Marc Tarpenning, along with Martin Eberhard, was the cofounder of Tesla Motors back in 2003. But before that, Tarpenning and Eberhard were also the cofounders of NuvoMedia, which produced one of the world’s first ebook devices, the rocket eBook. So, for the first part of the episode, Mark recounts the story of NuvoMedia and then about 25 minutes in we begin the founding of Tesla, in my opinion, perhaps the most amazing startup story of the last 20 years.


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Brian: Marc Tarpenning, thanks for coming on the Internet History Podcast.

Marc: My pleasure.

Brian: There’s so much I want to cover with you today, so I only want to dip briefly into the early part of your career. But I believe early on in your career you worked at a lot of disk drive startups, is that right?

Marc: Yeah. Well, actually I graduated at Berkeley in ’86 or ’85, I guess, and then I ended up going to Saudi Arabia for years. So, I was orbiting the planet every 6 to 12 weeks. I had round-the-world tickets actually, so I really did orbit the planet doing work on computers in Riyadh, in Saudi Arabia. And when I came back to Silicon Valley, I ended up, well, in the way that Silicon Valley works. I was at a party and one of the people that worked at a disk drive company that was a startup, a stealth disk drive company, and they said, “Oh, you know, we were looking for somebody. You got to come and just check us out.” Then I ended up working there for a couple of years. They were doing the very first of sort of the small drives, 2.5-inch diameter drives, the ones you might see in a laptop. And at that time, that was very hard to do.

Brian: I asked you that because I wonder if there were lessons working at startups like that, that would apply later to what we’re about to talk about.

Marc: Oh, yeah, yeah. So first, the whole sort of startup idea where get stuck and you work for these little companies and nobody has any resources and you’re all very scrappy, and that sort of ethic and that, you know, culture was very important and certainly informed everything else that I did. But also, disk drives are kind of interesting. It is very multidisciplinary because you have magnetics people, you have media people that are actually, you know – in this case, magnetic media. The analog engineers dealing with the re-channels, mechanical engineers with the physical stuff, servo engineers which is a special control systems part of software, and then the sort of firmer people that make the data flow in and out in a controlled way.
So, it was a very neat project because you had all of this very deep specialties, and it was a great example of how software is eating everything. That the mechanical complexity of disk drives, if you look at a modern disk drive versus one from the 1970s, the modern disk drive with tons more density is mechanically super simple; and it’s super simple because software has been able to take over all these functions, that it is much, much cheaper to do it in software obviously than precision hardware.

Brian: Well, I think software and hardware, that tie-in that you just talked about is going to be very important here in a second. Tell me about meeting Martin Eberhard.

Marc: So, one of these trips back from the Middle East, I was visiting my high school friend and college roommate who was working at a company called… I think at that point he was at MCD, and that was a startup dealing with network terminals. So, you know, stone age technology but at the time very innovative. Martin was one of the cofounders there and was essentially my friend’s boss. So I met him, you know, through my friend Greg, who parenthetically I just had lunch with about an hour ago.

Brian: So, I guess you hit it off with Martin?

Marc: Oh, yeah, yeah. We have very similar ideas on things. And I’m a software guy and he’s a hardware guy, so you kind of need both to make things happen.

Brian: Yeah, it’s sort of that perfect yin and yang. So, what is the genesis of NuvoMedia? Is it that you guys decided you want to do some sort of a company together, or how does the idea start to form?

Marc: Yeah, so we decided we wanted to do a company together, that would be very fun. I was doing this disk drive stuff and he actually got segued into a little bit of that as well. Because I think it was at one of his friend’s parties, that’s how I ended up getting segued in. So he worked at a couple different companies for just a short period of time doing consulting on the electrical side. And then we said, “You know, let’s do something ourselves,” but we didn’t know what to do, of course. We had a bunch of ideas and we quickly decided that we needed to do something that we actually knew something about. So, for example, we knew what disk drives were doing, and we knew what Silicon was doing, and we could see the sort of progress.

So one of the things that we realized was that you were going to be able to record video onto hard drives, which wasn’t really possible only six months before, and it was just going to become possible. So you could make a digital video recorder and if you could record TV on, you know, you didn’t have to use a video tape, that tape or those spinning things that people used to have these giant cartridges. So, we said, “Well, that would be great.” The only problem is neither of us owned a TV.

Actually, since we didn’t watch TV, we kept talking about it. I said, “Well, you know, we don’t ever use this product.” It’s got to be something we actually use. So, we went through a couple of different iterations of different things. And, at that same time there was a group of people making TiVo. They were almost at exactly the same moment going, “Oh, wow. This is just possible,” and they found TiVo literally a few weeks later, I think.

So we decided that the thing that we really like to do is read lots of books, and we have books everywhere. So we thought, “Oh, that’s perfect.” The technology is becoming available, we could display those books on screens. I mean, it sounds ridiculous now but at the time, again, we had lots of resistance from people. They said no one is ever going to read onscreen. You know, it’s one thing to read an email but they’re never going to read a book on a screen.

Brian: Well, also it should be pointed out that this is around the same time that Palm Pilots are coming out and people are using.

Marc: Exactly.

Brian: So it’s this notion that pocket devices are finally becoming a thing. This is around like, what, ’97 – ‘98.

Marc: Correct, ’97. Yeah. So the Palm Pilot, we obviously used that in our pitch decks to say this stuff is going to happen. I mean, people really are going to have these digital devices. And obviously, it’s going to take a larger screen to really read a book effectively. But, it’s going to be possible we’re going to be able to distribute the books over this internet thing and we’re going to be able to get the digital content from the publishers, which turned out to be incredibly difficult. The publishing industry is super old. They’ve been around for hundreds and hundreds of years. They have a whole special set of laws that apply to them. And many of the same people, like you go to these companies that are 200 years old and the same people are running them. And they don’t like change so much.

So, it was extremely hard to get the media, you know, to get content into digital form. We had to spend millions, literally, with lawyers creating whole new ideas around how that happens, the way that books are licensed. Which is what’s the standard now, but at the time none of that existed.

Brian: So the product you launched is called the Rocket eBook. I believe it retailed around $500 maybe and weighed about 1.25 pounds. Give me some of the specs that you remember, like how many books could I store on the initial Rocket eBook?

Marc: Oh, my gosh. I don’t actually remember. Certainly like 10 or 20 on each device, and obviously, you could then… It plugged into a computer so you could keep a library of sort of an unlimited on your computer. Remember, this is at a time when Pilot was the dominant means of dealing with the internet. So, the common paradigm was that you would buy something online, although even online it was kind of a novel concept. You would download the content onto your computer and then you would transfer it over to your electronic book. The book itself didn’t have wireless built in or anything. That was really not possible.

Brian: Right. Because Wi-Fi isn’t ubiquitous yet. Cellphones probably don’t even have 40% market penetration at that point.
Marc: Well, right, and they don’t have data. You can text through a cellphone but you can’t really transmit data that way.

Brian: Also, it’s an LCD screen; it’s not the e-ink screen that we’re used to with Kindles. But even that was something that was just suddenly available, like having a screen that was able to be sharp enough, to function as a reader with something that you’re on the cutting edge of.

