Musk's 'out of cash' dilemma many business founders love to share (2023)

Musk's 'out of cash' dilemma many business founders love to share (1)

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'Out of cash' to $13+ billion net worth

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In a span of less than four months, Tesla Motors founder and CEO Elon Musk has added $2.3 billion to his personal wealth. Musk is now worth more than $13 billion, according to the Bloomberg Billionaire Index, but it could have worked out very differently.

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In fact, a crucial decision Elon Musk was forced to make in 2010 when, by his own account, the billionaire was broke, is one of the reasons Musk has been able to cash in on Tesla's rapid share rise this year: Musk held on to shares at the very moment when a sale to raise cash would have made financial sense.

Musk, who had $200 million in cash at one point, invested "his last cent in his businesses" and said in a 2010 divorce proceeding, "About four months ago, I ran out of cash." Musk told the New York Times' DealBook at that time, "I could have either done a rushed private stock sale or borrowed money from friends."

It's a dilemma that many entrepreneurs face, but there is a big difference between the options available to Musk and the options available to most business owners. Musk was able to live on $200,000 a month in loans from billionaire friends — while still flying in a private jet — rather than sell any of his Tesla stake. Though the root of the problem is the same: intangible assets or, in other words, a business owner who is "asset rich" and "cash poor." And it can lead business owners to the most difficult decision of all: having to sell a piece or even all of their company.

This is not a problem limited to founders of technology start-ups based in California.

"It's really one of those tough scenarios with no good answers," said Richard Stumpf, CFP and managing partner of Wichita, Kansas-based Financial Benefits. Stumpf has worked with farmers in this situation, and sometimes for reasons that are similar to what drove Musk to admit he was broke: divorce.

"It happens all the time here," he said. "Farming 2,000 acres ... asset-rich, cash-poor. And the options are limited, quite frankly."

Even if you have friends as nice as Elon's, borrowing money can cause problems. Years ago a friend of Stumpf's, who owned a heavy road construction company, got into a bind and borrowed money from buddies. He eventually paid them back, but got behind and risked ruining relationships. In the end the business survived better than his strained friendships.

Even for business owners with collateral to back the loan, the cash flow needs to be coming in to meet debt payments. And in many cases lenders are picky about asset types they will accept. Intangible assets are not the type of collateral that a typical commercial lender will accept, said Andrew Sherman, partner at Seyfarth Shaw, who has worked with companies at all stages of development.

"The bank is in the business of collecting interest, not foreclosing on collateral," Stumpf said. "Selling the business or some of the ground that you don't want to sell can be the only way to survive," he said.

This can be a good problem for business owners who have contracts lined up that will create significant cash flow but for which expansion is first needed. But selling equity to fund expansion is often a dreaded decision — and for good reason.

"You don't want to go the way of angel investors, because you know you're giving away a whole lot more than you're getting," Stumpf said. "In a fast-growing business, you sell 10 percent for cash to make it continue to grow, but when you're growing 30 percent to 40 percent a year, that's a heck of a return on capital" being given to someone else. "It's a shame when that happens with a viable business," Stumpf added.

In a fast-growing business, you sell 10 percent for cash to make it continue to grow, but when you're growing 30 percent to 40 percent a year, that's a heck of a return on capital. It's a shame when that happens with a viable business.

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Richard Stumpf

managing partner of Financial Benefits

Sherman said many entrepreneurs need to turn to the equity markets to solve cash flow problems, reaching out to angels, angel networks, online funding or private placements, especially when they lack real estate or inventory or equipment to pledge as collateral. In the short term it can be attractive, since it does not need to be paid back, but in the medium and long run it can be "a very costly source of capital" for a business that is growing and can expect its equity to increase in value, Sherman said.

One hybrid strategy is to partner with an angel for a bank loan, where the angel provides a guaranty with its personal balance sheet to secure the loan and receives equity or warrants in return. The business owner is still giving up equity, but far less equity than in a straight sale, since the risk to the investor is much lower, Sherman said.

There is an operating principle of entrepreneurship that makes it likely that business founders will face this situation at some point in a company's development. Owners plow profits back into a business, and the business itself is often 80 percent to 90 percent of their net worth, Stumpf estimated. In a fast-growth business, retained earnings should be low because the owner is reinvesting in the business.

