On April 2, 2017, Elon Musk announced that Tesla produced 25,000cars in the first quarter, setting a new company record.1Within twoweeks, Tesla’s market value zoomed past Ford Motor Company (whichmanufactured more than 1.5 million cars per quarter) and GeneralMotors (which made more than 2.5 million cars per quarter) tobecome the most valuable U.S. car manufacturer.2Elon Musk used theoccasion to needle his naysayers, writing on Twitter: “Stormyweather in Shortville.”3By most measures, Elon Musk was on a roll:Beyond promising to scale Tesla by a factor of 10 between 2015 and2018, Musk was vowing to deliver fully autonomous driving and anautomated car-sharing service.4To support hisaggressive plans,Tesla was constructing a giant battery factory in the desertoutside Reno, Nevada. Everything about the factory was massive:when complete, it would be the largest building in the world.5Thisso-called “Gigafactory”would require $5 billion in investment andwould ultimately produce 105 gigawatt hours (GWh) of battery cellsper year, more than the entire capacity of the world’sli-ion(lithium ion) production in 2015.6Musk also wanted to turnTesla into a renewable energy company.In the fall of 2016, Muskmade another big bet by orchestrating Tesla’s acquisition of therooftop solar installerSolarCity, where Musk was the chairman andlargest shareholder. While the automotiveand solar businesses werestarkly different, Musk insisted that they were part of Tesla’sgoal of “accelerating the advent of sustainable energy.”7TheGigafactory plus SolarCity would transform Tesla from an automakerinto what Musk called the “world’s only vertically integratedenergy company offering end-to-end clean energy products to ourcustomers.”8In his spare time, Musk wasalso the CEO of thecommercial space flight company SpaceX. Musk insistedthat SpaceXwould begin transporting people to Marsby 2025, achieving hisstated goal of making humanity a “multiplanetaryspecies.”9Transforming transportation, pushing forward renewableenergy generation and storage, and colonizing Mars: such was thescope of Musk’s ambition. Little wonder that a former colleaguesaid that “Elon thinks bigger than just about anyone else I’ve evermet.”10Even though Tesla and SolarCity were unprofitableand burningcash, for Musk the question was always: what’s next? For Musk’sboard and shareholders, the question was different: was Musk, ashis biographer put it, “a being sent from the future to savemankind from itself or a slick businessman dragging foolishinvestors along on grand cash-burning bets?”11This document isauthorized for use only by Alex Waterman ([email protected]).Copying or posting is an infringement of copyright. Please contact[email protected] or 800-988-0886 for additionalcopies. 717-431Elon Musk’s Big Bets2Elon Musk’s VenturesElon Muskwas born and raised in South Africa, and made his way to Canada in1989 at the age of 17. Staying with relatives and working odd jobs,Musk enrolled in Queen’s University in Ontario and then transferredto the University of Pennsylvania, where he earned degrees ineconomics and physics. He began a PhD program in applied physics atStanford, but dropped out in 1995 to start an online map anddirectory firm called Zip2 with his brother. They sold the companyto Compaq for $300 million in 1999. Musk used the money from thesale to launch another startup called X.com, an online bank. In2000, X.com merged with Confinity, another startup,which ran amoney transfer service called PayPal. The combined firm took thename PayPal in 2001 with Musk as the CEO and largest shareholderuntil the firm was sold to eBay for $1.5 billion in 2002. SpaceXNotcontent with founding and selling two successful startups, Muskfounded Space Exploration Technologies, better known as SpaceX, in2002. He told a reporter in 2003 that “I like to be involved inthings that change the world. The Internet did, and space willprobably be more responsible for changing the world than anythingelse.”12Reaching Mars was the long-term goal, and Musk claimed in2012 to be on track to get a manned spacecraft to Mars in 10–15years. In the shortterm, however, SpaceX concentrated on thecommercialization of near-Earth exploration.13Musk invested some$100 million of his own money in SpaceX and nearly lost it all whenSpaceX struggled to achieve a successful test launch of its firstrocket. By 2006, SpaceX had won contracts to take commercial andNASA satellites into space despite not yet launching a rocket. Itsfirst three launch attempts ended in failure. By September 2008,SpaceX was on the brink of collapse. As a colleague recalled,“Everything hinged on that launch. Elon had lost all his money, butthis was more thanhis