Entrepreneur Elon Musk: Why It's Important to Pinch Pennies on the Road to RichesPublished: May 27, 2009 in Knowledge@Wharton
At 38, Elon Musk has been a co-founder of PayPal, which he and his partners sold to eBay for $1.5 billion; and rocket builder SpaceX, which aims to commercialize the launching of payloads into orbit. He is also an initial investor in electric-car pioneer Tesla Motors, where he designs cars in addition to guiding the business; and solar energy company SolarCity, which sells and services solar energy equipment. In a two-part interview, Musk discussed luck, innovation and the fundamentals of starting a business. The first half of that interview, conducted by Wharton management professor John Paul MacDuffie, appeared in Knowledge@Wharton on May 13. You can find it here, along with an article about his recent visit with University of Pennsylvania students. In the second half, arranged by Wharton Entrepreneurial Programs, he tells Knowledge@Wharton the story of his entrepreneurial beginnings and what he learned about the value of pinching pennies.
An edited transcript of the interview follows:
Knowledge@Wharton: Elon, thank you so much for joining us today.
Elon Musk: You're welcome.
Knowledge@Wharton: I wonder if you could start with a question about your entrepreneurial ventures. [To] name just a few of them: PayPal, SpaceX, Tesla Motors, SolarCity. They cover quite a wide range -- so varied. And I wonder if there is some connecting thread among them or if there is some process you use to think about what kind of ventures you like to take up. What do you look for in these entrepreneurial activities?
Musk: I guess the common thread would be things that I think will affect the world in some way -- in a positive way. That has really been the basis for why I have [been] involved with those areas. [It is] not from the standpoint of ranking ... the return on investment or anything like that; or even the probability of success. But just from the standpoint of, "These are things that I think are important and so I want to help make them happen." That's how I got into the Internet initially and then electric cars and space and solar power. But, yes, when I was in college there were three areas that I thought [were important to] the future of humanity and those were: the Internet, clean energy and space.
Knowledge@Wharton: Let's ... go back a little bit before you entered college. I've read that your very first venture was at age 12 when you created something called Blast Star. Was that the game?
Musk: Yes, Blast Star. It was just a computer game.
Knowledge@Wharton: Can you tell us about that experience? Did you learn anything from the [effort] that has stayed with you through your [entrepreneurial career]?
Musk: I would downplay that. My mother likes to talk about that, but when I was growing up in South Africa, computers -- personal computers -- were just starting to come out. This was in the late 1970s and early '80s. I had actually one of the first computer game systems. It was pre-Atari, very primitive. And then [I] upgraded to the much more sophisticated Atari. So I loved playing computer games when I was a kid. My motivation to do some software programming was [that] I also wanted to create games. So I saved up money -- some combination of saved money and bugging my father -- [and] I got to buy a computer, initially a Commodore VIC-20, which had about eight kilobytes of memory along with some books on how to [write] programs. So I taught myself how to program from those books. And then I found out that you could make money by selling computer programs. So I wrote and sold two -- not for very much money but it was a lot of money to a kid at the time ... several hundred dollars effectively in spending power.
Knowledge@Wharton: And were there any lessons you learned that sort of stayed with you or was it just the thrill of that [first sale]?
Musk: Wow. I haven't really thought if there are any lessons there. I can't think of any. If you make something that people want, they'll pay you for it. That's probably it.
Knowledge@Wharton: That's a really good lesson.
Musk: Apart from that -- I had various odd jobs like delivering papers and things.... I also did a little bit of stock market stuff when I was about 15 or 16. I actually did pretty well just making bets on some stocks in South Africa. But I just made a few bets that did pretty well. I tripled my initial tiny stake and then that stopped because I just didn't like it.
Knowledge@Wharton: Of course, multiplying your money many-fold is something that happened very successfully with X.com, which became PayPal. Could you help us understand how did you evaluate that business opportunity and, again, what were some of the lessons that other entrepreneurs could learn from your experience?
Musk: I need to think more about what lessons can be drawn from my experiences. But I would mention that there is a company that I started that predated PayPal, which was called Zip2. That's the company that I started in the summer of '95 and then decided to continue ... and [so] deferred graduate studies at Stanford. I thought that was a good sort of hedging bets strategy. You know, worst-case scenario if the business failed [was] I could just go to graduate studies. [That would have been] a pretty soft landing if things didn't work out. And I thought they probably wouldn't actually. If you had asked me, I would say the odds were likely that I would probably not succeed and, therefore, I would be back. But I thought I may as well give it a try.
[One] lesson [is], spend very little money. That was a case where I had very little money, so there really wasn't any choice. I only had a few thousand dollars. And then my brother came down and he had several thousand dollars. We just rented an office for $400 or $500 a month -- some really tiny little office in Palo Alto. [It] was cheaper than an apartment. And then [we] bought futons that converted into a couch, which was sort of like a meeting area during the day. We would sleep there at night and shower at the YMCA, which was just a few blocks away. That was [an] extremely low burn rate. [It was] way cheaper than a garage. Garages are ... expensive. So we were able to ... putter along for several months until we got venture funding. I think that's a good lesson.... When you are first starting out you really need to make your burn-rate ridiculously tiny. Don't spend more than you are sure you have.
With Zip2, the idea was just to try to do something useful on the Internet that other companies would find useful and would pay us at least enough to keep the doors open. So we started off with maps and directions and Yellow Pages. We branched that into publishing and interfacing with heterogeneous legacy databases, particularly [those] that were of use to the newspaper industry. [The] newspaper industry was mostly not online in '95 and was trying to get online. And they had these old mainframes that had all the data and were very difficult to talk to. So what Zip2 essentially did was this model evolved into helping newspapers get online and create compelling web sites. So we had customers and investors -- The New York Times, Knight Ridder, Hearst [and] a number of others. And we ended up being acquired by Compaq in early '99 for a little more than $300 million in cash, which at the time was the largest of all cash transactions for an Internet company. That was certainly a better outcome than I had ever expected. But I felt there was still more that could be done with the Internet. [This led to] X.com [and] evolved into PayPal.
The idea was, "Let's make a really convenient site that combines all of people's financial needs into one seamless, easy-to-use location." And then we had a feature which was the ability to send money and securities from one customer to the next. If you weren't in the system it would just send an invitation to join the system. At the time it was ... a very [simple] thing and we found people really responded to that feature. So we adjusted our focus and started going more and more in the direction of payments and ... focused on creating a great payment system. Coincidentally], many of the financial elements [developed for the original business plan] turned out to be quite important in creating that payment system because the efficiency of our payments increased dramatically if people kept money in the system. So, by creating inducements to keep money in the system -- such as a money market fund that PayPal had with Barclays Global, and a debit card that could directly access your PayPal account -- [gave customers] reasons ... to keep money in the system and not take it out. And the cost of a transaction to PayPal of somebody sending from their PayPal balance to another PayPal customer was essentially zero. Whereas if somebody was sending money to somebody else and funding it via credit card, it would cost us, inclusive of fraud ... somewhere between 3% and 3.5%. So it is a gigantic difference.
So those financial services elements ended up being quite important. And eBay [which bought PayPal for $1.5 billion in 2002] really should add some additional financial elements to that. In particular they should offer people checking [accounts] so you can write checks off your PayPal account, and direct deposit. And then why do you need a bank account. I've suggested this many times, but they don't seem to see the merit of that for some reason. I don't understand why.
Knowledge@Wharton: That's a very good point.