SOURCE: The Wall Street Journal
Paul Elio isn’t a billionaire like Elon Musk.
In fact, at one point the budding auto entrepreneur was in such need of cash that he had to take a job roofing houses in Arizona just to pay the bills.
Now, five years later, the man behind Phoenix-based startup Elio Motors believes he is just months away from beginning production on a new three-wheel car at a former General Motors Co. assembly plant located just outside Shreveport, La.
The vehicle, which has two seats arranged front to back and one door, promises to deliver 84 miles to the gallon and cost about $6,800. It will be sold directly to consumers through company-owned stores instead of through dealers, which is similar to how Mr. Musk’s Tesla Motors Inc. does business.
Whether Mr. Elio starts production in the first half of 2016 as planned, however, depends on whether he can raise an additional $230 million in capital, which he is hoping to do through a combination of outside investment and a loan from the federal government. He already had $70 million in funding, thanks in part to an angel investor and deposits from people seeking to reserve one of his vehicles. Once production starts, his goal is to churn out 250,000 cars annually.
“It’s a lot of vehicles right?” Mr. Elio says. “But I believe we can sell to people in the new-car market, used-car market, those who drive clunkers and those who just want it, too.… The Elio is personal transportation, and people are going to want one even though they own other cars.”
The idea of a three-wheeler roaming the nation’s roads in any large quantity has already garnered a long list of skeptics, some of whom point out that traditional four-wheel small cars such as Daimler AG’s Smartcar and the Fiat 500 have failed to stir strong interest.
“There has always been a dream by entrepreneurs to do a cheap car for the masses,” says Matt DeLorenzo, managing editor for auto-tracking firm Kelley Blue Book. “But the complexity of cars makes it a pipe dream.”
Although he has already had to push back the production date once, there is no denying the 51-year-old Mr. Elio has come a long way since his days as a roofer—and he has done it without venture capital or personal wealth.
“Our capital markets just aren’t set up to fund a new car company,” Mr. Elio says, adding that when he showed venture capitalists that he needed to spend as much as $300 million before producing any revenue, “their heads would pop off.”
Saved by an angel
Mr. Elio’s dream began in 2008 when he was working as an automotive engineer. Using revenue from his engineering firm, ESG Engineering, he founded Elio Motors and set to work on the design of the three-wheel car. But when ESG’s revenue disappeared during the recession, he struggled for almost three years to find funding for his project.
“All my assets were gone. I had hundreds of résumés out for everything from high-end jobs down to Starbucks.… It took me working as a roofer before I was ultimately led to the support of Stuart Lichter.”
Mr. Lichter is the billionaire real-estate developer and founder of Industrial Realty Group LLC. Mr. Elio crossed paths with Mr. Lichter in 2012 while looking around for a future production site. Mr. Lichter, who was involved in acquiring some of the assets spun off from GM during its bankruptcy, including the plant in Louisiana, talked to Mr. Elio about his project and was sold. He has invested $20 million in debt and equity so far.
“What is amazing to me is the number of nonrefundable reservations Paul has received, and the car isn’t even in production,” Mr. Lichter says.
The two-tier reservation system Mr. Elio set up in January 2013 allows potential Elio buyers to pay an amount ranging from $100 to $1,000 to secure a spot on a vehicle waiting list. They can make a refundable or nonrefundable deposit; those making nonrefundable deposits get a priority spot in line. Mr. Elio says the company has collected more than 41,000 reservations so far—most of them nonrefundable—locking in more than $280 million in product orders and $17 million in capital. It “is really a crowdfunding program,” he says.
Betting on a loan
For his next cash infusion, Mr. Elio is turning to a provision in the 2012 federal JOBS Act, known as Rule 506(c), that allows a startup to offer accredited investors the chance to buy into the company with a minimum investment of $15,000. Accredited investors are those with $1 million in assets or income of at least $200,000 in each of the prior two years for an individual ($300,000 for a family).
“Before [the rule change] if people asked if you are raising money for your company you had to say no because you couldn’t publicly disclose your private placements,” Mr. Elio says. “Being able to publicly disclose the fundraise is a huge deal for us. It democratizes it.”
He aims to raise $30 million through the strategy, he says.
Meanwhile, Mr. Elio also is seeking an Energy Department Advanced Technology Vehicles Manufacturing loan, which could amount to about $185 million. The program is designed to support the development of clean energy or more fuel-efficient technologies. Late last year, Elio’s application moved into the second phase of the three-phase approval process, Mr. Elio says.
Kelley Blue Book’s Mr. DeLorenzo applauds Mr. Elio’s progress, saying “there is capital out there for people who have dreams.” But in terms of revolutionizing travel, he isn’t sold.
Mr. Bennett is a reporter for The Wall Street Journal in Detroit. Email him at [email protected]