Invest Like the Best with Patrick O'Shaughnessy - Ernie Garcia - Disrupting the Auto Buying Experience - [Founder’s Field Guide, EP. 45]

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Starting point is 00:01:12 Integrate with your cloud provider and tools, check off items on the customized to-do list, and let Vanta continuously monitor your security so you can focus on growing your business. Foundersfield Guide listeners can redeem a $1,000 off coupon at vanta.com forward slash Patrick. That's vanta.com forward slash. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of

Starting point is 00:01:50 podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Ernie Garcia, co-founder and CEO of online used car platform Carvana. Ernie launched Carvana in 2012, and less than a decade later, the business commands a $60 billion valuation while selling a used car every other minute.

Starting point is 00:02:42 Our conversation covers a lot of ground. We discussed effective decision-making, what it means to be a long-term thinker, and what Ernie sees as the defining features of attractive markets. We then went deep on Carvana itself, covering the original insight, logistics operations, and counterintuitive decisions Carvana took, as they said about building their brand. I think you'll find Ernie's insights and energy infectious. I hope you enjoyed this great conversation with Carvana CEO, Ernie Garcia. So, Ernie, I've been to toying with where to begin our discussion. And when we talked on the phone last, there was this great idea of comparing sort of this, I think you called it physics envy that investors have, trying to always cram things into formulas.

Starting point is 00:03:24 One powerful formula in investing is this concept of seven powers. Like, how is your company competitively advantaged versus others? And you said this really interesting line, which is that really what's important is the average decision quality inside of a business. And I'd love to start there. Like what that concept means to you, average decision quality and how you as a leader think about engendering that into the culture of the business. To me, it's not about an investor era.

Starting point is 00:03:47 I think it's about a human error. I think all of us love narratives and love tight logic that explains the world around us. And I think that we seek that. And we seek the simplicity and the comfort that comes with feeling like we understand everything. And just observationally, you know, being inside of a single. company and then having conversations with investors and seeing where, you know, sometimes my view diverges a bit from theirs. I just think oftentimes it's spreadsheet versus reality is another way to collapse it. And I think that like the truth is going from idea to something successful that

Starting point is 00:04:17 works at scale is just a really long path with a lot of things you have to figure out along the way. There's a lot of hard times and there's just so many lessons that you've learned and there's so many decisions that you make and so many of them are right and so many of them are wrong. And I just think that in my experience to me, if I had to pick a direction that I think many people from the outside make in terms of their errors, I just think they try to oversimplify and that really like accompanies thousands and thousands of decisions that get made over time. And some of those decisions gets you to the spot where you are. I think the most important thing you can do, like you need to make sure that big foundational conviction decisions are really good. What market are you going after?

Starting point is 00:04:56 why are you going after that market? How are you going to approach it? What's centrally important to you? What things will you trade off on? What will you not trade off on? What are your principles and values and things that you're going to adhere to through thick and thin, regardless of what direction, maybe numbers might be pointing you in the moment? Those are really important things, but the rest of it is just about great people that are learning along the way that are trying to figure things out. And I think, to me, I think there's a little bit more randomness and luck to it than maybe the stories appreciate. If I were an investor with my extremely limited experience set and I were trying to make good decisions based on that experience said, I think I would be looking for people that I believed in to constantly learn and make good decisions along the way. And I think I would know that along the way, a lot of those decisions won't be right, but that that's what matters. To push a little bit from both like an outside and an inside angle on this average decision quality concept, I'm curious if you were going to look at another business, let's say it was one that Carvano was going to acquire or something, you were interested in the business, how you would.

Starting point is 00:05:52 assess average decision quality happening inside a business that you don't run. So something outside of Carvana. And then I'll ask how do you promote it within Carvana? First, we would start with where is the business today. That's a pretty good indication of average decision quality with variation off of average decision quality being driven by luck and just reality that caused things to move. But I think that's a good place to start. And then I think we'd be looking at the people. Obviously, kind of the senior people that you get more exposure to matter a lot. And you want to believe in them and respect them and trust them and think that they're thoughtful, smart people that are learning as they go. I also think you'd want to see their interactions

Starting point is 00:06:27 with the rest of the people on the team. And you'd want to see as best you could the way the rest of the team feels and how they feel about the journey that they're on. Because I do think that part of building a great company is about getting this groundswell of all the people inside the company that believe in what you're doing and feel good about it and care about it. And so I think you want to look at how the entirety of the team, how they feel about the mission that they're on. I think that's really, really important. So I think would start there. So really, that does reduce to current position of the company and then the quality of people that you're interacting with and then the culture that company has. But I think those are

Starting point is 00:07:01 probably the most important things. I'm sure that those same three things then apply internally at Carvonne. You want great people. You want great culture, et cetera. Culture is one of these ultra squishy words. It can mean a lot of things. Everyone has to talk about. Everyone kind of does. What does that concept mean to you in a very deliberate or intentional way in terms of how you build it at Carvana? Let me start with the previous jobs that I had prior to Carvana. I would always be at companies that had values written on walls and you would walk past them and you didn't know why they matter or what they were. And it sounded even squishier and stranger when you kind of heard people on TV talking about culture and how it's important. And it just didn't feel real.

Starting point is 00:07:37 I didn't understand it at that time. And then I think when you start a company, you've got relatively small group of people. And every group people has a culture. It's not stated. It's not articulated. It's not written down anywhere. But there's the ways that you interact, the shared jokes that you have and the way that you approach problems. And all those things are just part of what your culture is, what's important to you. They're part of your culture, but you never say them. And then as you kind of get bigger, you start to all of a sudden step into conversations where some of those same things that have always been important to the original group that were unstated are being violated to some degree. And they're not adhered to in the same way they used to be adhered to. And I think that's when you start to realize. okay, this is the thing we have to be purposeful about. You have to actually live it and make it part of what you do and part of your language every day. And starting at the top,

Starting point is 00:08:22 but trickling all the way down, I think people have to really use the language of your culture and values. And when someone violates it, when someone does something different than is normalized behavior inside of your culture, it needs to catch everyone off guard and seem weird. And everyone needs to kind of feel like it's weird. And if they don't think it's weird,

Starting point is 00:08:39 then your culture is not strong. It's not like embedded in the way people are making decisions every day. For entrepreneurs, what do you think are the characteristics that make for an interesting and durable and worthwhile market to go after? So used cars is obviously a big market. Big, I guess, would be one way to think about it. Big indoor growing. But what other key features do you think matter in a market? You've mentioned like fractal complexity to me before.

Starting point is 00:09:04 What stands out in your mind? I think, I mean, big is good, obviously. I think lack of change is like a really strong indicator. at a high level what the best business model for customers should be. It's a function of the technologies available and where customer preferences are. And technologies constantly evolve forward. Customer preferences constantly evolve. So if you see a business model that is stagnated for a long time, there's a good chance

Starting point is 00:09:28 that there's a way better way to approach that market today than there was when technologies were different and preferences were different. So I think stagnation is a good sign. I think complexity is to me a really good property if you're trying to build something really big, but it's also a property that decreases your odds of success. I think that it's like complexity generates a higher likelihood of failure, but it also generates, in my opinion, the most important and persistent and durable mode once you clear it. So I think to me, complexity is kind of a function of how big a swing you want to take to some degree, but maybe that's

Starting point is 00:10:05 how I think about that. We're going to get, of course, into how Carbana works as sort of like almost like an operating system and how you've coupled technology with hard physical asset. But I love this idea of it being a fractal problem that as you zoom in and out, whether it's from America to the northeast to New York to Queens or something that you sort of face a lot of the similar challenges at different levels of that tiering. And it sounds like that's what's made a lot of the challenge of building Carvana so interesting is solving hard problems with really smart people. Can you talk a little bit about that self-similar levels of nesting complexity that you faced? So we talked about this general concept of complexity, which you can kind of see from the

Starting point is 00:10:42 outside. It's not that hard to say business A is probably more complex than business B. What I think is generally true of all people, but I think it's really true of ambitious people is while we might be able to say A is more complex than B, we massively underestimate the complexity of both A and B. And once you zoom in and you try to take the problem on, you just start to realize, like, all of these parts are so complicated. Little things that you may have given two words in your high-level description of a business, all of a sudden become massive undertakings that are super complicated. And the deeper you get into that undertaking, the more you appreciate that there's 10 more the undertakings underneath that that you didn't even know to articulate in the first

Starting point is 00:11:22 place. And so that's something that's so interesting. And I think it's important for entrepreneurs to be aware of because you're always taking on more than you think you are. I think that that's like generally true. And I think that one of the things that, in a way, like that complexity, blindness, I think is a strength because it puts you in a spot where dumb enough to jump. Yeah. If you do it all, you wouldn't do it. Yeah, exactly. If you know how hard it was, you wouldn't do it. But it's also a thing that causes you to choke at some point because you've bit off so much more than you realized. And I think that trying to recognize that that's the truth as quickly as you can and then trying to figure out, okay, like, what does this mean?