Marc: Yeah. In fact, at that time, and I think it’s probably still the case, all the best displays come from Japan. And so we had to go to Japan and work our way into all the various – the Sharp’s and Sony’s, to see their latest stuff that wasn’t out in the market yet because nothing on the market was good enough. You couldn’t really read on it. The contrast ratio wasn’t high enough and these are all black and white screens, remember. The color screens were terrible at the time. Nobody could read on those.

So we finally found a screen made by Sharp that used – it’s called DMTN. It’s a kind of LCD panel that was unusual that had very, very high contrast ratio for the time. It was like about 10x what anything else had. And they had developed it for a client to make a particular kind of golf computer that never really took off but they spent millions and millions and millions of dollars developing this technology and really wanted to find another market for it. And, you know, it was a perfect fit. And it was the thing that actually once people saw it, we have all these meetings and they say, “well, no one’s going to read on screen,” blah, blah, blah, and then we would hand them one of the few sort of handmade prototypes that we have and they would look at it and go, “oh my gosh, this is going to be big.” Because before that, nobody had seen anything quite like that.

Brian: I read that, you know, and this would have been obvious in 1997 and 1998, that you went really hard at Amazon to try to get Amazon to buy in as an investor, but didn’t have any luck.

Marc: Well, sort of, yeah. No, we did. We actually had a couple of great meetings with Jeff and he’s totally great and we came to terms. We had sort of a deal for an investment. At that time Amazon was really worried about Barnes & Noble. Amazon was quite small. Barnes & Noble was the big book seller, the biggest book seller on earth at the time and they were going to go into digital or, you know, they were going to go into online, and basically destroyed Amazon was what everybody believed. It’s hard to imagine now but that was what looked like it was going to happen. So they were very concerned about Barnes & Noble. So we came to a deal for an investment. It was just an investment — a Series A investment or Series B perhaps, I can’t remember now. And we then started, you know… when you get these things, the person says “yes, here’s the terms”, and then the lawyers get at it. We could not close the deal with the lawyers. The lawyers or the lawyer that he had, we just couldn’t get a deal. The terms would come back completely different than what Jeff had said.

Meanwhile, we want to close around and then we went and talked to Barnes & Noble. Because we figured, well, if Jeff’s really afraid of Barnes & Noble, then we should go to Barnes & Noble and see what’s going on there. And they also said, you know, it’s going to read on screens, blah, blah, blah. And then, they saw a demo and… now I’m blanking on the head of Barnes & Noble’s name.

Brian: The Riggio’s?

Marc: Yeah, the Riggio’s. Steve. Steve Riggio looked at it and he’s like, “Oh, my gosh. This is really potentially, you know, big.” And they were in and they said, you know, “You can ask anyone in the publishing industry. If we say these are the terms and this is the deal, it’s done.” And sure enough, I mean, their lawyers were at it away for a week, and then we had a perfect terms sheet and perfect legal documents that all matched exactly what we’ve spoken and the deal was closed.

And it was just because Jeff’s lawyer was an incredibly, not bad but he had a very different agenda than I think Jeff Bezos did. What was interesting is we were going to be his first sort of or Amazon’s first investment in a startup and we ran into two other people over the years that were also in that position, and they had exactly the same experience. They made the deal with Jeff and then the lawyer, it was just terrible and they could never close the deal, and they ended up getting money from somebody else. And, then that lawyer got fired because Jeff is extremely quantitative. So, I’m sure the first time he said, “Oh, flakey entrepreneur.” The second time, he probably said, “Hmm, interesting. It’s just happened again. I must have just gotten unlucky.” And then the third time when it happened, he said, “Hmm, the one common denominator is the lawyer.” Then, he invested in 12 companies in a row very successfully.

Brian: You don’t have to but do you remember those two other companies that missed with Amazon as well?

Marc: No, I don’t know.

Brian: So, with retrospect and knowing now that e-books didn’t really seriously go mainstream until the Kindle to say that maybe Rocket eBook was too early. But, I mean, I found numbers like you sold 20,000 units in the first year or doing double that the second year, and you know, by like 1999, you have the base model cost down to $169. So, it was a pretty successful early entrance into this market, right?

Marc: Well, I think so. I think you can argue that the timing was probably we were a little bit ahead of the market because, you know, the Kindle comes out years later and by that time people were used to buying online, by that time the publishers were used to having content online, all the pieces that sort of come into place. You can argue that our market timing was off.

Also, when we got the opportunity to sell the company, it was sort of an unsolicited offer from Gemstar-TV Guide. It was at a very high number and we knew we were going to have to go raise money again in the next few months. We had recently closed around so we were okay for a while, but as we were ramping up, and then when get this unsolicited offer and it would make all the investors happy, and this was in 2000. Things were getting a little squirrely. I mean, the bubble, it was becoming apparent that all was not well on the financing front. So we worked very hard to close that deal and we thought genuinely that they had a plan for digital publishing. They knew that TV Guide was sort of fading away because of online guides. They had an interesting plan. I wouldn’t say it would have been successful but they had a reasonable plan.

And then, of course, a few months later, Rupert Murdoch takes control of the company and he’s not particularly interested in electronic books at that point. He has other things to go do. So, you know, it sort of failed in that front. But on the other hand, we had a successful exit with technology. That particular product didn’t succeed but I think we did push, you know, we were part of the enabling technology or the enabling legal framework and everything else that allowed then later, you know, the Kindle to be successful. And, you know, I read many of my books of course now either on a Kindle or by iPad. And every time I do, I say, “Oh, you know, I was a small part of that game.”

Brian: Before we leave NuvoMedia, you had mentioned that working with the publishing industry and negotiating some of the first, you know, digital royalty agreements and things like that, this is sort of around the Napster era. So, weren’t they aware of that? Wouldn’t they be eager to–

Marc: Oh my gosh, really aware of Napster. They were very terrified. So what they were very concerned with was getting any of their intellectual property essentially in digital form. So, you cannot imagine–I mean, coming from Silicon Valley, it was difficult to really wrap your mind around the fact that even in the late ‘90s or ’97, most books were not digitally typeset. They never really were in digital form in a normal sense. So, a common thing would be somebody would submit a manuscript, literally handwritten or typed like with a typewriter. Then they would key it into some sort of machine, I’m not even sure what it was. And then they would typeset it. Then that would produce films that would… then these sorts of large negatives would get produced. The large negatives, they have artists that would go and touch up these large negatives even because they would even be editing the book after it had sort of gotten to photographic print, so then they would go and actually change, they would make edits on the negatives themselves. And then they would take these to these presses and they would do a print run, and very often if there was photographs and stuff that were included in the book if there are illustrations, those were done in a completely separate process. And then they would come together in the binding house and be bound together.
So there was never a moment where that book existed in a digital form that was machine readable in any complete sense. That process I just described was normal. In fact, it was incredibly common. If a second run of the book was needed, if it had been quite a while between the first run and the second run, they would have to literally– because they didn’t have it in any reasonable format, they would go and buy a copy of the book. I’m not making this up. They would buy a couple of copies, they would send it to the Philippines. They would have two typists retype the book in and then they had a little fancy program that would compare the output of the two typists and find any discrepancies. Then a third, an editor would look and figure out which was the mistake and which wasn’t. And then they would repeat the process and that’s how they would do the second edition.

