Innovation and entrepreneurship is the source of power for high-quality economic and social development. Elon Musk's entrepreneurial experience is legendary, and there has been a lot of research on Musk's success factors, but there has been little exploration from the perspective of financial ability.
Is there a financial competency factor to his ability to repeatedly succeed in different industries and sectors? How does financial competence help them succeed in their business? This article gives an example of Musk's financial ability to provide a reference for the majority of entrepreneurs.
01
Formation of financial competence
Musk began teaching himself programming at the age of 9 and designed a space-themed game called Blastar at the age of 12. Subsequently, the source code of the game was sold to a South African magazine and earned $500. This made Musk Jr. deeply realize that knowledge can create wealth.
In 1992, Musk's financial literacy in college improved his financial literacy, laying a solid foundation for him to use his financial skills in various entrepreneurial projects in the future. He wrote a paper in college on his favorite topic– supercapacitors. The paper was not only rated as "very thoroughly analyzed" but also considered to have "excellent financial knowledge."
02
Practice financial skills during entrepreneurship
1. Cost budget table for SpaceX projects
In 2001, Musk tried to buy missile launch vehicles from Russia, but the deal did not close because the supplier gave the price far exceeded Musk's budget.
On the return flight, Musk handed his laptop to his companions, who were stunned: Musk made a form detailing the cost of building, assembling and launching a rocket.
According to Musk's calculations, he needs to build a medium-sized rocket to meet the needs of those segments carrying small satellites and scientific payloads, which can save a launch cost.
2. Cost planning for the Tesla project
In 2007, when auditor Watkins revealed the true cost of the Roadster car, Musk believed that CEO Eberhard had made a serious mistake in managing the company and allowed the cost to soar.
To reduce the company's cost of producing roadsters, Musk asked employees to meet every Thursday morning at 7 a.m. to review the latest raw material bills. They have to know the price of each part and then make a reasonable plan to make it cheaper.
For example, if a generator cost $6,500 at the end of December of the previous year, Musk wants its cost to drop to $3,800 in April of the following year, and he asks the company to analyze and plan the cost of these parts every month.
03
The role of financial competence in entrepreneurial success
Musk's financial capabilities include business planning capabilities, cost control capabilities and financial integration capabilities, which help him succeed in entrepreneurship.
1. Business planning ability
Musk has roughly made five ventures, including the Zip2 website, PayPal cyberbank, SpaceX, Tesla Electric Vehicles, and Solar City. For these five entrepreneurial projects, Musk thought about their commercialization at the beginning, and the core is the profit model.
(1) The profit model of Zip2 website
Zip2 website profit model is a resource model, by Zip2 as a resource collector and transmission platform, and in the exchange of information to obtain profits, the company has a To B business model, become the world's earliest birth of the platform-based Internet products, can see Musk's business planning capabilities forward-looking.
In 1995, Musk persuaded navteq, an electronic navigation map provider, to offer free mapping software. He then wrote the code needed to put the two databases (business lists and maps) together.
Initially, Zip2 expanded the content of its business listing by convincing businesses to pay for maps that landed on Zip2, and began offering newspapers a platform that allowed them to create local catalogs for online subscribers.
Between 1996 and 1997, Zip2's team developed a software package that sold it to newspaper companies that could rely on it to create their own catalogs of real estate agents, car dealers, and various classifieds. Soon, Zip2 was a huge success in journalism.
As a nascent Internet company, the main cost of Zip2 is software development.
In order to continue to grow the business, in 1995 Musk purchased an access license to the San Francisco Bay Area Enterprise Database, which provided the name and address of the business. Over time, Zip2's commercial footprint has expanded, which has also brought zip2's second major cost, namely the cost of employment. Musk recruited technicians and salespeople to promote Zip2 services online and offline.
In addition to the above two categories, the cost of Zip2 also includes the investment of renting an office and purchasing equipment.
The amount of profit depends on the revenue and demand. With the continuous expansion of the business, more and more news and publishing groups and other enterprises have become the business customers of Zip2, so the company's revenue has shown a large-scale increase trend.