fortune at stake—it was hiscredibility.”14The launch succeeded, however. Then, in July2009,SpaceX had its first successful paying mission.15In May 2012,SpaceXbecame the first commercial firm to successfully dock avehicle with the International Space Station (ISS), and later thatyear it delivered its first load of cargo to the ISS.16In late2013, SpaceX carried out its first successful launch of acommercial satellite. SpaceX achieved another milestone inDecember2015, when it successfully landed a rocket afterlaunch.Musk saw reusable rockets as an essential step toward makingspaceflight truly affordable. SpaceX executives estimated thatreusing rockets could cut its launch prices by 30%, from around $61million to $43 million per launch.17SpaceX advanced further towardthis goal in March 2017, when it successfully launched and landed apreviously flown Falcon 9 rocket. Elon Musk was not the onlyhigh-profile technology entrepreneur to pursue ventures in space.Amazon founder and CEO Jeff Bezos, the second-richest person onEarth, founded spaceflight company Blue Origin, which directlycompeted with SpaceX. In November 2015, Blue Origin was the firstcompany in history to successfully launch and land a rocket duringa mission to space, proving to the world that reusable rockettechnology could work.18As of March 2017, Blue Origin was focusedon launching its first crewed flight into space and building heavylift rockets to further compete with SpaceX. In order to ensure thecompany had enough money to accomplish its goals, Bezos pledged tosell $1 billion of his Amazon stock each year to finance BlueOrigin.19Despite these successes, launching rockets into spaceremained a risky activity, and SpaceX had lost a few rockets andpayloads over the years. On September 1, 2016, a SpaceX rocketexploded on the launch pad at Cape Canaveral. While no one washurt, the loss was a particularly high-profile one This document isauthorized for use only by Alex Waterman ([email protected]).Copying or posting is an infringement of copyright. Please contact[email protected] or 800-988-0886 for additionalcopies. Elon Musk’s Big Bets717-4313because the satellite on boardwas to be used as a part of Facebook’s effort to bring Internetaccess to regions of Africa, the Middle East, and Europe.Suchsetbacks had a significant financial impact on SpaceX: in 2015,SpaceX’s revenue declined 6% after multipleyears of strong growth,and the company recorded a wide operating loss of $260 millionfollowing multiple years of small but positive operating income(see Exhibit 1). An early 2015 funding round valued SpaceXatapproximately $12 billion, making it oneof the most valuableventure-backed private companies in the world.20Meanwhile, therevenue generated by SpaceX’s success in near-Earth missionsprovided the capital to continue working toward the ultimate goalof regular space travel to Mars.While SpaceX sought to addressMusk’s dreams in the stars, he also had great ambitions forrevolutionizing travel on and under the Earth’s surface. TheHyperloop, The Boring Company, and Neuralink In August 2013, Muskannounced his idea for yet another revolutionary mode oftransportation, dubbed the Hyperloop, which Musk claimed would be afaster and cheaper replacement for high-speed rail. Inspired bypneumatic tubes once used to shuttle documents around offices, itwould transport passengers at speeds of more than 700 miles perhour in pods enclosed in underground steel tubes under near-vacuumconditions. Given his other obligations, Musk did not attempt tocommercialize the idea, but published an open-source white paperdescribing the technology. A few startups picked up the idea andbegan developing the technology. One of them, a firm calledHyperloop One, held a demonstration in the Nevada desert in thespring of 2016, propelling a sled one-half mile down a test trackat speeds of over 300 miles per hour. The startup had raised $150million for the venture through January 2017.21At the end of 2016,Musk tweeted the launch of a Hyperloop-like venture called TheBoring Company, which would build underground tunnels to combattraffic. Days after the tweet, he boughtthe websiteBoringCompany.com and staffed a SpaceX engineer to oversee the newventure.22Finally, in the spring of 2017, Musk started yet anothercompany, called Neuralink, which sought to merge the human brainwith computers. Musk planned to be CEO of both new startups.TeslaAlthough Elon Musk was the face of Tesla, he was not one ofits founders. The company was started in 2003 by Silicon Valleyengineers with the goal of producing a high-performance electricsports car. Musk joined the company in 2004 (two years afterlaunching SpaceX) as its chairman