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Unfortunately, Rogers’s third set of printouts dealt with matters much less grand, though still of great import to LM. One of the company’s key engineers had sent a series of e-mails informing Rogers of his intention to take up to a month away from work to undergo surgery. Because Rogers knew the engineer’s absence would make it impossible to roll out LM’s first model, “The Rally Fighter,” on time, he had been pleading with him to delay the surgery. “I don’t know if Local Motors will be here in a few months to pay for my coverage,” replied the engineer.

Indeed, LM’s cash would be running short in a few months and follow-on fundraising efforts were taking more and more of Roger’s time; he was considering pursuing very nontraditional resources for financing. Additional funds were needed soon to build the company’s first microfactories and execute the marketing plan. Even as film crews set up the lights for that night’s high-profile broadcast, Rogers wondered how long he could keep the lights on at Local Motors.

Building a Company

Profile of the Founder

A graduate of Princeton University’s Woodrow Wilson School of International Affairs, John (“Jay”) Burton Rogers cut his entrepreneurial teeth helping his father build a biomedical testing business in China during the mid-1990s. (His family tree included another prominent entrepreneur as well; Rogers’s grandfather, Ralph Rogers, ran the Indian Motorcycle Company in the 1940s.) Later, he became an analyst at an investment bank, eventually moving on to work in private equity and venture capital. In 1999, with an offer of admission to Stanford’s Graduate School of Business in hand, he decided he wanted to pursue an officer position in the United States Marine Corps. When Stanford denied his request to defer admission, he joined the Marine Corps anyway.

Approaching his fifth year in the Marines, Rogers began to think about contributions he would like to make in civilian life. He had been following a series of articles in the financial press about the huge losses being posted by the U.S. car industry. He recalled:

You learn in the Marines to “be humble, but think big.” I had loved cars deep in my heart since I was a kid. I had the background in entrepreneurship. That and my work in finance would mean I would be able to raise money. And I had led a lot of people; as a company commander, I was in charge of 300 Marines. I thought, “Who better to make a difference in the car industry?”

During his tour of duty in the Middle East, Rogers became convinced that America’s approach to transportation ultimately threatened its long-term security. “Basically, I saw the roots of the major conflicts coming down to oil. And our dependence on oil was totally driven by our choices with vehicles. We had to change our approach to cars to improve our security,” stated Rogers. He began to refine his thoughts about lighter, more fuel-efficient cars—as well as a totally different kind of automotive operation to build them.

Local Roots

Rogers entered Harvard Business School in the fall of 2005. From day one, he was focused on taking classes and pursuing other activities that would help him further develop his ideas about opportunities in the auto industry. During the summer between his first and second years, he worked for McKinsey & Co.’s automotive practice.

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In the second year, Rogers and a classmate with significant experience in the car industry won a $20,000 grant from the school’s Social Enterprise Initiative, which was targeted toward students who wanted to launch socially responsible businesses. “We said, ‘Look, we can make a huge impact; we can reinvent the automotive industry’,” said Rogers.

Rogers and his partner visited a number of auto companies to interview executives; those companies ranged from industry stalwarts such as Ford to niche players like the profitable kit-car maker Factory Five and tech-oriented start-ups like Tesla. “Basically, we found all of them were very willing to talk with an HBS team,” he recalled. “The thing I saw missing is that except for one company, none of them really knew who the customers were going to be for their new cars. They were just making extraordinarily expensive guesses.” The company that Rogers felt knew its customers best was Factory Five, based in Wareham, Massachusetts. “They had basically stumbled onto their model because they started their company with essentially no money, only $75,000,” he said. “The key was community. They didn’t mean to create one, but they did.” Rogers was blown away that at any time of the day, 700–1000 people were actively participating in the online forum that Factory Five had developed; this represented participation among Factory Five customers and potential customers that far outstripped the rates of other popular communities created by major players like Ford and Volkswagen. “They were both customers and future customers. They would talk about both the most banal and the most exciting things, including products they wanted to buy for their cars and ways they wanted to adapt them,” remembered Rogers. “We knew we wanted community as a part of our plan, but we didn’t know the extent to which it could shape our business.”

Rogers and his partner continued to develop their business plan with the intention of seeking funding after their graduation. As Boston’s dreary winter gave way to a dreary spring, the partners needed to finalize their plans. Rogers remembered:

My co-founder showed up at my door the night before I had to decide whether I would go work for McKinsey, work for a private equity firm, or go start Local Motors. We both sat down and committed to each other we were going to launch this company. Then he showed up at my door at 9:30 the next morning, grim-faced and worn out from a sleepless night, and said “My wife and I are just not sure we can make this kind of commitment.”

