Dear Reader,
I’m writing this profile in Product | Strategy | Innovation as a response to a proposed business structure and much more.
Elon has already shared his response.
Background
Almost 4,000 responses to a Twitter poll were about 50/50 as a good idea or bad idea. I would like to consider a holding company as proposed, but more importantly alternative business structures for “X”. My perspective is influenced as a product, strategy & innovation leader in large multi-national corporations, startup ventures, academic research labs and as a retail investor. I will keep this post as brief as possible, but it does require more text than a tweet. You can direct feedback to @sdpittman on Twitter or leave a comment at the bottom of the post.
This profile is [Part 1] in a 3-Part Series on fostering innovation to kick-off 2021. The Series will follow this format:
Provide background context,
Architect an alternative business structure, and
Overview a relevant proxy to create, fund, accelerate and scale new companies.
If you are not a subscriber to Product | Strategy | Innovation, please consider doing so to get updates on this series and more.
Others have already commented on forming X as a holding company with Dave on YouTube. This isn’t CNBC. One perspective is from a “chicken” + “genius” who lives in Singapore. But he actually provides good insights as a Tesla investor and pushes back on the idea of a holding company for at least the next 5-10 years based on the growth of Tesla and near-term interest of its shareholders.
I would add that Elon Musk is doing pretty well founding, funding and running SpaceX, Tesla and his numerous other ventures on his own without advice from Twitter and YouTube. However, Elon has also been an advocate for retail investors and includes Tesla’s retail investors in various ways like contributing questions to Tesla’s quarterly earning calls.
Considering alternatives to a holding company
So, in this post, I will first explore 5 topics for context and perspective.
What is the
Scope
of Elon Musk’s business interests?Is there an actual
Problem
to solve here?Why
Holding Companies
typically kill innovation?What are the
Objectives
for an alternative business structure?Are there relevant
Proxies
to consider?
Then, from this informed perspective in a follow-up post, I will identify what I think are key features to include if an alternative business structure is considered relative to the current state of business interests or a parent holding company. The Verge is also thinking about this and has published 5 easy ways for Elon Musk to combine his companies into a super-conglomerate.
1. What is the Scope of Elon Musk’s business interests?
Based on public information, the following is a list of Elon’s business interests. The list also includes a few past companies for completeness. As mentioned below, StarLink currently operates as a division of SpaceX. Similarly Tesla Insurance, Tesla Solar Roof and other emerging businesses operate as startups within Tesla according to Elon. So the list could actually be much more extensive than shown.
An important feature of the list is the magnitude of the total funds (over $30B combined) that Elon has raised to realize all the innovation covered by these business interests. This is certainly influenced by the size of the total addressable market each business interest is pursuing. Another important feature is the size of the total addressable market many are pursuing as a mission-driven company.
Tesla - public electric vehicle and clean energy company traded on NASDAQ as TSLA; co-founded as Tesla Motors by Elon in 2003 who initially served as Chairman, but became CEO in 2008; Elon also serves as Product Architect and owns about 20% of Tesla; over its history Tesla has raised a reported $20.4B with 35 funding rounds (note: this report seems to exclude 2 $5B secondary offerings by Tesla in the 2nd half of 2020).
SpaceX - private space company founded in 2002 by Elon that also includes the StarLink division for satellite internet services ; a reported $5.4B has been raised to date with 34 funding rounds; Elon is majority shareholder with a reported 54% of equity and 78% voting control through his Elon Musk Trust; Elon serves as CEO & CTO.
Solar City - public solar energy services company that traded on NASDAQ as SCTY; founded in 2006 where Elon served as Chairman and was a principal shareholder; a reported $2.1B was raised over 20 funding rounds; the company was acquired by Tesla in 2016 for $2.6B.
The Boring Company - founded by Elon in 2016 as a subsidiary of SpaceX, but became an independent private company in 2018 with a reported 90% ownership by Elon and 6% by SpaceX; Elon serves as its CEO; a reported $233M has been raised to date with 2 funding rounds.