Starting point is 00:11:58 What do we have to change? This is more complicated than I thought. And it's hard. than I thought, and I can't make all these decisions anymore. You have to constantly be learning and changing and you have to be surrounding yourself with great people and you have to be willing to give them the ability to make their own decisions move quickly because you just can't. The problems get so big. Some of the decisions that have to be made and the complexity that just constantly grows and emerges is so great that I think you have to find ways to tackle that once you've accidentally

Starting point is 00:12:23 jumped and you find yourself in the middle of it. You have to find the best way you can to manage it. Another thing that I think has been really interesting is, a lot of times really thoughtful, smart, high-achieving people, there's like certain types of problems they want to take on. And it's because those problems are oftentimes glorified and they're appreciated by their peers for how interesting they are. But like the truth is every problem is interesting.

Starting point is 00:12:47 Just to dive into one, finding a way to title cars effectively and register cars effectively across 50 states with DMBs in every state that have different processes and you're interacting with a customer who's entering information, to a fixed interface and then ultimately it's got to go to the DMB is going to interact with it manually. That problem, there's nothing on the surface that's sexy about that problem. There's not a single thing. But it's incredibly interesting when you dive in.

Starting point is 00:13:11 And I think that's another really important thing in trying to be successful is when you find these complexities, can you find great people that want to tackle superficially sexy problems? And can you get those people to be like, hey, but wait a minute, this other problem that has no sex appeal whatsoever is actually even cooler because it's got the same complexity as the sexy problem, but no one's tackling it because it's not sexy. We can make an even bigger impact here. And I think that's really, really important, too, is just as kind of a way to manage that complexity,

Starting point is 00:13:41 is just to try to generate inside of a company, inside of a culture, appreciation and excitement around solving hard things, regardless of where those hard things are. My friend Zach Cantor always points me to this essay, it's titled Reality Has a Surprising amount of detail. And I love that essay because it basically gets into like a stairway that you build. It seems simple. And then you dig in.

Starting point is 00:14:02 It's like, oh, my God, this thing is crazy complex. I think with that in mind, it's an appropriate time to sort of rewind to the start of Carvana and describe the original customer experience or behavior change that you envisioned, you and your team envisioned. And then I really want to talk about how you've built this interesting machine, if you will. Let's start at the beginning. What was the Genesis idea or the Genesis vision for? curve on of the business? I was lucky enough to one, try another company before and fail at that

Starting point is 00:14:32 and learn some lessons. And I was also lucky enough to grow up in and around the automotive retail and automotive finance business. And so it just get like a lot of exposure to it and understand how it worked. I think it's one of these businesses that's very, very large. It's the largest retail vertical in the U.S. And then it's one of these businesses that hasn't changed very much in a very long time. And I think that then begs all these questions of why, which I felt like I was always asking inside the industry, like, why is it still this way? Why hasn't this changed? Why hasn't that changed? And I just think that the answers that were given to me, I at least just didn't find satisfying. We're all kind of circumstantially, all kind of reduced

Starting point is 00:15:09 to because that's how it's always been. And even things like, well, you know, the test drive is really important. I would think about, well, what's my experience test driving a car? I feel like if you put me in two cars for the most part, I can't really tell them apart that well. It's like a blind taste test with wine or whatever. Can you really tell them apart? I don't know. I'm not sure I really could. So I'm not sure I was gathering that much information. And then when I would think about what's going through my mind when I'm test driving a car, I always felt like it was part of the setup for the negotiation I knew was coming next. I was sitting next to a sales guy and I was trying to say things that made it sound like I wasn't a chump. So when we went and sat in the room,

Starting point is 00:15:41 I wasn't going to get, take it. Like that that's really what was going through my mind. I felt like if I talked to other people, that was kind of really what was going through their mind too. And so is the test drive that valuable? And if it's not, and then you look at kind of the cost structures of existing dealerships, you start to realize, like, there's a lot of cost that goes to provide, like, that particular thing to customers. There's a lot of cost. And then I think that because all these dealerships have evolved in similar ways and have similar underlying beliefs and then similar ways of attacking the problems because automotive retail is so complex. And so much of the process outsourced to all these different third parties instead of

Starting point is 00:16:16 each individual company building the solution themselves, there was so much competition. And that competition led to the need to be more and more creative to monetize the transaction a way that enabled dealers to build a reasonable business. And I don't want to vilify that in any way shape or form because that's just like the reality of being an economic animal in a very competitive market. But it led to, in my opinion, leveraging kind of the opacity that exists in the transaction and the lack of knowledge that customers have beyond like the most simple parts of the transaction, like vehicle price and maybe their trade in value to find ways to make money more creative ways. You're selling all kinds of different aftermarket price.

Starting point is 00:16:50 products that the customer doesn't really understand. And you're positioning them as what they're doing to a payment instead of their upfront price because people aren't that good at dividing by 72 and appreciating what that really cost them and thinking about the cost that over the life of their loan. And I think that people aren't doing that math, but they would walk out of the experience with a stomach game. They would walk out and they would be nervous that when I talk to Uncle Car Guy and I tell them about the experience I just had, he's going to tell me how dumb I was. So to me it was just like you've got a huge market. It's complex, which means there's opportunity. It hasn't changed a lot, which means there's opportunity.

Starting point is 00:17:23 Some customers love the way that it currently works, but many walk out with a stomachache, and all that just felt like the opportunity. And then it's like, okay, well, how do you address that? It felt like going back to this idea that what changes the best business model is changing technology and changing customer preferences. It was just like, what's happening to customer preferences, what's happening to technology, and can we build something different? And I think trying to build something simple, scalable, and that kind of alleviated the stomach

Starting point is 00:17:49 That was basically the set of goals we started. Customer preferences change. The behavior is changing a lot here. Like they're giving up some things that they might get at a dealership. And then they're picking up other things that are made possible by not needing physical proximity to the inventory and limitations around scale economies at a dealership level or whatever. So what were the new things originally introduced? Like when you said like V1 of the service in this market, what were the most critical things

Starting point is 00:18:14 for you in your mind to deliver as part of the new customer experience of buying a use? car. We have these pillars of like a great experience, great price, and a broad selection. And I think once you move to national infrastructure with our own logistics network, you can provide all those things. When you move to a digital or more of an action and you start to move traditionally variable costs into fixed costs, you have like this huge upfront investment. But what you generate is you generate economies of scales. You generate benefits that come with getting bigger. And that's very valuable. But when you start, you don't start at the end. You start. You start with the need to invest all this money, and you start without those benefits of scale.

Starting point is 00:18:53 So when we launched, we had like 40 cars on the website, right? It was no different than going to your local dealer. We were able to offer lower prices, because especially at volume of 40, it doesn't really matter what your prices. You're going to lose a ton of money anyway for trying to build a digital platform. So it was just purely about experience. And I think it was also appealing early on, or we at least believed it would appeal early on, to a buyer who is more interested in that digital transaction and someone who was maybe most concerned about walking out out of a dealership with a stomachache. And so we kind of knew that in its early iteration, this is going to appeal to a smaller subset of people than it will appeal to in its later

Starting point is 00:19:28 iterations, where selection is very large and prices are low and experiences great because we've perfected all of these things. But we thought that there was variation of what customers want, and there was not variations, or at least meaningful variation, in the offerings that customers could get when they were buying a car. Going to dealerships were pretty similar. We hoped that by building something different that we thought put us on a path to building something that was long term better for a large group of people, that it would also be different enough for a small group of people to kick us off and make it work early on. And then I think we were lucky enough to kind of get enough momentum. I do think luck plays it apart in these things because you just need the kind of wheel to spin at all the right time when you're trying to raise capital and tell your next story and explain why it's going to work next time.