Soon after he was left by his partner to go it alone, Rogers phoned Mark Smith, the founder of Factory Five, to give him an update on both the auto-industry research project and his career situation. Smith hopped on his motorcycle and traveled up to Boston to meet with Rogers. At lunch, Smith asked Rogers what he could do to help get the embryonic business off the ground. Rogers’s answer: “Investment.” Smith offered to invest in the venture and provide office and garage space next to Factory Five’s manufacturing facility. He also promised access to engineering and design talent. Additionally, Smith would provide relevant operational and manufacturing information and contribute the time, advice, and credibility of Factory Five’s senior management team. Three weeks later, Rogers and Smith agreed to value Factory Five’s contribution at $1 million and Rogers’s enterprise value at $3 million, giving Factory Five a 25% post-investment ownership stake in the new venture.

Several months after the initial investment, Rogers traveled to New York to meet with another interested investor. Before Smith’s investment, this investor had proposed to take upwards of 60% of LM for a $1 million infusion. When Rogers turned down that offer, the investor agreed to contribute later at a higher valuation if Rogers could obtain a “better deal” for a similarly sized tranche. Given

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Factory Five’s participation and the early performance of LM, the New York investor led a Series A round of investment, which valued the company at almost $9 million.

Refining the Concept

With financial backing ensured and a future office space and garage waiting for him near Cape Cod, Rogers worked to refine his business plan, mining more insights from automotive experts and authorities on growing start-ups. He had always held an undefined view that he would mobilize some sort of “community” to design and market cars. Rogers remarked that Joe Lassiter, a professor at HBS, “suggested that we weren’t the ones who were going to have to convince our customers to buy our product, the customers were going to have to convince the customers to buy our product.” Lassiter urged Rogers to have modest ambitions about the numbers within the core community, but to make sure that they were the kind of people who could “design the product for you.”

Further consultations with Factory Five’s Smith continued to refine Rogers’s planning, clarifying what it meant to have customers help the company build a car. Smith wanted the customers to actually build the car. Rogers commented, “I was previously thinking of building cars for inventory out of regional factories and selling them to customers like any auto company would, but that’s an expensive proposition.” Rogers zeroed in on a production model that required a significant amount of customer labor to finish the cars at Local Motors’ microfactories. Smith also highlighted an additional benefit of requiring customer labor: LM could potentially delay the significant investment of time and money needed to conduct federally mandated crash tests for the mass production of automobiles. Rogers planned to design cars to the safety standards of “federalized” vehicles, but not to undertake the final expensive step of conducting crash tests. If an LM car model proved popular, the company could later justify the investment of a full round of crash tests. “This suddenly put both the capital structure and the amount of money I had in line with our desire for customer attachment and the ability to go to market almost immediately,” Rogers stated. “Basically, we found an entrance point into the market that had been orphaned as ‘niche’.”

LM consulted with attorneys experienced with the U.S. Department of Transportation approval system. The lawyers were not familiar with other companies pursuing a similar model, but sketched out a plan for the company to bring its car to market in compliance with existing federal laws and regulations—theoretically. “We had legal ‘top-cover,’ so we decided to go for it,” said Rogers.

Building a Community

Developing a Design Network

Central to Rogers’s concept of an automotive community was attracting a robust set of car designers—both professional and amateur—who could create the cars that LM would build. This sort of “crowd-sourcing” model was essential both to the economics of the company and to its ability to cater as closely as possible to the changing preferences within a fickle marketplace. As LM contractors began work on an online community that would allow designers to post automotive design concepts as well as comment and collaborate on others’ designs, Rogers set out to locate the members of the community. He lined up meetings with the top administrators of the Arts Center in Pasadena, California, a school that boasted one of the top automotive design programs in the world. “It felt really important when I was meeting with them, but they were old school,” recalled Rogers. “They were really just looking for people who would hire their graduates.” According to the director of the program, only about 20% of graduates at that time were finding full-time employment with major automakers. Rogers believed that these designers—freshly minted but unemployed or

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underemployed—could be convinced to upload their portfolios to an LM website and participate in an interactive community with fellow auto-design fanatics. From his meetings with auto companies and independent design studios, Rogers came to believe that because the young designers were not acculturated to the traditional design and business ideas in the auto industry, they would make the online community an intensely creative place.

Rogers had hired a software engineer part-time to develop LM’s online presence and design community functionality. The engineer happened to be very familiar with the concept of crowd- sourcing because he was also involved as a co-founder of a start-up building an online fashion community inspired by the Web sensation Threadless.com. As major elements of LM’s design community were about to go live, Rogers was concerned about the lack of activity on the site. He had agreed with Arts Center officials to pay students $500 to upload their portfolios for a few months, but that had done little to “prime the pump,” and user activity was sporadic at best. “It was obvious that the concept of ‘If you build it, they will come’ was not going to work in this situation,” quipped Rogers. “We needed to get the word out.”

As fate would have it, help was not far away. LM’s part-time software engineer told Rogers, “You should hire my fiancée to build your design network.” The fiancée in question was Ariel Ferreira, a graduate of the Automotive Marketing Program at Northwood University in Midland, Michigan. She had previously worked on events and other customer-outreach programs for Volvo and General Motors. Ferreira started visiting automotive and other industrial design community sites to find potential members and begin online dialogues with them. “We really had to develop some credibility. No one had ever attempted anything like this before,” said Ferreira. “There was a lot of handholding and a lot of time convincing people that we were not a fly-by-night operation.” Ferreira spent the better part of her workdays e-mailing potential design community members from around the world. “I would wake up in the morning and there would be 20–30 e-mails with big broad questions. People asked, ‘Are you going to steal my work?’” Ferreira stated. “We would go back and forth 5 or 10 times before they would start to trust us and upload their portfolios.”

