Tesla Founder: How an Empire Was Built | Marc Tarpenning

We spent nine months coming up with a business plan, trying to figure out exactly how you're going to make a car, what the technology that really matters, what we're going to have, what the car thing is, and what we're going to outsource, how we're going to have them built. And then we went looking for money, and we found a bunch of investors, one of whom was Elon Musk.

Oh, well, it's great to be here and thank you so much for the invitation.

So, really early on when Martin Eberhard and I were starting our first company, actually, one of our mentors pulled us aside and he said, 'Okay, I'm interested in this company, but you want to make sure that all of the paperwork, and I know this sounds really tactical and really silly, but make sure that all of your paperwork is correct at the beginning of time, and you keep track of it, and you do it all, and it's so easy to do at the beginning, and it's so hard to do like a year later or two years later when you get that acquisition offer or you're trying to get another investment with much more serious investors that are requiring things to be papered properly.' And so we did that and it all worked out fine. Now having seen and having been on the investor side or on the acquisition side of companies that did not do that, multi-million dollar deals being blown because the first year or so of operating they can't account for anything. They don't have employment agreements in place. They don't have all the boilerplate legal stuff done. They didn't pay for some loan that they got from their mom or whatever. And the millions of dollars that that cost. And we've had several investments like that and I just think, 'Oh my gosh, it was so simple and so easy and made such a difference.'

I know it's tactical and silly and actually really useful. On the worst advice, there is a VC who I will not name. This is when we were raising money for our first company, which was a company that sold electronic books, basically like early iPads if you will. We were giving the presentation and he says, 'You know, we're not investing. This whole idea of a business model where you make a product that people want to buy and sell it to them, that's dead. We're never investing in anything like that ever again. It's all just advertising and eyeballs, and any business model that requires people to actually like your product is just garbage. And you need to totally retool your thing.' That was the stupidest thing I've ever heard. And that fund ended up losing like a billion dollars.

Well, exactly. So in our first company, which was this ebook company, we didn't know how far we could take it or how big it got, and it got acquired for 187 million in the end, which was a fine exit for everybody concerned. It was great. Could we have taken it further? Maybe. But it's more this tactical paperwork thing: if you're going to try to raise money from real investors, for most companies you need to be able to raise money. Not all companies need to raise money, but most of them do, at least the ones in Silicon Valley that I'm a creature of. Having all the paperwork be correct, it's such a silly thing, but you want to reduce friction at all points, whether that's your customer wanting to buy the product, you want to make it super frictionless, or an investor trying to invest in you. When the lawyers ask where's the intellectual property agreements or whatever, all of that stuff is boilerplate. It costs almost nothing to do. It's so easy to do and you just have to keep track of it. It makes you want to get rid of that friction because if the investors have to spend three extra weeks in due diligence trying to figure out what's going on inside the company, it sets a bad taste in the investor's mouth, or they might just say, 'This isn't worth it. This company is screwed up. I don't want to deal with it.'

Yeah. Well, I wish there was some formula because it would really help during this whole investment thing. We'd be much better at investing. So one thing that we really focus on is customer love. It doesn't matter if the customer is a business or an individual or whatever, it's that you're making a product that people actually like. I know it sounds funny, but if it's a product that is kind of okay and maybe saves them a little money or whatever, that's okay. But what we really want to find are products, and I think all companies that are truly successful, they have a product that people like to use, that they get some benefit from professionally or personally, but they have a love for the product. One of the things we always do is we talk to customers of these companies and ask them why they spent money on this product. It's really telling almost immediately: you can find out if they don't really care that much about it, or if they think it's just the greatest thing ever. That's what we're looking for. So I think really successful companies have that thing going for them: they have a product that is differentiated in some way that people really like.