and led its fundraising efforts,which netted $7.5 million in its first round. Musk became CEO in2008, by which time he had invested $55 million of his own money.The company raised $260million in its 2010 IPO, the first Americancar company to go public since Ford in 1956.23At the end of 2016,Musk remained the largest shareholder in Tesla with a 20.8%ownership stake in the company. By March 2017, Tesla had raisedover $9.3 billion in financing (see Exhibit 2a). Musk articulated agrand vision for Tesla and the broader electrical vehicle (EV)industry as the key to sustainable transportation, in the contextof the looming disaster of climate change. As he put it in 2011,“[I]n order to change the infrastructure such that we avoid havingsome sort of catastrophic situation [acentury from now], we mustact now, because we’re talking about changing what will probably be2 billion cars. You don’t just change that overnight. A wholeindustry has to be born.”24Musk saw Tesla’s role as bringing thatindustry into being, with the long-term goal of creating anaffordable electric vehicle. Because the cost of electric vehicletechnology, particularly battery technology, did not permit theconstruction of an appealing mass-market electric car in the early2000s, Tesla and Musk decided to enter the market at the high endand move down-market over time. Musk, tongue-in-cheek, revealedThis document is authorized for use only by Alex Waterman([email protected]). Copying or posting is an infringement ofcopyright. Please contact [email protected] or800-988-0886 for additional copies. 717-431Elon Musk’s BigBets4Tesla’s “secret plan”in 2006: “1. Build sports car; 2. Usethat money to build an affordable car; 3. Use thatmoney to build aneven more affordable car.”25True to the plan, Tesla’s firstproduction vehicle, released in 2008, was a high-performance andhigh-priced sports car called the Roadster. Tesla only manufactured2,500Roadsters,but it demonstrated that an electric car coulddeliver superior performance. The 300 horsepower Roadster went from0to 60 in 3.7 seconds, had a top speed of 125 mph, and sold forabout $110,000 in 2009. Tesla’s next vehicle was a luxuryperformance sedan called the Model S that was released in 2012 anddesigned to compete withMercedes, BMW, and Audi. It was pricedstarting at $70,000, although optional features (such as a largerbattery to provide longer range) could push the price well past$100,000. While not by any means a truly “affordable”car, totalModel S sales rose from under 5,000 in 2012 to150,000 by September2016.26Initial reviews for the Model S were very positive. In 2013,Consumer Reportsgave the first model its highest rating ever, a 99out of 100, and Motor Trendnamed the Model S its Car of the Year.Two years later,Consumer Reports gave an all-wheel-drive version ofthe Model S a score of 103 out of 100 for its combination of powerand efficiency, prompting itto rescale itsscoring systemto bringthe Model S down to a perfect 100. Surprisingly, reliabilityproblems with the Model S led Consumer Reportsto revoke itsrecommendation in late 2015, citing “a worse-than-average overallproblem rate”based on a survey of 1,400 Model S owners.27Tesla’sreputation suffered a further blow when threeTesla vehicles weredamaged by battery fires in 2013, caused when the battery pack,which was installed in the car’s undercarriage, was damaged bystriking roadway debris. Although no one was hurt in the accidentsand Tesla pointed out that fires happenedat a far higher rate ingasoline-powered cars, the fires raised potentially damagingconcerns about battery safety. Tesla’s stock fell nearly 4% on thenews,and the National Highway Traffic Safety Administration (NHTSA)opened an investigation. In response, Tesla announced in early 2014that it would modify the Model S to raise its ground clearance athighway speeds and that it would reinforce the vehicle’s underbodyarmor in order, in Musk’s words, “to bring this risk down tovirtually zero.”28The NHTSA subsequently closed its investigation,saying that “a defect trend has not been identified.”29Safetyconcerns were renewed, however, when a Model S caught fire whilecharging at a supercharger in Norway in January 2016, completelydestroying the vehicle. Tesla, which ultimately traced the cause toa short circuit, insisted this was an isolated incident and pointedout that vehicles had been charged at supercharging stations 2.5million times without incident. Norwegian officials concluded thatit represented an isolated event.30Tesla released its next vehicle,an SUV called the Model X, in late 2015, and it had sold anddelivered about 37,000of the vehicles by March 2017.31Like theModel S, it received rave