Elon Musk isn’t one for taking a conservative fiscal route. Despite the fact that both his businesses, Tesla and SpaceX have been around for more than 10 years now, both are still heavily in debt and financed from outside. Given the demand for electric vehicles and satellite launches, many people are still at a loss as to why, but Musk is sticking to his guns, pursuing a course of high growth and high debt, despite what the pundits might think.
Musk’s strategy hasn’t always been easy. Back in late 2008, both his companies hit crisis point. He desperately needed an injection of cash, or the whole thing would have gone under. At the 11th hour, just before the Christmas break, Musk got the money he needed, and his business survived, even thrived.
There’s are a bunch of reasons Musk doesn’t like bootstrapping. Here’s why.
Slow Business Growth
One of the main disadvantages of bootstrapping is slow growth. Earning money and paying for things as you go is a recipe for a slow start. In fact, sometimes it can be an outright disaster. For instance, many novice business people assume that the profitability of a business is constant. But experience shows that certain companies have scale thresholds, beyond which profit suddenly spikes upward. Because all bootstrapped businesses must grow using their profits rather than outside savings, this growth period can be very long, and sometimes non-existent.
Think about Musk’s case in particular. He could have bootstrapped Tesla, but the company might never have escaped the confines of niche carmaker. It certainly wouldn’t be doing what it’s doing now, churning out tens of thousands of mid-range, consumer-grade vehicles.
Bootstrapping might be okay for some business models, but if you’re looking to expand quickly, it’s not ideal, especially if you’re in a capital-intensive industry. Smart entrepreneurs find out lending details and think about how they can use their own assets to borrow. They use their capital as collateral to get the funds they need, just as homeowners use their houses to get mortgages, ramping up their spending power and allowing them to enter businesses which they could not have otherwise entered. Musk would never have been able to get the funds he needed, had he not developed his car plant in Fremont, California. He used the money already locked up in his firm to borrow even more and at a lower interest rate.
Inability To Take Advantage Of Opportunities
Both the space and electric car markets are technologically feasible today. But if Musk hadn’t borrowed, he wouldn’t have been able to take advantage of the situation. Today, we could very easily have a world in which some Tesla or SpaceX competitor was doing exactly the same thing as either of these companies, had Musk decided that bootstrapping was a better option. Timeliness in entrepreneurship is essential: if you can be the first to market with a product, you have a massive advantage. This is precisely what Musk did and explains why he is where he is today.