In the long run the value of a company is defined by the value of its products and services. That’s real important to bear in mind it’s why companies exist, they shouldn’t exist otherwise. The value of the company will follow the value of the products. A company that starts making lousy products is pretty soon going to have a lousy valuation, and a product company that makes great products is pretty soon going to have a great valuation, because that’s how the system is set up and that’s how it should be set up. If the output is more valuable than the input, that's profit, that says you have a useful company.
In a high-growth scenario you have a lot more inputs for future outputs so you have negative cash flow and lack of profitability, but in the long run of course that has to be fixed. There can't be negative cash flow in the long period. There needs to be a net positive output. The real question on profitability is where do we set the dial on growth? and obviously, if you set the dial on growth to be super high, then you face dilution because of that increased capital. If you set it too low there's less dilution but then you grow slower. So you want to set it at the right level, the right mix of dilution and growth. I mean, as it is, it's just important to bear in mind, like as a manufacturing company, our percentage growth I think it's unprecedented in the modern era. It's really nutty.
I try to spend as much on R&D as we can, so we really max out R&D. Any money that we get in revenue we put that right back in R&D. And some of it is longer-term, like for example the Mars vehicle and doing some Mars communication stuff with NASA. For Tesla we do have the option of slowing down our investment in R&D and be profitable, but I think it's more important that we try to increase production and bring more affordable electric cars to market, even if that means that we are not profitable in the short to medium term. We have certainly chosen the path of high growth over the path of profitability.
One thing I should point out is Tesla does not have any special ownership class. There is only one class of common stock for Tesla. I personally only own like 20 or 25% of it so there is an easy remedy if the shareholders don't like me. They can just fire me. I would encourage them to fire me if they think I'm doing a bad job.
It kind of sucks running a public company. The stock goes through these huge gyrations for seemingly arbitrary reasons, and then I get asked why it has changed, and I'm like I have no idea. I think it's a big distraction actually. The market is like a manic depressive, I mean one day it's super great and then it's negative - it's not like the underlying fundamentals of Tesla change that much, but the instantaneous price changes a huge amount. It's very confusing I'll say things that I think if people understand what I'm saying the stock should go up, but it goes down, like what the hell? and vice versa.
I think it's actually quite distracting to have public stock and the time to go public, ideally, is when things are fairly stable. The world economy will move in cycles and we'll have recession and boom and bust times. I think generally one should always expect there's going to be a boom and a bust period in economies, and in recession times everything seems gloomy, and in boomy times everything seems amazing, but really it's kind of a sine wave.
In terms of going public the important thing is that the expectations of the public shareholders are not too far from what the goals of the company are. The reason I haven't taken SpaceX public is because the goals of SpaceX are very long term, which is to establish a city on Mars. That is outside of the timeframe of an analyst on Wall Street. That means there would be too much of a tension between the timeframe of the analysts and investors on Wall Street compared to the timeframe of the company. That's why I am hesitant to take SpaceX public. I think we won't take SpaceX public for a very long time. What I've said is: when we're doing regular flights to Mars, that might be a good time to go public. Before then, because the long term goals of SpaceX are really long term, like - it takes a long time to build a city on Mars - that doesn't match with the short term timeframe of public shareholders and portfolio managers that are looking at the sort of two to four year time horizon. I think we'll need to hold off going public for a while. Now, that said, what we do do is we do offer stock options, and restricted stock, and we do liquidity events every six months. We have the company valued by an outside firm every six months and we will do stock buybacks every six months. It sort of, I think, gets the best of both worlds where you have stock liquidity but you don't have the massive fluctuations that you have with a public company at any given week - like, for example with Tesla. The feedback cycle in the stock market tends to be quarterly and maybe they can handle a few years max. If you're talking about something really long term like the city on Mars, and you end up sacrificing profitability for a very long time in order to get there, and build the technology in order to do so, I think it would be not super loved by the market. In the case of Tesla and SolarCity, we had to raise capital and we had kind of a complex equity structure that needed to be resolved by going public and I thought we kinda needed to do that in those two cases. We don't have to do that at SpaceX. I think there's a good chance that we will at some point in the future, but SpaceX's objectives are super long term and the market is not. I expect SpaceX to go public once we have regular flights to Mars, maybe twenty years from now or something like that.