reviews for its performance, but alsofaced quality issues in the early months after its release,including problems with the vehicle’s unique falcon-wing rear doorsand, more seriously, a faulty seat latch that in some cases allowedthe rear seats to fold forward during a collision, which led toarecall of 2,700 vehicles in 2016.32Shortly after the launch of theModel X, Tesla announced the availability of a package ofself-driving features, which it called “Autopilot.”The system usedcameras, radar, GPS, and other sensors to provide semi-autonomoushighway driving, keeping the car in its lane, changing lanes whennecessary, and maintaining a safe following distance.Musk and Tesladescribed the system as a “public beta,”recommending that driverskeep their hands on the wheel and remain alert and readyto takecontrol at all times. It soon became clear that drivers were notheeding such warnings, posting videos of themselves reading orwatching videos while letting the car drive itself.33In May 2016, aTesla driver was killed while driving in Autopilot mode whenneither the car’s sensors nor the driver detected a tractor-trailercrossing the highway and the vehicle collided at full speed withthe trailer. The Tesla driver was reportedly watching a movie atthe time of the crash.34Tesla responded by releasing This documentis authorized for use only by Alex Waterman ([email protected]).Copying or posting is an infringement of copyright. Please contact[email protected] or 800-988-0886 for additionalcopies. 717-431Elon Musk’s Big Bets102016, it had a range certifiedby the EPA at 238 miles and an estimated sale price of about$37,500.87In 2015, Audi, Mercedes, and Porsche announced plans forelectric luxury vehicles that would compete with the Model S andModel X.88EV manufacturers faced unavoidable trade-offs betweencost and rangeof batteries. Tesla had, with the Model S and ModelX, chosen to maximize range by equipping them with a largebattery:a 70 kWh or 85 kWh battery delivered an EPA-estimated rangeof 240 to 265 miles,respectively, on a single charge. In 2016,Tesla announced the availability of 100 kWh battery packs for bothvehicles, pushing the estimated range of the Model S over 300miles.89But that range came at a cost: the size of the batterycontributed heavily to the vehicles’price, which could be as highas $135,000. Other manufacturers had opted to sacrifice range tocut costs. Nissan’s Leaf, for example, originally came with a24-kWhbattery that gave the car a range of 84 miles per charge, whileBMW’s i3 had a 22-kWh battery that delivered a range of 81miles.90Offerings from Volkswagen and Mercedes similarly hadsmaller batteries with ranges between 70 and 90 miles. Tesla andother automakers partnered with major technology companies,including NEC, LG Chem, Samsung SDI, and Panasonic, to supplybattery technology for their vehicles. Early in its history, Teslahad made the choice to construct its battery from existingindustrial-grade li-ioncells manufactured by Panasonic, rather thanbuild or outsource a battery specially designed for its vehicle, asother EV manufacturers had done. The form factor cells used byTesla were slightly larger than an AA battery and were commonlyused in consumer electronics. Tesla worked with Panasonic tooptimize the cells for its vehicles.Energy StorageIn addition toelectric vehicles, energy storage for residential, business, andutility use was a major potential market for battery technology.The widespread adoption of renewable energy sources such as windand solar would require significant increases in storage capacity.Falling renewable energy costs(the cost of solar panels had fallenover 85% between 2007 and 2014)had led to increaseduptake aroundthe world.By 2015, the world was adding more renewable generatingcapacity than that of gas, coal, and oil combined. In many Europeancountries, wind and solar accounted for over 20% of electricitygeneration, and Germany had set a target of getting 80% of itsenergy from renewables by 2050.91To reach such goals, renewableenergy generation would have to be paired with large-scale storagecapacity, most likely in the form of batteries, allowing energygenerated by solar panels or wind turbines to be stored for usewhen the sun was not shining or the wind was not blowing. As wellas facilitating renewable energy use, load-balancing for electricutilities was another potential application; massive batteriescould permit utility companies to avoid the necessity of firing upso-called “peaker” power plants to meet peak demand. Instead,utilities could draw power from batteries at times of peak demandand recharge them when demand was low. As Musk put it in 2015, “youcan basically, in