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Comment by tdees40 | Hacker News Reader

So here's a thought. If I have lots of businesses with a high chance of failure, and I bring them under one roof, any one business is more likely to destroy my entire company. So if I have two high-risk businesses (electric cars and energy storage) having both in the same company greatly increase the total company's chance of insolvency and failure.

On a higher level, I LOVE Elon Musk, but what made Steve Jobs so great is that he could innovate like crazy and make gobs of cash. Right now, Elon is innovating, but his companies are really struggling to even sniff profitability.

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That makes sense if the businesses are unrelated, but that's not the case here. Batteries are critical to both Tesla's cars and energy storage products. Even before the Powerwall announcement, a lot of people called Tesla a battery company that just happened to sell cars.

Tesla has always been a bet on batteries. And if you're going to bet on batteries, why not expand that bet?

Regarding "gobs of cash," Tesla would be profitable now if it weren't pouring money into future expansion. The Model S sells well (given Tesla's size) and has high prices and margins. But that money (and more) is being put into design and production of a new model, and a gigantic battery factory.

I don't think Jobs is a good comparison to Musk. Jobs's recipe for success was to take products that existed and were popular in a niche, and refine them so that they appealed to a wider audience. The Apple II was a friendlier PC (used in the generic sense, not "IBM PC compatible," of course) with mass-market appeal, the Macintosh took existing GUIs and refined them to the limit, the iPod did nothing that existing MP3 players didn't do, but was made to have far greater appeal, and on and on.

Musk, on the other hand, is pushing the envelope. First electric car with a long range. First electric car capable of long-distance travel. First electric car that can compete with gas cars on its own merits. First reusable rocket (still trying).

If they were in the same market (and if Jobs were still alive), Musk's companies and products are the sort of ones Jobs would have been appropriating and refining a few years down the line once the concept is proven and demand is demonstrated.

It's not at all clear that the Model S has high margins. They are burning cash on operating activities [1] (i.e. not including CapEx).

[1] http://www.google.com/finance?q=NASDAQ%3ATSLA&fstype=ii&ei=j...

The battery factory is going to reduce the cost of the batteries in the vehicles, increasing their profit/reducing their cost to being mass-affordable; on top of this they're turning the battery factory into a product itself, so we could see other companies purchasing and building them further strengthening the ecosystem Elon's trying to create.

He'll be the market leader in both electric vehicles and battery production - they'll be able to undercut everyone perfectly positioned for when "everyone" is buying electric vehicles.

Hang on, they're not unrelated businesses. This is kind of the same as Steve Jobs even.

Apple is a software company that also creates hardware for their software to run on. They're two businesses under one roof. Hardware is definitely a pretty high risk business too.

Tesla is an electric car company that also creates batteries for their cars to run on.

Tesla has more chance to make higher profits by controlling their battery operation, and also has higher chances of failure. This is the same as Apple and creating their own hardware instead of letting their software run on all hardware. There's differences, but I think your argument doesn't hold much water and has nothing to do with whether Apple or Tesla can be successful businesses.

>Apple is a software company that also creates hardware for their software to run on.

You sure about that?

Sure, well - you could say Apple is a hardware company, and Tesla is a battery company that creates cars for their batteries to use. Either way, that's the point.

Well don't forget PayPal which innovated like crazy and is super profitable. But for modern day Musk I think you're forgetting his businesses are by definition very capital intensive. He has to build out the entire means of production as well as the end product. It would be awesome in some ways if he could just pay Foxconn and have them shoulder all that infrastructure build out cost to build him some more Teslas but it doesn't work that way with what he's doing. The flip side is if he pulls this off he can hit a tipping point where he's the AWS of batteries for a whole range of industries and becomes a huge profit machine.

I don't think your argument is correct. That is the whole point of portfolio theory:

1. https://en.wikipedia.org/wiki/Modern_portfolio_theory

Let me tighten up my argument a bit. Assume two businesses with an 80% chance of success, where success is worth $1000, and a 20% chance of failure, where failure is worth -$2000. But of course these are stocks, so they can't be worth less than zero, so the expected value of each is $800.

But the expected value of the combined company (where all outcomes are floored at zero) is only $1280 (not $1600), because there's a real chance that one business blows through the profits of the other.

Looking at it from another perspective, this is exactly why you want to incorporate if you start a business, instead of just going as a sole proprietorship. That way you have two entities (your person and your business) and if one fails (your business goes under) the assets of the other are protected (they can't take your house).

This is why Alphabet is stupid. But in Tesla's case, the two businesses are clearly related and may benefit one another so as to compensate for this effect.

This is apples and oranges.

With MPT, you're not necessarily running a business, you're holding securities/assets that cannot have a negative value. (i.e. they can't become liabilities, you can't have a stock or bond that you owe money on)

With a business, the net value can become negative and in some cases when it does, you declare bankruptcy. This is why you'd want to ring-fence/separate out the more risky ventures from your main business, so that it's a separate entity that can rise/fall on its own.

See the case of Target (USA) and Target Canada: http://www.alvarezandmarsal.com/target-canada-co-et-al/

I think Tesla is somewhere between Apple and Amazon/Ebay/Paypal. Trying to sell a desirable Apple-like product but at Amazon-like margins to try get wider uptake which is important for this type of product where critical mass is required for it to succeed.

Tesla is one business, "Battery Manufacturer". They currently have a few products in their line. Home batteries, Industrial batteries, and some battery powered vehicles.

Wait - that strategy worked for Wall Street, didn't it? Putting lots of worthless mortgages in one basket creates a triple-A rating!

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