An Automaker Is Born — The Early Days Of Tesla (New Book Excerpt)

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Originally published on EV Annex.
by Charles Morris

This article is an excerpt from the new book, Tesla: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries, by Charles Morris. 

A look at the original Tesla Roadster (Source: EVANNEX. Photo by Casey Murphy.)

It sometimes happens that a symbolic event marking the end of one era neatly coincides with an event that ushers in the next, although no one notices the concurrence at the time. In late 2003, a brief renaissance of electric vehicles came to an ignominious end, as GM rounded up and smashed its EV1 electric cars. Just a few weeks later, three Silicon Valley entrepreneurs sat down for a fateful lunch.

Elon Musk was a famous visionary who had made a fortune from the online financial service PayPal, then gone on to create a private space exploration company called SpaceX. JB Straubel was an engineer who had been part of a Stanford team that built a solar-powered car for the American Solar Challenge race. Harold Rosen was an aerospace pioneer who was known as the “father of the geostationary satellite.” The three had plenty to talk about — they all loved rockets, fast cars and green tech. As Musk recalls, Straubel told him about a prototype electric car that a local company called AC Propulsion had built — not a pokey little runabout, but a roadster with Porsche-like performance.

EV pioneer Tom Gage’s e-piphany happened in the early 1990s, when Honda hired him as a consultant to research the nascent EV scene. He went to Southern California, where there were a bunch of small shops doing EV conversions. “Most of them were pretty amateurish or even crackpots,” he told me. “Alan Cocconi had clashed with GM on the Impact program, and thought he had a better idea, so he started AC Propulsion. When I drove his prototype car [a Honda Civic conversion with a 200-horsepower electric drive system], that was the light switch right there, because he really knew what he was talking about, and he put it into practice with this conversion that he practically built right in his front yard. I drove around the block, went up on the freeway onramp and when I looked down, I was doing 80 merging onto the freeway, going uphill. I came down off the freeway, just in front of the shop and he said, ‘Stop here.’ He flipped a switch and said, ‘Now, floor it.’ What he had done was turn off the traction control. I floored it and the front tires turned into smoke.”

From that moment, Gage knew he wanted to build EVs. “I knew a thing or two as an automotive engineer, but not that much about EV technology. The other guys really didn’t know what they were talking about, but Cocconi did, and he had the hardware to back it up. I started helping him out on the side, one thing led to another, and within a year, I was pretty much full-time at AC Propulsion.”

The AC Propulsion team built a prototype electric car at their shop in San Dimas, and named it for t0, the mathematical symbol for a starting point in time. Plenty of other tinkerers around the world had built electric cars, but most were designed to be practical little gas-saving machines — “glorified golf carts” as the tired cliché has it. The tzero was another animal altogether.

Paul Carosa was AC Propulsion’s VP of Engineering in 2003 when the Tesla boys came calling. He told me that the idea to build the tzero originated with John Fagan, a professor at the University of Oklahoma. “They did their own version of this little electric sports car that was based on a vehicle called the Piontek Sportech that was designed for a motorcycle engine. Alan Cocconi and I were intrigued by the idea, and we bought one of these vehicles from Piontek.”

The first tzero used 28 Optima Yellow Top lead-acid batteries, which weighed 1,000 pounds and were mounted in the vehicle’s sides. This meant that the doors didn’t open the way most car doors do. “They were actually only maybe about 8 inches tall and kind of opened upwards at a 45-degree angle and you had to step over the side,” Carosa told me. “You were actually stepping over the batteries. It was like a high sill on the side of the car and you had to step up a couple of feet over it. It wasn’t a roomy vehicle.”

The historic sports car had 200 hp of power and could go from zero to 60 mph in 4.1 seconds, but its range was only about 60 miles. The company envisioned selling it for $80,000.

The second tzero prototype, built in August 2003, was powered by 6,800 laptop-style lithium-ion cells (cylindrical cells in the 18650 format), was 700 pounds lighter than the original version, and had a range of about 300 miles. It could do 0–60 in an impressive 3.6 seconds.

Tom Gage met Martin Eberhard in 2002. “We were just getting involved in converting the tzero over to lithium-ion batteries,” Gage told me. “He put some money into AC Propulsion and we finished this conversion of the tzero. We drove it from LA up to San Francisco with only one stop, so it was obviously getting much better range with the reduced weight and increased capacity of the lithium-ion batteries, which had replaced the lead-acid batteries. Martin was pretty impressed. In November 2003, I remember going to the LA Auto Show with him and he started talking up Tesla, saying he wanted to convert a Lotus Elise, and that was sort of the start of it right then.”

