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Tesla Raises $1B from Stock and Bond Sale (wsj.com)
171 points by ericd on May 18, 2013 | hide | past | web | favorite | 147 comments

This is a quadruple whammy for Tesla.

1. Tesla pays off the $452 million Dept of Energy Loan, and this improves their political image and in the long-run will help sales.

Tesla's had difficulty in some states selling direct to consumer, and paying of the DOE loan can help them convince conservative lawmakers to vote on Tesla's side in states like Texas and North Carolina (both have bills on the table).

Also, paying off the DOE loan removes ammunition from a lot of critics who have said that Tesla is just leaching off the U.S. gov't.

2. Tesla puts more than $400 million additional cash into their bank account (they already had over $200m), so now it's well over $600m and close to $700m in cash they hold.

This allow them to speed up a lot of the intiatives they have to roll out infrastructure. First, they can open more stores (especially in Asia and Europe). Second, they can roll out more service centers (all around the world). Third, they can roll out more Superchargers stations (around the world).

Finally, Tesla has an upcoming 5th announcement in a 5-part trilogy and I think Tesla might announce battery swapping stations (for long distance travel). Tesla can now more aggressively roll these out as well.

3. Tesla stock gets a boost of confidence from Elon Musk spending $100m to buy common stock.

Elon Musk is putting his money where his mouth is and is basically saying that at the offering price of $92.24 that TSLA stock is not overpriced but is a fair value to himself buying more stock and to investors.

4. Involving Goldman Sachs and Morgan Stanley in brokering convertible notes and stock increases the credibility and perception of Tesla. Big funds are now starting to invest in Tesla after their blowout 1st quarter earnings report (WSJ reported in another article that European funds and large-cap funds are starting to invest). Recently Morgan Stanley sent a client note saying that after the 1st quarter earning report saying that viability was no a problem for Tesla. This opens up TSLA stock to a whole new crowd of investors because Tesla's risk has been dramatically reduced.

Overall, I think this is a great move by Tesla.

I hate the whole "leeching off the fed" argument. Every large-scale business venture in this country leeches off the government, often in multiple ways:

* Free use of state-subsidized infrastructure.

* Free use of state-funded research and development. (This is huge.)

* Government contracts.

* For the finance industry, they are backstopped by the government if they are "too big to fail."

* Government limits on liability for many risky industrial processes.

... and so on.

Tesla is threatening the status quo in a stale, moribund industry. That is what people don't like.

The US government takes 5.62 trillion in local, state, and federal taxes from people each year, and when it unilaterally increases those prices people must pay up, renounce citizenship, or be thrown in jail at gunpoint.

Where's the cost/benefit analysis to show that those services you tout (infrastructure, etc.) are actually provided efficiently? For those cases where private examples exist alongside (FedEx/UPS/email vs. Postal Office; SpaceShipOne/SpaceX vs. NASA; Google self-driving cars vs. California train-to-nowhere; Coursera/Udacity/Khan vs. Dept. of Ed) the comparison is not flattering.

I'm aware of the large libertarian chunk of HN and have nothing against libertarians.

But api made no references or comments about the efficiency of government services; he merely stated that companies use government services.

Not to be rude, but it seems like you are looking to start a political debate where there isn't one (and a conversation that has been had over and over again in HN threads).

I see this mistake in economic thinking over and over again when it comes to public vs private and it's getting to be rather dull. You need to do a much deeper dive into economics or step back from making these types of statements. Much of the most "efficient" government spending is spending that the private sector would not take on because it is "inefficient" in the narrower definition of a corporation. FedEX/UPS would be much smaller companies if they'd had to rely on private corporations to builds roads and highways. The Internet would never have reached the same critical mass as private telephone companies (dial up) would never have bothered wiring huge swaths of this country where houses or farms are miles apart. UPS and FedEx (sensibly) cherry pick the richest segments of delivery as the Postal Service has to cover the non profitable segments. SpaceX would not be able to launch if it wasn't for government funded space infrastructure initiatives.

IF a market is such that it can be serviced by the private sector efficently that's always the better choice. In many cases here the government, if it was in it already, will remove itself over time (USPS is going through this now on a massive scale) But there are multiple examples over the course of time where only something like a national government can rationalize the investment in infrastructure that results in dramatic improvements down the road (Eisenhower's Federal Highways, Massive Power projects, Telecommunications)

Your factual claim that infrastructure would not exist without the government is actually not true; look at the history of private roads/turnpikes and rail in the US and Britain:


> Private road building came and went in waves throughout the nineteenth century and across the country, with between 2,500 and 3,200 companies successfully financing, building, and operating their toll road.

"Your factual claim that infrastructure would not exist without the government". Your desire to reduce this to black and white statements tells me you're only interested in convincing yourself you're right. "private telephone companies (dial up) would never have bothered wiring huge swaths of this country where houses or farms are miles apart." It's not too hard to deduce from my statement that private telephone companies would have wired parts of the country where homes were very close together and they could therefore reasonably price their services and capture a profit. And roads would be built to the most populous towns and cities where there would be enough traffic to create tolls low enough that people would adopt the roads.

Again, government investment in infrastructure makes a lot of sense, and happens, when the economics do not make sense for a private company.

  spending that the private sector would not take on... 
  The Internet would never...private telephone companies 
  (dial up) would never...SpaceX would not...only something 
  like a national government
Note your continual use of "only" and "never". You made this a black and white question. I'll freely admit that the government can build infrastructure; you should admit that history shows that independent individuals can as well. Then the question returns to the relative cost-efficiency of each provider, which was my original point. And that's an empirical question: could these services be rendered for less than $5.62 trillion in taxes per year?

The relevant question is not “could” they be rendered for less than $5.62 trillion, but “would” they be. From what I have observed, privatization of infrastructure does not typically result in cost savings; corporate profits soak up whatever was previously “government waste”.

