How Elon Musk combines entrepreneurial energy with an investor’s mindset

Starting a business can be intense. Building something from nothing requires speed, creativity and courage. That’s why entrepreneurial passion and the ability to get things done are critical.?

But that’s not enough.?

The most successful entrepreneurs know that to build a company that thrives they need to add a layer of cold, hard financial logic to their fiery entrepreneurial spirit.

The entrepreneur-investor hybrid

Picture a Venn diagram where the energy of an entrepreneur overlaps with the sharp, analytical mind of an investor. That sweet spot is where the magic happens.

Great entrepreneurs are big picture thinkers, risk-takers who see a future that doesn't yet exist. Investors, on the other hand, are the realists, the number crunchers, the ones who demand a return for every dollar risked.

The most successful entrepreneurs combine these two mindsets, creating a powerful combination:

• The entrepreneur dreams big, spots opportunities, and charges forward with relentless determination.
• The investor assesses risk, scrutinizes financial metrics, and ensures every resource is allocated for maximum ROI.

The building blocks: unit economics and corporate value

Successful entrepreneurs understand that the foundation of a thriving business lies in its unit economics. This means dissecting the financial building blocks of your company: the price at which you can sell your product or service and the costs incurred to deliver it.

This granular understanding is not just about number-crunching; it's about gaining a clear picture of your company's fundamental profitability. By analyzing the relationship between revenue and costs on a per-unit basis, you can:

• Identify profit drivers: pinpoint which products, services, or customer segments are most profitable, allowing you to double down on what works.
• Optimize pricing: determine the optimal price point that maximizes profit without sacrificing demand.
• Control costs: uncover hidden expenses and inefficiencies that are eating into your margins.
• Forecast growth: project future revenue and profitability based on your unit economics.

Elon Musk: the visionary investor

Elon Musk isn't just a brilliant entrepreneur, he's also a master investor. He starts with a grand vision of the future, then breaks it down into market size, potential sales volume, pricing, costs and finally an idea of how much the business could be worth in the future if growth targets are achieved.

This approach allows him to:

• Set big goals: Musk's vision inspires his team and attracts investors.
• Focus on execution: he breaks down those goals into actionable steps.
• Communicate value: his financial projections justify the investments he makes.

A couple of weeks ago at Tesla’s annual shareholder meeting, Musk provided an example of how he thinks about value creation. This was related to Tesla’s robot business, which is still in development:

“I’m confident that the ratio of humanoid robots to humans will be greater than one to one. So there’ll be more than 10 billion humanoid robots in the world, probably 20 or more, and Tesla’s gonna be by far the leader in that.”

“I think the build rate will be probably something ultimately, like a billion a year humanoid robots.”

“And if Tesla just has a 10 percent share of that, and it might be a lot more than 10 percent, and we make like 100 million Optimus units a year. I mean, for reference, the auto industry is roughly 100 million vehicles per year. So that sort of similar ballpark at least within an order of magnitude.”

“And I think we could make one for a cost of maybe, at a really high scale, of about $10,000. It’d be less expensive than a car. And I think if you sell it for $20,000, Tesla would basically make about a trillion dollars of profit a year from that.”

“If the price earnings multiple is 20, or 25, something like that, that would mean a $20 trillion market cap from Optimus alone, and probably 5 to 10 from autonomous vehicles. So like I think it’s actually conceivable, it’s within the realm of possibility for Tesla to achieve a valuation 10 times that of the most valuable company today.”

Breaking down what he sees

Muks is summarizing:

• The size of the end market
• His company’s market share, which gives a sense of annual sales volume
• Price and profit margins at the unit level?
• Revenue and profit at the company level
• A valuation multiple on those potential profits

This is something that every entrepreneur can do with any product and market. It doesn’t need to be perfect, it just needs to be directionally correct. Notice that Musk didn’t pull up a massive spreadsheet with 30 different products and markets, each with a specific margin carried to the third decimal. That’s not necessary. Rough numbers grounded in reality are what you need.???

Those numbers provide an idea of the value that could be created and therefore they guide how much can be invested.?

One dollar of profit is great if it requires a three-dollar investment to get it - that’s a 33% ROIC. It is a lot less attractive if it demands a $20 investment, which translates into a? 5% ROIC. Again, you don’t need complicated analysis, just big picture numbers that are based on good logic and reality.?

In summary

Combining the entrepreneurial impulse with the investor’s rational approach can be an explosive combination. And it can be as simple as:

1. Tracking ROI: measure the return on every single investment in the business.
2. Obsess over unit economics: understand the financial profile of the most meaningful units of the business (units of a given product, customer segment, geography, etc).
3. Set financial goals: don't just dream big, set concrete financial targets.
4. Communicate: explain the business model and projections in a language investors and employees understand.
5. Embrace financial discipline: make decisions based on data in addition to gut feeling.

By adopting an investor's mindset, successful entrepreneurs sharpen their focus on profitability and long-term value creation. It's not just about creating products and services that you can be proud of, it's also about building a business that lasts.