Zip2's software allows them to quickly access the business to the Internet without developing their own technology, because it is a software product, the company's employees only need to pay the cost of future maintenance without developing new products, plus Musk advocates the rational use of resources to save costs, so Zip2 has a good profit margin.
(2) SpaceX's profit model
The services provided by SpaceX are spacecraft manufacturing and space transportation services. The main source of revenue is orders from individual customers, including but not limited to the delivery of a satellite called TacSat-1 for the U.S. Department of Defense.
There are four main aspects to its expenditure.
The first is R&D spending, including the intention to work independently on the entire development of the Falcon rocket, as well as the manufacture of a gas generator; second, the cost of employment, where SpaceX hires executives from companies in related fields; the third is the purchase of test sites; and finally the cost of finding suitable contractors.
SpaceX's way to make a profit is to reduce costs and grab the market at a low price, so as to obtain a considerable launch order volume and ultimately profit. SpaceX procures as cheap raw materials as possible and produces its own parts, so launch costs are low. On the commercial track, this is also the reason why SpaceX frequently gets orders in the competition.
(3) Tesla electric car company profit model
Tesla Electric Vehicles is committed to the manufacture and research and development of electric vehicles, and strives to transform modern vehicles from fossil fuels to sustainable energy.
Tesla's revenue sources are mainly in four aspects.
● One is the revenue from car sales. For example, in 2020, Tesla's total revenue reached $31.544 billion, ranking first in the electric vehicle brand.
● The second is the income generated by favorable policies. In 1990, the U.S. state of California enacted a policy requiring that 10 percent of California's cars for sale be zero-emission vehicles by 2003.
To include hybrids, the California Air Resources Commission introduced credits for "partially zero-emission" vehicles and implemented a system that allowed automakers to buy and sell credits to meet their zero-emission vehicle obligations, which indirectly helped Tesla generate a small amount of revenue.
These revenues are increasing year on year, with Tesla generating $1.58 billion in revenue in 2020 by selling carbon credits to other traditional fuel car makers.
In November 2020, the California government introduced a new incentive: anyone who buys an electric car or plug-in hybrid in the state will receive a $1500 "clean fuel incentive", and Tesla is undoubtedly one of the biggest beneficiaries.
Tesla's operating income in 2019 was $24.578 billion, up 14.52% year-on-year, while Tesla's operating income in 2020 was $31.536 billion, up 28.31% year-on-year.
● The third is the income from car rental business and car battery energy storage services. In 2015, Musk decided to develop Tesla-related supporting business operations around the car sales business, and in 2017, Tesla's revenue in car rental, energy storage services and other related businesses has accounted for more than 25% of total revenue, becoming a source of income that cannot be ignored.
● The fourth is automotive software revenue. Tesla FSD generated more than $600 million in revenue in the first quarter of 2020.
Although Tesla has the ability to generate revenue through many channels, due to its large expenditure, in the past 10 years (2010-2020), the net profit in the first 9 years has been negative, and it has lost money for consecutive years.
In 2020, Tesla turned a profit for the first time, the company's annual net profit was $721 million, and for the first time to achieve full-year profit, mainly because Tesla earned $1.58 billion by "selling carbon" that year.
However, it is worth noting that this part of the profit is far more than the annual net profit of $721 million, which also means that Tesla's main business vehicle sales are still facing losses in 2020. Therefore, in terms of profit margins, Tesla still has a long way to go in the future.
(4) An overview of Musk's business planning capabilities
By analyzing the profit model of the above projects, it can be found that Musk is always at the forefront of the times, creating some innovative new ways to make profits.
Even a few years later, these models are still imitated by countless latecomers in the Internet age and can still be successful, such as Dianping and AutoNavi map imitating the business model of Zip2, Xiaopeng Motors and Weilai Motors imitating the sales model of Tesla Motors, these examples are enough to show that Musk has a unique business perspective, reflecting his super business planning ability.
Although there are twists and turns in the implementation process of preparing and running these entrepreneurial projects, the initial commercial thinking is undoubtedly one of the keys to the success of entrepreneurship. What really stands out about Musk is his ability to combine complex physical concepts with business plans.