1. A lot of people don't care about the DOE loan. But those who don't like the government investing in private enterprise probably aren't going to run out and buy a new Tesla just because the loan is being paid off. Net-net: perceptions of Tesla are not likely to change based on the loan repayment.

As for Tesla leaching off the government, it is important to note that $85m of Tesla's revenue in the last quarter came from regulatory credits. The vast majority, ~$67m, came from California's zero-emission program. All told, 15% of Tesla's revenue came from state and federal credits. Forget politics and perception: the impact of regulatory and tax credits on the company's finances and sales prospects over time is something any long-term Tesla investor should thoroughly understand.

2. Tesla is smart to raise capital now while money is still so cheap thanks to an almost unprecedented compression of risk premiums. The odds that capital will become more expensive in the next several years is certainly higher than the odds that it will become much cheaper.

But raising capital doesn't guarantee that capital will be deployed effectively. Celebrating the capital raise without acknowledging that there's execution risk is like celebrating a championship before the season has even started.

3. Elon Musk's obvious confidence in Tesla is a good thing, but you should not oversimplify the details of his stock purchases. Business Insider has more on this at http://www.businessinsider.com/elon-musk-borrows-150-million....

4. Raising capital for companies is one of the things that firms like Goldman Sachs and Morgan Stanley do.

As for Morgan Stanley analysts taking a positive view on Tesla's prospects, consider that in July 2008, Morgan Stanley was advising clients to buy Lehman Brothers stock because "we think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing."

Tesla may or may not be successful long-term, and its stock may or may not be a good investment at current prices, but I think your analysis here is akin to looking at the exterior of the vehicle without examining what's under the hood.

1. I think my point about repaying the loan and changing perception toward perception is largely geared toward conservative lawmakers and politicians. Some (like Romney and Palin) have grouped Tesla with the likes of Solyndra, calling them "losers". Even some of the public have the perception that Tesla received bailout money (which isn't true because the DOE loan is separate). But for the public it was around the same time as the government bailout of GM, etc. So, paying off the loan clears up misperceptions, and this can help their case with being able to sell directly to consumers in states such as Texas and N Carolina (with their bills being voted on).

2. Totally agree Tesla was smart to do it now and agree that execution isn't guaranteeing success. But money in the hands of a wise person can really accelerate a roadmap and enlarge success. I personally think Tesla is at an inflection point where the money will be very well spent and will accelerate growth and demand.

3. Regarding Elon Musk's purchase, it's true he's borrowing a bunch of money but even that still signals his confidence in the stock and its current price. And I think that's overall good to ensure investors since the stock has been very volatile of late.

4. It's true investment banks have made terrible mistakes in the past, but still lots of investors and institutions are influenced by the top investment banks. Fidelity owns $1.5b of common stock and Morgan Stanley owns $500m of TSLA common stock (as of 3/31/13, http://www.nasdaq.com/symbol/tsla/institutional-holdings). Lots of institutions and funds are starting to invest in TSLA and this is providing upward pressure on the stock over time (especially if TSLA keeps meeting/surpassing expectations.

The next big milestone for Tesla is reaching 25% gross margin (which is rarely had in the auto industry). Elon Musk is promising they'll reach this milestone 4th quarter this year. If they reach it this year, it is nothing short of miraculous.

The next big milestone for Tesla is reaching 25% gross margin (which is rarely had in the auto industry). Elon Musk is promising they'll reach this milestone 4th quarter this year. If they reach it this year, it is nothing short of miraculous.

I would say so, considering they're at 5% now.

Edit: Strike that. It's actually 2%. Musk had this to say:

"I am highly confident that we will have a gross margin of at least 25%, and — I mean, the emphasis on at least. I think we will do better than those numbers. So, I want to be very clear about that."

The man is all in. I'll give him that.

I thought 1st quarter gross margin was 5% w/o the zev credits. Elon Musk said that that was the average in the quarter, meaning that they started lower and ended higher than the 5% average. I think they're well on their way to 25% by the end of the year. In the conference call Elon shared that it took several months for the gross margin improvements they make to show up materially, meaning that they will have implemented most of their gross margin improvements months ahead of the 4th quarter. This is why Elon is so confident with 25% gross margin by the end of the year... because most of the manufacturing improvements have already been made and it just takes time to realize the increased margins.

I thought I read 5% somewhere, but went and looked it up and saw 2%. Probably depends on how you count it. Either way, that is a huge increase. Musk has a long history of exaggerating, which is what I suspect he's doing here.

Credit sales do not come from government money. They work similar to Emissions trading, that is, other manufacturers who do not produce clean vehicles have to buy them. So all that money is coming from other manufacturers. (ironically, many of them are of course giant behemoths who have been given massive direct subsidies by their respective governments)

That said, Tesla clearly has a brilliant track record of putting money to use. They built a frickin fully electric luxury sedan in 2 years on a $450M budget.

I think you're missing the point: a direct subsidy is not the only way that businesses derive revenue from government.

The ZEV credits are granted to Tesla by California. By regulation, other car manufacturers have effectively been forced to purchase these, giving them value. Put simply: these credits only exist and have value because of government.

You can play games with semantics, and political pundits can argue about the merits of programs like California's, but those doing due diligence on Tesla should understand the regulations and how these credits may be valued in the future. For instance, if more auto manufacturers develop electric vehicles, the value of the credits will likely decrease over time, perhaps substantially, while the competition in the EV market will at the same time increase. Will Tesla suffer substantially in this scenario? Maybe or maybe not, but I haven't seen many analyses of the company delve into this, at least around here.

As for Tesla's track record: I think one can be truly impressed by what the company has accomplished thus far from a technology perspective without jumping to the premature conclusion that the company's investment has produced a viable long-term business.

Yes of course, but theres a very big difference between a direct subsidy with hard cash (or a loan guarantee) and an open-to-all incentive system, not last in public perception.

