Tesla’s IPO is Go-Go Despite Red Flags

Silicon Valley wants Tesla Motors to succeed for numerous reasons, including the lackluster IPO market of late and its potential to turn electric cars into the next, lucrative emerging technology. The country wants Tesla Motors to succeed, too. After all, the last U.S. car company to hold an IPO was Ford, in 1956.

Yet in all the excitement over what may be the most anticipated IPO since Google, it’s been surprisingly easy for enthusiasts to forget just how long a row the company has yet to hoe. In just one small indicator of how big a gamble investors will be making, Telsa, which is looking to raise $226 million through the sale of 13.3 million shares, devotes a full 40 pages to “risk factors” in its prospectus. (Google, in comparison, devoted 18 pages to its risk factors; the battery company A123 — whose market cap has been halved since its IPO last fall — outlined its own risks in 27 pages.)

Indeed, unlike many companies to go public on promises of growth — and to get hammered for poor top-line revenue growth afterward — Tesla has largely managed to avoid accusations of going public prematurely, despite that as of March, it had sold just 1,063 cars in its seven-year history and it’s predicting sizable losses for the “foreseeable future.”

Few seem concerned that the company has yet to even finalize the design of the $57,000 Model S sedan on which investors are pinning much of their hope, or that it has no firm production agreements, or that the company will have to service its cars itself because the small number of Tesla stores it is opening won’t create a large enough geographic footprint. (The plan? To transport Tesla cars to its stores, or else send out Tesla “rangers” to repair cars in the field — an unproven approach whose costs the company acknowledges it may not be able to recoup from its customers.)

So why are people batting away the endless stream of red flags? Maybe the market is channeling Elon Musk, the intrepid 38-year-old CEO and majority shareholder of Tesla, who has never let the numerous obstacles facing the company stop him. Maybe in the face of so much bad news — the spill, the economy, the World Cup — investors just want to believe that a company like Tesla can beat the odds and win.

We’ll soon see what they get for suspending their disbelief.

Just some of the “risks related to our business and industry” from Tesla’s S-1. (It’s worth reading the fine print if you have time.)

1.) Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment. [The company’s first car, the Tesla Roadster, was delivered in 2008. As of March, the company has sold just 1,063 of them to customers It intends to “derive substantial revenues” from its planned Model S sedan, though “we have no operating history with respect to the Model S…and have only recently begun the component procurement process for the Model S.” ]

2.) We have a history of losses [$290.2 million from inception through March 31, 2010] and we expect significant increases in our costs and expenses to result in continuing losses for at least the foreseeable future.

3.) Our future growth is dependent upon consumers’ willingness to adopt electric vehicles.

4.) The range of our electric vehicles on a single charge declines over time which may negatively influence potential customers’ decisions whether to purchase our vehicles.

5.) The operation of our vehicles is different from internal combustion engine vehicles and our customers may experience difficulty operating them properly, including difficulty transitioning between different methods of braking.

6.) Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our electric vehicles.

7.)If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.

8.) We are dependent upon our ability to fully draw down on our loan facility from the United States Department of Energy, which may restrict our ability to conduct our business. [Tesla has to hit numerous milestones that could be hard to reach for a variety of outside factors, not to mention possible hiccups internally, including, for the Model S and its manufacturing facility alone, an “environmental assessment of such facility approved by the DOE and the completion of the processes under the National Environmental Policy Act, or NEPA, and the California Environmental Quality Act, or CEQA.]

9.) Our relationship with Daimler is subject to various risks which could adversely affect our business and future prospects. [Daimler is using Tesla's battery technology in trials of its electric Smart ForTwo car.]

10.) There are no assurances we will be able to formalize any joint development activities with Toyota. [Last month, Tesla and Toyota announced their intentions to cooperate on the future development of electric vehicles, but there are “no assurances we will be able to enter into any agreements, including any purchase orders, with Toyota for such joint development projects on terms favorable to us, if at all,” says the prospectus.]

11.) We may not be able to identify adequate strategic relationship opportunities, or form strategic relationships, in the future.

12.) If we fail to manage future growth effectively, we may not be able to market and sell our vehicles successfully.

13.) If we are unable to attract and retain key employees and hire qualified management, technical and vehicle engineering personnel, our ability to compete could be harmed.

14.) We are highly dependent on the services of Elon Musk, our Chief Executive Officer.

15.) Many members of our management team are new to the company or to the automobile industry, and execution of our business plan and development strategy could be seriously harmed if integration of our management team into our company is not successful.

16.) We are subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in building our manufacturing facilities.

17.) We may not be able to obtain, or to agree on acceptable terms and conditions for, all or a significant portion of the government grants, loans and other incentives for which we have applied and may in the future apply. As a result, our business and prospects may be adversely affected.

18.) Our business may be adversely affected by union activities.

19.) We are subject to substantial regulation, which is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.

20.) We retain certain personal information about our customers and may be subject to various privacy and consumer protection laws.

21.) Our vehicles make use of lithium-ion battery cells, which on rare occasions have been observed to catch fire or vent smoke and flame.

22.) We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.

23.) We may be compelled to undertake product recalls.

24.) Our warranty reserves may be insufficient to cover future warranty claims which could adversely affect our financial performance.

25.) We may need to defend ourselves against patent or trademark infringement claims [relating to battery packs, electric motors or electronic power management systems], which may be time-consuming and would cause us to incur substantial costs.

26.) Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.

27.) Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.

28.) Two of our trademark applications in the European Union remain subject to four outstanding opposition proceedings.

29.) We may be subject to claims arising from an airplane crash [in February, in Palo Alto] in which three of our employees died.

30.) Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.

31.) In the past material weaknesses in our internal control over financial reporting have been identified. If we fail to remediate any material weaknesses and maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our business, operating results, and financial condition.

32.) If our suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.

33.) We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

34.) Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions. [Musk will likely end up with 28 percent of the company, post IPO; approval of anything major will be difficult to impossible without his support.]

35.) As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

36.) An active, liquid and orderly trading market for our common stock may not develop, the price of our stock may be volatile, and you could lose all or part of your investment.

37.) A total of 80,178,696, or 85.77%, of our total outstanding shares after the offering and the concurrent private placement are restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.

38.) Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

39.) Our current agreements with Blackstar, an affiliate of Daimler, contain certain restrictions that decrease the likelihood that potential acquirors would make a bid to acquire us.

40.) Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

41.) If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

42.) Our management will have broad discretion over the use of the proceeds we receive in this offering and the concurrent private placement and might not apply the proceeds in ways that increase the value of your investment.

43.) After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.

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3 Comments

  • Damn the Torpedoes! Full Speed Ahead! NEVER give up, NEVER surrender!

  • I love how you were able to sneak “World Cup” in alongside “spill” and “economy” in a list of bad news. I assume that was intended to be humor. Or at least an exercise in which one of these things is not like the other.

  • [...] Continue reading here: Tesla’s IPO is Go-Go Despite Red Flags – Private Equity Hub [...]

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