AC Propulsion was in dire financial straits at that moment. Eberhard’s $100,000 investment was very welcome, and gave the team the funds they needed to develop the lithium-ion-based tzero. “Martin borrowed the tzero in 2004 for about three months,” said Gage. “He took it up to northern California and used it to woo investors, show them what he was talking about and that it could really be done. I think it was pretty key in getting the company off the ground.”

The tzero was a completely hand-built car. “There’s almost nothing but headlights and shock absorbers and things like that, that were taken from other cars. All the major parts were hand-built. It was a Sportech kit, but we actually changed the frame and the body by the time we built the second car.”

“We realized that we couldn’t continue to make money, let alone meet crash test standards and the like, so we sort of changed gears and started developing the eBox, an EV conversion based on the Toyota Scion xB. The plan was to commercialize that and get some money to do so, so I went to see Elon Musk. I took the tzero and he drove it. I said what we’re really looking for is money to do this eBox, but he wasn’t interested in the eBox — it was too mundane, he wanted a sports car. I said he should talk to Martin Eberhard.”

Gage and company thought the eBox had a better chance at being commercialized, but Musk and Eberhard were interested in the sexier tzero. “Martin asked ‘Are you going to build my car? How’s the progress going?’ I told him we weren’t going to build any more tzeros. So that to some degree was the impetus for him to get into the business (if you’re not going to build it, I’ll build my own).” Eberhard and his partners decided to build their own electric sports car, and in May 2004 they signed a license agreement to use AC Propulsion’s powertrain technology.

Martin Eberhard loved fast cars, but was concerned about climate change and the country’s dependence on Middle East oil. He was one of the early adopters who leased an EV1, and he was as angry as anyone when the company took the cars back and crushed them. However, his real electrical epiphany came about on a drive through Palo Alto, where he saw stylish performance cars like BMWs and Mercedes parked next to sensible “dork-mobiles” or “punishment cars,” as he called them, such as the Toyota Prius. “It was clear that people weren’t buying a Prius to save money on gas — gas was selling close to inflation-adjusted all-time lows,” he observed. “They were buying them to make a statement about the environment.”

Realizing that there were others who shared his conflicting loves of speed and the environment, and who could afford to pay for what they wanted, he determined to build a car that had it all — high performance, beautiful styling and minimal fossil fuel consumption. In a presentation he created around this time, Eberhard imagined “the Porschius, a car for people who love cars and who also care about oil consumption,” that combined the best features of Porsche and Prius.

Tesla: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries, by Charles Morris

Marc Tarpenning spent a few years as a contractor and consultant for an aviation conglomerate in Saudi Arabia before he came to Silicon Valley and got involved in a couple of startups in the disc drive business. He found the startup experience to be “really compelling, exciting, great fun and potentially really life-changing.” In 1997, he and Martin Eberhard started a company called NuvoMedia that made an early e-book reader called Rocket eBook, which they later sold for $187 million.

Eberhard and Tarpenning got back together and incorporated Tesla Motors in July 2003. “We were ready to do another startup,” said Tarpenning. “The first one had been great fun and successful. I worked in the Middle East for years and the idea of sending all of our treasure to the Middle East just doesn’t appeal to me.” The two wanted to build cars with the most efficient and sustainable propulsion method available, and they considered several alternatives before concluding that electricity is “by far the best choice.”

Once they had settled on electricity as the optimal power source, Tarpenning and Eberhard turned their idea into a business plan. “We quickly convinced ourselves that we could make a compelling electric drive,” Tarpenning told me. “That’s Silicon Valley stuff — computers and batteries. But I was extremely concerned with our ability to actually make a car, because there are thousands of components and it just seemed like that was impossible. [However], I learned that the car industry had sort of re-factored itself starting in the ’70s, and that they had essentially gotten rid of everything except … marketing, some styling, and internal combustion engine development. Almost all the [other] components come from other companies. So, that was what convinced me that this business was actually possible, because we could buy from those same suppliers.”

Now that they had a business plan, Tarpenning and Eberhard set about securing funding, a game that they already knew well how to play. A startup that’s looking for funding needs to have a concise and compelling one-hour presentation for the money men, and these two were constantly polishing their pitch by rehearsing it with other entrepreneurs.

“We were in that mode of taking our pitch and refining it, and it just so happened that Ian Wright had been trying to raise money for [an optical subsystem startup]. So, we asked that he pitch to us and we’d critique him, then we’d pitch to him and he’d critique us. That’s how we found Ian. He didn’t get his optical thing going … but he loved our idea and a few weeks later he said he wanted to join us.”

Ian Wright, a native of New Zealand, was a racing enthusiast who had converted a lawn mower to a go-kart at age 10. He moved to California in 1993, and happened to be a neighbor of Martin Eberhard. Wright’s automotive expertise was just what Eberhard and Tarpenning needed, so he took the chance to combine his interests in software, engineering and racing, and became Tesla’s VP of Vehicle Development.