"They will do whatever they can to keep the business alive," Stumpf said. His prime example is himself. "What I took out of paycheck in the first few years was insignificant. I was buying new computers or subscribing to information services or doing marketing programs. I don't have a million dollars' worth of a factory behind me, but I was still doing same thing — reinvesting in the business rather than taking big paychecks home."

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As CEO and co-founder of small-business finance company Biz2Credit, Rohit Arora has a lot of experience with business founders facing the decision to sell as a result of early success. Owners of quickly growing business are barely paying themselves and can only withstand so much of a lack of equity in the business before it becomes a cash flow challenge. "While you're doing great on paper, just to keep operating at the expanding scale, we have seen owners have to get an equity infusion," Arora said.

Entrepreneurs can raise money in the debt market, but after a certain point debt gets very expensive. "It's a classic mousetrap," Arora said. "A growing business that looks good and there's lots of money going in and out, plenty of cash flow, but any time there is a hiccup, all the cash flow gets sucked up."

One of Arora's clients, an entrepreneur in his 30s who rapidly grew a series of franchised smartphone stories in New York City, borrowed often from the Biz2Credit platform as the business grew to 50 stores over four years. The expansion was so swift that it turned into an asset-rich, cash-poor situation, with the entrepreneur needing more money to run the 50 stores, and for reasons from payroll to stocking expensive smartphones. The notorious Samsung Galaxy Note 7 fire recall put this owner in an immediate cash crunch — he had to wait three to four months for compensation from Samsung.

He really only had two options: Sell a stake or sell the entire operation. He ended up doing both, initially selling a stake but ultimately selling the entire business to a large distributor of phone accessories who was keen to reach customers directly.

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"I've seen it so many times," Arora said. "He needed to give up equity, and once he got it, it stabilized the company. But as an entrepreneur, it was difficult working for someone else. He decided it was better to get totally out."

"In any high-growth business, I don't think you can do anything much different to avoid it," Arora said, though he does suggest that geographic expansion beyond an existing successful footprint be considered with caution.

For entrepreneurs, the good news is that there's always another business to create with the proceeds from a sale. The smartphone store entrepreneur could have sold to a bigger chain or even at a higher price if his hand hadn't been forced, Arora said. But he made good money and is now back with several new businesses, including one in the smartphone accessories market.

He took what he learned about selling accessories and doing smartphone repairs to the online world, where margins and volume are higher. And instead of lamenting the loss of physical stores, the entrepreneur has eliminated the risk of a cash crunch associated with retail locations.

Musk's 'out of cash' dilemma many business founders love to share (3)

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FAQs

What are Musk's intentions for Twitter? ›

Shortly after agreeing to buy the business this year, Musk had indicated he wanted to quintuple Twitter's annual revenue to $26.4bn by 2028, according to the New York Times. Advertising accounts for 90% of Twitter's revenue and Musk has raised a number of suggestions to generate turnover by other means.

What was Musk's involvement with PayPal? ›

In 2002, PayPal was acquired by eBay for $1.5 billion in stock, of which Musk—the largest shareholder with 11.72% of shares—received $175.8 million. In 2017, more than one and a half decades later, Musk purchased the X.com domain from PayPal for its sentimental value.

What is Elon Musk's most successful business? ›

Entrepreneur Elon Musk has achieved global fame as the chief executive officer (CEO) of electric automobile maker Tesla Inc. (TSLA) and the private space company SpaceX. Musk co-founded PayPal (PYPL), was an early investor in several tech companies, and in October 2022 completed a deal to take Twitter Inc. private.

What is Musk's problem with Twitter? ›

He drove out the head of ad sales, alarming the companies that account for nine-tenths of Twitter revenue. He implemented a new verification system where anyone can pay for a blue check, which (of course) led thousands of people to impersonate celebrities, politicians, and huge companies.

What is happening with Musk Twitter deal? ›

After months of waffling, lawsuits, verbal mudslinging and the near miss of a full blown trial, Elon Musk now owns Twitter. On Thursday night, Mr. Musk closed his $44 billion deal to buy the social media service, said three people with knowledge of the situation.

How much did Musk receive from PayPal acquisition by eBay? ›

As the majority shareholder, Musk was ousted as CEO amid protracted boardroom squabbling. PayPal then accepted eBay's offer to buy in July 2002 - against Musk's advice. After the 1.5 billion deal finally went through, he came away with $180 million after taxes.