LM created a “Charter Member” program for the first 20 designers who uploaded their portfolios to the community site, and posted feature stories on some of these members in the LM blog. LM sent all charter members a replica of a gas cap for a classic sports car emblazoned with the company’s logo as a token of appreciation for their early involvement in the community. “All they knew of us was our Web presence. Sending something tangible made us seem more real to them,” said Rogers.

Within a few months, the job of attracting design community members had begun to become much more manageable. “We reached a point where it ‘tipped’ and people stopped asking those questions about our credibility because so many of their friends and colleagues were already involved. They realized we were legit,” commented Ferreira. Twelve months after LM’s network- building efforts began in earnest, the company had attracted 1,400 designers and other car enthusiasts to the design community. According to Rogers, that amount was equal to what the T-shirt company Threadless.com was able to recruit in its first year of Web community development.

Soliciting Designs Through Competitions

In April 2008, LM launched its first auto design competition. Tying into the “local” in “Local Motors,” designers would be periodically challenged to develop an auto concept geared around the weather, culture, aesthetics, and customer needs in defined U.S. regional markets. LM chose to concentrate on the Southern California market for its premier design challenge, calling on automotive artists to create an off-road vehicle for the desert regions of the southwest (see Exhibit 2 for competition guidelines). The company decided to pull the $2,000 prize if the competition couldn’t

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attract at least 10 serious entries. It received 22 submissions. “At least seven were hot-shit designs,” said Rogers. The winner, Filip Tejszerski, a 30-year old transportation designer from Australia, designed an off-road performance concept called the PanTerra. Within the next two months, LM launched three additional design contests. Its Miami Motors competition attracted 40 entries, its Air Base Motors challenge gained 80 submissions, and its Adventure Team Motors contest received around 100 designs. In each of these competitions, the votes of LM’s design community decided the winner (see Exhibit 3 for contest winners).

Story of a Designer

LM’s contests made an impression on Aurel Francois, a 25-year-old aspiring industrial and auto designer from Castres, France. Francois had graduated from university in October of 2007 with a degree in transportation design. He believed he would be signing on full-time with the automotive component supplier where he had served as an intern, but that position fell through at the last minute. “I had to move back with my parents,” said Francois. “There was no car industry and no real design positions in my hometown. By the end of the year, I was working in a slaughterhouse.”

Still driven to work in automotive design, Francois sent out applications to car manufacturers and posted designs on online forums. “I felt that sending out applications was ineffective, because only one person in human resources is likely to see it. I thought the Internet forums were much more effective, because hundreds of people could see your portfolio,” he commented.

After he had posted his work to design-oriented websites, Francois was contacted via e-mail by Ferreira. “It was a very difficult e-mail to read at the time because of my English skills. It was just ‘thick’ and filled with too much information. I just kept thinking that what they wanted to do looked totally utopian,” said Francois. He uploaded his sketch portfolio to the LM community site and began to practice his craft again, spending long hours with his sketchpad and computer. He posted newly created car designs to LM’s “Check Up” section, where community members could share one-off designs and in-process ideas. Then, he decided to enter LM’s second competition, the Miami Motors challenge, which would require a much more significant investment of time.

Francois needed to undertake a great deal of research and analysis to develop an auto concept for Miami, a city he had never visited. “At first I thought Miami was California with grapefruit. But then I thought about the movies set in the city, like Miami Vice, Scarface, and Bad Boys.”

Francois’s design received the third-highest tally in the community vote. He said he benefited from critiques from community members and engaging in dialogues to defend his concept. “I don’t even know how many hours I committed to the project. I just remember staying up until 5:30 a.m. on the final night before the deadline and then having to get up to go to the slaughterhouse a little while later,” said Francois. “But I loved the feeling of the ‘sprint.’ It’s really a great memory for me.”

Building a Car

In summer 2008, LM started the process of determining the first car design it would offer to the public. The company’s community was a major part of this process. “We had identified 8 to 10 segments that weren’t heavily built in. You have to be careful, because you don’t want to ‘choose the market’ from the top down like a big car company would, but you do want to signal to the community what areas might be underserved or good to work within,” said Rogers. Community members rated and commented on entries across those subcategories; high-profile candidates began to separate themselves, including the four contest winners, near-miss entries from the previous

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contests, and one-off designs that members had recently posted to LM’s Check Up section. Some participants had produced compelling designs around novel car-building concepts that LM had seeded into the community. The company encouraged cutting-edge thinking around concepts like inline autos (where a single passenger seat is behind a single front seat), dockable mini-cars, and vehicles with variable-height suspensions.

