The De Facto Tesla Company Story: From Eberhard's Roadster to Musk's Worldwide Gigafactories

It all officially started in July 2003, when the company got incorporated as Tesla Motors, Inc. Two men, Eberhard and Tarpenning, got appointed respectively CEO and CFO.

They had known each other from their time at NuvoMedia, the company they had led to the development of the Rocket eBook. The first e-book was launched in 1996 when the commercial Internet was still at the embryonic stage (for some context, the Amazon Kindle would be launched in 2007).

Yet, even though Eberhard had founded and led NuvoMedia to a successful acquisition, which in the year 2000, was purchased for $187 million, by another media company. Eberhard was all but rich.

In fact, over the years his shares in the company had been diluted to the point, that, Eberhard's exit from the sale only had not made him rich, but as he was divorcing his wife, most of that wealth went to her, and Eberhard had to start all over again.

Yet, along his journey Eberhard, had met Elon Musk, which, by 2003, was deep into his new venture: SpaceX.

This is how the Tesla story starts!

I had the chance to review it all with Tim Higgins, author of The Wall Street Journal, which wrote a great book, called The Power Play. That is a whole account of Tesla’s history from its early days!

Musk's first ventures

Elon Musk had successfully exited the PayPal sale, by making $180 on a $1.5 billion acquisition in 2002. Yet, while SpaceX had been founded in 2002, Elon Musk had started to look into it a couple of years before.

Musk was not new to entrepreneurship and the rollercoasters this "profession" was about. In fact, a few years back to PayPal, in 1995, together with his brother, Musk had founded Zip2.

The company built maps and business directories, which were very useful applications for media websites. Eventually, they sold the company to Compaq, for over $300 million, which made Elon Musk more than $20 million to start his next company. Zip2 would become a component of AltaVista, the search engine owned by Compaq.

With the new cash infusion, Musk started his next company, called X.com. Musk's vision was to transform X.com into a financial behemoth, through the Internet. While his vision was unbounded, he also pushed his team to execute fast.

Yet, X.com had been founded in late 1999, when the commercial Internet was still young, and revolutionizing the financial system was not as simple as it seemed.

X.com's team randomly met the team of Confinity (for a period they were neighbors sharing the same office building).

Another startup, created in late 1998, similarly to X.com was trying to build an Internet financial company. Yet, while X.com had an unbounded vision, Confinity, which had been founded by Pether Thiel, and Max Levchin, wanted to give people the ability to pay online, by beaming their money through a device, called PalmPilot.

For some context, in the late 1990s, the Palm Pilot was a successful device, especially in California, which is where Confinity was operating. Yet, the initial business plan of the company didn't seem to work in the real world.

In fact, the beaming technology never took off as they had envisioned.

Instead, by late 1999, one thing was clear, a “side feature” became the killer commercial application for both companies. That was the ability to pay by using an email.

This, in fact, would become the primary feature for both X.com and Confinity, and both had stumbled upon it, as it got very popular on a platform: eBay.

While those two companies were very different, they had completely different visions, and leadership, in a strange turn of events, the companies eventually merged.

The new company was called PayPal, after Confinity's email payment feature, which was already well known through eBay. Thus, the company took the name of the side-feature, which unexpectedly became the commercial killer application.

Yet, by early 2000, the newly created PayPal, was all but safe.

In fact, the various near-death experiences in a year time frame turned PayPal into a drama machine. In the meantime, this drama machine had taken out various CEOs, until Elon Musk became - unwillingly - CEO of the company.

Yet, once CEO he pushed the company with his unrelenting management style, which pushed people beyond their limits. The management style of Musk, coupled with a complete divergence in vision between Musk and the other co-founders (in particular Thiel, Levchin, and Sacks) led to a final conflict.

Indeed, in 2000, Musk would be ousted as CEO, with a coup organized by PayPal's other co-founders, Peter Thiel, Max Levchin, and David Sacks. As Musk was on his honeymoon, he was flying and he could not fight that back.

Musk was out from PayPal, and now he had time to think about what would come next!

SpaceX

As Musk got time to think about his next ventures. He had looked into something that he had been passionate about since childhood: space.

First, he tried to get involved by helping NASA get more funds and interest, in space exploration. He thought that was the main issue. Space exploration, a hot topic, during the 1960s-70s, had stalled, in the last decades.

Yet Musk realized it was not a matter of funding. The whole innovation system, related to space, was non-existent, so he needed to get involved.

As he got involved, he started to build SpaceX, from scratch. Indeed, initially, he had looked into various ways, to outsource parts of the rockets. But over time, SpaceX would have a different approach. SpaceX started to build all the components that would make up the rocket, in-house.

