Tesla

Acquired kicks off Season 3 with a gangbuster two-hour extravaganza on America’s most successful automotive startup since The Ford Motor Company: Tesla. We cover everything, from founding to its 2010 IPO to all that’s happened since, including the question on the minds of superhero fans everywhere: who came first, Elon Musk or Tony Stark? (Spoiler: Elon) Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Carve Outs: Ben: The Dissect podcast https://dissectpodcast.comDavid: Harry Potter and the Sacred Text podcast http://www.harrypottersacredtext.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Do you know the code name for the Model S?

• 0:02David Rosenthal?

  Uh, White Star.

• 0:03Ben Gilbert?

  Yeah.

• 0:04David Rosenthal?

  Yeah.

• 0:06Ben Gilbert?

  It's amazing how cool you feel doing this and learning the code names of projects. And you're like, ah, that was a code name, even though it has no... It's not secretive. It's not. It's just boring, but I think it's cool.

• 0:27Ben Gilbert?

  Welcome to season three, episode one of Acquired, a podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:34David Rosenthal?

  I'm David Rosenthal.

• 0:36Ben Gilbert?

  And we are your hosts. Today, we are covering a company that was not founded by Elon Musk, Tesla.

• 0:42David Rosenthal?

  Debatable. Depends who you ask.

• 0:46Ben Gilbert?

  Tesla is an unbelievably complex and nuanced company to research. They're without a doubt, one of the most innovative companies in the world right now. They've created the electric vehicle era that we're in. They've invented the most adored cars on the market through sheer force of will, brilliant design, and world-class engineering. In fact, the most recent US automaker to reach success before Tesla was Ford, and that was 111 years ago. Tesla is also a solar energy company, semi-truck company, autonomous vehicle pioneer. They're becoming the world's largest lithium ion battery manufacturer. They're a creator of large-scale charging infrastructure across the country. They have a car in orbit, and by all accounts, their CEO appears to be the love child of Tony Stark and Steve Jobs.

• 1:30Ben Gilbert?

  Now, they've also strung together, David, before you get too excited about this company, a series of miracles to stay alive and make this all happen. Both financial, engineering, PR, you know, you string the miracles together correctly and thread the needle exactly right, and you get Tesla. And in fact, as we'll talk about in the latter half of the show, they're in a pivotal moment right now to see if the company can even stay alive. The public markets right now are made up of Tesla diehard never sellers and a tremendous amount of short sellers. And for those who pay attention to short ratios, which is the amount of money being shorted on a company relative to the number of shares outstanding, 27% is their current short ratio. So that's... 27% of the amount of shorts, the ratio, the number of shorts to the ratio of the

• 2:15David Rosenthal?

  Number of people who hold the

• 2:17Ben Gilbert?

  The number of people, yes, is 27%. So everybody's got an opinion. There's lots of incentives. Everything you read is probably charged with somebody that knows somebody or that actually represents somebody that has a lot to gain by Tesla moving one way or another. And there's high risk and high reward everywhere. So David, can you feel it?

• 2:37David Rosenthal?

  Oh, boy, can I ever. This is a word of caution to listeners. This is going to be a long episode. We wanted to really do this justice and give the full acquired treatment to Tesla. So we have gone very deep. I won't claim in advance for this to be the definitive take on Tesla, but it will be the definitive acquired take on Tesla.

• 2:59Ben Gilbert?

  It's not like nobody's ever in the Slack requested, hey, you guys should do Tesla before. I mean, we've gotten a ton of this and I think we've been almost a little daunted by it because it's really, there's an incredible amount of nuanced corporate structure here, evolving strategy. You could look like a complete fool by being too bullish on Tesla or too bearish on Tesla because something amazing is going to happen to this company over the next 10 years or six months. And I think in retrospect, you could either be looking like the guy that said the car wasn't going to be a thing or the guy that says that Enron was going to be the next big company. We really wanted to do our diligence to make sure that, not necessarily that we took a stance one way or another, but that we did the company justice in telling the story.

• 3:41David Rosenthal?

  Indeed.

• 3:42Ben Gilbert?

  So what are we covering today? It's Tesla, Tesla writ large. We're, we're going to be talking about the IPO as sort of the way that we structured the episode, but then also doing sort of an extended take later in the episode on where's the company today, what's its future? What are key risks and opportunities for it? And so unlike other required episodes where it's purely centered around a transaction, this is loosely around the IPO, but really about the company as a whole. All right, a little bit of administrative work before diving in. If you like the show. I guess if you don't like it too, but we'd like it more if you like it, leave a review on iTunes. It helps us grow the show. If you're ever wondering sort of, how can I help the show, a review on iTunes is a great way. If you're new to the show,

• 4:23Ben Gilbert?

  you can join the Slack at acquired.fm where we are always chatting with the 1,400 strong and growing group of people that, you know, talking about the most recent things that are going on, which David and I sometimes talk about the show, but don't always talk about on the show. So if Amazon's buying Whole Foods, that's the place to be for that day where there's lots of hot takes and good insights on it. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 5:03David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 5:24Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 5:46David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 6:04Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. All right, David. You know, this is what we've all been waiting for.

• 6:36David Rosenthal?

  The main event. I'm a little nervous.

• 6:40David Rosenthal?

  We'll do it justice, my pages and pages of notes here. Okay, let's kick it off. History and facts of Tesla. So a little bit of background to start. So one of the things we did in preparing for this episode, we went back and listened to our PayPal episode, which was one of our early ones. And listeners may or may not know, but Elon Musk, the potential co-founder of Tesla, who we're going to focus on a lot in this episode, was also a co-founder of PayPal. The Series A investor. The Series A investor. The current CEO of Tesla was a co-founder of PayPal. Relistening to that episode, it was definitely the early days of acquired, and we've come a long way since then. It was fun to go back and listen to it.

• 7:25David Rosenthal?

  We did not really get the story right. So at some point, we need to redo the whole episode on PayPal because there's so much there. But I'm going to cover a couple things that weren't in that episode that's important to know about Elon and his personal history coming into Tesla. So even before Elon co-founded the company X.com, which would morph into PayPal via a few iterations, he had started a first company in the US. I say in the US because he is, of course, South African, was born there and then immigrated first to Canada and then to the US. But his first US company was a company called Zip2. And it was a startup during the dot-com era in Silicon Valley. Elon was the founder, he was the original CEO.

• 8:09David Rosenthal?

  And the VCs, Moore David Al was the main VC. After they invested, they brought in a quote-unquote "professional" CEO, which was all the rage back in the day, and they pushed Elon out of the CEO seat and into the CTO seat. And that really left a scar on him. And he resented it ever since and still resents it to this day. And I think you can see a lot of his behavior through that light. Certainly after it happens at Zip2, he actually attempts a coup to regain the CEO seat, attempts a board coup and fails. That was his first failure in the startup world. Zip2, shortly after that, ends up getting acquired by Compaq for about $300 million. Elon nets about $22 million out of that sale.

• 8:53David Rosenthal?

  And so he's kind of been burned through his experience there, but now he has $22 million. He doesn't really know what he's going to do with his life. He decides to basically become a playboy, live like the playboy lifestyle in Silicon Valley. And the media kind of gets wind of this and loves him. He's like this dot com wonder kid. So the first thing he does, and this is going to directly lead to Tesla here.

• 9:14Ben Gilbert?

  And it's not the media in the sense that he's covered in the media today. It's amazing to even think about Elon five years ago, let alone 15, 20 years ago, of just not being the sort of global icon that we know of today.

• 9:25David Rosenthal?

  Yeah, this is a very, very different Elon and a very different kind of media coverage here. So the first thing he does, he buys a McLaren F1 for $1 million in cash. So the McLaren F1 was, was, maybe still is, I think, the fastest car ever made. There are only about 50 of them in the world. And then he gets CNN to live broadcast the delivery of the car to his house and him taking receipt of the car and then driving it around.

• 9:53Ben Gilbert?

  Which is one of the best things on YouTube.

• 9:55David Rosenthal?

  Oh my God, unreal, unreal. And then he, he cold emails Larry Ellison, the Oracle CEO. He doesn't know Larry, but he knows that Larry also owns a McLaren F1. So he cold emails him and says, let's get together and race these things.

• 10:10David Rosenthal?

  Which they do. This is the world that Elon is in. So he's blown a million dollars of his $22 million straight off on this car. But he also wants to start another company and he wants to make sure that the VCs will never oust him as CEO again. He starts a company, he calls it X.com. And the goal is, he's really ambitious. He wants to become an online bank. He wants to bring banking online. He funds it himself. He invests $12 million directly into the company. And he has a few co-founders, but this time he has problems with his co-founders. So one of his co-founders stages a coup and ends up taking most of the employees and going and starting a rival company doing exactly the same thing. Not good. Elon keeps going with X.com.

• 10:54David Rosenthal?

  We didn't get any of this in the PayPal episode. X.com would become PayPal. Because they now have all this empty space in their office. They sublet some of that empty space to a plucky startup in Palo Alto called Confinity that was founded by Peter Thiel and Max Levchin and the rest of the PayPal crew. They're working on some crazy Palm Pilot stuff, but they see what Elon and X.com are working on and they're like, oh, that's a good idea. We should just do that and change pivot and compete with these guys who were subletting space from. They do that and they change their name to PayPal. Then a bunch of stuff happens. Elon kicks them out of the space. They go somewhere else.

• 11:32Ben Gilbert?

  So David, the people that spun off to formal rival company, what did that end up being? Or did that just fizzle?

• 11:39David Rosenthal?

  That just fizzled. Yeah, that didn't go anywhere. But now he's had like two major blows. So there was the initial blow at Zip2, two major blows in the PayPal journey. They end up X.com and Confinity end up merging. They changed the name to PayPal. All that has been, much has been written about. After the merger happens, the board decides, the new board of the combined company decides to oust Elon, bring in a professional CEO again. So his worst nightmare has just happened again.

• 12:06Ben Gilbert?

  He would be better suited by becoming one of these professional CEOs, it seems.

• 12:10David Rosenthal?

  He really would. He really would. So that, that doesn't last very long. Elon stages a coup again. He comes back. He, he becomes CEO, but his employees of the combined company are so unhappy with him that they then go behind his back on the day he's leaving for his honeymoon. They go back to the combined board and oust Elon once again out of the CEO role of PayPal, bring Peter Thiel back as CEO again on the day that Elon is leaving for his honeymoon for his first marriage. Brutal. You know, again, it's the dot com crazy days. I guess it's actually after the crash as we covered in the PayPal episode. Shortly after that, the company gets acquired by eBay and probably a lot of that drama had a lot to do with why they decided to sell to eBay, which we didn't talk about in

• 12:55David Rosenthal?

  the PayPal episode. Anyway, Elon nets from that sale about $180 million after taxes. So he is now rich at a whole nother level than he was from his Zip2 acquisition.

• 13:07Ben Gilbert?

  One thing you sort of see with successful people is, you know, one time they're lucky, twice they're good, three times you know they're good. And what you see with Elon is a pattern where people do the things that made them successful because they believe that that is the way to do things. And he has every data point so far to show that when something goes really well and you get a bunch of money, you should plow all that money back into your next thing because that will do well too.

• 13:39David Rosenthal?

  I think because that will do well too. And like, he just has this complex that's like, deep within him from these early days of like, I need this to be mine. I need control. He's been burned time and time and time and time again. Again, all that is just background, but I think it's really important to understand as we look at the journey of Tesla and what's happening today and why Elon necessarily behaves the way he does. Okay, so he gets $180 million after taxes. He decides he's done with the dot com Playboy shtick. He wants to actually have a really big impact. This is the summer of 2002, after the PayPal sale. He still has his whole life ahead of him. That leads to him starting SpaceX, which is a story for another day. We won't go into it. That

• 14:24David Rosenthal?

  will certainly be another acquired episode at some point in time. But that is going to be his next chapter. He is going to start SpaceX. He's going to make the human species a multi-planetary species, and that is his calling. Along the way, though, he gets involved with Tesla. And that's the story we're here to tell today. How did Tesla start? About a year later, in the summer of 2003, Elon has moved down to LA, and he's building SpaceX in LA, where it still is today. And at the time, the biggest status symbol that you could have in the Hollywood, LA ecosystem, and also in Silicon Valley, but even more so in Hollywood, was a Prius. Because these were the days of the Iraq War, and of course,

• 15:08David Rosenthal?

  you know, Hollywood and all of California is very liberal, but is very against the war, viewed, you know, the US's oil interests and oil dependencies were terrible.

• 15:17David Rosenthal?

  And so all the big movie stars, I remember there was a whole series of Curb Your Enthusiasm episodes with Larry David about buying a Prius, driving a Prius, having it be the status symbol. It was the thing to do. And so Elon kind of gets swept up in this too. He gets really interested in alternative fuel sources for powering vehicles and reducing. Did Elon drive a Prius? I actually wasn't able to find that out. If he didn't, he certainly was living in a milieu where Priuses were the thing. He also still had, I believe he still had his McLaren F1 at that point. Actually, I think he does because I think it'll resurface later.

• 15:56David Rosenthal?

