How can you break into the notoriously brutal auto industry and become the world's most valuable carmaker in 17 years? According to Matthew DeBord of Business Insider, if you're Tesla, you "aggressively attack opportunities, heedless of risk."
But while “attacking opportunities, heedless of risk” may have been a factor in Tesla’s success, plunging headfirst into high-risk business decisions nearly bankrupted the company. Twice.
Rightly so, Elon Musk receives a lot of credit for the automaker's success. But one thing is certain: Tesla would not have made it to this point without a strategic CFO leading the company during its most difficult moments.
First Near-Bankruptcy Crisis: The 2008 Economic Crash
In the summer of 2008, Tesla was about to close a $100 million Series E funding round when the world's economy collapsed, sending the company into a whirlwind that would lead to bankruptcy by year's end.
The bankruptcy of Lehman Brothers sparked an international banking crisis. What is one effect? It became almost impossible for a startup like Tesla to raise capital. When industry giants like GM and Chrysler were collapsing, why would anyone take an unwarranted chance on a fledgling, independent American automaker?
In the wake of this crisis, Elon Musk took over as CEO. But every strategy Tesla had for the $100 million funding round was scrapped. Tesla couldn’t build a new factory or headquarters. The business had to cancel the Model S launch and let go of close to a fifth of its workforce.
The safe decision would have been to sell the company. But Musk took a risk. After Series E failed, he invested his personal money in the company.
That may not seem notable when you consider Elon Musk the billionaire today. But at the time, he had already put all the $180 million he received from PayPal shares into Tesla and SpaceX.
Elon Musk's brother reportedly informed reporters that Elon was "more than broke".
This story prompted Steve Jurvetson to call efforts to save Tesla “the most extraordinary act of entrepreneurial zeal and commitment” he’d ever seen because Musk was willing to go “net negative, personally.”
Musk claimed the business was just three days away from bankruptcy when a $40 million loan and following financing round eventually closed on Christmas Eve 2008.
However, a $40 million loan to save Tesla from bankruptcy didn't cause the situation to change overnight. The strategic guidance of CFO Deepak Ahuja did.
The Solution: IPO As a Funding Strategy, Not an Exit.
By seeing the company's June 2010 IPO as a fundraising strategy rather than an exit strategy, Ahuja assisted Tesla in navigating through these difficult times.
Ahuja questioned at the time whether he would be affected by Tesla's massive round of layoffs. He’d only joined the company a few months before the economic crash. And he added that it might have made sense: "Why have a high-paid CFO when you don't need it?"
But when there is a financial crisis, you really need a strategic CFO on your team. And Musk must have recognized this because Ahuja was kept to assist Tesla to get back on track.
In actuality, Tesla would constantly require more funding. That’s just the nature of the auto industry. That’s why Ahuja and Musk started down the IPO path.
Tesla's financial issues weren't miraculously solved by the IPO. However, it did assist the business in fully recovering from its 2008 crisis of near-bankruptcy and set Tesla on the route to becoming the world’s most valuable automaker 10 years later.
Second Near-Bankruptcy Crisis: Production Hell with the Model 3
Between 2017 and 2019, when Tesla tried to scale up to mass production of its Model 3 automobile, it experienced production hell, pushing the business once more to the verge of bankruptcy.
For Tesla, the Model 3 brought forth an existential crisis. And that crisis was one of the key reasons Musk brought Ahuja back to Tesla in February 2017, after he’d retired in 2015.
The company's long-term success depended on the mass-market model, which was more reasonably priced. Ahuja noted that the product simply wasn't ready and that the actual time to market was much longer than anticipated. He said to CNBC:
From a numbers perspective, the Model 3 production plans never made sense. For at least five consecutive quarters, Tesla's free cash flow was negative (Q1 2017 through Q1 2018). And according to Bloomberg data, the company was burning over $7,430 per minute.
All of that financial chaos brought Tesla within “about a month” of bankruptcy.
Musk didn't need a CFO who could highlight the risk involved in the Model 3 production plans. He needed an advisor who could work within the constraints of the challenge to help Tesla win in the end. And that’s what Ahuja proved he could do.
The Solution: A Strict Control on Spending
When Ahuja rejoined Tesla, his main objective was to balance the Model 3 production demands with a need to get spending in check by reducing CapEx across the company.
That was easier said than done because, according to a leaked internal email, the company was "adding about 400 people per week for several weeks" and making widespread upgrades to production factories.
The solution wasn’t to advise against these production goals. Rather, Ahuja and the finance team had to “comb through every expense worldwide, no matter how small, and cut everything that doesn’t have a strong value justification.”
This process may not have alleviated the stress of Model 3 production hell. Nevertheless, it allowed the business to function on a tight budget until it could generate revenue from hundreds of thousands of Model 3 preorders.
By the time Ahuja made the decision to retire from Tesla once again in 2019, he had helped the business achieve two consecutive successful quarters with a combined profit of more than $450 million. The company had also grown to over $24 billion in yearly revenue. And not only that, but Tesla had also just surpassed GM as the most valuable carmaker in the United States.
Give Finance a Seat at the Strategic Table
Tesla entered the S&P 500—a benchmark for the largest U.S. stocks—in December 2020 with a valuation of over $600 billion, making the automaker "Wall Street's sixth largest company by market capitalization." Elon Musk deserves a lot of credit for this achievement, but some people, like Homebrew VC Hunter Walk, wonder if there’s “any large cap public company with more of its value tied to one specific person than Tesla.”
Musk’s personal brand and his penchant for taking massive risks bring so much value to Tesla. But without Ahuja's leadership in navigating Tesla through numerous financial difficulties, Tesla could never have reached this height.
You won't achieve Tesla-level success by imitating Musk's strategy of seizing chances no matter the risks. What matters most is your capacity to manage those risks with strategic finance, even when the statistics don't make sense. And for that reason, it's critical that finance has a seat at the strategic table.