Tesla's IPO: A New Test Drive for the Old VC ModelJosie Garthwaite
Last Friday, buzz about an imminent initial public offering for electric car startup Tesla Motors hit the Internet, courtesy of two anonymous sources familiar with the plans who spoke with Reuters. As with several previous stories about Tesla's possible plans for a public offering, however, the company has declined to comment.
If and when Tesla goes through with its long-discussed goal of going public, it could be the biggest and possibly the first public offering for a U.S. car company since Ford Motor's IPO more than 50 years ago. The event will also offer a glimpse at the role IPOs will play in the nascent green car market. The question remains: Is the classic venture capital model—invest early and find a big exit in the form of an acquisition or IPO—viable for this sector, or will a green-car IPO be more about feeding big capital needs and branding?
While hard answers won't come until after Tesla makes its debut, the outcome of a Tesla IPO will influence the financing strategies of competing green-car startups, shape potential investors' thinking about possible exits from these companies, and also—like the A123Systems IPO a couple of months ago—serve as a gauge of public confidence in electric cars.
A123Systems' backers didn't gain much
Hopes for a Google-like moneymaker in cleantech (Google took only $25 million in venture capital to make millionaires of 1,000 employees and billionaires of its two co-founders in a wildly successful IPO) have already started to fade for some in the sector. Stephan Dolezalek, managing director of VantagePoint Venture Partners, which has invested in Tesla, told Reuters in September that public offerings now serve more as "financing events" for alternative energy and other cleantech startups, rather than as a way for investors and founders to cash in on equity.
That seemed to be the case for battery maker A123Systems, which, like Tesla, is trying to capitalize on an electric car boom. A123's September market debut bore more resemblance to the model described by Dolezalek than to the heady days of Google: The IPO served to increase the battery maker's cachet and will likely help the company move forward on its ambitious manufacturing plans. But as Thomson Reuters and the Cleantech Group pointed out>, A123's venture capital investors made an average return of a little over four times their investment, while those of individual investors ranged anywhere from four to eight times. As Katie Fehrenbacher noted at the time, those returns aren't bad, but when compared to some dot-com-era exits, they're not amazing, either.
Greg Brogger, CEO of the private equity marketplace SharesPost, put it to us this way over the summer: Cleantech companies building capital-intensive products such as cars and solar panels need to raise more funds faster than their Web 2.0 counterparts. You can stretch a dollar a lot further building apps than you can trying to develop, safety test, manufacture, market, and distribute vehicles for the mass market.
Before its IPO, Google was profitable
Tesla has already tapped private investors and the federal government for hundreds of millions of dollars in financing (including more than $200 million in six rounds of equity financing and $465 million in low-interest loans from the Energy Dept. A public offering could give it an important new financing channel.
Using an IPO simply to raise money isn't exactly a new strategy. As The New York Times put it in an editorial following Google's (GOOG) 2004 IPO: "Some of the dot-com-bubble darlings…famously turned to Wall Street to raise cash merely to burn it." Tesla, A123, and other ventures trying to break into large-scale manufacturing need money to set up factories and crank out physical goods for sale, among other things. It's worth remembering, however, that they haven't yet proven themselves profitable. Google had done that by the time it went public.
Public offerings are not just about financing. They're also branding events, as panelists at the AlwaysOn Summit at Stanford noted this summer. A successful IPO for Tesla could serve to boost the credibility of its brand and could also cast a halo over other green-car startups. On the flip side, if the stock performs poorly, it could detract from Tesla and other electric carmakers' efforts to establish themselves in the mainstream. Over on The Truth About Cars blog, Edward Niedermeyer writes that Tesla's existing brand—that of a Silicon Valley native—could be a boon on the public market.
"The best argument for a successful Tesla IPO is the popularity of its electric roadster among the Silicon Valley elite," Niedermeyer writes. "IPOs are rarely rational phenomena, and local homerism could just provide Tesla with sufficient capital to take its Model S to market."
Worth $550 million or $1.24 billion?
A successful Tesla IPO could also provide a branding boost for government bets on venture-backed car startups as creators of green jobs, from the federal backing for Fisker Automotive on down to local incentives for V-Vehicle in Louisiana. As Pascal Levensohn, founder of Levensohn Venture Partners and a National Venture Capitalist Assn. board member, told us in September: Jobs are typically lost when companies are acquired instead of going public, while IPOs help create jobs.
In June, analysts for the research firm NeXt Up put together a report on Tesla for SharesPost subscribers, valuing Tesla at $1.05 billion. Last month the firm upped that valuation to $1.24 billion, or an estimated $4.21 to $4.93 per share. Six months ago, however, Daimler took a stake in Tesla at a $550 million valuation, so NeXt Up's valuation may be generous.
Whether or not Reuters' sources are right that Tesla will register with the Securities & Exchange Commission within a matter of days for an IPO, we may have quite a while to wait before the company actually goes through with a public offering, letting us see first-hand how the event reverberates through the industry. Investor Dolezalek said back in September that the startup wouldn't be going public until late 2010 at the very earliest "if the market stays the way it is today."