principle, shut down half of the world’s powerplants if you had stationary storage.”92Tesla saw this as animportant secondary market for its batteries; in fact, Muskestimated in 2015 that the long-term capacity demand for stationaryenergy storage would be roughlydouble the demand for batteries forelectric vehicles.93Indeed, in September 2016, Southern CaliforniaEdison announced it would purchase 20 megawatts of Tesla batteriesto plug into one of its substations, charging them up during timesof low usage and discharging them at times of high demand.94To takeadvantage of the energy storage market, Tesla announced in early2015 its Tesla Energy suite of battery packs, designed to providestationary storage for residential, commercial, and utility-scaleapplications. The residential product, called Powerwall, wasdesigned for load-shifting (charging This document is authorizedfor use only by Alex Waterman ([email protected]). Copying orposting is an infringement of copyright. Please contact[email protected] or 800-988-0886 for additionalcopies. Elon Musk’s Big Bets717-43111when rates werelower anddischarging when rates werehigher), to provide backup power duringoutages, and to be used in conjunction with rooftop solarapplications, storing surplus solar energy for use when the sun wasnot shining. The Powerwall battery pack provided 6.4 kWh of energystorage, at a price of approximately $3,000. Multiple battery packscould be installed together for greater capacity if needed.InOctober 2016, Tesla unveiled the Powerwall 2, along with solarroof-top panels that integrated directly with the energy storagesystem, at an event in Los Angeles. The new Powerwall forresidences had more than double the capacity of the first edition(14 kWh) and contained a built-in power inverter (a previouslyneeded separate piece of hardware). The second edition was alsopriced higher at $5,500. Although the residential system garneredthe most attention, Tesla executives anticipated that commercialand utility-scale applications would be much larger; Musk estimatedthat 5–10 times more capacity would be deployed at industrial andutility scale than at the consumer scale. A few months after thelaunch of Tesla Energy, Tesla CTO Straubel said that about 70% ofreservations had been for the industrial-scale Powerpack and 30%for the residential-scale Powerwall.95Musk claimed the demand forTesla’s energy storage solutions had been “staggering”in the firstfew months after announcing the product. By the end of the secondquarter of 2015, Tesla reported that it had received more than100,000 battery reservations, worth $1 billion if they turned intosales (whichMusk admitted they might not).96Musk insisted that, inorder to realize the goal of transitioningthe world’s electricitygeneration to renewable sources, Tesla hoped other batterycompanies would join Tesla in building “Gigafactory classoperations of their own.”He also said that Tesla would continue itspolicy of “open-sourcing”its information technology related to theGigafactory and battery manufacturing.97The opportunity tomanufacture batteries for various energy storage solutions, whethertargeted for electric vehicles or renewable energy, demonstratedsuch great potential to Elon Musk that he made the bold move tofurther vertically integrate Tesla by merging the electric vehicleand battery manufacturing company with SolarCity, an alternativeenergy sourcing and storing company.Tesla’s Renewable EnergyDivision: Solar CityTesla and SolarCity haddeeply linked historiesand close ties. SolarCity’s founders, brothers Lyndon and PeterRive, were Musk’s cousins;and it was Musk,by all accounts,whoencouraged them to look into the solar energy business in 2004.Musk became chairman and a major financial backer when SolarCitywas founded in 2006,and was its largest shareholder when it wentpublic in 2012. He remained chairman and the largest shareholder in2016. In addition, Tesla CTO Straubel sat on SolarCity’s board, andthe firms shared one additional board member.98For most of itshistory, SolarCity positioned itself as a solar energy provider; itpurchased solar systems and installed them for residential,business, governments, and ultimately utility companies. It coveredthe cost of the installation and maintenance of the system andcharged customers for the energy produced by the system.Residential customers could pay as little as zero for theinstallation and pay a monthly fee for the electricity produced bythe system, typically ata cost lower than that charged by the localutility.99The option to transition to solar power with no up-frontcosts had spurred adoption, and the number of SolarCityinstallations grew rapidly, with the installed customer basereaching 300,000 by the time Tesla acquired the company in November2016.100Revenues had also increased significantly, from $60 millionin 2011 to $538 million for the year ending June 30, 2016. Despiterapidly increasing revenues, SolarCity’s debt levels grew at a muchquicker pace (see Exhibit 6 for SolarCity financial data).Thisdocument is authorized for use only by Alex Waterman([email protected]). Copying or posting is an infringement ofcopyright. Please contact [email protected] or800-988-0886 for additional copies. 