Tesla on the road to failure
The automaker has much in common with Webvan, a Silicon Valley company that flopped after going public 10 years ago.
By Eric Jackson, TheStreet
Every 10 years or so, the smart folks in Silicon Valley select some inefficient industry run by dummies that they want to set straight and revolutionize. Ten years ago, there were smart entrepreneurs (with Internet backgrounds), with even smarter venture capitalists behind them, who started a company called Webvan. It was designed to transform grocery shopping. People would no longer go to brick-and-mortar stores, they said. Instead they'd buy all their groceries online.
After raising hundreds of millions of dollars and going public, Webvan failed. The smart Web entrepreneurs overlooked some basics about running a grocery business -- online or offline -- like the need for big, expensive distribution centers. Maybe if they'd had some grocery execs in the fold (on the management team or board), they might have thought of that "key success factor" for operating in that industry.
But before their failure, had they been asked about bringing in some industry talent, their response might have been: We're trying to re-create this industry, so we don't want to tie ourselves down to the old ideas that have failed.
Ah, how important it is to balance "fresh eyes" to look at industry challenges anew with "gray hair" wisdom that can tell you which potholes to avoid stepping into.
In Silicon Valley, with lots of money, ego and talent, you can will a lot of companies into existence -- especially if they are able to capture some exciting buzz. However, success breeds arrogance. Webvan was Exhibit A of how that arrogance can result in a high-profile failure.
There's another Webvan-like company that just went public a few weeks ago and is heading for the same kind of ignominious failure by the end of 2012: Tesla Motors (TSLA).
Tesla shares many similarities with Webvan. The company was founded in 2003, set on revolutionizing the auto industry by providing the world's leading electric cars. You could argue that it's been losing money ever since.
By 2004, it needed cash. Enter Elon Musk, a PayPal co-founder with cash in his jeans since eBay (EBAY) acquired PayPal. Musk, 39, is now chairman, CEO, and product architect of Tesla. He has an explicit employment contract that will keep him in that role until the end of 2012.
The company -- thanks to Musk's involvement, his worthwhile mission of creating non-fossil-fuel-powered cars, and the pixie dust he brought from his past PayPal success -- found it easy to raise money in Silicon Valley. It attracted investments from Google (GOOG) co-founders Sergey Brin and Larry Page, eBay co-founder Jeff Skoll and a host of well-know VC firms. Most people are familiar with its racy Roadster model -- currently Tesla's only car, with a list price of more than $100,000.
Last June, Tesla went public at $17. Two days later, its price jumped to more than $30. Three days later, its price had dropped below $16. It's now more than $19, after its first earnings release since its IPO disclosed that it had lost a record $39 million in the quarter and $68 million in the first six months of the year.
The recent S-1 filing makes for some interesting reading on Tesla. People who now express surprise about Mark Hurd's expenses leading to his ouster at HP (HPQ) obviously weren't reading the SEC filings a year ago. I think there are even more troubling details in the Tesla filing -- especially the "risk factors" section.
Here are the main reasons I'm betting against Tesla and why I think it could be the next Webvan:
- No senior auto experience on the management team. Tesla has chosen to build out the management team without senior auto industry people (although they do have people who held junior positions at car companies). When asked about this recently, Musk defended the decision because they are trying to recreate the inefficient auto industry. Why should they listen to Detroit people?
- Revolving door at the top. Musk is the fourth CEO in three years at Tesla. Start-ups can have their share of management drama but this company is still going through its adolescence as a company while being public. Management instability breeds more management instability.
- CEO narcissism. Musk had a role in the recent Iron Man 2 movie, and was an inspiration for the movie's character Tony Stark. He lives in Bel Air. He's been a guest on the Stephen Colbert show and Time's list of the 100 most fascinating people. If Musk was a woman, we'd probably hear more comparisons between him and Carly Fiorina. Anytime a CEO starts to care more about his celebrity status than his business, it usually suggests he's distracted from the business -- which might start to show itself in the company's operating results in the quarters to come. The company's second-quarter results were a good start to that.
- Tesla has bet its future on its next car: The Model S. Very shortly, Tesla will stop manufacturing the Roadster. Its viability as a company will depend on its next car: The Model S. The car is a family oriented sedan and looks like a Volkswagen Passat. It hopes to start delivering the car in 2012 but it could take longer (according to their filing). There is no clear plan yet for how it will sell the car (other than through the internet and its small boutique stores in rich cities like Monaco). The Roadsters have sold only a few thousand, so Tesla will quickly have to learn how to sell its next car.
- Tesla has no manufacturing experience as a company. Its Roadster is built entirely by Lotus -- not Tesla. The Model S will be built by Tesla and they just bought the old Toyota Nummi plant in Fremont, CA, to do this. The purchase price Tesla is paying is $42 million, which will eat up most of its available $69 million in cash.
- Tesla has not shown it can make money. It has lost $237 million from inception through Sept. 2009. It sells an overpriced Roadster and will likely sell an overpriced sedan. The only reason the company is still in business is because of a $465 million Department of Energy loan. On one hand, I support the government offering incentives for the development of alternative energy. On the other hand, I have a problem with the government picking winners and giving generous loans to a company that has never made a dime and decided to pay its Silicon Valley millionaire CEO a total compensation package worth $25 million (not including money he would have made through the IPO in June) last year. Why does Tesla deserve half a billion dollars from U.S. taxpayers? If the company would go bankrupt today without that support, how does the government justify providing that assistance?
- Musk treats the CEO position at Tesla as a part-time job. At the moment, Musk holds three CEO positions, including Tesla's. His other focus areas are his space exploration company and his solar energy company. Maybe this flies in Silicon Valley for start-ups, but it's just not acceptable for a Nasdaq-listed company to have a part-time CEO. If Musk wants to be the CEO of Tesla because it's a great opportunity, then be the best damn CEO. If he wants to fiddle around with a space company, then he should go do that.
- Musk should get his brother off the board and bring in some more auto industry experience. At the moment, Musk's 37-year-old younger brother Kimbal sits on the Tesla board. Kimbal is a chef, with a restaurant in Boulder, Colo., and a Web company. If he wasn't the CEO's brother, he likely wouldn't be on the board. He should have stepped down pre-IPO and made room for more auto industry "gray hair."
The bottom line is that Tesla is going to bleed cash from now until it starts selling its Model S in 2012 or later. It will need to raise money, with a high chance of launch delays.
Electric cars will be the future, but I'm betting they won't be Tesla's electric cars.
At the time of publication, Jackson held a long position in GOOG and a short position in TSLA.
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The company has made at least 4 acquisitions in the space, and few people have paid any attention.
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