Neuralink - private company founded in 2016 by Elon who serves as its CEO; a reported $158M has been raised to date with 2 funding rounds; both rounds appear to be led and funded entirely by Elon.
Hyperloop - open source transportation concept Elon proposed; Hyperloop Transportation Technologies and Virgin Hyperloop are commercializing this concept.
Astra Nova School - not-for-profit independent school in Los Angeles, CA founded by Elon’s Ad Astra School team; Ad Astra was an experimental school started by Elon and operated in a SpaceX factory to educate his kids and some other SpaceX employee’s kids; although Elon made a donation to help start the Astra Nova School, he does not appear to be involved in the school.
OpenAI - co-founded & co-chaired by Elon who no longer serves on its board; a reported $1B has been raised to date with 2 funding rounds.
X.com - company founded by Elon in November 1999 as an online bank. In March 2000, X merged with Confinity to create PayPal. Ebay bought Paypal in 2001 for a reported $1.5B. Elon later bought back rights to the X.com domain. This should not be confused with X.company, where X is the Moonshot Factory for Alphabet & Google.
Zip2 - past company founded by Elon and his brother Kimbal Musk in 1995; the company was sold to Compaq Computer in 1999 for a reported $305M.
2. Is there an actual Problem to solve here?
There does not appear to be a single glaring problem that is screaming a new business structure is urgently required to the current state of Elon’s various business interests, but what if multiple challenges across many of Elon’s business interests suggest at least considering alternative options. In the end, you can always choose not pursue a new structure or shelve the concepts to consider at another time in the spirit of innovation.
SpaceX requires significant capital to fulfill its mission to make humanity multi-planetary.
SpaceX has mastered the use of multiple, staged funding rounds plus NASA and private contracts to build out very talented engineering teams to advance its aerospace and rocket technology. Elon has also done an incredible job raising only the funds required to reach major milestones for a step-up in valuation to manage equity dilution. He has stated the importance of maintaining his control with majority voting rights to ensure SpaceX can successfully reach Mars. So the challenge (not problem) is raising the funding required to reach Mars without diluting the majority voting rights that Elon now holds.
The Boring Company and Neuralink are at a much earlier development stage with much different needs than growing businesses within Tesla & SpaceX.
Scaling Tesla Model Y in Fremont, Shanghai, Berlin and Austin is a much different challenge than establishing proof of concept in a pig for a neural implant or an alpha tunnel to transport people in Las Vegas.
Elon has stated Tesla is really over a dozen startups where each product and plant is also considered a startup, but even these are at different stages of development and commercial viability.
Scaling the Solar Roof and Insurance businesses and potentially seeding a home HVAC business line within Tesla competes for resources that could also drive significant revenue within the more mature business lines. Even spinning out and operating StarLink separately from SpaceX competes with limited resources to execute and scale contracted commercial rocket launches.
Top engineering talent to fulfill the missions of these various companies is a limiting factor.
Elon uses public events to repeatedly recruit engineering and other talent like actuaries for the Tesla Insurance business. Tesla is also using factory locations in Shanghai and Berlin to access additional key talent pools outside the US. Scaling top engineering talent may be more of a constraint on future growth than capital requirements.
Elon’s bandwidth at some point is a limiting factor.
The concurrent performance of SpaceX and Tesla suggest Elon is a master of allocating his time for impact. His leadership teams in the various businesses have also played a significant role. But as SpaceX and Tesla continue to scale and emerging ventures like The Boring Company and Neuralink evolve into more established businesses, Elon’s time will be even more of a premium. Meetings are the nemesis of someone like Elon, but at critical decision points, Elon can also play a significant role to drive progress forward.
Shared services are duplicated among these multiple companies.
SpaceX, Tesla, The Boring Company and Neuralink are very different businesses, but Accounts Receivable, Accounts Payable, Financial Planning & Analysis, IT Services, Legal Services, Investor Relations, Human Resources, ERP systems, etc. share common processes and skills. Duplicating identical services in each business leads to similar management structures that could be consolidated. This not only leads to increased costs, but varying practices. Elon is less efficient when different practices are used for the same function across different businesses.