Brian: So, were you guys able to gently nudge them in the direction of just going digital first might save all that hassle?

Marc: Well, they just weren’t set up for it. And so we had this really naïve Silicon Valley view of this. So we liked the digital files of some books that had come out and then we could format it in some nice way for our electronic book. You know, electronic book formatting obviously is a little bit different because the page size orientation can change so you can’t — You know, page layout is a very sort of different concept. And they looked at us like we had two heads. They had no idea what we were talking about because here’s these photographs of the pages, this is the negative of what you want and stuff.

So they knew they had to get there. But the technical details were only part of it. The legal framework was extremely difficult because the industry has been around for a long time, so there’s layers and layers and layers of sort of legal precedent and tradition around it. So it’s very common for books to be sold by geographic region, the rights for a book. So you have the North American rights, you have the English language rights for North America or you have the English language rights for all other countries outside of North America and England (for example, Great Britain), that’s a very common system. So, how are you going to if somebody on your digital platform is in South Africa and buys it versus buying it in New York, well, that’s two totally separate geographic rights that are negotiated completely separately. And the author owns those rights, you know, sort of all rights not explicitly sold are owned by the author.

Brian: And the individual territories, yeah.

Marc: So if the author only sells the rights, for example, to English language in North America, and then somebody buys it in Germany, well, the publisher doesn’t have the right to send that file to that person because they don’t own the rights for English language distribution in Germany, for example. So, on the internet this was an incredibly large problem of these geographic monopolies basically that they had. Then on top of that, you don’t only sell it, you also sell it by book type or by published… I can’t remember the term now.

So for example, the hardback rights are sold completely separately than the paperback rights, which are sold completely separately than the trade publication rights. So, those individual rights are all independently sliced and diced by geographic region. So then you say digital. Well, the publishers typically don’t own those rights at all, at least at that time because they might have had a contract in English language – North America, but they didn’t have the digital rights, where that was only for the hardback.

So, the publishing houses, if they wanted to have you publish one of these books from their office, they would have to go back to the author and renegotiate.

Brian: A whole new negotiation.

Marc: A whole new contract because they don’t have the rights to do that. The author still retains that. And a couple of the publishing houses maintain that once they have the hardback rights, that was the same as the digital rights. They have literally hundreds of years of caselaw that show that that isn’t the case. That in each new format that’s come out, the author retains those rights unless it’s expressly given away.
And, we had one publishing house that was so proud of itself. We knew this was coming. We were sure this was coming. So our whole catalog, we own the digital rights of all of our hardback books because we actually negotiate that and we have that. Even though there was no digital distribution, we knew it was coming. So our whole catalog, we’re like, “Oh! That’s so great.” So we are like a week from launch when their lawyers called in a total panic saying all these titles that we’re going to do at launch, we can’t do any of them because although we own the digital rights, it turns out since we didn’t know what digital rights were, there’s no payment structure agreed upon in these contracts. So we had to go to every author and get a separate payment agreement before you call the first run.

So even they had to go, but we eventually got all through that. So I figured that if nothing else, we pay for a lot of the lawyering that allows all of the content to be distributed the way it is now.

Brian: Well, thank you for blazing that path. All right. So let’s start on the next story then. So, you and Martin do have the successful exit to Gemstar-TV Guide and I guess you enjoyed the ride so much that you decided you want to go again and do another company. So, what are you guys thinking about when you’re thinking of going again?

Marc: Well, we looked at a bunch of different things. So, one thing we wanted to do though was raise the bar a little bit. The last one had been something that we thought would be fun and we wanted to meet authors and sort of understand the whole world. We met some great people and it was totally fun. It did exactly what we had wanted.

The second time around, we wanted something a little bit more meaty, a little bit meaningful. And we looked at a bunch of different things in terms of everything from bizarre lawn sprinklers that would save water to, you know, all kinds of random stuff. But Martin had this idea of– he had wanted to buy an electric car and it was right about the time when the zero emissions mandate got rewritten in Sacramento here in California. So, all the electric cars had ceased to exist and they weren’t very good anyway. The EV1 was the only one that was kind of viable and it was leased, and of course, GM took them back and crushed them.

And so he just talked about that. He says, “Why don’t we just do this electric car thing? It just can’t be that hard.” And I thought in making a car–our experience with batteries and the consumer electronics world for the e-books, we knew the batteries were getting better and better and better. It had gone really from Ni-Cad to nickel–metal hydride and then lithium ion. And just in our sort of experience, the lithium ion batteries were so much better than the nickel-metal hydride batteries. However, they’re finicky to work with but once you know how to work with them, they’re not that bad. And it makes up for it because the energy density is so much higher.

So, we were sure with some spreadsheet calculations that in fact, you could put enough energy on a car to make it really compelling, I mean, way better than any of these EV1’s or anything else ever imagined. And the rest of it is a computer science problem because it’s really just computers synthesizing waveforms to make motors go; and a network problem because there’s lots of little computers required to do all of that. That’s our world, little computers that control stuff. Silicon Valley is really good at that.

Brian: Because remember, the big thing at that time was hydrogen fuel cells and stuff, but you guys do the math and you’re like, “No, EV is the most efficient way to go if you’re trying to improve what a car could be,” right?

Marc: Correct. If your goal is to reduce energy consumption, specifically oil consumption, in any given resource you want to use it as efficiently as possible, right? So you don’t want to fix them and it just consumes a lot of that for no apparent reason. And hydrogen is uniquely bad. There’s a thing in the auto industry that says hydrogen is the future of transportation and always will be. It’s a scam, as far as I can tell because the energy equation is terrible. It is just terrible because hydrogen, the proponents would always say, “Oh, it’s the most abundant element in the universe.” But it’s abundant out there in the universe, not here. We live on a planet. On a planet, all the hydrogen, it’s super reactive. It’s bound up into everything. It’s bound up into water, wood, and everything else. So the only way that you get hydrogen is that you have to pour energy and to make it. You have to break it free from the chemical bonds that it’s bound up into.

So, electrolysis is the most common thing. You could put electricity in water and it separates it. So you’re making, you’re pouring energy in in order to make the hydrogen. And then you have to compress it and that takes energy. And then, you have to transport it to wherever you actually need it which is very difficult because hydrogen is actually much harder to work with than gasoline or even natural gas, and natural gas is not that easy.

And then, you have to convert it ultimately in a car, and then you have this very high pressure vessel in your car which has its own safety issues rather. Then on top of that, you have to convert it back into electricity to make the car go because hydrogen powered cars are really electric cars that just have an extraordinarily bad battery. Because hydrogen, it’s an energy carrier. It’s not a primary fuel source on this planet. Maybe somewhere in the universe it might be but not on terrestrial planets.