These days, the last few years, is really when Tesla's achieved a level where it's not facing imminent death. Even as recently as early 2013, we were operating with maybe one to two weeks of money. The stock price reflects a lot of optimism on where Tesla will be in the future. The thing that makes that quite a difficult emotional hardship for me is that those expectations sometimes get out of control. I wouldn't recommend anyone start a car company, it’s not a recipe for happiness and freedom. I find it quite tough when there are high expectations. I try to tamp down those expectations to a degree possible. I've gone on record several times saying that the stock price is higher than we have any right to deserve.
I hate disappointing people so I’m trying really hard to meet those expectations. It is a pretty tall order, and a lot of times really not fun, I have to say. A whole lot less fun than it may seem.
I’ll never sell any stock unless I have to for taxes. I’ve said publicly I'm not going to take money of the table — I'm going down with the ship. Every bit of money that we make -- we don't issue dividends, we don't have high salaries -- my salary is one dollar a year -- I spend it well -- I do have shares, but I don't sell them. In fact I promised I’ll be the last one to sell shares. Yeah, captains should go down with the ship, hopefully it's -- wait a second -- the captain should be the last one to comfortably exit the ship.
I think sometimes people over estimate the enjoyment that money can bring. Buying a lot of things is not necessarily the thing that leads to happiness. Certainly being incrementally wealthy does make one incrementally happy. At least for me it's like what am I doing that's useful, what's are my efforts making the world a little bit better. I like to build things, I like to construct and evaluate if it's based on what things have I helped to build that people have enjoyed. That's the main thing.
Not personally being motivated by money is not the same as saying SpaceX shouldn't make money, in fact it's really important that SpaceX should be profitable because we got to earn the money necessary for future developments. I want to continue the path of establishing a self sustaining city on Mars I think that is an important thing that needs to happen, and also sustainable energy and sustainable transport. Then education and pediatric healthcare those are the areas essentially where all my money is going.
I'm not sure about the whole family dynasty thing from a wealth standpoint. That seems to often work out worse then if the kid wasn't given a large amount of money. Unless they actually demonstrated that they have a high ability to be a good steward of the capital then it's not gonna work out I think to give them a huge sum of money. I'm wavering a little bit on that because for example Ford and GM, GM went bankrupt and Ford did not because it had the Ford family as a stabilizing influence. There could be some merit to having a family stabilizing influence but maybe not necessarily complete control. I was actually, at one point, of the school of thought that it's best to give away 99% of one's assets - kind of like the Buffet school of thought - I'm still mostly inclined in that direction, but after seeing what happened with Ford and GM and Chrysler where GM and Chrysler went bankrupt but Ford did not, and Ford seemed to make better long term choices than the other two companies, and that's in-part because of the influence of the Ford family. I thought, well, maybe there is some merit in having some longer term family ownership, at least a portion of it, so it acts as a positive influence. I mean, this is something I'm still thinking about, but acting as a positive influence in the long term so the company does proper long term things. Look at what happened, also, in Silicon Valley with HP and I think it's quite sad, and that to some degree is because there was much diminished influence by the Hewlett and Packard families. I think they should have prevailed when they were opposed to the merger that took place at one point, and I think they were right actually.
People sometimes think I am a venture capitalist, but actually I am... uhh, I am an engineer. When I apply capital it is to my own companies, and occasionally to the companies of close friends of mine, where I do zero due diligence and I just basically invest on the basis that I think they're good and likely to succeed. So I'm not the guy to pitch on ideas to be funded, it’s better to pitch a venture capitalist. One thing that's important if you have a choice between a lower valuation with someone you really like, or a higher valuation with someone you have a question mark about, take the lower valuation. It's better to have a higher-quality venture capitalist who will be great to work with then one that is a question mark really. It's somewhat like getting married, even though I'm not really good at that.