And yet, let's remember, when SpaceX's journey, crosses that of Tesla, we're in 2003, when all SpaceX had was a prototype rocket on a computer. It would still take a few years for SpaceX to successfully perform its first launch.

In fact, on  September 28, 2008, SpaceX completed the Falcon 1 launch successfully!

In this context, Tesla entered the picture.

Back to Tesla

Musk had always been passionate about cars. In the footage, back in 1999, Musk was among the buyers of a rare supercar, which he showed off to the camera:

https://www.youtube.com/watch?v=s9mczdODqzo

Musk at the time was 28, and he was about to start a new journey he hadn't thought about.

EVs were in the air. Indeed, in 1999, GM had launched its EV1, which turned out as a complete flop:

https://www.youtube.com/watch?v=KTryhfFWnC8

The most difficult part was not only building the electric engine, but that also would last, not catch fire, and be able to cover a large range.

But it was also about performance and coolness.

In fact, most of the electric vehicles that were in production were bulky, ugly, and ineffective.

Tesla was set to change all that.

Telsa's Roadster

Tesla's initial plan was to manufacture a sports car that would be compelling to a very niche audience. Indeed, the target for the Tesla Roadster was to showcase the technology to a bunch of innovators, that liked the idea of an electric vehicle, which performance, could compete with other sports cars.

However, as Eberhard started to roll out Tesla's business model (Musk had endowed Tesla with a few million, in 2004, to start the production of the Roadster), it became clear that building a performance electric car was not an easy fit.

While Eberhard had targeted the right audience (wealthy Californians, who would use the Tesla Roadster as a status quo), he had miscalculated the execution strategy.

Indeed, Eberhard thought Tesla could be built by outsourcing most of its parts (just like he had done years back with manufacturing the NuvoMedia ebook device). Yet, this turned out to be not the case.

Several challenges came up, right on:

• Batteries caught fire.
• Components were way more expensive than they thought.
• Large suppliers didn't want to deal with Tesla, at the time a small startup, when the legal liability of batteries was much bigger than the potential payoff for the supplier.

All the above didn't help.

And Eberhard felt more and more pressure, as time goes by, and the Tesla Roadster is far from manufacturing, and it was way more expensive than the price point Musk had promised.

In this period, a person which played a key role at Tesla, and would be the main point of contact for Musk was JB Straubel. An engineer at the core, he was interested in battery technology.

He had worked in 1993 for Rosen Motors, and, just like Ford, in the late 1800s, Straubel was a racer.

Indeed, for him racing electric cars was a way to showcase their torque (with respect to gas-powered vehicles, electric cars produce an instant torque, which made the start of an EV more similar to a rocket launch than a car start).

Straubel's ability to tinker with the electric engine would prove critical. In fact, one of the major issues with battery packs was that they caught fire.

Strauber invented a way to prevent batteries to catch fire, by enabling these cells to dissipate their energy. This was a major improvement.

While Eberhard was trying to progress with the Roadster, Musk was putting growing pressure on him. He wanted Tesla to execute faster, and he came up with continuous changes to the car.

Musk, therefore, had very close ties to the company. Indeed, when he had first invested in Tesla, of the total $6.5 million round, Musk had invested $6.35 million of his own money, while Eberhard had invested $75K (as a "skin in the game deposit").

While the relationship between Musk and Eberhard initially was a good one.

Over time, it deteriorated. And things only got worse, when Musk introduced a team within Tesla to audit its finance and see what was the real cost of producing the Roadster, at that moment.

From the analysis, it came up that expenses were out of control, and that the challenges to producing the Roadster were immense.

This triggered Musk, who added pressure on Eberhard and convinced him to start thinking about resigning as CEO and focus on the product instead.

While they both had agreed, eventually things precipitated, and the relationship between Musk and Eberhard quickly deteriorated.

To the point that Eberhard left Tesla, by signing a non-disparagement agreement, and after a quest to find Tesla's new CEO, eventually, Musk appointed himself! It was 2008, and one of the greatest financial turmoils was to hit the US.

The Secret Tesla Master Plan

By 2006, Musk would lay out the foundation for Tesla's plan for the next decade. It was a four points master plan, structured as below:

1. Build sports car
2. Use that money to build an affordable car
3. Use that money to build an even more affordable car
4. While doing above, also provide zero emission electric power generation options

These four points would take a decade to be executed. Musk showed how, even when it comes to an unbounded vision, like his, most of it is still about execution.

In the meantime, Musk had become the CEO of Tesla, which had also turned into a draining endeavor, consuming a lot of his time. And yet, as the 2008 financial crisis hit, Tesla managed to survive it, also thanks to a partnership with Daimler, who took a 10% ownership stake, which kept the company afloat.