And so when you add that all up, it turns out that the amount of energy in per kilometer driven is just terrible. I mean, it’s way worse than almost anything else that you can come up with, which I’ve always suspected is one of the reasons why the energy companies have been big proponents of it. And when we were raising money the first time, you know, and we had really carefully gone through all the math to understand fuel cells because there was a bunch of money going to fuel cells at the time. And also we looked at biofuels and ethanol, you know, we sort of went down the whole list and figured out what the most energy efficient was, which turned out to be battery electric cars because charging lithium ion batteries is over 90 percent efficient and then discharging is also over 90 percent efficient, so you hardly lose anything in the storage part.

But, we would go to these VCs and we would say, you know, about half — We got a whole slide deck on why hydrogen fuel cells were a bad idea. And about half the VCs, we’d get to that slide and they would say, “Oh, skip this. We know it.” And actually one of them used the word ‘scam’. “Oh, we know it’s a scam. Literally, we’ve done the analysis. We know.” The other half of the VCs would get quiet and ask lots of questions about it and have us go back over the slides again about the hydrogen fuel cell because they had of course invested in fuel cells, all of which went out of business.

For transportation, there are fuel cells that are useful for other things. You know, there’s some really funny solid oxide fuel cells. There’s ones that are like in the base of the New York stock exchanges that you run a natural gas and they’re used for backup power because you can’t use diesel generators in downtown Manhattan. So there’s some specialty things but for storing energy and driving cars, it’s insane because you almost get nothing for the kilowatt hours you put in.

Brian: Could I prompt you for two insights because to me, I feel like reading about this was key, which is first of all, actually– So there was recent experience with electronic vehicles, GM’s EV1, specifically, and that experiment specifically told you that you could be successful because the word that I love or the quote that I love is that you learn that tree huggers and geeks have a lot of money. So, tell me about that insight.

Marc: What was interesting about the EV1 was, you know, GM, not the most well-loved brand among the money people. Because if you’re successful, you tend to go buy a Mercedes or BMW or something; you don’t go buy like this GM vehicle. And when they had the EV1 out there, they only released them in California and yet the people who used them, almost all of them were very wealthy. And so because electric cars are so incredibly energy-efficient, they’re actually really cheap to drive per mile. The per mile cost is super low. So, the sort of assumption for a lot of people was that the only reason that you would drive an electric car is because you were super cheap. You wanted to save money on gas. That was widespread, that we were asked that constantly, “When will it pay for itself?” That was a constant question that the VCs asked.

Brian: Pay for itself by saving on gas, you mean.

Marc: By saving on gas. It’s a $100,000 sports car. I would say, “Oh, what sports car do you have?” They would go, “Oh, I’ve got a Porsche 911.” I say, “When will that pay for itself?” “Oh, well…” you know. “It doesn’t pay for itself, no. It’s usually expensive.” I mean, yeah, exactly.

But that’s not why you bought it. It wasn’t to save money. And people don’t buy electric cars to save money in general. So the interesting thing was that the people who were buying or leasing, in this case, electric cars in California were the top 1 percent, the people that you read about. They were clearly not trying to save money. Gas is at about $1.50 a gallon at the time. They literally were spending more at Starbucks than they were at the gas station. And yet, they were buying electric cars or they were leasing electric cars. And they were doing it for some other reason.

So when we look at that, then you said, you know, a new technology is going to be expensive. We’re going to have to come in at a high point. What extra value can we deliver, and it turns out electric cars are really, really quick off the time. And sports cars, that’s what a sports car is about, is that incredible acceleration that you get. And there’s nothing like an electric car in terms of acceleration.

We had people that would drive one of the Model S’s now or would drive the Roadster at the time, and they would come back and say, “You know, you broke my Ferrari. You broke my Porsche.” I’m like, “What are you talking about?” They say, “Well, now I get in my very expensive gasoline powered car and it’s just slow,” because electric cars have that instant acceleration that’s maximum at 0 RPM. It stays maximum for a very long time.

Brian: And that’s similar to the other point that I found fascinating. Because remember, Priuses become a thing around this time and Toyota discovers a similar thing that the Prius sales actually cannibalized their Lexus sales. People were trading in their Lexuses for Priuses.

Marc: Correct. And that was not their plan. I mean, the Prius was for a whole variety of reasons. You know, they were only sold in California initially. They came out, in typical Japanese fashion, incredibly tortuous political path within Toyota. And they really weren’t supposed to sell very well and they certainly weren’t supposed to sell into that particular demographic. And, you know, in downtown Palo Alto here which is… you know, Palo Alto is a very wealthy suburb here in Silicon Valley. And literally at that time, every driveway had a Porsche and a Prius. They had traded in one of their cars, they traded in the BMW, they had traded in the Lexus and they had replaced it with a Prius. And it wasn’t about saving money on gas; it was because they didn’t want to be consuming gas.

Brian: They’re making a statement.

Marc: They were making a statement. Because, you know, all the cars do the same thing. Whether you buy a $100,000 car or a $10,000 car, you go to the same places, you’re going at the same speed, and at least around here, you’re rarely even going as fast as the freeway speed because the traffic is so bad.

So it’s not about — You’re not going to get there twice as fast because you have a sports car. It just doesn’t work that way. And yet, whenever anybody has any extra income they tend to upgrade their car and part of that is they want to make a statement. It’s a reflection of who they are, whether it’s the sporty image or the fancy sports car or the conservative image of the Volvo, you know, whatever it is. But they’re really making a statement and the wealthier you are, the sort of more flexibility you have to make that statement. And so the wealthy people are here buying Priuses. They didn’t want to be part of the oil economy, or at least they wanted to be less a part of the oil economy. So, that was sort of the marketing insight that allowed us to come out with a sports car that was electric because we could–

Brian: That’s that genius insight that because– So, you realized that you can come in at the top of the market, you can come high end, high quality, sexy, flashy, but that also fits what you have to do for your business plan because there’s no way you can compete with GM or Ford or anybody like that mass production. You need to start out small, right? So, it’s this amazing – It fits perfectly what you’re going to have to do.

Marc: Well, right. And yeah, we looked very carefully at what other advantages other than just not using oil did the electric drive provide and that, you know, it turns out that of course, as we say it perfectly, electric drive provides extremely rapid acceleration, and the great thing is that the Model D which is the big sedan, you know, with all wheel drive, it has a 0 to 60 time of 2.8 seconds. So, it’s faster than the latest Porsche 911 that they just released in North America. And somebody asked the Porsche rapid shift, you know.

So, your Porsche is at 3.8 seconds, 0 to 60, but the Model D, the Tesla Model D is 2.8 seconds. It’s a second faster. “Oh, but that’s not fair. You’re comparing a sedan and a sports car.” Oh, that’s great. Normally you would think the sedan would be the slower vehicle. But of course, it’s electric so it’s actually faster or quicker in this case.

So anyway, yes, it worked out that we could come up with a plan, a kind of car because the modeling showed us we could make a whole variety of different cars. And modeling, I mean Excel spreadsheets.

Brian: So yeah, I want to highlight that. So, you’re not talking about complex milling; you’re talking about literally just doing the math in Excel.

Marc: Well, exactly. And it’s all sort of high school math and physics really because you’re just trying to figure out how much energy does it take to accelerate something, how much friction do you have on the wheels and, you know, how it would sort of estimate the arrow drag based on a typical sports car — we didn’t have the actual design — or a typical car, so we’d put in a truck or, you know. Because SUVs were very popular at the time. We thought maybe we could do an SUV. It turned out for a variety of reasons we couldn’t really make a compelling SUV at first. And then you know the energy density of the batteries and you know the gravimetric density, how much energy you can put in per gram.