Starting point is 00:20:11 And I think early on we were able to get the wheel spinning. it's fun really slow at first. It took us months to sell our first car and then, you know, we sold one and then to maybe eight a month or nine a month. I remember having conversations with our CEO-o and being all excited and saying it won't be long now, so we're selling one a day. You're building from there and you kind of just need that momentum early on that allows you to explain to your partners, investors who are going to fund the rest of your dream, then like we can build this to a big and great thing. That early part's hard because it's all about just getting enough momentum to make the next step.

Starting point is 00:20:42 In the early days, one of the charts that's so interesting in all the annual reports for the company is this idea of gross profit per car per unit. And this is this upward marching to the right chart. And I think you've already mentioned, you have to be willing early on to lose money, even on a gross basis, deliver that great experience to sort of prove out the early possibilities. How do you think about that as a measure that matters for the business and what you can do to drive it up? And maybe this is an excuse to talk about dealership. everyone's been to a dealership, like dealership unit economics versus unit economics you can build with a logistics network and help us understand the contrast between the two and what drives that gross profit per unit. I personally wasn't super worried about being able to get to reasonable

Starting point is 00:21:26 GPUs. I'm running the reason is because there's this huge infrastructure of 40, 50,000 dealers nationwide that all make pretty similar GPUs. To me, the question was, okay, they make pretty similar GPUs And it just is logically clear that if you can build an experience that has kind of a centralized supply chain that puts the customer in control and allows them to kind of manage their own customer experience, you can save money. You can have lower variable costs. There's a question of how long that takes you and what scale it happens at, but I wasn't worried about that ultimately happening. And then to me, the big question was just, do people want to do this? And how big does the price inducement have to be to get people to do this? But the good thing about that was you could answer that question without having to build the whole machine.

Starting point is 00:22:07 because you could just look at how big is our discount to market and how many sales are we getting? And then do we think that that can be made up in the rest of the economics of the business? And to me, that all seemed like it was going to happen. I was much more concerned with can we build a great customer experience than I was with, can we ultimately get to the unit economics? It makes sense. And then I think obviously getting there with speed is important because it reduces your cash needs and increases your odds of success.

Starting point is 00:22:31 But to me, like the question of when we get there, I wasn't super worried about. And then I think that the big equation that I think exists for every business is, what is the quality of experience you deliver to your customers versus everyone else? That's point one that is most important. What are the variable economics that you can get versus everyone else? I think that that's a question two. And then what are your variable expenses? Just kind of break down the revenues and the expenses.

Starting point is 00:22:53 And I think that's question three. And so the way that we've tried to build the business is let's make sure that we always deliver what we think is the best customer experience and that we think is at least the best customer experience for a large subset of customers. and then let's try to build a model in a way where we give ourselves access to the most variable revenue. So let's look at maybe not just what automotive retailers have historically done, but what does a customer need when they buy a car? There's two ways to look at what the opportunity is.

Starting point is 00:23:20 You can say, what does everyone else in the business do? And what have they historically done? And then you can say, once the catalyzing transaction of buying a car is occurring, what are all the things that customer needs? Generally, that's going to be a bigger set of opportunities than what everyone else is answering. And what everyone else is answering, they're doing that for good reasons. But we wanted to make sure that we looked at what all the opportunities were. And then we thought about where we well positioned, given all the things that we're building,

Starting point is 00:23:42 to kind of deepen our relationship with customers. And then we wanted to say, let's look at the entire cost structure of the relationships. Let's think about where they money, both ways that are totally visible on the income statement and then ways that are sort of invisible to the income statement. So for example, a way that is sort of somewhat invisible to the income statement because it doesn't show up as a cost, but I think it is a cost, is the depreciation of cars that dealers hold. And so by building a platform where we have cars nationwide

Starting point is 00:24:07 that we can deliver to customers, we can now offer a very broad selection without having to carry that in a single physical spot. That's value. Like in the long run, that's an opportunity to cut out a cost that doesn't show up in the income statement, but is a cost.

Starting point is 00:24:19 And just looking at kind of, okay, once you move to this world where a customer is no longer physically coming to a dealership to buy a car, they're buying it through a computer screen. How can you change the entirety of the underlying supply chain? to give customers a better experience and to generate variable revenues and to decrease expenses. And we thought there was a lot of opportunity there. And so that's why we've built our

Starting point is 00:24:38 infrastructure of reconditioning centers that are nationwide and our nationwide logistics network that allow us to move cars around the country really inexpensively and give customers that broad selection. One of my all-time favorite quotes is from General Omar Bradley and sometime during World War II, I think, where he said that amateurs talk strategy and professionals talk logistics. So I'd love to talk logistics for a minute and understand you've referenced this logistics network a few times, like what it actually is, like what is an IRC center? How do you think about like the hub and spoke model? How did you build it? The skeleton of this thing would be really interesting to hear about in detail because I think it's such a key part of your advantage. Use cars are a very

Starting point is 00:25:14 interesting market because most markets are defined by production and consumption. Like most products are consumed. Use cars aren't really consumed. They sort of are over like a very long time scale, but generally speaking, miles are consumed. And then really what's happening is just customers are swabbing cars between themselves. The customers have to just. side, I want a new car every four or five years, so I'm tired of this one. And really all that's happening is there's this huge apparatus in the background that enables me to swap my car out with you. And that's what we used car market is. As a car buyer, I suddenly have a different standard for the new car that I'm taking in than I had for the car that I've been driving for the last

Starting point is 00:25:51 five years. I'm going to go through this like binary moment of taking this new car in. It needs to be in better shape than my car wants. My car might have had bald tires and it kind of made a weird knocking sound and the AC didn't work that well. But I'd make it. piece all those things because it happened over a long period of time. When I'm buying a new car, those same things can't be true anymore. I need to feel different about this new one. And so if the whole used market exists to allow customers to trade with each other, how do you change the asset from the thing that was acceptable to me when I owned it for five years to the thing that I need to see now that I'm buying a new one? How do you do that as efficiently as possible?

Starting point is 00:26:23 We built these inspections editors because we think it's a better way to do it than the way that dealerships have traditionally done it. Dealers have done it for good reason, but some don't really recondition cars very much. They do maybe superficial work and sell the car and they hope the customers don't have as high as standard for the car as we like to believe our customers have for the car. Many dealerships, though, they use kind of their retail footprint to do that same work. So they're paying a bunch for their retail footprint to be able to service the car and transition it from the thing that I was willing to get rid of to the thing that I want. And then because they have this limited footprint, they also generally have very capable

Starting point is 00:26:57 technicians that can do everything that is necessary to fix a car. And so you have to have this specialist that has this very broad skill set. But when you move to a world where you say, okay, now the customers no longer going to be physically in front of the car when they buy it, I can have this separation between the customer and the car. I can now move to way less expensive real estate. And I can also, because I'm going to have customers in many markets and be service out of a single spot, I can move to more of a production level facility that's much larger.

