“You have to spend money to make money.” We’ve all heard that well-worn phrase. To a business owner, that means investing funds for supplies, product, advertising, staff salaries, and other operating expenses. For entrepreneurs trying to get a business idea off the ground, spending money with no revenue is difficult without borrowing from friends, family, their financial institution, or if really lucky, a venture capitalist willing to take a risk.
Imagine the difficulty Elon Musk has trying to create an automobile company with new technology. Mr. Musk started off slowly by building a few cars at a time and selling them at a very high price which built up some cash reserves. Later on, the company went public, and more cash from stock issuances came in.
Then came the hard part. Stockholders are patient with new companies for a short time but then expect a reasonable return on their investment, either by a higher stock price or high dividend rate. Mr. Musk’s response was to transform Tesla from a niche product to a mass-market vehicle in less than two years. That requires a whole lot of new capital.
There are several ways for Tesla to bring in new money. They can offer more stock, float bonds, ask Mr. Musk to chip in some of his own funds, raise the price of their cars, or a combination of all of them. Each scenario carries its own level of financial risk. While the stock price continues to climb, it makes additional issuance more expensive and dilutes Mr. Musk’s stake in the company. Former Federal Reserve head Alan Greenspan feels we’re in a bond bubble ready to burst. Mr. Musk reducing his personal net worth is something the average consumer deals with daily. Finally, raising the price of the cars can put a damper on sales.
Tesla’s biggest problem at the moment may be Mr. Musk himself. Entrepreneurs by nature are always looking toward the next big thing. He still has an interest in creating commercially-viable space vehicles and colonizing Mars. Company founders are typically not good at managing people and systems. It may be time for Mr. Musk to clear the way for a professional manager to lead the transition of Tesla to a full-scale auto manufacturer.
The latest count is that approximately 450,000 individuals have paid a $1,000 deposit to purchase the mass-market Model 3. The company expects to reach a production rate of 5,000 cars per week by the end of this year and 10,000 per week by the end of 2018. Will consumers at the end of the line wait that long for their car? Given many consumers’ needs of wanting things immediately, this will no doubt be an interesting experiment in 21st century economics.
By the way, Plautus, the Roman playwright during the third century BC, was credited with the quote, “You have to spend money to make money.” He’s also known for creating the joke pattern used for “knock knock” jokes. From personal experience, anyone managing a business, especially one that markets to the public, needs a sense of humor.
David M. Green