The designs were strong and the dialogue intense. “There was a lot of jockeying on the site. We didn’t want the safest or most unobjectionable designs to win out. We wanted some controversy,” Rogers commented.

LM staff members selected a set of the most highly rated designs for the team to discuss internally. Over several days, Rogers led LM’s 10 staff members in selecting the best design of that set. At first, each LM team member had three votes; as they winnowed down the list, staffers had to be more selective and support just one design. LM had previously informed its design community that the company itself would choose among designs submitted to the website.

After much debate, LM’s internal team zeroed in on the off-road segment and a recently submitted design concept called the “Rally Fighter.” But the process was not yet complete. “I made it clear to the team and the community that this was not the final decision, but rather that I as CEO would take the input under advisement and make the final decision on which model we were going to build,” said Rogers. “I wanted people to know from the beginning that someone would be making the ultimate decision and that we would not just be bound to a democratic process. At such a tender stage with such a small community, no precedent, and such a major portion of our investment at stake, I felt that the person with the most experience with the company should choose from the community designs based on what we could build, what we could market, and so on. I call this process of community and company collaborative decision-making ‘bimodal intelligence’.”

Still, some within the LM team felt that if the company was going to focus on the off-road segment, it should choose the design of the winner of the Southern California Motors contest, which focused on that very segment. Rogers disagreed: “The winner of the earlier contest developed a great design, but really his concept came out on top because he was an incredible renderer of designs,” stated Rogers. “For our first vehicle, we needed a design that was more iconic.”

Before finalizing his decision on the Rally Fighter concept, Rogers sought the counsel of a number of outsiders affiliated with the business. He communicated with experienced auto designers, including some from the Arts Center. He consulted with Factory Five experts and other authorities on engineering issues. Comfortable that the Rally Fighter was a solid launch vehicle—literally and figuratively—Rogers announced Local Motors’ selection to the design community via his blog and the company’s website on August 11, 2008 (see Exhibit 4 for renderings of the Rally Fighter).

While some elements of the LM design community were buzzing, the excitement was not universal. “To me it was not such a big event. Local Motors had everything to prove. I personally only contributed to and commented on the Rally Fighter quite late compared to my involvement with other aspects of LM,” said Francois. “I thought that choosing this kind of car was weird. From a European and a French point of view, we favor small cars and have a concern with the environment. Also, I felt this kind of car would never show up in Europe, so I didn’t pay much attention.”

Multitudes of Microfactories

By early 2009, LM had produced plans for its earliest regional microfactories. Rogers did not view these future workshops solely as a place where cars would be assembled, but as part and parcel of

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Local Motors’ community-oriented marketing strategy. “We’re lost as people if the only ‘places’ we have for community going forward are on the Internet. We all still need that physical ‘campfire’ to gather around,” commented Rogers. “Yes, our microfactories will be important as a place to manufacture our vehicles, but they will be places to gather and work together as well.” LM had already shown that car-building could be a compelling hub for a community. Once a month, the company hosted an event called “Burgers, Cars, and Welding” in its Wareham headquarters and garage. Dozens of car lovers and amateur mechanics regularly gathered to discuss design and see the company’s progress on the Rally Fighter prototype. “Burgers, Cars, and Welding” would serve as the backdrop for the upcoming report for The NewsHour with Jim Lehrer.

Rogers hoped that eventually, LM’s “car-building campfire” would expand from southern Massachusetts to the 30–50 regional microfactories the company planned to construct over the next 10–12 years. One of Rogers’s early investors was a member of the founding team of the well-regarded retailer Container Store, who helped Rogers think through the rollout of LM’s physical presence across the country. The facilities would be sited near major metropolitan areas in accessible, well- trafficked commercial and retail developments. Rogers likened the potential appeal of Local Motors to retail experiences like Bass Pro Shops, Ikea, Home Depot, and Lowe’s, and he planned to develop his microfactories in areas with those sorts of establishments. LM’s first two facilities were planned for Phoenix and suburban Boston.

LM’s manufacturing concept shaped the way it analyzed opportunities. Local Motors truly assessed its markets on a local basis, assessing opportunities city by city and region by region. “In breaking down the potential for a city like Chicago for a microfactory, first we would look at the total base of car sales there, which is about 410,000 per year. But what interests us more is the 26,000 ‘experiential buys’,” said Rogers. “Some people are more progressive in their purchases; they will go after new technologies or limited edition models. These are the types who will be the most likely to buy and build a car in one of our microfactories.” Rogers counted customers ranging from early purchasers of hybrid vehicles to buyers of kit cars among those seeking the kind of immersive purchase/assembly experience LM would offer.

Under the current plans, each microfactory would be approximately 80,000 square feet (see Exhibit 5 for a schematic of the microfactory design). Accounting for regional variance in land prices and construction costs, LM computed that the cost for building microfactories could range from $3 million to $10 million, with an average price tag of about $6 million. Running steady state, an individual facility would employ 40 people, primarily salespeople and mechanics, earning on average $18 per hour, in a simple single shift.