Starting point is 00:27:22 And then once I move to a production level facility, I can start to decompose all the tasks that might be necessary to take a car from the state that a customer sells it to the state that a customer wants when they buy it, and I can break that down to a bunch of little steps. And now because of that, I can have more specialized people that don't necessarily know how to do everything, but they know how to do some steps along the way. And then that all of a sudden puts you in a spot where some of these tasks that many, many people can do that it doesn't cost as much to hire someone who can do that as someone who can do like the very complicated things. You can actually do that at the lower cost because you don't need the very expensive person who can do

Starting point is 00:27:53 everything to do those same tasks. And then you also can build career pathing that's really interesting because you've broken down all of these tasks. And so inside of these assembly line facilities, you can have people that are kind of moving through the different stations and learning different skills and becoming the valuable specialist, which is attractive to bring people in. You can do things differently. But again, it all stems from this first premise, which is if we think that we can get rid of the test drive and we think that we can sell the car site unseen and we think some customers are going to prefer that, then all of a sudden an entirely new supply chain makes itself available. And then you connect that up with logistics. That unlocks all kinds of

Starting point is 00:28:26 other interesting things like taking advantage of geographic price differences and taking advantage of the geographic differences and availability of certain types of inventory. I do think our entire supply chain is different, but it all stems from that initial insight, which is we don't need to have the customer physically adjacent to the car to sell. Give me a sense of scope of one of these centers, like how many cars will go through it in a given day or something and how much cost savings does this compartmentalized model represent versus the one specialist at some dealership doing all himself. Sure. So, I mean, the facilities are, we've now got 13 of them. We're probably on our seventh or eighth iteration. The first couple were very, in circumstance, we bought locations that we

Starting point is 00:29:07 wedged and inspections center into, and then it's constantly been evolving. And the most recent ones are really cool machine. I actually went to visit one recently in Haines City, Florida. It was just beautified. I couldn't believe how cool an enormous life-size machine it was. Fidt you to 100 acres with thousands of cars in the ground, producing 1,000 plus cars per week. And there's just like all of these stations, and there's clocks and the cars are moving from station to station as the clock's kind of expiring. It's really a cool facility. Now, in terms of the cost difference, what's hard is we generally speaking hold ourselves to a different certification standard than many dealerships do. So like an apples to apples comparison is hard there. And we do in general just sell a car at a

Starting point is 00:29:50 higher quality. I wouldn't want to put a precise number on that. It's not. insignificant. It's not massive. That's not like the reason it works, right? That's one of the reasons it works. But the other thing that I think is really big is it lends itself to a scale that's very different. Very, very hard to build hundreds and hundreds and hundreds of these retail locations to get the scale that you need to build a huge business. It's a lot easier to build these massive 100-acre facilities that have huge, huge capacity and then really focus on making sure that you're at, you know, an efficient intersection of expense and three, put, I think that that in many ways is even more valuable than the cost savings, but the cost savings

Starting point is 00:30:28 are certainly there as well. If those IRCs are the major hubs of the operation, I'd love to talk about the spokes. It seems like moving cars is got to be as expensive as moving anything. They're big heavy things and complicated and people live all over the place. You've got to get them to infinitely number of small little spots, homes. What have you learned there? Like, how does the spoke or the logistics part of this whole story work and how does it get better over time? What does it generate for customers? It generates select. because now all of a sudden cars everywhere are available anywhere. That's like a huge, huge thing.

Starting point is 00:30:58 And then it generates some price advantages because there are geographic disparities in price. There are geographic disparities in vehicle availability. Oftentimes there's more sedans coming off lease in the northeast than in other parts of the country. And so we can move things around that generates a lot of value. So I think that that's really important. But then if you want to give customers a fixed amount of selection, imagine that you want to put 100 cars in front of customers. One way to do that is you can hold 100. cars in a bunch of different locations.

Starting point is 00:31:26 But then you need to have sufficient demand to move those hundred cars in all those locations. Or you can hold 100 cars in a single location. You can move them out. And when you kind of think about it like that, you sort of realize like, okay, well, if you've got a fixed amount of demand across the U.S., in this case, let's say, if I hold 100 cars in one location, the cost of doing that is that now I have to pay for shipping to get those cars out to customers.

Starting point is 00:31:48 But the benefit of doing that is that conditional on the same amount of selection for customers, I can turn them way faster because I can focus all of this demand nationwide on a single inventory. And so when you have cars that depreciated around $10 per day, that can pay you for a lot of transportation pretty quickly. And so you can generate for customers that selection in a way that doesn't necessarily have an extra cost because it's almost like, that's a phantom cost. It's like a contra margin that shows up in dealerships because they have to hold cars for a long period of time. And again, I got to be careful when I say that because Today, our turn times are not that different from traditional dealerships, but that's because

Starting point is 00:32:23 we're choosing to take this advantage that we have and to express it in a very large selection for customers. You can choose to take that same advantage and express it in way faster turn times and therefore higher margins, but today we're expressing it more in kind of selection that we are in economics. One of the most obvious and interesting business benefits is scale economies, and obviously by building this big network, it's something that you can then leverage. You can just have more scale. You've already talked about it in several ways, have more throughput if you're playing the long game. And so I'd love to turn to that idea of what long game means. Everyone talks about being a long term thinker. I think it's generally a good idea, right? Because maybe it's less competitive to be a long term or something or more competitive. What do you think about that term? Do you think that's an overused term to be a long term? What does it mean to you? What does the long game mean? I think it is an overused term. And I think it's like culture. It's a thing that's really important. but is overused and doesn't always have a clear meaning.

Starting point is 00:33:19 And so I think then you have to try to say, like, what does it mean to us? And to me, like, I think one way to articulate it is there's kind of this traditional list of constituencies. You've got shareholders and you've got your customers and you've got all the people that work at the company. And I think to me, one way to express what long-term thinking is, is to really value customers first. And honestly, I think investors third.

Starting point is 00:33:42 I think investors don't always love hearing that. But I think that you even have to think hard about what does putting customers first mean. And oftentimes it also means putting the people inside the company first. Because what matters to build a great customer experience in the long run is you have to have great people who stick around, who care about what they're doing, that have fun doing it, that think about it when they go to bed at night, when they wake up in the morning. And so you need to create an environment where those people can build great solutions. And I think that's really important. And I think that there's always pressure. We all feel pressure, regardless of how you

Starting point is 00:34:14 you'd like to think that we are from it. When you're going to report your next quarter, there's some set of expectations that you know that the world has for you, and that generates pressure, and it influences the decisions that you make internally. But I think being long term is about being willing to face that pressure and having conviction that what matters most is customers and building a team that can build for your customers first

Starting point is 00:34:34 and that the rest will take care of itself as long as you're on a good path, and your kind of foundation is well thought through. When you have a good economic underpinnings to what you're trying to build, so you're not just in fantasy land, you're running away from investors, but that you're building something that's truly valuable. I think that's what it means. And then I think the other thing that it means, too,

Starting point is 00:34:51 is there are times, you have to be really careful with this, but there are times when you're picking between projects, and often many of them are going to have payoffs next week or next month, and many of them are going to have payoffs that are two or three years down the road. It's hard. It takes discipline to invest in those things that are going to pay off down the road. And I think it's also hard from a communication with investors,

Starting point is 00:35:13 perspective, in my opinion at least, right? Different people can have different views on this. I don't think it's very smart to talk about those things that have the potential on payoff down the road because the further in the future the payoff is, the higher the likelihood is that you ultimately fall on your face and fail. You don't want to make that your story. But if that's not your story and if you have the discipline to keep investing those things, then it's going to cost you money and you're going to have to manage like investors through all that. But do you have the strength of conviction of the things that you're building and the size of the dream that it's worth chasing those things down, that you're going to do that even when it's hard and uncomfortable.

Starting point is 00:35:46 And I think to me, that's what long-term thinking is really about. One of the things that most intrigued me kind of just in preparation for today is if you read an annual report from Carvana, six or seven pages in, you'll see six metrics, right? Like everyone reports some of key metrics. And a lot of these are obvious. It's like revenue, how many cars did you sell? Your gross profit, which we talked about per unit. And then one pops off the screen is so interesting, which is car vending machines and the number of those that you've built, which in 2020 stands at 20. I encourage people to Google these things.

Starting point is 00:36:14 They're so cool looking. What is the story here? Like, why is this one of the six things that's reported alongside more traditional metrics? What are they? Why do you build them? Building a brand is hard. And people will talk about, you'll hear all kinds of every heuristics, a billion to build a brand, a couple billion to build a brand, whatever it is.

