It's hard to describe but Tesla was in a really dire situation at the end of 2007.
Chris Paine who did the documentary called ‘Who killed the electric car?’ did a follow up documentary called ‘Revenge of the electric car’ he ended up following 4 car companies one of which was us. The movie actually followed what was the most difficult time for Tesla in its history with multiple near death experiences. We had multiple near death experiences, like death on the nose, like right in front of you. If you're curious about seeing the early history of Tesla then "Revenge of the electric car" is a great movie to watch.
The real key thing was from mid 2007 to mid 2009 that two-year period was super bad. I think some of the stumbles were silly mistakes we made ourselves and some were market externalities.
It had come to light that the cars cost would be $140,000, we had been selling it for $92,000. I wish we didn't have to raise prices, it sucked, but I couldn't carry Tesla by myself, I just didn't have the resources to do it. We can't sell cars for less than it cost us to produce. We got some anger from people, they felt that we had done like a bait and switch, and it is sort of true it was sort of a bait and switch.
We had made so many mistakes at the beginning of Tesla that we basically had to recapitalize almost completely in 2007. Almost every decision we made was wrong. We had to make some really dramatic changes. Really just recapitalize the business, and invest about twice what we originally had expected, and what we really expected as the outer limit.
In the beginning of Tesla and Solar City I thought the probability of success was so low that I provided all of the money. All of the money just came from me personally, I didn't want to ask people and other investors for money if I thought we were going to die, because I thought we would. I invested entirely the money that I got from PayPal, all of that got invested into Tesla, Solar City and SpaceX. I had to take all of my reserve capital and invest it into Tesla, which was very scary because obviously it would be very sad to have the fruits of my labor with Zip2 and PayPal not amount to anything. But there was no question in my mind that I would do that because Tesla was too important to let die. The difficulty is that in that situation there's so much responsibility that you have to the employees, and the investors who came along, it would've been extremely disappointing if I would've not been able to keep my responsibility to have the company survive.
That forced us to scale back our plans a little bit, and we had to do a layoff. We had to raise the money internally from existing investors. I had to put up a lot of the money personally because there was just no money. That was sort of a hair-raising time for the company. Once just to keep Tesla alive I had to wire $3 million personally with no guarantee of anything, basically wire the funds and say use it, otherwise we wouldn't be able to make the payroll.
I'll tell you where things were in 2008, which was the most difficult time for Tesla as it was for many companies. We were able to solve the problems, but then as time went by the companies needed more money, and just when we were able to solve the problems the economy was going into a tailspin. We were in the process of raising a $100 million financing round to take Tesla to the next level. That began in sort of the summer of 2008, and then we ran smack into the worst economic recession since the Great Depression The whole financial market was crashing, and we ran into, you know, a force 5 hurricane. That's when the financing round fell apart, nobody wanted to give us money. We weren't able to raise any money at all.
I certainly did not anticipate that we would have the worst economic climate since the Great Depression, and one which was just proportionately bad for cars. General Motors and Chrysler went bankrupt. The car industry is a very difficult one and electric cars maybe especially difficult, I mean if you look in the United States the next youngest car company was Chrysler, they were almost 100 years old, and they went bankrupt. Now they are a division of Fiat. It was not an environment that was conducive to start ups trying to raise money, and a start up company that's making electric cars to boot sounded like stupidity squared. Investors would be angry that we even asked them.
In fact some other electric vehicle start ups like Fisker and Coda went bankrupt and we barely made it, it was super close. I mean General Motors went bankrupt, I mean General Effin' Motors! and here we were, a young company selling a very optional car, people didn't need $100,000 sports car.
It would've been terrible particularly in the case of Tesla, but also in the case of SpaceX 2008 was awful, because we got the third launch failure in a row of the Falcon one at SpaceX. We had the economic tsunami take place and that made things even worse. If we would've not succeeded we would've been used as a counter example for why people shouldn't do electric cars or shouldn't try to build private rockets. That would've been really bad, it would've been a double whammy. People would've used Tesla as just another stupid car company. That would've been really terrible. It's pretty hard fighting a two front war in the middle of the Siberian winter, and both fronts are really freaking hard.
