Elon Musk paper Neville Aga 11/14/2019
Quick question: What is the highest interest rate available on any kind of government paper in the developed world? And what in the world does that have to do with Elon Musk?
Elon Musk was born in… No, seriously! Pause here for a few seconds and think to yourself what the highest interest rate is available on government guaranteed paper, and after you have thought of that, think about how that could possibly relate to Elon. After all, Elon Musk has done several things that only nation-states have ever accomplished, and he has ambitions that are past the grandest aspirations of all the nations on planet Earth. Comparing the entrepreneur Elon Musk to a nation may be a better comparison than comparing Elon to a mere mortal human. Clearly, Elon is an ambitious, grand entrepreneur, the kind of person that we write books about. This paper will take an assessment of Elon in the areas of wealth risk, family life, and force of will and use that assessment to answer some basic questions about Elon. Those responses will then be compared my personal responses to those questions. Finally, this paper will end with a musing if it is indeed possible to be a successful entrepreneur and hold onto one’s personal values.
A good starting point for me is to think about the textbook definition of the word “entrepreneur”. I think most people associate the word entrepreneur with business owners, people who provide a service, get paid and add value into the economy. But that definition is only partly correct, and it misses what I believe is the core mark of the word. The full definition (courtesy Oxford via Google) is
Greater that normal financial risks really is the operative definition of the word entrepreneur for me. George W Bush (who I greatly admire) organized and operated the Texas Rangers, some oil ventures, and even the entire US Government as our 43rd president, but was he really an entrepreneur? Even when he was running Arbusto energy? His dad H.W. Bush started that particular oil company. What financial risks did Bush Jr. take in being CEO there? Had he not been elected or run for president, what financial ruin would have come to him? The answer is none. Personal risks, character risks – sure, but financial risks – no. George W Bush had his millions either way and would have lived a great life no matter what because of the legacy of
his father. However, taking “greater than normal financial risks” is a gross understatement when it comes to Elon Musk.
Financially, Elon accomplished at the age of 28 what I hope to accomplish in my lifetime, but likely never will. In 1999 he sold his company Zip2 to Compaq for $307 million, personally netting Elon Musk $22 million. $22 million is a hard number for me to fathom for personal wealth. When I was younger (twenties) I had a saying that I want $4 million in the bank, and then I’m totally set. Fire me, lay me off, whatever- I don’t care. I have enough money in the bank that no one can hold anything over my head. Today (well into my forties) that $4 million is still elusive, but I slog towards it each day (including tonight where I spend the night in a hotel room in Tulsa away from my wife and kids – I don’t believe I would be where I am on this particular night if I had $4 million in the bank presently). How does one even imagine $22 million at age 28? If you can get a lousy 4% return on that you are talking $880,000 per year, just on the earnings never even touching that $22 million. Margarita beach – here I come, with the intent to take permanent residency! But Elon? Nope. Pour substantially all of that $22 million into some other kooky venture to reshape the financial industry by buying and selling tulip bulbs. Well close enough, a financial services company that sounds like a strip club (X).
Instead of ruin though, how about another step up in wealth – X becomes PayPal (marketing clearly was not Elon’s forte then, but no matter) and is sold for $1.5 billion just 3 years after the buyout of Zip2. That transaction personally nets Elon just over $120 million dollars1. Nine- figure wealth. If you can earn 4% on that sum you are talking $5 million per year on the earnings alone, or about $500k each month, or about $20k each day. Steak, lobster and champagne in New York still only costs $500 a night, so you have virtually no way of spending that kind of money in one or several lifetimes. If I’m Elon’s adviser at this point in his life (he is only 31 at this time) I’m telling him “OK, you should have banked the first time, but you got lucky a second time. Bank it now and you can have it both – the Margarita beach, and you have enough money to fund a few stupid save the whale foundations and you can live a life being big and important to some tree-huggers. You can have it all!”
But once again – Elon’s answer to playing safe with this wealth is a resounding no. He trades real, unrestricted cash for equity paper in Space Exploration Technologies, a rocket company that will likely consume all his cash and ten times more. It is not a hard concept to grasp that SpaceX being worthless is a very reasonable and likely outcome. The book mentions at length of Musk’s inner circle warning him against this venture and all the previous fortunes that have been lost in playing with space and rockets. On top of his $100 million SpaceX bet, he simultaneously funds an electric car company, and puts $70 million of his own money into that. The last successful American car company? Chrysler in 1925. So, here is Elon willing to risk millions of dollars of personal wealth on ventures that he thinks most likely will fail.2 And fail it
1 From the Paypal S-1 filed in 2002, Elon converted all his series A and earlier interest in Paypal into 5,314,393 shares of PYPL, which got bought out in late 2002 at over $23 per share.