Starting point is 00:36:30 But building a brand is a hard thing to do. And I think that sometimes having a symbol that reflects what you are. And sometimes having that symbol just be cool and fun, sort of awesome. Those are real things. Those aren't a spreadsheet. I care about it and you care about it and customers care about it. And it's one of those intangible, valuable things. And so I think like the rational way that we got to it, I'll start there. And then we can kind of get to some of the awesome in a second. But the rational way that we thought about is, okay, we're going to build this business model that benefits from sight unseen transactions. So we can have this different supply chain and then you're

Starting point is 00:37:02 going to have these folks, but then you've got to have last mile logistics, which is hard. And that means you have to be inside of every city. So you have to have some infrastructure inside of every city just for the practical reason of that being less expensive than trying to do very long leg last mile. And then once you have that, it's kind of like, okay, you realize that last mile is not totally inexpensive. And if part of our insight here is that we only want to spend money in place where we think it's valuable to customers, do customers want to come pick up from us?

Starting point is 00:37:26 And would that save us money, then we can pass back to them in the form of lower prices or more investment in something else they love or whatever else. And so we just tested this idea of having customers come pick up from us. And we did this Atlanta was our first vending machine. And really all it was was it was a couple of glass garage door bays. and we would send the customer a four-digit pin, and that code caused the garage door to open. But our marketing team was like,

Starting point is 00:37:47 oh, let's call this a car vending machine. And we didn't have, like, a pixie dust pass. We weren't blessed by Silicon Valley. We didn't have, like, a bunch of investment from big venture capital firms. We didn't have a lot of press coverage early on. And so we would do anything to try to get some press coverage. I mean, it was just like, all we wanted was a little bit of free advertising.

Starting point is 00:38:04 He was like, please, somebody help us out. And all of a sudden, you called this thing a car vending machine, even if that wasn't the most accurate description of what it was. And it was like, on the homepage of Yahoo for like three days after that. That is the power of awesome, right? We started here in a super rational place, and then we discovered the power of this is cool and fun and people like it. And then we decided to double down on that. So we did a bunch of work to try to figure out how can we take this thing from a great label to something that lives up to that label

Starting point is 00:38:33 and really is that cool. And we built our first vending machine. And I do think what's interesting is the math kind of works out pretty rationally. Once you build something awesome, people want to go have that experience and you do save last mile expenses and that kind of works out. Then you also have this symbol that helps you to build your brand. So I think it works out in a number of ways. But to me, it's like that's in our culture. We've got this thing that is hard to put a finger on, which is fun, which I think is tremendously valuable. And in our brand, I think we have this thing that's hard to put a finger on, which is the vending machines. And to me, it's fun and awesome. It stems from the same queue in place, but there's real value in that.

Starting point is 00:39:07 Is there any more there to why it's on this page with the five other traditional metrics? Sounds like there was maybe some interesting thoughts there. I think honestly, early on it was there because it's always been there. And I think early on it was one of the physical representations that we existed in the universe and that we were making some progress when we were begging investors to see that we were making progress to justify out of the next round. At this thing, does it necessarily belong there? I think that that's a reasonable question.

Starting point is 00:39:33 But I think it was very important for us early on. I think it's a very important part of our brand. And it remains important that we keep building them. But it's certainly a different kind of metric than the metrics that's around it. I, for one, hope you keep it there. I think it's really cool and fun and just Google these things. And they're really something to see. I'm sure they'll get even cooler in the future. You alluded to a little bit there with the PR comment about these two layers of any business, one being sort of the customer experience, which we've talked quite a bit about. But the second being sort of communication of the company, the brand, the value proposition, et cetera.

Starting point is 00:40:02 Can you say a bit about your thinking on this layer one, layer two concept for any business? The way that I always think about that, my view, and I'm sure there are many views, like the best way to build a business. to build the thing that's best for a theoretical customer that understands all their options completely. The ideal economic theme, the perfectly rational person understands all of the options they would have, build a business that's better for that person. But then recognize that that person doesn't exist.

Starting point is 00:40:29 There are a lot of businesses that aren't built for that person, but are tremendously successful because they communicate so well. They build a brand that is interesting to customers, and they can convey their value proposition in a way that makes customers want to partake in it, even if it's not really better than other options that exist. But I think that when you build something that's truly different, you necessarily are taking on a communication burden. People haven't done that in the past.

Starting point is 00:40:55 And I think that when you're doing it in an area where the transaction is as expensive as buying a car and where the transaction, again, not speak negatively about dealers traditionally, but the transaction has a reputation that's not super positive, and therefore customers are going to be risk-averse. They're going to be anxious about making a mistake. You take on an even bigger communication burden. And so we really try to approach the problem is like, let's build the best business model we possibly can if this perfectly rational person.

Starting point is 00:41:20 But then let's recognize that we have this huge hill to climb in communication as well. And we need to find a way to build a brand that makes people feel like they know that we exist and they understand what we do and that it's different and why it's better for them. They trust that the experience we deliver is going to be a good one that if they don't like the car, they can return it. But like we have to build this brand too. And that's a really, really important part of what we're doing because you can build the most beautiful business model in the world that no one ever hears about or cares about. And honestly, if you're picking one or the other, communication matters more because you can't succeed without communication. That's a prerequisite.

Starting point is 00:41:53 But I think to build a great business you need both. And so, you know, that's something we try to put a lot of effort into both sides of that equation. What mistakes or failures have you had in the effort to be good communicators? And what have you learned from those mistakes? I think the biggest mistake is being too close to it and being too proud of yourself and assuming the customer's care. If you look at our first homepage, it was like PhD presentation on why we were a great business, 70 bullet points with 13 sub bullets of like why this makes sense for you, Mr. Rashed customer.

Starting point is 00:42:25 And that's not effective. You have to give the customer something that causes them to want to give you their attention. And then once you have their attention, you have it for this like, fleeting moment. You have to get the best message you possibly can through to them about who you are and what you do and that you exist. And then you have to try to brand it really quick. And I think that to me, I almost think of marketing existing on that spectrum where like you can do these unbelievably cool stunts and then put your logo at the end. And you're going to get a lot of attention because like you did

Starting point is 00:42:54 something so cool that everyone wants to pay attention. You didn't get an opportunity to explain what you do. And I think that like trying to creatively solve that equation where you're doing things that get people's attention, but you're doing it in ways that allow you to tell your stories so that you can kind of build from no awareness whatsoever to awareness, understanding, and trust. That's a really, really hard thing to do. And I think at first, we started by just trying to say, like, of course people care about us, because we care about us. So let's tell our full story. And we didn't pay them for their attention. And I think that that was like a big mistake. And I think that we're over time learning more and more. And I think the right answer, too, by the way, changes as a company evolves.

Starting point is 00:43:29 And I think in many ways that part of what's valuable about a brand is a brand ultimately can capture for a customer. Your logo can start to mean, I know what Carbon is. I understand what they do and I trust them as a brand. And once it means that, you have all kinds of new marketing opportunities because now you can just do really awesome things with just your logo at the end. And people will get it and you're going to get tons of attention. But early on, your logo doesn't mean anything to anyone. So you don't have that opportunity. So you have to be super clever about grabbing a little bit of attention and then trying to kind of send your messages as effective as you can. I think we've got to.

Starting point is 00:44:03 a really great creative team. And I think that they've done an unbelievable job. They've put out tons of content. We've got basically like an internal agency. And they iterate a ton on content. And a lot of our content has not worked. And a lot of the stuff that we're most proud of has worked. But a lot of it has worked. And I think that we've learned lessons along the way and gotten better at it over time. One of the things that you've written extensively about in terms of what defines a great business or a great company is this idea that a company, a great one, gets a lot done and very fast, which I think always comes back to the people. It's unassailable that the market you're in and your penetration into that market is a great story.

Starting point is 00:44:36 Like it's a huge market, you know, you represent a relatively small percentage of it, even though that's been a huge amount of progress. So there's something amazing to be done here, but therefore it becomes about execution. Like how do you get from A to B? So talk about that idea of getting things done fast, like the role of organization and why that's such an important word in your business. I'm fascinated by this execution piece. We all have fixed time.

Starting point is 00:44:57 Time is fixed. And so therefore, speed is accomplishment. The amount you accomplish is governed by speed because time runs out. We've all only got so much, so speed matters a lot. And then I think there's this question of how do you actually move the fastest in reality? And reality's hard, and it throws all kinds of roadblocks in your way, and it's not clean. So it can't just be sprints all the time. It has to be smarter than that.