717-431Elon Musk’s BigBets12Since SolarCity had not historically manufactured solarsystems, it had benefited from the falling price of solar panels,which had enabled the cost of its rooftop installations to declinefrom $4.73 in 2012 to$2.84 per watt of generating power in 2016. In2014, however, SolarCity acquired panel maker Silevo. Theacquisition made SolarCity, in the words of Peter Rive, “the mostvertically integrated solar company in the world.”101To that end,SolarCitybegan construction on a $750 million factory in Buffalo,New York,where it would manufacture solar panels in 2017. SolarCityofficials claimed that the new panels would be as much as 30% moreefficient than the commodity solar panels it was currentlypurchasing. These efficiency gains, combined with a simplifiedmanufacturing process and the scale of production, had thepotential of even further reducing the cost of residential solarinstallations to $2.50/watt.102Declining costs for producing solartranslated into greater competition for SolarCity. The residentialand commercial markets for solar installation were both highlycompetitive. According to one analyst, the top 10 residential solarinstallers in 2015 represented 58% of the market, with SolarCityleading at 35% (Vivint Solar was second at 11%). On the other hand,the top 10 producers in the commercial market represented only 42%,with SolarCity leading at 14% (SunPower was second at 7%). “Thefragmented commercial developer landscape is largely the result ofbottlenecks in the customer origination process that make itdifficult for any individual player to consistently grow,” saidnoted one research analyst. SolarCity would need to defend its leadposition among two different sets of competitors,while at the sametime, barriers to entry were falling.103To do so required highspending; SolarCity’s sales, administrative, and research costswere $438 million in the first half of 2016, 42% greater thanrevenue of $308 million.104Such a high level of spending meant thatSolarCity needed to find a solution to its continuing need forfinancing. Further indicating its commitment to the renewableenergy business, Tesla first announced in June 2016 a proposal toacquire SolarCity. The acquisition offer was all-stock, in whicheach share of SolarCity would be exchanged for a fraction of ashare in Tesla. This exchange ratio of stock represented a value of$26.50–$28.50 per share of SolarCity and a total equity value of$2.6–$2.8 billion. Tesla’s shareholders did not react positively tothe announcement; the next day Tesla’s stock price fell by 10.5%,while SolarCity’s stock price rose 3.3%.105In the context of theSolarCity acquisition, Musk pointed out that renewable energygeneration had long been a part of Tesla’s vision. “The point ofall this,”he wrote in July 2016, “was, and remains, acceleratingthe advent of sustainable energy.”Indeed, the original “masterplan”written by Musk in 2006, though focused on Tesla’s EVbusiness, included the goal of becoming “energy positive”byproviding “zero emission electric power generation options,”partlythrough partnership with the then newlyfoundedSolarCity.106SolarCity had begun offering home energy bundlesincluding solar panels and battery backup using Tesla’sPowerwallbattery packs earlier in the year, and for Musk the merger was anatural progression. Musk argued that there was considerableoverlap between the two companies’ potential customer bases, thatTesla’s design and manufacturing experience would benefitSolarCity’s solar panels, while SolarCity’s sales, distribution,and installation capabilities could serve Tesla customers.107Teslaclaimed $150 million in cost synergies that would be unlocked inthe merger (see Exhibit 7). JP Morgan’s research reporton theinitial offer cast doubt on the customer overlap: “Absent adetailed explanation (at this time) we are struggling to see brand,customer, channel, product or technology synergies.”108(SeeExhibits 8 and9.) Several analysts criticized the proposed deal asadding to Tesla’s already daunting challenges of scaling batteryand vehicle production, but Musk insisted that Tesla would benefitfrom creating a “smoothly