Periods of major step changes in technology present serious challenges to investors, particularly those who have significant interests in incumbent firms. In retrospect, one can confidently point to inflection points that represent technology shifts with enormous impacts on human history but forecasting such changes prospectively is fraught with difficulties. False starts are common. Visionaries who are ahead of their times are naturally attracted to such environments, as are fraudsters who seek to profit from building castles in the air. Vast sums can be lost betting on technology at inopportune times.
With an understanding of the perils of investing in emerging technology, many investors simply stay on the sidelines, effectively acknowledging their ignorance. There is no shame in doing so. However, for many of us, continuing to observe the world around us remains fascinating and well worth the time. A better understanding of the world, formed through multidisciplinary reading with a curious mind, can hardly hurt our investment returns and has the potential to improve results, even if indirectly. Even with no investment implications, learning about technology can be a great deal of fun.
The life of John Glenn, who died yesterday at the age of 95, serves as a reminder of the optimism Americans felt during the 1960s as one seemingly impossible obstacle after another fell in man’s quest to explore space. The moon landing in 1969 left Americans wanting more – including a potential mission to Mars. Unfortunately, the pace of space exploration slowed considerably in the following decades culminating in the decommissioning of the space shuttle fleet and the indignity of Americans relying on Russian aircraft to reach the international space station. From an early age growing up in South Africa, Elon Musk was captivated by space and, ultimately, the possibility of humans reaching Mars. The quest for not only a Mars landing but a human colony on Mars has been the driving force behind his ambitions ever since. In a compelling biography, Ashlee Vance allows the reader to gain a great deal of insight into Elon Musk’s world.
Elon Musk is most well known for leading Tesla Motors. As an early investor and Chairman of the company, Mr. Musk played a hands-on role in product development long before he assumed the CEO title formally in 2008. However, it is less well understood how Tesla is merely one part of a radical world view that consists of simultaneously reducing the risk of human extinction on Earth while hedging our bets by establishing a human colony on Mars. This world view has driven essentially all of Mr. Musk’s business endeavors subsequent to his departure from PayPal after losing a management struggle.
With eBay’s acquisition of PayPal in 2002, Mr. Musk was worth hundreds of millions of dollars and set for life. However, his extremely high tolerance for risk and singular focus on his ambitious world view led him to pour the vast majority of his fortune into Telsa and SpaceX. This led to near ruin in 2008 when additional funding for these money losing ventures became difficult to secure and Mr. Musk came within inches of losing everything before funding came through late in the year. Since that time, delivery on key objectives at both companies has fueled Mr. Musk’s net worth and his celebrity status has kept pace.
Ashlee Vance was able to secure Mr. Musk’s cooperation on the book mid way through his efforts and access to Mr. Musk’s inner circle clearly helped paint a picture of his life that would have been difficult to achieve from the outside looking in. Details of Mr. Musk’s sometimes troubled personal life are interspersed with his professional life and development of his public persona. The portrait that is painted is one of a genius who is sometimes held back by ambitions that exceed his resources and personality traits that make it difficult to relate to others, even as he somehow simultaneously inspires nearly everyone around him, even those who intensely dislike him. In this way, Mr. Musk resembles the late Steve Jobs in certain respects, although no such comparison is ever going to be totally on target.
The story of SpaceX is even more interesting than that of Tesla, perhaps because as a private company less information had been previously available regarding its operations and history. From a microeconomic standpoint, Mr. Musk entered an industry that had long been dominated by large, entrenched players with many decades of experience and deep relationships with the federal government. As is often the case in such industries, costs were extremely high. The government has exacting standards for every aspect of a launch and bureaucratic protocols must be meticulously adhered to even if they do not always make sense.
SpaceX aimed to dramatically lower the cost per launch and eventually emerge as the “Southwest Airlines of Space”. Through vertical integration, SpaceX intended to gain control of the cost structure of the entire system which would open new markets by offering launches at lower cost:
The rocket would cater directly to a theory in the space industry that a whole new market might open for both commercial and research payloads if a company could drastically lower the price per launch and perform launches on a regular schedule …
SpaceX was meant to get so good at this process that it could do multiple launches a month, make money off each one, and never need to become a huge contractor dependent on government funds. SpaceX was to be America’s attempt at a clean slate in the rocket business, a modernized reset. Musk felt that the space industry had not really evolved in about fifty years. The aerospace companies had little competition and tended to make supremely expensive products that achieved maximum performance. They were building a Ferrari for every launch, when it was possible that a Honda Accord might do the trick. Musk, by contrast, would apply some of the start-up techniques he’d learned in Silicon Valley to run SpaceX lean and fast and capitalize on the huge advances in computing power and materials that had taken place over the past couple of decades.
In many cases, Mr. Musk was able to take commercially available components that were not specifically intended for use in space and show that they worked well enough. The lessons learned at SpaceX related to vertical integration were also used later at Tesla, although a reading of Tesla’s annual report shows that, like all automobile manufacturers, the company now uses a significant number of third party suppliers.
The story of Tesla is fairly well known and, as a public company, anyone can read the annual and quarterly reports since the company went public in 2010. One aspect of the book, which is common in many biographies of business leaders, is that we read about the financial travails of the subject’s companies without the benefit of actual financial statements or much precision in general. In the case of Tesla, the financial losses over its history as a public company are quite staggering as the income statements shown below illustrate (click on the image to expand the view):
Tesla posted a small profit in the third quarter but obviously it has a long way to go in terms of achieving consistent profitability and an acceptable return on capital. Perhaps the upcoming Model 3 mass market vehicle will provide the operating leverage required to bring the company to consistent profitability. The book, which was published in 2015, does not contain a great deal of information on the Model 3 and, while it does cover Solar City, it obviously was written well before the Tesla/Solar City merger. In general, it is fair to say that a reader who wants to better understand Elon Musk’s world from a financial perspective is going to have to do some digging because the book isn’t aimed at such readers directly but rather at a more general audience.
One surprising aspect of the book that is a definite negative is the absence of an index. While perhaps seeming like a minor quibble, the lack of an index in a biography of this type is really inexplicable and makes it difficult for a serious reader (or reviewer) of the book to easily find information after an initial reading.
There are many other subjects covered in the book that readers will find very interesting such as Tesla’s unique approach to automobile distribution, one that the original founders of the automobile industry such as Alfred Sloan found to be problematic in their era. But what sets apart Elon Musk from prior characters in the story of the automobile is that Tesla is merely one cog in his master plan for Mars. The concept of human habitation on Mars might seem ludicrous to many readers, and perhaps it is, but after reading this book one cannot help but look forward to seeing what exactly Mr. Musk will do over the next several decades. Even those who would never think of investing with him will find the upcoming story interesting to observe from the sidelines.