Starting point is 00:45:24 And I think the way that we've solved that equation, you know, solves a way to be strong a war. But the way that we try to manage that is I think we're tremendously lucky. And I don't think this was purposeful early on. But I think we're very lucky that inside of our management team, we have really different personalities. I am more on for sure, like the aggressive, move fast, optimistic. Of course we can do it side of things. And then we've got others on the team who I think are much more aware of all the things that can go wrong and are constantly bringing that up and constantly pushing it on that.

Starting point is 00:45:56 and are anxious every time they see any sign that something is moving off the rails, bring it up and we push on it. And I think that what's interesting is in a lot of teams, I feel like teams are made up of one or other personality type. And I think entrepreneurs are almost always the optimistic types. But if you only have that type, then you just run. You tackle all that complexity that's harder than you thought. You didn't appreciate how hard it was going to be.

Starting point is 00:46:18 And you get caught in the mud and you don't make progress. If you only have the anxiety around everything can go wrong, then you don't take any big swings. and you can't do anything truly exciting. If you can find those different personalities, and then the hardest part is binding them with a relationship that is real, that kind of values the other perspective and isn't annoyed by the other perspective, because I think oftentimes people on one side of the spectrum are annoyed by people on the other side.

Starting point is 00:46:41 I think that's where you can find the speed of reality. You can push to go as fast as possible, but you can be aware of all the things and go wrong. And I just think we've got a really good team that finds that balance. And I know like our COO for me represents that more than anyone else. And what I just love about our relationship is we always disagree. When the conversation ends, I always try to think afterwards about why he's right. And he always tries to think about why I'm right.

Starting point is 00:47:05 And then we kind of call each other up afterwards and make up and explain why one another was kind of right and where the right answer really is. And I think having that relationship is super important. And then I think that that's like the most important thing. That exists at a higher level, I think, than org structure, which we'll get to in a second, which is just you have to evaluate what the opportunities are, where you are, and how much you can take on all the things to go wrong, and then what's like the smart number of things to take off the shelf and start to build? And I think that that's really, really important.

Starting point is 00:47:32 Then to me, like, org structure fits underneath that. And the way you organize people matter so, so much. And early on, it doesn't matter because you're small and you're nimble. There's not this risk of bureaucracy building through approval chains and through interdependency of all these different groups that have to coordinate and coordination costs and all these different things. So early on, it's super easy. But as you get bigger, there's like many different ways that you can organize all these different

Starting point is 00:47:55 functional groups. And they have all these different tradeoffs. But to me, it's a really important question. I think I could probably talk on that one for like an hour and a half. And I don't think I know the answer. I think we're starting to learn the answers as we kind of move to this problem and move through different scales and learn about it. But I think that to me, the quality with which you approach that question and the way that

Starting point is 00:48:14 you're able to learn where your organization is moving slower than you wish and why and how you can kind of evolve that, that's what increases like your overall capacity. And then all of a sudden, the person representing kind of the more negative perspective and the person representing the positive perspective, all of a sudden now you have more speed. You have more capacity inside of your system to take on if you do a good job answer to that question. So you have all the exact same debates, but you get to take more things off the shelf simultaneously. The ability to have that debate to soberly assess where you are and what you realistically can do is really important to prioritize and take the right number of things off the shelf,

Starting point is 00:48:47 but then also just building a company that has the capacity to move quickly is really important and to me is a totally separate problem, but a very important one. The company itself has scaled a lot. So you've gone through these like a snake shedding at skin multiple times or something. You've kept having to build more organizational structure. And to go fast, I think maybe one of the strategies is to not go slow. What are the things that you've done to make sure you don't go slow so there aren't those decision approval chains, that there aren't the things that traditionally slow down big

Starting point is 00:49:14 companies. What has worked here to stop you from slowing down as you've scaled? I'll give an example. For the most part, every engineer, their favorite time of year is when you have like a half-thodon. It's like every company. And it's like, why is that so fun? And it's fun because there's complete independence. There's no coordination cost. There's no legacy technologies. There's no plugging into this team. There's no approval from this person or that person. You just get to run. You just get to build. And that's what a startup is. Like day zero of a startup. is a hackathon. And then as a company gets bigger, smart people across time have faced these questions. They've done their best to answer them. But what happens on average is you build bureaucracy

Starting point is 00:49:55 and bloat and it becomes less fun and the most productive people don't want to be there. It's not because people are stupid. They make the decisions they make for good reasons and they're smart and they're well-intentioned. But generally speaking, I think what happens is it's coordination across many different teams and it's approval, which is another form of coordination. So coordination to me is just kind of like the biggest word that drives slowness and that drives blow, that makes things less fun. And so you have to actually look like, what's the value of coordination? I think the value of coordination is having a cohesive strategy and it's prioritization, right? It's making sure that you're working on the right things. But it comes at this massive, massive cost. And so how do you try to

Starting point is 00:50:31 generate the most independence you possibly can while still having a cohesive strategy, minimizing coordination costs the best you can? And I just think that we've definitely learned over time that We're not in an awful place today. I'm sure we're not. I'm sure we'll keep evolving. But having more independent teams that have a formulaic way of articulating where they want to go that is then signed off on. This is like the strategy.

Starting point is 00:50:57 This is where we're all heading. We believe in this. And so we make sure that we have cohesion in like the strategic direction that we're going. But then trying to organize those teams and all of their processes in the skill sets that exist on those teams and the ways that they build technology so that they don't have as much dependence on others and so others have less dependence on them, but trying to structure them so they can be as independent as possible. So once there's an agreed upon direction that you're running, they can run as free of coordination as possible. I think that's the goal. And what that necessarily

Starting point is 00:51:25 means is that you're giving up power, giving up some decision-making authority. But in my opinion, at least, people are smart. And once you have a conversation about the direction you want to go, the value of speed and the value of excitement and the energy that gets built on a team that can build things quickly and move fast without all kinds of boring coordination, absolutely overwhelms the value of you being in control or me being in control. It's probably not surprising that it reminds me of the Amazon PRFAQ idea of like a structured memo for communicating ideas. What is the literal formula that you found effective for, say, a team to communicate what it wants to do and why? I think it's incredibly similar. Something that I think is important inside the culture of a company

Starting point is 00:52:07 is to be a culture of problem solvers and to face a new problem and when you face it, not answer it the same way that everyone else answered it, but think about it from first principles and try to come up with the best solution you possibly can. That is culturally important. You want to embed that inside of a company. Once you have that, you don't want to copy things that other companies have done because it erodes the culture of being first principles thinkers and solving problems yourselves. That said, I do think Amazon's done a tremendous job at solving this particular problem. That's just a fact. And I think that if you read books about their history, I think a great one is working backwards. I think that you find things that are just true

Starting point is 00:52:46 inside of every company. And you see them fighting battles that you're fighting. I'm sure you think often about resilience and adaptability of the organization, because you've talked a lot about how reality throws curveballs. And I think our curveball bias is to think negative things. But interestingly, reality also throws upside curveballs. And I think COVID is a really interesting question for any e-commerce or any web-based or digital business, that it was sort of this positive Six Sigma event or something. And there's a risk there too, that you're not prepared to take advantage of those things when they come. So adaptability works, you know, in both good and bad directions. What was that experience like for you? How did it feel going through something that

Starting point is 00:53:25 seemed like for a lot of businesses originally felt like an existential risk? And then it felt like perhaps the largest opportunity that ever existed. What was it like as a leader to navigate that last year? There's so many different stories that we could discuss about COVID. Most importantly, what it was is it was massively unexpected. And when you face massively unexpected things,

Starting point is 00:53:48 all the things that you hope are true get tested. Your ability to face difficult problems gets tested. Your culture gets tested. Your adherence to your values gets tested because you face fear and you face uncertainty and when you face those things, it's easy to get really short-term focused.

