The Exchanges

Q All right. So, uh, let's jump into the business model for people that haven't used shift, uh, explain exactly how they use it. Is this for renting cars or buying cars or all the above?

A It's for both selling and buying cars. So there's two parts of the business. If you have a car to sell, you come to our website, we price the car for you, and then we'll buy it from you. Um, we'll pick it up from you at your location. We can drop it off at our location, whichever one you want to do. Um, that's available in all of California and all of Oregon. And then if you want to buy a car, you have three ways to buy a car. You can either, um, have a test drive be brought to you at your house or your office, um, or you can come to our warehouse to look around, kind of like you would go to a Costco, or you can buy a car site unseen online, and then it'll be shipped to you, um, anywhere in the country. Um, and you know, we sell a very broad range of cars, all used, but anywhere from one to, you know, 12 years in age.

AI assessment note: “It's for both selling and buying cars. So there's two parts of the business.”

Q In that value cohort, less than 12,000 dollar price point, more than 80,000 miles on the car, you'll juice your margin there. What, you'll double it 30% or you stick to closer to 15?

A No, we'll still stick to about, you know, 15 to 20%, but we'll do less reconditionings, right? So if we may, we might make 2000 dollars or 5000 dollars on that car, um, but we'll recondition only four or 500 dollars because buyers of those cars don't care so much about appearance. They care about safety and the car running really well, but they know that they're not buying a, you know, a new car or one that's in perfect condition on the outside in terms of what it looks like. But they're getting a car for, you know, that's safe and good for 10,000 dollars and all the cars brought to them for a test drive. So it's actually a really great experience in a world where you're buying a cheaper vehicle.

AI assessment note: “No, we'll still stick to about, you know, 15 to 20%”

Q I want to dive into that here and the virus and how it's impacting your business here in a second. But first I want to go just make sure really understand the business model here. I assume what you're actually doing here when you're giving me an offer on my 2009 great Prius. Is your listing and essentially selling it beforehand, or you know what you can sell it for?

A Uh, we know what we, we don't actually list them beforehand. We thought about doing that, but we've not done that yet, but we, we do know what we can sell it for. Cause we have a fairly complex pricing algorithm that we use to kind of understand where the market is. And then we try to give sellers an offer. That's usually better than what they would get trade in, or if they sold the car or close to what they would get, if they sold the car themselves. And then we sell a car, you know, at 98, 99% of market, um, so roughly where the market kind of generally is, um, and then make margins on the difference. Plus, we make money on, you know, financing, warranty, and other attached products that you can get when you buy a car. So it's very similar to what a dealership would do, except sell it as a little bit better, and the buyer gets a way better experience because the test was brought to them, rather than them having to go to a store.

AI assessment note: “we don't actually list them beforehand... but we, we do know what we can sell it for”

Q You, I assume, in your Assumption cells that drive the margins you want to make, ignoring the upsells of financing and warranties, you have an assumption cell to optimize for that. So if you were going to pay me, I'm going to make the math easy, 10,000 for my 2009 gray Prius, you know you can sell that for what on the other side?

A Yeah, probably something like, um, 11, uh, 11,500 is kind of what we try to target, meaning like a margin of 1500 dollars. And then some portion of that goes to, um, reconditioning the car, right? So we, that's not our full profit. Um, but that's very rough, um, because it all depends on the kind of car you're dealing with, right? And we have a segment in our business that we call Value Auto. So these are cars that are, um, below 12,000 dollars in price and over 80,000 miles on them. Um, they're actually very, very popular. You would be surprised, but the twice as much demand is for the happens for those cars. That's where everything else, um, even though they're older. Um, and so for that car, we actually do less reconditioning, right? So there we try to have a lot more margin on the car itself, less reconditioning because we know that we're going to make less margin on the warranty and the loan because the price of the car is so low. There's not a lot of margin to be made there. On the other hand, you know, for a more expensive vehicle, Like a BMW that's only four years old, you actually are okay making less margin on the car itself, because you know that most likely somebody's going to get a loan when they buy that car and you'll make margin there. So kind of our goal overall is to make money kind of in aggregate right on the full transaction, knowing that some cars will mak…

AI assessment note: “probably something like, um, 11, uh, 11,500 is kind of what we try to target”

Q Yeah, I mean, that's obviously impressive. How do you, how does that, I just don't know this industry stats, how does that compare to other car sales folks?