Your wording simply suggested to me that you thought these were somehow backed with government money. I'm sorry if I misinterpreted here.

Musk has said in conference calls that their 25% margin target is not predicated (at all) on credit revenue, but he can't magically make money appear, so that remains to be seen.

There is a very worthwhile recap of the regulatory credits systems here:


It's semantics. The net effect is that the government forces the transfer - It's no different than if they had taxed it and granted it.

Huh? Much everything the government does to markets is incentive based regulation. The whole tax-code might be considered such.

If it weren't for government force, those credits that netted Tesla millions would never have been purchased. Therefore, they have the same net effect as if the government had taken the money from the buyers and given it to Tesla. That is logically equivalent to a government subsidy for Tesla (or any company in their position).

It's not conservative law makers that are in the way. It's car dealerships. That type of local law is very common and widespread. Expect Tesla to submit to it eventually.

I disagree with this point. I don't think the laws are there to thwart competition, but to stop manufacturers from exploiting their own dealers. If, for example, a Ford dealer takes on the risk of setting up shop it would be crummy for Ford to come in and annihilate them. Tesla is operating under a completely different sales model, I don't think you're going to see judges slavishly ruling to the letter of the law.

I don't think so.

The whole point of the various laws is to make sure the dealers have a presence and are not cut out by the manufacturers, which is exactly what Tesla is trying to do.

There's nothing different about that, except that Tesla is trying any way conceivable to get around those laws and nobody else is. It's not surprising that they're updating the laws to catch up with Tesla's hacks that clearly circumvent the intent of the laws.

Put another way, not only will the car dealers get pissed, but why would ford, toyota, honda, GM, etc allow Tesla to operate with an advantage? One way or another, Tesla will wind up playing by the same rules as everyone else. And given how local and how dug-in the dealerships' political power is, I'm guessing they will suck it up and sell though dealers.

I hope I'm wrong. I would love to see manufacturer-run car stores.

A few months back a preliminary injunction sought by some dealers in Massachusetts was denied. Sure there'll be a fight, but I think Tesla is going to end up on top.


Tesla never had dealerships, but GM and all the others did. These laws do exist, as you say, to prevent the manufacturer from cutting out the dealer after benefiting from the service the dealer provides to its customers, but Tesla never had any dealerships they could unfairly circumvent.

Yes this is the main point. Car dealerships were understandably nervous that the major automakers could suddenly implement a direct model in their state/location. They could decimate them overnight due to advantageous economics of selling directly to the public. The problem here is that Tesla never had a dealership network that it asked to go all in on their product only to come in behind them later and sell direct. What car dealerships really worry about is that if Tesla proves this to be the better sales model for 2013+ the big guys will want/need to copy this approach. That would be disastrous for them.

Those laws exist because dealers were able to get them passed, not because there is any sound reasoning behind them. Without them, the dealers would not exist today. They're not going to let tesla ruin that without a big fight.

I hope Tesla wins. I hate these made-by-middlemen-to-protect-middlemen laws. Recently in Turkey, there was a huge fight between banks and goldsmiths because banks decided to trade gold as well at better rates than offered by goldsmiths. Lots of fight later, banks are now restricted to accept and trade in 2-3 gold types. But I hope the industry is going to open up.

It is the middleman's job to remain relevant in changing economies, not resist changes so that relevancy is guaranteed. I think competition laws should be encouraged.

The dealers claim they are protecting consumers from the automakers.

I keep wondering where I can find an example of a person who clearly is not an owner/employee/etc of a dealer who genuinely feels protected. There are probably far more people who enjoy going to the Apple Store (which was created by the same guy who now works at Tesla to set up Tesla's showrooms) than who enjoy the dealership experience.

Also, in a lot of the rest of the world, there apparently are no independent dealers, and that seems to be pretty non-disasterous.

I honestly have no idea what the nominal protections are supposed to be, or what they were supposed to be once upon a time. It's not like they offer awesome warranties themselves, or even provide good value for repairs.

5. Elon will finally tell us what the hyperloop is, now that Tesla is profitable and doing well.

I sometimes wonder if that's a clever joke on his part -- put out this crazy-sounding sci-fi idea by name only and never tell anyone what it is.

It's already public knowledge: http://en.wikipedia.org/wiki/Hyperloop

That's fairly content free.

So is Hyperloop.

Great except for the part where current shareholders' stakes are diluted.

Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Value of the company more than the dilution. Are you saying this is not true or is there some functional reason why dilution is bad in this particular case?

Dilution is always bad. It means you own less of the company. It's necessary in order to finance a company like Tesla, but bad nonetheless.

But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.

The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.

Hence the "necessary to finance a company like Tesla".

Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?

You are mixing up your definitions.

Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.

Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.

>Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.

No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.

That's not what "dilution" means. Dilution necessarily reduces the per share value of the stock. Always. That is the definition of the word. Shareholders allow it because the company gets money in return for that dilution, which will presumably increase the value of their shares over time.

>Dilution necessarily reduces the per share value of the stock. Always.

No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.

I hate to turn this into finance 101, but there seems to be some confusion here.

Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.

You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship.

Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business".

Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.

>I hate to turn this into finance 101, but there seems to be some confusion here.

There does indeed seem to be some confusion. The problem is you're the one who is confused.

>Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.

The part where they issued new shares is dilution. But the part where they give them away, guaranteeing a drop in the price of the stock, is not.

In the real world corporations don't give stock away. They will sell those 50 shares on the open market and use the money to, say, buy capital equipment. In most cases the price of the shares will remain unchanged, because the value of the company's assets have increased by a corresponding amount. The price is absolutely not guaranteed to go down.

Issuing new shares has no more effect on the share price than raising capital through other means like borrowing from the bank or issuing bonds.

What people are getting at is that if at the same time as the dilution the market places a greater value on shares (due to what they think a company can do with the money). Then they don't necessarily have to lose value over the short term.

