Business Founders Just Love to Talk about Elon Musk’s ‘Out of Money’ Dilemma

In less than 4 months, Elon Musk, the founder CEO of Tesla Motors added $2.3 billion to his personal net worth. The man is now worth more than $19 billion, but it could have worked out very differently. A crucial decision by Musk in 2010 when the billionaire was broke is one reason Musk cashed in on Tesla’s speedy share rise in 2019. By holding on to his shares when there was a sale of shares to raise cash, he would have been financially wise. Musk, with $200 million in cash at one point, invested all his wealth in his businesses and confessed in a 2010 divorce proceeding, that four months back, he ran out of cash.

Musk could have rushed to borrow money from his friends or indulge in a private stock sale or and it’s a dilemma many entrepreneurs have faced. Musk lived on $200,000 a month in loans from billionaire friends while flying in a private jet without selling any Tesla stake. He was a business owner who was ‘asset rich’ but ‘cash poor’ and had to make a difficult call between selling company stock or even the entire company.

Typical Start-up Problems

This is not a problem limited to founders of technology start-ups. It’s a tough scenario with no good answers. It happens all the time, he said. Even with friends, Elon’s borrowing cash could have brought up problems. Even for business owners with collateral to back loans, the cash flow needs to come in to meet debt payments. Lenders are choosy about the kind of asset types they are willing to accept. Intangible assets are not collateral that a commercial lender accepts.

Survival at all Costs!

The bank’s business is collecting interest, not foreclosing on collateral. Selling the business or some real estate that you don’t want to sell is the only way to survive. In a fast-emergent industry, you can sell 10 % for cash to push it to grow, but if you grow 30 % to 40 % annually, that’s a great return on capital being given to someone else and is a shame when that happens with a viable business. Many entrepreneurs turn to equity markets to solve cash flow problems, reach out to angel networks, online funding, angels or private placements, if they lack inventory, or real estate or equipment to pledge as collateral. In the short term, it can be attractive as it need not be paid back, but in the long run, it is a expensive source of capital for a firm which is developing and expects it’s equity to rise in value.  

Angel Funding Solutions?

One hybrid strategy is partnering an angel financier for a bank loan, where the angel provides a guaranty with its personal balance sheet to get the loan and receives warrants or equity in lieu. The business owner is giving up equity, but less equity than in a straight sale, as the risk to the investor is low. The operating principle of entrepreneurship ensures that business founders face this situation at some point in a company’s development. They try to keep the business alive. What Musk took out in the first few years was insignificant as he re-invested in the business rather than taking big paychecks.