2 In several interviews Elon Musk has acknowledged that the purpose of his companies was to advance the fields of sustainable energy and transport, not to make a lasting company like HP did once and Apple did when Steve Jobs had his youth session with Dave Packard. If Tesla, fails but opens up the way for a new market in the process, that would be just fine by Mr. Musk. That outcome would most certainly not be fine for Packard or Jobs.
all did, at least on paper. For a matter of a few days in 2008 his net worth was essentially zero- he would have lost it all except for a call from NASA for a contract. Even more nuts, if these companies don’t fail because they never turn a profit and run out of cash, Elon is seemingly trying to make sure Tesla fails by open sourcing all Tesla’s patents. So here in Tesla you have a company that:
- 1) Elon pours tremendous personal wealth into,
- 2) Incurs high levels of daily cash burn, and
- 3) The core technology is free and encouraged for anyone to copy and use.
By now it should be clear to the reader that money (for the sake of personal gain) is not a driving force for Elon. Excuse my part Gordon Gekko and part Adam Smith for a minute and let me state plainly that money (for the sake of personal gain) is a driving force for me. Now, there are limits to what I will do for personal gain, of course. But the idea of money as a tool to change the world simply because it is the right thing to do with probable loss of that money is not in my DNA. It is in Elon’s DNA.
The even crazier thing? By being true to himself, his idea of a higher purpose for mankind from technology, and now because of the way the public perceives Elon Musk, his wealth pile now stands at $30 billion. While I sit at the Holiday Inn downtown Tulsa (they are the only hotel with a Tesla destination charger in downtown) as a cog in a corporate wheel. Perhaps the lesson is for me to quit, move back to the southeast and pursue my dream of CheckinSooner.com or some venture with college football and Auburn University, but I fear real life and four real kids will keep that from ever happening.
Personally speaking, I would like to emulate this lack of concern for money as a consumption tool or personal safety tool, I just don’t think I’m bold enough to actually go through with it.
The next facet of Elon Musk I would like to focus on is his family life. From what I read Justine Musk looked to be an ideal wife for Elon. They share interests and they both have qualities that they admire in each other, things they can’t do on their own. Elon is not the writer that Justine is, and Justine can’t make a rocket. They married when he was 29 and she was 28. Not exactly marrying young like Justine describes on her blog. Their marriage saw the couples combined wealth go into the multiple hundreds of millions of dollars, 5 kids and a team of nannies to take care of the kids. Still, with the background of that assumed love, support and success their marriage did fail. And for what? No really good reason I can see. How will this impact Musk in the future, say 10-20 years from now?
In the summer of 2008 when Elon filed for divorce, he was rich on paper but in a very illiquid sense. At that time, he had to raise cash, even selling his prized McLaren sportscar. That can, I imagine, put quite a toll on a marriage. Still though, within days of his divorce he flies to London for a weekend, meets a twenty-two year old actress, and starts dating her immediately. At this point he is 37 years old and she is a 22 year old virgin. As far as I am concerned that pretty scandalous. However, the public gives Musk a pass on this facet of his life. Why, I wonder? I
guess it’s just how culture looks at these things now. There was a time when people would not vote for John Kennedy because he was Catholic. Then there was a time people would not vote for Ronald Regan because he was once divorced. Now we have a president on marriage #3. So, times and attitudes do change.
For me the takeaway is that the celebrity CEO gets to live a personal life that is different from you or me. Los Angeles is rife with famous people dating younger women by a half-generation or more. I think this does tend to be a driving force, to define a person. I have seen it written that Elon’s employees judged his mood and if they would ask for big purchases based on the hair color of his 2nd wife (as her hair got closest to platinum blonde, his approvals for purchases went up). This 15-year younger dynamic just does not fly for normal people in Oklahoma, at least I have convinced myself of that. It is certainly not my driving force, as I am going on 20+ years of marriage.
Here is a part of Elon’s makeup that I have no desire to emulate. I am looking forward to a very traditional family Christmas as a grandfather many years from now, something that I think would not be possible for Elon in the future.
As for the CEO image of Musk being a person that works 7 days a week till 11pm and then starts again at 7am – I reject that as being truth. With trips to Cuba, Dublin, Oslo, Azores, Geneva, Aspen, Vail, Tijuana, and Missoula on a private jet all within a 365-day span, he can’t be all business all the time. I think it is just the image the public wants to ascribe on celebrity CEO personas. I really think the hard worker is the person who works a factory floor in China, or a cash register or desk at Walmart. For my money that is the real work – when work is truly a place and not an activity.
I think travel is in Musk’s DNA as a driving force, going back all the way to his childhood and the travel experiences his parents provided for him, and travel is in my DNA as well. I think I do emulate Elon in this area, and I do like that about myself. I believe the things you hear, see, and learn when you travel color how you react to people back home. Things you pick up become factors in how well you succeed back at home.