Oh, probably. I mean, airlines, it's an interesting thing. They do have something that is unique in the sense that people might not like the airline, but the fact that they're flying it is that they've got the routes that matter for that particular customer. If they could always fly their favorite airline, but they can't because it doesn't go there or the times are terrible or something. So that's a differentiated product. I think the companies would be more successful if they really worked on delighting the customer all the time. But it's a hard thing, especially as you scale, it gets harder and harder. Airlines are also weird because they're regulated in the slots that they have and all these other things. So you can get by as a crummy airline pretty successfully because you got the right slots in the right airports or whatever.

Exactly. They're the one that gets you there.

Yes. So we don't actually have a preference there. I'm trying to think about this. I suspect our portfolio is a little bit heavier on B2B or B2G, B to government, than it is to B2C, but not by much. It certainly isn't a thesis thing like, 'Oh, we're only investing in B2B or something.' We find that compelling products, if they sell well, if people like them, they sell well. And B2C works just as well. We have four or five portfolio companies that have a lot of customers that are normal people.

Huh? Yeah. Physical, but that's... So the mindset: entrepreneurs have to be slightly irrationally optimistic because if they actually understood all of the problems that they're going to have, they would just never do it. You just wouldn't do it. It's like having kids: if you actually understood all of the implications of it, you would never have kids, but actually when you're having kids, it all kind of works. So I think that entrepreneurs have to be a little bit irrationally optimistic, but they cannot be too optimistic because they have to make the numbers work ultimately. You have to actually have the sales, you have to actually have the revenue, all that kind of stuff. So I do think it's important that there's a little bit of optimism. The other thing that's really important is that they can tell a good story. This is something that not everyone can do. It's a learned thing. It's not like, 'Oh, you're a storyteller.' But good CEOs, good entrepreneurs can really tell a good story. Not only can they tell the good story to their potential customers, depending on what business they're in, but to investors, they can tell the story of why this is an exciting company and where it's going in the future in a way that makes sense and is coherent and compelling. They can also tell it to recruit people, because getting talent, you want the best possible people, and if you can tell a really good story, you have a good chance of getting really good people. So the storytelling thing is super important because it really affects all aspects of it: customer acquisition, raising money, which the CEO's responsibility is not to run out of money, that's the fundamental thing, and also being able to recruit the best talent. So storytelling is super important.

I don't know. I mean, some of my closest friends that I grew up with, that I still hang out with, who have been with me on many entrepreneurial journeys, they are not entrepreneurial. They're incredible individual contributors. They don't like to manage people. They like to do their technical thing. They do it really, really well. For them, it wouldn't fit. It's not what they're interested in. They're not good at it because they haven't done it before. But they're willing to come along on all kinds of these crazy startups that my friends and I have done over the years. But they've never expressed any interest in actually being the entrepreneur. So yeah, I think it's not for everybody. There is a certain kind of mindset and a certain willingness to take a little risk and be a little unpredictable that just isn't their thing because they're interested in technology or whatever it is. Which is great, because we need those people. Everyone can't be an entrepreneur because otherwise it doesn't work.

I don't know. We work with entrepreneurs that do everything from something like monk mode to ones that are very focused on their private time, where not everything that they do is completely consumed by work. One of the people that I got to work with over the years is Judy Estrin. She was the CTO of Cisco for years, super technologist, really interesting person. When I worked for her at one of her startups, it was really interesting because she and her husband at the time, they're since divorced, had a kid, and they would get to work and work really hard all day, no prisoners, running, and at 5:00 pm, gone. She would say, 'Now it's family time. I'll answer email later in the evening, but I need to be home. My kid's getting off school. I need to be there.' They really isolated their family time. When I started having kids, I did the same thing. That's an example where it isn't really monk mode. I'm not waking up at 5 in the morning to meditate or whatever, but I am carving out time for what's important to me personally. I think that was very helpful during the day.