Is PayPal still under Elon Musk? ›

X.com merged with Confinity to become PayPal, and Musk spent a short time as CEO before being ousted in 2000. He went on to found Tesla, SpaceX, and The Boring Company, all of which he is still involved in.

Where did Elon Musk get the PayPal money? ›

Musk and his younger brother, Kimbal Musk, founded the company in Palo Alto, California in 1995 and eventually sold it to Compaq for roughly $300 million in 1999. Musk used the money from that sale to found X.com, the online financial services service that merged with Confinity in 2000 and later became PayPal.

What is the business strategy of Elon Musk? ›

Musk's strategy can be characterized by common themes across three areas: what fits into his vision for problems to solve, how he designs an organization as a solution to those problems, and why he can so effectively mobilize resources towards those solutions.

What is Elon Musk's main goal? ›

As the co-founder and CEO of Tesla, Elon leads all product design, engineering and global manufacturing of the company's electric vehicles, battery products and solar energy products. Since the company's inception in 2003, Tesla's mission has been to accelerate the world's transition to sustainable energy.

What is Elon Musk main source of income? ›

Elon Musk rocketed to billionaire status, after entering the elite club in 2012 just nine years later he tops the list. His wealth is based mainly on his shareholdings in the electric car firm Tesla, of which he is the CEO.

How did Elon Musk achieve success? ›

Elon Musk cofounded the electronic payment firm PayPal, and in 2002 he founded SpaceX, a company that makes rockets and spacecraft. He was a major early funder of Tesla, which makes electric cars and batteries, and became its chief executive officer in 2008. He purchased the social media service Twitter in 2022.

Is Elon Musk good at problem-solving? ›

Elon Musk has been instrumental in building three revolutionary, multibillion-dollar companies in completely different fields. His ability to solve seemingly unsolvable problems is essential to his success and he attributes his problem-solving success to first-principles thinking.

What is Elon Musk competitive advantage? ›

This is the essence of what Elon considers to be Tesla's #1 long-term competitive advantage*. Right after he mentioned “the machine that builds the machine” in order to summarize their theoretical end goal in factory development, he said: “Tesla's long-term competitive advantage will be manufacturing.”

Why does Musk want to back out of Twitter? ›

Why did Musk back out of buying Twitter? Musk grounded his argument largely on the allegation that Twitter misrepresented how it measures the magnitude of “spam bots” – or automated accounts – that are useless to advertisers.

Why did Elon Musk quit buying Twitter? ›

July 8 – Musk moves to terminate his acquisition of Twitter, pointing to the issue of fake accounts. "Mr. Musk has sought the data and information necessary to 'make an independent assessment of the prevalence of fake or spam accounts on Twitter's platform'" and did not receive it, a securities filing said.

Why did Elon fire Twitter employees? ›

They were told that they had been terminated for “violating company policy,” according to emails seen by The Times.

How much did Elon Musk Pay for Twitter per share? ›

How much will the Twitter acquisition cost? Musk is paying $54.20 per share for Twitter, or about $44 billion. It's the same price he offered when he first tried to buy Twitter in April.

How much will Musk lose on Twitter? ›

Questions about Twitter's long-term financial viability are real. Musk has previously estimated that the company is losing $3 million a day. Musk has gone to drastic lengths to make Twitter a cheaper place to run, like laying off half of the company's staff, or about 3,700 jobs.

Did Elon Musk buy all Twitter shares? ›

The acquisition of Twitter by Elon Musk began on April 14, 2022, and concluded on October 27, 2022. Elon Musk began buying shares of American social media company Twitter, Inc. in January 2022, eventually becoming the company's largest shareholder in April with a 9.1 percent ownership stake.

Is PayPal bigger than eBay? ›

PayPal currently has a market cap of $106 billion, compared to the $31.5 billion of eBay, which has been in free fall over the past year.

How much of Tesla does Elon Musk own? ›

Elon Musk cofounded six companies including electric car maker Tesla, rocket producer SpaceX and tunneling startup Boring Company. He owns about 25% of Tesla between stock and options, but has pledged more than half his stock as collateral for loans.

Is PayPal still owned by eBay? ›

Established in 1998 as Confinity, PayPal went public through an IPO in 2002. It became a wholly owned subsidiary of eBay later that year, valued at $1.5 billion. In 2015 eBay spun off PayPal to its shareholders, and PayPal became an independent company again.