  So meanwhile, back in Silicon Valley, a guy named JB Strawball is hanging out. Well, actually, JB lives in LA, but he's spending a lot of time back up in Silicon Valley, hanging out there. He's a Stanford grad. And while he was at Stanford, he had been part of the university's solar powered car team. And this was a intercollegiate competition that Stanford had a team for, gone on for years, where engineers from different universities would build vehicles that were powered by solar power, and then they would race them across the country. It was kind of like a alternative track to the DARPA challenge where university teams would create autonomous vehicles to navigate terrain. This wasn't autonomous, but it was powered by solar. And

• 16:37David Rosenthal?

  so Strawball had been part of the team while he was at Stanford, and through a variety of ways, ended up staying in touch with the current team members after he graduated and spent a lot of time with them. He, along with some of the current members of the team, kind of came to this realization that they could use laptop batteries, lithium ion batteries, in these cars to store the energy much better than they had been. I think, I think they had been, maybe been using ultra capacitors before. I'm not quite sure what technology, either that or lead acid batteries. They weren't using lithium ion. But this was, you know, 2003, laptops were really taking off, replacing desktops as the primary way that at least college students, if not many

• 17:19David Rosenthal?

  people, did their computing. And so lithium ion batteries were getting much, much better. And they realized that you can string together a bunch of these and actually have enough power to power a car. He's working on this. He gets really excited about it and he starts looking around for people to fund essentially this team at Stanford and kind of like a passion project. He views this very much as a side project to develop a prototype of a car that would be powered by lithium ion batteries, an electric vehicle. And in the fall of 2003, he gets introduced to Elon. Elon thinks this is a super cool idea and he's like, "Great, I'll give you $10,000 to help fund this." And Strabill's like, "Awesome." By the way, you know, you're like this, you know, the McLaren F1 guy, you know, you're

• 18:03David Rosenthal?

  really into cars. You might want to check out, down here in LA, there's this kit car manufacturer, this essentially car enthusiast group of guys called AC Propulsion. And they make this electric kit car called the T-Zero.

• 18:19Ben Gilbert?

  T-Zero.

• 18:20David Rosenthal?

  The T-Zero.

• 18:21Ben Gilbert?

  Listeners, you gotta Google this thing and look at it. It looks like a joke.

• 18:26David Rosenthal?

  It looks like a joke, but it goes 0 to 60 in sub-five seconds.

• 18:31David Rosenthal?

  And it's powered entirely by, it's an electric drivetrain. Now, it's not using lithium ion batteries. I believe it's using lead acid batteries at this point in time. But Strabill takes Elon over to the AC Propulsion garage, shows him this thing. Elon gets in, drives it, and he's like, "Oh, man, you know, the acceleration on this thing is like as good as my McLaren F1. This is awesome. I want to find a way to go all in and really turn this T-Zero into like a consumer car. And maybe this can replace the Prius as the status symbol in LA." The AC Propulsion guys, though, they're just like car enthusiasts. They don't really have any intention or desire to start a company, turn this into mass production. They're making

• 19:14David Rosenthal?

  kit cars, you know, for other enthusiasts to get the part. They sell the parts, the other enthusiasts put it together. That's what they do.

• 19:20Ben Gilbert?

  And in fact, the car, while street legal, isn't a car the way that we think about a car that couldn't like endure conditions. Like if left out in the rain, it will stop working. Nothing was ready for the element. So it's not like you could leave this thing in your driveway and go grab it in the morning. It's, it'd be a huge risk.

• 19:35David Rosenthal?

  Yep. This is not the Tesla you know and love.

• 19:39Ben Gilbert?

  No, it does kind of look like, for people who are not Googling it, sort of like the goofy clown car illustration sketch version of the original Tesla Roadster.

• 19:50David Rosenthal?

  Yes. Well, there is, the DNA of AC Propulsion is very much within the roadster, as we will see. So Elon is like, okay, the AC Propulsion guys aren't going to do this. Strawball is great, but like, he's not really going to start a company either. He's doing this as like a, you know, safe humanity side project, building batteries. He starts looking around for others who might be interested in building a real electric car company. And it just so happens that at the same time, there are two other guys back up in Silicon Valley who had also approached AC Propulsion and tried to convince them to license their technology to them, or become a real company, or do something.

• 20:32David Rosenthal?

  They, they had the same goal as Elon. And those two guys are Martin Eberhard and Mark Tarpening, names that you probably haven't heard of, the two of them, who, who are Martin and Mark. They had had a successful exit themselves. They were startup guys in the Valley. They had co-founded a company that was a really early ebook reader. So like a Kindle competitor before the Kindle. That ended up getting acquired for, I believe, about just under $200 million. They had a successful exit. And they were just like Elon, looking to do something more meaningful with their lives in their next gig.

• 21:08Ben Gilbert?

  And the dotted line you can kind of draw here is, one of the trends that led them to start an ebook company was that battery technology was getting better. And what can we do with smaller, better, more efficient rechargeable batteries? Gosh, maybe ebooks could finally be a thing. And so, you know, I think they sort of still had that bug in their mind when, when they sold the company.

• 21:27David Rosenthal?

  Yep. So unlike Elon though, so they're basically in the same position as Elon. They're trying to get the AC Propulsion guys to do this. They realize they won't. Elon already has SpaceX though. He's already started a company. Eberhard and Tarpening, they're free agents though. So they're like, great, we're going to do it. We're going to start this company. We're going to get the band back together. On July 1st, 2003, they incorporate the company. Eberhard goes down on a trip to Disneyland in LA, ironically, with his wife. And he's walking around Disneyland and seeing all the, you know, the, the history and how Disney's incorporated that into the lore and mythology there. And he comes up with the perfect name for the company. Tesla Motors in honor of Nikola Tesla,

• 22:12David Rosenthal?

  the famous inventor who did much, much work on electricity.

• 22:15Ben Gilbert?

  And the goal that Eberhard had there, which is really similar to sort of Elon's later vision for the company is we cannot build something that screams electric car. We cannot scream something that says environmentalist or nerd or like it. It just can't be about that. The T zero, that's what the T zero was, you know, the name T zero represents like the time on the X axis where it intersects the Y axis. Time is zero and going on from here. So it's for like, you know, math nerds and battery nerds. You know, the whole vision of starting Tesla when they're thinking of, you know, what's the right name for it is really around how do we go mass market with this thing, yet still pay a loose homage to sort of where we, where the history of the industry is.

• 22:55David Rosenthal?

  Yep. And so they, again, they and Elon are on the same page. They just haven't met yet. They think that the best way to get this thing going and get it to market is to actually start with what AC propulsion is doing with the T zero and make it, you know, a consumer version. They do a bunch of thinking about like where the technology is, both with batteries and drivetrains and everything. And they realized that it's not like a big SUV they should be building. They should be building a sports car. That's what's going to best express the technology of electric vehicles at the time and not a Prius and those sorts of things. So they take this business plan and they actually, not just the business plan, but an actual T zero itself to Sand Hill Road. And they go start pitching

• 23:40David Rosenthal?

  VCs on raising a series A to start building this company, to start building Tesla. And of course, they've raised money before. They've had a successful exit and everybody on Sand Hill is like, you guys are nuts. You want to build a car company? Like you're tech dudes. Like what are you doing? If you're a VC firm and a pair of entrepreneurs, not just even a single entrepreneur, but the whole team, like the two co-founding team has had a successful exit for you, made a bunch of money and then they start another company. It's almost like a blank check. It's kind of like Aaron and the rubber episode. Like whatever you do, like I want in, I'll lead it. It's so bad that their lead investors from their old company are like, uh, I mean, we'll give you $500,000, but we're not going to lead because this is nuts.

• 24:25Ben Gilbert?

  And it's sort of a fascinating case study too, where like you don't know what wave is coming. And you know, Elon started this wave, or I guess Eberhard and Tarpining may have started this wave. But Tesla started this wave of electric vehicles. And then you sort of get into a overlapping wave of autonomous vehicles. And now like everybody's got a thesis on that. Every firm's got chips somewhere along the value chain there. But it's very difficult when you're the first one to sort of brave the storm a little bit. It's as if they were going and pitching like, you know, uh, the next step for VC backed tech companies is definitely hot air balloons. And everybody would look at them like, you're completely insane. That's, I don't, I don't understand. No one else is making bets there. I haven't read anything about this. I haven't heard about this. My consciousness is not, you know, there's nothing leading me to believe that this is the next thing.

• 25:09Ben Gilbert?

  And so it's super hard to make those bets.

• 25:11David Rosenthal?

  Totally. Well, and in their somewhat defense, the VCs weren't totally wrong. Like Tesla becomes a, you know, burning money pit for, for, well, really still to this day.

• 25:23Ben Gilbert?

  How long has it been around?

• 25:25David Rosenthal?

  Really still to this day, uh, which we will discuss later. So they get $500,000 from their old VCs.

• 25:32Ben Gilbert?

  Also funny in this is, is that they're effectively, it's not quite a competitor, but like they're pitching pre-product using their competitor's product. Like they're taking people for test drives in, you know, it's like, it's going to be like this, but like a commercial version of this.

• 25:45David Rosenthal?

  Yeah. Now, to be fair, I don't know if they had already agreed. There are certainly discussions to license the drivetrain from the T zero. And they ultimately end up doing that. And that is the drivetrain for the roadster, for the first roadster.

• 25:57Ben Gilbert?

  An interesting nuance too, in that license is that they cannot raise money from any of the investors that, that were in AC propulsion. So AC propulsion says basically, yeah, yeah, you can totally do that. You just can't raise money from people that we raised money from. AC propulsion had previously pitched Elon and he had said no, which made Elon eligible to be pitched.

• 26:17David Rosenthal?

  Yeah. Interesting. I didn't, I didn't get that detail. Well, that perhaps leads to Eberhard and Tarpining. They're like, kind of out of luck. They don't know where to go. They think they need $7 million to get, um, a prototype of what would become the roadster built. The Valley has turned them down and the AC propulsion guys tell them about Elon. They're like, oh, hey, there's this other dude down here in LA. He's got a bunch of money. He's running this space company, but he wants us to do this too. Maybe you guys should chat. They introduce them. Elon meets them and within a matter of days, typical Elon fashion from first meeting and hearing about these guys. Something like four days later, he's like, I'm in, I am personally going to lead your series A.

• 27:02David Rosenthal?

  I'm going to write a check for the rest of the seven million you need. I'm going to invest $6.5 million myself. Now, this is not like, you know, typically when you raise money as a startup, you know, you do a seed or a series A or whatever. And you have individuals involved, they come in as angels, they're writing like 25K checks. It's incredibly rare that an individual person would lead a series A, let alone one who is the CEO of another company with a full-time job.

• 27:28Ben Gilbert?

  And that other company is actually how they had a chance run in before Everhard and Tarpining with Elon Musk. Did you, did you find this at all?

• 27:37David Rosenthal?

  I did, I did, yeah.

• 27:39Ben Gilbert?

  Yeah, in 2001, Tarpining, so big space nerd drags Everhard to a Mars Society conference at Stanford and sees Elon speak about SpaceX.

• 27:48David Rosenthal?

  The idea for what would become SpaceX, he hadn't started SpaceX yet.

• 27:52Ben Gilbert?

  Ah, good call. Is it just fascinating like, hey, we saw this guy speak once and he's kind of a car guy.

• 27:58David Rosenthal?

  Yeah, well, and the AC propulsion guys had kind of reminded them and so it introduced. So, you know, again, typical Elon fashion, he's in, he's all in. But he also, you know, he's also given $10,000 to JB Strabell, as we talked about with the battery packs. And so he says to Everhard and Tarpining, he's like, hey, I know this other guy who nominally lives in LA, but basically spends all his time up in the valley anyway. He's really into batteries, you're going to need some better battery tech. You should go talk to this guy. They're like, okay, they bring Strabell in, they hire him on the spot to come in and join Tesla as one of the very first employees and he leads battery engineering. Thus, between Everhard, Tarpining, Strabell and Musk as chairman and lead investor, Tesla is born.

• 28:46David Rosenthal?

  So this is kind of end of 2003, beginning of 2004. They work for a little over a year and at the end of January 2005, they have the first prototype car built and it works amazingly. So they've taken the drivetrain from AC propulsion. They've taken the car body from the Lotus Elise. Lotus is, I believe, a British car manufacturer, I think. And they made the Elise sports car.

• 29:11Ben Gilbert?

  And it's the chassis from that and they custom built their own sort of body and shape.

• 29:17David Rosenthal?

  I'm not sure actually for this prototype, if it was, maybe it was.

• 29:20Ben Gilbert?

  For the mule?

• 29:21David Rosenthal?

  Yeah.

• 29:22Ben Gilbert?

  I think, I think you're right. For the prototype, they hadn't done their own custom body design and they were just stuffing it full of their parts.

• 29:28David Rosenthal?

  Exactly. I think it actually was the body of the Lotus Elise. So they have a board meeting as soon as it's done at the end of January. And again, the board is like Elon, because he's the dude who's the investor. There's no firm, the VC firm here. Elon drives it at the board meeting, likes it and he's like, great. I am now going to lead your series B.

• 29:49David Rosenthal?

  And they're like, uh, okay. So Elon invests $9 million more into the company, leading the series B. They raise 13 more million in total. A few other investors come in. So on top of the previous 7 million, they've now raised $20 million and they're going to use that money to get the Roadster to production. Ha, we will see how that goes.

• 30:13Ben Gilbert?

  That should only cost $20 million.

• 30:14David Rosenthal?

  Sure, you know, no, no, no big deal. How hard is it to build a production car?

• 30:19Ben Gilbert?

  And the plan was something along the lines of, oh yeah, the Lotus Elise, you know, we'll replace enough parts so it doesn't look like an Elise. Like it'll kind of look like our own thing. We've basically got all the tech down and gosh, you know, we feel like if we have access to all these different suppliers that are commoditized at this point, you know, Lotus already has relationships. They can just get all the parts sent to them. They can do all the assembly and like, it should be pretty much taken care of.

• 30:46David Rosenthal?

  Right. Except Elon now owns a significant amount of the company. And if there's one thing that Elon is, it is opinionated.

• 30:57David Rosenthal?

  And he also happens to often be right. So that plan would, maybe you could get a car built on $20 million with the plan, Ben, that you just described. But Elon's like, no, that's not what we're gonna do. The Lotus Elise is unacceptable to Elon. His vision is he wants his then-wife, Justine, a celebrity in her own right, which we won't get into here, to feel comfortable driving it. The Elise, like, you basically had to jump into the car. Like, this was not a car you were gonna, like, take to work, or, you know, it's not mass market.