3. Why holding companies kill innovation?
Multinational holding companies usually evolve over time to improve operational efficiency and manage resources. Companies like GE and IBM centralized corporate research, various shared services and even product teams to then serve region-specific marketing & sales teams for global operations. This seems to work in principle, but GE Capital was really driving much of GE’s financial performance in its best years.
IBM was able to successfully evolve from mainframe computing into mini-computing and then personal computing by disrupting itself with cheaper computers that continued to grow the market. This required establishing separate teams in different geographic locations. But when computing became further democratized with cloud computing and the SaaS business model, IBMs competitive edge with CIOs was diluted among a competitive field that includes Microsoft, Oracle, Salesforce, Amazon Web Services, Google, Salesforce, Slack Technologies, etc. IBM could give up software if it dominated hardware, but it lost its dominance across both software and hardware to compete primarily with services.
Many mature and emerging businesses co-exist within a parent holding company’s business groups. Scaling a mature business is often an exercise in deploying capital when the business dynamics to acquire and retain customers are well known and product/market fit is well established. Emerging businesses are still discovering the product and market attributes and even the commercial viability of the business itself. These stages of emerging and mature businesses share vary little even if they are in the same industry. Executives often allocate capital where the perceived risk is lower with more certainty. They may also allocate the minimum capital needed to emerging ventures to keep them alive, but not thrive. This results in zombie projects throughout an organization. Stock buybacks and paying dividends support the financial performance to satisfy shareholders. But eventually this leads to the business being valued with lower Price-to-Sales and Price-to-Earnings multiples as a value-based stock. Companies can return more than 100% of quarterly revenue back to shareholders with stock buybacks and dividends.
This context usually leads to killing innovation in the interest of certainty and short-term profit. Zombie projects and bad products should be killed quickly. But what if they became a zombie by repeatedly steering resources away from them in the interest of more immediate wins like stock buybacks. This is relevant to many of the companies that make up the S&P 500 today. Disruptive innovation will help save the day. Many of these zombie companies reject the potential threat of emerging startup ventures since the competition is often not for their most valued customers who demand higher performance. And when they wise up to the threat it is usually too late. This is described in the Innovator’s Dilemma by Clayton Christensen.
4. What are the Objectives for an alternative business structure?
If there are significant challenges worth pursuing, what are the Objectives for an alternative business structure to a parent holding company. Objectives should be clear and are further clarified with quantifiable Key Results achieved within a specific time frame.
Architect and optimize a business structure to maximize the impact of key resources across many separate business interests with unique, ambitious missions.
Amplify Elon Musk’s and his key team members’ impact across multiple interests when bandwidth is a limiting factor.
Unlock Elon Musk’s ability to raise financial capital for these interests.
Unlock developing and recruiting top human capital.
Nurture, seed and accelerate product & process innovation.
Recognize synergies between businesses at similar stages of development and differences in different stages of development even when they are in the same industry.
Recognize the different regulatory requirements across defense contracting, medical devices, automotive vehicles, electric utilities, trucking, and government contracts.
Drive greater operational efficiencies for shared services that are duplicated across many business interests.
Align the optimum business structure with a unifying core mission for all business interests, for example, to ensure human survival and progress.
Don’t become a cost-plus, single-vendor project management bureaucracy for all of the other business interests that Elon has already disrupted with milestone-driven, competitive bidding by at least 2 vendors to privatize space exploration.
5. Are there relevant Proxies to consider?
Holding Companies as multinational conglomerates have already been mentioned with some relevant examples, but parent holding companies include Alphabet and Berkshire Hathaway highlighted here.
Objective - Focus Google more on its core businesses and set up a separate parent holding company Alphabet to hold everything else. Berkshire Hathaway partially inspired this structure.
