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Can Tesla defy gravity? CEO Musk hopes so

What goes up must come down, as Internet entrepreneur Elon Musk has been finding out lately.
Image: Elon Musk & car
Elon Musk, CEO of Tesla Motors, poses with a Tesla car in front of Nasdaq following the electric automaker's initial public offering, Tuesday, June, 29, 2010, in New York. Mark Lennihan / AP

What goes up must come down, as Internet entrepreneur Elon Musk has been finding out lately.

The South African-born entrepreneur has always had a knack for making money — but he’s good at spending it too. The question is whether Musk’s significant fortune will survive his broad ambitions, which cover everything from software to space, as well as clean and green electric vehicles.

Last week, the visionary celebrated a belated 39th birthday by launching an IPO for his latest venture, Silicon Valley-based Tesla Motors. Though the electric vehicle maker has so far produced only one low-volume product and lost more than $230 million since its founding, it generated a significant charge among Wall Street investors.

By the end of the first day of trading they’d snapped up 13.3 million shares, netting $226.1 million for Tesla, and had driven the closing price for the day to $23.89, a 40.5 percent gain on the IPO’s strike price of $17.

That was particularly good news for Musk, who sold off enough of his own shares to pocket an estimated $24 million. He can use it.

That might seem surprising considering his record of starting companies and then knowing when to sell them off. Musk made his first $500 when, at the age of 12, he sold his first commercial software, a game program called Blastar.

His career almost got sidetracked by college, but two days after entering Stanford University, where he planned to earn a graduate degree in applied physics, Musk dropped out to start a company producing online publishing software with his brother Kimbal. Four years later, in 1995, Zip2 was sold to Compaq for $307 million in cash. That same year, Musk co-founded what would eventually become the online pay service, PayPal. He held 11.7 percent of its stock when eBay bought it in October 2002, for $1.5 billion.

But as his bank account grew, so did Musk’s expenses. Even before selling PayPal he was launching, quite literally, his third entrepreneurial venture, SpaceX, aimed at the market for private and commercial space vehicles. Early on, the Hawthorne, Calif., firm ran into a series of problems, including launch pad failures, that strained the corporate bank account into which Musk, the SpaceX CEO, has pumped $100 million of his own cash.

Difficult, expensive
Getting Tesla up and running has been equally difficult and expensive. A series of technical glitches, notably with the transmission on the firm’s first product, the Tesla Roadster, pushed production back by nearly a year and ran up millions of dollars in cost overruns. Even though the firm has largely met its initial sales expectations for the limited-volume, 2-seat sports car, it is mired in debt, running up losses of $230.5 million since its founding in 2003.

The loss for the first quarter of 2010 nearly doubled, year-over-year, to $29.5 million, as Tesla began the big push to ready its second, and most critical, model, the 7-seat Model S, into production.

Add in a bitter, ongoing divorce, and Musk was forced to reveal in court, over the spring, that, “About four months ago, I ran out of cash.” At least until he could pull some cash out of the IPO, it appears, he had been living off the kindness of friends and colleagues. They are a who’s-who of the digital and technology world, many of whom had either invested in Tesla themselves or had at least signed up to buy one of the Roadsters.

In a conversation late last year, Musk expressed a surprising indifference to his own fate and fortunes. He readily conceded that Tesla could very well be run out of business by bigger competitors, such as Toyota or General Motors, which are making a big push into the electric vehicle market.

“That’s great. That was the goal,” to get the entire industry believing in electric propulsion, Musk insisted, adding that, “To say a car company is the best way to get a return on your investment is absurd, though Tesla will do well for its shareholders. And regardless of the outcome, it won’t change my lifestyle one iota.”

While Musk’s comments likely didn’t have a direct impact on the market’s initial warming up to Tesla stock, it’s clear that investors have been taking a second, colder look at the battery carmaker’s offering. After peaking at just above $30 a share, Tesla stock has dipped to the $17 range.

“I think reality set in,” says Joe Phillippi, chief analyst with AutoTrends Consulting. “It’s very risky.”

No guarantee
There’s no question the automotive market is showing signs of accepting electric vehicles, but as Musk himself acknowledged, there’s no guarantee his little start-up will be around to enjoy that acceptance. He’s been vague about when the Model S will go into production, though that’s likely to happen sometime in 2012.

To get there, Tesla will have to switch from what is little more than a kit car — the Roadster is a modified Lotus Elise — to more conventional automotive manufacturing. That will require a company with no high-volume production experience to not only design the new sedan, but manage a network of suppliers and operate a new assembly plant acquired from Toyota.

The NUMMI plant, in suburban San Francisco, is a leftover from the joint venture the Japanese carmaker ran with General Motors. It was transferred to Tesla as part of a complex deal in which Toyota is also investing $50 million in the battery car company. The Department of Energy provided a $465 million loan from a fund aimed at spurring the development of clean, high-efficiency automobiles.

Like many players in the fast-evolving automotive world, Tesla has made some strange bedfellows. Along with Toyota, it has also inked an alliance with Daimler AG, maker of Mercedes-Benz products, as well as the little Smart fortwo. Tesla is providing the drivetrain for the low-volume Smart electric and is also working on various projects with Mercedes, though it’s unclear any will ever generate significant cash.

A workaholic with a tendency to demand from subordinates as much as he himself gives, if Musk is worried about Tesla’s challenges, he doesn’t show it.

His track record, even with its downs, has plenty of ups. And SpaceX is looking more and more like it could escape Earth’s gravity entirely. After finally scoring big when its Falcon 1 became the first privately funded, liquid-fueled rocket to orbit a satellite, SpaceX can look forward to taking in $1.6 billion from NASA. The U.S. space agency will rely on Musk’s firm to supply the International Space Station after the retirement of the space shuttle.

Whether Tesla will eventually show equally orbital results is uncertain. No wonder Wall Street-bound investors are uncertain what to do next.