• 31:28Ben Gilbert?

  And it's $100,000 car. So they're, they're marketing it to people who would be comparing it against, like, oh, my gosh, this is such a nice luxury vehicle to get into.

• 31:37David Rosenthal?

  Mm-hmm. You know, I mean, there are people who will buy $100,000 sports cars that are completely impractical, but that is a very, very, very small market. And Elon's like, no, no, this is gonna be like, a sports car, but it's gonna be a sports car that's gonna compete with, you know, a Mercedes sports car, or whatever. And so he keeps pushing them to, to do that. That, of course, leads to tons of delays. Side fun fact, during the summer of 2005, as they're working on it, they take one of the prototypes to Burning Man. They all like, Elon goes to Burning Man every year. This'll come back up again later. And they're like, well, that's, we're going to Burning Man. Let's take the Tesla prototype.

• 32:14David Rosenthal?

  So they keep working on it. It's now summer of 2006. The company has 100 employees at this point, working on the first production Roadster Candidate. They are out of money. They raise another $40 million at this point. Elon invests $12 million personally, and they raise the rest from a group of VCs who are now finally like, okay, there's something interesting here. And like, clean tech is all the rage. And, you know, for some reason, VCs have changed their mind. Surprise. July of 2006, they think they're pretty close to production at this point. They hold a press conference where they announce the Roadster to the world. You know, this is the beginning of, like, the Elon Musk showmanship. They announce this car. They get a whole bunch of celebrities to come. They hold it in Santa

• 32:57David Rosenthal?

  Monica. Arnold Schwarzenegger, who is, at that point in time, the governor of California, he comes. I think Larry and Sergey from Google are there. There are a whole bunch of people, celebrities.

• 33:08Ben Gilbert?

  And they have it, they have it like at an airport or something so that you can, if you're in the room where it's being announced. The, the way that it happened is basically they unveil the car, someone gets in the car, drives it, does a lap around like a runway or some extended piece of road and then drives it back into the building.

• 33:26David Rosenthal?

  Yeah.

• 33:28David Rosenthal?

  That's, but they announced that it's going to go zero to 60 in four seconds or less, which is pretty impressive. Elon also announces at the event that they're going to release a sedan for $50,000 within the next three years. So by 2009.

• 33:48Ben Gilbert?

  So begins Elon's early promises.

• 33:50David Rosenthal?

  So begin the Tesla promises at least.

• 33:53Ben Gilbert?

  Yes.

• 33:55David Rosenthal?

  They start taking pre-orders for the Roadster after the event and people go nuts. This is the talk of the town, you know, in LA, in Silicon Valley, in San Francisco, in the automotive press. People start showing up to the Tesla offices. I can't, I don't know if they're in Menlo Park or Palo Alto at this point, if they'd moved to Palo Alto. People just like randomly like walk in and like, I want to put my name in.

• 34:19Ben Gilbert?

  At the event, they were trying to sell the initial 100. There was like a special club of people that were going to get the first 100. There was going to be a plaque. There was going to be signatures. It's like the Gavin Belson signature edition box. I think they, they sold like 116 or something. So they hit their goal there.

• 34:34David Rosenthal?

  Well, and it's even better than that. They're, they weren't actually legally allowed to sell the cars because they hadn't made the cars yet. And there's a bunch of regulations about this and like, you know, selling cars and whatnot. And, and we won't really get into it here, but Tesla, of course, does not use the dealership model, which is very disruptive to the existing car industry. Anyway, what they decide to do is you join a club for, initially it was 80, it was $85,000 and then they raised the price to $100,000. You join a club for 85 or $100,000. And as a benefit of joining the club, you get a free car.

• 35:07Ben Gilbert?

  And nothing else.

• 35:08David Rosenthal?

  Nothing else. Yeah. Well, you're also, you get the plaque and all the things you were saying. You get like a, you know, a membership card and whatnot.

• 35:16Ben Gilbert?

  We should say too, like, we've been saying Elon, Elon, Elon. He has appearances on stage, but it's really Eberhard's show at this point. Eberhard's talking to the press, Eberhard's doing that, that big announcement. He's subsequently flying around to, you know, do interviews with car magazines and go to car shows and he's really the face of the company and he's being sort of heralded as a, as a genius. In 2006, he was featured as the face of research in motions campaign for the BlackBerry Pearl.

• 35:48David Rosenthal?

  Yes.

• 35:48Ben Gilbert?

  As, as the guy who created the first electric sports car. And really like, like when you think about apples think different when they were like heralding geniuses, like Eberhard is, is the guy that appears in that ad is like, this is the face of innovation. And so it's kind of amazing. I mean, three years into Tesla, it's still not the Musk show and he's, and Eberhard's really starting to get recognized for this.

• 36:10David Rosenthal?

  That's so funny and I think says everything about RIM, that like their version of the Apple campaign, they choose Eberhard instead of Elon. I mean, who could have known at that point, but anyway, this is, yes, Eberhard is very much the CEO and, you know, co-founder and CEO of the company. Elon is the, you know, series A and B and C investor. And I think at this point, probably largest shareholder.

• 36:38Ben Gilbert?

  After this little roadshow, he's starting to make a little bit of a ruckus about this. He, he mentions in an email that he's feeling a little bit neglected. He'd like to talk with every major publication within reason. And that's a, that's a direct quote to sort of put his stamp on it. He says that the, the way that my role has been portrayed to date where I am merely an early investor is outrageous. That would be like Martin Eberhard being called an early employee. Apart from me leading the series A and B and co-leading the series C, my influence on the car itself runs from the headlights to the styling, to the door, to the door sill, to the trunk, and my strong interest in electric transport predates Tesla by a decade. Martin should certainly be the front and center guy, but the portrayal of my role to date has been incredibly insulting. And he's talking to their PR guy. He says, I'm not blaming you or others at Tesla.

• 37:22Ben Gilbert?

  The media is difficult to control. However, we need to make a serious effort to correct this perception.

• 37:28David Rosenthal?

  Well, this is why. You know, I wanted to spend the time talking about the background upfront. By the way, a lot of this history comes from Ashley Vance's great book biography of Elon called Elon Musk. Elon is for all of his Tony Stark Iron Man, you know, much like Tony Stark, like he's very sensitive and emotional like inside. Like he went through just terrible, you know, betrayals and, you know, heartache and burns with his, with his first few companies. And like, you can very much see that coming, coming out here and demanding this role, demanding this recognition. So all this is happening. There's personality clash starting to happen between Elon and Everhard.

• 38:09David Rosenthal?

  And in the midst of this, as we get into early 2007, it becomes clear that there are major, major problems with Roadster production. It's not going to ship anytime soon and they're, things are not good. So one of the new investors that came in, in the series C was a firm called Valor Equity. And they had invested in other things in the automotive industry. They were more, you know, not a VC. I think they're based in Chicago. I could be wrong on that, but they're, you know, not a Silicon Valley VC. They have experience in this industry. They send in a fixer to kind of assess the situation of what's going on with production with the Roadster. He comes back and he reports to the board. At this point, they're intending to sell the car for $85,000.

• 38:53David Rosenthal?

  And of course they would have to, you know, produce it for less than that to make a profit. That's how business works. That's not going to happen. He assesses the cost to make the Roadster, that model at about $200,000. So literally they're going to sell dollar bills for 50 cents.

• 39:10Ben Gilbert?

  Yeah. And listeners, the places where this are going off the rails, I was attempting to try to chalk it up to something. It's everything. They've basically taken the vision of we are going to modify a Lotus Elise just enough. So you don't notice that it's a Lotus. And, you know, they, not only did they, they held a contest for a custom design. They picked their own custom design. They then basically gave those specs over to Lotus to start manufacturing. But a lot of it was not only extremely difficult to do, but constantly changing. So Elon custom. Designed some headlights, which are awesome and give it a very iconic feel. And you know, the Tesla Roadster, when you see it, but you know, created months and months and months of new parts that had to be created and suppliers that had to be sourced. They dropped the bottom of the door frame so you could get your feet in by three inches.

• 39:55Ben Gilbert?

  And so they had to sort of re-engineer the whole bottom of the car to do that. Rather than having a few sub-assemblies, it's like four or five that they were planning on doing. And then having the Lotus company do the, the rest of it. Tesla has now decided that so much needs to be custom that they themselves, having never produced a car before, are responsible for over a hundred of the sub-assemblies of the car themselves. So rather than the initial vision, and it's kind of funny, you can look at the original business plan that Eberhard was pitching around that says, oh yeah, the thing that's changed in the auto industry is you can just grab from the parts bin of, you know, any of these suppliers now and throw them together. He wants to be a fabulous car manufacturer in the same way that like a lot of these chip companies are fabulous chip companies and actually outsourced and made by someone else.

• 40:39Ben Gilbert?

  Tesla in the initial vision wanted to be like a fabulous car company. And now they are a full-blown auto manufacturer with zero experience ever making cars before.

• 40:50David Rosenthal?

  Yep, that's basically what happened.

• 40:54David Rosenthal?

  Now, to be fair, again, like if Eberhard had had his way, I think they actually would have tried to be a fabulous car manufacturer and just use the Elise body and, and AC propulsion, drivetrain and whatnot and slapped it together and called it a day. Elon was the one who was like, no, this is unacceptable. We need to make a real car here. All this culminates in August 2007. The board has a vote, you know, board is controlled by Elon and they ousted Eberhard as CEO, so.

• 41:22Ben Gilbert?

  And how they got there is nuts because Eberhard brought up in the previous board meeting or maybe two board meetings before, like, hey, you know, it's 150 people now. I've never managed something of this scale. We had to switch on to SAP, that migration's going terribly. I don't understand how to do it. It's not in my wheelhouse. Maybe we should have a CEO. I'm amenable to that. And so he expects like, there's going to be some discussion after that. The board sort of looked around and out of their heads and they were like, yeah, it does feel like maybe this is going off the rails and we should bring in a CEO. So they call a private board meeting without him and take a vote and then call him and say, hey, you're out. And he's like, wait, wait, wait, I just was sort of floating that like I thought. And then he looks in the bylaws and realizes that they can't actually do that.

• 42:04Ben Gilbert?

  So then they have another board meeting with him there just to vote and inform him.

• 42:09David Rosenthal?

  Totally the mature way to handle all this.

• 42:12Ben Gilbert?

  Yeah.

• 42:12David Rosenthal?

  Oh, boy. Fun times. So he's out. He becomes like an advisor to the company or something, but by December of 2007, he leaves altogether and is very bitter. He ends up suing Elon and the case gets settled. And so they still, I believe the two men have not talked since then. Yet they settled this case. So there's non disparagement agreements on both sides and everybody's at least financially set, I think at this point. So the board, though, needs a CEO. Elon still isn't contemplating yet that he would become the CEO. He's the CEO of SpaceX. So they bring in Michael Marx as interim CEO. He was never intended to be full time CEO, but as interim CEO.

• 42:56David Rosenthal?

  Michael Marx is a legend. He is the founder and CEO of Flextronics. At this point in time, all the way still through today, if you are doing something with hardware in the valley, like you want Michael Marx involved. He then later would found a private equity firm and growth investor that has done very well, but it was a huge coup to get Michael to come in and try and start to turn the ship around. He shows up and he institutes the Marx list that it gets known as, which is a 10 point plan for getting all of the problems with production back on track, you know, as quickly as possible. He stays, he basically draws up the plan and is like, I'm not gonna do this. I have other things like, you know, you need to bring in somebody else to actually execute the plan.

• 43:40David Rosenthal?

  So at the end of 2007, Elon and the board bring in a guy named Zev Drori. I may be butchering that name. It's Israeli name Zev Drori to be the CEO. He was not their first choice. You know, he had some experience. He had started a memory chip company that he had sold to AMD and he had been the CEO of a car alarm company. So knew sort of something about cars and hardware, I guess. Bring him in to execute the Marx plan. It doesn't go too well. Still lots of delays. Musk starts getting more and more personally involved. He starts showing up at the company. He demands that everyone at the company work 24/7. And eventually, later in 2008, in October of 2008, he makes it official and he fires Drury and just becomes the CEO himself.

• 44:26Ben Gilbert?

  It was a pretty, pretty quick couple of years there.

• 44:29David Rosenthal?

  Well, it was a couple of years at Tesla, but Drury lasts less than a year before Elon.

• 44:35Ben Gilbert?

  Right, but with, with Marx and, you know, that, that, that rapid transition there.

• 44:39David Rosenthal?

  Yep. So Elon is now CEO of Tesla. He's focused on getting the, the Roadster out the door in production. There's just one problem, though. This is the fall of 2008 and Lehman Brothers has just gone under and the world is literally falling apart, particularly the financing world, which is important for, you know, people who want to buy $100,000 cars. The automotive world where, you know, GM has gone bankrupt or is going bankrupt. The car industry is literally being bailed out by the US government. And all throughout all of this, Tesla has all the problems of, you know, any startup, let alone one as complicated as this. They're burning $4 million a month at this point and things are not looking good.

• 45:22Ben Gilbert?

  Yeah, Musk himself is 55 million deep into the company personally.

• 45:26David Rosenthal?

  Yeah. And between SpaceX and Tesla, Musk is literally out of money at this point, but so is Tesla. They need money by Christmas of 2008 or like they won't be able to make payroll and the company will go bankrupt. So he's desperate for money. He starts going around to all of his friends in the valley and raising money from them in like angel sized chunks. So he gets like a whole bunch of people, including Sergey Brin, who invests $500,000 to like scrape together just some money to keep the company going. Musk takes out a loan at SpaceX, like a SpaceX loan that he then takes the proceeds from and pours-

• 46:04Ben Gilbert?

  This is unbelievable.

• 46:05David Rosenthal?

  And pours that into, into Tesla.