A Yeah, I mean, the way I tend to think about it is like, Carvana, which is a public company, they've been public for about three years now. They got started out of a larger dealership chain, kind of as a digital play. Um, so they went public, uh, in 2017. In 2016, they did, um, about 17,000 cars. Uh, and about three hundred million in revenue. So that kind of sets in context, like this year is meant to be our pre IPO year, right? Because if we do the revenue and the volume that we're projecting, we'd be in fairly good shape to go public next year. Now, again, who knows what happens and things might get delayed and change and whatnot. Um, our unit economics generally have been a lot stronger than theirs were prior to IPO. So we've also kind of never really pushed for crazy, crazy growth because there's a balance between how fast you can grow and the unit economics story. Um, you know, the industry as a whole is massive. Forty-five million used cars are going to be sold, uh, in the U.S. this year. Um, yeah, it's about 750, um, billion dollars in used and another, um, six hundred million in new. So the industry is really, really massive, but it's super fragmented. So the largest car seller that sells new, new and used sells about a million cars a year.

AI assessment note: “Carvana, which is a public company... In 2016, they did, um, about 17,000 cars.”

Q Okay, so take me back. You did part of your series. Series D was seventy million in debt, I think, or series E was seventy million in debt. What are you using the debt for? You're not doing your own loans?

A No, the debt is to buy cars, right? Because we own the cars and you'll underwrite those with, with, with a debt because there's an existing product that you can use to do that in a very low interest rate. But when we started shift, we did want to do captive loans. It was kind of a vision My co-founder, Toby Russell, who's my co-CEO as well, he had actually been a Capital One before we started Shift, and part of the thinking was, like, learn a lot about financial services to get a financial services company going. But what you learn over time is that until you're doing about a hundred million dollars of securitization every quarter, it's too expensive to do your own loans. So we need to get to about a billion dollars in sales. Of which then, 40%, we'd be doing our, on our own, so like, four hundred million dollars of loans on our own, to be able to do them in a profitable way. So eventually, you know, out in 20, 24, 25, we will do capital loans, but we just need to grow to be large enough before we can do that. Um, otherwise, the costs are just way too prohibited.

AI assessment note: “No, the debt is to buy cars, right? Because we own the cars”

Q total business, obviously I think it's very clear to the audience, how you make money on the spread between what you buy and sell. There's obviously financing, there's warranties, et cetera. But if you look at it, The total revenue you guys did last year, there's obviously a percent that comes, or that's the question, actually. What percent comes from the margin between buy and sell versus financing the warranties?

A Yeah, right now, it's probably two thirds comes from the car, and one third comes from the warranties and loans. Um, in the world which we want to be in over time, it's probably going to be closer to like, um, 4060, maybe even 55, um, 45. Um, like, that's the ideal world. Like, really successful dealerships, Um, are actually closer to a 60% loan, uh, and warranty and 40% metal, but they also sell new cars and new cars have lower margins on the metal. So it's a little bit of a different world. Um, but, but I think like we are trying to probably trying to get to a place where 60% of our revenue comes from the cars and 40% Uh, comes from loans and warranties over the next 1824 months.

AI assessment note: “two thirds comes from the car, and one third comes from the warranties and loans”

Q Got it. And give us a sense of kind of a growth in size. What year did you found the company in?

A Um, so Shift was founded at the end of 2013, um, and then we spend, you know, a few months getting ready to be in business. Obviously, there's a bunch of things we had to do like get, um, you know, insurance and kind of define a model, um, build a website, et cetera. And we started selling cars in June of 2014, um, so about two years ago now. We've grown from, you know, um, uh, four cars in that first month to, uh, Being a, uh, a very large, um, way to, or a very significant part of the market in San Francisco, we generally have not released sort of our volume numbers, um, just yet. Um, we, we might do that soon, but we haven't done that yet. Um, but we are, you know, pretty significant.

AI assessment note: “Shift was founded at the end of 2013”

Q So that last round was, it was over a year ago. Anyone on your path, you're raising every kind of 12 to 18 months, which means you are in the middle of raise right now, and this virus is throwing everything in the air. How are, how are you handling that?

A Yeah, we were planning on going out in the next, um, kind of month or so basically, um, to start the funding process. Um, look, we are, um, we're in strong shape financially, which is good, and we can weather sometime, right? I think in practice, there's going to be a bunker mentality out there for 60 to 90 days. And so nothing's going to happen. Um, and I think we all need to bunker down and kind of get ready for that. Um, and then we'll, um, you know, plan for, um, uh, for the funding period after that. Now I do think, look, in practice, valuations are going to come down, right? So I think not being overvalued right now is a good thing. I think we're lucky because I don't think we're overvalued, um, compared to a lot of companies kind of out there. Um, and then secondly.

