This is the third episode in Elon Musk series.
Zip2 and X.com was covered in first episode. SpaceX was covered in second episode.
In this episode, we will take a closer look at the history of Tesla.
Hi. My name is Vijay Mohan. You are watching - Investment Insights.
Tesla's story starts with JB Straubel. He had Bachelors and Masters degree from Stanford University.
His specialization is "Energy Systems and Engineering" - controlling energy through software.
He knew that when a 10,000 Lithium Ion batteries are put together, it can create enough energy to drive a car for 10,000 miles. So he was researching into that.
He started building a full electric model race car with some Stanford engineering students.
Budget: $100,000. When he was looking for people to fund the project, he came to know about Elon Musk and met him.
Elon was very interested to know cars running on Lithium Ion batteries. He funded $10,000 to Straubel's project.
This happened in 2003.
During that time, a company called AC Propulsion was building electric cars as a fun car. We can say that it is adult's toy car.
Tzero is one such car they built. Though Tzero is an electric car, it was fast enough to achieve 0 to 60 mph speed in 4.9 seconds.
When Straubel demoed this car to Elon, Elon was convinced that electric cars are not boring cars, but they can be made as a fun car to drive.
When Elon offered AC Propulsion folks funding to make this as full commercial car, they did not show any interest on it.
During the same time, another couple of guys, Martin Eberhard and Marc Tarpenning were researching about Electric cars in the market as well.
When they came to know AC Propulsion, they both went and met them in person.
They both were impressed with their electric cars and suggested them to make commercial electric cars based off of lithium ion batteries rather than lead acid batteries.
AC Propulsion were not interested in commercial cars at all and so they rejected the offer again.
Knowing that no one else is going to do it, Eberhard and Tarpening started their own Electric car company, Tesla Motors, in memory of electric motor founder Nikola Tesla.
Their thought was, electric motor is already there in the market, thanks to Nikola Tesla. The only thing they have to figure out is, a drive train that sends power from motor to the wheels.
They believed that they should be able to figure that out easily.
So they went to venture capitalists for funding.
Who is going to come forward to invest in an automobile company? that too an electric car company? They were not able to find any investors.
AC Propulsion suggested Eberhard to approach Elon.
When Eberhard approached Elon, Elon drilled both Eberhard and Tarpenning with questions and got convinced that they both are actually good enough to do it.
So he invested 6.5 Million dollars in Tesla Motors.
Elon was the largest shareholder of Tesla. He became the chairman of Tesla as well.
Both Eberhard and Tarpenning did not realize that camel is entering into their tent.
Knowing Straubel as a battery specialist, Elon brought Straubel into Tesla.
Straubel brought all his Stanford engineer friends into Tesla and they started building their first prototype car - Roadster.
We have heard about software companies getting started like this. But have we heard about any car company starting like this? This group did that.
They took the powertrain from tzero and fit that into the body of a British sports car - Lotus Elise.
That is the easy part. The difficult part is - battery pack. Their primary focus was on that.
No one has even attempted to connect 100's of lithium ion batteries in parallel before.
If it is any other company, many 100's would for many years to create a prototype.
But here at Tesla, 18 engineers, 4 months, Prototype was ready by Jan 2005.
Musk was more than happy with the development of the car. $13 million was funded immediately in the next round of funding .
Musk alone invested $9 million again.
As there were too many batteries that are put together, they tested the batteries for fire safety.
They tested with 20 batteries and to their shock, it was a big blast.
If 20 batteries can create this big of a blast, they cannot imagine the blast from 7000 batteries in Roadster. That will be the end of the company.
So they started looking into how they can prevent an accident like that.
They redesigned their batter pack smartly so that the fire does not spread from one battery to another.
The successful design of that battery pack is what made them as market leader in the EV segment Today.
After they were comfortable with their prototype cars, they started their real game.
They ditched Lotus Elise body and designed their own. They showcased their car to the public for the first time on May 2006.
Till then everybody knew only Toyota Prius as a Electric hybrid car.
Though it is a good car, to be honest, it is a boring car.
But here, a full electric car. Also a fun to drive car. People were taken by awe.