What companies did Elon Musk buy? ›

From building rockets and brain chips to digging tunnels, here's what all of Musk's companies do.
  • Tesla. Tesla Inc. ...
  • SpaceX. ...
  • Neuralink. ...
  • 10 richest football stars of 2022: net worths, ranked – from Neymar to Messi. ...
  • The Boring Company.
1 Nov 2022

Is Elon Musk the richest man in the world? ›

1. Elon Musk. Image courtesy Getty Images/Saul Martinez.

How much companies does Elon Musk own? ›

Elon Musk now owns Twitter, making it the fifth company led by the world's richest man. Musk runs Tesla and SpaceX alongside two smaller start-ups, Neuralink and The Boring Company.

When did Elon Musk left PayPal? ›

Business Insider reported that in October 2000, Musk wanted to switch the PayPal servers from a Unix platform to a Microsoft Windows platform, but the other cofounders didn't like the idea. While he was on his way to Australia for a vacation, Musk was fired by PayPal's board.

How much has Elon Musk made PayPal? ›

How much did Elon Musk sell PayPal for? In 2002, eBay purchased PayPal for $1.5 billion. As the majority shareholder in the company with 11.72 percent of shares, Musk made between $175 million and $180 million from the deal.

How much did Elon Musk make out of PayPal? ›

After spending $1 million on a McLaren sports car, he rolled the rest into his next startup, X.com, later named PayPal. It was sold to eBay for $1.4 billion in 2002. Mr. Musk collected more than $100 million from the deal at the age of 31.

What are the key elements of Tesla strategy? ›

Tesla business strategy aims to accomplish this mission via the following three key principles:
  • Focus on electric cars. ...
  • Ownership of distribution. ...
  • Low cost of ownership. ...
  • Unconventional way of doing business.
22 Apr 2021

What is the master plan of Elon Musk? ›

Create stunning solar roofs with seamlessly integrated battery storage. Expand the electric vehicle product line to address all major segments. Develop a self-driving capability that is 10X safer than manual via massive fleet learning.

What business Leaders Can Learn from Elon Musk's marketing strategies? ›

He often also responds to others and engages with followers. Showing your personality and engaging more with your audience on social media will give people the chance to become more than customers. This is how you can turn buyers into hyper-engaged buyers and fans; this is how you can become an influencer.

What is Elon Musk's philosophy? ›

Maybe you've heard of the new, vibrant philosophy called “longtermism.” It's beloved by Elon Musk and Peter Thiel and many other Silicon Valley winners who are funding its development and promulgation.

What are Tesla's goals and objectives? ›

We're building a world powered by solar energy, running on batteries and transported by electric vehicles. Explore the most recent impact of our products, people and supply chain. We design sustainable systems that are massively scalable—resulting in the greatest environmental benefit possible.

How much earn Elon Musk in a day? ›

His net worth in 2022 was calculated to be about $273 billion. This means he makes an average of $432 million per day!

How rich is Elon Musk examples? ›

“In 2002 Elon Musk got $176 million when PayPal sold to eBay , ” writes Nicholas Colas, co-founder of DataTrek Research. “He reinvested much of that into Tesla , SpaceX, and other startups. Now, he is worth $274 billion.”

Is Elon Musk self made? ›

Elon Musk: Biography of a Self-Made Visionary, Entrepreneur and Billionaire.

Why is Elon Musk so inspiring? ›

His ability to be passionate and also persistent to keep going forward even after multiple failures sets him apart from most. Elon Musk is an inspiration because of his ability to be passionate and persistent at the same time. He is always optimistic and not afraid to take risks, even after multiple failures.

What is Elon Musk famous question? ›

You're standing on the surface of the Earth. You walk one mile south, one mile west and one mile north. You end up exactly where you started. Where are you?

What is Elon Musk first principle thinking? ›

Musk used first principles thinking to break the situation down to the fundamentals, bypass the high prices of the aerospace industry, and create a more effective solution. First principles thinking is the act of boiling a process down to the fundamental parts that you know are true and building up from there.

What is Elon Musk's Favourite interview question? ›

Earlier today I set you the following problem, which was Elon Musk's favourite interview question for engineers applying to work at SpaceX (according to his biographer Ashlee Vance).

