Dear Reader,
In the previous profile [Part 1] in Product | Strategy | Innovation, I discussed a concept proposed by others to organize all of Elon Musk’s various business interests into a parent holding company called “X”. I would encourage you to read that post for background context. I am not in favor of forming a parent company over a short period of time to consolidate ownership of an entire portfolio of companies including new, emerging, scaling & eventually maturing businesses at different stages of growth. The needs of these companies are very different based on their stage of growth and maturity. This can lead to a bias to allocate resources and capital away from uncertainty towards sustainable growth, earnings and average results.
But I do support the opportunity to consider improving outcomes with alternative business structures for X. Disruption and breakthrough innovation challenge accepted beliefs. This can produce an order of magnitude or greater improvement in key outputs although with more uncertainty and variability. The concept of X in a different form has significant potential upside for Tesla and SpaceX and for the emerging businesses like The Boring Company and Neuralink. But X can also accelerate innovation and even more startup ventures within those companies towards positive change for humanity.
This profile is Part 2 in a 3-Part Series on fostering innovation to kick-off 2021. The Series will follow this format:
Architect an alternative business structure for X, 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.
Background
If we segment businesses into at least 3 stages of a so-called Innovation “S-Curve” illustrated below, we can identify and iterate on alternative business structures that recognize the different needs of ventures at different stages of growth.
Startup ventures in the Launch Stage can be further broken into Exploration/Discovery, Problem/Solution Fit & Product/Market Fit. During this stage, the founding team is investigating the problem and relevant data, talking to experts and customers to better define the problem to solve, forecasting market size, and iterating on the requirements to build and refine prototypes and key assumptions to test in experiments. Eventually, a successful team can define and validate (or reject) the problem they are solving with a specific solution on 100s of target end-users. Then with more detailed requirements and refined prototypes for a specific market and price, the team can work to validate (or reject) Product/Market Fit with 1,000s of target end-users. These early adopters and the marketing and sales data collected can help refine the market size, cost to acquire a customer and the life-time value of a customer. When manufacturing and forecasting are ready to scale with Product/Market Fit, a new stage is possible.
Ventures in the Growth Stage have already validated Product/Market Fit. During this stage, you can improve the strategy to acquire customers and enhance customer engagement, but the primary objective is to scale growth with access to new capital and/or reinvestment of cash flow back into acquiring more customers. This stage does require growth beyond the early adopters into the majority of target customers. Growth can also continue with market expansion. For example, as Tesla scales battery cell production to lower their unit cell costs, these lower cost of goods for a key component can be used to lower the sales price so more customers can afford to purchase the finished vehicle.
Established businesses in the Maturity Stage use product life cycle and supply chain management to sustain sales revenue, but with more limited growth. This is when these businesses are valued more on their certainty for steady income vs. significant growth. These businesses are more likely to use a portion of cash flow to pay a dividend and/or buy back stock than ventures in the Growth Stage. Businesses in this stage can still provide significant value. These types of businesses make up much of Berkshire Hathaway’s subsidiary companies mentioned in [Part 1] that has substantially outperformed the S&P 500 over many decades. But instead of acquiring external Maturity Stage businesses, X could use cash flow from these businesses to re-invest into the Shared Services they utilize and businesses in the Launch or Growth Stage.
X, alternative to a holding company
The alternative business structure treats X as as a mission-driven startup venture during its own Launch Sage to define its vision, strategy, objectives and key results for the services it will provide for Elon Musk’s business interests and scales over time in proportion to the value it creates. The Mission for X previously mentioned in [Part 1] to “ensure human survival and progress” seems to achieve the mission-driven intent.
Guiding Architecture for X
Some key features that guide architecting X are listed below. All are important, but the Growth Horizon Strategies prioritize what is built out to achieve the Vision. For illustration, I propose what those Strategies could look like. The Strategies do not include the leadership and teams required to make them happen.
X begins operations as a startup venture that must prove it should exist with milestone-driven performance.
Establish Governance, Voting Rights & Ownership.
Establish Mission, Vision, Growth Horizon Strategy, Objectives & Key Results.
Funding secured to achieve Objectives for 1st 12 months, but released Quarterly based on achieving Key Results.
X potentially grows to include 3 Divisions to help organize business interests based on their stage of growth, but starts with a Launch Division, then sequentially phases in a Growth Division and Maturity Division as needed to manage scope and resources.
Based in Austin, TX with Tesla operations and a remote workforce as needed, but eventually scales to include other locations in key markets like Bangalore, Berlin, Eindhoven, Melbourne, Palo Alto and Shanghai.
Telsa and SpaceX are separate from X (at least during the formative years). But X can provide services to startup ventures within these companies and shared services to the more advanced businesses.
The best relationship between X and Starlink, The Boring Company and Neuralink can be determined over time, but it does seem that at least operating units of each would benefit within X immediately to accelerate their commercial activities.
A Culture to take on big audacious goals like ensuring human survival, advancing synthetic biology, scaling the pool of top engineering talent and creating the future of multi-planetary work.
