Tactics And Lessons Learned From Elon Musks Investments
Tactics And Lessons Learned From Elon Musks Investments
Key Highlights
Career History * After dropping out of Stanford in 1995, Musk started Zip2 with his brother Kimbal using $28,000 borrowed from their father. In 1999 it sold to Compaq for $307 million, with Musk earning $22 million.
* Musk invested $10 million of his Zip2 proceeds into founding X.com, one of the first attempts at online banking. It later merged with Peter Thiel’s Confinity and became PayPal in 2000. After IPOing in 2002 it was sold to eBay the same year, Musk made $180 million from the sale.
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* Post-PayPal, Musk invested all of his proceeds into his new projects: SpaceX ($100 million), Tesla ($70 million) and SolarCity ($10 million). By 2008, he was almost penniless and living on $200 thousand monthly loans from his friends after a $20 million divorce.
* By 2017, his fortunes had changed and his net worth had risen to $16 billion; just six years earlier, it was only $68 million.
Goes All-In with His Businesses * After being outmaneuvered in the boardroom at Zip2 and PayPal, Musk began to take more of an iron grip with managing his companies. At Tesla in 2007, he converted $8 million of preference stock to weaker common stock just to oust its CEO.
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* Aside from small angel investments, he avoided cashing out of his businesses at opportunistic or exit stage moments and maintained large ownership percentages. His proceeds from Tesla’s IPO were only $15 million.
* Musk has personally borrowed over $620 million that he has used to purchase more stock in his companies. In 2013, he drew down a personal loan to buy stock and help Tesla pay off one of its own loans.
Creates Ecosystems around Himself * Investing within his network has provided Musk with a successful angel investing record. He made a $90 million return from DeepMind and only one of his investments has been a total loss: Halcyon Molecular in 2012.
* Over his career, he has been involved in four businesses with his brother Kimbal and two with his cousin, Lyndon Rive.
* His businesses regularly cross paths and transact with each other. SpaceX has purchased over $250 million of SolarCity’s bonds and Musk has personally bought $65 million. These kinds of links were a worry for investors during the Tesla and SolarCity merger.
Creative Financing Methods * By 2015, Musk’s businesses and their customers had benefited from $4.9 billion in savings from government subsidies. The benefit split between the two was 70% and 30% respectively.
* Within the aforementioned benefits were $517 million in Zero Emission Vehicle credit allowances that Tesla sold to rival automotive producers. This allowed Tesla to boost revenue at opportune times.
* A $1.6 billion contract from NASA in 2008 helped stave off bankruptcy at SpaceX.
A dilettante, or a brave maverick? * Musk’s hands-on and all-encompassing roles have led to cries of poor corporate governance within his businesses. This issue was raised by a group of Tesla shareholders in a 2017 letter to him.
* Capitol Hill lawmakers have also raised concerns about federal money paid to SpaceX being used to inadvertently prop up SolarCity.
* Dissention was once again abruptly quieted on a May 2018 earnings call when Musk stopped taking questions from Wall Street analysts on "shorter-term" issues like Model 3 production and cash flow in favor of questions from a retail investor more interested in the bigger picture.
Since founding Zip2 23 years ago, Elon Musk has gone on to start another two businesses and invest in countless others. He is one of the most admired leaders in the world, gaining respect for the ambitious nature of his activities and sheer dedication towards ensuring that they succeed.
His endeavors naturally receive a lot of press, and countless armchair analysts pore over the viability of self-driving cars or if mankind can colonize Mars. In this article, I am going to leave those pontifications aside and purely focus on Musk the investor. What are the tactics and game plans that he follows when funding his companies—or, indeed, other people’s companies? What are the lessons we can learn from his investment track record and success? If you are interested in a deeper look into his background and the companies that he is involved in, I highly recommend Tim Urban’s writings on Musk and his businesses.
To do this, I will first lay out the career of Elon Musk’s investments and entrepreneurial activities from a high-level perspective, and then review the trends and tactics that he has followed. In researching this, I found that Musk clearly learns from his mistakes and experiences, adapting his future actions thereafter.
Phase 1. Musk the Early-stage Entrepreneur
After dropping out of Stanford in 1995, Musk founded Zip2 with his brother Kimbal using $28,000 borrowed from their father. It was intended to be an online consumer version of the Yellow Pages linked to mapping visuals. After VC Mohr Davidow later invested $3 million, Musk was relegated to the role of CTO and the business pivoted towards a B2B offering aimed at newspapers. With his ownership diluted to 7%, his influence waned over the direction of the business and eventually in 1999 it sold to Compaq for $307 million; Musk earned $22 million from the deal.
In November of the same year, Musk invested $10 million of his Zip2 proceeds into founding X.com, one of the first attempts at online banking. In March of 2000, it merged with Peter Thiel’s Confinity platform, which was its major competitor at the time. Later that year, Musk was again ousted as CEO, this time by Thiel (but he remained on the board) and the business rebranded to the now ubiquitous PayPal in 2001. By February of 2002, the business had IPOed, but then eight months later it was bought by eBay for $1.5 billion and Musk pocketed $180 million from the sale.
Phase 2. Musk the Multi-tasker
With a batting average of 1.000 from successful startups, you would have expected Musk to perhaps take a step back after the PayPal sale. Instead he entered into a grueling phase of his career which can be characterized by the running of a string of concurrent entrepreneurial ventures.
As with X.com, he didn’t waste any time after the PayPal sale and he established SpaceX in the same year. In April 2004, Musk first dipped his toes into the world of Tesla through a $6.35 million investment in its Series A round. At this point in time, he was also continually investing into the formation of SpaceX and he was following on in future funding rounds of Tesla with rising largesse and frequency. Despite not “founding” Tesla, his influence rose continuously, stemming from his invaluable operational and financial input.
Moving on to 2006, following Musk’s suggestion and encouragement, his cousins Peter and Lyndon Rive established SolarCity. Musk invested seed capital into the business and assumed the role of chairman. He followed on in three more subsequent rounds between 2007 and 2012. was a nadir for Musk and potentially the most pivotal point of his career. He was fighting on three fronts to build companies with significant scope and ambition. From a liquidity perspective, his situation reached a flashpoint, with the seemingly infinite PayPal money now reaching its end. A divorce from his first wife also added a $20 million bill that year. Through loans from friends, Musk managed to continue on his course and some unexpected gifts arrived via the first proceeds from his angel investing portfolio (Everdream and Game Trust).
Tesla’s IPO in 2010 marked the end of this era and allowed Musk to consolidate financially and move onwards with his evolving strategy.
Phase 3. Musk the Conglomerator
With Tesla starting to turn the corner, now was the turn of SpaceX, which began to get positive traction through successful trials and contracts. The realms of his three companies began to slowly intertwine, in terms of deals between them and their common narrative of forging a sustainable future for mankind. Indeed, despite IPOing in 2012, four years later SolarCity merged with Tesla, with the apparent synergies and vertical integration opportunities receiving blessing from 85% of shareholders.
In this period, Musk’s angel investing took a turn towards AI and biotech focused startups. He parlayed a significant return of $92 million from an investment in DeepMind (bought by Google) and made other investments into the sectors via Halcyon Molecular, Vicarious, and NeuroVigil between 2010 and the present day.
His net worth during this period grew exponentially, from