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Michael Gardon

  • Writer's pictureMichael Gardon

Is Tesla Bad?

I got into an argument, well more of a conversation about Tesla this weekend. I walked into the conversation hearing this "yeah, but they've never made a profit, and I think they are going to take a lot of people down with them."

I like profits. Having been a part of 2 venture backed company, and having raised money for high stakes, high growth companies, I've generally soured on the venture funding model. My point of view is that with venture, you lose too much control and have to make a tradeoff of "growth" (users, customers, eyeballs) for sustainability (ie my company can "make a profit" at the scale we are at).

For the vast majority of businesses, sustainable growth makes sense, fueled by reinvested profits and thoughtful external capital sources. VC makes sense in only about 2% of business cases - and it happens to be perfect for people trying to change the world.

The points I wanted to make in the conversation are that:

1. When profits start to flow is somewhat controllable, meaning companies can cut certain growth investments to show profits. However, this is not always in the best interests of creating value. I'm not certain Tesla is at this point, but all you have to do is look to other high growth companies that have decided when they will make the change to profitability through less reinvestment (FB, AMZN, AAPL, GOOG, Uber).

2. Profits are not the only societal value that gets created. Tesla has created 45,000 jobs! We now have serious performance electric vehicles that non one profitable (semi-profitable, unprofitable) auto manufacturer has done. Yes they are expensive, but they are on the downward sloping technology cost curve (especially once a scale is reached that further drives down manufacturing cost). The idea that all vehicles could become electric in the future has been proven. Even if Tesla fails miserably, the investments will have been worth it.

3. Building a new company is high stakes, and risky. Musk knows this and doesn't try to hide it. He is certain he is working on the right problems, but he is very transparent about the overall risks. I think the people that work for him understand the risks, but have coalesced around a shared mission of doing something big and important. This is hard to understand if you haven't ventured out on your own (not saying the person I was talking to hasn't - I'm not sure what he does for a living).

4. Musk puts his money where his mouth is. Incentives and alignment matter. Too many people try to take zero personal risk while gambling with other people's money (Wall Street, executives that come in to "grow" established businesses). I've learned to avoid people who have a "skin in the game" problem, and to back people who are extraordinarily invested and at personal risk. Musk has put virtually his entire net worth from Paypal on the line into both Tesla and SpaceX. He's lived on friends couches during the almost collapse of both companies. No one has put more of their net worth on the line for their companies.

I've backed companies where founders are first money in, last money out. I've had some successes and some failures, but at the end of the day we are always in it together, operating from the same place, under the same incentives toward a common goal. Musk might fail, but I'll go down with a true, invested believer any day of the week.

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