Tesla's IPO: A New Test Drive for the Old VC Model

After A123Systems' splashy initial public offering, venture capitalists wonder if the electric automaker can reward its backers—or just raise money

By Josie Garthwaite

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Tesla Roadster Courtesy of Tesla Motors

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Last Friday, buzz about an imminent initial public offering for electric car startup Tesla Motors hit the Internet, courtesy of two anonymous sources familiar with the plans who spoke with Reuters. As with several previous stories about Tesla's possible plans for a public offering, however, the company has declined to comment.

If and when Tesla goes through with its long-discussed goal of going public, it could be the biggest and possibly the first public offering for a U.S. car company since Ford Motor's IPO more than 50 years ago. The event will also offer a glimpse at the role IPOs will play in the nascent green car market. The question remains: Is the classic venture capital model—invest early and find a big exit in the form of an acquisition or IPO—viable for this sector, or will a green-car IPO be more about feeding big capital needs and branding?

While hard answers won't come until after Tesla makes its debut, the outcome of a Tesla IPO will influence the financing strategies of competing green-car startups, shape potential investors' thinking about possible exits from these companies, and also—like the A123Systems IPO a couple of months ago—serve as a gauge of public confidence in electric cars.

A123Systems' backers didn't gain much

Hopes for a Google-like moneymaker in cleantech (Google took only $25 million in venture capital to make millionaires of 1,000 employees and billionaires of its two co-founders in a wildly successful IPO) have already started to fade for some in the sector. Stephan Dolezalek, managing director of VantagePoint Venture Partners, which has invested in Tesla, told Reuters in September that public offerings now serve more as "financing events" for alternative energy and other cleantech startups, rather than as a way for investors and founders to cash in on equity.

That seemed to be the case for battery maker A123Systems, which, like Tesla, is trying to capitalize on an electric car boom. A123's September market debut bore more resemblance to the model described by Dolezalek than to the heady days of Google: The IPO served to increase the battery maker's cachet and will likely help the company move forward on its ambitious manufacturing plans. But as Thomson Reuters and the Cleantech Group pointed out>, A123's venture capital investors made an average return of a little over four times their investment, while those of individual investors ranged anywhere from four to eight times. As Katie Fehrenbacher noted at the time, those returns aren't bad, but when compared to some dot-com-era exits, they're not amazing, either.

Greg Brogger, CEO of the private equity marketplace SharesPost, put it to us this way over the summer: Cleantech companies building capital-intensive products such as cars and solar panels need to raise more funds faster than their Web 2.0 counterparts. You can stretch a dollar a lot further building apps than you can trying to develop, safety test, manufacture, market, and distribute vehicles for the mass market.

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