Private Ownership is Good for Risk Taking
People who know me know that I appreciate risk takers and entrepreneurs. Their willingness to dream big and go all-in on their beliefs drives us all forward. Elon Musk, CEO of several high profile companies, has been an interesting one to follow.
Last week, Musk said he might take Tesla Motors back to private ownership. This move could have real benefits, and I hope it moves forward. Going private would insulate Tesla from the frustrating expectations game played on Wall Street. Quarterly reports can be brutal on young public companies like Tesla. Their growing pains are full display for the world, and for Tesla, those pains are very real.
Throughout the company’s short history, Tesla has had significant problems with production volume, late delivery, quality control, and poorly managed expectations. Musk is chronically guilty of over-promising and under-delivering. Tesla still manages to make innovative products that people want to buy, so they need to do a better job managing investor expectations.
To illustrate, consider the comparison with the venerable giant, Ford Motors. While Tesla might be pleased if they manage to produce 150 thousand cars this year, Ford Motors will manufacture and sell more than 6 million vehicles. Despite Ford’s massive advantage in scale, Tesla boasts a $60 billion market capitalization — 50% larger than that of Ford. Wall Street clearly expects Tesla to make huge profits on every vehicle, or to scale up their operations massively, or more likely a combination of the two. But neither has happened yet, and that puts a lot of pressure on the company.
That pressure has made Tesla a media circus in recent years. There’s a repeating cycle of hype and fanboy vs naysayer dueling in the media. The stock price is unsurprisingly very volatile. These are driven in part by Musk’s personality, and in part by the scrutiny that comes with Tesla’s public valuation.
Taking the company private would relieve Tesla’s management of many bureaucratic and regulatory demands that do not apply to private companies. Furthermore, making Tesla’s equity illiquid (by de-listing it from the stock exchange) would dramatically tone down the hype cycle. As a private company, Tesla would not need to transparently report its operational setbacks, and everybody could stop arguing over what the company should be worth.
Electric propulsion is efficient and high performing and seems like a good bet for the future. Tesla has become a market leader in autonomous driving capability and battery production. Their vehicles use the same batteries that power our phones and laptops, and Tesla’s mass production of batteries improves performance and lowers costs for everybody.
At today’s valuation, it may take a very long time to turn a new investment in Tesla into financial returns, so new investors will need to be patient. But, there is a lot of private capital looking to back technologies that can shape the future. Tesla seems to fit that bill, and whatever happens, I’m rooting for this innovative American company to succeed.