Impressed by the car, many venture capitalists invested in the next round of funding.
That included Google founders, Larry Page and Sergey Brin.
They were able to get $40 Million in this round. Elon invested $12 Million more to his share.
Tesla's plan was to make a luxury car first.
Because people in that market segment do not worry about price. They will be willing to pay any amount for their status symbol.
Profit margins will be high and so we can build cheaper cars for the mass market in the future with those profits.
By that time, battery technology would be cheaper as well. And so, Tesla decided to target the luxury sports car first.
So they chose the $100,000 Roadster as their first car.
Elon was involved in the design of the Roadster heavily.
Elon made many demands like the car has to be in carbon fiber body, should have soft touch and should be very comfortable.
What else can Tesla do? He is the main guy funding the company. And so they listed to his inputs.
Till then Elon was not involved in day to day activities of Tesla.
Eberhard ran the whole company as CEO.
They ran into their first problem in 2007 - Transmission issues.
They had a contract with a British contractor for their transmission. But its integration did not work well with Roadster.
That was one problem. And then there was a problem with battery plant in Thailand... and then many more manufacturing problems.
When Elon came to know about this, he was very unhappy with Eberhard.
Though Eberhard is a talented engineer, he is not really a CEO material.
So in 2007, all the board of directors removed Eberhard from CEO role and gave him the president of Technology role.
He got so mad at that incident. Saying that they should have treated him with more respect as he is the founder of the company, he quit Tesla.
When Eberhard left, cofounder Tarpenning left Tesla as well.
After that two other CEO's came. But nothing worked out. And so Elon took the role of CEO himself in 2008.
As the production of Roadster was going at full speed, Tesla ran into financial issues.
They needed $4 million per month to run the company. But they did not have enough money in the hand for that.
The whole automobile industry was waiting to see how Tesla is going to fail spectacularly.
Elon tried to save money. wherever he can.
He borrowed from friends. Till then he was using his private plane. But he started flying in Southwest to save money.
Even some Tesla employees themselves gave checks to run the company. You can imagine how bad the situation was.
At the same time, SpaceX's third flight failed and they ran into financial issues as well.
Add Great recession to that. Without another round of funding, there is no way to run the company any longer.
Who is going to give funding during a recession? two start up companies. Both are at the brim of collapse. How can one single person save both?
Well, he did. Not just saved, but he made them both successful.
To his good fortune, SpaceX's fourth flight was successful. They managed to get a funding of $1.6 Billion from Nasa.
Tesla borrowed some of that money from SpaceX.
With that backing him up, Elon went to current investors for more funding.
"$40 Million is the need. I can out $12 Million. The rest of you can cover the rest" - Elon proposed.
Though everyone agreed, one group did not accept the deal.
Their plan was to intentionally fail the company so that they can outcast Elon and take over the control of Tesla.
Is Elon that easy to run over? Knowing that only an equity funding needs the investors approval, but not issuing a debt, Elon changed the funding as a debt.
Venture capitalists were not used to funding a debt. So they hesitated to move forward.
So Elon bluffed saying that if they are not funding it, he will get the whole $40 million from SpaceX as a loan.
Not to lose their investment value, the investors decided to fund the deal.
Tesla escaped in the last minute from a complete disaster.
Today many say that Elon is not the founder of Tesla. He is someone who actually took away Tesla from the actual founders.
But in truth, regardless of whether he is the actual founder or not, If it is not for him, there will not be a Tesla Today.
In that regard, we can say that Elon is a founder of Tesla.
This edge of the seat thriller 2008 finally came to an end.
Tesla successfully launched Roadster in 2009.
So far they have raised $187 million in funding. Elon alone has invested $70 Million.
During that time, US government was providing loans for many billions to encourage green energy.
Tesla got a share of that as well. In June 2009, Tesla got $465 million as a loan from US department of Energy.
If you think, there is nothing stopping Tesla now, wait till next episode to see what happened next.
Though many appreciated this Elon series, some has asked, "Why do we need this?
"What is its relation to investments? What am I going to do with this knowledge?"
What do you think is the relation between this Elon series and investments? Share your thoughts in the comments below.
We will soon meet again in another episode. Thank You.