Elon Musk's Near-Fatal VC Choice
Elon Musk recounted how choosing the wrong VC firm almost killed Tesla during its 2006 Series C. He says picking VantagePoint over Kleiner Perkins was a mistake that nearly bankrupted the company, emphasizing that trusting the partner is more critical than the valuation.
The pivotal 2006 Series C round saw Tesla choose VantagePoint Venture Partners over the storied Kleiner Perkins. Kleiner Perkins had offered a $50 million pre-money valuation, which Elon Musk was willing to accept if legendary investor John Doerr joined Tesla's board. Doerr, however, had too many other commitments and couldn't agree, leading Tesla to accept VantagePoint's higher offer of a $70 million pre-money valuation. John Doerr of Kleiner Perkins has since called the decision to pass on Tesla "probably the worst investment decision of all time." At the time, venture capitalists were wary of investing in new car companies, a sector notorious for bankruptcies. Kleiner Perkins instead chose to back Fisker Automotive, a competitor that ultimately filed for bankruptcy. The relationship with VantagePoint soured by late 2008, as Tesla was on the brink of collapse amidst the global financial crisis. With only weeks of cash left, Tesla needed to raise a $40 million funding round from existing investors. Musk personally committed $20 million of his own money, the last of his funds from the PayPal acquisition, to keep the company afloat. In the final days before Christmas 2008, the crucial financing deal almost fell apart. VantagePoint’s co-founder, Alan Salzman, allegedly stalled, refusing to sign off on the final paperwork because he believed the deal undervalued Tesla. Musk has stated he believed this was a strategic move to bankrupt the company, remove him as CEO, and allow VantagePoint to take control of the assets. With payroll due and bankruptcy looming within hours, Musk's team devised a workaround. They restructured the financing from an equity round, which gave VantagePoint blocking rights, to a debt round, which the firm could not interfere with. This last-minute maneuver allowed the deal to close on Christmas Eve, saving the company with just hours to spare. The 2008 crisis was a crucible for Tesla, which was burning through roughly $4 million a month and facing lawsuits from suppliers. The company had laid off 24% of its workforce and its cash reserves had dwindled to as low as $9 million. The successful, albeit dramatic, funding round provided the necessary lifeline to continue operations and development of the Model S.
