Understanding Elon Musk’s Rickety Empire


20150206192236-elon-musk-2High-risk investments frequently go up in smoke, albeit in a less literal way…

When the SpaceX Falcon-9 rocket exploded on its launchpad on September 1st, more than one payload was jeopardized. Elon Musk, the founder of SpaceX, has spent years working to legitimize the private space industry, fighting the US government in court for the right to compete for contracts and selling the public on the idea of affordable, private sector-led space travel. With this explosion, which also destroyed a valuable satellite to be used in part by Facebook, that dream looks far more uncertain.

In any high-risk industry, one has to expect setbacks. In aerospace and rocketry, disasters and explosions are almost guaranteed to happen. Yet, with a nascent enterprise that is both high-cost and yet to establish itself inside a traditionally government-led industry, such failures can be devastating. Private space flight will probably be worked out eventually, and it may even be SpaceX that does it. But the empire that supports SpaceX is built on very tenuous foundations.

The Look of a Visionary

Elon Musk is one of those rare business leaders who has succeeded in crafting a truly larger-than-life public persona. Thanks to a long string of successful (and frequently visionary) investments, he has become a poster child of private industry’s new innovative boom.

After making his initial fortune with PayPal, Musk has gone on to take on massive projects that seek to transform whole industries. Tesla Motors, the electric car company he runs, has done much to enliven an electric car industry that was moribund for years. SpaceX is trying to bring the private sector into space.

These wild ambitions have been backed up by an individual of intense personal energy and insight, one who has worked not only to build industries from scratch, but also to make those industries seem legitimate to a skeptical public. No easy feat.

Musk has been rewarded for his efforts by the market and the press. He is now one of the most recognizable figures in the tech world, and certainly the most well-known in the realm of serious industrial production – most of his fellow tech barons work in software and the aether of the Internet, while he is busy changing the world in concrete ways.

Musk’s various enterprises have made major technological breakthroughs. Yet, these businesses remain unprofitable, and their financial futures look progressively less sure.

An Empire of Debt

The reality underpinning Elon Musk’s ventures is that they aren’t making money. That’s a problem, because, as visionary and innovative an individual or company may be, the private sector is driven by financial performance.

So far, Musk has gotten away with a lot. He has taken on massive personal loans to finance moonshot projects, and his various businesses likewise have extensive debt burdens. Despite that, his companies are still darlings of the capital markets. Take Tesla, for example. It is a company that has a freakishly high forward-sales multiple, despite never having seen a profit. AND forward projections of earnings only getting worse in the next few years.

Tesla also has significant debt issues, which are, right now, being danced around by Musk and his team. He is working feverishly to find the cash he needs to cover short-term financing. He will likely find a workaround this time around, but the fundamental economic reality of the business is not changing any time soon: While Tesla was fantastically innovative and has succeeded in galvanizing new interest in electric cars, competition will only get fiercer from incumbents and new entrants. Being an industry leader with big losses right now, the last thing you should want to hear is that competitors are going to muscle in to make life even harder.

Yet, people continue to believe in Elon Musk and his companies. He has built an image in the Valley, and with investors at large of being a sort of super genius. And he has succeeded in leveraging that carefully cultivated reputation to support his ventures. The problem is that, no matter how good the dancer, the music always stops eventually.

When the Music Stops

The cracks are already starting to show in the Musk empire. The recent cash crunch at Tesla is just one example. A company that makes home solar panels, SolarCity (by his brother), is also a major liability. Musk’s most recent financial gambit, prior to the crisis with the Falcon-9, was to try to merge Tesla with SolarCity. Ostensibly this is to remove conflict of interest in future dealings (Musk is chairman of both companies).

Yet, investors have started to look askance at this sort of move. They see the roping together of these two companies more as an effort to save a faltering SolarCity, than to create any true synergy with Tesla. This move is exactly the sort of bold move Musk loves. The problem is that he is fast running out of financial wiggle-room for this sort of shenanigans.

I like Elon Musk. It would be hard for any libertarian not to. He is trying to shatter staid and stale industries, break government monopolies, innovate new technologies, and create entirely new industries. What’s not to love about that?

The problem is that grand visions can be extremely expensive, even ruinously so. For every fabulous new innovator breaking the mold, there are dozens who crash and burn. Musk’s numerous interlocked businesses, all fueled by mounting piles of debt and all with no clear path to profitability, represent exactly the sort of business empire that proves most likely to crack. Even if he manages to wriggle around the financing issues, win major government contracts for SpaceX, and get far deeper adoption of his electric and solar technologies, the tiniest hiccup in debt markets could see his financing opportunities dry up to nothing, and with them his businesses’ lifeblood.

People need to be wary of those who peddle in grand visions. They frequently hide unpleasant, and expensive, surprises.

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John Engle

John Engle is a merchant banker and author living in the Chicago area. His company, Almington Capital, invests in both early-stage venture capital and in public equities. His writing has been featured in a number of academic journals, as well as the blogs of the Heartland Institute, Grassroot Institute, and Tenth Amendment Center. A graduate of Trinity College Dublin, Ireland and the University of Oxford, John’s first book, Trinity Student Pranks: A History of Mischief and Mayhem, was published in September 2013.