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The Tesla Story, Part 2 – Creation Of The Company And The Roadster

by Stephen Fogel

Tesla Before Elon

Elon Musk was not involved in the initial creation of Tesla Motors. It was started in 2003 by two engineers, Martin Eberhard and Marc Tarpenning. Eberhard and Tarpenning had been in business together as consulting engineers, and worked on many of the earliest mobile computing devices. They saw the slow but steady progress of battery technology and wanted to capitalize on it.

Step One: Make A Pile Of Money

Together they started NuVo Media and developed the Rocket eBook, an e-reader. It was moderately successful after it was released in 1998. When the pair received an offer to sell the company for $187 million to Gemstar-TV Guide in 2000, they sold.

Less than a year after selling NuVo Media, Eberhard and Tarpenning wanted to start a new company. Eberhard was considering buying a sports car following his recent divorce, but wanted one that was environmentally friendly. There was no such thing on the market.

The Idea Behind A New Car Company

Eberhard researched many alternate power sources, and concluded that electricity was the most efficient choice for such a vehicle. The pair’s new venture would be an electric car company. Its first product would be a two-seater high performance electric sports car, followed by more affordable models that could sell in higher volumes.

Eberhard and Tarpenning’s initial research showed them that the strong performance of electric induction motors, with their instant torque from a standstill, would be greatly appreciated by drivers. Regenerative braking, in which energy is returned to the battery when the brakes are applied, was another benefit of electric power. Lithium-ion batteries were their choice for energy storage.

Making Cars Without A Factory

Eberhard and Tarpenning also realized that they could actually build a vehicle of their own by using the wide network of auto parts supplier companies that had sprung up over the past few decades. This was the result of the auto industry’s trend toward the outsourcing of most components to these supplier companies.

Today, vehicle manufacturers basically create their own body structures, engines and transmissions, and get the rest, built to their specifications, from outside suppliers. Tesla Motors would take this to the next level, outsourcing the vast majority of their electric sports car’s components. In theory, this would keep their costs manageable and their production process trouble-free.

Picking A Name And Getting Started

The company’s name is a tribute to Nikola Tesla, the Serbian-American genius and inventor, who in 1887 created the AC induction motor they would use in their electric vehicle. The domain name of Teslamotors.com was acquired in April 2003, and the company was incorporated in July of that year. In August, Tesla Motors Inc. moved into its first office in Menlo Park, California.

Eberhard and Tarpenning put together a business plan for Tesla, in which they spelled out the capabilities of their proposed electric sports car:

  • Zero to 60 mph in less than 3.9 seconds
  • World-class handling
  • 100 mpg equivalent
  • Zero tailpipe emissions
  • 300 mile range
  • Zero maintenance for 100,00 miles (other than tires).
  • A selling price less than half that of the cheapest competitive sports car.

Figuring Out How To Build It

They quickly came to the conclusion that their first vehicle had to be as easy to build as possible, to keep the costs from getting out of hand. The best way was to use an existing vehicle and modify it to accept their electric drive system. After deciding that this vehicle had to be as light as possible (so that the battery pack would not be too big) and that a mid-engined layout was preferable for the best handling characteristics, they selected the Lotus Elise, made in England. An added benefit was Lotus’ separate engineering company, which could help them to integrate their electric drivetrain into the Elise.

Raising The Initial Round

To raise their first round of capital in 2004, Eberhard and Tarpenning got small investments from friends, family members, and some venture capitalists, but they still needed someone to make a very large investment to get their company off the ground.

That someone turned out to be Elon Musk, who had recently started SpaceX. Tarpenning and Eberhard had met Musk in 2001 at a Mars Society conference, where they heard him speak about space vehicles. They contacted Musk, and he agreed to hear about Tesla.

Musk shared the Tesla founders’ vision of an electric car that was superior to those with a combustion engine. He also agreed that a high-end sports car should come first, and then be followed by a more affordable successor. After some due diligence, Musk was in. He put up $6.3 million and led the first round, which totaled $7.5 million. It was April of 2004 and Tesla was ready for launch.

Tesla After Elon

Elon Musk was named Chairman of the Board of Tesla, but he was not involved in running the company in those early days. In November of 2004, the first Tesla “mule” – a Lotus Elise chassis with Tesla’s electric drive system installed – was test driven. It went very fast and there were no mechanical failures, so it was considered a great success. The basic concept was proven.

Musk had been involved in many aspects of the Roadster’s design and development. He developed the battery pack, which used a large number of lithium-ion laptop computer batteries. Musk also upgraded the body material from fiberglass to carbon fiber to reduce weight. He designed the car’s headlights as well. He even lowered the car’s doorsills so that it would be easier to enter and exit.