I think it's worth investing your own capital in something that you believe in. I don't believe in sort of the ‘using other peoples money’ thing. I'm a big believer in you don't ask investors to invest their money if you're not prepared to invest your own money. I really believe in the opposite philosophy of other peoples money, it doesn't seem right to me that if you ask other people to invest that you shouldn't also invest. I think if you're not willing to put your own assets at stake then you shouldn't ask other people to do that. I'm always incredibly grateful for anyone who is an investor in Tesla, and you put your faith in us. We will do whatever is necessary to reward that faith.
I think the true strength of Tesla will be decided by its pace of innovation. I think as a combined automotive and power storage and power generation company the potential is there for Tesla to be a $1 trillion company, market cap company. If we play a major role in transitioning the world to a new form of energy generation, and storage, and transport it’s what kind of happens.
I think that true competitive advantage on the technology front is more about your rates of innovation then it is to the degree you are slowing others down. Also you see a lot of these very big companies in these big patent battles, like Apple and Samsung and like who is really winning there? the lawyers honestly. Tesla made all the patents open and SolarCity went actually even a step further than that, which is they made their technology available to developing countries, and offering to have people come from those countries and sit in the factory and see how it is done.
I don't like patents personally. When I first started out developing technology I got a lot of patents, and I thought this was a good thing. Then I discovered that a patent is just a lottery ticket to a lawsuit. You look at sort of Apple and Samsung, is it really winning there? the lawyers a winning certainly, but neither of the two companies.
In the case of Tesla I thought would Tesla ever sue some other car company if they were using our patents, and try to make them stop making electric cars? we would never do such a thing, so why pretend that we would? Maybe it generated some goodwill, and maybe the goodwill is helpful.
Sometimes I think people think we open sourced our patents because there was some competitive reason that it would somehow be helpful to Tesla because more people would enter electric cars, and it would somehow be a rising tide lifts all boats.
I think the outsourcing of our patents does slightly impair our competitive position on balance, but I am hopeful that it generates enough goodwill to overcome that competitive impairment.
The reason for open sourcing our patents or essentially making them available to anyone who wants to use them is to help encourage the advent of electric vehicles, and just sort of be a good neighbor. I think it's extremely important to the world that we accelerate the advent of sustainable transport. I don't want Tesla to do anything that would slow it down, so any company in China or elsewhere can use our patents to create electric vehicles. Now this may turn out in the future people may look back on it and say well this was a pretty foolish decision, and now you got your butt kicked. That may be the case, in which case well damn, but the more important thing is really the acceleration of electric vehicles. Hopefully our patents can be of some use to some companies, and do some good, and encourage more electric vehicles. That's really the only reason we did it, and I hope it doesn't turn out to be a dumb decision. I think the most important thing is to keep innovating. All pattens really do is they slow down competitors. It's like if you're a ship and you're dropping mines behind your ship to slow down the other ships, and we don't want to drop the mines.
If there's anything that Tesla can do that's helpful and doesn't distract us from making cars, then we're happy to do that. I mean, we'd be happy to share information with our competitors that would help improve safety. We'd be happy to do so.
We don't think too much about what competitors are doing, because I think it's important to be just focused on making the best possible product, how do we make the best car. I don't really think about competitors all that much. I think it's sort of analogous to when you are running a race, don't look at the one who is running the race with you, just focus on getting to the finish line. Don't worry about what the other runners are doing. Just run.
I think that's probably a good philosophy, we just take the approach we want to make the best possible car we can and then the chips fall where they may. If the results of our work are good, if they are competitive then the company will succeed, and if not we will not. We don't try to say how will we compete from a strategic standpoint against the future products developments of other car companies. We just say let this be a great electric car and how can we make this as great as possible.