Well, I'm not so sure I'm great. We won't know how these investments go until years from now. I think that part of it is just always being curious about stuff. I'm always reading. Or one could argue I just have a very short attention span, but I like to read all about various technology and science, which is my main interest, in a lot of different fields. So I know a little bit about a lot of random things. I think that helps. I think always trying to find out new stuff is helpful. Certainly, it just makes life more interesting. It's great when you run into somebody at a party or whatever and they're doing underwater drones and I'm like, 'Oh, I've been reading about that.' And they think, 'Really?' Nobody reads about that. But it's a good conversation starter.

Yeah, I was always an entrepreneur. When I was growing up, computers were quite rare. I'm old enough that it wasn't the stone ages, but there were rocks everywhere. As a teenager, I was very into electronics and later computers when they were possible. We'd make our own computers because you couldn't buy them really. It turned out that when I turned 16, which is the legal age of working in California, I ran into someone in line at a 7-Eleven. There's a whole story of why I was at that 7-Eleven. One of the guys in line, we started talking, and he offered me a job. I said, 'I'm not 16 yet, but I'll turn 16 in a month and a half.' He said, 'Call me back.' Then he called me on my birthday and said, 'Hey, it's your birthday. Ready to come to work?' All that time I was always doing little consulting projects and little things for my parents' friends, always doing random stuff. This job was the same thing. I was never into the idea of working for some giant company. I was always doing these random little things based on connections I had. I was always kind of like that.

Is there a story to that also? At the beginning, in the long ago before times, computers were quite rare and all of the people who had personal computers in Sacramento, California, where I grew up, about a million people, we all knew each other. There was a club and we'd all meet every once in a while. One of the guys I liked there was a younger guy. He had a computer, a really nice computer. And he owned that 7-Eleven. He ran the 7-Eleven. So he had his kiosk where you go and pay, and he had all this computer gear and he would spend his days hacking away on the computer and dealing with customers coming in. So my friend and I would go and hang out there with Quentyn in his 7-Eleven because we would be able to geek with this slightly older guy, probably 28 or something, who ran this 7-Eleven. So it was like a hub of geeky teenagers would hang out with Quenton. And then this guy who strangely reached out to me, I had coffee with him last week, 40-some years ago. He's still intact and still doing something.

Yeah, what it was... So I mean, Silicon Valley, especially 20, 30 years ago, I think was utterly unique. I'm from Sacramento, which is admittedly not that far, but it's a few hour drive. The thing that makes Silicon Valley unusual is that it's not just, 'Oh, there's a bunch of tech companies here.' It's that the entire ecosystem here is set up for it. An example is if you need to do all that legal paperwork, all that stuff I was talking about. If you go into a normal town and go into the law offices of some law firm to draft all that stuff, they're going to want a bunch of money for it, and they may not know what they're doing. In Silicon Valley, we went in and said, 'We want to start this company, but we don't have any money yet, but we're going to raise money.' One of these giant law firms said, 'Okay. We'll give you the standard package and everything, and you'll owe us like $10,000 or whatever it was. But we get to invest, our retirement fund gets to own a little bit of your company, a tiny bit, and we'll write you a check for that.' We were like, 'Okay, we can do that.' When we went to rent office space, this happens in all the companies we've done, which has been several. You go to rent office space here, and typically you negotiate with the landlord to get the price. Once the price is set, the entire due diligence is the landlord says, 'Are you venture-backed?' You know, yes. They never ask who, just, 'Are you venture-backed? Yes. Can we invest? Can we get a piece of the equity? No.' And that's the deal. You're done. Renting that same office space when we were trying to rent some space in Detroit required six months of financial due diligence. I could have bought the building. But here, I was literally moving into a new space and the entire deal was done in 15 minutes once we negotiated the price. On top of that, there are very few places in the world where you can go to somebody who's making $200,000 a year and say, 'I've got this slide deck, I have this great new idea, why don't you quit your job and come join me?' And the person says, 'That sounds great.' That's like normal places with normal people, they just don't do that kind of thing. So it is a unique environment. It's not just Silicon Valley; there are other hubs like this, but Silicon Valley has a lot of people that are crazy like that.