The Build-It-Yourself Car

Each time a customer ordered an LM model like the Rally Fighter, the chassis and outer body would be delivered to the microfactory from an offsite fabricator. Vehicles would be assembled during a 14-day build process during which the future owner would play a major role. As assembly commenced, LM’s mechanics would conduct some initial work over a 5-day period. Then, Friday through Sunday, the customer would come in to work 8- to 10-hour shifts with a “builder-trainer” on the car’s assembly—mounting tires, hauling body panels, and turning wrenches. After another 5-day phase during which LM mechanics and technicians would build and check the cars’ systems, the customer would return to put in three more 8- to 10-hour shifts on the weekend. A typical LM microfactory would have the capacity to produce around 2,000 vehicles per year. Assembling the Rally Fighter would require $22,000–$24,000 in parts from third parties and $4,500–$6,000 in Local

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Motors employee labor at the microfactory. LM planned to sell the 30 mpg, diesel-powered vehicle for around $50,000.

LM planned on encouraging customers to bring in family members and friends to work with them on the assembly process. “This could really be a great shared activity, like sky-diving, a scuba trip, or a journey to Disney World. For us, it gets more people familiar with and interested in our process, creating more advocates and future consumers. Plus, it gives us an extra free labor pool,” said Rogers. Customers would ultimately account for 50%–60% of the labor content of an LM vehicle, depending on whether they recruited friends and what level of expertise they brought to the assembly process to begin with (see Exhibit 6 for a partial list of the labor that customers would contribute during the assembly of their vehicles).

After-Sales Service

The microfactories would also be hubs for servicing LM cars. The company had sketched out what it called the “Night Owl Service Plan.” If the car could still be driven, an LM representative (earning $8–12 per hour) would drive the auto from the customer’s house to the LM facility, provided the customer lived within a three-hour drive. LM hoped to limit the downtime by returning repaired vehicles to the customer’s driveway by the next morning. If a service job would take longer than one night, LM would arrange for a loaner vehicle at the customer’s expense.

LM’s service philosophy was different from that of at least one future competitor, Rogers felt. “Tesla announced they were going to have the most advanced and enjoyable service centers imaginable. People could sit back, relax, and have a cappuccino while they watch their cars being serviced. We thought that was nonsensical,” Rogers commented. “People might want to have a cappuccino while they are buying their cars, because that’s an ‘experience.’ But when their cars are broken, they want them fixed now.”

Rogers felt that even customers who found it inconvenient to have their car maintained through an LM facility would still have plenty of service options. All of the parts in LM vehicles would be from well-known North American auto-parts suppliers; the parts were also used in vehicles produced by GM, Ford, Chrysler, Toyota, and others. Through its website, the company would provide open access to information on all systems and parts to any mechanic who might service the vehicle. “We’ll truly be the first ‘open source’ car company,” said Rogers.

The U.S. Car Industry in 2009: Crashes and Crises Even as Local Motors and a host of other auto innovators searched for their pathways to growth,

the core of the American car industry seemed to suffer setback after setback. Although U.S. automakers had experienced problems due to foreign competition and bloated labor deals for more than two decades, a plunge in home prices and a near collapse of several elements of the U.S. financial sector threatened to strike the final blow to American car manufacturers. In the waning weeks of the administration of George W. Bush, the U.S. government announced that it would provide a $17.4 billion bailout package to keep General Motors and Chrysler afloat. Throughout the first several months of the Obama administration, several more billions of dollars of loans, loan guarantees, and other forms of aid were made available to the U.S. automakers. (The number-two domestic manufacturer, Ford, did not take bailout money from the federal government.)

Even as the major car companies clung to their financial life preservers, they began the hard work of restructuring. Assembly plants were shuttered, especially many in highly unionized northern

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states. As a part of its restructuring plan, GM announced its intention to phase out several brands, either through sale or outright closure. Pontiac, which traced its roots back to 1900, would be eliminated. Hummer, a maker of large trucks and sports utility vehicles based on U.S. military vehicles, was discussed as a possible acquisition target by a Chinese manufacturing company. And, Saturn, the “new look” brand created in the 1980s to help stave off foreign competition, was announced as a candidate for closure or sale. Factory and division closures rippled through the North American auto sector, affecting hundreds of thousands of jobs in parts manufacturers, auto dealerships, and other companies supporting the car business.

GM, Ford, and Chrysler faced challenges beyond financial crises. Tactically, most industry analysts felt the American automakers needed to significantly alter their product lines, shifting toward smaller, more fuel-efficient vehicles and reducing their reliance on gas-guzzling models like SUVs. The concerns went deeper than the current models; many in industry and government believed that the business models, labor relations, corporate practices, and core organizational beliefs of the American firms were not conducive to running successful modern car companies.

The Upstarts

The instability in the American auto industry seemed to provide one of the best opportunities in decades for new firms to make their mark. A host of contenders with different backgrounds, business models, strategies, and design philosophies rushed to get their products to a marketplace seemingly tired of the approaches of the incumbent carmakers.