We're just trying to move the industry towards electrification faster than it might otherwise go, and we're certainly quite pleased whenever there's any announcement about another manufacturer producing electric cars. The overarching goal of Tesla is to get the industry to move towards electrification - competition or not - whether we do that with our own cars or with cars that we help other people make.
I think for a lot of people in the auto industry it is not clear that the economics work for electric cars. It is a new technology architecture, and usually in the car industry things don't change that much technologically relative to let's say consumer electronics. I think for a lot of the carmakers they are uncertain about the demand for electric cars, so you get kind of a chicken and egg problem.
I think it's good that some of the big car companies are worried about Tesla, because that will make them more likely to create electric cars. Generally we found working with the other car companies that the motivations are not great. They seem to want to do the least amount of electric vehicles required by law. That is generally the case. The conclusion I've come to with respect to the big car companies, because I was wondering why they are not making more electric cars? why don't they make it a mainstream effort? all they seem to be doing is the minimum to comply with government regulation, and then because they're so powerful they can influence the government regulation to be very weak, so that does not result in change. There seem to be only two things that will drive the other car companies to go with sustainable vehicles. Those two things are government regulation and competitive pressure. The government regulation is relatively weak in this regard, so they will do the least number of electric cars necessary to fulfill the government regulation, and because they are big car companies they are very strong in influencing government. Their lobbying power, in the US in particular, is very strong. My conclusion and the rest of the Tesla team conclusion is that the thing that will get them go electric is competitive pressure. The only way to get them to take electric cars seriously is for them to conclude that if they don't take it seriously that Tesla will take their customers. Competitive pressure I think is the only thing that will get the big car companies to make electric cars. Our goal at Tesla is not to take away their customers, but if we don't compete with them, and they don't see that there's a risk to their future if they don't make electric cars, then they won't make electric cars. If they think if they don't go electric they will go out of business, then they'll go electric. Again in terms of the effect that Tesla will have is much more on the behavior that we will induce in other car companies rather then the cars we make ourselves. I think we will make probably in the end only a small percentage of the cars, but will induce the rest of the car industry to make electric cars.
I think almost every automaker has some electric vehicle program. They vary in seriousness, some are very serious about transitioning entirely to electric, and some are just dabbling in it, like hybrids. Hybrids are sort of like amphibian, there was a role for amphibians when life was moving from the oceans to land, but in the end very few amphibians remained. Some, amazingly, are still pursuing fuel cells, but I think that won't last much longer.
Electric motors in general have very high life times, the electric motor of let's say the air-conditioner runs continuously for years and years and years. So generally for the power train it should have a longer life than a gasoline power train because it doesn't have all the wear and tear of the heat, and the oil, and the burning cylinder, and that kind of stuff.
I think it's great what Nissan is doing with the Leaf, what GM is doing with the Volt, what Daimler is doing with the electric Mercedes. Well, I guess they're competition in a sense, but pretty indirectly. It's such a huge market.
As long as there's competition, competition is good for innovation. Ideally you'd want an industry where there's at least three or four entities competing. That, I think, tends to lead to the best level of innovation because any company that sort of stays stationary with their technology will be exceeded by their competitors. Some of them do take swipes I suppose that's natural for competitors. I think the truth wins out in the end, particularly these days with the Internet. People are able to search and compare and with five minutes of research you can get to the truth very quickly.
Our strategy is that the other car companies copy Tesla. I think companies like Apple would probably make a compelling electric car, it seems like the obvious thing to do. It is an open secret. It's pretty hard to hide something if you hire over 1000 engineers to do it. I hope we are surrounded by electric cars from other manufacturers. I really look forward to the day when every car on the road is electric. That's the goal, we want to make that happen. That is the Holy Grail, and we're trying to get there as fast as we can.