• 46:08Ben Gilbert?

  It was borrowed from a bank and it was securitized against his equity in SpaceX or something like that.

• 46:16David Rosenthal?

  Something like that. But he ended up, SpaceX at this point had gotten lots of contracts and loans from the US government and NASA. It ended up having to be approved by, by NASA to do this, crazily enough.

• 46:26Ben Gilbert?

  Yeah. And a quick derailment. The way that they basically started SpaceX was that Elon had enough money to buy, I think it was-

• 46:34David Rosenthal?

  Two Russian rockets, and this was like him personally funding the company. And basically, if they didn't have something successful with those two rockets, then Elon would be both bankrupt and the company would shut down. And like, I think the first rocket blew up. The second rocket actually worked, so they had enough proof point to go and raise more money. So Elon is sort of out of money from personally funding, buying those Russian rockets for SpaceX and of course, leading all these investments in Tesla. And so is now literally out of, I think it was actually, it was even crazier than that at SpaceX. We will definitely tell that story someday.

• 47:09Ben Gilbert?

  Yeah, you gotta do that.

• 47:09David Rosenthal?

  I think they were on like the fourth launch, like they had money for two. They didn't work, they blew up, then the third one blew up and then like, so anyway, it was bad. Musk somehow manages to scrape some money together. He does two other things to get the money. He sells some shares of SolarCity, which he owns on the secondary markets. SolarCity had just been started. That will come back into the narrative in a little bit. His cousins had at some point built a data center, also moved from South Africa to Silicon Valley, built a data center company called Everdream that was sold, I think at the end of 2007 to Dell. And so Musk was an investor in that. He used all the proceeds from that, plowed it into Tesla. We're approaching Christmas.

• 47:49Ben Gilbert?

  And the other way that Elon extends the runway is as soon as he comes over, he lays off 25% of Tesla's employees.

• 47:54David Rosenthal?

  Yes, yes, as soon as he becomes official CEO. We're approaching Christmas. Elon has now scraped together between like Sergey Brin and the loan from SpaceX, his money from proceeds from the Everdream sale and all this stuff, about $20 million. He goes to all the rest of the investors around the table and he asks the investors to match it for a $40 million total round. Vantage Point Capital Partners, which was one of the investors, they block the deal. They had the right to block the deal, so they block the deal and they hold the company hostage. And that's normal, like as, you know, if a VC leads a round, I don't know how they would have this as not being a lead, but you have the right to block future, you have approval over future equity raises.

• 48:36David Rosenthal?

  So Musk is like, all right, fine, you're going to block this equity raise. I'm going to do this deal as debt. He puts the money in his debt and he gets, he convinces the other investors to do this as a debt deal.

• 48:48Ben Gilbert?

  Is it convertible or is it a pure debt deal?

• 48:51David Rosenthal?

  I'm not sure exactly whether it was convertible or not. It ends up closing on Christmas Eve. And, and the company, the company is given a lifeline and thrives. Goes on to thrive, debatably as we'll see, but survives at least.

• 49:06Ben Gilbert?

  Goes on to produce amazing cars.

• 49:08David Rosenthal?

  Goes on to produce amazing cars. So 2008 was a crazy pivotal year for Elon and Tesla.

• 49:14Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 49:28David Rosenthal?

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• 49:42Ben Gilbert?

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• 49:52David Rosenthal?

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• 50:10Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 50:26David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 50:43Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 50:52David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. The other thing that we have to talk about in 2008, I remember this vividly. So I was working on Wall Street as an investment banking analyst in 2008. It was my first year out of undergrad and watching all this destruction around me of banks failing. You know, first Bear Stearns and then Lehman Brothers. It was just like unreal. But in the middle of all this, when things are so bad, a movie comes out. And this movie, like I actually could, you know, I remember going with all my colleagues at UBS at the bank I was working at. You know, we were all so depressed and we went out one night to go see this movie because

• 51:37David Rosenthal?

  it was getting so good reviews and it kind of sparked a glimmer of hope. And it was this movie called Iron Man, which was obviously the first Marvel movie of, that we talked about in the Marvel episode, that would lead to Marvel and the acquisition by Disney and all that.

• 51:52Ben Gilbert?

  That movie made me sure I wanted to be an engineer. I saw it freshman year when I was like in my first engineering classes and I was like, all right, I'm in.

• 52:00David Rosenthal?

  Yeah. I mean, this movie, I mean, it's, it's hard to remember now because it was 10 years ago, but like it had a huge amount of cultural impact in the US. I mean, things were not good when it came out. And so why are we talking about this here? Robert Downey Jr., who of course, you know, who portrays Iron Man as he's preparing for the role and seeking inspiration, he learns about Elon Musk and his story. And he actually goes and seeks out Elon and spends a bunch of time with him as he's preparing for the role and uses Elon in his life as like a part of the inspiration that leads to creating the Tony Stark character. So much so that Downey actually asks and makes a request that in Tony Stark's workshop in the movie, that a Tesla Roadster be in it.

• 52:44David Rosenthal?

  And not just that it be in it, but that it be the object that is closest to his workbench because it's closest to like his heart and like an example of like what's going on in the real world in America that's, you know, paralleling this movie.

• 52:56Ben Gilbert?

  Whoa, I didn't realize they had talked before that. That's wild.

• 53:00David Rosenthal?

  Isn't that crazy?

• 53:01Ben Gilbert?

  Yeah. I guess you and I wrote that stupid intro, I didn't even.

• 53:07David Rosenthal?

  It's real.

• 53:08Ben Gilbert?

  I have no idea.

• 53:08David Rosenthal?

  It's real. I mean, of course, like, you know, Tony Stark is not Elon Musk or vice versa. But like, there is a, you know, actual threat of Elon in Tony Stark. So, you know, just like Iron Man and Tony Stark himself, Elon and Tesla do come back to life from the brink of death with, you know, a nuclear reactor heart installed in them. And over the next few years, you know, in, in 2000, I think it was, I think it was beginning of 2009, when they actually started shipping the Roadster, they sell about 2,500 of them. At this point, $100,000 a pop. That's a quarter of a billion in sales, 250 million in sales. And that is enough to keep the company going.

• 53:49Ben Gilbert?

  Well, that, that and a $465 million interest-bearing loan from the Department of Energy.

• 53:55David Rosenthal?

  We will, we will get to that in a minute.

• 53:56Ben Gilbert?

  Okay.

• 53:58David Rosenthal?

  That has to do with the codename White Star project that we will get into in just a sec. But just on the Roadster, like, the company, you know, survives. If the company were to stop at the Roadster and not go forward, like, it is a, you know, self-sustaining business at this point, which is a major, major accomplishment. They have produced a car. It is, you know, gets great reviews. They, they only sell 2,500 of them, but, you know, that's meaningful.

• 54:25Ben Gilbert?

  Here comes the threat of Elon being the guy that doesn't quit. Like, reinvest it all, all the time. I'm not resting on my laurels. This is not enough.

• 54:35David Rosenthal?

  No. So Elon, we've talked about on this show, and Ben and I have talked about, this is just like, I love this, this mantra, and nobody exemplifies it better than Elon. But like, Elon plays offense, not defense. Many people would play defense in this situation of like, okay, we finally stabilized the company. Let's like, take a breath. And like, not Elon. So as things stabilize with the Roadster, Elon is obsessed on making good on his promise that he made at the Roadster introduction of introducing the sedan for $50,000. And the project codename for it is White Star. And so the first thing Elon does is, as all this is, you know, it's kind of the end of 2008,

• 55:18David Rosenthal?

  all this is happening, he goes out and he recruits a superstar car designer from the automotive world. He hires the chief designer from Aston Martin to come in and be the designer of the White Star, what would become the Model S. A very, very celebrated man in the automotive industry, Henrik Fisker.

• 55:42David Rosenthal?

  Might ring a few bells for some people. Fisker, like the Fisker Automotive Company, that is a competitor to Tesla, was, was a competitor to Tesla. So Fisker comes in from Aston Martin, he comes over to the US, he starts working on the design and it's like, he and Elon do not get along, the design is horrible. Within a few months, he bolts, he leaves the company and starts his own competitor, Fisker Automotive. Musk later learns that apparently, well, who knows with Musk. Apparently Fisker had been thinking, it was his intention to do this all along, he just wanted to come to Tesla to learn what they were doing, steal some secrets and then go start his own company. Musk sues him later, ends up losing, Fisker wins the suit. It doesn't really matter though, because Fisker, the company, and Henrik Fisker, the founder,

• 56:27David Rosenthal?

  they decide to make the car a hybrid instead of a fully electric vehicle. Tesla's philosophy was that hybrid is too many compromises, isn't going to work. So they just kind of ignore it. Fisker ends up going bankrupt, flames out massively, burns tons of capital. Again, a story for another day. Tesla though, back to the drawing board on Project White Star. So they decide to kind of hack it together internally, just like they did with the Roadster. Tesla ends up surveying the luxury sedan market and deciding that their favorite and best luxury sedan out there is the Mercedes CLS. And they're going to start using that as their inspiration, both design and other one.

• 57:07David Rosenthal?

  For the Model S. Listeners, if you know what the Mercedes CLS looks like, if you don't, you can Google it. It actually bears quite a lot of resemblance to what the final Model S looks like. So they go buy one from a dealership in Palo Alto. They got it and they essentially, just like they did with the T zero, they turn a Mercedes CLS into what becomes the first Model S.

• 57:34David Rosenthal?

  Oh. Or at least the first prototype of the Model S. At the same time, you know, Henrik Fisker has now left. Elon is still trying to recruit a superstar to come in and and really lead the design for this thing. The first person he goes to try and replace Henrik is his friend, fellow Silicon Valley luminary, Tony Fadell, who of course, we've talked about on the Nest episode. Bringing it all back. Bringing it all back. And this is when, you know, there's all the turmoil in the CEO role. You know, Elon has just come in as a CEO. Unclear and still, you know, debatable by different people have said different things whether they were, whether Elon was recruiting Tony to be the CEO of Tesla. It certainly was something that probably was on the table at some point.

• 58:18David Rosenthal?

  However, Steve Jobs counters an offer and does his Steve Jobs magic to keep Fadell at Apple until he would leave and start Nest in 2010. So they lose, they lose Tony, but they do end up hiring another guy from the automotive industry, Franz von Holzhausen. I think he was at Mazda at this point, but he had redesigned the Volkswagen Beetle in the, you know, the iconic reboot of the Beetle in the 90s, you know, kind of 2000s. He was super entrepreneurial. He'd bounced around in a bunch of traditional auto manufacturers because he was fed up with all their bureaucracy. Tesla ends up recruiting him to come in and be the lead designer for what would become the Model S.

• 59:00David Rosenthal?

  He moves to LA. Franz is now based in LA. They decide that they're going to set up the design office for the sedan in LA. And so the natural place to do that is where there's already a lot of office space, you know, that Elon controls, which is the SpaceX office.

• 59:18David Rosenthal?

  So Franz and the design, what is now the design team for Tesla, they set up office inside the SpaceX offices and hangars in Hawthorne, California. And I believe that they are still there today, which is quite funny. And then they end up doing lots of press events at Tesla, press events at SpaceX. And of course, there's now the crossover with the new Roadster being blasted off into space.

• 59:41Ben Gilbert?

  Why not?

• 59:42David Rosenthal?

  Why not? Synergies.

• 59:44Ben Gilbert?

  Synergies and a lack of corporate governance.

• 59:46David Rosenthal?

  Indeed. Musk and Franz, they kind of are, they become really kindred spirits during this time and still to this day. Musk decides the car body has to be aluminum to save weight. And this is like, no, no car has ever, mass production car has really ever been made in aluminum before. And Franz is like, sure, we got this.

• 1:00:08David Rosenthal?

  They together decide on the design for the door handles, the iconic door handle design where there are no door handles. Apparently, all the engineers at Tesla were like livid and ripping their hair out at this. It's like, why would we do this? This is going to cost so much time and money and like, it's a door handle. But Musk and Franz have their way and it's an iconic part of the Model 3.

• 1:00:30Ben Gilbert?

  That's very Jobsian, like when Jobs insists that it has to fit in this specific form factor. And then everyone's like, what are you crazy? And then it takes like, you know, some engineer figuring out you can fold a motherboard over on itself in order to make the iPod shuffle.

• 1:00:45David Rosenthal?

  That was, that was apparently what happened with the door handles. Once Franz comes on board, work actually moves super quickly on designing the Model S, or codename White Star at this point, in March 2009. So like, real fast, they hold a press event at SpaceX and they unveil the Model S. When they unveiled it, it was completely glued together, like basically non-functional. If you like touched it, it would fall apart. The car that they unveiled was still a Mercedes CLS chassis. The first Model S that was shown to the public was, was still a Mercedes under the hood.

• 1:01:23David Rosenthal?

  People get really excited about it and momentum starts to build and, and actually, I don't know if it was on the back of this or a separate relationship and introduction, but Daimler, the parent of Mercedes Benz, the German company, they get pretty excited about what Tesla's up to and they end up contracting with Tesla to build two prototypes of A-Class Mercedes that are powered by Tesla electric drivetrains and batteries. And they end up placing an order for 1,000 smart cars that Tesla would manufacture the drivetrains and batteries for to electrify them. And as part of that order, so obviously there's revenue associated with that, they also invest $50 million into Tesla at a $500

• 1:02:05David Rosenthal?

  million valuation for 10% of the company. This is summer 2009 and that gives the company a foothold of capital to start ramping up mass production of the Model S. Toyota does basically a similar deal, also invests into, into the company. And then the big coup in January 2010, Tesla lands a deal with the US Department of Energy for, this is Ben, of course, who you were referring to earlier, a $465 million loan agreement, low interest loan from the US Department of Energy. And this is going to be all the capital between that and the, I believe it was in total $100 million from Daimler and Toyota, all the capital that Tesla thinks they'll need to get Model S production off the ground. In

• 1:02:49David Rosenthal?

  exchange, the terms of the US DOE loan are that Tesla will produce its own electric vehicle and produce it in the US, which of course they do. But that is one of the major reasons why the Tesla plant and manufacturing facility is in Fremont, California. The other reason is that there was an existing very large car manufacturing plant already there in Fremont.