There was quite a bit of schadenfreude in the media, who was sort of like, we had the temerity to try to create a car company. It was like "who do these arrogant jerks think they are, they think they can create a car company, you know the hell with them they are just going to die" There were multiple blogs that were maintaining a Tesla death watch. That really pumps you up you know.
Then SolarCity had a deal with Morgan Stanley, and Morgan Stanley had to renege on the deal, because they themselves were running out of money. So it looked like all three companies were going to die. We had to figure out how do we get through this dark period and not go bankrupt.
I had to make a choice then, either I was going to have to take all of my capital that I'd made from my sale of PayPal to eBay and invest it in Tesla, or Tesla would die. I was like man if I invest everything there's a chance that we will survive, if I don't invest everything there's no chance. The only choice I had was invest all the money that I had left. I thought I would lose all my money that's what I thought would occur, but that was not the hard decision. The hard decision was that I had two companies, SpaceX and Tesla, and you know if you've been a part of creating these companies it feels like a child. I could either take the money that I had left and I could divide it between SpaceX and Tesla, or I could say no I'm going to let one company die and give all the money to the other. That was the hard decision, not whether I should give all my money, that was easy.
I was also going through a divorce, so my personal life was somewhat in shambles. It was a terrible time, everything was going wrong at once.. three rocket failures in a row.. Tesla financing round was falling apart.. SolarCity was having difficulties… getting divorced.. getting attacked by some in the media. Every bad thing you could imagine.. It was really terrible. I was very sad.
So I put all of my money into Tesla, and most of the existing investors agreed to fund the company, which amounted to about $40 million, 20 million of which came from me. I was tapped out I had to borrow money for rent after that from friends. That was actually a bit awkward that I had to borrow money from friends for living expenses.
If things didn't work out I would have been negative - essentially - but because I was willing to invest everything that I had, the other investors in the company were willing to put up the other half of the money that was needed to keep Tesla alive.
In addition to all the stuff happening I was getting dumped on massively in the press. I was being accused of being an idiot, a charlatan, an idiot and a charlatan, not even a good charlatan. This is basically where Top Gear falsely implied that the Tesla Roadster had run out of energy when they tested it, which it didn't. In fact the whole vehicle has a detailed computer log so we can see it. Also when we dropped the car off, one of our guys happened to see a script sitting on the table. They already dropped the car off and he was reading through the script, and in the script the car breaks down. Like, wait a second you already wrote the script before we even gave you the car? there's something wrong about that. We were hoping that it wouldn't be that bad, but when we later did the Tesla IPO roadshow, we got one investor after the other asking us why our car broke down in Top Gear. Particularly in Europe every investor asked us why are car broke down. We said this is ridiculous. To add salt to the wound Top Gear just kept repeating that episode.
For sure if I hadn't invested everything I had there would've been no chance. Between Tesla, SpaceX and SolarCity I went all in. That wasn't the plan at the beginning by the way. Peter Thiel has been a big supporter, he invested in SpaceX at a very important time in 2008 before we reached orbit. After our third failure, but before our first success. So big credit to Peter and Luke Nosek and the other guys at Founders Fund, basically my buddies from PayPal. My buddies from PayPal saved my butt you know. It was really good.
At the end of 2008 the fourth launch worked, that was all the money we had, but nothing more. We just barely barely scraped together enough to do the fourth launch. Then there was a whole bunch of dramas that - skipping a bunch of drama - the worst point was probably just the weekend before Christmas 2008. We had maybe about a weeks worth of cash in the bank or less. There was very little time left in the year to resolve these things, there were like two or three business days left in the year. That was literally - we would have gone bankrupt a few days after Christmas. I thought we would probably die. I think it would have been irrational to have any other view. It was looking pretty grim.
I remember waking up on the Sunday before Christmas thinking, damn this is the closest I've ever come to having a nervous breakdown. I never thought I was someone who was capable of a nervous break down, I thought nervous breakdowns those are ridiculous, why would people have such a thing? I didn’t, but I could see it, I was within sight of it. I thought this sucks, this is terrible. I think once you snapped you probably don't realize it, because you've gone insane. Your ability to just sort of look in the mirror psychologically is substantially impaired. Probably most insane people don't think they are insane. I think I came as close as I'll ever come. It was just like geez. It was quite a terrible emotion I would say, and sleeping was difficult.
