In 1884, a 28 year old Serbian-born inventor named Nikola Tesla immigrated to America. As he passed through Ellis Island, Tesla’s entire worldly possessions consisted of a book of poetry, a letter of recommendation to Thomas Edison and exactly four cents.
Collaboration of Edison & Tesla was only for a short time, but their partnership eventually soured because Edison didn’t pay Tesla the $60,000 bonus he promised for improving his inventions.
TESLA TOPICS: Rivalry & Royalties, L1 Contract, AC vs DC, Tesla Cashes in, War of Currents, Westinghouse & Tesla both lose, L2 give now, get later, Fading & Down-Hill Journey, L3 Management, Legacy, L4 Consequences, Loser & Winner, Quotes.
Rivalry & Royalties.
Over the next decade, their heated rivalry set off an electrical revolution that drastically changed the lives of every human being on earth. Tesla’s electrical innovations blew Edison out of the water and are still the standard today – more than 100 years later. Tesla’s 300 different patents brought him fame & incredible fortune in his lifetime. At one point, the royalty payments on his Alternating Current [AC] patents were worth hundreds of $M’s. By most estimates, Tesla’s royalties were so valuable that he easily should have become the world’s first $B and the richest person on the planet, by a long shot. But none of that happened. Unfortunately, not only did Tesla burn through his entire personal fortune on failed projects, he also threw away his most lucrative patent and subsequently his chance to become a $B. When Tesla died in 1943, he was bankrupt, alone and teetering on the verge of insanity. How on earth did that happen?
No $50,000 Bonus. When Tesla came to America, he immediately landed a job at Edison’s General Electric. The job came with a weekly salary of $18 which is equal to $440 in 2013 dollars. Edison also offered a $50,000 bonus ($1M in today’s dollars) if he could redesign and significantly improve the current, Direct Current, electrical motor system. Tesla triumphantly accomplished that feat within just two months but Edison refused to pay him the $50,000, claiming the bonus was just a joke. Edison explained “Tesla, you don’t understand our American humor” and instead offered him a $10 a week raise. Tesla refused the raise and quit that very same day. Lesson 1: when someone makes a significant promise, draw up a Contract.
Alternating vs Direct Current.
His next endeavor was the Tesla Electric Light & Mfg, but that soon failed and he found himself forced to dig ditches in the street to earn money. Prior to 1880, no home on earth had electricity. In 1879, Edison demonstrated his incandescent light in Menlo Park, NJ, and soon after founded his company Edison General Electric. Edison was a pioneer of . . .
Direct Current (DC) electricity. Direct Current is a simple system but also comes with some extreme limitations. Since nothing else existed at the time, DC became the standard system around the world. In the United States, Edison Electric made a fortune building hundreds of DC power sources all over the country. As the country became addicted to electricity, Edison personally earned a $M’s in fortune off his Direct Current patent royalties.
Alternating Current (AC) In 1887, Tesla’s Electric Company was founded. Within a few months, Tesla built & patented – what would become his most significant invention of all, the Brushless AC Motor. This new motor quickly proved to be vastly superior to the standard DC system. The three phase AC Induction motor was by far the most efficient way to convert electricity to mechanical power. Not only could AC produce significantly higher voltages, it could transmit that electrical power exponentially longer distances, at a cost that was 1000 times cheaper than DC. Another major drawback of DC was that each power source could only provide electricity for 10-15 homes at any given time, and each home needed to be within 2 miles of the power source. On the other hand, a single Tesla AC power source could transport electricity hundreds of miles and provide electricity to tens of thousands of homes simultaneously.
Tesla Cashes in.
After word spread of AC’s superior capabilities, Tesla was approached by the Westinghouse Electric and offered a generous deal to license his technology. In 1888 Tesla met with company founder/ president George Westinghouse and agreed to license his patents for the sum of $60,000 (worth $1.4M today), plus 150 shares of stock and a $2.50 Royalty per horsepower generated by his AC motor. Tesla was also given a $2000 a month salary to work for Westinghouse, (the equivalent of $48,000/mo today But Tesla’s real windfall didn’t come from stock, salary or bonuses, it came from those Royalties. As AC power slowly became more widely adopted across the country, Westinghouse happily paid Tesla $100K’s in Royalties each year. By 1890, just one year before his 35th birthday, Tesla had become a full fledged $M. To give some perspective, $1M in 1890 would be worth about $25M today.