I was fortunate to go to Beijing back in May, and there during a visit to GE Healthcare in Beijing we learned the term “5/10/7” – meaning working hours of 5am to 10pm, 7 days a week. That equates to 119 hours/week. Their culture is engrossed in “work” in a way we can’t comprehend. Of course, their work includes meals and events and activities, but setting a standard that high is insane. I get it that companies can get this kind of culture because if someone slacks off there are 30 people on the street to replace that person, but still this expectation is staggering. This is what real work looks like, not what we want it to look like for Elon Musk, or what I know it is (not) like for me, when I compare to the China standard.
A third aspect of Elon Musk’s character I would like to explore is his force of will. It is one thing to want to hop on board the green bandwagon and do your part in saving the planet. We all do it to some extent, most everyone recycles. But not every nurse becomes Mother Teresa and lives in abject poverty among the poor. Quoting Elon in 2008 “I will spend my last dollar on these companies. If we have to move into Justine’s parents’ basement, we’ll do it.” Elon’s
strength of his will is legendary. Ashlee Vance ends the book with this line “After spending time with the man and studying him for years now, I’m convinced frankly that few people have the wherewithal to grasp the depth of Musk’s motivation and strength of his will.” This is his real defining characteristic. He does not suffer fools. He believes in his analytical mind to the point that he does not believe he will ever fail. To that, I’d say he is right. I know there are many who believe the finances of his companies dictate that he will fail one day, but I would say those people are wrong. Musk has earned in goodwill and raving fans what will never be captured in a statement of cash flows. There are literally people that would line up and give a kidney to the man, no joke. His force of will and belief in the cause has become so large that we have moved him from entrepreneur to demigod status.
Finally, is it indeed possible to be a successful entrepreneur and hold onto one’s personal values? I would say for Musk the answer is a resounding yes. What has Musk personally valued? From the time of his youth he has been clear with himself. He has always had this intent to bring the world sustainable energy and planet redundancy, and that has never wavered or changed. He did not value his marriage above all else, his kids above all else, or money for personal gain above all else. For him it has always been about these ideas to help humankind have a bright future, and not in an incremental way. And he has succeeded as an entrepreneur fulfilling that personal value. Musk stated “I’m not an investor. I like to make technologies real that I think are important for the future and useful in some sort of way.”
There is a famous quote from Steve Jobs in the days before Apple ruled the world – “the [people] who are crazy enough to think that they can change the world, are the ones who do.” That definitely fits Musk. I’d say the average entrepreneur (myself included) does not really want to change the world, but just live a comfortable, fulfilled life (a little bit of family, a few successes professionally, and leave the world just a little bit better than how we found it). In that sense, the Chick-Fil-A franchise owner is a successful entrepreneur who holds onto their personal values. In fact, I’d say the lesson of Musk here is that you have to hold on to your personal values or you won’t find success. I imagine that if Musk settled for compromise in products and results that were “good enough” he would be bankrupt today. It is precisely because he knows so deeply what he wants and how it aligns with his personal values that he is able to change the world in such a profound way.
So, back to the highest interest rate available on any kind of government paper in the developed world. Did you get it? At the start of this class back around 10/3/2019 the yield curve was flat to the point of inversion. Japan and Germany of course have negative rates, all the way out to 10 year paper. Even the basket case of Italy has lower 10 year yields than the US (1.2% compared to 1.5%). 1-month T-bills get you higher at 1.7%, but the absolute highest yielding instrument – overnight government paper – the fed funds rate at 2.07%
What does this have to do with Musk? Tesla bonds yield about the same at 2.1% as the fed funds rate. So, think about that – the investing community assigns equal risk to Elon’s crazed
ideas to become an interplanetary species, and overnight lending to the US government with our printing presses and Army.
Elon Musk, or more specifically the celebrity persona of Elon, could not exist if this were any time in the 20th century. At that time junk paper was priced like junk paper (imagine asking Drexel circa 1985 to fund a few billion dollars to make humans an interplanetary species back then). Basically, capital market discipline would have made 1985 Elon impossible. But we now live in a world of cheap money and negative interest rates, which allow risk taking like this to exist. The other big element we have in the 21st century we did not have in the 20th century was investor’s shame. As Peter Thiel pointed out in 2010, “We wanted flying cars, instead we got 140 characters”. There are just no other games in town for people who want exposure to big, messy tech. Seemingly all other tech ventures are ideas with products that are often delivered virtually.
Today, Elon can do these seemingly crazy ideas successfully, because we (the public market) fund these ideas. At first of course, SpaceX and Tesla were self-funded by the entrepreneur. But that is no longer true today. Tesla is 20% owned by Musk, meaning 80% is owned by the investing public. When we stop funding, the Elons of the world stop existing.
I have no desire to be an entrepreneur by building big, messy things. I’ll leave that to Elon. I have a great desire to be an entrepreneur by playing it safe and adding incremental value – that does have an impact and change lives of people that use your product. If that makes me less than Elon, so be it. I’m comfortable with that reality. I possess none of the sense of altruistic purpose, lack of commitment for family life, or force of will that would allow me to ever become the next Elon Musk.