Then the next morning NASA calls and said that we’d won this 1,5 Billion dollar contract. They awarded us for the first major operational contract, which was for resupplying cargo to the Space Station and bringing cargo back. The next morning, literally, I was at home, and I thought they had all gone home for the holidays. I would have said there was no chance of getting a call, I thought people would be on vacation and that sort of thing. That was awesome, I couldn't even maintain my composure I said: “I love you guys.” I don’t think they had ever gotten that response before.
So that was the Monday morning, and I think it was the Tuesday night or the Wednesday night on Christmas Eve, 6:00 p.m, December 24, 2008, that we closed the Tesla financing round. It was the last hour of the last day that it was possible. So it went from really terrible to definitely a good week, but definitely took it's toll from a mental standpoint, I think I mentally just burned out a few circuits.
We would have gone bankrupt a few days after Christmas if that round had not closed. That tied us over for about six months to May 2009, when Daimler invested in Tesla.
In 2008, when we were really still trying to figure out how not to die, one of the things that I thought would really help was if we had a strategic partner, like one of the big car companies. We had been trying to sell our technology to Detroit, and other car companies in other parts of the world. I mean, we really tried hard to work with a lot of different car companies. We would say, drive our car and look at our technology, I don't know it just never seemed to sort of sink in.
In October of 2008 I think it was, I stopped over in Germany in Stuttgart, on the way to India, actually, and met with Dr. Weber the head of global R&D at Daimler, and we had a conversation. Daimler is the company that invented the internal combustion engine car, and the maker of Mercedes and the Smart. They are the oldest car company in the world. I said look what does it take to work together? We would love to do something, we would love to do something with an affordable mass market car that we ourselves couldn't do right now, because we don't have the capital. I would love to figure out how to work with Daimler, is there anything you guys need on the electric vehicle front, is there anything we can do? he said well they wanted to make an electric Smart car, but they didn't have a good source for the battery and power train. You know, the Smart car was always intended to be an electric car, but they could never get the battery right. I said that we could help, what would it take for us to work together? he said if you could do a prototype that would really go a long way, and that there was a Daimler team that is planning to visit Silicon Valley in January 2009.. He said that he would ask them to meet with Tesla and kind of make their assessment. So I thought we got three months, immediately as I left that meeting I called JB and said: "JB we have three months to make a working electric Smart car" and JB was like what are you talking about?
There were some challenges, because the Smart car was actually not available in the United states. We worked really hard and 40 days later the Daimler sort of senior engineering team shows up. It was clear when they entered the building they were not excited about meeting with some like American car start up, whatever. They took the attitude of what does some little startup in Silicon Valley know that we don't know or can do? So they had been told that they needed to do this. They were like this is obviously going to be a waste of their time, and they were quite grumpy actually. We started off with a PowerPoint presentation and they really didn't like the PowerPoint presentation. So I said like: “You know what why don't we just skip the PowerPoint presentation, would you like a test drive?” and they were like: "What are you talking about, what do you mean a drive?”. I said: “Yeah we made one and it's just outside, do you want to drive it?” then they went out and test drove the insane performance Smart car. It was so fast you can do wheelies in the parking lot. Basically you can't exit that without a grin on your face. They went from ‘being grumpy’ to ‘Holy cow this is awesome.’ They really liked what they saw.
Actually out of that meeting we got our first development contract with Daimler to create an electric Smart car. This was early 2009 and to sort of paint a picture, General Motors and Chrysler we're busy going bankrupt at the time. I think if we hadn't done that Tesla would have died, because the Daimler partnership gave us credibility. They also paid us for the development program which was really helpful from a revenue standpoint, because Tesla was going to run out of money in May 2009. Daimler invested $50 million in May of 2009, which was a lifesaver. Without that investment Tesla would've been game over. That gave us the resources that we needed to get the company to moderately healthy position, and actually get us to the point that we could build Roadsters without losing money on every car.
Then they said, OK, well let's take it another step further, and they gave us a little R&D contract. Eventually it got to the point where we got the contract to supply 1,000 cars for them. That Daimler investment was a fundamental pivotal point to the survival of Tesla. It's ironic that the first company to invest was not an American company, but a German company.
