The Funding Needs of Tesla
US Tech company Tesla, was founded in 2003 by Martin Eberhard, Marc Tarpenning and current CEO, Chairman and majority shareholder Elon Musk. They set out to innovate towards a more efficient future with zero emissions through designing and producing solar and energy storage products. One example is the ‘Powerwall’; a huge rechargeable lithium battery used to meet the energy needs of homes. Furthermore, Tesla constructs innovative fully electric automobiles, such as the Tesla Model S, which have led to the company’s increasing popularity amongst consumers. This has transformed the carmaker into a market leader within the electric automobile industry, with growth rates increasing year-on-year. However, currently, investors have rising concerns about Tesla’s need to raise capital, due to the falling share price of the company amidst dozens of executives exiting the company, false promises of a share buyback and other erratic behaviours of Elon Musk spread across the internet. Investors have increasingly started shorting the company’s shares, with institutions such as Goldman Sachs stressing the need for Tesla to raise more cash due to bond maturities coming to an end, which we will go into more detail below. So, we’ll discuss the ways in which Tesla has raised money in the past via both debt and equity, and whether the markets are right in saying that it needs to raise more capital now.
Tesla’s first financing round saw Elon Musk as the controlling investor, as he invested $6.35M of his personal funds into the business in Series A financing, (the first round of financing), . Large investment also came from venture capital firm Compass Technology Partners, where venture capital refers to funds given to start-up companies by investors who have high prospects for the future growth of the business . The second round of funding in February 2005 saw Valor Equity Partners added to the list of venture capital investors, this round constituting $13M raised, with Musk still the leading investor. By round three Tesla netted serious financing totalling $40M from world-renowned institutions such as investment bank JP Morgan, tech giant Google and corporate finance advisory firm Vantage Capital Partners – although the volume of investments increased, Musk was still a co-lead investor in Series C. So far, money has come from two main streams: CEO Musk’s contribution of his own funds, and investment from venture capital firms. However, in 2008 the company began to raise money via debt financing.
Debt financing is an alternative way from equity in which companies can raise money. A firm may sell bonds, bills or notes to investors, where the original amount, (the principal), must be paid back at an agreed date in the future, as well as annual coupon payments, (a percentage of the principal amount), which are paid to investors as compensation for taking on the debt. Some advantages of raising money using debt rather than equity include the fact that lenders do not have a stake in the business and so cannot control operations with their investment, hence giving the company more freedom to operate. Also, debt interest can be deducted from the company’s tax return, therefore, lowering costs. Another key advantage is that fixed rate loans can be planned for, providing more financial stability for the company . $40.2M was raised in the first round of debt financing in 2008, nonetheless, the nature of emerging tech companies such as Tesla is that of high, rapid growth, which meant that Tesla burned through cash quickly. More money needed to be raised, which brings us to Tesla’s IPO.
In June 2010, Tesla carried out an IPO, (Initial Public Offering, where a company raises funds by allowing the public to purchase shares), via the second largest stock exchange in the world, NASDAQ, with the help of investment banks Morgan Stanley, Goldman Sachs, Deutsche Bank and J.P Morgan. This raised $226M for Tesla, selling 13,300,000 shares at the price of $17, . A huge benefit of carrying out an IPO is the ability to raise cash quickly, as a much larger number of investors can be reached.
Moving down the timeline, Tesla’s growth was not dissimilar to that of fellow technology companies – Tesla’s stock price surged a whopping 426% during 2013, climbing from 34.4 USD to 180.90 USD between January and October 2013 . This was largely due to the company exceeding expectations when it came to profits and production targets, with the carmaker having to make even more cars than forecast to meet worldwide consumer demand from regions such as Asia, not simply just in the United States. Therefore, since Tesla’s stock has seemed to perpetually increase since its beginnings, the question arises: why has its share price hit a downturn?
Trouble in the Media
Recently Tesla was put in the spotlight when Musk announced on Twitter hazy plans to take the company private at a price of $420 per share, (a premium of 20% from the current share price at the time), with 169.79M shares outstanding having “funding secured”.This led to shares in the company spiking to highs of 8.5% , (as a key advantage of privatisation for shareholders is the possibility of their shares being bought at a premium_),_hence why demand for Tesla shares increased as this deal would have been worth $71.31B. Unfortunately, this was short-lived, as soon after the credibility of Musk’s plans were questioned, with an investigation from the Securities and Exchange Commission, or ‘SEC’. Investment banks such as Morgan Stanley and Goldman Sachs removed their stock rating from Tesla, indicating that they may be involved in taking the tech giant from public ownership, however this wasn’t enough to appease the markets, which delivered a 17% drop in Tesla’s share price only one day after Musk’s cryptic series of tweets. Investors shorted Tesla’s shares, (where investors borrow shares from an incumbent shareholder to sell them, purchasing them later at a lower price), with short position holders sitting on more than $1B . Therefore, Musk’s attempt to send shares higher resulted in an aggregate reduction in share price.
Why Go Private?
One of the main reasons why Tesla would benefit from going private is that it would no longer be prone to the pressure of having to act according to the wishes of shareholders, as it would not have a public share price. Many public companies must plan operations quarter by quarter, as a large proportion of investors decide on whether to purchase shares based on quarterly performance results, which can lead to volatile rises and falls in share price, therefore going private may allow Tesla to plan for the long-term, providing better oversight.
Furthermore, a private company reduces the chance of a hostile takeover. With shares of the company currently being one of the most shorted in history, going private would flush out any big shareholders who may have plans to take ownership of the firm, as they may have different goals than the innovative visions of original founders.
On the other hand, Tesla would have less liquidity going private, (shares are less able to be bought and sold quickly without influencing the share price), which may lead to a valuation of Tesla to be difficult and the company may be mis-valued. For example, Musk’s valuation of the shares at $420 per share even disappointed some shareholders, as they believed the company to be worth even more.
Competition and the Future
Whilst Tesla is the market leader in electric cars, its potential rivals include established car manufacturers such as, Nissan, BMW and Subaru, who all have their own versions of electric automobiles. But Tesla’s key rival, Lucid Motors, an American automobile company which in fact specialises in electric cars, recently secured $1B in funding from Saudi Arabia’s sovereign wealth fund, , who in fact have a stake of up to 5% in Tesla. This may pose a threat to Tesla in the long run, due to such a significantly large investment in Lucid Motors allowing them to gain some more traction, however, Tesla is years ahead when it comes to innovation.
So, we know that Tesla is strong when it comes to electric cars, but there is still the aspect of autonomous driving which could be dangerous to Tesla in the future – the main rival being Google’s self-driving system, ‘Waymo’, as they both have access to the most data, which is essential in creating a fully autonomous car which is safe.
One thing is for sure – Tesla hasn’t reached its full potential. It’s only released three cars so far and with revenues reaching all-time highs, costs that aren’t completely out of proportion and innovative features that provide consumers with a futuristic and environmentally friendly experience in a market that doesn’t seem to be dying down anytime soon, Tesla’s journey will continue to be a success, albeit taking the road less travelled. However, with the constant shorting of its shares, it would be prudent for Tesla to raise money as a hedge for the future, even if it doesn’t not desperately need to now.