2. Cost control ability
(1) Cost control of SpaceX
The traditional aerospace industry is very mysterious to ordinary people, and the research and development cycle of its products is very long, and the launch cost is also high. On the one hand, SpaceX retains the characteristics of high risk, high investment and high technology in the traditional aerospace industry; on the other hand, SpaceX also integrates the economic and market characteristics of commercial companies.
SpaceX's research and development cycle is relatively short compared to the traditional aerospace industry, mainly relying on finding mature technologies to quickly transplant to reduce the risk of trial and error, while greatly reducing manufacturing costs by introducing large-scale industrial production.
The core reason why SpaceX can play a low-cost "trump card" is that Musk broke the traditional production model of different parts and components undertaken by different development units in the past, and turned to the company alone to undertake the key core work of the design, development and production of most rockets and spacecraft. This production model, which seems to be contrary to the modern division of labor of specialization, is the key to SpaceX's cost reduction.
Through this integrated production model, SpaceX can better optimize the production process of the rocket and spacecraft, and can also establish a closer and faster information feedback mechanism between the design and production teams, which provides spaceX with the possibility of accurately controlling product quality.
Under Musk's low-cost route of "self-production and self-sale", SpaceX has completed 80% to 90% of the manufacturing work in its own factory. As for the acquisition of raw materials, SpaceX's purpose is to purchase flexibly, in addition to the traditional procurement channels, the procurement department will be allowed to eBay or even scrap factories to buy second-hand parts.
● In terms of company operation, Musk adheres to the simple and efficient "Silicon Valley model", which fully reflects the flat management model and vertically integrated project management.
SpaceX reduces expenses, improves efficiency, and streamlines decision-making and delivery by reducing management levels internally and outsourcing products externally.
Under Musk's design, the company has only 3 levels of management, and several teams are formed internally according to the project, directly led by the corresponding vice president, and CEO Musk will directly participate in the discussion of the technical team.
This organizational structure design improves the efficiency of teamwork and reduces the cost of redundant personnel.
● In terms of personnel composition, we will enrich the talent team by recruiting outstanding talents who have worked in NASA, Boeing, Nogues and other institutions and companies. The introduction of these talents has brought spaceX mature technology and advanced management experience, saving the cost and time cost of manpower training.
● In terms of production design, most of SpaceX's business is compressed in the factory in Hawthorne, California, and the R&D department is intentionally connected with the production workshop as a whole, so that all aspects of decision-making to implementation are more closely linked and communication costs are reduced.
● In terms of engineering design, the company pays special attention to the generalization and standardization of products. Musk firmly believes that for spaceflight to be truly inexpensive, flight components must be reliable and reusable.
SpaceX's core product rockets are assembled horizontally, and combined with a generalized design, they can achieve mass production like the fuselage of Boeing aircraft, thereby reducing costs.
Under Musk's efforts, SpaceX's launch cost has become the lowest in the world, and his competitors are still adhering to the traditional non-low-cost route of "importing raw materials to process finished products", which shows Musk's advanced nature.
(2) Tesla's cost control
Musk is a cost control maniac. He controls the cost of Tesla vehicles by enhancing the "software" of the vehicle configuration and the "hardware" that compresses all aspects of the vehicle.
● In terms of strengthening the "software", taking Tesla's classic model Model 3 as an example, Musk in order to make Tesla's auxiliary driving software run smoothly and have enough room to upgrade the computing power, he decided to no longer rely on the traditional supply chain, and take as far as possible to get rid of the supply chain system of traditional primary suppliers or even secondary suppliers to save costs.
Because it is self-developed, the underlying software of the chip and controller does not need to rely on chip suppliers and does not have to pay the high software license fee for the automotive open system architecture.
● In terms of simplifying the "hardware", for vehicle radar, Tesla makes full use of cheap ultrasonic radar and cheap cameras, and then uses the advantages of identification, fusion and control algorithm software to integrate to achieve the established effect.
In terms of vehicle batteries, the battery cost of general economic electric vehicles can account for about 45% of the price of the whole vehicle, so people often compare batteries to the life of electric vehicles, and they are also the main part of the source of electric vehicle costs.
If how to reduce the cost of batteries as much as possible is a science of electric vehicle manufacturing, then Tesla is undoubtedly a superior student of this science.