Starting point is 00:54:04 I just think we felt all those same pressures. Every other company in the world felt. We all felt it. We were all scared. What does this mean? Something I'm very proud of is when we felt those pressures, when those pressures pointed in the direction of solutions that ran afoul of our values, our culture, and our principles,

Starting point is 00:54:24 we like acknowledge that and we sat in a room and we're like, now what do we do? Try to make that as concrete as possible. Something that's just really unfortunate, when you're building a business like ours, a lot of the value in the long run is in the way the system functions. It's in the technology and the processes that you're building. And you need to keep moving forward to that because when COVID hits,

Starting point is 00:54:46 there's a world on the other side of it. It's going to be a little different, but there's still a world on the other side of it. You need to have this system operating. Suddenly you have this dramatic reduction in demand and in revenue. And so what that means is all the people that do all the real actual work on the front lines, they don't have as much to do. That's just the truth. And so then as a business that's trying to say for the long run, health of the sum of all of our

Starting point is 00:55:09 constituencies, we have to keep building this machine. But now, like, the investment community views us differently. And, like, our view of what our runway from a cash perspective looks like before is different. It's a totally different world. What do you do? We've got all these people inside of our team that were here to produce triple-digit growth. And now all of a sudden, we're facing a massive reduction in sales. And so across the economy, you know, you saw layoffs and furloughs and all these things.

Starting point is 00:55:33 And there was very good economic reason for that. And I don't want to, in any way, shape, or form judge anyone that made those choices in those moments because it's like it was hard. And that was reality. That reality was a real bummer, but it was still reality. And so when we were facing that, we knew we had to do something similar. We had to cut costs too to keep the machine spinning and build it. But that meant cutting back on this team that we had built, all of these people that worked so hard and made Carvona part of who they were and who were relying on us and who in many ways were maybe the. the least capable of absorbing the shock of an income hit. That's a hard one. We came up with this

Starting point is 00:56:09 plan to build the world on this together fund. One of our values is we're all on this together. Our entire executive team put our salary through the entire period into this fund. Our board did the same. And then we basically put out video. We started doing probably twice a week company updates over video because we stopped having all hands meetings. And we basically said, hey guys, here's the situation we're in. And this same situation that everyone else faces, this sucks pretty bad. This is not a good place to be. So we have to do something. Here's what we think the best answer is in the long run, but this hurts people, right? And this is going to hurt people that are part of our team. So we're going to build this fund and this is what we're going to do. And for all of you out there

Starting point is 00:56:46 that can absorb a little bit more strain, but if you're in tech or you're in corporate, and so you're still building the machine. And so you still got your full paycheck. But we're going to pull back on everyone else. If you can, and don't do it unless you can, but if you can, please contribute to this fund. And this fund's going to be distributed to, the people who need it more than we do as we ride this thing out together. That's a value. So like, are we going to live up to that right now or not? And we really tried to send that message to the company in a way where we didn't want to obligate people to do it. We knew that we could afford it. The board could afford it. The executive team, we could afford it. We were going to be

Starting point is 00:57:16 all right. But to me what was so awesome was just hundreds and hundreds and hundreds and hundreds of people across the company poured money into that fund, like sent emails back and said, I'll give up my entire salary through this period. Even people, hourly people, they were in different situations where maybe they still live with their parents or maybe they had a spouse that their job wasn't in a tough spot. They poured everything into it. And it was just like such a cool moment of coming together and seeing people become people when it mattered. I just thought it was so cool. Because to me, that was a moment where we creatively solved the problem and this cultural ideal that's so easy to pound your chest about when times are good. It got tested and like everyone stood tall.

Starting point is 00:58:00 Everyone showed up. It was just cool. And so to me, like, that's the thing I'm proud of inside the business by a long, long way. It's a cool moment. I don't think we'll ever surpass it. And I hope we don't ever face a question where we need to surpass it again. But to me, that's like my favorite COVID story. And obviously there's so many other things that happen from demand perspective and supply chain perspective and whatever else.

Starting point is 00:58:21 But that was like the deepest thing that mattered the most. It's an incredible story. And it makes me wonder like since you're sitting in such a unique seat where you're obviously the product is physical, but the business is so operationally intensive and digital. Do you think that COVID just fundamentally change the nature of customer preferences and demand forever? Do you think that we'll see a return to normalcy or that this is just a seismic shift in the way that the economy, economy works and there's going to be a digital version of everything, which maybe you wouldn't have said that buying a car 15 years ago. You just said that's crazy and now here you are. Do you think it's something permanently has changed? I think both is the answer. We've talked a lot about

Starting point is 00:58:59 what changes, what the best business model is, customer preferences and technology. But then, even as the best business model gets built, there's this communication layer of explaining that it's the best. I only think you can think of COVID as being this acceleration of the communication layer because all of a sudden, people that would have never ordered groceries online or never would have ordered food from an app, they were doing that. And so habits were broken and ears were open to new ways of doing things. And then once people try things that are actually rationally better, they tend to realize it.

Starting point is 00:59:31 But they might not have tried it for 10 years otherwise. Like, I don't know that fundamentally persistent customer preferences are going to change that, that much as a result of COVID. I think business models that all, already were better given pre-existing preferences, but hadn't been adopted to the level that they might have been adopted because of difficulty in communicating the quality of those businesses. I think that those businesses may get adopted more quickly because habit was broken and people tried new things. That causes adoption just happened at a different speed.

Starting point is 01:00:03 We open our conversation talking about this notion of physics envy, maybe that investors or just all people have wanting simple explanations for what are fundamentally complicated and detailed things. Are there any other leaders, businesses, individuals that you've learned the most from watching or studying that you think people out there should study themselves? There's all the obvious ones. I agree with all the obvious ones. Jeff Bezos may be the greatest business mind, I don't know, in a really long time. Elon Musk may be like our generation's version of Isaac Newton or Benjamin Franklin. There's like these incredible people out there. for me, like in my little experience that I was really lucky to work for a CEO before starting

Starting point is 01:00:46 Carvana that saw the world very differently than I do. I do tend to be more conceptual and strategic and kind of bigger picture and then try to kind of reduce down from there. This person was so bottoms up, wanted to go talk to all the operators and learn about their problems every single day and what mattered to them and was so much about culture, which at the time I didn't believe in, or didn't think was important. I learned so much from my exposure to him. And I don't know that it was just because he was good, although I think he was good. I think it was more because he was so different than I am and he was effective. And it forced me to recognize places where I was wrong and where I wasn't as effective as I wanted to be. And it forced me to value these other skill sets in a way that I'm not

Starting point is 01:01:31 sure I otherwise would have. I think just get exposure to people that see the world different than you is a useful thing. You may walk away and think I was right all along, but you're going to have that position with more conviction and with more evidence than you did before. And probably that won't be how you walk away. Probably you're going to learn something from people who see the world differently than you. So he played a big role in shaping who I am and how I see things. Two closing questions for you. The first is about surprising aspects of the industry in which you operate. Obviously, we don't get to spend the time you do inside of this network, this space, this logistics set up. Is there anything surprising about the future of transportation and or cars that

Starting point is 01:02:11 you think people would find interesting? There's the obvious questions like autonomous vehicles and what that will do. And what do you think are interesting things that you spend your time studying as you look to the future as a company focused on change and technology and logistics? What are areas that people might be surprised by or not fully appreciate about transporting cars? I think one, recognizing that the use car market is really just this huge apparatus where customers trade cars. I think that has all kinds of interesting implications. I think the opportunity here is really, really large for all the reasons that we've articulated. And I don't think looking inside the industry at the biggest players is the best way to appreciate what that opportunity is.

Starting point is 01:02:48 I think looking at other disruptors and other verticals and seeing what sorts of things they were able to do in other industries is a better way to think about it. There's so many things happening in this industry right now more broadly, whether it's electrification or the move toward autonomy or big, interesting cultural things that are happening now. because of COVID, people moving to more rural environments and out of urban environments, all these interesting things happening. I think there's so many interesting things. I think as a company, what we have to focus on is where do you have the most conviction, where you can make the biggest impact, the fastest, that constantly positions you for how the game keeps unfolding in front of you in the future. Because I think that trying to foresee six moves down the field is to some degree pretty hard.

Starting point is 01:03:33 But if you can keep saying, we know that if we build more of these inspection centers and bigger logistics network and a better transaction platform that does all things customers want more effectively, we can keep gaining more and more scale that builds more and more of those assets that generates all kinds of interesting opportunity for us

Starting point is 01:03:48 because customers have all these needs when they buy a car. Regardless to the evolution of all these things, there's just going to be opportunity there. I think that's the area that we should spend the most time and energy because we have conviction, we can add value and position ourselves well for whatever the future is.