There are some people out there that keep beating Tesla over the head with the DoE loan thing. It's important to appreciate what this program, which is called the Advanced Technology Vehicle Manufacturing program, was about. It was part of a program that was initiated in 2007, in boom times, that was intended to accelerate the development of energy efficient cars. In fact, the loan program under which Tesla competed for loans was actually created and signed into law by George Bush. It was executed during the Obama administration, but signed into law during the Bush administration.
Unfortunately these loans were announced right around the time that there were bailouts taking place and there was a stimulus, so people naturally confused the two which is unfortunate, but they're really quite different.
First, I should say, the loan that Tesla received did not come from stimulus funds at all. It was tax payer dollars, but it was very very different from the stimulus funds or the bailouts or anything. In fact, one of the prerequisites for being in this program was demonstrating that you were an ongoing concern independent of the loan. One of the requirements of that loan program was that you had to be a viable entity in your own right, and provide 20-30% of private capital as a matching contribution. This is why General Motors and Chrysler didn't receive any funding under this program, because it's difficult to make that argument while you're in bankruptcy. We could demonstrate viability with the Roadster.
Ford, Nissan, and Tesla did receive essentially lines of credit. But unfortunately in the media this got confused. The value of the loan was really to accelerate the progress at Tesla, not to keep Tesla alive. A few other things which are noteworthy about the ATVM loan, of course we paid interest, it was a reduced interest, but we still paid interest. We did not need the loan, but it was certainly helpful from a capital dilution standpoint. If we repaid the loan early then there was no capital dilution, but if we didn't repay the loan early then the U.S. Government got a bunch of stock warrants in Tesla. So, it was a pretty good deal. In the grand scheme of things, of all the various government deals that are done, I think this is one of the smarter ones.
The first money that Tesla got from the DoE loan was march 2010. The way the loan program worked was that there were a whole bunch of technical milestones, and product development milestones. We could only invoice for the milestones after they had been accomplished, and then Price Waterhouse would audit the financials and then we would send a request to draw down the loan in little bits and pieces. It would usually take 2 to 3 months after we actually had spent the money to receive any of the loan proceeds. Again this was fundamentally different from what happened in the Auto Bail Out, although a lot of people sort of think it's the same thing. The timing that we started receiving the DoE loan money was after Tesla was out of the danger zone. It's worth noting that of all the automotive companies got either direct government grands or been in the loan program. The DoE was there, and our competitors were using it. Ford for example I think got 4 or $5 billion, Nissan got $1.6 billion. Tesla for the Model S program got $380 million, and then $100 million for a powertrain factory to supply other companies. Fisker got I think $500 or $600 million.
Tesla was the first to pay off the DoE loan. There was actually a prepayment penalty, so you had to pay the interest plus a penalty for prepayment, because the normal loan would've been paid off in an additional 10 years. We just paid off the loan and paid the penalty, because morally it felt like the right thing to do.
This is one of the tricky things with something like car companies. There are good times and bad times, and when the economy goes south, then that's when things get really tricky for a manufacturing company. In the U.S, for example, like the only two car companies that haven't gone bankrupt in history are Ford and Tesla, that's it. Everybody else is bankrupt or went bankrupt at some point, General Motors, Chrysler, and others.
The Daimler money was crucial to the success of Tesla, although people often think that it was the US government investment that was the lifesaver for Tesla - it was not. The government loan that we got, we only received when we were actually in okay shape. Somehow a lot of people think that the federal government bailed us out or something like that, this is not true. It was the Daimler investment that saved Tesla not government funding. We were bailed out, but by Daimler not the government, they are the ones that deserve the credit. Tesla would not have been around if they had not helped out. If they hadn't come in with that investment we would definitely be gone, yeah gone. The government loan was an accelerant, but it was not life or death, but the Daimler investment was life or death.
Anyway, that was a very tough call at the end of 2008. I cannot understate the degree of grief that I have personally gone through, and that many of the people at Tesla had gone through to make it work. It was very hairy for a couple of years. We came close to not making it. We just barely made it by the skin of our teeth there in late 2007 to say the first half of 2009. I think we just made it by the skin of our teeth.