tripling then doubling quarterly output
• 350 sole-source suppliers must scale in lockstep with Tesla's ramp
• Established automakers (GM, Ford, BMW) are accelerating electric vehicle programmes with existing manufacturing expertise

Bull and bear cases

• A+: Hits 500,000 units in 2018; generates operating cashflow; retains stock price to raise equity on favourable terms
• A–/B+: Misses production targets but stock holds; does a dilutive but manageable equity raise; buys time
• C: Acquired by Google, Apple, or another strategic buyer at a significantly reduced valuation
• F: Bankruptcy — triggered by stock price collapse, margin calls on Musk's personal loans, and inability to access capital markets