Palo Alto Weekly

Cover Story - April 16, 2010

Ready to roll out

Tesla Motors seeks to raise $100 million with its initial public offering

by Tim Clark

Palo Alto seems an odd place for a car manufacturer. But Tesla Motors is hardly your blue-collar, Detroit-style company.

Aiming to employ 650 workers in the Stanford Research Park, Tesla is preparing for an initial public offering (IPO), in which the company seeks to raise $100 million. Both its strength and its vulnerability are outlined in its financial filings submitted to the Securities and Exchange Commission Jan 29.

The modern automobile is a sophisticated blend of hardware and software that requires significant manufacturing expertise and logistics skill, since today's cars are built with thousands of parts from suppliers. Tesla's Palo Alto headquarters positions it perfectly for software engineers but puts it far from the auto industry's epicenter, Detroit.

It's not a coincidence. Tesla has earned the reputation for thinking like software people, not automakers. Tesla's management, board and early investors are overwhelmingly from software backgrounds, although it has hired seasoned auto executives in design and manufacturing. Tesla CEO Elon Musk, the car company's largest investor even before he got $44 million in stock options last month, founded online payment system PayPal and sold it to eBay.

Tesla has intentionally departed from the traditional auto-industry model in two key ways. First, it owns its entire vehicle sales and service network. When your Tesla breaks down, you will take it to a dealership, such as Menlo Park's, owned by Tesla, not an independent business that runs a Tesla franchise.

Second, Tesla is betting the house on electric cars, not hybrids, gasoline or diesel. The electric powertrain is Tesla's key proprietary technology. It powers both its high-end, $100,000 Roadster model (introduced in 2008) as well as the $57,000 Model S sedan, due in 2012. Tesla will sell its electric technology to other car companies, a potentially lucrative revenue source.

Tesla's IPO features both blue-chip bankers (Goldman Sachs, Morgan Stanley, etc.) and Palo Alto talent — legendary Wilson Sonsini Goodrich & Rosati is Tesla's legal counsel and the Palo Alto office of law firm Simpson Thacher & Bartlett LLP helped on the IPO filing.

Tesla's IPO will not be its largest source of capital — and neither is $303 million in venture capital and angel investor funds already powered in. It's Uncle Sam, through a $465 million, low-interest loan from the U.S. Department of Energy. Some $100 million is earmarked for the powertrain manufacturing plant on Deer Creek Road. Manufacturing cars requires lots of capital.

One rather odd Tesla investor is Daimler, the German manufacturer of Mercedes-Benz that largely drove U.S. carmaker Chrysler into bankruptcy after Daimler acquired it. In addition to a 5 percent stake in Tesla, Daimler also has contracted for 1,000 Tesla's powertrains for its electric smart car in Europe.

Tesla's IPO will be closely watched by Wall Street and the green-technology industry.

"Tesla is an important and highly visible IPO," said Kris Tuttle, the France-based CEO of Research 2.0, a Boston research firm focused on emerging technologies. He expects buyers of Tesla stock to include green-themed mutual funds and giddy individual investors.

As the e-car sector is increasingly jammed with both old-liner players (Nissan, GM, Ford, Toyota) and newbies (Fisker Automotive), Tesla gives Palo Alto a front-seat view on CleanTech's sexiest market.

Tim Clark, founding editor of Palo Alto Weekly, does market research for technology companies through the FactPoint Group.

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