Rocket Man

PayPal co-founder Elon Musk, who made his fortune on the Internet, is now risking it on space exploration and the $98,000 Tesla electric sports car.

By Kambiz Foroohar
Bloomberg Markets June 2008

Elon Musk, co-founder of online payment giant PayPal Inc., was flying back empty handed from Moscow for a third time in November 2001, when the idea for his new company hit him. His attempt to buy an unarmed SS-18 intercontinental ballistic missile, a rocket the Soviet Union had aimed at the U.S. during the Cold War, fell through when launch company ISC Kosmotras wouldn't bend on price. Now Musk, tapping furiously on his laptop, was calculating how to make his quest to put a greenhouse on Mars a reality without the Russian craft.

"Elon leans over and says we can build the rocket ourselves," recalls James Cantrell, chief executive officer of research firm Strategic Space Development Inc., who accompanied Musk. "We rolled our eyes. But Elon says, 'Look at the spreadsheet.' He'd worked out a plan."

After raking in almost $300 million selling PayPal and online directory company Zip2 Corp., South African-born Musk, 37, is aiming skyward for his next act. In 2002, he founded Hawthorne, California-based rocket maker Space Exploration Technologies Corp., or SpaceX, where he's CEO, chief technology officer and largest shareholder. He's poured in $100 million of his cash, driven by the conviction that mankind needs to leave this planet to explore new realms and that he can build the cheap rockets to accomplish that. A greenhouse on Mars was one way to show that life can exist away from Earth, exciting the public's imagination, he says.

"This is the first time it's possible to extend life beyond Earth," says Musk, who studied physics at the University of Pennsylvania and boned up on space with books on aeronautics and rocket propulsion. "It's incumbent upon us to do it." Technology entrepreneurs have no trouble dreaming big. Duplicating their successes is another matter. After Craig McCaw sold his cellular telephone network to AT&T Corp. for $11.5 billion in 1994, his forays into communications satellites and local phone service flopped. Musk, who dropped out of Stanford University's physics doctoral program in 1995 before attending a single class, has watched his first two rocket launches fail.

Space exploration seduces some of tech's brightest stars. Jeff Bezos, 44, founder of Amazon.com Inc., started Blue Origin LLC in 2000 to develop a rocket to take passengers up about 62 miles (100 kilometers) into suborbit. John Carmack, 37, co-creator of Doom, at one time the most popular video game of its type, founded Armadillo Aerospace to build a vehicle for space tourism.

Microsoft Corp. co-founder Paul Allen, 55, funded Burt Rutan's SpaceShipOne. In October 2004, Rutan's rocket won the $10 million Ansari X Prize, awarded to the first private company to send a manned spacecraft up 62 miles to the edge of space twice in two weeks.

Musk is betting bigger than them all. He wants his Falcon rockets to fly 250 miles into orbit to supply the International Space Station. In August 2006, the National Aeronautics and Space Administration awarded SpaceX $278 million to show that it can do just that. The agency is trying to replace the space shuttle, which costs about $800 million per mission and is retiring by 2010. SpaceX is scheduled to send up its third rocket from the Kwajalein Atoll in the Pacific Ocean in June. It will carry a satellite for the U.S. Air Force and, if successful, make Musk the father of the first privately funded rocket to reach orbit.

Such a feat would be enough for most people's second acts. Except for Musk. He's poured $50 million of his money into San Carlos,California-based Tesla Motors Inc., maker of a $98,000 electric sports car that runs on 6,831 lithium-ion batteries, the same ones that power laptop computers. It's designed to accelerate from 0 to 60 miles per hour in less than 4 seconds, faster than a Ferrari or a Porsche, and go 220 miles without requiring a charge. A flap over the car's transmission and escalating costs have delayed production by more than a year. In November, Musk ousted Tesla founder and CEO Martin Eberhard. Then in January, he fired about 30 employees, including some managers. Now he's running things himself as chairman. "Part of what motivates Elon is fame and glory," Eberhard says. "He wants fame." After his ouster, Eberhard started a blog at teslafounders.com and quoted a Tesla employee who referred to the firings as a "stealth bloodbath."

Musk has also invested $10 million in SolarCity, the biggest installer of solar panels in California. The Foster City-based company is run by his cousins, brothers Peter and Lyndon Rive. Musk plans initial public offerings for all three companies, with Tesla's coming as soon as year-end.

