Blog Post

Tesla IPO: 12 Things You Should Know

Tesla Model STesla Motors, by filing on Friday for a long-awaited initial public offering, has unleashed a flood of facts and figures about its business, strategy, future plans and more than a few challenges.

In the hours after the 7-year-old startup first filed its prospectus with the SEC, we laid out the company’s financials, noted the significance of this IPO as a test for the VC model in the green car biz and pulled out some fun facts from the filing (including plans for a big gap in Roadster sales after 2011). Here’s 12 more things you should know about Tesla’s current and future business that are tucked into the S-1 filing — from what happens if the startup’s deal with Lotus doesn’t get extended to why Tesla thinks it has the lowest-cost battery pack on the market:

What does Tesla have riding on its deal with Lotus? Tesla’s current contract with UK-based supplier Lotus is only good for another 700 or so vehicles and “gliders” (partially assembled vehicles without an electric powertrain). Tesla notes it needs to seal a new supply agreement, or extend the existing one with Lotus, or else contract with another supplier — opening the floodgates for new challenges. Tesla says it would require redesign of the Roadster chassis, adjustments in the supply chain, establishment of a light manufacturing facility, licensing of certain intellectual property rights, and more — all at great expense and significant time.

What’s Tesla selling besides cars? In addition to sales of the Roadster itself, Tesla has drawn $11.1 million in revenue by selling zero emission vehicle, or ZEV, credits to other automakers since June 2008. The startup currently has a deal with one car manufacturer for credits earned from the sale of the vehicles that Tesla made in 2009, and it has until the end of June 2010 to sell those credits under the agreement. Tesla says it’s now “negotiating to extend this agreement for vehicles manufactured in 2010 and 2011.”

Can Tesla break out of the Silicon Valley bubble? Tesla is charging into uncharted territory with the Model S, a product targeted for consumers closer to the mainstream than its inaugural Roadster. Whether the company will resonate with tens of thousands of customers outside its established insider network of early adopters remains to be seen. “Many of our Tesla Roadster sales have been made to persons who had pre-existing relationships with our management team or who are affluent individuals with a strong interest in owning a novel product,” the company observes. “It may be difficult to attract high numbers of new Tesla Roadster customers who do not have pre-existing relationships with us or who are attracted to buy the Tesla Roadster after its initial novelty phase.”

What technology has Tesla developed in-house? Battery “cooling, power, safety and management systems,” a “proprietary alternating current 3-phase induction motor and its associated power electronics,” and “extensive software systems to manage the overall efficiency, safety and controls.” Tesla believes these innovations, combined with standard components, have given it the lowest-cost battery pack currently on the market, in terms of cost per kilowatt-hour.

What’s at stake in the EPA’s new range calculations? Based on today’s EPA testing system for electric vehicle range, Tesla expects to offer electric range options from 160 miles to 300 miles. But those numbers could be up to 30 percent lower by the time the Model S rolls out, since the EPA is working on a new methodology, as Tesla notes: “Recently, the EPA announced its intention to develop and establish new energy efficiency testing methodologies for electric vehicles, which we believe could result in a significant decrease to the advertised ranges of all electric vehicles, including ours.”

Why can’t Tesla take its time with the Model S? Delays, changes in the electric range estimates and the design changes that are all but inevitable as the Model S goes from prototype to production could cause Tesla to lose customers — historically, the company says people have cancelled their reservations for the Roadster after production delays.

Moreover, a delayed Model S launch would also push back the next-gen Roadster, which Tesla does not plan to introduce until at least one year after Model S production begins. “The launch of our Model S could be delayed for a number of reasons and any such delays may be significant and would extend the period in which we would generate limited, if any, revenues from sales of our electric vehicles.”

What might keep Tesla out of certain markets in the U.S.? Legal challenges lie ahead for Tesla’s distribution model — selling its own vehicles at stores (rather than through franchised dealerships) and over the internet. As Tesla notes, “many states have laws that may be interpreted to prohibit internet sales by manufacturers to residents of the state or to impose other limitations on this sales model, including laws that prohibit manufacturers from selling vehicles directly to consumers without the use of an independent dealership or without a physical presence in the state.” As a result, Tesla may have to change its sales model for at least some states or find itself shut out of whole swaths of the U.S. market.