In June 2009, a Forbes cover story entitled “The Next Detroit” highlighted many of the new automotive outfits.2 The cover boy was Henrik Fisker, the famed car designer and founder of the new Fisker Automotive. The Irvine, California-based firm aimed to start production of an $88,000 100-mpg plug-in hybrid sports sedan at a Finnish assembly plant in November 2009. “America has never been more ready for a new American car company,” commented the Danish-born Fisker. The company had attracted nearly $200 million in venture capital from the likes of Silicon Valley venture capitalists Kleiner Perkins Caufield & Byers and the Qatar Investment authority. Henrik Fisker declared that he wanted his company to sell 100,000 vehicles worldwide annually.

Tesla Motors was another high-profile upstart offering a high-performance car. Its $101,000 electric roadster had already hit the streets of America. Founded by Elon Musk, the Silicon Valley entrepreneur behind online payments system PayPal, Tesla had also attracted around $200 million in venture capital and a strategic investment from Daimler, one of Germany’s auto giants. By mid-2009, Tesla had several dealers offering its roadster in North America and Europe. The company also planned to market a $50,000 all-electric sedan starting in 2011.

Aptera Motors aimed to build two-seater gas/electric hybrid and all-electric cars that the company claimed would be the most efficient production vehicles in the world. The start-up asserted that its designs were conceived of and executed in nine months, a period far shorter than the 4- to 6- year process of traditional automakers. The company’s website touted Aptera’s breakthroughs on fuel efficiency and aerodynamics: “Even NASA’s aerodynamics lab did a double-take because of our astounding initial results.” Aptera was affiliated with the technology incubator Idealab and had raised a significant amount of venture capital, including a recent $24 million Series C round.

2 Joann Muller, “The Next Detroit,” Forbes, June 8, 2009.

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At least two other new auto companies planned to focus on defined niches in the commercial and governmental markets, not the consumer realm. Bright Automotive was founded by the inventor of the batteries used in GM’s ill-fated electric car EV-1 (chronicled in the film Who Killed the Electric Car?). Bright Automotive was launched under the organizational auspices of the Rocky Mountain Institute, the famed environmental think tank, and counted aluminum-maker Alcoa, auto parts manufacturer Johnson Controls, Google, and the Turner Foundation among its collaborators. Bright Automotive’s first vehicle, the Bright Idea, would be a van targeted at commercial and fleet applications. The planned launch date was in 2011. Carbon Motors manufactured “the world’s first purpose-built” vehicles for the police and homeland security markets at a plant in Indiana. The cars would be faster and more durable than existing law-enforcement vehicles, which were based on mass-production sedans from the large domestic automakers. They would also be more fuel efficient and run on clean diesel fuel.

And then there was Local Motors, touted by Forbes as the most “non-traditional” of the bunch—a tag enjoyed by the team in Wareham, Massachusetts.

Forks in the Road to the Future

As Jay Rogers helped his employees unload the meats, buns, and condiments for that evening’s “Burgers, Cars, and Welding” event, his mind raced as he assessed the decisions the company would have to make over the next several weeks.

Show Me the Money: Financing LM’s Rollout

“The VCs are simply not going for our deal right now,” said Rogers. “Most venture capitalists are not used to investing in auto companies—and if they have, it’s usually been a bad experience. Plus, the capital requirements are different. Tech VCs will look for proof points and then release out a little more capital. We need financing in larger doses.”

LM had raised $4 million to date, the majority of which was from investors who contributed about $100,000 each. Rogers commenced efforts to raise the next round of equity financing in the winter of 2008, about eight months earlier. He had engaged in in-depth conversations with 14 firms and, while he deemed a few of them “interested,” he did not consider any to be “hot prospects.”

Rogers wanted to gain additional funding for Local Motors within the next few months amounting to at least $10 million, and perhaps as much as $25 million. The primary uses of the funds would be to build the company’s first two microfactories, to support the increased working capital costs for inventory needed to construct Rally Fighters, and to develop LM’s next vehicle platform. The speed with which LM could roll out its marketing strategy was entirely contingent on the timing and amount of the firm’s next capital raise.

Rogers weighed his options. He could continue down the track he had followed since 2009: soliciting blue-chip venture capitalists that were used to investing in information technology and health care, and more recently, in several clean-technology sectors. However, he didn’t know how well his company’s strategy, business model, and operations fit with the investment profile that these VCs favored. Rogers could also go back to his original investor pool to raise funds, possibly reaching the low end of his desired range. “Or do we hunker down, conserve capital, and move really slowly? Basically, we would have a ‘sell a car, build a car’ bootstrap model.”

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In recent weeks, a new financing option had emerged: franchising. A manufacturer of industrial equipment based in Texas had approached LM about partnering with the automaker to develop microfactories throughout the state. Rogers had also fielded inquiries from other potential franchisees who might be interested in starting out with one or two microfactories. Franchising would allow LM to develop a presence in key regional markets years earlier than it might otherwise be able to and would provide the firm capital needed for priorities such as vehicle development. However, Rogers felt that franchising before the company had more fully developed its brand, corporate culture, manufacturing operations, and service model might carry long-term risks.