Outcome - Google and its core businesses that include YouTube have had great success under Alphabet, but they made up the majority of revenue even before Alphabet was formed. But most of the Alphabet companies outside of Google have had limited commercial success to date and are still developing. Time will tell if Alphabet produces a better outcome than the prior structure under Google.
Success - Dandelion Energy (sustainable geothermal energy), but required separation from Alphabet’s innovation lab for commercial progress. The linked HBS Case Study details the Foghorn Project and its “kill metric” within X, Google’s Moonshot Factory. The Foghorn Project did not fail within Alphabet. Its team just verified that it did not meet its objective. Dandelion is now pursuing what was out-of-scope for Alphabet.
Objective - Acquire and manage capital allocation across a portfolio of subsidiary businesses in many different industries like insurance, furniture, apparel, manufacturing and rail. Use the float created through insurance premiums to invest back into these businesses and other investment opportunities. Berkshire has built large equity positions in companies like Coca-Cola and Apple over time.
Outcome - Berkshire Hathaway’s compounded annual gain from 1965-2019 was 20.3% vs. 10.0% for the S&P 500. Berkshire Hathaway’s overall gain over that 54 year period was 2,744,062%. But although Berkshire Hathaway has invested in companies like Apple and Amazon, it portfolio of subsidiary businesses provide stable income over many years vs. exponential growth of an emerging tech business.
Success - Hands off approach with limited staff at the holding company level; CEOs of subsidiary businesses operate independently without the burden of being a unique public company (Berkshire Hathaway represents all its holdings as the public company).
Multinational Conglomerates leverage operational scale to drive efficiency across many different businesses worldwide. They often centralize their R&D that is sponsored by the corporation and its various business groups to sustain growth. The outcome is these businesses are usually priced as a value vs. growth investment. A current trend is to spin off mature businesses to focus on a new core with more emerging growth potential.
Research & Development / Engineering Innovation Companies can exist as an independent entity or through an affiliated corporation with other commercial operations (e.g. PARC is an independent Xerox Company).
Other Models exist beyond holding companies, multinational conglomerates and research & development companies. These are also more aligned to support and nurture emerging businesses where the winners are spun out later for acquisition or the public markets.
Objective - Identify & seed breakthrough biotech innovation to create founding team & spin out winners as new ventures to raise growth capital and scale as an independent biotech company. The process is highlighted here.
Outcome - over 100 new biotech companies formed to date with 22 IPOs since 2013.
Success - Moderna was formed around 2010 with an IPO in 2015; mRNA-1273 vaccine was developed, cleared by FDA for emergency use & commercialized in less than a year in 2020. Moderna’s headquarters in Cambridge, MA and the Flagship Pioneering network likely contributed to Moderna’s ability to take mRNA-1273 to market on it own with supply chain partners vs. BioNTech feeling the need to partner early with Pfizer to commercialize and distribute their own mRNA vaccine.
Alfred E Mann & Alfred Mann Foundation
Objective - Develop and commercialize innovative solutions for significant unmet or poorly met medical conditions.
Outcome - Al Mann founded & helped fund 17 new ventures during his career; the Foundation allowed Al Mann to reinvest successful exits back into R&D to develop more solutions.
Success - MiniMed insulin pump for diabetes acquired by Medtronic for $3.3B.
Objective - Nurtures and provides seed funding for early stage startups.
Outcome - These ventures and their founders have access to experienced founders as mentors, investors and most importantly peer entrepreneurs who are going through the same challenges with their ventures.
Success - Alumni ventures include Airbnb, Cruise, DoorDash, Dropbox, Ginko Bioworks, Stripe, Twitch, etc.
Conclusion
This [Part 1] post provides relevant background and context to consider for “X” as a parent holding company or alternate business structure for all of Elon Musk’s business interests. In a [Part 2] in Product | Strategy | Innovation, I will identify what I think are the architecture and key features to consider for an alternative business structure.
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Nothing in this post is intended to serve as financial advice. Do your own research.