Tesla Motors Was Cash Flow Positive Last Week, Elon Musk Says
© Michael Graham Richard
Important Milestone for the Electric Car MakerTesla CEO Elon Musk has had a very good year in 2012, and it's not quite over yet. He wrote on Twitter that Tesla Motors achieved an important milestone last week; it was cash flow positive. Not by much, but still... If it can stop burning cash, it's likelihood of survival in the long term becomes much higher.
Some might be wondering how they could have been cash flow negative until now despite selling expensive vehicles. Well, we must look at the whole picture, starting at the beginning. It's always very hard and expensive to be a manufacturing startup, and it's even harder and more expensive to be a manufacturing startup in a high-tech, innovative field. Before the first EV can be sold, you have to spend millions on engineers doing R&D, on capital equipment and materials, on testing and certification, on marketing, etc. If you even survive that initial phase and then want to do a more ambitious second model that can be sold by the tens of thousands, you need to spend hundreds of millions more on R&D and on new manufacturing facilities that can produce more vehicles, hire more employees, create a distribution network from scratch, etc..
All those things mean that lots of money is going out the door, and little is coming in because, until recently, they didn't even have the second product (Model S electric sedan) available for sale. So they had to raise money on the equity market (they did an IPO, sold shares a few times) and on the debt market (loans, including from the US government).
But if at some point you don't get more cash coming in than going out, creditors and investors won't want to invest in you or lend to you, and that makes you very sensitive to macro-economic shocks. This is what almost killed Tesla during the financial crisis of 2008-2009; they were running out of cash and the equity and credit markets had frozen up. Musk had to put all his personal money into Tesla to keep it going... Hopefully Tesla will stay cash-flow positive from now on and we'll be able to see their third platform in a few years (it should be a lot less expensive than Model S, and be produced in much higher volumes -- and EV for the masses!).