integrated and beautifulsolar-roof-with-battery product. We can’t do this well if Tesla andSolarCity are different companies, which is why we need to combineand break down the barriers inherent to being separatecompanies.”109In anticipation of the completion of the merger, Muskannounced a new solar roof product which replaced a traditionalroof with glass tiles that contained This document is authorizedfor use only by Alex Waterman ([email protected]). Copying orposting is an infringement of copyright. Please contact[email protected] or 800-988-0886 for additionalcopies. Elon Musk’s Big Bets717-43113power-generating solar cells.Musk later claimed that Tesla’s solar roofing material would costless than traditional premium roofing materials, even beforefactoring in savings from electricity generation.110SolarCity’sfinancial struggles also contributed to skepticism abouttheproposed acquisition. The company struggled to become profitableand its operating losses were mounting—totaling nearly $980 millionfor 2014–2015, leading to considerable doubts about merging twocompanies that were steadily burning through cash, to the tune ofan estimated $2.5 billion combined in 2016.111(See Exhibits 3band6b for Tesla and SolarCity cash flow data.) The Wall StreetJournal wrote that “Tesla latching on to SolarCity is theequivalent of a shipwrecked man clinging to a piece of driftwoodgrabbing on to another man without one,” while Forbes wondered howthe already-indebted Tesla could carry SolarCity’s $5 billionlong-term debt load.112Some critics argued the acquisition wasaneffort to save SolarCity from its debt obligations, which grew13x from 2013to 2016. “This deal has everything to do with debt.Call it a bailout, call it what you will....SolarCity is one badeconomic downturn away from going belly up,” said oneanalyst.113Musk and Tesla responded by pointing out thatSolarCity’s debt position and cash flows appeared to be worse thanthey really were because SolarCity used debt to finance rooftopinstallations that generated revenue over time through long-termleases and power purchase agreements.114Tesla revised its offer forSolarCity on August 1, 2016, in part due to SolarCity announcingthat its 2016 forecast for megawatts installed would be 10% lowerthan previously expected. The new acquisition offer was about $300million lower than the initial offer at $25.83 per share,representing a $2.6 billion equity valuation.115This price forSolarCity was 10x higher than the average revenue multiple ofSolarCity’s publicly traded peers (see Exhibit 10). On the otherhand, $25.83 per share was well below SolarCity’s all-time-highclosing price of $86.14 set in February 2014 (see Exhibit11).Corporate governance issues were also debated. The requirednumber of shareholders from both companies to approve the mergerwas considerably lower than normal. JP Morgan’s research remarked:“The proposal requires the majority approval...from shareholdersaccounting for 39.44% of economic interest in Tesla(50% ofshareholders excluding Elon Musk’s interest of 21.12%) and 38.73%of economic interest in SolarCity(50% of shareholders excludingElon Musk’s interest of 22.54%).”116Due to conflicts of interest,several board members of both companies had to abstain from votingon the merger. On the Tesla side, Elon Musk and AntonioGraciasrecused themselves because they served on both boards. Onthe SolarCity side, five of eight board members recused themselvesgiven their various connections to Elon Musk and Tesla. This lefttwo independent board members, Donald Kendall and Nancy Pfund, whowere solely responsible for approving the merger on behalf of theSolarCity board.117In the end, investors sided with Musk againstthe skeptics. After the boards of both companies approved theproposed merger in August, shareholders overwhelmingly approved theacquisition in November, with over 85%of Tesla shareholders votingin favor of the deal.

What are the key environmental challenges Elon Musk saw asopportunities? How did he address those challenges in differentbusinesses?

Why do you think that Tesla, with a shorter history,significantly smaller sales and virtually no history of profits wasvalued higher than the other American car makers? Should there bedifferent performance metrics for startups, such as Tesla?

How are the different businesses of Elon Musk related orunrelated to each other? Would it make sense for Elon Musk to putdifferent businesses into one corporate umbrella or would he bebetter off running them separately?

If Elon Musk had to divest one of the various businesses, whichwould you recommend him? Why? How would this divestiture help himincrease performance and investors’ confidence?