Tesla Motors is an American-based company, incorporated in 2003. It was started by Martin Eberhard and Marc Tarpenning. When they received outside funding from financier Elon Musk, the two original co-founders were forced out.
Revenues for the year ending 2015 are $4.05 Billion. This amount represents a 26.5% increase over the previous year’s revenues. However, operating loss is significantly higher than the previous year. This shortfall could be attributable to its anticipated 2018 release of its new car.
How the Company Started
As the name suggests, the company was inspired by the great engineer/inventor, Nikola Tesla. Tesla created the induction motor and an alternating-current power transmission. The company uses the base of this technology in its current design.
The company started out with the Tesla Roadster, which was geared towards the sports car industry. They did this to test the market. This test was the initial stage of a much bigger picture where the sales of higher-end products will be used to develop lower priced products. Tesla’s goal is to continue this economies-of-scale until most consumers can afford its product.
Martin Eberhard and Marc Trapenning funded the company initially. The company received Series A funding shortly after that. Neither of these founders is with the company anymore. The current Chairman and CEO is Elon Musk, who led the Series A funding for the company and has controlling shares.
The company continued to receive support by way of further funding. Google’s founders have infused cash into the company as well as funds controlled by JPMorgan Chase.
As a sole financier in Tesla, Elon Musk was able to instill confidence in other investors to obtain future financing. However, back in 2010 as part of his divorce settlement, Musk ran out of money. This was a problem for him as well as Tesla. When news leaked out that the company was having cash flow issues, new buyers became skittish and wanted to back out of purchases in case the company was not able to follow through on delivery. Tesla needed the cash infusion from the car sales and Musk personally guaranteed to refund deposits should Tesla not come through on delivery.
When news leaked out that the company was having cash flow issues, new buyers became skittish and wanted to back out of purchases in case the company was not able to follow through on delivery. Tesla needed the cash infusion from the car sales and Musk personally guaranteed to refund deposits should Tesla not come through on delivery.
To get through the financial difficulties, it turns out Tesla started reimbursing Musk for expenses that he would have earlier paid for himself. There were other payments including stock options in which the company took some heat. At the time, they were looking to go public, and many feel Tesla should have disclosed these payments.
Tesla’s goal is to create a car that is accessible to many. However, this won’t become a reality until 2018. Currently, a car from the company will cost over $70,000. Even when the lower-end model does become available, it comes with a price tag starting at $35,000.
While on par with many other electric cars, this is still a high price for many families. Of course, this doesn’t include any tax incentives that may be included, but it’s not easy to know in advance how much that will be. The upside is getting 80 to 90 MPG equivalent gas mileage. Potential buyers will need to figure out the break even point to determine if it is worth it to make the purchase.
All electric cars face the challenge of recharging while on the road. It’s a concept known in the car industry, as range-anxiety. Consumers are wary of buying cars if they will not be able to make it to the next recharging location. Tesla is answering this concern by adding free charging stations in strategic locations. This action could help address the concerns but more are needed.
Why it Works
Tesla is not just an automotive company. They make energy storage products as well. This helps them diversify their product line. However, the main goal of the company was to make an all-electric car affordable and accessible to the masses. In the United States, a Tesla electric car will run about $35,000 before government incentives. The company is well aware that this price point may be too rich for many consumers. This is part of their promotion plan (see below).
Another main reason Tesla works is because of Elon Musk. He is a genius as well as an innovator. He knows how to generate great PR for his brand. This is not to say everything was a success with Tesla right from the start. There are also still plenty of challenges ahead. However, with Musk at the helm, if anyone can make it work, it will be him.
With the goal of accessibility to many, Tesla believes that economies-of-scale can occur as the company sells each successive model. The first model was a sports car that cost over $100,000. The sales from these, as well as additional funding, helped to refine the manufacturing process needed to make more affordable models. The latest release is going to cost $35,000 base. However, the money raised from sales will be used to develop an even more affordable model for the future.
The company does not sell at traditional dealers. Currently, these dealers are at odds with selling electric-only cars due to the range-anxiety described previously. Tesla has company-owned stores which it uses to sell its brand. But the biggest channel is online.
According to Tesla, salespeople are not on commission. This sales model makes it less likely to focus only on selling. Elon Musk believes that the product speaks for itself. The idea behind the stores is to showcase the cars. Most sales occur online while the stores are used for customers to see and test drive the cars.
Tesla Motors receives fantastic reviews from its customers. The mileage that it can get as well as its safety features makes for great satisfaction. Since the models are still at the high-end of the price spectrum, customers are not as concerned with range-anxiety. This could be because they use the cars within an acceptable range and don’t travel far.
Lessons Learned by The Business
- Elon Musk used funding from the sales of other successes to fund Tesla. His belief is to keep control of the company as long as possible, so that the returns mostly come back to him.
- Show others that you are serious about your business. Again, because he put up the bulk of the funding in Tesla early on (from sales of other ventures), he showed investors that he is putting his money where his mouth is. This instills confidence for other investors to jump on board. It also gives customers the confidence that the company will deliver on its advanced orders.
- Elon is a great storyteller. He has the media eating out of his hands. Other car giants certainly sell more electric cars than Tesla. However, he can project the story that his company is superior to the others.
How Other Businesses Can Learn from This
Starting a capital-intensive car company in today’s market with industry giants may seem like suicide, but Elon Musk was able to make it happen. Even though he didn’t officially start the company, he was the visionary that made it a success. The main lesson businesses can take from him is if someone is capable of making money in the car industry, it shows it is entirely possible to make money in just about any industry.
You need to have the belief to make it happen and know how to raise money on your own. Even if you have other investors, retain control for as long as possible.