AI assessment note: “we all need to bunker down and kind of get ready for that”

Q Are you scraping data from other kind of online websites to make sure you set a profitable price? I mean, is that how it works?

A Uh, we scrape a lot of data from a lot of different sources, um, to, to get the right price on cars. Um, and we, we built a pretty complex pricing algorithm that's like very unique. In the market, but my point about revenue was that in, in 2014, oftentimes we'd mispriced cars, and so when you would have a loss on a car, Um, that, uh, loss obviously accounts against revenue. So, you know, we, um, probably also had a lot of negative, uh, revenue in addition to positive revenue because of the, some of the losses on cars. Cause I, you know, in the beginning we didn't have all the data that we needed. And so we'd go to more traditional places to price cars and those are super inaccurate.

AI assessment note: “we scrape a lot of data from a lot of different sources”

Q like, lost your audio, George. Now you're back. You're back. Uh, yeah. Yeah. By the way, look, nobody knows, right? Even Wall Street analysts are saying this is the hardest quarter we've ever had to predict because you just have no fricking clue. So with, I mean, what did take me in that meeting to the extent you can, I mean, how do you think about our plan for this?

A Well, I mean, it's, so I think for a lot of Tech companies, it's a lot easier to plan, and for us, because they just have, like, a very office-based workforce, right, that either is coding or is selling, and so when people start talking about work from home, that's a lot easier to arrange. We have a much harder time with that because we actually have to be in the retail business as well, so we have, like, a two-faceted workforce, and what happens on the retail side is very different, and it's a different type of employee than typical Silicon Valley startup employee, um, and, you know, uh, Unfortunately, they're the ones who are that type of an employee is the one that's hit the most in times like this in terms of kind of Um, you know, wages, et cetera, et cetera. So we just kind of, we don't have any answers yet. We're just trying to figure out what's going to happen and what our options are at this point. That's what we're going on. We were still in business this weekend. We actually had a reasonably good weekend, um, better than I had expected that we'd have, um, which is good. Um, now again, like if a test drive is brought to you, you don't really actually come in contact with that many people, right? So, um, it's the same as if you're ordering delivery for, for food, et cetera. So I think that piece is really positive. And then of course, by now, um, You know, literally you…

AI assessment note: “We're just trying to figure out what's going to happen and what our options are”

Q Did you risk it all, though? I mean, did you put all your money in? Did you have no backup plan?

A I put a lot of my money in. I didn't put all my money in, but I put a lot of my money into my company, yeah. Um, so, uh, the reason was I had a used car, um, that I had leased out. That was actually my very first car, um, back in, uh, 2007. And then in 2010, the lease was kind of running out. You know, it was like a 38 month lease or something. And I wanted to buy out the car. So I went to a bunch of different banks trying to get financing for the purchase. And none of them would do it. And I couldn't understand why. Cause I'm like, all of you guys do auto lending. Why wouldn't you give me a loan then? But the answer always was, Hey, why don't you go to a dealer and a dealer will be able to give you a loan? So, um, that kind of was like a very strange experience. I went to a dealer and the dealer actually approved me for financing with, um, two of the four banks that said no to me when I went to see the banks themselves. And so that was kind of the beginning of learning about the outer space. I'm like, this makes no sense. Let me understand why. Turns out because there's this thing called a direct loan when a bank issues your financing automatically, and there's an indirect loan when you get money, um, from, you know, from a bank, but it's through a third party, and they really only like to, um, indirect loans. Um, so, um, that kind of, uh, uh, got me interested in, like, can w…

AI assessment note: “I didn't put all my money in, but I put a lot of my money”

Q We have five minutes left. Let's shift to the other part of your business, which is very interesting. Uh, you sell the car, you're potentially, you know, putting a loan out. There's financing, there's warranties. Let's assume you sell me a 20,000 dollar car. I have generally kind of okayed a good credit. What's that loan? What are those loan terms going to look like from you?

A So we work with banks to provide financing. We don't do financing on our own. Um, so we have, you know, almost a dozen banks on the back end, it's called, that are providing financing, and what we do is we have technology that's unique in the industry, does not exist anywhere else, that allows you to submit your information to us all digitally, and then we're actually able to pre-qualify you for, for a loan to understand what kind of loan you will qualify for, and give you a sense of what your monthly payment on that loan is going to be, what the interest rate will be, etc., And you can kind of change that, right? So, well, actually, I'm happy I'm paying a high interest rate, but I want lower down payment, or I want a high down payment, low interest rate. So you can kind of manage that yourself.

AI assessment note: “We work with banks to provide financing. We don't do financing on our own.”