Tesla Founder Marc Tarpenning on How to Start a Car Company

Compared with Tesla Motors co-founder Martin Eberhard, the startup’s other founder — Marc Tarpenning — has kept a relatively low profile. But Tarpenning spoke this morning at IBM’s (s IBM) Almaden Institute 2009 in San Jose, Calif., telling his version of the Tesla creation story that Eberhard and CEO Elon Musk have been fighting over this summer.

Back in 2003, Tarpenning and Eberhard knew they wanted to start a new company, but hadn’t settled on specifics. “We knew we wanted to solve a real problem,” Tarpenning said. “We just couldn’t do another network widget.” Eberhard suggested that they “do oil.” Climate change had yet to become a major mainstream concern in the U.S., but “there was this nagging suspicion about, what if we run out of this stuff.”

The pair looked at cellulosic ethanol and hydrogen fuel cells, but ultimately decided to work on the electric car. Tarpenning said that at the time, about half of the venture capital community was interested in taking a close look at fuel cells, and the other half had already looked at the technology and concluded that “the energy equation doesn’t make sense.”

Settling on electric vehicles, Tarpenning and Eberhard developed the idea of building a beautiful, but expensive “aspirational” vehicle to help improve the image of green cars and bring them into the mainstream. Then the entrepreneurship part began. “Imagination is great,” but “how do you then start a car company?” Tarpenning said. “In Silicon Valley, you have an idea, you immediately incorporate — why not?”

From there, Tarpenning described Tesla’s next three years as a cycle of developing, hitting a milestone, and then seeking fresh capital. When you have a major milestone, you switch gears, said Tarpenning, to seek funds for future development. After hitting its first major milestone in 2004 — the company’s first drivable version of a Tesla car — “the main thing we did is immediately raise money,” he said.

By May 2006, when Tesla had closed its third round of venture capital investment, Tarpenning said the pitch had gotten much easier — and not just because the startup had a drivable mule. The cleantech sector had started to take off and the startup refined its pitch, shifting from the idea of a car with “a bunch of computers in it and it goes real fast,” to a technology and vehicle that could become a key part of the nascent cleantech sector and market for greener cars.

Even so, Tesla ran into trouble late the following year when the transmission failed in durability testing, and in April 2008 had to get a bridge loan. This time, the milestone-fundraise pattern worked against the startup. “We had this big milestone, and we failed it.” These were “dark times” for Tesla, Tarpenning said.

Tesla has since managed to pull itself away from the brink, and Tarpenning noted, has since “received a bunch of money” from the Department of Energy loan program, as well as a $50 million investment from Daimler AG (s DAI).

But Tesla is far from mass production. And Tarpenning says he’s “a little skeptical” that Tesla will hit its 2011 production target for its own electric sedan. Likewise EVs are nowhere close to mainstream. What’s the biggest hurdle still standing between electric cars and the mass market, according to Tarpenning? “The batteries really aren’t good enough yet.”