So, you can make a pretty good guess of how heavy the vehicle is going to be and that works out to the acceleration, but it’s all sitting there on a spreadsheet, filling with these numbers. And the incredible power of math to predict things, you know, we sit there for weeks filling this thing, and then we kind of go like, “Oh, we can make a sports car that would really perform super well and the price would be about this.” And, “You know, wow. This would be I think a really compelling product.” And then five years later when we release it, it pretty matched and we met that specification because the spreadsheet predicted what was possible to the math. And I think that that’s just amazing to me.

Brian: Okay. So, doing the math is one thing. Doing the modeling is one thing. But, you guys are software and hardware engineers but you’re not automobile engineers. So, tell me how you get to the point of actually, “Okay, we’re going to have to build a car. We can do it. We can solve the battery things and math. We can solve the software things. But, how are we going to make a car?”

Marc: Well, this was actually my biggest concern with the project. I kept telling Martin it was great. I am convinced we can make – You know, we convinced ourselves collectively that we could do the hardware and the software and the drivetrain. We can do that and the batteries are good enough and all that. But I just didn’t see how we’re going to be able to make a car.

But then the more that we researched the industry, we discovered that over the previous 30 years, the car industry had completely refactored itself. So it went from being sort of vertically integrated where, you know, the most famous being Ford which literally would take in iron ore and produce Model T’s at the other end to the current model where basically the car companies simply do final assembly. And they make the engines, they all typically make their own engines, but we don’t care about that because that’s the last thing we want, is an engine. And actually, everything else is done by other companies. So, the windshield, wiper, motors are made by different – you know, they’re all just suppliers or they’re suppliers to the final assembly process. And then, some of the final assembly is actually completely outsourced as well.

So, at the time all the BMW X3’s are being made by a company called Magna Steyr in Austria. BMW had very little to do with it. Magna Steyr built all the cars. The SUVs were being done by Magna Steyr as well. A couple of the other American car companies that had European version, Magna was building.
So we knew that it was possible to go to a company like Magna and say, “Okay, here’s the drivetrain and the suppliers are going to be shipping you parts. Can you screw the thing together?” Now, Magna tended to only— They wanted contracts in like 50,000 cars, that kind of thing. And we knew the Roadster wasn’t going to be that volume. So we ended up at Lotus that had experience making low-volume sports cars and had experience doing this outsource manufacturing because they had done this for GM. They had made the Opel Speedster for GM. I can’t remember the other one, the Vauxhall something or other, that they had made for another car company in Europe.

So they had a legal structure that could accommodate us and they had this idea on their line, their production line. They knew that some of the cars they were making were Lotus cars and then they would either convert the line for weeks, or whatever their particular–

Brian: To keep the line running.

Marc: They would do something to keep the line running but they were producing another car for a different car company.

Brian: Because if you go to, say, a Ford and say, “hey, we’d like you to produce a car under our name,” there’s no way they’re going to say yes.

Marc: They won’t do that, no, no.

Brian: Right.

Marc: But Lotus is small enough and they were strappy enough, so they had been doing it for other companies. And, of course, there was this other class of company that that’s all they did. There’s no Magna Steyr branded car. They just make cars for other car companies. So then we ended up with a deal with Lotus because they had a better sort of impedance match with us.

Brian: So, okay, that will solve that end of it. But what about actually making the batteries work based off your math? You’re working with literal laptop batteries — 18650, the gold standard of the lithium ion battery cells. So, you just have to make packs out of them and then shove them in the cars, right?

Marc: It turns out that with cars, obviously, there was a lot more to that.

Brian: Sure, sure.

Marc: So 18650s at the time, they’re the only industry standard sort of cell, and I think that’s still really the case. Everyone now for the most part has gone to various lithium polymer technologies because they want the battery shaped to be at the bottom of the laptop or wrapped around the cellphone or whatever. At the time, every laptop had these 18650s in it, and in every camcorder which were this separate – they were like cellphones but they didn’t have phones, that part. They just had video recorders, very strange things. All of them were using these 18650s.

And this is really one of Martin’s insights is we were looking for how to make the packs. We were familiar with the 18650s from the e-book days. The thing is, you know, “well, let’s just use these.” I said, “Well, that’s insane. It’s going to be thousands of them.” But the more we thought about it, that was the great thing because they were a commodity, they’re made by dozens of different companies around the world. Not all of them are the same quality but they’re all pretty much the same, you know, they’re the same form factor. And that’s what you want if you’re a buyer. You want to have lots of choices. You don’t want to be locked into one particular weird format that only one company makes. You want to have lots of competition all beavering away to make those 18650s cheaper and better for you.

So the whole sort of chicken and egg problem around specialized automotive batteries goes away because we’re just buying these laptop batteries. Now, it turns out that laptop batteries need to be handled very carefully when you combine a whole bunch of them together. And the battery companies really didn’t want us to do that.

Brian: They didn’t want you to tinker with them at all.

Marc: Well, they did not want us to put more than 7 of them together, and because there is a chance that there will be a fire. If you mistreat them, you can get them to essentially catch fire. They don’t explode but they kind of catch fire. And then if you’re really not careful, that fire can spread to adjacent cells. And Sony quite famously had a whole set of laptops that would spontaneously burst into flames this way because their charging socket was messed up. I don’t know if it was the charging socket or if it was a chemistry problem in their battery but they had – it was a giant, very expensive recall. So, the battery companies were extremely sensitive to having lots of these because you can imagine if you put a lot of them together, that could be a really big fire if you weren’t careful.

So they really didn’t want us to do that. But we eventually convinced them that actually we knew more about how to keep their batteries safe than they did. We finally got a supply agreement worked out. It turns out that if you go to a sales guy and you say, we think – If you ask a sales guy, “What is your fantasy customer for your batteries?” and they say, “Oh…” They would have three of these cells in a laptop and two of them in a camcorder and two more of them in an extra battery for their camcorder. And we’d go, “Okay, great.” So like seven cells or something around there.

Brian: Per user, yeah.

Marc: Per user, per customer. It’s your fantasy customer. They go, “Oh, yeah.” And you’re selling lots of this. You’re selling hundreds of millions of these things. I said, “Well, you know, we think that your market is a thousand times larger.”

Brian: Because how many would be in every car.

Marc: Nearly 7,000. And if you convince even a relatively low-level salesman that their addressable market is really a thousand times larger, you will get a call from the CEO of that company – no matter how big their company is – asking about what’s this thing about a thousand times larger market. So, we eventually convinced several battery companies to work with us. And it helped that we had by far the best safety data because nobody else had really tried it — nobody else. They had this sort of knee jerk reaction. They don’t put very many of them together. And if you don’t know what you’re doing, you can in fact hurt yourself. But if you think about it and do the right thing, you can actually make them quite safe.

