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Tesla's biggest problem might not be finding customers for its forthcoming $35,000 Model 3 electric sedan but figuring out how to actually build enough to meet the demand.
CEO Elon Musk has set a goal to produce 500,000 cars a year between 2018 and 2020. That's going to require expanding Tesla's production facilities, which will require a lot of money. As a Bloomberg headline put it last week: "Tesla needs billions to meet Musk's ludicrous assembly timeline."
Now we know where those billions are going to come from. Bloomberg is reporting that Tesla will sell $2 billion in new shares to the public as a way of raising extra capital. This extra cash comes on top of billions the company has raised already. And that makes Tesla a real outlier in Silicon Valley. For all the breathless coverage of Silicon Valley's alleged tech bubble, the really striking thing about most Silicon Valley startups is how little cash it takes to get them off the ground.
Fortunately, there's lots of money available to invest in fast-growing, capital-hungry companies like Tesla. The problem for investors and the US economy is that there don't seem to be nearly enough Teslas to go around.
It didn't take much money to build big Silicon Valley companies
To see how unusual Tesla is here, it's helpful to compare it to Google.
Today, Google is one of the world's most valuable companies, with a market value of almost $500 billion. Yet building the company was comparatively cheap. It raised just $26 million in outside investments prior to its 2004 initial public offering. Google has raised $1.6 billion in its IPO — money that helped fund further expansion. But the company could have gotten along perfectly well without the money, as it had already generated $106 million in profits in 2003 and its search ad revenue was growing rapidly.
Newer startups have been somewhat more aggressive about fundraising. Uber is the industry's fundraising champion, with $10 billion raised over the past seven years. Airbnb has raised $2.4 billion.
But like Google with its IPO money, these companies are largely raising money because they can get it at favorable rates — not because they particularly need it. Uber, for example, has said it's already profitable in the United States but is spending billions to gain market share in China. Uber has also spent some of its capital to fund a zero-sum price war with rival Lyft.
But none of these companies are investing all that much money in long-lasting, tangible assets. They don't manufacture physical products, so they don't need factories. Uber doesn't own the cars its passengers ride in. Airbnb doesn't own the apartments its customers stay in. Google has invested millions in its data centers, but those expenses are a small fraction of its revenues.
More Teslas would mean higher returns for investors
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The ability to build a gigantic technology company with a small amount of capital is great news for the company's founders and early investors, since it meant they get to keep a large share of the company's eventual gains. But if you're someone with money to invest, the situation isn't so great.
Over the past decade, American companies have been generating more and more profits, and last year they paid more than $1 trillion out to shareholders. But shareholders have struggled to find anything productive to do with the money. If you add up all venture capital firms' investments in 2015 — including big investments in Uber and Airbnb and many smaller investments — the total was just $59 billion. Money raised in initial public offerings accounted for another $30 billion.
With nothing better to do with the money, a lot of investors have simply used their dividends to buy more stock in existing public companies. These payments go to the companies' previous shareholders — not the company itself — so they don't lead the companies to put the money to productive use.
Instead, share prices have been getting bid up. Right now, stocks in the Standard and Poor's 500 — an index of 500 large American stocks — are selling for almost 24 times their annual earnings. This is an unusually high value that signals that stocks are likely to produce below-average returns over the long run. At the same time, interest rates on government and corporate bonds are at their lowest point in decades.
What investors need is a lot more capital-hungry companies like Tesla: companies that need a ton of cash to grow quickly. Tesla is more capital-hungry than most Silicon Valley companies because it sells physical products that take complex manufacturing facilities to build. Tesla is planning to spend $5 billion on just its "gigafactory" — a vast facility to produce batteries for its cars.
And if Tesla is successful, its appetite for capital will only increase. Even if the company achieves its goal of producing 500,000 cars per year, it will still be a very small player in the overall auto market. It's going to need to build many millions of cars a year to achieve Elon Musk's goal of making electric cars the industry standard. And that will require building many more facilities for creating batteries and building cars.
The problem for investors is that there just don't seem to be very many companies like this. Too many investment dollars chasing too few investment opportunities.
This may also explain the slowing growth of the US economy as a whole. Investments in new factories, equipment, and technologies are a major way that advanced economies grow. But while there's lots of money available for this kind of investment, it seems to be getting harder and harder to find productive ways to put that money to work.