If X was operating at full capacity it might look something like the following diagram where Neuralink, The Boring Company, Starlink, SpaceX and Tesla exist outside of X. That structure could evolve if commercial operations for ventures start within X and the value provided and capitalization of X result in an eventual acquisition of the entire venture by X. For instance, Starlink commercial operations could incubate within X and exit by IPO or X could IPO to capitalize and acquire Starlink, Neuralink and/or The Boring Company.
SpaceX would likely remain private until it validates and establishes sustainable commercial operations to and from Mars. Tesla’s current scale and valuation would likely keep it separate as well, but X can accelerate and incubate Telsa’s emerging ventures to spin back into Tesla, keep them within X and license key technology and services from Tesla or spin them out by an IPO or other exit.
Taken to an extreme case, X becomes the innovation and capitalization engine for all of Elon Musk’s business interests and eventually absorbs everything over time by acquisition. But that would be a performance-based outcome that Elon prefers and shareholders across multiple business interests would have to vote to support with their shares as required.
1st Growth Horizon Strategy
A critical need for the 1st Growth Horizon is to define and prioritize 3-5 Objectives for the 1st 3 and 6 months to create momentum and progress towards 3-5 Objectives over the first year. Each quarter should begin with 3-5 Objectives to hit key milestones. And each Objective should have 3-5 clearly defined, quantifiable Key Results that can be used to validate whether the Objective was achieved. This process is essential at the venture level, but can be replicated for teams and even individuals to help align effort towards meaningful Objectives.
In the list that follows, items 1-3 could form 3 Objectives for the 1st 12-month period to manage scope. Items 1-3 could then evolve in the 2nd year to build on the 1st 12-months and item 4 could be added to Launch the 2nd Division. Then item 5 could be added in the 3rd year to further build on the 1st 2 years. Based on the performance of Tesla and SpaceX, this seems to be the approach already taken, but it would be important as well if X were to operate as a startup venture.
Create X and then create Launch Division with 3 core programs
The primary objective with a decision to formalize X is to create and fund a startup venture that operates to fulfill the mission and vision of X.
Establish founding team & incorporate business entity that operates as X
Establish primary milestones for the 1st year
Create super voting rights and a special class of shares for this initial funding to help establish control for Elon Musk as a primary outcome for X
Fund X to reach key milestones for the 1st year
Create Launch Division with 3 core Programs within X
Innovation Services (shared services to launch lean and scale AcceleratorX, IncubatorX, PersonaX and eventually GrowthPadX)
AcceleratorX
IncubatorX
Launch IncubatorX Program with initial cohort of emerging business ventures
Participating ventures enter IncubatorX with Product/Market Fit requirements defined to test, iterate & refine towards validation
StarLink (commercial sales & marketing unit that licenses technology & services from SpaceX)
The Boring Company (commercial sales & marketing unit)
Neuralink (commercial sales & marketing unit, if ready; otherwise, AccelarorX Program )
Tesla Solar Roof (commercial sales & market unit)
Launch 1st class of AcceleratorX Program with Tesla startups
Regardless of the industry and target customers, synergies in the innovation process exist across a cohort of startup ventures in the Launch Stage. Additional synergies happen if ventures at similar stages can enter programs like “AcceleratorX” at the same time. Y-Combinator uses this process to provide access to key resources and a demo day to advance and showcase participating ventures to foster access to venture capital. Organizations like MassChallenge and Techstars run accelerators around the world in a similar way.
Tesla has a number of high-potential emerging ventures with revenue or near-revenue. A goal of the 1st class in the AcceleratorX Program is to use an online community of Tesla EV owners (PersonaX) to better define product requirements, pricing and the addressable market for target products & services. At the end of a 90-day program each venture should be able to define their requirements & success criteria to validate Product/Market Fit.
Tesla Home Services (Solar, Energy Storage, AutoBidder, HVAC, other services)
Tesla Insurance
Tesla RoboTaxi Service
Tesla Roadster
Tesla India (infrastructure and vehicle requirements might require a more staged approach than more mature markets)
PersonaX (online community of Tesla EV owners who are inspired to participate in product research to create what they want next)
4680 Tera Battery Factory
So after completing these 1st 3 Objectives in just 1 year, X would look more like the the following illustration. Focus is critical to achieve the most strategic results, but what if the value of the inputs is increased by an order of magnitude (6-10x) during these 12 months. That would buy X another 24 months to go after all 5 Objectives of the 1st Growth Horizon.
Create Growth Division with 3 core programs
The Growth Division provides a number of services across many of the scaling business interests. Key objectives are to help build best practice for key functions and reduce duplication of overhead and management within each of the business interests. Emerging ventures in this stage of growth have likely outgrown much of the incubator concept, but still share some common challenges and processes. Therefore, GrowthPadX is where incubated ventures with validated Product/Market Fit can scale with easy access to shared services including capital for investment into people, processes & production to further define the Cost-to-Acquire target customers and the Long-Term Value of these customers.
During the Growth Stage, ventures can stay within the Growth Division as long as they meet growth criteria, exit and spin-into a separate operating company like Tesla, or exit and spin-out with growth capital to IPO. This division provides shared services that are duplicated by Growth Stage businesses and Market-specific services through in-country resources. Those shared services are also provided to the separate operating companies like Tesla and SpaceX.
