Elon Musk's VC Warning
Elon Musk recounted a cautionary tale from Tesla's Series C, where taking a higher valuation from VantagePoint over a better partner in Kleiner Perkins nearly bankrupted the company. His key takeaway for founders: trust and alignment with your VC is more critical than the valuation itself.
The Series C round in question was a $40 million fundraise for Tesla back in 2006. The choice was between Kleiner Perkins at a $50 million pre-money valuation and VantagePoint Venture Partners at $70 million. Musk reportedly would have accepted the lower valuation if famed investor John Doerr had joined the board, but Doerr's existing commitments prevented it, leading Tesla to partner with VantagePoint. The founder-VC relationship soured by late 2007 when VantagePoint attempted to lead a deal that would have diluted Musk's control. The conflict escalated dramatically during the 2008 financial crisis as Tesla teetered on the edge of collapse, having burned through capital with Roadster production delays and cost overruns. With only weeks of cash left, Tesla scrambled to raise a $40 million bridge round in December 2008. VantagePoint's co-founder, Alan Salzman, allegedly stalled, refusing to sign the final page of the agreement because he felt the new round undervalued the company. Musk believed this was a tactic to bankrupt Tesla, oust him, and allow the VC firm to recapitalize the company and seize control. To circumvent VantagePoint's ability to block the equity deal, Musk and the other investors restructured the financing as a debt round at the last minute. The deal, which included the last of Musk's personal fortune from his PayPal exit, closed on Christmas Eve 2008—mere hours before the company would have failed to make payroll and gone bankrupt. Even after that save, Tesla's survival was precarious. A critical lifeline appeared in May 2009 when Daimler acquired a nearly 10% stake for a reported $50 million, an investment Musk later credited with saving the company. This was followed by a $465 million low-interest loan from the U.S. Department of Energy in June 2009, which stabilized the automaker's finances. Tesla ultimately repaid the government loan nine years ahead of schedule.