This is sort of silly - they're trading the new shares for lots of money, which now belongs to everyone who owns the shares. So they own a smaller share of the total company, but that company now includes itself plus $500M in new money that wasn't there before. If the company is properly priced at the moment, it's a net neutral transaction. If it's overpriced, it's great for the current shareholders.

This has thead has gotten a bit out of context. I don't have anything more to add. I was trying to explain why the original post felt the need to point out that dilution is bad for shareholders, and apparently did a poor job.

This is generally not considered an issue. When you take investment, your %age ownership of the company goes down but the market cap increases according to the dollar amount you raised (or more, if investors are optimistic about your ability to use the cash.) So the value of your equity stays the same or increases.

That's not true at all. The market cap does not inherently increase according to the dollar amount you raised.

Cash on a balance sheet almost never gets a one to one value in a public corporation. In fact quite the opposite, it almost always gets a significant discount.

If you need a great example of this, take a look at how the market valued Apple's cash vs market cap as their cash exploded to the moon rapidly while their market cap imploded (or Microsoft's similar demonstration a decade prior). Berkshire Hathaway has also regularly demonstrated this principle in action over the last 20 years. Cisco has been demonstrating it for a decade as well. None of these companies have seen their market valuations well supported or increased by huge cash positions, their cash is and was always heavily discounted (in the case of MSFT and AAPL it's not viewed as particularly valuable because it can't or won't likely be used to fuel growth, but rather discharged gradually as a modest dividend, or left to rot on the balance sheet earning very little; in the case of Berkshire, the market would rather see Buffett doing acquisitions or holding equities to boost the return (both of which he prefers to cash)).

There are a lot of companies that are publicly traded, where if you calculated their cash as part of their market valuation, they'd be trading at extremely low discounts (eg AAPL at 6 times earnings). The market is simply telling you in those cases that it does not believe their cash is very valuable.

The market cap does not inherently increase according to the dollar amount you raised.

Good point. It all comes down to the (perceived) return on investment that a company can get using its cash.

In cases where companies are selling stock to raise cash it's usually perceived that the company will be able to get a decent ROI. So in most cases where a company raises cash (through funding or sale of stock) their market value will stay constant or increase. This is Tesla's situation.

In contrast Apple/Google/Cisco have shown very little ability to get a high return on investment on any additional cash, because they already have so much. This ROI is perceived by investors to be lower than what the investors could get on their own, which is why the cash is discounted.

The dilution is peanuts compared to the premium they paid in the first place for Elon Musk's reality distortion field.

edit: to further explain what I have apparently not (judging by the speed with which I got the first downvote), what I am saying is that Tesla trades at a massive premium to any normal way of valuing a public company - far more than the dilution of another offering. Clearly, the people investing in Tesla are not worried about dilution, and are betting on the Big Plan and the ability of Elon Musk to create something absolutely freaking massive. Either that, or they're just not doing the math. But I'd bet on the former.

Tesla strikes me as having a lot more growth potential than any other publicly traded company I'm aware of, if things go well for Tesla. I certainly think its value is based upon future earnings potential, and not current revenue.

On the other hand, if Tesla continues to raise funds every six months in a manner similar to the recent secondary offering, buying and holding the stock for a long time will probably not turn out to be the fantastic deal for shareholders that it has a good chance of being if Tesla chooses to bootstrap from here to 20 million cars/year.

Elon seems more interested in accelerating EV adoption than making his shareholders rich, so we'll probably see more of these secondary offerings if they can happen on terms Tesla finds reasonably good.

The stock has risen from 85 to 91 on the news and is now holding there for a few days already. You may have been diluted on percentages, but the money value of your stock has increased far more.

Also note that a large part of this money was raised in convertible debt, where shares won't show up in the float for many years (certainly in Tesla-time-periods).

There is no scenario under which that wouldn't happen eventually. Tesla needs cash to fuel its next vehicle programs and growth. If it didn't get it, the growth story Shareholders should be glad, as I am, that they were able to raise at the price they did. They shown they can convert cash into value. They need to do it.

The article doesn't say anything about that. I could be wrong, but I'm surprised if you can legally dilute a public stock.

The article does not have to say it. When a company does a secondary offering, that is a dilution, by definition.

Dilution by secondary offering does not require shareholder approval, up to a threshold. On the NASDAQ, the threshold is 20%. A company could, if it felt like it, dilute by 20% every single year for twenty years, and leave the original shareholders with 4% of the company.

The theory is that because the secondary offering will take place at fair market value, the cash raised will adequately compensate the existing shareholders for the dilution.

After reading through all the comments in the dilution thread I think I finally understand:

The value of a stock is determined by what people are willing to pay for it on the market, and if a company simply issues more stock, its entirely possible that the price of the stock will go up, go down, or stay the same.

This is of course only true for public companies, and in the case of private companies dilution is a completely different issue.

Ah, I see, that makes sense. I don't know what I was thinking. Of course selling stock is dilution, it's not like the company has extra stock it is holding in itself.

Lots of companies routinely dilute as a form of raising capital (to take advantage of a high valuation, or frequently out of desperation).

This is one of the most common forms of funding for young (or weak), publicly traded biotech and pharma companies.

It was very frequently done during the dotcom bubble days.

If you create more stock, you dilute the ownership of current holders. It's inherent in the concept of an offering, and very much legal.

I wish Tesla made hipster apps with mediocre photo filters too, so they could have some additional money easily to do their awesome stuff xD

That's actually a really really good point.

I've often wondered why Things Needing Money (cities with budget deficits, states with budget deficits, caltrain, etc) don't develop startup-like things they can sell.

From one point of view, the answer is obvious: nobody wants to make someone else rich when they can make themselves rich [1]. But, from the other point of view: people do that all day every day. The majority of people don't understand (and don't want to understand) the complexities of corporate ownership, acquisitions, and payouts. They just want enough to pay for housing, food, support their family, and buy some toys a few times a year.