• 1:03:12Ben Gilbert?

  Former Toyota plant.

• 1:03:13David Rosenthal?

  Former Toyota and GM joint venture plant that was completely abandoned after the recession, when, you know, demand for, for new cars had fallen sharply in the US. Toyota and GM abandoned this plant. It was sitting there empty and it's a massive, massive plant. Tesla was able to come in and buy it for $42 million. This thing had once, it costs at least a billion dollars to build.

• 1:03:36Ben Gilbert?

  Yeah. And, and when Toyota was operating it, it was peaking at being able to produce 500,000 cars per year.

• 1:03:44David Rosenthal?

  Yeah. Crazy, which of course Tesla is still nowhere near that production.

• 1:03:49Ben Gilbert?

  Right. Yeah. And where were they around this time? They had shipped in 2009.

• 1:03:55David Rosenthal?

  They had shipped in total across all the years that they were doing the Roadster, 2,500 Roadsters. And like, you know, maybe a couple Model Ss had been delivered at this point.

• 1:04:05Ben Gilbert?

  So a lot of headroom in that plant if they make it efficient.

• 1:04:09David Rosenthal?

  Yeah, indeed. On the back of all this news, they filed to go public. Which, you know, it's funny, this is like a detail of the history here for acquired. Usually our main event is the IPO. It's actually pretty straightforward. They just need more money.

• 1:04:23Ben Gilbert?

  Yeah. And this is a classic, we will see this theme over and over and over again with Tesla. On the back of something very exciting and, and very speculative, doing an equity offering.

• 1:04:34David Rosenthal?

  Yes.

• 1:04:35Ben Gilbert?

  Get everyone as excited as possible. And every startup, you know, every startup does this and every startup should do this. It's the moment where you have the best story to tell. You go, you get the highest valuation, you can raise the most money with the least dilution. Tesla did it private and Tesla does it public.

• 1:04:48David Rosenthal?

  Yep. Summer of 2010, they filed to go public. June 29th, the IPO happens. They raised $226 million. The stock jumps 41% on opening day and it is the first IPO of an American car company since Ford in 1956, which is crazy.

• 1:05:09Ben Gilbert?

  Oh, wow. Ford was private for a long time.

• 1:05:12David Rosenthal?

  Ford was private for a long time. Yes. And then of course GM would re-go public later after it had been delisted through the bankruptcy process and then owned by the US government and then was, was ultimately relisted a little while later. Crazy. So on the back of all this, they are hard at work, you know, getting this new plant in Fremont, California online. Getting the Model S out the door, you know, at production scale. But they're having some problems. So the Model S's start trickling off the line. The reviews and the responses amazing. I mean, it's really not an exaggeration, I think, to say that the Model S was like the iPhone of cars. Like, it completely changed the game

• 1:05:55David Rosenthal?

  of what it meant to be a car. And really, you know, people talk about it. Cars were cars before the Model S. The Model S is a computer on wheels. It's upgradable via over-the-air updates. Like, car companies just weren't thinking about all this stuff. I mean, it had crazy acceleration and handling, of course. You can get it configured to seat seven. It's got a touchscreen in the dash instead of all the knobs and stuff. I mean, even today, like, I ended up, through a whole bunch of crazy circumstances, two winters ago, had to rent a car to drive in a snowstorm. And the only thing they had were like, the luxury Mercedes SUVs at the car rental place. So I rented like, a new, you know, Mercedes luxury SUV. I couldn't figure out how to operate the stupid thing. Like, the knobs

• 1:06:38David Rosenthal?

  and the, like, it's just crazy where car companies have gotten to at this point. Unusable. Tesla, by contrast, was like, let's put an iPad, essentially, in the dash.

• 1:06:49Ben Gilbert?

  And in true Tesla fashion, let's not put an iPad. Let's custom build our own iPad.

• 1:06:53David Rosenthal?

  Yes, of course.

• 1:06:53Ben Gilbert?

  And put that in the dash.

• 1:06:55David Rosenthal?

  There are no dealerships. So there's no haggling. Like, buying a car in the US is such a highly stressful, like, awful process, haggling, whatnot. And Tesla's like, nope, you can buy it on the internet, you know?

• 1:07:07Ben Gilbert?

  Yeah. It's worth taking a quick dovetail into this, just because there's one thing that shows how deeply Tesla has created a community of people that love, love, love their vehicles and buy into the lifestyle. So in most states, Tesla has had to go through crazy regulation where they cannot both be the manufacturer and the dealership because basically lobbyists and entrenched industry interests. So what they do is they have these showrooms, and the showrooms have Tesla employees, and they show you, you can't actually buy it here, but look how cool the car is. And I'm happy to walk you through it and stuff. And sometimes in the stores, if the states allow it, you can actually buy it online in the store using their website, or they recommend to you, you should go home. And buy it at home with this exact configuration.

• 1:07:49Ben Gilbert?

  There are states, and I believe Texas is one of them, where it is illegal to even do that. And so you cannot have employees in the showroom, even though it's a showroom and not a dealership. And so there are volunteer Tesla owners who are so passionate about owning those cars that they take shifts just hanging out and volunteering in the showroom with no employees.

• 1:08:12David Rosenthal?

  Nuts.

• 1:08:12Ben Gilbert?

  Tesla has created an unbelievable product with Apple-level fanboyism.

• 1:08:18David Rosenthal?

  Absolutely. It is, it is no exaggeration to say it is the iPhone of cars. It is the unanimous 2012 Motor Trend Car of the Year. I don't know that there's ever been a unanimous car before, like, I mean, it gets all of the, all of the press accolades, all the reviews, you know, it just is truly game-changing for the car industry. There's just one problem, though, which is that they can't make them. So like, you know, when Apple comes out with a revolutionary product, like Apple has Tim Cook and the supply chain and Foxconn and everything and like, you know, they can deliver it into people's hands. That's never been Tesla's strong suit.

• 1:08:57David Rosenthal?

  So while all this is happening throughout 2012, production is like anemic. They're making like dozens per week, you know, and the backlog to-

• 1:09:05Ben Gilbert?

  Which like, it's funny, the phrase dozens sounds as high until you think about it in this context.

• 1:09:09David Rosenthal?

  Yeah, dozens.

• 1:09:11Ben Gilbert?

  It's like saying like, we should go out and we can make dozens of dollars, you know?

• 1:09:15David Rosenthal?

  That's literally what was going on. I mean, and again, remember this, this plant that they bought in Fremont was making 500,000 Toyotas and GM vehicles a year. And Tesla is, you know, pumping out on the order of like hundreds, not hundreds of thousands, hundreds of Model S's at this point.

• 1:09:32Ben Gilbert?

  And we should say for a few reasons. One, it requires enormous capital expenditures in order to buy all of the right equipment and let's just scope it to equipment to build these cars. And so like, if they're ever going to get up to 500,000 in that plant, then they have to spend probably at least high, single-digit billions, maybe tens of billions of dollars in order to put all the stuff in place.

• 1:09:51David Rosenthal?

  One, one quick thing, including and especially batteries, which is not a problem that, you know, traditional cars have.

• 1:09:59Ben Gilbert?

  No, no, but Tesla has the Gigafactory for that. So they, they

• 1:10:03David Rosenthal?

  Well, will have the gig, but at this point, the Gigafactory isn't even a gleam in Elon's eye. So they're trying to source batteries that like also Apple and, you know, Microsoft and HP are trying to source like. Now Tesla has all their own IP and stuff, but they're still, their suppliers are still the same suppliers in Asia making these batteries as, as other, you know, computers.

• 1:10:22Ben Gilbert?

  The biggest thing here between Tesla and a regular car company is Tesla is born of tech and these car companies have been around for 100 years and are born of manufacturing. And Toyota, you know, invented Kaizen and Lean and Six Sigma, like anything that we borrow in tech and believe is like this new sort of like lean startup or the way that we think about our, our change in, in the way that we do engineering and technology organizations is largely borrowed from the things that Toyota pioneered in order to have organizational efficiency and nimbleness when you need it. And the ability to know how many flaws could come up and allow tolerances for those things. It's, I think we often paint car companies as big and slow, but they've created processes that work extremely, extremely well for this.

• 1:11:06Ben Gilbert?

  That are going to take years to internalize both in the culture and in the, the capital to be able to institute them.

• 1:11:10David Rosenthal?

  Yep. It's also what makes Tesla so, and the Model S so revolutionary, right? Like you can update the car over the air, just like you get a new version of iOS, like, you know, like they add autopilot to cars. Like, that's crazy. But, you know, they also have to get good at producing the things and they're still in that journey. All this is happening, like on the one hand, it's a tale of two Teslas, like, you know, Motor Trend Car of the Year. They've revolutionized the industry. Things couldn't be better, but they also can't make them. And so like they have these huge production problems and it creates, you know, huge liquidity and cash problems at the cash cycle problems at the company. Ends up like a huge, once again, a huge short position builds up in the stock. People are like Tesla's going to go bankrupt.

• 1:11:55David Rosenthal?

  Like, like they're running out of money. They can't make these things. They can't sell them. They can't get the revenue. They can't keep the factory going. By early 2013, things are looking really, really bad. People start canceling their $5,000 deposits on the Model S because like the delays are just, you know, people are on the waitlist for years at this point. Musk announces that he is going to backstop the resale value of Model S's as a way to like sure up faith in the company. So like, if you want to sell your Model S, you know, you're not happy with it. Musk will buy it back from you.

• 1:12:27Ben Gilbert?

  Which that of course does interesting things to a company's balance sheet, having made those guarantees on every single unit sold.

• 1:12:32David Rosenthal?

  Yeah, totally. As we've talked about on the show, well, alluded to, but haven't been clear about the line between Tesla financials and SpaceX financials and Elon Musk's personal financials.

• 1:12:44Ben Gilbert?

  And SolarCity financials.

• 1:12:45David Rosenthal?

  And SolarCity financials is blurry at best, at best. The other thing that he does, and we'll, we'll come back to this later, is he actually, like, things are so bad and the company is so close to going bankrupt. Musk takes hundreds of Tesla employees that are doing other things in the company, like HR, you know, engineering, customer service, whatnot. And he recasts them, he basically reassines their jobs to be call center employees to just start cold calling people, anyone who has ever, a lead of anyone who has ever expressed interest in Tesla or the Model S that is in their database. He sets like the employees of the company to just start calling them and trying to convince them to preorder a Model S. That's how bad things were.

• 1:13:29David Rosenthal?

  Now, this is, this is, I think, the craziest part of the whole episode. I did not know this until I read the Elon Musk book. I'm curious, Ben, if you came across this, like.

• 1:13:36Ben Gilbert?

  I think we're thinking of the same thing, but maybe not.

• 1:13:39David Rosenthal?

  If it has been reported, it probably has, there's just so much news about Tesla, I glossed it over.

• 1:13:43Ben Gilbert?

  There's one call that he makes that is not to a potential customer.

• 1:13:46David Rosenthal?

  Yes, there is one call that he makes. Uh, I think we're on the same page here. He's so desperate that he makes a call. Uh, I think he goes to see one of his very best friends in the world, a person. That he routinely, so also Elon doesn't own a home in Silicon Valley. He only has his home in Bel Air in LA. So when he comes up and works at Tesla, he just crashes on friends' couches. And he often crashes on the couch, probably more than a couch, of Larry Page, the CEO of then Google, now Alphabet. Fun fact, this was right down the street from the garage that I lived in when I was a student at Stanford at GSP. My wife Jenny and I rented a one bedroom apartment in a converted garage in Palo Alto. We were like half a block away from Larry Page's house.

• 1:14:31David Rosenthal?

  And Elon, while all this was happening, Elon goes to Larry and he's like, I don't think we're gonna make it. I need Google to acquire Tesla to keep this dream going. Larry is in and Google very, very nearly acquired Tesla during this period.

• 1:14:47Ben Gilbert?

  For $6 billion.

• 1:14:48David Rosenthal?

  $6 billion. They hammered out a deal where Google would acquire Tesla. Again, this is the beginning of 2013 for $6 billion and commit two things. One, that Elon would retain personal control of the company for the shorter of eight years or until they hit mass production of a mass market electric vehicle, what would become the Model 3. So Google would have no control. It would only be Elon. And Google would be willing to give Tesla up to $5 billion in capital to accomplish these goals. Just sort of, you know, underrated capital expenditures at Tesla of $5 billion.

• 1:15:26Ben Gilbert?

  Which interestingly enough would not have been enough.

• 1:15:29David Rosenthal?

  Would not have been enough. Probably wouldn't have been anywhere near enough.

• 1:15:34David Rosenthal?

  Oh, man. You know, those VCs way back in the day, they, they were not wrong that this was gonna become a burning money pit. Then basically a miracle happens. So the deal is like done. I believe Elon had presented to the Google Board of Directors. Google was scheduled to come in and in return and present to the Tesla Board of Directors, i.e. Elon. There are other people on the board, but he controls the whole thing.

• 1:16:00Ben Gilbert?

  It's actually worth a quick, quick detour to say, what does the board of directors of Tesla look like at this point? Because it's a little shocking if you haven't dug into this before. So it's Elon Musk, and I'm actually, this is a 2016 board, but I think it was probably the same in 2013. Brad Buss, who was the CFO of SolarCity, maybe this was after the SolarCity acquisition. Robin Denalm, who is a person with no ties to Elon, which is, I think, the only person on the board. Ira Emfries, I'm probably butchering that name, managing partner at DBL, which is an investor in Tesla, SpaceX, and SolarCity. Antonio Gracias, who's the board member at SpaceX and SolarCity. Steve Jervitson, who's the managing director of DFJ, a significant SpaceX shareholder,

• 1:16:44Ben Gilbert?

  or was a significant SpaceX shareholder, and of course, Kimball Musk, Elon's younger brother.