Brian: So you guys are starting down the road in this amazing sort of engineer-hacker ethos of, “well, let’s just make it work, let’s do the math. The math is right. Let’s make it work.” One thing we haven’t talked about is raising money and convincing people, “hey, we’re doing a car company. And not only are we doing a car company, we’re doing an electronic vehicle car company.” So tell me what was it like? I believe you guys actually go to Sand Hill Road because that’s what you know, you come from the Valley. What was it like to try to pitch a car company to VCs on Sand Hill Road?

Marc: Oh, we’re considered crazy. So one of the things if you raise enough money, enough time, you’re used to people saying no. I mean, that’s just the way it is. It’s almost always they turn you down. So, that didn’t bother us too much. What we did do though is we knew some VCs that were friendly to us. I mean, they kind of liked us, but we knew that they wouldn’t invest in us because like for example, their fund only invested in internet routing (was one of them), you know, the infrastructure sort of things.

Brian: Or biotech or something like that.

Marc: Or biotech, exactly. So we knew that we were completely outside of their investment space. And we called them up and said, “Hey, we have this crazy idea and we want to pitch you guys. We know that you can’t—so this isn’t a pitch that you’re going to have to actually respond to but what we’d like is just the feedback.” And we weren’t really sure what they would see, but it turns out that if all day all you hear are pitches for internet routing startups, if somebody says “I’ve got this crazy idea about high performance electric sports cars,” all the partners will show up, if you provide lunch, and hear this because they want to hear something other than a router pitch. And so they gave great feedback as to things that had to change and they asked quite insightful questions which we thought we had all of our ducks in a row and all of our answers figured out, but they would ask these questions, and like, “Ooh, shoot. I don’t really know that.” They would challenge us on the numbers and we wouldn’t have answers to it. So then we go back and sort of rethink and retool. And that’s how we honed our pitch before we actually used our sort of silver bullets to the VCs that we thought might fund us. Because you only get kind of one chance, really. So we wanted to make sure that we had all the answers.

So then starting in January, we were doing this sort of over the holidays of 2003 and then starting in January, we actually went down Sand Hill Road. And, you know, VCs are always polite or at least most of them are. We quickly discovered that we could pretty much convince a few people in the VC firms that this was a cool idea and worth funding. But, in a large firm there’s lots of partners and you typically need sort of unanimous consent to make the investment. You know, investments are pioneered by or sort of championed by one partner, but ultimately you need everyone to at least say okay as opposed to you’re insane. And the larger the partnership, the harder that was because it would be always one person that said this is insane.

So we very quickly targeted smaller funds but only had a couple of partners because we figured we could probably get a couple people to say yes. And we lined up money from SDL Ventures and Compass Technology Partners because they were relatively small funds with only one or two deciding partners. And of course, you know, various friends and family.

And then in April/March, we pitched Elon as a super-angel. And Elon liked the idea, and we went down to SpaceX and did the pitch. SpaceX at that time hadn’t launched anything yet. It was a total small little startup doing – It was years from their first launch attempt. And he said, “I like this. I’m really concerned about oil consumption as well. I get the vision. I love where you’re coming in on the market. I’m in.” So he led the Series A round and then was on the board after that obviously.

Brian: Was it just that simple you-pitch-and-he’s-in or did he do a lot of due diligence?

Marc: So I’m simplifying the whole process. So we pitched on a Friday or Thursday or something, and then I was in Washington DC on a weekend. So I was sort of peppered with questions by Elon over the weekend and then into the beginning of next week. Then, I think Thursday or Friday of that next week, because I was back by then, we went back down to LA and he asked some more questions and we told whatever, and he says okay. He had clearly checked us out as well and he looked at our backgrounds. And we’ve answered all the questions apparently well enough and he says, “Okay, I’m in.” And then it takes about a month typically from that point to get the paperwork all done and the money.

Brian: It just seems such an example of it was so right up his alley, an idea that he would have been primed and ready to be interested.

Marc: Exactly, yeah. It was exactly up his alley. That’s one of the reasons why he was a very supportive and originally an investor, obviously, and now you can argue he’s been a very successful CEO for Tesla because it really was aligned with his interests to begin with. And he had simply said, “If I wasn’t doing SpaceX, this is an example of something that I would be doing. This is exactly the right approach and the right market and doing the right thing for the right reasons, and it’s hopefully going to be successful financially.”

Brian: We’ll get into a little bit of the step-by-step. But one more thing on the fundraising thing because I liked this as an idea. Every step along when you would come out with a mule or a prototype or whatever, that’s what you would use to raise more money. You would literally take the vehicle around and drive people around and then ask them for Series B or Series C.

Marc: The thing is, let’s say that you need $60 million for some project. It’s incredibly rare even now that you’re going to – It’s not even really desirable to raise that money all at once because if you’re just a couple of guys with a PowerPoint, your company isn’t going to be worth very much. So, to take the $60 to $70 million at once, even if you could get somebody to agree, they’re going to own the whole company at the end because the initial value of your idea just can’t be very high. So what you do is you raise money in tranches, which is easier although it takes – you’re always raising money in a way. So you raise a little bit of money. At first you say this is the big technical risk, which in our case it was really around the battery because that was the thing that everyone always asked about. “Can you really get this kind of energy density in a battery like that?” and “Can you really make it safe?”

So, that was the goal of the first tranche of money. So the deliverable at the end of that was that we would have a mule, a vehicle that doesn’t reproduce. As in the car industry, you take a little bit of one car and a little bit of another car. It’s a rolling test platform that doesn’t reproduce. And we made a mule and at that time because at least as we were already on trend to a deal with Lotus, we built our battery pack. Then we used an AC propulsion motor and invertor because it was really the battery pack that we were focused on. And meanwhile, we’re working on our own motor and inverter but we knew we could do the motor and inverter, that those had been around. I mean, Nikola Tesla invented AC induction motors a hundred years ago. So we knew that was going to be possible, with the most common electric motors in existence.

The thing that was a little bit unclear is whether we could really retire the risk around the battery pack. So, we built a car and, by and large, the VC community is not hugely imaginative. So when you come and you can give whatever it is that you’re trying to raise money for, if you have a demo that really shows off what you’re doing, it helps investors get comfortable with the idea. So in this case, we had this yellow Lotus and you got into it, and it took off incredibly quickly, and it was silent and beautiful and really fun. And we got that and as soon as we were able to drive that, literally, we got it working like midnight, the next morning we had a board meeting. The board is there, Elon is there. We show it off and, you know, we’re not running out of money but it’s time to raise money again, and we had retired that risk from an investor’s perspective and looking to get, “wow, the battery system is going to work. Here’s an example of it working. And wow, it was such a rush to ride in that thing.” It was a much more visceral experience.

So then it was easier to raise money, so then we were able. We had some meetings with other VCs at that time. We were still in stealth mode and actually, they came from in Chicago, they saw the place, they all rode in the car. And the partnership was only 3 or 4 partners. He said, “Can we borrow your conference room for a few minutes? We have a meeting we have to do.” Yeah, sure. So they’re going to be on a plane back to Chicago and they come out of a meeting about 20 minutes later and they said, “You know, we’re in. That was our partnership meeting. That was our Monday partnership meeting we just had.”

