Journal of Corporate Renewal

Nov/Dec 2015

In his recent book on Tesla founder and CEO Elon Musk, Ashlee Vance describes Timothy Watkins of Valor Equity Partners, an early investor in the electric car company, as an eccentric Brit who helped Musk and his team understand the real cost of a Tesla Roadster and how to bring that down to an acceptable level.

True to his eccentric description, Watkins sported a ponytail, leather jacket, and a black leather pouch (which was never more than 12 feet from him during his visit) when he arrived to meet with CTPs and CTAs at FGMK in Chicago recently.

Watkins, head of operations for Valor, provided an overvwiew of the investments that the Chicago-based private equity fund targets—typically situations with high growth potential in which more than just capital is required to scale the business. For example, an ideal target company might have high growth prospects but a management team that wants to maintain its focus on products while Valor’s project managers and engineers assist in optimizing the supply chain and sales processes based on critical market needs.

Valor assisted in redesigning the supply chain for Tesla’s complex battery packs, which were sourced from low-cost labor in Asia. The battery packs were shipped to Tesla’s European partner, Lotus, which assembled the vehicles in the UK before shipping them to the United States. When the cost to capitalize this supply chain at production volume was calculated, those involved quickly realized that it had to be simplified.

While Musk had the courage to commit to a U.S. factory for building battery packs, some competitors stayed with complex international supply chains.

“It is, in my opinion, one of the reasons why Fisker failed,” Watkins said, referring to Fisker Automotive, which produced a plug-in hybrid electric vehicle and continued to operate with an Asian and Finnish supply chain until it was forced to close its doors in 2013.

Watkins vividly remembers Valor’s first visit to the Tesla facility. “We just had so much fun in the car. We knew right there that we had to make an investment,” he said.

As the first institutional investor in Tesla, Valor would play a key role in not only guiding the Tesla team to reduce the material cost of the Tesla Roadster from $120,000 to $85,000, but also to build what they called a “sales machine.” “It is all about understanding the sales event,” Watkins explained, “and for the Roadster, it was the test drive. The more test drives you can perform, the more Teslas you will sell—that simple.” What sets Musk apart, Watkins said, is that “he has a special way to line up all the human vectors in one direction.” Also, Musk has tremendous insight into what is really worth fighting for in a product. When Tesla faced a failed two-speed gearbox design in the Roadster that reduced the car’s 0-60 mph acceleration from sub 4.0 seconds to 4. 3 seconds, Musk took another year to complete a full redesign to bring the car back to sub 4.0-second 0-60 mph performance.

Not all of Valor’s investments are as high-profile as the Tesla success story.

By applying lean supply chain principles to its investment in Little Caesars pizza franchises, Valor performed an equally impressive turnaround. “We just didn’t know how often the product was not ready for customers,” Watkins said. Once actual point-of-sales data was used to establish 15-minute supply chain replenishment triggers, the market's positive reaction convinced the team that it was on the right track.

“We have learned not to primarily seek control,” Watkins explained. “Control is, many times, illusionary. What is more important is to take the time to reach consensus with the company on where you need to go.” It is rare to find an investor so determined to bring more than money to the table, from trying to bring a manufacturing system online at a small French subcontractor during the August holidays—which Watkins described as “more psycho warfare than engineering”—to applying lean techniques to the SolarCity installation process to understanding data collection in India for Valor’s investment in Premise. Valor Equity Partners shows that it is possible and profitable for an equity investor to actively work with its investment teams for win-win outcomes.