We’re gonna change things up for this series. Looking at Electric Vehicle adoption, and reminiscing the times in 2018/19 where everyone was bearish TSLA stock:
“NOT ENOUGH CASH ON BALANCE SHEET”
“INVENTORY ACCOUNTING GIMMICKS”
“BANKRUPT SOON”
“SCAM”
It was more than enough to develop a “short TSLA”. The most prominent being the tag $TSLAQ on Twitter. If you search for it you’ll see endless takes and analysis (some super-detailed) on why $TSLA stock is a zero. These people still exist today.
And they couldn’t be more wrong. Though back then they may have had a point, the initial Electric Vehicle ponzi was kept up long enough for it to reach escape velocity and become self-sustaining.
In this post we get into “ponzis,” how they begin, and what it takes to reach escape velocity. The next part we’ll go through a great example of the concept of a ponzi “achieving escape velocity” using Electric Vehicles.
Ponzis
Here’s the definition according to Encyclopedia Britannica:
First off, we can’t use this definition to describe something like Tesla. Tesla wasn’t a fraudulent or illegal investment operation (some will argue it was). And it certainly didn’t promise a good return on your investment for little or no risk. The risks were understood, as they are with a lot of other “ponzis” we see today.
Whether its EV SPACs, Decentralized Finance Protocols, Hydrogen stocks, Metaverse projects etc., if there existed a chart showing the number of potentially new, disruptive projects launched overtime.. It would be near all-time highs today.
“So why are these kinds of projects/companies being called ponzis?”
TLDR: These are being called ponzis because of the constant stream of subsides they are receiving for only communicating a vision. No sustaining business has even been built yet.
Imagine: We are in 2010-2016. Someone comes up to you/media whatever with an idea to do something game-changing, and nothing else. Just a vision. Would have you allocated that person anything close to a meaningful portion of your portfolio? Highly unlikely. Institutions wouldn’t have taken this risk either.
Some of you might say “hell yea I would’ve taken that risk!” But we forget how different things were back then. Life was *relatively* simple, easy, nothing needed drastic transformations, life was good.
But everything has changed since then. Money supply up 40%+, the income and wealth disparity getting severe, tech innovation curve pulled forward by 5+ years, inflation flattening the working class, increasingly ignorant/incompetent leaders etc... Only today can we more clearly see the potential and need for life-changing innovation. Back then things were fine, we didn’t need things to change. Now we do. A vision for a better future is what we need and it’s what we’re willing to take bigger risks to invest in, including institutions. No detailed business plans necessary anymore, just hope.
“How are these business different from any other business looking to raise capital?”
TLDR: The main difference between these “ponzis” and a mature company is the risk involved in investing in these projects given they are based on visions rather than forecastable/real-world values. They are either worth 0 or billions. Forgotten or a part of the future.
Normally investors require a detailed business plan to be able to forecast potential cash flows and determine a reasonable range of valuation for the company. These new-age companies are offering much less in terms of details as they attempt to build a foundation of certainty for the future in an uncertain present.
Valuations range from $0 to $ billions.
Either it becomes the future or it doesn’t.
There is no in-between.
The majority of the business plan is centered around the potential for raising ongoing streams of capital until the vision is realized or until it becomes apparent the vision will never be realized. That’s why these new-age companies are being called ponzis, they are reliant on external sources of continuous funding. Investments in the vision either goes to 0, or the ponzi achieves escape velocity.
“What does a ‘ponzi achieving escape velocity’ look like?”
TLDR: No more subsidies or other sources of (artificial) funding is needed to keep the project going. The project can stand on its own through organic demand.
There are very few examples of these new-age companies achieving escape velocity, for at least a portion of, if not the entire, business is still being subsidized. We could look at an established company/protocol that was once a ponzi, such as Apple (just a silly digital screen), Amazon (just a book store), Ethereum (just a computer coin). These are now all at the point where investors, especially early ones are being rewarded handsomely for their early participation and faith in the vision of the company. They are now being paid out in terms of price appreciation, dividends, buybacks, token burns etc. What was once a ponzi has now reached escape velocity.
This is the meaning behind “everything is a ponzi.” They have all gone through the perpetual funding cycle at some point. Some make it out alive while many do not. Today, the emergence of many of these innovative companies and protocols has given rise to this concept once again.
Some would say we shouldn’t be calling these companies ponzis at all - the process is simply capitalism at work. Returns will reflect the risk taken by investing in a “vision-only” project just as returns in a project with a sound business plan will reflect the investment risk taken. But we refer to these “vision-only, new-age” projects as ponzis given their seemingly binary nature of being worth either $0 or billions.
In the next part we’re going to expand on this concept, going through one of the best examples of a project that began as a ponzi (vision-only) but after several years of ongoing streams of funding has finally reached escape velocity and can sustain operations with very little external help.
It’s not one you are familiar with but it displays this concept of a “successful ponzi" very well. Due to the immense success of China’s Ten Cities, Thousand Vehicles program, many other nations are mimicking the concept in hopes of achieving a successful ponzi as well.