And it was because they had ridden in it. Really, it proved to them that this was possible and that it was unlike anything that they had been in. I mean, this wasn’t some golf cart. This was a mule. I mean, the specs from the final car were much more impressive but we knew, you know, this was the proof of concepts that it was going to be something that was really going to be great to have.

Brian: Well, and so much of your story is about that convincing people and later on in the press and things like that that electric vehicles aren’t golf carts. In fact, they’re better sports cars than you’ve ever ridden in your life. It’s such a great position to be in when the product itself is the thing that wins people over.

Marc: That’s the goal. That’s always the goal. You want your product to be the thing that tells the story. You see the product and you go, “Oh! I get it. I want to be part of this.”

Brian: Okay. I’m going to skip a couple steps here for time purposes, but another thing that I love about your story is, tell me the fun of crash testing because usually, engineers in Silicon Valley don’t get to throw their product against the wall and see what happens.

Marc: Well, it’s actually incredibly impressive because we didn’t use a lot of traditional car engineers because most of the car industry is not geared to Silicon Valley’s sort of speed and mentality. And also, a lot of it is wrapped around internal combustion engines and the emissions and stuff like that, which we didn’t have any need for.

The one sort of sub-discipline that was incredibly impressive to me is the crash people. And there are companies that that’s what they do, right? And these people had had experience with the Lotus at least, and it was similar enough that their models kind of were not super hard to adapt. It was all okayed with the Lotus IT department.

So they came and they take all these measurements, they fit and model it. They don’t measurements, they just grab the CAD files and they do everything. And they make a couple of tweaks and what’s incredibly impressive is that they’re able to save, again, this incredibly predictive power of mathematics. Well, you might have trouble on the side impact on the doors, so we’re going to want a special test for that because we want to make sure that that’s going to be safe, because we think that’s a little on the edge. But everything else should pass and we, you know, are getting these very expensive engineering prototypes.

So at some point you say, “okay, pencils down. We know what we’re going to make,” and you go and you make some. And it’s sort of production intense. So this is really what we think we’re going to make, but it’s not production process and you make 10 of them, and they’re all largely identical except for color. And you crash some of them. What you’re really doing in those crashes is validating their computer models, because in their computer models they’ve crashed many, many, many times. They crash it with all kinds of different manufacturing variances and to make sure it’s always going to pass. Every car will.

But how valid is the model? So we go and you spend an enormous amount of money taking it to – Again, this is all part of this ability to do this because everything has been outsourced. In the olden days those crash tests, people would have only—they would have been captive to or the crash modeling people would have been captive to GM or whatever.

Brian: Right.

Marc: And we wouldn’t have been able to go to a place that does crash tests because those were owned by Ford or whatever, only for Ford. But instead, we went to one of the several independent houses that did that kind of thing. This particular one I think was with Siemens in Germany or Austria. I can’t remember where it was anymore. And they have these very high-speed cameras and this incredible setup and they take – Each one of these engineering prototypes cost hundreds and hundreds and thousands of dollars to make, and they basically accelerate them into concrete walls. Where they’re not accelerating them to concrete walls, they’re taking these like rams, like medieval things that are stored in castles, and they’re smashing. They’re computer controlled and accelerated rams but they’re smashing those into the car. And of course they’ve instrumented the car like crazy. They’re looking at the g-force as it happened on the driver and the passenger and what happens to the car itself.

And what you see is millions of dollars being just destroyed in front of your eyes in incredibly vivid, super high-speed HD. You look at these beautiful videos back, they just make your heart sink in the sense of everything that’s being lost. What is incredible to me though is you see these tremendous crashes and then the crash test dummies look pretty good, and when you look at the data from the crash test dummies, you go, “Oh, they would have walked away.” It’s amazing. It’s one of the reasons I won’t drive in old cars because they’re really demonstrably more dangerous. The modern sort of post-airbag era of crashes, it really, really made a difference. What’s incredible in the modeling, then we crash these engineering prototypes and the modeling exactly predicted it, like within a few percent, like oh yeah, okay —

Brian: But they still have to run the physical test anyway.

Marc: Yeah, because you really need to validate the model. Now the big guys, the GM’s and Ford’s and stuff, they have argued for years with their lawyers that they don’t have to actually do the physical crashes because in fact, they haven’t had a mismatch between — at least this is what we’re told – they haven’t had a mismatch between their modeling and their crashes in years and years and years. So they argue that once it passes to the computers, it’s okay. And, the lawyers have always maintained if there was ever a suit, if there was ever – If you had to prove them in the court, it’s so much better to just be able to see this is what we did. We crashed four of these cars or whatever in the crash test, in the physical things and look it, here’s the videos and here’s the results, that that is just a much more compelling legal argument than, you know, “Oh, we played with it in the computer and it was great.” But the crash modeling people had said that they hadn’t had a mismatch in years.

Brian: All right. So bring me to the product launch. Bring me to where we get the first Roadsters out to the public. February 2007, you’re doing validation prototypes but you start to run into trouble like for example with the transmissions.

Marc: Right, yeah. So the engineering process, what you do is you drive them to the end of the ground basically and you drive them to the ground as quickly as you can. You do all kinds of tests. You put them in ice. You literally drive around in frozen lakes and cold weather. But those are of course test tracks that you hire out and it’s all professionally done. It’s again, something that wouldn’t have been possible in an era with the car companies and everything. And they have these durability tracks that are like cobblestone racetracks and they have drivers that do nothing but beat the cars to hell on these tracks. So you’re trying to get 10 years and 100,000 miles of wear and tear in a shorter period of time as you can. And stuff flies off the car and breaks all the time. And everything that breaks, you do a big analysis as to why did this fail, I mean this shouldn’t have failed.

So you do this incredible sort of analysis coming back. And the one thing at that time in order to meet our top speed in our acceleration parameters, we had a two-speed manual transmission which we didn’t think would be hard. The car industry is making two-speed transmissions or is making manual transmissions for 100 years. So we contracted with a small transmission house. Now we had a lot more torque than there were used to but we figured how hard is that, it’s years. It was not something that we really focused on because we had a supplier that we thought could deliver. And their transmissions just didn’t work. They couldn’t shift, which was unfortunate for us.

So, that was a problem but we caught that in the sort of engineering prototype land as we’re feeding all these thousands of changes for the production cars. We also realized the transmission wasn’t going to work. So, we then contracted with another, much bigger by this time. We had a lot more money and people that were doing it a much higher profile with another auto supplier to build transmissions. And we spent lots and lots of money with them and their transmission project was a little late. So meanwhile, we’re doing also the testing and we just had some cobble to get there, sort of mule the fuel transmissions so we can do all the rest of the other testing except for the transmission. And we finally get the first articles on what we hoped to be the production transmissions. And they looked kind of good initially but we put them on the durability track, we put them on our dynodes which are the test fixtures in the lab. And they all begin to break, and they all break in different ways. And that’s not good. If they all break in one way, you can kind of deal with it.

Brian: You can isolate it, yeah.