From 2013 to 2020, the corresponding cost per kWh of the battery of Tesla electric vehicles fell from $210 to $100, an overall decrease of about 52.4%.
For Tesla's cost control, Musk's secret is to reduce BOM costs by simplifying "hardware" (such as car parts, batteries), while enhancing software (such as driving system, mileage). Without sacrificing the customer experience, we continue to reduce costs and maintain our technological superiority over competitors.
For most car companies, selling cars depends on dealers, but Tesla and traditional car companies are completely different in the establishment of sales channel models.
Over the years, Tesla has always insisted on building a direct sales model. According to Tesla's official data, by the end of 2020, the number of Tesla's official direct stores in China exceeded 180, covering 50 cities across the country.
On the one hand, this innovative marketing model saves channel costs and cuts the cost of establishing relationships with dealers; on the other hand, the use of direct sales models can also make prices more transparent and bring convenience to consumers.
Musk followed Apple's vertical procurement model and opened his supply chain system to a large number of parts manufacturers. He believes that Tesla will not pay too much attention to its existing market share when selecting suppliers, but will consider more cost-effective factors under the premise of reliable quality.
Once other suppliers have more cost-effective products, Tesla's partnership with the original supplier will change at any time.
In addition, in order to prevent the supplier from forming a monopoly of "one big family", Musk's approach is:
With the growth of sales, Tesla will gradually change the early exclusive supply model, began to introduce a second supplier, or even a third supplier, if the second supply or third supply can have some new breakthroughs in technology, bringing higher cost performance, the follow-up will be likely to get a larger share.
This can not only force suppliers to reduce supply prices, ensure the safety of supply in the industrial chain, and form a healthy competition between suppliers, but also indirectly reduce the price of supplies, drive Tesla raw material procurement costs to decline, and achieve the purpose of cost reduction.
3. Ability to finance funds
(1) Tesla's risk financing process
In 2003, Tesla Electric Vehicle Company was founded. At the beginning of the business, except for a small number of venture capital, the rest of the capital expenditure came from the two founders, Martin Eberhard and Mark Tarbening.
In April 2004, Eberhard and Tabronen were in desperate need of funding, which was when Musk brought Tesla $6.5 million in investment (Series A financing) and entered the board of directors on the condition that he became chairman and began to control Tesla's financing behind the scenes.
As can be seen from Table 1, after Becoming Chairman, Musk relied on his unique "pull outreach" ability to bring new financing to the company again and again, enabling Tesla to obtain investment of more than $1.4 billion through various channels (excluding public offering financing here) in just over a decade, thus rapidly growing into a giant in the new energy automobile industry.
(2) Tesla IPO and capital market refinancing
Fast forward to 2010, and with $300 million of its previously raised money running out, Tesla needs to raise another large amount of money to buy production equipment, hire thousands of employees, and open more stores to keep the company running well. In order to continue to raise funds, Musk chose to let the company go public through an IPO.
In June, Tesla said in its listing application that it hoped to raise $178 million through its IPO. Although some mainstream media were not optimistic about the IPO, and even sang about it, investors understood Musk's ability to run the company and believed in his outstanding financial ability, so they enthusiastically embraced the American car company.
Tesla shares rose sharply on the first day of listing, opening at $17 per share, and by the close had risen to $23.89 per share, allowing the company to raise $226 million in one fell swoop.
Today, Tesla stock is more than $600 per share, and it has to be said that this is a very successful IPO financing. As of December 9, 2020, Tesla has raised 11 times in the stock market, with a total financing amount of $17.67 billion.
(3) Musk's ability to finance funds
Under Musk's leadership, Tesla has raised a total of about $19.097 billion through venture capital, private equity financing, and public equity financing. Capital is the blood of an enterprise and the first driving force for its economic activities.
Therefore, the ability to raise funds is an important part of the financial ability of entrepreneurs. Musk has the ability to continue to bring huge amounts of financing to the company after taking over Tesla.
When Tesla fell into crisis, he turned the tide through strong financial integration capabilities, and then raised more funds through successful listings, which verified its excellent financial capabilities again and again. It is this ability that has helped the company smoothly through the crisis and ultimately succeed.