As Wired explained back in 2009:

The deal provides Daimler with batteries and the know-how needed to bring an electric car to market "at the highest possible speed," company officials said. In exchange, Tesla gets a big pile of cash and, perhaps more importantly, the parts and engineering expertise it needs to build the Model S sedan.

This deal would be critical for Tesla to get additional oxygen while having a strategic partner, and going toward the IPO.

In fact, Tesla would IPO the year after, at $17 per share, valuing the company at about $2 billion.

Tesla borrowing Apple's retail strategy

As Tesla started to roll out its business plan, back in 2003, the company chose to keep control over the sales experience.

This choice was not an easy one. Indeed, the Tesla executive team liked the idea to go direct to consumers. But in the auto industry that was not an easy fit.

In fact, most auto companies sold through car dealers and franchises. Those franchises represented a huge, and powerful industry, which made most of its money, not necessarily on the sale of the vehicle, but rather on servicing the vehicle over time.

Yet, since the onset, Tesla had a feeling that going through car dealers wasn't the right pick for it. And it started to build its retail capabilities.

In that respect, Tesla borrowed Apple's retail strategy. For that matter, George Blankenship, a key player in the retail strategy of both GAP and Apple, played a key role in launching the Tesla store operations.

In 2008, Tesla opened up its first store, in LA, on Santa Monica Blvd.:

The store would play a key role in both educating people about the Tesla brand, and also, later on, developing the service side of the business.

By controlling the customer experience, Tesla could, over time amortize the cost of the stores and build a valuable/differentiated brand. Even though Tesla's cars were expensive.

Building up stores that sold wasn't easy either.

By 2013, Tesla sales figures looked bleak, so much so that Musk looked into a potential sale of the company to his friends, Google's co-founders' Page and Brin, for $6 billion.

Indeed, after setting up the templates for the stores, Blankenship had left the company. And Tesla's slowing sales were clear in 2015. McNeill revamped the sales force and trained it to close deals.

Where in the early days the store was only about education, by 2015, it had to become a sales machine, to make Tesla numbers add up!

By 2022, Tesla had hundreds of locations across the US.

To get to its sales numbers though, Tesla had to solve another critical issue, making batteries for its cars available at scale!

The Gigafactory

As we go through the whole Tesla history, another key ingredient was the Gigafactory.

In fact, as Tesla had successfully launched, and dumped up production of the Roadster first, it had already started to invest in the Model S, which by 2012, had launched.

Yet, the real turning point, for Tesla's scale would be represented by the Model 3.

Indeed, the Model 3 would have changed it all for Tesla, by expanding its market and by enabling it to "cross the chasm."

The Roadster proved the viability of the technology to a small niche of the sports car industry, represented by innovators who were more interested in the technology.

The Model S had represented a further step. Moving from innovators to early adopters. People are interested also in the technology, but also in the performance, aesthetics, and in part, pricing.

As Tesla moved ahead, the Model 3, became the turning point. The car to move from early adopters to the early majority.

In fact, as the company highlighted "Tesla’s mission is to accelerate the world’s transition to sustainable energy through increasingly affordable electric vehicles and energy products. To ramp production to 500,000 cars per year, Tesla alone will require today’s entire worldwide supply of lithium-ion batteries."

Therefore, where the Roadster was about prototyping, the Model S was about manufacturing, the Model 3 was all about mass manufacturing!

In order for Tesla to achieve mass scale, the Gigafactory played a pivotal role.

As the company explains:

Tesla broke ground on the Gigafactory in June 2014 outside Sparks, Nevada. The name Gigafactory comes from the word 'Giga,' the unit of measurement representing “billions.” The Gigafactory is being built in phases so that Tesla can begin manufacturing immediately inside the finished sections and continue to expand thereafter. Already, the current structure has a footprint of more than 1.9 million square feet, which houses approximately 5.3 million square feet of operational space across several floors. Still, the Gigafactory is about 30 percent done. Once complete, Tesla expects the Gigafactory to be the biggest building in the world – and entirely powered by renewable energy sources. Designed to be a net zero energy factory upon completion, the facility will be primarily powered by solar, and installation is already underway.

For Tesla to build its own batteries was another turning point.

Vertically integrating

As Tesla scaled, one thing was clear, Musk sought to control.

Tesla had kicked off its business plan by wanting to outsource almost everything.

Instead, it ended up manufacturing its own batteries, while going direct to consumers with its online and retail stores.

Another piece of the puzzle was lacking: energy production.

In that respect, a company called SolarCity, founded in 2006, would eventually become part of Tesla.

Musk had prompted his cousins, Lyndon Rive and Peter Rive, to start SolarCity.

The idea was to build this into an external arm, able to provide potentially clean energy for Tesla vehicles. In fact, Musk backed the company, while sitting on the boars of SolarCity and Tesla.