What is Elon Musk management style? ›

Elon Musk's management style is notoriously impulsive, toxic and cruel. Onetime employees describe being “tossed to the curb like a piece of litter,” the result of Musk's “complete lack of loyalty or human connection.” This coldness hasn't been reserved just for middle management or low-level workers.

What are Elon Musk's values and beliefs? ›

He supports universal basic income, gun rights, freedom of speech, a tax on carbon emissions and opposes some government subsidies, though Tesla, Inc. have received billions of dollars in government subsidies. Musk is also a prominent critic of short-selling.

What strengths does Elon Musk have? ›

7 Leadership Traits Elon Musk Used To Build Tesla and SpaceX
  • Bias Towards Action. Musk does not suffer from analysis paralysis in any way. ...
  • Aggressive Optimism. ...
  • Work Ethic => Your Goals. ...
  • Know And Live Your Priorities. ...
  • Know Your Mission. ...
  • Solve Big Problems. ...
  • Focus On Causes Of Problems, Not the Symptoms.

What is Elon Musk biggest investment? ›

SpaceX value is as of June 2022, The Boring Company is as of April 2022 and Neuralink is as of August 2021.
...
Elon Musk's top investments.
CompanyValue# of Employees
Tesla$943 billion99,290
SpaceX$125 billion12,000
The Boring Company$5.7 billion<200
Neuralink$500 million – $1 billion<200
1 more row
9 Aug 2022

What is Elon Musk biggest achievement? ›

Elon Musk cofounded the electronic payment firm PayPal, and in 2002 he founded SpaceX, a company that makes rockets and spacecraft. He was a major early funder of Tesla, which makes electric cars and batteries, and became its chief executive officer in 2008.

What are Elon Musk's top 3 inventions? ›

Elon Musk's Greatest Inventions
  • Tesla Motors electric car.
  • SpaceX, and the Falcon rocket.
  • X.com (now known as PayPal)
  • Hyperloop.
  • Zip2 an online city guide.
  • SolarCity, solar-power systems.
  • Location-specific searches.
  • The Blastar video game.
25 Mar 2020

What was Elon Musk's first success? ›

Zip2 was Elon Musk 's first company and it sold for $307 million in 1999. For most people, that would be the high point of a lifetime, but Musk looks back on the experience with frustration and disappointment. Elon Musk might be the only person in the world whose biggest failure in life made him a millionaire.

How rich is Elon Musk today? ›

THE REAL-TIME BILLIONAIRES LIST
ranknameNet Worth
1Elon Musk$189.4 B
2Bernard Arnault & family$175.2 B
3Gautam Adani$140.7 B
4Jeff Bezos$117.5 B
24 more rows

Who is richer Musk or Bezos? ›

Musk, Tesla's co-founder, still has the biggest fortune on the planet, at $208.5 billion, while Amazon's Bezos is second with a $129.6 billion net worth, according to the Bloomberg Billionaires Index.

What is the personality of Elon Musk? ›

Elon tends to be ambitious, fast-paced, critical, and efficient at work. As a Type One, Elon tends to be rational, principled, and judicial. Elon usually has a desire for justice and equality and is motivated by a strong sense of right and wrong. As an INTJ, Elon tends to be confident, analytical, and ambitious.

What has Elon Musk done for society? ›

Musk donated roughly $5.7 billion of Tesla shares to charity in 2021. No tweet or public announcement preceded or succeeded the gifts. They came to public light through a recent Securities and Exchange Commission filing. The donations were made during a series of stock sales totaling $16 billion.

How Elon Musk is changing the world? ›

Musk, the famous entrepreneur, and innovator supporting SpaceX, Tesla, SolarCity, OpenAI, and more. Musk started the famous payment system PayPal and sold it for a whopping 1.5 billion. Musk wishes to save our world: he wishes to send citizens into space and eventually to mars in hopes to colonize it.

What is Elon Musk's newest invention? ›

Elon Musk is unveiling a new Tesla invention. Named Optimus, this new humanoid robot has been introduced as a creation that could be part of our everyday lives in the future, and potentially available to purchase in 2027.

Did Elon Musk start money? ›

It's crazy that he went from basically $0 in 1995 when he started Zip2, to $180 million in just 7 years! Although Elon has made billions of dollars, he considers himself cash-poor.

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