"There are three areas that could change the world: One is the Internet, the other is changing the world from a hydrocarbon-based society to solar electric and the third is becoming a space-faring civilization," says Musk, who's dressed in a black Tshirt and green denim jacket in SpaceX headquarters, where the mailing address is 1 Rocket Road. His accent has been softened by 13 years on the U.S. West Coast.

So far, Musk has succeeded only in the first. In March 2006, SpaceX's 70foot (21-meter) Falcon 1 rocket caught fire when fuel leaked because of a corroded aluminum nut. A second Falcon 1, launched the following March, spun out of control at 180 miles, about 25 miles shy of its intended orbit. Those failures make June's launch critical, says Scott Hubbard, former director of NASA's Ames Research Center and now a professor in Stanford's Department of Aeronautics and Astronautics. "They need to put something up," he says.

Musk is already dealing with delays at Tesla. He wanted a two-speed gearbox for the electric car. The first gear would take it from 0 to 60 mph; the second would allow it to cruise at up to 130 mph. Trouble is, Tesla can't find a supplier to make the part. So the company, which assembles the roadsters at the Group Lotus Plc factory in Hethel, England, is producing one car a week using an interim transmission, leaving prospective buyers such as Google Inc. founders Sergey Brin and Larry Page and actors George Clooney and Matt Damon waiting. The company expects a new transmission system later this year, allowing it to reach full production.

Musk isn't deterred by the snafus. He says next year's revenue will exceed $150 million and he'll use funding from the planned Tesla IPO to build a second electric car, currently called White Star. The five-door sedan will cost $50,000-$65,000, about the same as a midrange BMW or Mercedes. He wants to produce 10,000 of them a year by 2010. Beyond that, he's considering a $30,000 model.

Grabbing a mass market will be difficult, says Jim Hossack, an industry analyst at AutoPacific Inc. in Tustin, California. Musk will need dealers, parts, service and advertising. "Going head to head against dominant auto industry players is tough," Hossack says.

Musk has gotten into trouble before when his ambitions bumped up against reality. As PayPal CEO, he tried to challenge the banking industry by developing a full-service online financial supermarket. Other managers balked and pushed him out. "I personally wonder if Musk doesn't want to be Time man of the year," Strategic Space Development's Cantrell says. "He wants recognition for changing the destiny of man."

Musk has never been shy about aiming high. In Pretoria, South Africa, at age 12, he created a video game called Blaster and sold it to a computer magazine for $500. At 17, he flew to Canada, where his mother had citizenship, and enrolled in Queen's University in Kingston, Ontario. Two years later, he transferred to the University of Pennsylvania's Wharton School on a scholarship, getting a bachelor's degree in economics in 1994. He stayed at the university an extra year to study physics and get a second bachelor's degree.

At Penn, Musk didn't appear to be more gifted than other students, says Eugene Mele, a physics professor who taught him. He was just above average and didn't work all that hard. "Had he put his shoulder into it and done the work, he'd be an outstanding student," Mele says. "He was doing a zillion different things. He was diluted."

Musk headed to Stanford in 1995 to pursue a Ph.D. in physics. He planned to study capacitors and energy storage devices that could be used in electric-car batteries. Instead, he caught the Internet bug. Netscape Communications Corp.'s browser was opening up the World Wide Web. Musk spent part of the summer designing a Yellow Pages-like site to put company directories online with advertising, maps and directions. Two days into the fall semester, Musk, then 24, withdrew from Stanford. "I called my professor and asked for a deferment," Musk recalls. "He said, 'I'll never see you again.'"

Musk started writing code for what became Zip2 in the same windowless building in Palo Alto, California, in which he slept on a futon. In January 1996, he took his idea to venture capitalists and raised $3.5 million from Mohr Davidow Ventures in exchange for more than half of the fledgling company. "He's very real and wants to create something huge," says George Zachary, who was then a partner at Mohr Davidow. "Zip2 was a clever idea, but we were not sure about the business plan." Zachary says he didn't know how the company would enerate revenue.

Zip2 got off the ground by licensing, creating and running Web pages for the Boston Globe, Miami Herald and New York Times. During the height of the Internet craze in February 1999, Compaq Computer Corp., now part of Hewlett-Packard Co., bought Zip2 for $307 million. Musk received about $22 million for his 7 percent stake.

