Can Elon Musk’s business empire survive and thrive?

By P.F. | NEW YORK

ELON MUSK, a serial Silicon Valley entrepreneur, has become one of the most famous tycoons in America. He builds electric cars, launches rockets and installs solar panels. And he dreams bigger than almost anyone else, with plans to populate Mars and create a “hyperloop” that would allow high-speed travel along America’s west coast. But lately concerns have been raised about his finances. A plan to merge Tesla, Mr Musk’s car firm, with SolarCity, his struggling energy company, is controversial on Wall Street. Jim Chanos, a hedge-fund manager who helped rumble Enron, says Mr Musk is in financial trouble. Far from conquering planets, some fear that Mr Musk has become like Icarus, who flew too close to the sun. Can his empire stand the heat?

Mr Musk’s empire is complex, with two publicly listed firms (Tesla and SolarCity) and one privately held one, SpaceX, which deals with rocket launches and is the only one of the entities that is generating cash, rather than burning it up. Tesla is planning to ramp up production of the Model 3, its new and relatively cheap electric vehicle, and has a goal of producing 500,000 cars (of all models) a year by 2018, compared with about 85,000 today. That will require large investments. SolarCity, meanwhile, has a poor record of generating cash. In total Musk Inc will eat through perhaps $2.3 billion of cash in 2016, and already has $6 billion of debt. Adding to the strain, Mr Musk has taken out about $500m of personal margin loans secured against some of his shares in Tesla. Although Mr Musk likes to think of his group as a technology enterprise, it lacks the high margins and minimal investment needs of Silicon Valley’s most successful firms.

Musk Inc won’t run out of money immediately. It has $5 billion in cash and unused bank overdrafts. And Mr Musk has a decade-long record of defying the odds. But if the group continues to invest heavily it appears to face a big funding gap. It would be reckless to raise even more debt, so Mr Musk should probably raise more equity. He may be reluctant—doing so could dilute his stake in his listed companies to a level below 20%. The alternative would be to scale back the group’s investment plans. But that would hit Tesla’s bubbly stock price, which relies on a very rosy future. The typical financial forecasts by investors already assume that the firm will grow revenues as fast as Google, Amazon and Apple did at the height of their success in the mid-2000s. Mr Musk wants to raise cash, maintain control and keep his stock price high. But he probably cannot have all three of these things.

If Mr Musk were to succeed it would be a triumph on several levels. It would show that America’s entrepreneurs can tackle huge societal problems such as green transport; that traditional capital-intensive industries such as carmaking can be disrupted by outsiders; and that publicly listed companies can deliver on long-term projects that do not produce smooth quarterly earnings. So it feels mean-spirited to point out that Mr Musk appears to have driven himself into a tight spot. His group’s finances only really work if he can meet hugely ambitious targets. It is far more likely that there are slip-ups along the way, or worse, and that Mr Musk’s fragile finances force him to rein in his ambitions, and leave some investors bruised.