“The original conversation I had with Martin was over a beer at a party,” Wright told me. “He said, ‘I know you used to build and race cars, and my buddy and I have built a startup company and we’re thinking of building very high-performance electric sports cars. What do you think of that idea?’ And I said, ‘I think you’re crazy! They’re only golf carts, aren’t they?’ Clearly, I was wrong. The tipping point for me … was when he borrowed the tzero from AC Propulsion and I got to drive it. Although I wouldn’t want to buy that car, I could certainly see how you could make something new and interesting with electric drive.”

The Tesla team needed not only money, but an experienced investor to lead the first funding round. “What the lead does is deal with all the negotiations and set the valuation, and then they represent the series,” explained Tarpenning. “When you’re raising money, you get people who give you a tentative yes, but they won’t lead. If they have to do all the due diligence and be the ones with the lawyers for two weeks closing the deal, it’s not worth it to them. So they’ll say, ‘This is interesting enough, as long as we don’t have to lead.’ They looked us up and saw we made money for the investors last time. It was a roll of the dice, but it was kind of cool and as long as they didn’t have to do any of the work, they were willing. We pitched Elon, and when he said that he would lead, then we were off to the races, because he was the point person who was willing to do the legal work.”

“One of the questions we were asked in our pitches was, ‘What’s your competitive advantage? How could you possibly think that you could have a competitive advantage against GM?’ Remember that the auto companies had all said that there was no future in electric cars and they had no interest in it. It wasn’t like we were out there doing battle with Ford on a daily basis because they weren’t in the game. They had specifically said they were never going to be in the game. And that was one of the things that we would pitch in our business plan. We have some number of years where we have the field to ourselves, and when we show the world that [we can] make compelling cars, the big guys are going to care, and we will have been years ahead of them at that point.

“Now, we believed (quite naively), that once the Roadster was out and people saw that you could make a compelling electric car, all the car companies would jump on this idea and they would all spend a ton of money with R&D teams. And we would have more experience and more electrically driven miles than anyone on the planet at that point, so even if the stand-alone company becomes questionable, it’s okay because there’ll be ten car companies around the planet that will want us, the whole world will be wanting to build these cars and we’ll be the world’s experts on the drivetrain, which is the only thing that they don’t have. And of course what has shocked me, quite frankly, is that the big car companies are still screwing around with nothing. They are still lamely trying to figure out what to do.”

Elon Musk agreed to come on board, investing a chunk of cash himself and tapping his connections for more, with the condition that he would be chairman of the company, and have the final say over all decisions. If Eberhard and Tarpenning had reservations about turning over so much control of their company, they set them aside, because they needed what Musk could bring to the table. “You take money from the people who offer it to you,” said Eberhard.

As is the case with most human collaborations, Eberhard’s vision and Musk’s were closely aligned in some ways, and quite different in others. Those differences came to light years later, fortunately after the Roadster was firmly on the path to production. Ian Wright later articulated the basic fault line. “Eberhard’s initial stimulus for starting Tesla was to build the EV he wanted to buy,” said Wright. “Musk had a much grander vision: He wanted to be the next General Motors.”

Musk led the Series A round of investment in early 2004, and joined Tesla as Chairman of the Board and Head of Product Design. Musk ponied up $7.5 million of his own personal funds, and became the controlling investor in the new company. He also brought several venture capital firms and private investors on board.

The official five founding fathers of Tesla were Chairman Elon Musk, CEO Martin Eberhard, CFO Marc Tarpenning, CTO JB Straubel and VP of Vehicle Development Ian Wright. They opened the company’s first office in San Carlos, California in July 2004.

Elon Musk gives an early test drive of the Roadster in the company’s first showroom in Los Angeles and talks Tesla (YouTube: Elon Musk Tesla)

The founders initially estimated it would take $70 million to get the Roadster into production. “We started that company with a lot of naiveté about what it takes to create a car company, and pretty much everything went wrong,” said Musk. “Ultimately, I think it took five times the amount of capital that we thought it would to bring the Tesla Roadster to market.”

Who knows exactly what the actual figure was? In later interviews, Musk has given different estimates, from $150 million to $195 million. Several observers have estimated that it took a cool billion to get the company up and running.

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You’ve just read Chapter 4 of the new book, Tesla: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries, by Charles Morris. Subsequent chapters explain how the five visionaries formulated a master plan to develop a compelling electric car for the mass market, and executed that plan in three steps, beginning with the Roadster, continuing with Model S, and culminating in Model 3. The latest edition brings the Tesla story all the way up to the present day — it includes detailed assessments of Model Y from Tesla expert Roger Pressman and manufacturing guru Sandy Munro, as well as a description of plans for the Tesla Semi and Cybertruck.