Electric-car maker Tesla is worth more than Ford, GM or Fiat Chrysler, despite booking only a fraction of Big Auto’s sales and losing boatloads of money. Philipp Stauffer, co-founder and managing director of FYRFLY Venture Partners, who is an investor in Tesla, argues in this opinion piece that the company still is significantly undervalued. He sees Tesla’s market cap rising to 10 times the current level in a decade. Stauffer considers Musk one of those rare entrepreneurs who boldly move mountains to accomplish a grand vision for the good of society. He compares Musk to Alfred Escher, who transformed Switzerland from a backwater country to a model of modern development today.
In June, I read Silicon Valley entrepreneur Steve Blank’s arguments about why Tesla is worth $60 billion despite losing $700 million in 2016. It felt like déjà vu. For five years, I have tried to explain to value investors why Tesla is undervalued, not overhyped. (I am an investor in Tesla.)
Tesla’s market value of $60 billion is conservative, in my view. I believe that Tesla will grow to 10 times its market cap within 10 years — or go bust and be worth nothing. I give the “10x” scenario a 90% probability and the belly-up scenario a 10% chance. I base that argument on the remarkable achievements of Alfred Escher, a 19th century entrepreneur known as the father of modern Switzerland.
If you are a traditional investor pitting Tesla against Volkswagen, Toyota, General Motors, or other conventional automaker ‘rivals,’ you misunderstand the company. We underestimate entrepreneurs like Elon Musk, Tesla’s founder and CEO, because we don’t have any good comparisons in this lifetime. Tesla is not a typical firm, and Musk is not a typical entrepreneur. He is more of a value-chain architect, and so was Escher.
If you want to understand why Tesla is on track for 10x in 10 years, Escher is the best comparison. And if you want to understand why I give Musk a 10% chance of failing, Escher is also the best comparison — more so than other business titans such as Andrew Carnegie, J.P. Morgan or John D. Rockefeller.
A Swiss Legend
I moved from Switzerland to Silicon Valley in 2001 to follow my passion for innovation and entrepreneurship and to build a bridge between these entrepreneurial communities. Last winter, my father, who has been a small business owner in Switzerland for most of his life, visited me in the Bay Area. One evening over a game of chess, he asked me, “What is early-stage investing?”
“I believe that Tesla will grow to 10 times its market cap within 10 years — or go bust and be worth nothing.”
Sparing him a detailed explanation, I said that we look for entrepreneurs who are building companies that have the potential to transform industries, cultures, and societies. We identify them early so that we can invest small amounts of capital for a potentially massive impact and return.
“Ah, I get it,” said my father. “You’re looking for the next Alfred Escher.” My father summed up his opinion with a name that few Americans know. Indeed, I have been searching for other Alfred Eschers and found Musk — but it was way too late for me to become an early-stage investor.
Value Chain Entrepreneurs
Scientists who study natural disasters categorize floods by their probability of happening over a given timespan. A 100-year flood, for example, is a flood that has a 1% probability of occurring in any given year. I use a similar system for entrepreneurs. Musk and Escher are 100-year entrepreneurs. More specifically, they are what I call Value Chain Entrepreneurs. Four attributes distinguish Value Chain Entrepreneurs from other types.
- First, their “problem statement” addresses a dizzyingly complex issue that seems unsolvable to others but that they deem must be solved. Not solving the problem will have severe and unpredictable consequences.
- Second, no single company, project or category can solve the problem. Rather, the solution requires the introduction of a new or significantly changed value chain — a new series of activities (usually performed by firms) that add value to society.
- Third, the Value Chain Entrepreneur often operates multiple companies in parallel to construct that value chain. Of course, this produces voids and vacuums that the entrepreneur cannot address alone.
- Fourth, the Value Chain Entrepreneur always threatens powerful incumbents. Thus, he or she must influence policy to achieve acceptance and regulatory support for the new value chain. So they become active in politics out of necessity to change the social contract that sustains the incumbent value chain.
Value chain creation and therefore disruption looks chaotic because it creates a wild-west environment of sorts. The 19th century oil craze, for example, created a semi-lawless industry depicted brilliantly in the movie “There Will Be Blood.” The chaos resulted in one man, John D. Rockefeller (1839-1937), controlling 90% of the U.S. oil market at one point.
But then the U.S. Supreme Court found his company, Standard Oil, guilty of violating antitrust laws. The consequent breakup and regulation created all the precursor firms to today’s giants (ExxonMobil, Conoco, Chevron and others). The hydrocarbon value chain went on to shape a century of international politics, economic development, and material culture. Many products trace some part of their value chain to hydrocarbons.
Now, Musk is ready to demolish hydrocarbons with a sustainable energy value chain, which sounds impossible in a world still running on that fossilized organic matter. But again, Value Chain Entrepreneurs try to solve problems that almost nobody else dares to touch. Not solving the problem is not an option, however, because they see failure as an existential threat — to the world in Musk’s case and a nation in Escher’s.
Switzerland’s Existential Problem
Escher was a hybrid entrepreneur with elements of 19th century German statesman Otto von Bismarck and John D. Rockefeller combined — a politician in the realpolitik tradition who also built a business empire. Despite Escher’s status as a Swiss national hero, historians have written little about him, especially in English. Most of the details about Escher’s life come from Joseph Jung’s book, Switzerland’s Success Story: The Life and Work of Alfred Escher (1819 – 1882).
In the first half of the 19th century, Switzerland had few of what Harvard professor Michael Porter calls “competitive advantage of nations.” Landlocked in Europe, Switzerland is the origin of four major river valleys: the Rhône, Rhine, Aare, and Thur. The Alps historically made Switzerland difficult to invade or cross. The combination of mountains and rivers earned Switzerland the nickname “Water castle of Europe.” But the geography divided the territory into German-, French-, and Italian-speaking enclaves, which, as nation builders will tell you, isn’t ideal for national unity. Although the Swiss Confederation dates to 1291, Switzerland in the 19th century was still a young, direct-election democracy plagued by internal conflicts.
Escher was born in 1819 to an outcast aristocratic family in Zurich. France, under Napoleon Bonaparte, had just failed in its latest attempt to conquer Eurasia (1815), and the continent was recovering. Switzerland, despite some progress in manufacturing and a worldwide reputation for watchmaking, was a laggard in the industrial economy. More than half of the national workforce