Could those Things Needing Money work it out by advancing internal EIR positions with enough funding to hire subordinates as necessary?

[1]: The valley does provide a way around "constantly working to make someone else rich." At large places (Cisco in the old days, Google now, probably Facebook too) you see people work the system. They can leave their company, start a startup of basically what they were working on at Big Corp, then have Big Corp aciqhire them back for a few million dollars. Or, they make a startup, get acquired by a Big Corp, vest their buyout, then immediately leave and re-create their original startup they sold, but better (maybe more sustainable or more IPO-like the second time around, but it's the exact same thing as the first time around).

Government organizations tend to focus on treating all of their employees "fairly" or "equally". That typically manifests itself in some odd outcomes. Among them is very little individual accountability. Some amount of consideration is typically given to "years in service" when handing out promotions or salary increases. Very few people are ever fired and the few that are typically have to commit an egregious fraud like not showing up for work and claiming they did. Showing up and doing nothing or near nothing will keep you happily employed with regular salary increases. If there is a down economy and they need to cut jobs they do it on a strict seniority basis, most recently hired, out first. The net effect is that over time the only people that leave are the ones good enough to get a better job where their above average ability will get them a higher salary. What you end up with is a large organization of average to totally incompetent mid-career to older workers and a segment of newly hired workers, typically younger, with a wide range of abilities.

If it is even legal for a government organization to make something to turn a profit, in many cases it isn't, the chances that an organization run like that would produce even the stupidest of successful money making apps is unlikely. On the off chance that they did succeed the cry from private industry would be so incredulous it wouldn't last long.

I have done consulting for the fed and what you describe is exactly accurate. It also describes the situation in many huge corporations, since as corporation size approaches infinity its internal political reality approaches government.

It'd be a good place to get a job if you wanted to cool your heels for a bit, but long-term I think I'd get really cynical and depressed. The thing that really hurts is that people who do go above and beyond don't get more than a token reward, and usually don't end up making more than the paycheck-suckers. Like you said it's all seniority. You'll see one or a handful of people busting their butts and doing really good work, and dozens or hundreds of people coasting, and the former are not given raises.

"Pure" meritocracy is a pipe dream. It's an idea that sounds good in rhetoric but is near-impossible to even define, let alone achieve, in reality. In the real world attempts at pure meritocracy often devolve into stress-inducing 80s Wall St. films. But absolutely flat anti-meritocracy sucks worse. The optimum is probably somewhere... hmm... maybe 2/3 of the way to an attempt at pure meritocracy? Enough incentive and accountability to motivate and reward, but enough flex and forgiveness to not burn people out.

You make "develop[ing] startup-like things they can sell" sound like it's easy, or at least deterministic.

Without even considering the impact of luck, there can be no doubt that building "startup-like things" takes enormous effort and dedication - and those can only rarely exist as secondary concerns in another organisation.


Meta: I like your style of writing! Do you have a blog that I can follow?


Thanks so much. I'm getting a new site up soon to write some articles and musings. If all goes well, it'll be inescapable around here.

The moment you begin building teams to sell.. you become Ycombinator. I think it's clear that's a full time business, not something you do to generate cash.

Because many would see it as government meddling with private industry and go completely nuts over it.

"The best minds of our generation are trying to get people to click ads. That sucks." - Jeff Hammerbacher

I think this is the quote of our generation, at least. It manages to summarize a huge part of what's wrong with the economy, politics, and the human condition.

Reminds me of a short, succinct, techie version of this:


I think we should take it as a call to arms.

Fortunately, it's also false, from what I can observe.

I wouldn't pretend to know all the best minds of my generation, but I believe that I know a statistically meaningful sample. A few of them are working in finance, which does make me sad, but the vast majority of them are working on really cool stuff, both in academia and in industry. Only one of them is trying to get people to click ads.

This isn't to say that there aren't some great minds working on getting people to click on ads, just that they represent a tiny fraction of the "best minds of our generation".

Even if they were all working on "getting people to click on ads", I think that's still an improvement on "building the atomic bomb", which we could have said about a previous generation at one point in time. (And just like the bomb gave rise to some wonderful physics, I have no doubt that getting people to click on ads will lead to some wonderful insights into cognition, psychology and economics).

I hope you're right, and that this perception just comes from startupdom.

Actually, come to think of it, I think you probably are correct. But a more accurate quote would be "the most well paid best minds of my generation are busy getting people to click on ads." I do know of people doing incredibly cool stuff in industry and academia, and none of them are making what the ad-analytics and finance people are making. In many cases they are making a graduate stipend (read: vow of poverty) and have poor employment prospects post-graduation (if they actually want to use their degree).

At some point this has to bite us in the ass as a society. If the bulk of the economic reward is going to three-card molly finance bullshit, ad-clicking, and photo filters while cancer and material science researchers have to switch fields to eat, there has to be a day of reckoning.

What are you on? The internet revenue advertising model has fomented the greatest expansion of information and international communication that history has ever seen, and it's only been going on for a decade!

Hipster apps are not enough.

It is better for example to create some social mobile games, and then get valuated in a crazy bubble.

For example the company Gungho, they got 273 million invested on them at march for about 60% of the company (do not remember the exact number), then released a single game named Puzzles and Dragons, and now they are valued on the Tokyo Stock Exchange for about 15.1 billion USD yay!

And yes, that is more than Nintendo, for a single game. Perfect example of investor rationality.

Except that single game (and they have many others) is making towards $1B per year. http://en.wikipedia.org/wiki/Puzzle_%26_Dragons

Maybe a Mars mission will be funded with a reality show and/or porn.

It's being planned already:


Just as I predicted, Tesla's one quarter of profitability was just an enabler for them to raise more money for development of future models, which will most assuredly take them onto the red again, albeit probably temporarily. In this respect their profitability was not "real" in that they knew it was temporary prelude to more fund raising. It doesn't show sustainability, only that they can put the brakes on all spending for a quarter to look good to investors.

