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That time Tesla nearly failed, and investors had no idea

Rick Newman
Senior Columnist

Elon Musk is part entrepreneur, part magician.

The CEO of both Tesla (TSLA) and SpaceX has built companies in two tough industries where most startups wither and die. Tesla has created a new paradigm for electric cars, while SpaceX has proven that private firms can handle space missions once tackled only by deep-pocketed governments.

But Musk may be even wilier than his many fans realize. A new biography, "Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future," by tech writer Ashlee Vance describes how Tesla nearly ran out of money just two years ago, with shareholders largely in the dark about the firm’s desperate finances. “Too many [buyers] were sitting on the sidelines and it caught up with them,” Vance tells me in the video above. “People weren’t coming to Elon and alerting him to this.”

Tesla had endured close calls before, most notably in 2008, when Musk coughed up millions of dollars of his own money to keep the company afloat. But that was in the company's early days, before it had gone public. It had just begun selling its original vehicle, the Roadster. The company went public in 2010, and by 2013 it had grown from an automotive curiosity into a transformative firm whose breakthroughs were influencing established titans such as Toyota (TM) and General Motors (GM).

The 2013 cash crunch developed just a few months after Tesla’s Model S sedan went on sale. Customers who put down a $5,000 deposit for the car were holding back as models became available, reluctant to commit to the full purchase price, typically around $100,000. Tesla’s cash reserves fell dangerously low.

When Musk learned of the crisis in February 2013, he did two things: First, he turned every Tesla employee into a salesperson, directing them to call everybody who had put down a deposit and turn those pre-orders into final sales. Second, he persuaded his friend Larry Page, CEO of Google (GOOGL), to buy Tesla if the company actually ran out of money.

Google did its homework and agreed to purchase Tesla for a reported $6 billion or so, if necessary. It turned out not to be. Tesla’s crash customer-outreach program worked, and Tesla sold enough vehicles to fix its finances. A month after Musk asked Google for a lifeline, Tesla announced it had sold 4,900 Model S sedans in the quarter and turned a profit for the first time since going public. Then Consumer Reports gave the Model S the highest ranking ever granted a car it reviewed. Tesla recovered and the Google deal went away.

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Tesla’s stock has since rocketed from about $35 to nearly $250. But shareholders might want to note a few elements of the 2013 crisis that could be relevant today. Musk never let on, in 2013, that Tesla was in trouble. Tesla shut down its factory because orders weren’t materializing fast enough, but admitting that publicly could have spooked buyers even more and sent the stock price plummeting. So Tesla said it was shutting the factory temporarily to conduct maintenance—technically true, but only part of the story. (Tesla didn't respond when asked to comment for this story.)

Meanwhile, Musk’s public statements made it seem like everything was fine. The stock was stable throughout the first four months of 2013, until it started to rise in late April—shortly after Musk confided in Page. There was heavy short interest in Tesla at the time, but that turned out to be a very unwise position. “The short sellers were gambling that something like this was happening,” Vance says. “They were probably right for a while, but they got taken to the cleaners when that quarter ended up being profitable.”

Musks’s force of personality is clearly a factor in Tesla’s success. Yet the company still hasn’t had a fully profitable year, and the competition is getting tougher as most of the big automakers move in on Tesla’s turf with their own electric vehicles. Musk is still making big promises, though. Among other things, he predicts that Tesla will sell 500,000 cars per year by 2020 (up from 17,300 in 2014) and reach a market capitalization of $700 billion by 2025 — roughly the size of Apple (AAPL) today. That would be 22 times bigger than Tesla’s current value of $31.5 billion now. If Musk is right, Tesla will eventually become so big that even Google won’t be able to bail it out of a crisis.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.