Oh, do it in Madrid. I think that Silicon Valley has some advantages in that it has a ton of talent and this whole ecosystem that's set up for it. But certainly Dubai is doing stuff, Singapore, Madrid, Cambridge in England also has some interesting stuff going on. There's nothing magic about it. It's just a little bit easier. One of the problems here is it's very expensive. Housing is very expensive here, so that makes everything a little bit more difficult than it was in the past. Hopefully we'll fix that here. But I think you can scale really big companies all over. There are certainly laws that make it easier or not. One of the things that California has is that we don't allow non-competes.

In California, never have. So you can't, you know, there's nothing that says you can't go work for another company. And then the other thing is that hiring and firing people is really easy in California. And I do believe that there is an advantage when you're especially when you're starting a company because you can't afford to have a hire that isn't great and you don't always know. In fact, you never really know what even great looks like. So as you grow, it's important to be able to fire people basically and hire better people in those places. And it's fine for those people too because if they're not really producing like they should, they need to go find a place where they can. And many times you fire somebody and you feel really bad about it and then later on those people are super successful someplace else. They just needed to find their space. So I think that there's some legal things that make it easier in places where you can hire and fire.

Oh, sure. Yeah. So Martin and I decided to start a company and we were kicking around a bunch of different ideas and Martin was really into this electric car idea for a variety of reasons. I mean, we were both environmentalists and also there's physics that basically says that electric cars are just better in all ways. And we had a lot of consumer electronics background and we had seen batteries get better and better and better, cheaper and better and cheaper and better. And we as technology people, as entrepreneurs, we frequently look for, we always are looking for things that have been one thing for a long time and the pricing or the capability or whatever has been changing and suddenly that's enabling something else using it. And when that happens, if you're early, if you're too early, it's too hard. And if you wait too long, then everyone can do it. So you're looking for that sweet spot where the technology looks like it's going to be just good enough that you can get a product out there knowing that every year everything's just going to get easier and better and hopefully you'll have a dominant market position by then. And when we analyzed batteries because we knew a lot about batteries, it was clear to us that it had just crossed over the point where you could make a compelling car using lithium ion cells and that the great part is that it's the most expensive part of our product. And every year that thing, not caused by us, but just every year that component of your car gets cheaper and better and cheaper and better because it's being driven by this enormous market force of wanting lithium ion cells to be cheaper and better. And so that means that your product just gets better and cheaper even if you did nothing else, which is super powerful. That tailwind is great. So we looked for that kind of thing and in electric cars it was clear to us that it was the right time. So we spent nine months coming up with a business plan, trying to figure out exactly how you're going to make a car, what the technology that really matters, what we're going to have, what the car thing is, what we're going to outsource, how we're going to have them built, and then we went looking for money and we found a bunch of investors, one of whom was Elon Musk. So Elon led the round for our first outside series of money. And then he was a great investor. He participated in each subsequent round all throughout until our IPO. And he ended up being the CEO in the end. But he's the fourth CEO of Tesla. And obviously grew it really well and then destroyed its brand which is what he's doing right now. But before he destroyed the brand, he really grew the company incredibly well.

Yeah. Well, so there's a couple of questions there. One is did we ever anticipate it to be as big as it got? So we had a couple of goals. One was what we really wanted to do was completely change the image of electric cars because when we did the engineering analysis it was so clear that they were going to be higher performance and vastly more energy efficient. The most energy efficient internal combustion engine is about 17% efficient converting energy into motion whereas electric cars are well over 90% efficient doing that same thing. So you're going to win in the end and you can do it really fast. The performance of electric cars just crushes anything else for physics. The great thing is having physics on your side because it's not going to change. So we really wanted to change that perception of what an electric car was because we figured even if we weren't successful that would change the world, we would all be driving electric cars in the future that would be fun.

This can potentially change the world.