Starting point is 01:04:02 As it relates to autonomy, like the most interesting thought that I would say that I would just think is to some degree counter to the simplest narrative there is I think that autonomy equals fleet ownership is way too quickly made of a logical leap for most people. I think that when you start to do the math on how cars actually depreciate,

Starting point is 01:04:24 which includes depreciation and mileage and depreciation in time, and then you start to think about the realities of how humans interact with each other and that being physically next to each other is valuable and that people share schedules and therefore cars are going to sit idle during certain times, regardless, like this ideal of having cars constantly moving

Starting point is 01:04:43 is probably to some degree difficult without massive cultural shifts. And then you start to think about the math of how those things unfold and you start to say, wait a minute, let me even imagine that full autonomy, I can snap my fingers and I can arrive at full autonomy instantly. Is it then obvious that fleet ownership is the right economic solution for people,

Starting point is 01:05:00 or does it remain the case that personal ownership is the right solution? And I think when you do all the math, it's way less obvious than people think that fleet ownership is the right solution. I think that that will be like an interesting one to watch unfold as well. And that's not a position that I would hold with any conviction. It's just something that you asked for something interesting. You brought up autonomy. And I think that's at least a place where I'm not sure that my personal views

Starting point is 01:05:20 at least totally align with consensus views. I love the idea in general, though, of building a platform not predicting the future, as the operating strategy, right? And then whatever the future brings, the platform will be able to react. I think it's a really powerful closing point. I ask everyone the same closing question, which is to ask, what is the kindest thing that anyone's ever done for you? That's a big question. I almost got to be careful. I don't go a certain place, but I'll get all emotional on that one. Let me try and tie back to our conversation. I'll remember the moment for the rest of my life. But early in COVID, we were on a

Starting point is 01:05:51 director's call, and we were talking to all the directors in the company. It's around 100 people at the time. and we're giving an update to what we're doing. And one of the people in PeopleOps started talking about how the emails were coming in and people were contributing to the World on this Together Fund. And when they first brought up that there were hourly people, we had just cut 80% of their hours, and they were contributing the next 20%. To me, that was like an absolutely incredible moment.

Starting point is 01:06:16 Because it was just, that's a person that we, the company, was hurting. We were hurting them in that moment. And then they were standing up for the company. And to me, that just, that speaks to a bigger thing, which is people are good. And I really believe that, too. That one, that one got me. That was a cool thing to seeing people. And there are others too, but, but that's at least relevant to Carvonne and that one hit me. Wonderful, wonderful closing spot. I've learned a lot from our few conversations and reading about the business and I think it's just a fascinating one to study. I really appreciate your time and all you shared with the audience today. Thanks, Ernie. Thank you very much. This episode was brought to you by Snack Magic. four-part miniseries, I sit down with founder and CEO, Seanuk Amin, to talk about the origins of the

Starting point is 01:07:00 business, how they manage the complex logistical operation and what lies ahead in the future. In this week's episode, Seanuk and I discuss Snack Magic's origin story and an overview of the user experience. So, Seanuk, the best way to begin is with a great origin story for this business. It's very unique. It's very timely. It was a COVID story. Start by telling us the origins here and how you got to the idea for Snack Magic. Patrick, we've been working as a team together for close to 80 years. We ran a business called Stadium, which was a food delivery business based in Manhattan, New York. And the idea for Stadium was if a group wanted to order food from different restaurants,

Starting point is 01:07:39 let's say you were vegan, I wanted sushi, someone else wants a burger. It's very hard to do in a group where everything arrives together. So that's what stadium was. Groups could order from different restaurants and everything would arrive at the same time, in time for your meetings. Everybody can eat together and each dish will be labeled with your name on.

Starting point is 01:07:58 We ran the business for a good six years growing incredibly fast. February 2020 was our best month and we were growing 15 to 20% month month over month. And the audience was offices. Everybody ordering lunch to offices. And then that third week of March

Starting point is 01:08:15 or second week of March, everything went to zero overnight. And we had to do something. You know, we aren't the kind of people where we'd say, you know, we'd wait for this to pass over and then. So immediately, I think next day, we stopped on Friday and Monday, we're talking about how can we use this time to think about something new, something different, that play to our strengths.

Starting point is 01:08:37 You know, we didn't want to do something completely different, wanted to stick to our strengths. And what we realized was our strength was group gifting at scale, where an organizer can speed 200 people in less than two minutes and each person can choose their own, right? that was what stadium was. And we said, can you apply that concept to something else? And what we did is anytime we can't understand something, what we do is we'll talk to like

Starting point is 01:09:03 40 people in a two-week period or less. So we get a lot of data points and then we're connecting the dots. So we spoke to many customers and many brands. On the customer side, immediately like people were lost. They needed a way to connect with their teams to their clients. So we realized that they're looking for a solution. They don't know exactly what they want, but a fun way to engage. And on the brand side, what we realized very quickly was that we had so many calls from brands

Starting point is 01:09:31 and we thought everybody is closed. But what had happened was these small young emerging brands were getting kicked out of Whole Foods because everybody was talking up on essentials. And they did not have any way to reach their customers or new customers for that matter. So we heard that problem on the supply side where they have all this inventory, many of them were ready to get into whole foods or airports or offices or whatever, and things came too hard for that. And then I think we said, yeah, there's so much cool stuff out there.

Starting point is 01:09:58 If we could apply this model to this particular supply site problem, we could build a business out of it. So we said, yeah, fine. So we're going to create this concept. When we looked at the market at that time, it was boring snack boxes where I would pick and send the same box to everybody, but people are different. The snacking preferences are different. So we said we are going to turn the model on its side where we'll create a very cool, interesting

Starting point is 01:10:22 menu of hundreds of brands, like you as the organizer to set up a treat with everybody the link and everybody will build their own custom snack box. That's how snack magic was born. From idea to first order was three weeks. Maybe just a level set you could describe the exact experience that both the, let's say the gifter or the sender goes through exactly what they have to do in the product today and exactly how it feels to the receiver or the user of snack magic. So on the organizer side, you go to the website, you click on start and order, we'll ask you to name your treat, who it's coming from. And it's as simple as just entering everybody's emails, whoever you want to treat, select a budget for them, each person, and then send the invitation out.

Starting point is 01:11:09 You could choose to add additional customizations, but you could add swag in the box, you could custom brand the box and all those things. But it's pretty much that. You know, you upload emails, send the invitation out. You get a unique link which you can also share via Slack or however you want. So that's on the organizer side. On the recipient side, you get an email, invitation emails, and you've been treated to snack magic, click here and build your own box.

Starting point is 01:11:36 They'll enter in their own address, each recipient, because they're traveling so much these days, nobody knows where they are. They enter in their own address. It's global, so anywhere in the world. And based on where they are, we'll show them a list of offerings, a menu that's usually on the US and Canada side, close to 700 to 800 unique items. And everybody can go in and filter the menu, add stuff to the cut. They'll see their budget deplete as they're adding items. And then they'll just check out. Say a bit more about who uses this and how they use it. So like, who are your customers?

Starting point is 01:12:06 If you had to identify the top two or three use cases, what are they today? So I'd say the top two would be, one would be work from home perks where an employer just as a monthly thing, they want to treat their employees to build your own snack box every month. You don't have to do it every month. You could do it on an ad hoc basis for that we won. That's roughly 35% of our business. Another 35% would be virtual events. So leading up to an event, you want to send each attendee a box with some swag in it and get people excited and engaged for the business. So I said those two would be the top two. And then we have several others, fundraising and many others. Can you give a rough sense for what the budgets that people usually spend on their employees or on an event? What is the range? What's typical? Again, just trying to really zone in on for those listening. Like, here's how it's typically used. So our minimum is $45 per person.

Starting point is 01:13:00 And that includes everything, includes taxes, includes shipping. There is an $18 additional fee for non-U.S. recipients. Right. But that's all there is to it. If you want branding and swag, that's extra, but that's the minimum. I'd say the average would be between $50 and $60 per person budget. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly,

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