• 1:16:50David Rosenthal?

  Of course. Anyway, the deal is done. It's about to happen. But like I said, then a miracle happens. All of those employees that Elon had set to work, basically manning the call center, doing outbound telesales of Model Ss, it ends up working. And Tesla sells a huge number of cars in the first quarter of 2013. So many cars that they post a profit. They do over half a billion in sales, 562 million in sales, in the first quarter of 2013. And they have a net income of $11 million, and the company is saved.

• 1:17:25Ben Gilbert?

  Can they recognize that revenue? I guess they can recognize the pre-sales revenue.

• 1:17:29David Rosenthal?

  The pre-sales revenue, yep. I'm not exactly sure how the accounting work, but while all this is happening, they do start to ramp Model S production. They deliver just under 5,000 Model Ss throughout the quarter. They announce all this at their first quarter earnings call in May of 2013, and the world is dumbfounded. The stock was trading about $30. It jumps immediately to $130. And all of the short sellers that had built up these short positions in the stock, they take huge losses. Just a quick aside on short selling for people that don't understand how this works. When you sell short of stock, you're basically, it's a financial instrument to bet that the stock price will go down. Now, the beauty of Venture capital and equity investing in the stock market or anywhere else in general is it's,

• 1:18:15David Rosenthal?

  you know, and Nassim Taleb writes about this, it's asymmetric upside and downside. You can only lose one times your money, but you can make an infinite amount of, an infinite multiple on your money. There is no ceiling to how high a stock can go. When you start playing with short selling, that reverses. You can only make your money, but you can lose an infinite number of times your money. Because you're betting that the stock will go down, it can only go to zero, but it can go many multiples higher than where it is when you take the short position. So the short sellers lose like five times their money that they put into, into their short positions, you know, bad for them. Elon has a field day.

• 1:18:55Ben Gilbert?

  Which, which buys him years, perhaps five years of people believing that, gosh, I really shouldn't be betting against Tesla. Cause look what could happen to me.

• 1:19:04David Rosenthal?

  Look what could happen. Indeed. And so on the back of that, they, they end up repaying that Department of Energy loan. Early, I believe they of course, end the Google talks. They don't need to be acquired by Google anymore. At that point in time, we'll see now. And basically, you know, it's never smooth sailing with Tesla, but they ramp up Model S production.

• 1:19:24Ben Gilbert?

  How does the stock price going up positively impact them from a cash flow perspective? You know, if they did another equity offering or if they sold some of the, how does that work?

• 1:19:34David Rosenthal?

  So I don't have all the details. You, you may have them, but, as this happens, then they start doing a regular drumbeat of secondary equity offerings on the stock market. Bond offerings, so various forms of debt, both convertible debt into equity and, and non convertible debt. And they raise a lot more money over the subsequent years.

• 1:19:55Ben Gilbert?

  Yeah, I don't have anything from this era. I know in 2016 and 2017, they raised about $2 billion from offering just more shares out to the public.

• 1:20:03David Rosenthal?

  Yep. Yep. But they're also doing debt offerings throughout all this time. So, you know, the stock price going up and people having faith in Tesla enables them to both sell more equity, but also be able to raise money in selling bond offerings to the investing public as well. Let's see, in the rest of 2030. They sell 22,000 Model Ss at an average price of $70,000. So that's about one and a half billion dollars in revenue. Super impressive. In 2014, they unveil the crazy, what is it like the P100D or something version? With two motors.

• 1:20:39Ben Gilbert?

  With ludicrous mode. Elon had some tweet, he's like, get ready for the D. You know, he's like, when they're about to unveil the the dual motor offering, but nobody knows what the D is. He just keeps saying the D until you find out, oh, it's a dual motor.

• 1:20:51David Rosenthal?

  Dual motor. This thing, you know, it's a, it's a Model S, it's a sedan that, you know, you can get configured to seat seven people. It does zero to 60 in 3.2 seconds. Like, that's insane. They also launched autopilot in 2014. They're, I don't know what level of autonomous they're at at this point, but you know, freeway, at least autonomous driving that continuously improves. The next year, September 2015, they released the Model X, the SUV, which.

• 1:21:18Ben Gilbert?

  It's like the same chassis and they just bumped it all up a few inches.

• 1:21:21David Rosenthal?

  Yep. And at least judging by, you know, San Francisco and Silicon Valley is the new it car around here, replacing the, the Model S. And I should note too, I meant to say along the way, basically the vision, you know, that Elon and Martin and Mark, the original, you know, founders, quote unquote of Tesla, true founders of Tesla had of replacing the Prius as the status car of, you know, at least the liberal population of the US completely happens.

• 1:21:52Ben Gilbert?

  So with the Model X, they launched it in Q1 of 2016 and by Q, call it Q4 of 2016, it was doing just about as many sales as a Model S and has effectively continued like that until now.

• 1:22:05David Rosenthal?

  Yep, yep. In all of 2015, they do 100,000 unit sales of the Model S. Then by the end of 2017, they've eclipsed 200,000 unit sales of the Model S. And in February of 2018, they announced that they've done over 300,000 units total across all vehicles. Now, along the way, though, a couple of other things happened. We should for sure mention before wrapping up this.

• 1:22:33Ben Gilbert?

  And let's give credit totally amazing. They've produced a, you know, a third of a million of these cars. They ramped up to about 25,000 units per quarter. And in the sort of the most recent quarter before this one up to 35,000. So that's the number you should have in your head is what is Tesla capable of making? They bought this plant that Toyota was able to do 500,000 a year. And they're now doing 25,000 quarters. So call it maybe 100,000 a year. In sort of their production velocity.

• 1:23:02David Rosenthal?

  Yep. Elon stated goal, I think he actually tweeted it when they announced the Model 3 in March of 2016. That the super secret, you know, master plan for Tesla was that he was revealing to the public, which he had revealed to the public when he got involved was make a sports car, electric car. Use the proceeds from that to make a luxury sedan for, you know, the 1%. Use the proceeds from that to make a mass market electric vehicle that will, you know, compete with, you know, the Toyota Camry, if you will, and bring electric vehicles to the large part of the mass market in the US. That was the Model 3 that they of course announced in March of 2016.

• 1:23:44David Rosenthal?

  They originally wanted to call it, Elon wanted to call it the Model E, the letter E. And this is very Elon. He wanted that because they already had the Model S and the Model X. And so then their three models would be S, E and X. You can do the, the spelling.

• 1:24:01Ben Gilbert?

  And of course, the, the next announced model, the Model Y.

• 1:24:04David Rosenthal?

  The Model Y for S E X Y. They can't call it the Model E though, because Ford,

• 1:24:12David Rosenthal?

  Ford blocks them. Ford owns the trademark to the name Model E. And Elon is livid. Elon calls up, I don't know if it's, I think Bill Ford is no longer the CEO of Ford at this point. Alan Mulally, right? Is the CEO of Ford. He calls up Alan Mulally. He's like, dude WTF? Like you're not going to make a Model E. You're just blocking me from doing this. Like you're ridiculous. And they're like, oh, no, no, no. We're actually thinking about releasing a Model E. Of course they haven't released a Model E. So that's why. It's the Model 3 because it's an E backwards.

• 1:24:43Ben Gilbert?

  And of course, it's also Tesla's third car. So there's a double entendre there. There was something with, I think it might be because they had the Model T. They had also trademarked models for the founder, like I think it's E for Edsel. Like, I think it's related to the, you know, the Ford family name.

• 1:25:01David Rosenthal?

  Anyway, they announce it and the world goes nuts. Once again, within a week, they have 325,000 reservations at $1,000 deposits each. Massive, massive demand. So demand for more Model 3s than they have sold of all of their cars in history at this point. The stock goes nuts. Everything's great. Tesla and Elon are on top of the world. And so in August of 2016, they expand their ambitions for Tesla even further by acquiring SolarCity for 2.6 billion in stock. Now, we had debated making, at the time, doing a whole acquired episode about the acquisition of SolarCity. There's really no way to separate this out from all of the history of Elon and Tesla. Just a quick, you know, to talk about this here.

• 1:25:46David Rosenthal?

  Remember that data center company called Everdream that Elon, you know, this was an hour ago. Sorry, this is such a long history and facts, but like, the story is too good. When Musk, his cousins, had started Everdream, they sold that to Dell in 2007. That gave him the cash from the proceeds of his investment there to help bail out Tesla the first time. Turns out that those same cousins are the Rive brothers. And they were the founders and CEO and CTO of SolarCity. And that even before that happened, in the summer of 2004, they of course went to Burning Man with Elon. And on the way to Burning Man, Elon was like, you know, I've been looking into the solar industry and I think there's something there.

• 1:26:29David Rosenthal?

  When you're done with Everdream, I suggest that you pursue it. In the way only Elon can. Of course, that's what happened. Elon invested and financed them in pursuing SolarCity along with their proceeds from, their own proceeds from Everdream. They built SolarCity. It was a publicly traded company, most successful solar company out there. Elon was the largest shareholder. Tesla then acquires it in August of 2016 for $2.6 billion in all stock. And that raised some questions.

• 1:26:59Ben Gilbert?

  I'm going to dive into here. What did Tesla actually buy when they bought that? And special thanks to Ben Rush, who is an associate of mine at Pioneer Square Labs, who has done an incredible deep dive on Tesla, trying to understand the company and contributed significantly to this episode in understanding Tesla's current position. He's got this great presentation and part of it is what does Tesla buy? And it's $5.8 billion of leased solar energy systems, $1 billion of property, plant and equipment. So, you know, some serious capex there. $3.4 billion of long-term debt, which is now saddled up on the Tesla's balance sheet. A company that burned $500 million in operations from the prior year.

• 1:27:42Ben Gilbert?

  So it's not like they're buying a cash cow by any means that's going to be able to pay back all that debt that they're buying. And of course-

• 1:27:49David Rosenthal?

  Quick aside here that I think is important. SolarCity was so successful originally and went public and was the one story of like a clean tech company that worked precisely because they didn't make the solar panels themselves. They were a finance company. They let other people make the solar panels and then they helped consumers finance the purchase of them and get them installed on their homes. Well, in sometime around this, maybe like 2014, 2015, they switched their business model to actually making the solar panels. And that's why they took out all this debt and why they started burning huge amounts of capital. So Tesla's like-

• 1:28:25Ben Gilbert?

  The thing that made them successful and, you know, built that brand of we're actually a successful energy solar company is not exactly what they're doing.

• 1:28:32David Rosenthal?

  Tesla, you know, has to make cars, is having trouble making cars. SolarCity now has to make solar panels, is having trouble making solar panels. And Elon's like-

• 1:28:41Ben Gilbert?

  They're in-

• 1:28:42David Rosenthal?

  Let's put them together.

• 1:28:46Ben Gilbert?

  Neither of us know how to do this manufacturing thing. So what if?

• 1:28:49David Rosenthal?

  Let's not know how to do it together.

• 1:28:52Ben Gilbert?

  Are you also a struggling company? Boy, have we been there.

• 1:28:57David Rosenthal?

  Anyway, sorry to interrupt. Continue.

• 1:28:59Ben Gilbert?

  No. And the last thing is the synergies. And you know, you start to see like the Tesla doing the power wall and Tesla doing the little solar roof, which is really cool, probably with some of the SolarCity stuff, but like not materially contributing to their business. Maybe in a 10, 15 year roadmap envisioned as a part of the company so that it more effectively allows you to effectively and efficiently and environmentally friendly charge your car at home, power the supercharge network, things like that. But like, really? Now? Now is the time where we're going to do this to our balance sheet?

• 1:29:32David Rosenthal?

  Well, you know, in 2016, again, Tesla was riding really high. They had announced the Model 3, but they had not yet started shipping them. They had very ambitious production goals for the Model 3 that they thought they could hit, in part due to lots of automation at the new, well, then not so new, at the expanding plant in Fremont. Unfortunately, though, that didn't work out too well. And the production issues with the Model 3 have been like a return to the roadster days. They are having such a hard time getting these things off the line.

• 1:30:06Ben Gilbert?

  It's all relative, right? Like relative to the roadster days, they're producing them in incredible quantities, super quickly and very soon after they announced the existence of the car, relative to what they need to do and what they've told, you know, what the, I'm foreshadowing a little bit, but the guidance that they've given, it's a tricky road ahead.

• 1:30:22David Rosenthal?

  Well, and relative to the 325,000 people that made reservations for them in March of 2016, the vast, vast majority of which still here in summer of 2018 have not received their cars.

• 1:30:35David Rosenthal?

  It's a little bit of an issue.

• 1:30:35Ben Gilbert?

  Tesla got a billion dollars in interest free loans. So.

• 1:30:39David Rosenthal?

  Indeed, indeed. All right. Thus, we have mostly concluded the history and facts. Thanks for bearing with us, listeners. But this was awesome.

• 1:30:49Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:31:03David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:31:19Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:31:34David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:31:58Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:32:17David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:32:47Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. Before we go into what would have happened otherwise, I think, why don't we flip these sections and talk about the future of Tesla here?

• 1:33:18David Rosenthal?

  Yeah, I think so.

• 1:33:19Ben Gilbert?

  And then we can do what would have happened otherwise after.

• 1:33:20David Rosenthal?

  I think that makes sense.

• 1:33:21Ben Gilbert?