Can Tesla’s battery take the heat (and the cold)? Tesla mentions reports in its prospectus that “have suggested the potential for extreme temperatures to affect the range or performance of electric vehicles. Many others in the electric vehicle space, including General Motors’ Volt team, accept this as fact, but Tesla describes it as though it’s a surprising new discovery: “For example, certain recent reports have suggested that electric vehicles operated in colder temperatures may experience a reduced overall range as batteries may lose the ability to hold a charge more rapidly in cold weather. If such reports gain widespread acceptance, our ability to market and sell our vehicles may be adversely impacted.”

How likely is Tesla to win a larger supply deal with Daimler? Germany’s Daimler picked Tesla last year to supply up to 1,000 battery packs and chargers for a trial of the electric Smart fortwo in Europe. However, as Tesla acknowledges in its prospectus, “There is no guarantee that we will be able to secure future business with Daimler as it has indicated its intent to produce all of its lithium-ion batteries by 2012 as part of a joint venture with Evonik Industries AG. If Daimler goes through with this, we are likely to lose the only customer in our powertrain business.”

Does Tesla have a lock on the full $465 million DOE loan? Under its agreement with the DOE, Tesla notes it cannot “access all of these funds at once, but only over a period of up to three years through periodic draws as eligible costs are incurred,” and only then if Tesla meets certain conditions, including approval of a Model S factory site under environmental regulations, and commercial customers signing up for powertrain components.

How much of the DOE-backed projects does Tesla have to cover? Tesla has agreed to spend up to $33 million “plus any cost overruns” for the two projects (Model S and powertrain), and set aside half of the net proceeds from the IPO.┬áThe startup is also obligated to direct half of the net proceeds from the IPO to an account dedicated to its DOE-backed project. The feds will later reimburse those costs.

What’s coming down the pike? For future models, Tesla is considering an electric SUV, commercial van or coupe. “By developing our future vehicles from this common platform, we believe we can reduce their development time, and therefore reduce the required additional capital investment. Our long-term goal is to offer consumers a full range of electric vehicles, including a product line at a lower price point than the planned Model S.” Having designed the Model S with a battery pack that’s easily swapped out, Tesla says it may at some point offer Better Place-style battery swapping at its stores.

Model S photo courtesy of Tesla Motors

21 Responses to “Tesla IPO: 12 Things You Should Know”

  1. captn obvious

    Risk risk risk risk risk…. REWARD? I’m tempted but I don’t see it happening. When you look at all the possible stumbling points I think a game of roulette might yeild better odds. The cars may sell to the wealthy but I don’t see the average joe taking a gamble on something as important as their car. Honda and Toyota had the american public locked up because of one thing – reliability. That’s what sells a car.

  2. Jim,

    The Better Place model is the way to go. Tesla needs to partner with them. Then you can effective remove the price of the battery from the initial cost of the car and combine that with the Better Place approach to making the electric car infrastructure a reality. Agassi and Musk need to have a serious talk.

    Hybrids are a waste, they aren’t dealing with the infrastructure problem – they just ensure the old one stays in place.

  3. Having been in several startups that eventually went public, I can say that one of the most difficult and painful things to do is to write up all the Risk Factors that are required by the SEC. Look at any S-1 (and even 10-K and 10-Q) and you will see a Risk Factors section that lists everything that can go wrong for the company. Tesla is no different. Obviously if the company is aware of all the Risk Factors they are taking steps to minimize or eliminate the risk wherever they can.

  4. It’s a brand new car company that is building the WRONG kind of car. Unfortunately, Tesla was started just before people finally figured out the overall economy (read lower cost) of PHEVs. When the dust settles, people will figure out it’s easier and cheaper to add a tiny range-extending IC engine instead of an extra $10,000 worth of batteries.

    And with major automakers (GM, Ford, Toyota) all building the RIGHT kind of car, it’s hard to see how much of a niche Tesla will actually have to stand on.

  5. “For example, certain recent reports have suggested that electric vehicles operated in colder temperatures may experience a reduced overall range as batteries may lose the ability to hold a charge more rapidly in cold weather.”

    Isn’t this established scientific fact, or have the Tesla engineers never been outside of the sun belt? Generally, lower temperature = slower chemical reactions = less power from batteries.

    I had to get my car jumpstarted this weekend because I hadn’t driven it in 5 or 6 days in -15 Celsius and colder weather. I know the battery technology is different, but generally, those of us who live in colder climates know that all batteries loose charge in colder temperatures.