War of Currents (not the Fruit)
Not surprisingly, Edison was not happy to see his Direct Current “cash cow” threatened into obscurity. Edison quickly launched a PR campaign that spread “lies” about the lethal dangers of AC power. Their smear campaign often involved Edison conducting public “electro-cutions” of stray cats & dogs in order to convince the American people that AC power was totally unsafe. He even publicly electrocuted an Elephant in front of a large crowd on NY’s Coney Island. Ironically, these morbid public displays actually led Edison to invent and patent the Electric Chair. Edison’s electric chair was christened in 1890 on a condemned man at Auburn Prison in NY. In response to these false accusations and lies, Tesla went on a PR tour of his own where he would amaze crowds by passing one million volts of AC electricity through his body to prove that the only true downside of Alternating Current was only a bad hair day. LoL Unfortunately, the War of Currents took a big Financial toll on Westinghouse. Edison could weather the storm because he was backed by the millionaire financier J.P. Morgan.
Westinghouse & Tesla both lose.
By 1907, after nearly 20 years of fighting with Edison, Westinghouse was more than $10 million in debt and teetering on the verge of Bankruptcy. Out of desperation, George Westinghouse approached Tesla with a proposition. Westinghouse begged Tesla to lower or temporarily rescind his royalty in order to allow the company to survive. Westinghouse further explained that if the company went bankrupt, Tesla would be faced with the nearly impossible task of retrieving his royalties from a stingy Bank creditor. To Westinghouse’s amazement, Tesla tore up the original Contract on the spot. Tesla was grateful to Westinghouse for believing in him when no one else would. By tearing up the contract and relinquishing his royalties, Tesla single-handedly saved the Westinghouse Electric. In return, Westinghouse paid Tesla a $216K lump sum for the right to use his AC patents in perpetuity (worth roughly $5.4M today).
Throwing Away A Billion Dollar Fortune
In retrospect, Tesla may have been a brilliant Inventor but he was a terrible Entrepreneur. In 1907, when he tore up the contract, bankers estimated the value of his patents to be $12M. Shockingly, $12M (= $300M today).
Lesson 2: Give it up now, for later Rewards.
Obviously, the smarter move would have been for Tesla to offer a 5 year (or more) hold from the Royalty payment to allow Westinghouse to get back on its feet and destroy Edison. Over the next decade, AC wiped out DC Current and became the standard Electrical system across the world. Had Tesla held onto his royalty over this time, he easily would have become one of the wealthiest people on the planet. Even by conservative estimates, he should have become the richest person on the planet and the first person with a $1B net worth. Had he not emotionally ripped up that contract, today those same AC motor royalties would generate billions of dollars every year for Tesla’s relatives.
Fading & Down-Hill.
Unfortunately, Tesla’s luck and sanity deteriorated over the next 30 years. He was involved in a handful of very expensive and very public failed Electrical projects between 1920 & 1935. When Tesla died in 1943 at the age of 87, he was Bankrupt and living alone in a New York hotel surrounded by pigeons. His hotel room and meals were paid for by George Westinghouse, who remained one of Tesla’s loyal friends to the end.
Lesson 3: Since he was so poor at management, he should have got a Partner or Manager to help him with this aspect of his businesses.
In recent years Tesla’s legacy lives on through some of today’s brightest most famous Entrepreneurs. Google founders Larry Page and Sergey Brin are said to be huge admirers of Tesla and his achievements. Page was inspired to become an engineer after reading a Tesla biography at the age of 12. When Paypal $B Elon Musk founded his new electric car company, he chose the name “Tesla Motors” – which is now #1 Car in the World. The Serbian city of Belgrade is home to the Nikola Tesla Airport. Tesla also appears on the Serbian dollar bill.
Tesla’s Electric Cars
#1 in the World
Lesson 4: consider the Consequences of your actions.
a) Loser. Fate would eventually bite back at Thomas Edison. His company Edison General Electric wracked up its own mountain of debt during the War of Currents. J.P. Morgan used the debt to gain full control of the company away from Edison then merged Edison General Electric with Houston Electric Company of Mass. Edison’s name and responsibilities were removed from the newly formed company “General Electric”. As you may know, GE is still a thriving company today that owns thousands of businesses and has a market cap of $244B.
b) Winner. George Westinghouse’s company would go on to thrive for decades and even purchased TV network CBS in 1995. Westinghouse & CBS were purchased by Viacom in 1999 for $44B
Nikola Tesla’s Quotes:
“The progressive development of man is vitally dependent on invention. It is the most important product of his creative brain.”
“When natural inclination develops into a pass-ionate desire, U advance to your goal rapidly.”
“I don’t care that they stole my idea. I care that they don’t have any ideas of their own.”
“Science is but a perversion of itself, unless it has its ultimate goal betterment of humanity.”
“I could only achieve success in my life through self-discipline, and I applied it until my wish and my will became one.
Comments: Do you see any other Lessons?
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