Who Decides What Car Is Built? Who Buys the Cars?

LM’s use of its community as a source of designs, market intelligence, and buzz-building was viewed by everyone associated with the company as one of its main differentiators from the other automotive start-ups. But, as LM sketched out plans for mobilizing its member base for its second vehicle development project, different views were emerging about how the company should build and utilize that community.

During the process that led to the selection of the Rally Fighter as the first LM product, the design community’s influence was felt throughout. “Their role was to create, shape, inspire, and inform,” stated Rogers. But, ultimately, the community’s votes, ratings, and critiques were just one of several inputs to an internal LM decision-making process. “We employ bimodal intelligence to decide which models to build. The collective intelligence of the community is amazing, and we take it very seriously,” Rogers said. “But, internally, we have the experience and the knowledge of marketing and manufacturing. We need to combine these elements of intelligence.”

Some within the company had a simpler model in mind: the community designs, the community should decide. “It would give Local Motors much more legitimacy if the community vote determined the vehicle that was built,” said Francois. Francois joined LM in early 2009 as an internal design resource and a liaison to the design community. He regularly communicated with LM’s membership base about the company’s contests and the ongoing process to refine the design of the Rally Fighter. “As an employee now, I find my opinion is often very different from the community’s. I think we need to listen to them more.”

Ferreira also voiced support for giving the community a greater role in the selection process. “Maybe the design community could get us down to a group of semifinalists with their votes and then the company could choose,” she said.

The Rally Fighter design had been incredibly popular within LM’s design community and had been developed by the most well-regarded designer within the community—Sangho Kim of South Korea, winner of the Miami Motors competition. Still, when LM began taking small deposits to reserve the right to buy the first Rally Fighters produced, no design community members were among the two dozen car enthusiasts to lay down their cash. “Our design community members are simply a different group than the base of customers we’re going to have, especially early on. They are younger and usually don’t have the resources to purchase a car like this,” commented Rogers. “At the same time, many potential customers who do have the resources to purchase the car don’t have the time or the enthusiasm about cars to spend weekends cooped up in a factory.”

Francois felt that the community could be shaped to provide the right input. He commented: “We may have to develop the community differently to attract enthusiasts and customers along with designers and engineers. But in the end, we have to let the community decide.”

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Growing the Customer Base . . . and the Cost

With designers seemingly unwilling to pay money for the car designs to which they themselves had contributed (at least at this early stage), LM had to worry about where its customers would come from. Indeed, picking the wrong design could mean both alienating designers and eliminating prospective purchasers. More broadly, could LM find enough customers for each design, and in each market, who would and could take the time to take part in building their own vehicles?

Rogers had received a surprise phone call a few weeks before from a firm that promised to deliver a more robust enthusiast community in a matter of six to nine months. However, the services would cost about $50,000 of LM’s diminishing cash reserves each month.

The marketing firm, Kinetic Fin, boasted an eclectic mix of talent and an impressive track record in the automotive industry. Kinetic Fin had developed online outreach campaigns that reignited sales for some of the most prestigious luxury and performance auto brands in the world. By courting influential bloggers and employing social networking websites such as Facebook and Twitter, the marketing agency had recently been instrumental in the rollout of the new Bertone Mantide supercar, which blew the doors off of other prestige brands during its launch.

Given the funds needed to finish the engineering of the Rally Fighter and build the first prototype, Rogers knew that he would not have much wiggle room financially if he engaged Kinetic Fin to build buzz and presales for LM’s first vehicle. “It would shorten our ‘run room’ in terms of cash for operations by several months, but it could build a critical mass of customers months or even a year sooner than we would be able to on our own. Is it worth the risk?”

How Cool? How Fast?

Even as he pondered the dilemmas facing Local Motors, Rogers found a way to take a little time out for reality TV—in this case, for assessing proposals from some Los Angeles-based reality TV producers who wanted to make Local Motors and its design community the subject of a new show. The show would document a design contest and follow a handful of top designers as they competed in challenges and worked to create a vehicle that LM would produce. The TV executives saw the show as a natural fit for Spike TV, a network targeted at young adult males, or outlets like the Discovery Channel or TLC, which featured popular programming about creating custom motorcycles, developing fashion lines, and building businesses.

Because of its well-developed design community, LM seemed uniquely positioned to be the subject for such a show. While a TV show could raise the profile of the venture, Rogers knew that some existing and potential investors would view such an effort as a major distraction; he hesitated even raising the concept with many of them. In addition, participating in any sort of entertainment project would cost Local Motors precious cash reserves, perhaps, according to Rogers, “a couple hundred thousand dollars.” Yet, the opportunity was attractive. “We’re thinking about it hard. This would be really cool. Sometimes, you need to strike while the iron is hot, even if you don’t know exactly what is going to happen,” said Rogers.

Buy Local

But on this day at least, Local Motors had cameras aplenty to cope with already. For a few minutes, Rogers was able to stare at the grill set up behind LM’s development garage and just flip burgers as the NewsHour crew rolled tape. Then the garage began to fill up with “Burgers, Cars, and Welding” attendees. He looked forward to showing off the in-process Rally Fighter prototype.