Meanwhile, Tesla needed more money to keep going and get the Roadster into production. In February 2005, Musk again led another round of financing, which raised $13 million. The production contract with Lotus was signed in July of 2005.

In July of 2006, the Tesla Roadster was officially unveiled to the public by Eberhard and Musk at a star-studded, invitation-only event at the Santa Monica Airport. More than one hundred cars were sold within two weeks of this event. The world and the auto industry were now on notice that Tesla was an automobile manufacturer. Tesla also won the Global Green award that year for the car’s design.

In 2007, Musk and Technology Partners raised another $40 million. The company grew with the addition of additional investors, including the two men who started Google. Tesla now had more than $100 million invested in it.

If Making A Car Were Easy, Everyone Would Be Doing It

Production had been set to start in 2007, but there were some major problems to resolve before this could happen. One was that the original transmission, designed by Martin Eberhard, would not work. This would delay the car’s release by a year. The other was that there were major cost overruns, which would double the original projected price of $92,000. Musk visited Lotus in England to do his own investigation, and discovered many more major production problems. This state of affairs was simply unacceptable to Musk, and he stepped in to get the project under control, and quickly.

Elon Musk did what he believed was necessary for the company’s survival: he immediately fired everyone who was responsible for delaying the Roadster’s progress. This included Martin Eberhard. An interim CEO who was also a Tesla investor, Michael Marks, was hired. He immediately made a list of all the problems that had to be resolved before production could start. It was a long one, with more than thirty problems that had to be solved before the Roadster could be made. Each problem was assigned to a Tesla executive, and each one was solved.

A new CEO and President, Ze’ev Drori, was in place by December 2007. Drori laid off ten percent of Tesla’s staff, but it wasn’t enough to make the company profitable.

The Tesla team went to work. They got cost concessions from parts suppliers, redesigned parts to lower production costs, and took other measures. This reduced Tesla’s cost of building the Roadster to the point where only a relatively minor price increase of $20,000 would be necessary. Unfortunately, they would first have to honor the hundreds of pre-orders that were sold for the original price of $92,000 each.

The regular series production of the Tesla Roadster finally began in March of 2008. It was priced at $109,000, and several hundred orders came in at that price. Tesla just might make it.

Elon Musk, Totally In Charge

In October of 2008, Elon Musk succeeded Drori as CEO. Musk had the most at stake with Tesla, so he decided to “take the wheel.” At this point, Musk had put $55 million of his own money into Tesla, and the company was still hemorrhaging money.

Tesla’s bank balance dropped below $500,000. Musk had $20 million left, and had a choice to make. He went all in, with his last $20 million and another $20 million from other investors, including his brother.

As it turned out, this was the right call. This last-minute $40 million capital infusion kept Tesla alive until another major development could pay off.

Daimler-Benz Becomes A Tesla Customer

That major development was the sale of 1,000 Tesla battery packs to Daimler for an electric version of their smart car. Closing this deal in January 2009 brought in $40 million to Tesla. This was followed in May by Daimler’s agreement to buy almost ten percent of Tesla for $50 million. This was quite a testimonial, coming from the company that traces its lineage to the first practical internal combustion motorcar, patented in 1886!

The Tesla Roadster Rolls Out

Tesla had contracted with Lotus for 2,500 “gliders” (vehicles without powertrains), which Tesla then fitted with battery packs, electric motors, electronics, etc. By January 2010, production had reached 1,000 units. By the time that Tesla ended production of the Roadster in 2012, approximately 2,450 had been built. About 1,500 were sold in the United States, and around 1,000 were sold in the rest of the world.

The Roadster’s Legacy

The Tesla Roadster represents several milestones in the development of Tesla. It showed that:

  • Tesla could create and build a high-performance, long-range electric drive system
  • Tesla could design and produce a vehicle
  • Tesla could market and sell that vehicle
  • Tesla could sell its drive system to a well-established automaker
  • Tesla would have the opportunity to create additional electric vehicles

The initial vision of Martin Eberhard and Marc Tarpenning, backed by the money and the mind of Elon Musk, had launched Tesla into a very special place. By blending advanced technology with old school industrial engineering, they had created the first new automaker of the 21st Century.  

Let’s Go Back To 2008 For The Next Chapter Of  The Tesla Story

The Tesla Roadster beat all odds to make it to the marketplace. But Elon Musk is not one to rest on his laurels. He had a plan for Tesla Motors. His next vehicle would be even more audacious, with a much higher level of risk. The story of the Tesla Model S starts here.

Head over to our Electric Car reviews page to read our Tesla Electric cars reviews.