  So, listeners, for this episode, we wanted to do kind of an extended new section. That's really because the interesting thing to talk about with Tesla right now is not where they came from, although it's a fascinating, fascinating story. But, oh my God, what's going to happen? Because there's a chance that something happens in like the next six months. If you look at Tesla, you know, they've been in this position before where it's, everything doesn't really add up and you don't know what Elon's going to pull out of his sleeve, but he manages to pull something out. But we're sort of at an all time high for that right now. And I think what I want to do in this section is really break down sort of the what's scary about Tesla and what could be, dare I say, the end of Tesla, or at least the end of Tesla

• 1:34:04Ben Gilbert?

  in its current sort of structure and form. Or what's going to be fine? And how are they going to pull out of this and, you know, continue the magic that they've, they've been creating? And so I'm going to start with sort of concerns and why you might think, gosh, the, the market cap right now is a little crazy and can they continue to operate, given the conditions that they've created? So, we'll start with some facts. So Elon Musk owns 20% of the company. There are lots of things, and the rest is mostly institutional. There are lots of things that create sort of a tenuous position that they're in right now, and a lot of things are contingent on the stock price. So for one, there's a bunch of convertible notes outstanding, which at certain prices

• 1:34:46Ben Gilbert?

  could convert to equity, but if, if the, the stock price doesn't hit that equity, then suddenly Tesla's got a bunch of, of cash needs to go and pay off these loans. The other thing that's sort of contingent on the stock price is Elon personally. Elon has borrowed 627 million from big banks, so think Morgan Stanley and Goldman Sachs, against his personal holdings in Tesla to secure it. So it's secured against the changing, you know, something that's changing in value, which is his Tesla stock. And he's pretty much entirely used those borrowings to buy more shares in Tesla.

• 1:35:21David Rosenthal?

  Why would he do that, Ben?

• 1:35:25Ben Gilbert?

  The loan is totally secured by the assets that are exactly correlated to the assets that he's buying. So it's not a line of credit. It's a secured loan. And so you could see if the stock price goes up, then good things happen. If the stock price goes down, then the thing securing the loan that he took out is itself going down. So you could imagine if the price drops significantly, Elon personally could have a margin call, where the banks could say, hey, the collateral on this loan is no longer valuable, and you need to pay us whatever, $100 million or something, and put up the cash in order to back the loan. Because they're saying these shares are no longer backing the loan, which I don't know

• 1:36:09Ben Gilbert?

  how much cash Elon has personally, but if he really has done what he's done over the course of his life and sort of plow it all back in, if he goes personally bankrupt, then all of his Tesla shares, 20% of the company, could go to the lenders that he's borrowed money from. And at 20% of the company, if you start to see significant sell offs of those in order to get cash for those big banks, the whole thing could start to spiral down.

• 1:36:35David Rosenthal?

  Yep. It's turtles all the way down. It's Tesla all the way down.

• 1:36:38Ben Gilbert?

  It is. So that's one thing to know, is like, the stock price can trigger all sorts of things. So that's why everyone's sort of watching it so carefully.

• 1:36:46David Rosenthal?

  And another thing, you might be about to get into this, but we said earlier that the line between SpaceX financials and Tesla financials and Elon's personal financials are very blurry. Elon's wealth, he's worth on paper about $10 billion. Much of that is Tesla stock. The other part of it is SpaceX stock. SpaceX is not a public company. There's no liquidity in SpaceX stock. Now, there is a very active secondary market. Elon certainly could sell some of his shares on the secondary market, but it's not easy or immediate. Like, if he has a margin call on his loans, securitized loans from Goldman and Morgan Stanley, and he needs liquidity to pay that off immediately, he's not going to be able to get that super

• 1:37:30David Rosenthal?

  quick from SpaceX.

• 1:37:32Ben Gilbert?

  So other things you should know about Tesla. They have about $10 billion in debt. Three and a half of which came from the SolarCity acquisition and some of those maturity dates are coming up soon. I'll get to this kind of later, but let's summarize by saying it's unlikely that a lot of that convertible debt will convert into equity. And so they're going to have, they're going to have to pay off a lot of this debt as a company. And so they're going to need cash to finance that. Well, let's look at sort of what have they been doing already just in interest payments, let alone paying off the principal because they certainly haven't been doing any of that. And if you look at their, their financials in 2017, about $500 million went to interest payments. And in

• 1:38:13Ben Gilbert?

  2018, I actually don't know if this is so far or if this is over the total over the course of the year. I think it's so far is that they've done $600 million in interest payments. So big, heavy interest payments that they're having to make in addition to

• 1:38:27David Rosenthal?

  And that's just interest. That's not principal repayment.

• 1:38:30Ben Gilbert?

  Yeah. And so you think, well, maybe Elon will sell some shares in order like there could be a scenario where Elon sells shares slowly in order to get like to make sure that the company's financials are not, you know, dependent on his personal financials. He's repeatedly said he's the last guy to sell shares. So that we know, we know that's not happening. Tesla is now tied for the largest number of sell recommendations from analysts. So of all sort of the public companies where there's buy and sell recommendations are tied for, for analysts thing you should sell. We're also looking at a 27% short to float. So tons of people that are, you know, chomping at the bit to benefit from Tesla's stock going down. So all sorts of interesting things could agitate to make that go down.

• 1:39:14Ben Gilbert?

  The other interesting thing to know about that number is people obviously think it's going to go down. So that's the reason that people have sort of piled on in such great numbers.

• 1:39:21David Rosenthal?

  The other thing I was going to say about the, the banks and the sell recommendations as a refugee of Wall Street myself, I know how this works. Remember we mentioned that, you know, banks like Goldman and Morgan Stanley and others have made loans to Elon to, you know, support the Tesla stock. Well, who, who are the equity analysts who put out ratings on company's stocks? It's banks, right? So there's like a massive conflict here. Right? Like, banks have large exposure to Elon and Tesla's stock, right? And are massively incentivized for that stock to retain its value. And those are also the analysts that put out recommendations on stocks. Now, of course, there's a Chinese wall between different divisions of, you know, banks. But like, of course, right? Of course. Yeah, think about that for a little bit.

• 1:40:06David Rosenthal?

  That's why, you know, buy ratings, Tesla had so many buy ratings. One of the reasons potentially why Tesla had so many buy ratings for so long. That banks are now starting to break ranks and put sell ratings on Tesla. Just think about all the incentives that they're having to go against to do that.

• 1:40:22Ben Gilbert?

  Yikes. Okay. So a few more things we should know. Now, now let's talk a little bit about delivery promises and production. Why should we be thinking so deeply about delivery promises and production? Well, it's likely that they're going to need $2 to $3 billion of cash by the end of this year in order to pay off some of this debt. And then also sort of to just finance a lot of the operating activities and CapEx that they need to do. And so if you look at their current capital expenditures in 2018, we're looking at 3.6 billion of CapEx that they'll need. We're looking at 750 million in CapEx for the first quarter of 2019. We'll need 1.15 billion to refinance all this debt that's maturing.

• 1:41:06Ben Gilbert?

  So the estimates are that they'll need about 5.5 billion in cash from the beginning of 2018 through Q1 of 2019. Of course, they don't have that. And so we're looking at either we will need to get cash from another equity offering. And so the question then is sort of can, will that work? Will they be able to dilute existing shareholders and issue new stock without doing dangerous things to the the stock price by introducing a whole bunch of new liquidity?

• 1:41:36David Rosenthal?

  By the way, news from the last 24 hours. A former employee is claiming to be a whistleblower to the SEC about fraud at Tesla and the nature of which that if that were proven to be correct, Tesla would be barred from issuing any further equity. Unclear how much merit that case has, but. The SEC is actively investigating?

• 1:42:00Ben Gilbert?

  Huh, because I was trying to do some research a couple of days ago because I had seen that there is unopened letters or letters that have not been disclosed to shareholders that Tesla has received by the SEC and some have speculated, and I wasn't going to bring it up because it's like too speculative, that an investigation has been triggered and that means that they are unable to do any equity offerings, but the whistleblower thing kind of substantiates that a little bit more. We should look into that. But so I'm not going to say that it's likely that they're barred from doing any equity offerings, but it looks like that road is a little fraught anyway with you can't do it in large quantities without risking sort of destabilizing the stock or upsetting your investor base. It's all gravy when the stock's going up, but if it's not going up significantly, then people don't like dilution.

• 1:42:44Ben Gilbert?

  So what could they do? The other things they could do, they could access the bond markets and go and try and saddle up some more debt, but as we know Tesla is now a junk bond rating and their current bonds are trading below face value. And so it seems unlikely that they'll have access to bond markets to be able to borrow from big banks to get that done. So then if equity is a little bit of a tough road, which they could do, presuming they're allowed, they could do by the end of this year and they can't really access any more debt lines. Well, gosh, could they generate enough cash flow from operating? And maybe, the answer is maybe. And the way that they would do that is by producing highly

• 1:43:28Ben Gilbert?

  profitable cars, which they were doing, you know, when they were producing a bunch of the Model S and Model X, super profitable, that was really great. But the attention has shifted to producing the Model 3. So they're actually, they've ramped down a little bit of the S and X production lines in order to be able to hit the numbers that they want to hit for the 3. They're now producing the Model 3 at the rate of about 5,000 to 6,000 units a week, which after you're talking with Ben and other folks who've sort of analyzed this, it's believed that that is their break even point. The amount that they're producing, they don't make any money, but at least they aren't losing money by producing these cars.

• 1:44:05David Rosenthal?

  And that's because they're obviously making margin on the cars, but they have huge fixed costs in setting up all that production. And so they're basically just repaying the fixed costs right now?

• 1:44:15Ben Gilbert?

  Nailed it. Okay, well, gosh, it seems like the option then is to produce a ton of these Model 3 cars, and that will generate enough free cash flow in order for Tesla to do what they need to do, both in investing in future CapEx and just paying off this maturing debt. Okay, are they going to do that? Do we feel good about them doing that? Do we feel like that's a reasonable thing? Well, the 2018 delivery promise that they made to investors was 500,000 across all cars. They were doing like 25,000 a quarter. I think Q1, they did 35,000 a quarter. And to give you a sense of like, what's their history been over the last 13 quarters or so?

• 1:45:00Ben Gilbert?

  They were producing initially 10,000 cars and then ramped up to 35,000 cars. So it's been, it's been changing, but sort of like by a factor of three. In order to hit the ramp that they need to, in order to produce 500,000 cars in 2018, they would need Q2 production to be over 50,000, which they hit. They came out last week and they hit that 53,000 cars produced in Q2 with great growth. Now, of course, lots of people talking about interesting things they did, like pre-produce some of the cars except for the doors and then throw the doors on and call that done. There's also photos of them setting up a tent in the parking lot in order to push more cars through because they don't really have it fully set up in the factory in order to be able to do that.

• 1:45:45Ben Gilbert?

  What do they need to do next quarter now that they've hit this? In the third quarter, they're going to need to produce like 150,000. So that's 3X what they did this last quarter. And then in Q4, because, gosh, we're still nowhere close to that 500,000 across all cars, they need to do about 325,000. So they need to triple next quarter and then more than double after that. And this is not shipping software. This is making cars.

• 1:46:13Ben Gilbert?

  It's a tall order. It's a tall order for Mr. Tony Stark.

• 1:46:19Ben Gilbert?

  I'm not here to say if they can do that or not, I'm just sort of here to paint the picture of what they would need to do in order to hit sort of the promises made to shareholders. And what I don't know for sure is that, is that forecast the thing that allows them to generate enough free cash flow from operating in order to do what they need to do for all the capital needs going forward?

• 1:46:39David Rosenthal?

  Or is there a buffer in there?

• 1:46:41Ben Gilbert?

  Right, right. I'm not, I'm not totally sure. Let's continue playing this out a little bit. The stated goal for 2020, which we probably should just ignore because of, they've never hit a three-year goal before.

• 1:46:53David Rosenthal?

  Because Tesla?

• 1:46:54Ben Gilbert?

  Right, is a million a year. So if they were capable of producing the peak that Toyota was able to produce, which, my God, that would be incredible if Tesla could suddenly become Toyota from a manufacturing perspective, they would need by 2020, an entire second Fremont factory. Because remember, the Fremont factory was with Toyota producing 500,000.

• 1:47:18David Rosenthal?

  Yep.

• 1:47:19Ben Gilbert?

  Okay, they just signed an MOU for a factory in China. Maybe that will materialize in the next few years. That MOU, of course, is contingent on Tesla having the massive CapEx in order to build that factory, which we're already seeing them sort of struggle to produce. So one of the bottom lines here is Tesla could probably do this all if they stretched out their timelines a little more and had like $10 billion more to play with, but their access to capital seems to be lessening over time and sort of, instead of, you know, getting greater over time. Another interesting thing that I realized in diving into this is people always talk about, oh, will the Gigafactory be big enough? The Gigafactory is definitely not the problem. The, the main bottleneck is the Fremont plant and the fact that, you know, they're, they're just assembling these cars is tough and is a highly manual process despite the fact

• 1:48:04Ben Gilbert?

  that Tesla and lots of other people wanted to be able to do it more with, with machinery. Okay, so that sort of takes us to where we are today. You gotta make, as usual with Tesla, you have to believe they can really thread the needle and really do something that they thought was impossible on a timeframe that, that

• 1:48:23David Rosenthal?

  May well be impossible.

• 1:48:24Ben Gilbert?

  I just can't figure out how to do, yeah, in order to do all this. You know, one way that they could slip out of this, that, that could be okay. Is they probably won't hit all these production targets. So they'll, they'll make an admirable effort. Stock price will stay high. This is now making the bull case. They do an equity raise. And if you model it out and look at what they, they raise in equity, if they do $2.5 billion of equity raising at $250 a share, which is a little bit less than it is right now, but you kind of want to do an offering at a little bit less than the, where it's trading publicly to get other available shares. They could sell 10 million shares and it would only be 6% dilution. So if the stock price stayed sufficiently high, they could do that.