Yet, by 2016, the financial outlook for SolarCity looked bleak, and Tesla bailed out the company by purchasing it for $2.6 billion.

Later on, Musk would be involved in a lawsuit from Tesla shareholders around this acquisition.

However as SolarCity looked like a bailout, Musk was able to reframe it as an expansion of Tesla's mission.

In fact, in 2016, ten years after the Tesla Master Plan, Musk drafted the Master Plan, Part Deux (part two):

1. Create a low volume car, which would necessarily be expensive
2. Use that money to develop a medium volume car at a lower price
3. Use that money to create an affordable, high volume car
   And...
4. Provide solar power. No kidding, this has literally been on our website for 10 years.

As Musk justified at the time:

We can't do this well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies. That they are separate at all, despite similar origins and pursuit of the same overarching goal of sustainable energy, is largely an accident of history. Now that Tesla is ready to scale Powerwall and SolarCity is ready to provide highly differentiated solar, the time has come to bring them together.

While this was a narrative Musk had built around, and to justify the acquisition of SolarCity, by 2021, the energy generating and storage segment (of which SolarCity was part) generated over $2.79 billion in revenues.

Subsidizing Tesla via its leasing arm

When Apple launched the iPhone, it combined hardware, operating system, and a marketplace to enable third-party to develop applications on top of its device.

The iPhone's success was staggering, not just because it represented a device adopted, at mass, which would build the next consumer platform for decades to come.

Instead, Apple had managed to succeed nonetheless how expensive the iPhone was and is (the latest iPhone is more expensive than most computers out there).

How did Apple manage to succeed in distributing its iPhone?

Steve Jobs made mobile carriers subsidize the iPhone by amortizing its cost through the phone plans! (Apple deal explained here).

Still, as of today, most of the iPhone sales do not come from Apple direct stores. They come from third-party stores, which sell those iPhones via mobile carriers plans.

This is how you make a very expensive product, accessible, at scale.

At the same time, Tesla borrowed this strategy. But rather than enabling the subsidizing of Tesla through third-party, the company is doing it the way it has always done, through in-house leasing.

In fact, back in 2019, Tesla started to rump up its leasing operations of the Model 3 (the car which is supposed to go to the masses!) to enable the amplification of its distribution strategy, by subsidizing the product, and by building its own leasing arm.

In 2021, Tesla generated over $1.64 billion in revenues from its leasing arm (growing 56% year-on-year). And it's not just about the revenues coming from the leasing arm.

It's primarily about the additional distribution potential that this leasing arm would add to the company's customer base (considering that Tesla is experimenting with a $0 down payment in various states in the US).

Tesla to the masses

Back in 2018, to Musk's admission, Tesla was going through a very tough time again (the third near-death experience), and many expected Tesla to fail.

So much so that Musk was looking into selling Tesla to Apple, for $60 billion!

The deal didn't land, Tesla kept pushing through executing its plan, and after avoiding the worst period since its inception (short sellers were betting against Tesla since 2015), the opening of the Shangai Gigafactory made things look great again!

https://www.youtube.com/watch?v=ZucUZZkIQw0

The Gigafactory is instrumental to Tesla's future ability to deliver cars at scale. In 2022, another key milestone was achieved. Tesla opened its Berlin Gigafactory, right in the heart of Europe's automotive industry!

https://www.youtube.com/watch?v=y5uV6qLYqMQ

Master Plan, Part Three: An energy infrastructure platform?

While the challenges ahead for Tesla are still major, from mass production to the ability to deliver its new models, to a fully self-driving car, the ability to automate manufacturing through robotics, and to build its leasing/financing arm.

Yet Tesla seems to be building up what we can define as an energy infrastructure platform.

This platform might go well beyond cars, to embrace transportation, robotics, software, service, and finances.

The bet then is how big is this market in the future.

And to be sure, while this all makes sense in hindsight, Musk's vision to get there has always been there. The pat was all but linear.

Slowly, then suddenly blowing competition off the water

The journey from the Tesla of the early days, to the Tesla of today, has gone through many near-death experiences, potential sales of the company, several mental breakdowns of Musk and the executive team around him… and many exciting achievements!

And still, in 2018, Tesla's success was all but granted.

It took about 15 years for the company to build a viable business model at scale.

And while things progressed slowly for a long-time, they eventually and suddenly took off, blowing competition off the water.

It took two decades for Tesla to build the company we know today, and three years (between 2018-2021) from close to bankruptcy, to the trillion-dollar company!

If there is a lesson here: it’s that innovation is expensive, unpredictable, slow at first, then extremely fast, and only explainable in hindsight.

This is an excerpt from The Tesla Business Model. Learn more on the Tesla Company News Page.