I think it's a bit dishonest of Elon to claim there were no plans to go back to the public markets in last quarter's earnings call, only to raise more money a few weeks later.

It took SpaceX $100m to create a space rocket, engines, launch facilities, a cargo capsule fit for human travel, and a VTOL rocket prototype. I can't even fathom how it is possible that a different model of car costs $200m to develop, except that there must be a lot of middlemen.

A very good, low-cost, consumer electric car that can compete with gasoline cars and hybrids is a harder problem than putting cargo in orbit. It's also a harder problem than intercontinental fiber optic networks and supersonic flight. That's why we have all those things and still drive 1900s internal combustion engines around.

On the flip side, this shows us that space flight is not as hard as people commonly think it is, and that the reason it stagnated post-Apollo had more to do with NASA and the DOD's bureaucratic bumbling than with the inherent difficulty of it. Two things happened post-Apollo to hamstring space flight. One, Nixon cancelled the Saturn program and pushed the Shuttle, a stupid white elephant that ate up NASA's budget for 15+ years. Two, congress turned the space program into a pork program for influential districts, constantly moving goal-posts and creating and then scuttling programs to keep the pork flowing.

There is a lot of regulation. Almost every aspect of the design needs approval by the department of transport.

There is a need to ensure that the vehicles can be produced in mass production versus a one off. This includes quality control and specialised tooling for their production line. It might even include a new production line / facility.

I don't think it's middlemen increasing the cost.

Mass-production of anything cost-effectively at gigantic (100M+ units) scale is an engineering problem in and of itself, a whole other layer on top of the difficulty of designing the product in the first place. In some cases it's considerably harder.

My understanding was that the Model X is planned to be built on the same line as the Model S is currently being built on, they are currently building cars at a rate that works out to about 25,000/year, and they expect to be able to tweak the line to produce 100,000/year.

They will need some new tooling for the new Model X parts.

I'm pretty sure SpaceX spent much more than that. Wikipedia says they received $1 billion from 2002–2012.

Most of those years were spent creating technology and prototypes. Falcon 1 became commercial usable in 2009, Dragon in 2012, and as far as I know they are still working on the VTOL (or is it VTVL?) vehicle.

Really? How do you come up with the numbers for SpaceX? 100 million dollars sound like money from out of Elon Musk's pocket when he started SpaceX. Don't forget a lot of development is paid out by NASA.

cars are mass produced and highly regulated and are just as complex as rockets.

I don't know about the accuracy of those numbers, but I'd think that comparing the cost of building ONE rocket to the cost of building or expanding a plant to build cars at scale is not apples to apples.

Useless, fun speculation: I predict that Tesla will eventually buy Pep Boys Auto, an under performing company with a lot of real estate in middle class American neighborhoods. Pep Boys also has many stores already with service centers. Tesla will then start turning the stores into Tesla show rooms and service centers. They've already shown they are willing to take over legacy auto facilities, specifically the old NUMI Toyota plant in Fremont, CA. What are the odds that we'll soon see Manny, Moe, Jack, and Elon? Pep Boys has a market cap of less than 700 million and is profitable, so it shouldn't be a money pit.

Doesn't a sale of new stock generally imply that the company believes its shares are overvalued? Great timing in any case, this is the time to shore up on capital to make sure they can stick around a long time.

If a company with huge cash reserves like Google was selling new stock then yes, I would assume they thought they believed their shares were overvalued. But in general it's the same as taking VC investment. It might just mean the company believes they can use the cash in a productive way, or that they need cash to continue operating.

OTOH, Elon Musk buying $100 million worth of shares is a very strong signal that the shares are under valued.

It's probably not a coincidence that those two countering signals are being sent at the same time.

Great time to do this, with their greatly increased stock price and still very low interest rates. They're repaying their debt when they have the greatest leverage (unlike the common industry practice of buying back stock when their stock is the most expensive), which is a very shrewd decision.

I agree that issuing the new stock was probably a good move, but I'm not sure about paying back the debt. Low interest rates now mean that debt is relatively cheap, and if you think you might need the extra cash at some point but aren't sure if interest rates might rise at some point it might make sense to just keep the cash and don't pay back the debt.

Lots of companies are actually taking loans they don't need just to lock in rates, and then pretty much just sit on the cash. That's part of the reason that the amount of dollars in circulation has gone up by a huge amount over the last few years while causing negligible inflation.

>Lots of companies are actually taking loans they don't need just to lock in rates, and then pretty much just sit on the cash.

If you're MSFT or AAPL and can issue bonds at 1% and buy other comapnies' bonds at 3%, that's a pretty easy way to lock in a spread.

Interest rates are virtually guaranteed to rise in the next 3-5 years. Bernanke's previous quote is for interest rates to remain low until 2015, and Pimco has proclaimed that "the 30 year bull run in bonds is over".

The article doesn't say what the coupon on the bonds are for various maturities, but they are most likely extremely low yielding. I quote Bill Gross of Pimco in labeling these as a poor investment choice.

Gross: Here -take my money Mr Lew, Buffett, Ballmer, Cook. I’m ur beast of burden - provider of ur free lunch - a non-thinking bond investor


1.5% coupon for 5 years.

Note that these are convertible bonds, not regular bonds. The interest rate is reduced by the implied price of the warrant.

If Tesla drives that money into development of the economy vehicle, they're going to scare a lot of car manufacturers.

Not necessarily. Almost all car manufacturers are anticipating this kind of transition and have back up plans already [1]. I bet Tesla will become what Apple is to smartphones and then the rest will gradually pace up and someday attain equilibrium (or even overshoot) with Tesla's roadmap.

For example, a lot of manufacturers are already developing electric vehicles for masses, just that they don't want to get their feet wet and they want someone else to do it first , so they can just jump in and join them if the market is actually ripe.