Corporate Development (Mergers & Acquisitions, Alliances, Venture Fund, IPO team)
Core Markets & Government Relations (Shanghai, Berlin, Bangalore, Tokyo, Melbourne, etc.)
Shares Services (GrowthPadX, LegalX, FinanceX, CapitalX, PersonaX, etc.)
Pilot an AcceleratorX Extension with external companies and ventures to collaborate on key problems across all the business interests. Outcomes can lead to partnerships to adopt products & services within the business interests, investment into the external venture or project and/or acquisition.
Additive manufacturing
Materials science
Robotics
Blockchain & virtual power plants
Bioreactors & synthetic biology
Genomics & advanced sequencing
Artificial intelligence & neural processing units
SafetyTech for the Future of Work
And after 3 years with all 5 Objectives achieved across the 1st Growth Horizon, X looks more like this with the Launch and Growth Divisions realized.
2nd Growth Horizon Strategy
IPO X using commercial operations of StarLink, The Boring Company and potentially Neuralink to drive investor interest and valuation based on Elon Musk’s history and the Mission of X.
Tesla stays public-traded company, but leverages X to accelerate and incubate new ventures for greater efficiency.
SpaceX stays private to colonize Mars with Elon in control; additional funding provided to SpaceX through the X IPO and secondary offerings; StarLink also provides cash flow to SpaceX by licensing core technology and services.
Create Maturing Division with 3 core programs
Life Cycle Management program
Supply Chain Management program
Financial Planning & Analysis program
Accelerate & Incubate X Services Hub concept
City program to consolidate and operate end-user services in a centralized geographic location
Determine scope of services (e.g. Tesla vehicle delivery and service, home services, StarLink, etc.)
Launch X Services Hub pilot in a key market like Dallas, San Antonio or Houston for proximity to Austin, TX
Accelerate & Incubate X Innovation Hub concept
City program to consolidate and operate innovation services in a key market for engineering talent
Determine scope of services (e.g. Incubator, Accelerator, X Labs, PersonaX)
Launch X Innovation Hub pilot in a key market like Shanghai, Berlin, Melbourne, Bangalore or Eindhoven to access key talent outside the US
Accelerate & Incubate Astro Nova School concept
Build on Los Angeles school learnings to pilot additional schools in Austin, Shanghai and/or Berlin
Run expanded Astro Nova scope for distance learning on engineering and science (content, experiments, projects) through AcceleratorX to refine concept
Pilot engineering and science experiments and projects through an X Innovation Hub
3rd Growth Horizon Strategy
Accelerate and Incubate concept for 1st X Services Hub in space (Moon Base Alpha) with The Boring Company, Tesla Home Services, Tesla Insurance, Tesla CyberTruck, Tesla Solar, Tesla MegaPack, and other services).
Secondary X offering to accelerate Moon Base Alpha and start Mars Base Alpha.
Accelerate conversion of internal combustion engine (ICE) fleet on Earth to electric vehicles (EVs).
Accelerate conversion of electric grid on Earth to more home solar generation and home battery storage and centralized grid storage to build virtual power plants.
Accelerate an optimized, multi-planetary Future of Work.
Top Engineering and other key talent capacity is trained and readily available to scale across all business interests where needed.
High-risk work becomes more automated or monitored to help manage risk to essential workers.
Essential workers have access to benefits and training to improve skills and train for other jobs; X, Tesla and SpaceX become the preferred place to work not just for top engineering talent, but the majority of talent across a many roles.
Conclusion
The Mission to ensure human survival and progress is inspiring to recruit, develop and retain top human capital over decades of innovation. The Architecture & Growth Horizon Strategies presented here are representative for illustration and discussion. Their content could change to meet the priorities of the various businesses. But they do illustrate how X could seed and incubate new ventures as well as accelerate existing ventures within Tesla and SpaceX. They also anticipate a later time when various products reach a stage where product life cycle management is more important. The Tesla Model S & Model X will have to go through this process to improve their viability and positioning relative to the more recently introduced Model 3 & Model Y to the Tesla portfolio. The Tesla SuperCharger network will also eventually reach this Maturity Stage while still growing, but with more linear growth in core markets vs. exponential growth.
And by X beginning operations as a startup venture that must earn its existence by executing Objectives and Key Results every quarter and every year, the intention is for the culture around X to not kill innovation based on uncertainty or risk alone when first principles thinking and prototyping prove otherwise. But the culture should always support killing bad products! The value created by X will determine how far it scales. It could play a role where the majority of value created is through the services it provides and the exits it accelerates. X could also scale over time to become the parent holding company Dave Lee and others have proposed with all or the majority of Elon Musk’s business interests as subsidiaries.
The next profile [Part 3] in the 3-Part Series in Product | Strategy | Innovation is a deep-dive into a proxy for innovation in the biotechnology and life sciences industry. Pioneering is a great analogy for early innovation where uncertainty dominates until product and market attributes become more clear. There are lessons to learn from this proxy for X and innovation in general.
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Nothing in this post is intended to serve as financial advice. Do your own research.