With his next Internet venture, Musk wanted to build a financial services company to offer mutual funds, savings accounts and bill payment services online. After an internship in the chairman's office at Bank of Nova Scotia in 1992, Musk says he was convinced there wasn't much innovation in banking. "Moving money around is a database entry," he says, explaining why he'd decided to revolutionize the industry. "The idea was to dive into the financial sector and do something useful."

As with space exploration and electric cars, Musk says he didn't see his lack of experience as a handicap. He pitched the new company, X.com, and won $25 million from venture capitalists led by Michael Moritz, a partner at Sequoia Capital in Menlo Park, California, who'd funded Apple Computer Inc., EToys Inc. and Yahoo! Inc.

Musk jumped into a market where startups were already tinkering with online payments. Confinity Inc., formed by Max Levchin and backed by money manager Peter Thiel, was creating software to send money via the PalmPilot, one of the first handheld organizers. (See "Macro Man," January 2007.) Confinity also had a product called PayPal for paying via e-mail, says David Sacks, Confinity's chief operating officer.

In 1999, Musk was monitoring the list of X.com account holders and noticed Thiel, Confinity's CEO, had joined. Musk e-mailed him an invitation to lunch. The two soon agreed to a merger. The company adopted the name PayPal and appointed Musk CEO. Thiel and Levchin declined to comment for this story.

It didn't take long for the sides to clash. Musk pressed his financial supermarket idea, while the crew from Confinity focused on payments. "Elon had grandiose visions," says Jeremy Stoppelman, then an engineer at X.com who later headed engineering at PayPal. "He wanted to take on the financial institutions and win."

By August 2000, PayPal had more than 2.5 million customers after Musk offered $10 to every new user and to anyone who referred someone else. Amid the growth, PayPal was hounded by Russian hackers. EBay Inc., the biggest online exchange site, started offering its own payment service, cutting into PayPal's audience. Musk stuck to his banking plan and called for a complete technological overhaul, including rewriting much of the code and switching from Unix software to Windows, Stoppelman says. Senior managers countered that the changes might derail the young company. While Musk was en route to Australia for vacation and fundraising in the fall of 2000, the board voted to oust him and replace him with Thiel.

"In retrospect, an unwise move," Musk says of leaving the U.S. at a crucial moment. "If I hadn't made that trip, I'd have had the opportunity to talk directly to people rather than have things spiral out of control."

PayPal went public in February 2002. In July, EBay made a $1.5 billion offer, giving Musk about $175 million in EBay stock for his 11.7 percent stake. EBay shares tripled two years later. "I'd still probably be running the company, and I would not have sold to EBay," he says. Even so, "I'm happier that I'm doing SpaceX and other things," he says.

Musk, who grew up reading science fiction, says he started contemplating a space venture when he was stuck in traffic on New York's Long Island Expressway while returning from the Hamptons in the summer of 2001. Having made his millions, he was thinking about his next challenge. He wondered about NASA's stalled manned exploration program--especially about going to Mars. He found a 1989 NASA study that put a $258 billion price tag on a mission to the red planet. At that cost, Mars was simply too expensive.

Musk says he wanted to generate enthusiasm for space exploration again, re- creating the awe that had swept the world in the 1960s before he was born. He started calling space buffs, reaching Robert Zubrin, founder of the Mars Society, a nonprofit group dedicated to exploring the planet. "I emphasized to Musk that he had a chance to do something great," Zubrin says. He encouraged Musk to consider a Martian greenhouse.

Cantrell took musk's cold call that same summer. "He just said, 'I'm a wealthy Internet entrepreneur and want to create a space program,'" Cantrell recalls. Cantrell, Musk and Zubrin came up with Mars Oasis, a self-contained greenhouse that would carry seeds encased in dehydrated nutrient gel. The seeds would hydrate upon landing. One big issue was the cost of a rocket to launch it. After his failure in Russia, Musk figured if he could lower the price of a vehicle, space exploration would pick up. "I told him if you want to do something that will have an impact, build a cheap rocket," Stanford's Hubbard recalls. "Getting to space is too expensive."

Musk put the Mars quest on the back burner, recruited engineers and formed SpaceX in 2002 to build a no-frills budget rocket. Working in a warehouse in El Segundo, California, near Los Angeles International Airport, the engineers and machinists dug in. By 2005, they'd welded, hammered and pieced together their first Falcon 1. The two-stage liquid-fuel craft was designed to send satellites weighing less than 1,000 pounds (450 kilograms) into low orbit. Its Merlin engine, based on 1960s technology, uses one fuel injector instead of the multiple injectors common in the industry. Most of the Falcon 1 is reusable, with a recovery team prepared to pick up the rocket body when it falls into the ocean.