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“What can I get you?” Rogers asked the first person to come by the grill. “Hamburger? Cheeseburger?”

“Do you have a veggie burger?” inquired the visiting car enthusiast.

Rogers laughed. Some customers would just not be easy to please.

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Exhibit 1 U.S. Auto Industry Statistics

1A. Market Share by Company of U.S. Total Vehicle Sales, 1999–2008 (%)

Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 BMW 0.89 1.06 1.22 1.50 1.63 1.71 1.76 1.84 2.04 2.25 Chrysler 15.15 14.16 13.01 12.87 12.54 12.75 13.21 12.57 12.62 10.77 Daimler 1.98 1.89 1.76 1.79 1.90 2.04 2.16 2.37 2.14 2.41 Ford 23.20 22.58 21.60 19.90 19.19 17.99 17.01 16.04 14.59 14.19 GM 28.76 27.97 28.04 28.27 27.67 26.90 25.59 23.89 23.24 21.93 Honda 6.18 6.51 6.91 7.28 7.96 8.06 8.38 8.85 9.43 10.59 Hyundai 0.94 1.37 1.98 2.19 2.36 2.42 2.61 2.67 2.84 2.98 Kia Motors 0.77 0.90 1.28 1.38 1.40 1.56 1.58 1.73 1.86 2.03 Mazda 1.40 1.43 1.54 1.51 1.53 1.53 1.48 1.58 1.80 1.96 Mitsubishi 1.50 1.77 1.85 2.01 1.51 0.93 0.71 0.70 0.78 0.72 Nissan 3.91 4.24 4.04 4.33 4.70 5.72 6.19 5.99 6.50 7.06 Subaru 0.90 0.97 1.06 1.05 1.10 1.08 1.12 1.18 1.14 1.39 Suzuki 0.29 0.34 0.37 0.40 0.34 0.43 0.47 0.59 0.62 0.63 Toyota 8.48 9.10 9.97 10.26 11.01 11.92 12.98 14.95 15.96 16.47 Volkswagen 2.19 2.45 2.51 2.47 2.29 1.93 1.76 1.91 1.97 2.30 Volvo (car) 0.67 0.69 0.72 0.65 0.79 0.80 0.71 0.68 0.65 0.54 Other 2.79 2.57 2.14 2.14 2.08 2.23 2.28 2.46 1.82 1.78

Total Vehicles 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Source: Adapted from WardsAuto.com, accessed February 2010.

1B. U.S. Vehicle Sales, 1999–2008 (unit sales in 000s)

Year Cars Trucks Total 2008 6,813 6,680 13,493 2007 7,618 8,842 16,460 2006 7,821 9,228 17,049 2005 7,720 9,725 17,444 2004 7,545 9,753 17,299 2003 7,610 9,357 16,967 2002 8,103 9,035 17,139 2001 8,423 9,050 17,472 2000 8,847 8,965 17,812 1999 8,698 8,716 17,415

Source: Adapted from WardsAuto.com, accessed February 2010. Au th

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Exhibit 2

Source: Com

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Air Ba

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Local M

Exhib

Source

Motors: Designe

bit 4 Render

: Company doc

d by the Crowd,

rings of First

uments.

, Built by the Cu

LM Producti

ustomer

on Vehicle: TThe Rally Fighhter

5

510-062

19

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510-062

20

Exhibit 5

Source: Com

Microfacto

mpany documen

ory Design

nts.

Local Motorss: Designed by tthe Crowd, Builtt by the Custommer

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Local Motors: Designed by the Crowd, Built by the Customer 510-062

21

Exhibit 6 Vehicle Assembly Tasks for Local Motors Customers

Description of Task

Approximate Time

(hours)

Customers receive and view DVD about experience; explains use of different tools 0.5 Introduction to tools and fire-proof worksuit 1.5 Install rear and front axle and suspension on finished chassis 3 Mount fuel tank and filler neck (where fuel pump is inserted) 3 Install brake and accelerator pedals; mount master brake cylinder outside of firewall 3 Install brake lines to four wheels 4 “Close the tub”; installing the bottom of the interior cabin 4 Prep engine for installation 1.5 Engine, transmission and driveshaft lifted with chain hoist and mounted in car 1.5 Install radiator, hoses and fans 3 Connect emergency brake cables 1.5 Attach wire harness that will connect major electronics systems 3 Install gauge pod with dashboard readouts 1.5 Install floor sidewalls and latches in trunk 4 Mount wheels and tires; vehicle ride height set 3 Mount body panels; tighten eight screws 1.5 Install door, bonnet and trunk hinges 4 Connect head- and tail-lights 3 Hang hood, trunk and doors 4 Install side-view mirrors and glass 1.5 Run exhaust, catalytic converter and emissions system 2 Install fenders and splash guards 3 Connect seats to floor of cabin; install seat belts 3

Source: Company documents.

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