Mass adoption of electric vehicles is what most manufacturers fear and which is a valid concern, which is why Tesla's move is particularly so important.

Automotive industry is one industry where nobody is 'too late' for the party. As of now, I personally want to see Tesla succeed.

[1]Nissan, Toyota, Mistubishi, Chevrolet, Hyundai, BMW, Audi, etc. all have EV's in their roadmaps, some are budget EV's too.

Apple managed to maintain their strong lead for a relatively long time by creating the app ecosystem.

Tesla could do the same with their supercharger network, where they offer free charging. Although I think (and hope) that eventually they'll let other car manufacturers "license" access to Tesla's network, and this way they'll be able to not only pay for the maintenance and cost of the network, but also make a bit of money from it, too. They shouldn't charge too much, though. Maybe $100 per car.

By turning the network into an actual business and not just a "cost", they would have to incentive and capital to expand the network all over the world as fast as possible.

And that's how we all get free charging for all cars, forever. Goodbye oil industry.

Agreed. But 'Goodbye oil industry' will never happen in the near future. Not with the level of corruption with the top dogs right now. They'll do everything they can to suppress the viable alternatives. They'll buy out the media, pay the right guys to write stories about how unreliable and dangerous these EV's are and why oil based transport is still the best, and so on.

And co-incidentally, I am reminded of the Tesla-BBC fiasco...[1]


I don't know if you need to ascribe malice there, Clarkson has always hated EVs, even before they were serious contenders.

What you hate or like is your personal prerogative. But when you are addressing a public audience, who have faith in you and your brand and trust you, you are morally obliged to be factually correct and not let personal opinions distort the facts. If you read that article, Tesla claims that they forged a scene as if the car just stopped randomly which is highly unlikely when there is enough charge (I am with Elon Musk on this one).

(You doesn't literally mean you, but BBC in this case)

Clarkson is not a news reporter. He's an entertainer. He is expected to be controversial and opinionated, and - depending on your viewpoint - quite delusional.

If he started being objective and serious, the show would be cancelled. As it in fact was before he pitched the new, less serious, format and convinced the BBC to relaunch the show.

Sorry to burst your bubble, but the oil industry is far from just being gasoline and diesel.

Tesla will have to move down market, that will seriously restrict their profit per car. Where they are now with the S is in a price range which is less than twelve percent of the market but provides the majority of many automakers yearly profits. Get down to that below 40k mark and they are going to be in the same boat with everyone else. I doubt we will see a sub 40k car from them for years.

Tesla already has the ability to pay for the supercharger network by selling excess power back to to grid.

The legacy automakers all seem to think 100 miles on a charge is good enough; of them, only Nissan seems to be trying to do much more than build the minimum number to comply with California regulations.

The sales figures of Leaf vs Tesla seem to suggest that people bought the Leaf when the Model S wasn't yet available and the Leaf was the best EV available, and largely lost interest after that.

It seems entirely possible that the legacy automakers' EV plans could turn out to be too little, too late.

Tesla becoming the Apple of vehicles would be a worse case scenario for the other manufacturers considering that Apple assumes the (vast?) majority of profits.

Which is...good and will force them to innovate better, no? Case in point - Samsung was nobody a few years back, though they were very much popular as a 'budget' phone maker. But look at Samsung today, they make phones much better than even Apple's iPhone (though this is subjective) in terms of features, performance, etc. But what forced Samsung to become what they are today? Pressure from its competitors. Competition is always good....(until they start suing each other).

You were trying to link that automakers might not be scared because Tesla might "only" become the Apple of cars (I guess implying that less marketshare is not scary). But Apple's "small" marketshare enables it to reap most of the industry's profits which is far scarier to competitors.

How are they going to actually produce that economy vehicle? They are scraping by now with the luxury line.

Agreed, and expect the old guard to lobby more states than SC to put in rules that will severely hamper Tesla (by requiring them to open dealerships everywhere). (I realize SC hasn't voted it into law yet, but there is noise there about it.)

I'm sure they're already working on the $30k version, and a lot of this money will be being used to tool the factories for higher volume output.

When companies like Tesla sells bonds, where would you buy them from? And how would you know about them being made available? (Often seems to be that once it hits the news it's all over)

Your broker at a major bank is the only place where you'd be able to buy a new offering of bonds. There's usually some minimum quantity you have to buy, in the range of $30k-$100k minimum. You basically have to ask said broker to tell you when they're available. (give you the list of new issues periodically)

I think you can buy existing bonds on the market through more normal channels including discount brokerages.

edit: Public Service Announcement - don't trade in bonds, because you're virtually guaranteed to get taken advantage of hardcore by Wall Street bond traders, even the "flow traders" that do the transaction for you. One example is the broker giving you a price (via the trader) that reflects the bank's own book instead of the actual open bond market (you can check the discrepancy by demanding to see the Bloomberg data on the security). The bond market is still even to this day nothing like the stock market. Visibility & transparency (in the stock market) are your friend.

Something I think about sometimes: "In a poker game, look around the table and find the mark. If you can't, it's you."

This advice, of course, ignores the second order effect that someone skilled might pretend to be a mark....

The NYT accords the quote to Billy Waters.

Is it something you have to be an accredited investor for?

You don't need to be accredited. The debt of a company is higher in the capital structure than its equity (creditors come before shareholders in bankruptcy), so it's a more conservative investment. That's not to say that any bond is safer than any stock, and there are plenty of bonds that are very risky (companies have credit ratings just like individuals and countries). Keep in mind also that bonds tend to have a minimum purchase size (usually $10k face value) and minimum increments thereafter ($1k usually).

No, you can be a regular investor but you need to have an account through a major bank and have someone you can talk to who can show you their new issue inventory and make the transaction for you.

More details on the raise reveal that it's actually not just from a stock sale - they're also issuing $450M in notes: http://blogs.wsj.com/corporate-intelligence/2013/05/15/tesla...