SpaceX's launches cost less than those of its competitors, says Gwynne Shotwell, vice president of business development at SpaceX. It charges $6.7 million-$8 million for a small payload on the Falcon 1--about a quarter of the amount for Orbital Sciences Corp.'s Pegasus rockets. If a rocket fails, SpaceX collects because the launch is covered by insurance. "We've been cash flow positive since the fourth quarter of 2006," says Musk, who plans an IPO around 2010. "There's no hurry. We have no funding needs."

Musk is burning through cash at Tesla. The original business plan forecast that a $25 million investment would enable the company to become profitable. Instead, Tesla has spent about $100 million and put one car on the road--Musk's. Some 600 buyers are waiting.

Eberhard first approached Musk at SpaceX in 2004. He'd sold his NuvoMedia Inc. electronic book company to Gemstar International Group Ltd. for $187 million and was looking for backers for an all-electric sports car called the Tesla Roadster. Musk agreed to invest the $6 million Eberhard sought. "We had a handshake deal, but Elon wanted to do the deal if it could be closed in 30 days," Eberhard says. "His wife was expecting twins, and he was going to be busy." Musk now has five children, after triplets were born in 2006. His wife, Justine, is a novelist of horror fiction including BloodAngel (Roc, 2005).

As the prototype took shape, Musk and Eberhard disagreed on the design and features. Musk insisted on new headlights, seats with more padding and a lower doorsill for easier entry. The biggest conflict was the transmission. "I wanted a single transmission in the first model, with a two-speed transmission later," Eberhard says.

Musk countered that Tesla had to compete with gasoline-guzzling speedsters and, because of its price, had to dazzle buyers. "To have a car with a top speed and acceleration which any reasonable person would not consider to be a sports car is unacceptable," Musk says. "It looks like a sports car but doesn't drive like a sports car."

Musk got his way. In November, as he planned to raise another $40 million, he fired Eberhard and replaced him with Ze'ev Drori, an Israeli-born entrepreneur who'd founded semi-conductor maker Monolithic Memories Inc. and sold it to Advanced Micro Devices Inc. in 1987. "When I came in, the company was in never- never land," Drori says. "It was a startup struggling to get to the next stage."

It's still crunch time at SpaceX. The first Falcon 9 rocket, which has nine engines and competes with Boeing Co.'s Delta IV and Lockheed Martin Corp.'s Atlas V, is due for delivery to NASA in December for the space station launch. All of SpaceX's planned missions--seven for the Falcon 1 and seven for the Falcon 9--were sold out, including the two that have already gone up, Shotwell says. The Pentagon, the Malaysian government and Bigelow Aerospace, a Las Vegas- based company founded by Budget Suites of America owner Robert Bigelow, are among the customers. SpaceX has about $220 million in contracts beyond the $278 million from NASA.

Musk has plenty of room to grow. In October, he moved SpaceX to a 550,000- square-foot (51,000-square-meter) headquarters in Hawthorne where the fuselage for Boeing's 747 was once assembled. From 220 people at the end of 2006, SpaceX plans to ramp up to 550 by year-end.

Scientists and engineers are working on computers on a sunny February afternoon. Free breakfast cereal and cold drinks are available in a snack area. In the construction bay at the rear, the new Falcon 9 is taking shape. A long aluminum tube lies on its side. A white prototype capsule rests nearby. "Many people in the aerospace industry are rooting for Musk to succeed," Hubbard says. "If we're going to have a space exploration program, we need entrepreneurs like Musk."

Musk's ambitions are bigger than ever. "The extension of life beyond Earth for the first time is at least comparable to movement from ocean to land," he says, explaining that evolution--unlike space colonization--was a gradual process. "You could hop back in if it wasn't so nice, but it's pretty much a quantum leap to go to another planet to which we are not adapted."

For Musk, putting his Internet fortune where his convictions lie is just the first step. Now he'll have to prove that populating the future with fast electric sports cars, energy from the sun and rocket ships aimed at the stars is a goal he can reach.

Kambiz Foroohar is a senior writer at Bloomberg News in New York. kforoohar@bloomberg.net

May/02/2008 18:33 GMT

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