• 1:49:06Ben Gilbert?

  It wouldn't, it likely wouldn't tremendously destabilize. They kind of kick the can down the road, but they do buy themselves a little bit more time to start paying off some of this debt, invest in CapEx and thus increase the ability to produce more of these cars in the future. So if you wanted to bet against Tesla, one argument you would make is there's no, there's no way they're going to be able to hit these production targets. And I don't see how they're going to be able to get cash in the door otherwise. And if you wanted to make the bull case, you'd say, eh, they'll be able to raise a little bit more money. These timeframes aren't quite realistic, but they'll get there because they're superheroes. You know, true, like literally, like a literal superhero. And they, they produce something with just tremendous, incredible product market fit.

• 1:49:47Ben Gilbert?

  And so if they can just actually produce it, then this delightful product will go out into the hands of all these people and really change the world. And so I think that's really what you're looking at if you were to bet on Tesla right now. Now, of course, it's tricky to bet on Tesla in either direction right now because buying the shorts is so expensive because there's already so many people doing it. It's a big risky bet to short the company normally. And now you're piling on with all these other people too. It's tricky to short the company right now. If you wanted to buy Tesla, one thing you could look at is the price to sales ratio because a price to earnings ratio would be non-existent. And so we should just look at price to sales. What is their price to sales ratio? It's about 4.9, which is 18 times Ford's price to sales ratio.

• 1:50:31Ben Gilbert?

  If you want to look at other car companies at comps, you're like, okay, well, what does that put them at as a market cap perspective? It's $54 billion, which puts them between Ford and BMW as what people believe the, the company is worth. Now,

• 1:50:46Ben Gilbert?

  Tesla produces, what, 53,000 cars per quarter? Ford does about 12x that. And so if you try and make any apples to apples comparisons with other car companies, it gets frivolous quickly because you're like, they're 18x their multiple on price of sales, they're producing 1/10th of vehicles, you know, a lot of this is speculative. So it gets a little, you kind of feel like you might be buying in when it's already really expensive. So it's hard if you wanted to bet one way or another to make a bet on this company right now.

• 1:51:19David Rosenthal?

  Yeah.

• 1:51:25David Rosenthal?

  There we are.

• 1:51:25Ben Gilbert?

  So that's where the company currently sits.

• 1:51:28David Rosenthal?

  Two hours later.

• 1:51:30Ben Gilbert?

  Yeah. There's two other things to be aware of. One is nobody really talks about their competitors. Like as I was saying Ford in my head, I was thinking, are you really comparing Tesla to Ford right now? But these other car companies are not as sexy of a brand and they didn't invent electric cars and they weren't the pioneer, but they are really formidable competitors. And so GM has sold somewhere around 30,000 volts and those are all electric vehicles. They know how to make cars. Once they decide to just put the pedal to the metal, they're able to really just ramp production because they know how to do this super well. And like, yeah, the lithium ion stuff is different, the drivetrain is different, but like, ah, if it becomes a game of how fast can they ramp and there's existing car companies

• 1:52:14Ben Gilbert?

  with products that are finding traction, that gets a little bit scary if you're thinking about becoming a Tesla shareholder. BMW, of course, has the I3 and the I8 that just came out in sort of the sports car market. Ford's spending $4.5 billion over the next five years to add 13 electric models to their product line. And so where we previously were talking about, gosh, can these really, these old car companies really make it into the electric vehicle space? It's starting to materialize and it's not hard to see that continuing. So that, of course, takes us to, well, these, these car companies need to get their parts from somewhere. How does that work? Well, for the most part, except for the drivetrain and the electric batteries, it's all the same parts that they've had access to before.

• 1:52:55Ben Gilbert?

  If you look at Tesla's supply chain, they have 350 sole source suppliers, which means they are the only people that make that product. And each one of those has to ramp up to meet Tesla's demand. So as Tesla, you know, has their own problems and can we make cars quickly enough? Each of those 350 suppliers that they rely on that are the only person that makes that part for Tesla. So they can't look elsewhere also has to be able to meet that demand. And so a lot of these things start to add up for Tesla where you're thinking, wow, not only is it that the cash needs are a little bit scary thinking about their competitors, their production targets, then you start thinking about their whole supply chain and their supply chain versus the existing car company's supply chain

• 1:53:39Ben Gilbert?

  and sort of who knows how to actually do that. Tesla's got a lot of big challenges in front of them.

• 1:53:46David Rosenthal?

  That's probably why Elon is sleeping on the factory floor.

• 1:53:50David Rosenthal?

  He's been tweeting. On the other hand, it's Elon. I think he probably could, it would take a little while, but I think he probably could liquidate some SpaceX stock and pump that into Tesla.

• 1:54:04David Rosenthal?

  We'll see.

• 1:54:05Ben Gilbert?

  So that's sort of Tesla's future or the different directions of Tesla's future.

• 1:54:11David Rosenthal?

  Yeah.

• 1:54:13Ben Gilbert?

  Tech themes?

• 1:54:14David Rosenthal?

  Tech themes. Yeah, I think let's, we'll skip what would have happened otherwise because we've painted so many branching paths here already. It's wrapped up in the speculation. Okay, tech themes. I have two real quick. I mean, so many throughout the, throughout the episode, but two I want to highlight. One, there's a saying in Silicon Valley, or at least in VC, that hardware is hard. And on the one hand, it's a VC cop out, like all those VCs who passed on, you know, Martin and Mark way back in the original Tesla days. On the other hand, there's an element of truth to it. Like anytime you're working in the real world and doing production, like you really need to have people who know what they're doing. And I think this is where Apple actually is so great. Like Apple makes hardware, Apple has spent decades,

• 1:54:57David Rosenthal?

  and this is really what Tim Cook did within the company before he became CEO, building their hardware and supply chain muscle. That's one. The other one theme that kind of pops out to me here is like, people tend to think of IPOs as the endpoint, you know, the destination for a company. Like, man, it is just a point on the journey. Like, there is a lot of, you know, still existential risk and challenges and Elon's still sleeping on the floor, you know, at the company.

• 1:55:22Ben Gilbert?

  Yep. All right, I've got one. So Tesla, actually I probably have two. Tesla was made possible by, I think what Eberhard was calling "slow Moore's law." They noticed that batteries, and specifically lithium ion batteries, were getting 7% efficient year over year. And so, well, at the time they started the company, it felt like, "This is kind of silly. You can only go 120 miles or whatever on a charge, and that's impractical." They knew that by the time they got to 2018, we'd be going between 300 and 400 miles on a charge for the Model S. I love the notion that if you can see a trend, and you know where you want to be in a certain number of years, you should start the company X years ahead of time before other people sort of realize

• 1:56:07Ben Gilbert?

  that the future has arrived. And my other one is that something happened in like, I don't know when it was, sometime between the 60s and the 90s, where car companies, rather than entirely vertically integrating, started to work with external manufacturers for components. And so if you were to buy a Ford car in the 50s or the 40s, you're buying a lot of stuff made by Ford. If you're buying a Ford car in 2015, you're buying something assembled by Ford, designed by Ford, but they worked with a design shop. They probably built the engine, they probably built the chassis, they probably built the drivetrain, but like, everything else is done by specialty people. And so that paved the way for Tesla to be able to enter the market,

• 1:56:50Ben Gilbert?

  because they actually, there were suppliers for all these things, rather than going to one single competitor and saying, "Let us have access to your parts bin," which is kind of what happened to the DeLorean. In this era today, you know, there's so much that has been outsourced, because car companies believe it's not our core competency. You know, we do marketing, we do design, we do whatever, that you kind of chisel away, quote, "non-core pieces," little by little, and then you actually do end up a little bit thinner than you wanted to be in creating your mode, and there's opportunity for new entrants to use all these other horizontal businesses that you've created. And so that's been a sort of 50 year evolution over the car industry, enabling that disruption.

• 1:57:31David Rosenthal?

  They outsourced all the innovation and that left them in a spot where the Model S could be so revolutionary. All right. Greeting. As we said in our announcement for the trailer for season three, for recent events, we're going to move to, rather than trying to assign a grade, we're going to paint the picture of what an A plus and what a C would look like. Even though the Tesla IPO happened a long time ago and the SolarCity acquisition happened a long time ago, this is very much real time. So I think let's do that here, right?

• 1:57:59Ben Gilbert?

  Yep. Yeah, I say, looking forward from Tesla today, sort of what puts them in an A plus position versus what, what other outcomes are possible.

• 1:58:08David Rosenthal?

  Yeah. And I think, actually, Ben, you basically already painted it in the speculation section, like.

• 1:58:13Ben Gilbert?

  Yeah, if they hit 500,000 this year, A plus.

• 1:58:16David Rosenthal?

  Yep.

• 1:58:18David Rosenthal?

  And somewhere in between, but they still stay alive, like, you know,

• 1:58:23David Rosenthal?

  A minus to, you know.

• 1:58:24Ben Gilbert?

  Yeah, there's, there's a, there's a B plus, A minus thing where they don't hit production, but they do well, stock price stays high, they're able to issue more equity, they do that, they raise the capital necessary.

• 1:58:36David Rosenthal?

  Yep. F is obviously the company goes bankrupt. C is they end up getting acquired, right? By Google or SpaceX or, you know, somebody else, somebody comes and bails them out, right?

• 1:58:47Ben Gilbert?

  Yeah, you can imagine their stock, their market cap drops from 54 billion to like 20 billion and then it's not a crazy pickup for, you know, people have talked about Apple over the years, people have talked about Google, like, they're all doing car initiatives. Tesla's got a lot of the best car people.

• 1:59:03David Rosenthal?

  Not to mention Uber, Lyft, Google. It's so funny, I, I know we're already so way over long, but I can't help but thinking, was it the Atlassian episode where, Ben, you made the comment about how like, you know, Atlassian was like, the IPO, your parents want you to marry, like, it's so boring. You like the, you know, the James Bond going full speed towards a cliff, pull the e-brake. It's literally, this is that.

• 1:59:29Ben Gilbert?

  This is that.

• 1:59:30David Rosenthal?

  This is literally a Bond movie.

• 1:59:32Ben Gilbert?

  This is the trailer to, to Star Trek and like, James Tiberius Kirk is over, like, over the cliff already, reaching back, trying to figure out if there's something to grab on to while the car is spinning down to the river.

• 1:59:45David Rosenthal?

  Oh, man. Is it ever. All right. I think that-

• 1:59:49Ben Gilbert?

  But they've been here before.

• 1:59:50David Rosenthal?

  They've been here before. Yeah. Like, I mean, this is, this is a whole, not just a car chase scene. This is a whole movie of, you know.

• 1:59:57Ben Gilbert?

  And one other last thing is, in discussing who could buy them, it's striking to me that Tesla's market cap as a public company is lower than Uber.

• 2:00:07David Rosenthal?

  Yeah, yeah.

• 2:00:09Ben Gilbert?

  Like Uber will probably go public between 80 and 120 billion dollars, which will be twice the value of Tesla today.

• 2:00:16David Rosenthal?

  Well, it's the power of marketplace business bottles, Ben.

• 2:00:20David Rosenthal?

  Come talk to Wave.

• 2:00:23Ben Gilbert?

  All right.

• 2:00:24David Rosenthal?

  All right. Carvouts?

• 2:00:25Ben Gilbert?

  Carvouts?

• 2:00:26David Rosenthal?

  Yeah.

• 2:00:26Ben Gilbert?

  Yeah. So I have one, it's my new favorite podcast. It's so incredibly well done. It's called Dissect. It's, every single season analyzes an album and it uses the album as an excuse to talk about an artist's life. And so the season I'm listening to right now is season two, My Dark Twisted Beautiful Fantasy by Kanye West. And it goes song by song. And the guy who does it is a music producer and storyteller. And so he, he's able to really discover the samples that made up the tracks and sort of recreate some of the beats and pull it out. And you really get a new appreciation, understanding for

• 2:01:07Ben Gilbert?

  the craft of, of producing and creating music. He really goes into the lyrics and really just paints an amazing story of, of, if you like, like Rap Genius, you will love this because you go in, you get a little snippet of the story and then he uses it as like, let's, let's take five minutes and go back and talk about this moment in the artist's life. And then he finds interview clips with them and he finds, you know, family members they've talked to. And it's almost like acquired for music, but it done the right way for music where you're actually analyzing the sort of tracks and musicality itself. You know, having a whole season to dive into an album, you really start to understand the artist in sort of a really deep, personal way. And I'm a huge, a huge Kanye fan so

• 2:01:52Ben Gilbert?

  far listening to this. So it's, it's really fun. I'm excited to go into the next season too, which is Frank Ocean. So highly recommend the Dissect podcast.

• 2:02:00David Rosenthal?

  Nice. I actually had a different carve out that I was going to talk about, but I want to spend more time talking about it. And we're already over two hours, so I'm going to hold that for next time. But inspired by podcast for you, my new favorite podcast introduced to us by friend of the show and head of the acquired fan club, Preet Anand. Big shout out to Preet is Harry Potter and the Sacred Text. It's amazing. It's like two Harvard Divinity School graduate students going through the Harry Potter series, chapter by chapter, and reading each chapter through a spiritual lens. And it's really, really cool and fun. If you haven't already heard of it and you're a Harry Potter fan, check it out.

• 2:02:42David Rosenthal?

  All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:02:48Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:02:59David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:03:19Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:03:32David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:03:43Ben Gilbert?

  Listeners, thank you for coming on this journey with us. It feels good to get it off our chests. Really fun to dive into Tesla. I'm sure we will get email. I'm sure we messed some stuff up. I think we probably got the plot but missed some of the details. Come join us in Slack, acquired.fm. We would love to keep the conversation going. And if you are not subscribed and you want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined, we would love a comment on Apple Podcasts. Thanks so much and have a great day.

• 2:04:10David Rosenthal?

  We'll talk to you soon.