They actually upped that to $525M later I think.

It seems Tesla takes advantage of all kinds of government subsidies, loans, and windfalls. Is there a place that summarizes the government programs that Tesla takes advantage of, or how much of their revenue is from selling the carbon credits they get to other car makers?

I'm not implying anything political with this comment, just genuinely curious.

Tesla takes advantage of a lot of these things, but that sort of rent-seeking is so par for the course, that choosing to NOT take advantage of it would put any company of scale at a massive disadvantage relative to their peers. A short laundry list of the industries that do this very well: financial firms, energy firms (both production and delivery), car companies (who can forget GM and Chrysler in 08/09), sports teams/leagues (particularly when building stadiums/facilities, and others. The subsidies/tax breaks etc that they take advantage of are at the Federal, State, and Local level, sometimes international, and oftentimes playing different government entities against each other to get better deals.

The New York Times had a fantastic article on this: http://www.nytimes.com/2012/12/02/us/how-local-taxpayers-ban...

And a visualization here with some data: http://www.nytimes.com/interactive/2012/12/01/us/government-...

Re-reading it, makes you wonder how profitable all these industries would be without all these subsidies/tax breaks etc baked in.

Last I checked, and it's been a few years, the entire wind power industry exists only because of tax credits - their financial structure is designed pretty much entirely around them. Take them away, and there are no new wind farms, which is interesting, because part of the reason that costs are high for wind farms is the scarcity of turbines. The turbines are scarce because the GE's of the world do not want to invest long term capital in an industry propped up by government subsidies... and round and round it goes.

Point about the wind power industry is entirely correct - my goal was simply to put it in context. Many companies (including GE as you mention) are only so profitable by taking advantage of a multitude of tax credits/subsidies and the like.

Reference: http://www.nytimes.com/2011/03/25/business/economy/25tax.htm...

Several of GE's businesses are propped up by government subsidies. All I'm saying is that GE is not really different - Tesla simply happens to be in a sector that's particularly high profile and politically charged, and its claiming of those things are out in the open.

That doesn't answer my question, and I specifically said I wasn't implying anything political with my statement.

I would like to see that as well. More than anything, Musk appears to be absolutely masterful at taking advantage of government funding - directly and indirectly. The recent financing deal with Goldman to fund SolarCity panels is a great example as well. In fact, if you look across his current businesses, every one of them is only able to exist because he is taking advantage of government funding.

And before someone gets upset, I'm not saying that's bad or that it detracts from Musk's vision or skill. It just is.

What is the potential impact of this move when it comes to shareholders? I understand that a lot of the recent upside was caused by a short squeeze, which is a product of limited share availability.

Does this basically constitute a "cash out" for Tesla, and will this have a deflating effect on the stock?

No. Tesla needs lots of money and will continue to need lots of money. They can get that from debt or equity (or maybe the government, but leave that aside).

It is a signal that they believe that their stock is highly valued (or even over valued, but they would never say that) if they are raising equity - otherwise debt might be a more attractive offer. In the end, it's all a balancing act between taxes, cash flow, dilution, and market demand for securities.

Any time you raise money, you dilute ownership (or lower cash flow in the case of debt), which has the direct effect of devaluing the stock. But you wouldn't do that unless you thought you could increase the value of the stock by investing that cash and increasing future cash flows. (Incidentally, this is why everyone is so pissed at Apple, who has way too much cash to invest properly - they should be giving it back to shareholders to invest themselves if they can't figure out what to do with it).

The cynic in me says, "beware - this stock is overvalued and they're just taking advantage of that with this offering." The optimist says, "great then- they can raise money at a low cost and increase their chances of making it big". On this one, I'm siding with the cynic. This is highly speculative. Besides, do you want to be the one who is permitting them to raise money so attractively? (That's an open question - akin to paying a stupid valuation for a hot startup because it will not matter one day when it sells for 100x.)

I'm reminded of the time when AOL bought Time Warner with it's insanely overvalued stock. Didn't turn out to well for Time Warner shareholders.

It's not clear whether it was actually a short squeeze, or just a normal value increase caused by the shorts covering their positions. Shorting a stock always has a negative impact on its price, so now that Tesla has a much lower short interest, it's expected that its price will be higher regardless of whether there was a true squeeze or not.

I think that would partly depend on what price they offer the stock at to institutional investors.

Looking forward to a Tesla car I could actually afford ;)

I wish not only that I could afford it, but that regulations of my country did not made it almost illegal and impratical (in fact, Nissan Leaf is no go here either, and it was not lack of effort from Nissan, that even borrowed a entire fleet of them to the goverment to test)

What country do you live in?


And Brazil governments owns Petrobras, so it is very much against its interests to people ditch petroleum before Petrobras find some new business model...

I learned that Tesla is already taking preorders for the Model X, which is $45k (my mentor apparently put an order in).

Hopefully this means that we'll have a "Model Y" in the 25k-30k range in another 5 years!

The Model X signature edition deposit is $40K, the regular deposit is $5K; the two together may be where you got $45K. There is no reason the model X would be cheaper than the Model S; most of its versions have two motors instead of one in the S, and it likely has a bigger battery. That's not to say it won't be the price of the current model S, but no way it will be of a contemporary one.

The base model will have just one motor though, and the batteries are actually the same as Model S (60kWh or 85kWh). Given that they've had time to refine their manufacturing techniques and such, it could be cheaper than Model S.

However I agree that $45k is likely incorrect, and in practice it's hard to imagine they'd make it much cheaper than Model S, if at all.

I wonder how that would look like and how it would compete with a civic on specs. If it could, I guess it would be 'the future is now' kind of a moment.

They want to have a $30k version, that with a lease is when most everyone can afford one.

I hope the $30k model comes out soon. Regular Americans will have a better chance at embracing that model. With gas at disgusting price levels, I am pretty sure the rest of America would agree.

Good lor' das a lotta money

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