Marc: Right. But they’re really not breaking well. So, by this point everything else is done. We’ve gotten through all of the, what are called FMVSS (Federal Motor Vehicle Safety Standards), all of them had been completed. We are ready essentially to shift except we don’t have transmissions that work. And this nearly killed the company and it was also in 2007-2008, the money and financing is beginning to get a little skittish and here we have this huge – it was the first milestone that we really missed in a big way. Everything else might have been a little bit more expensive or a little bit later but there was a conscious decision along the way that did that — we decided to make the car better or we decided to change the specs. Everything along the way was sort of much more conscious. This one was just a screw-up. It failed. And it wasn’t in our core competency. We just didn’t consider it to be something that we had to – We were dealing with one of the largest transmission makers in the world, they should be able to make a transmission that works. We didn’t understand how dangerous that was.

Anyway, so that was a very dark and bleak time for us. But as it turned out, of course Moore’s Law, thankfully, is ticking along and the IGBTs which are the switching transistors in the inverter that synthesized the waveforms, International Rectifier — I believe it was International Rectifier — they had a new version that was just coming out and it was more efficient. They’re incredibly efficient, but this was more efficient. What that means is that you can put more power through without them overheating. So suddenly, by replacing the IGBTs and making a few other changes, we could increase the power that we could deliver to the motor more than we thought possible, more than once possible with the existing transistors. And what that allowed us to do was to increase the horsepower and the torque so we could get to a one-speed transmission, which is just a reduction. And that, the car industry and actually our new supplier was awesome and they came through for us and did an amazing job and record speed produced a beautiful transmission.
That’s what we ended up shipping. But, we shipped it late. We actually shipped some number of cars. I can’t remember how many but our customers have been waiting for years, you know. So we asked you can take delivery now, but what we’ll have to do is that that transmission we’re going to have is just something coupled together and it’s not going to give you the final spec performance. And then in about some time over the next six months, we will bring the car back in for service and we will replace the transmission and the inverter or whatever else that needs to be replaced in the drivetrain to meet the specifications it promised. And I think all of the customers said, “That’s fine. We’d rather have it now and be driving it around.”
So we started delivering cars and then I think we called it Rev 1.5 or something of the drivetrain, and then we ultimately – When the new transmissions came out and the new inverters were replaced, we then just retrofitted the ones that we delivered.

Brian: So Moore’s Law really saved you guys.

Marc: It does. Just when you can’t really fit that last bit of code into the space, it turns out that the number was four times more dense for the same price and you upgrade.

Brian: And you guys do start to deliver cars I think in June of 2008. I know it’s around this time that you and Martin both leave the company but can you tell me how close? Because you mentioned this is when the financial crisis is hitting. How close to oblivion was Tesla around the financial crisis period?

Marc: When we couldn’t deliver cars, I think it was a near-death experience for the company. And it was really the existing investors, Elon especially sort of ponied up and at a time when it was really difficult to do that. And they funded enough to get us to the next milestone which was delivering. And then once the cars began to be delivered and we were getting reviews and people were really getting excited about them, then the next funding round was easier essentially because we had really retired a lot of risk. We were shipping cars at the time. But that was a near-death experience for the company, for sure.

Brian: So I’m going to wrap up. There’s other podcasts and interviews that look towards the future and I kind of want to always focus on lessons from the past because that’s what this history show is about. I’ve got two questions that will kind of be a little future and a little of both. I think that a competitive advantage that you guys might have had when you launched was that you were coming in at the end of the first moment of electronic vehicles. GM gives up on the EV1 and so you kind of have the field to yourselves. And then, was there any thought that like, “Okay, so will–” Because you mentioned that you were in quiet mode for a long time that, “okay, once we perfect this technology, then everyone will come to us and we’ll teach the entire automobile industry how to do EV.” Was that part of your thinking at the beginning?

Marc: We didn’t know obviously. We didn’t how everyone was going to respond. But we figured that if we were successful, we do a couple of things. One is that we would change people’s perceptions of electric cars that they weren’t these lame golf cart things. Even though that it was an aspirational product and that it was very expensive, that people would say, “Oh, if I ever get rich, I want one of those electric cars,” as opposed to “those lame things”. It would be this aspirational product which we thought would enable the whole market moving forward. But in terms of the other car companies, what our sort of expectations were was that we would release this. The car companies would sort of wake up and go, “Wow! This is really possible. This can be done, this can be really compelling vehicles.” And there would be some amount of space race basically to get into the electric car business and we would have to deal with that as it went.

And we could deal with that in a couple of ways. We might be suppliers to some of those car companies. It was possible that they would be some kind of – We figured we would have more experience and more sort of electrically driven miles than anybody else in history by the time this became a hot thing. So, we would be the world’s experts in that, and that would be a good place to be if all the car companies were trying to be in that space. So there would be lots of potential deals; there was, who knows, an acquisition. There was a lot of different ways of going. We have lots of options. Then we would move into a more mass market car which would be a sedan. The sedan market is much, much larger than the sports car market. So ultimately, the Model S, that’s a much, much bigger volume than the sports car.

But that’s a very crowded space to be in and very difficult to be in, so we figured as we move towards that, we would have lots of options and partnership options. We would have lots of room to maneuver. And if the car industry just really decided to be very competitive with us, we also felt that Silicon Valley could outcompete them because they just move at a much slower pace. I don’t think any of us really imagined that they moved glacially slow as they really are. I mean they’re just now finally beginning to get with the program. And still, their technology just really isn’t as good. And they have huge resources and tremendous experience certainly in making cars. I certainly didn’t expect them to take this long to sort of wake up and begin to take electric cars seriously and begin to produce competitive products, which I think has played very well for Tesla.

Brian: Yeah, obviously. Sort of building off of that and I’m not asking this to be a troll and I’m not asking you to specifically throw anybody under the bus, but because as listeners of the show know, I know a lot of people in the automotive industry but I come from tech, and there’s this existential argument back and forth between these two worlds. So, my final question would just be, because you’ve lived and you’ve experienced it, the difference between the car people and the tech people, and if Detroit has to move in Silicon Valley’s direction and if Silicon Valley is infiltrating Detroit’s game, what have you learned about the difference between car people and tech people and the way they look at the world and their philosophy of product and innovation and things like that.

Marc: That’s a good question. There’s a bunch of dimensions to it. One is I think that it isn’t so much car people versus tech people. It’s much more really giant old companies whether it’s in the book industry like we dealt with before or probably almost any industry. If you’ve been around for a long time and you’ve done things the same way for a long time, you get very used to it and you’re making money. It’s not like you’re failing. And, there’s a huge resistance to taking risks and trying stuff new because that could have impact your divisions numbers or your career, and it just makes it very hard for innovative ideas to infiltrate these big companies.

In Silicon Valley, we don’t have any 100-year-old companies that are bigger here. We only have a handful. You know, the Intel’s and the Hewlett-Packard’s and stuff that have been around for a long time. And they go through periods of sort of struggle. I think HP currently is struggling with that problem and Intel to some degree. And they grew up in this environment and they’re deep into this innovative culture, and I think that the car industry which used to be very innovative and creative when they were smaller, but when they got very large and very content at making the same old thing every year, I think that that is what makes them sort of ripe for clever Silicon Valley startups. As I said, I don’t think it’s really a car thing versus a Silicon Valley thing. I think it’s just a Silicon Valley thing versus really old big industrial companies.