Ernie Garcia - Leading Through Crisis - [Invest Like the Best, EP.397]

My guest today is Ernie Garcia. Ernie is the co-founder and CEO of Carvana. Ernie joined me on Founder’s Field Guide in 2021 and despite all that the business has gone through since that conversation, you’ll hear how he has the exact same demeanor and crystal clear vision for the business and its operations today. Carvana is one of the most remarkable business turnaround stories in recent history, and Ernie gives us a raw and candid explanation of navigating through a 99% stock price decline and ultimately emerging stronger on the other side. I don’t know many leaders who could survive this. He credits his team of A players again and again for successfully weathering the storm and maintaining morale. We discuss leading through crisis, building for the long term, and a focus on ruthless prioritization and efficiency gains. Please enjoy my conversation with Ernie Garcia. Check out our new print publication Colossus Review. My guests today For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Ramp. Ramp’s mission is to help companies manage their spend in a way that reduces expenses and frees up time for teams to work on more valuable projects. Ramp is the fastest growing FinTech company in history and it’s backed by more of my favorite past guests (at least 16 of them!) than probably any other company I’m aware of. It’s also notable that many best-in-class businesses use Ramp—companies like Airbnb, Anduril, and Shopify, as well as investors like Sequoia Capital and Vista Equity. They use Ramp to manage their spending, automate tedious financial processes, and reinvest saved dollars and hours into growth. At Colossus and Positive Sum, we use Ramp for exactly the same reason. Go to Ramp.com/invest to sign up for free and get a $250 welcome bonus. — This episode is brought to you by Tegus, where we're changing the game in investment research. Step away from outdated, inefficient methods and into the future with our platform, proudly hosting over 100,000 transcripts – with over 25,000 transcripts added just this year alone. Our platform grows eight times faster and adds twice as much monthly content as our competitors, putting us at the forefront of the industry. Plus, with 75% of private market transcripts available exclusively on Tegus, we offer insights you simply can't find elsewhere. See the difference a vast, quality-driven transcript library makes. Unlock your free trial at tegus.com/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Follow us on Twitter: @patrick_oshag | @JoinColossus Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com). Show Notes: (00:00:00) Welcome to Invest Like the Best (00:06:00) Carvana's Journey (00:07:38) Facing the COVID-19 Challenge (00:08:12) The Rise and Fall: Carvana's Rollercoaster (00:10:05) Leadership and Resilience in Tough Times (00:14:32) Handling Drawdowns and Communication (00:16:58) Maintaining Calm and Leadership (00:18:19) The True Story of Carvana's Journey (00:20:36) Navigating Market Challenges (00:23:40) Learning to Say No (00:30:35) Project Management and Accountability (00:34:22) The Importance of Player-Coach Leadership (00:35:53) The Importance of Vertical Integration (00:40:43) Customer Experience and Vertical Integration (00:41:41) Navigating Economic Variables (00:43:52) Building Resilience in Business (00:45:27) Balancing Personal and Professional Life (00:48:57) Efficiency and Growth in Carvana (00:59:02) Insights on Investors and Entrepreneurship (01:02:42) Lessons from Family and Origins of Carvana (01:11:22) The Kindest Thing Anyone Has Done For Ernie

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:35Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes and other resources to keep learning at joincolossus.com.

• 1:00Speaker 01

  Patrick O'Neal is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc.

• 1:29Patrick O'Shaughnessy?

  My guest today is Ernie Garcia III. Ernie is the co-founder and CEO of Carvana. Ernie joined me on this show in 2021 and despite all that the business has gone through since that conversation, you'll hear how he has the exact same demeanor and crystal clear vision for the business and its operations today. Carvana is one of the most remarkable business turnaround stories in recent history and Ernie gives us a raw and candid explanation of navigating through a 99% stock price decline and ultimately emerging stronger on the other side. I don't know many leaders who could survive this. He credits his team again and again for successfully weathering the storm and maintaining morale. We discuss leading through a crisis, building for the long term and a focus on ruthless prioritization and efficiency gains. Please enjoy my conversation with Ernie Garcia.

• 2:15Patrick O'Shaughnessy?

  All right, Ernie, so you've got a nicely profitable business, growing 40%, only 1% market share, big road ahead of you. Must have been a easy last couple of years.

• 2:25Speaker 02

  That's basically the correct reduction of our story, and maybe the podcast is over.

• 2:29Patrick O'Shaughnessy?

  It's great to see you again. I am so excited to have this conversation. I really do think that Carvana and your story, the last three years, has been one of the most interesting business and market stories that I've ever seen. In this case, I'm really lucky because I know a lot of your large investors. I know the story quite well, and I'm really excited to pick it apart. And I think because it has just been such an insane turnaround from a moment in time, as I'm sure a very scary or stressful point in the company's history, I'd love you to just tell us, bring us back to whatever you think of as the most harrowing or stressful moment in this whole story. I want to get into all the aspects of the story because I just think it's so rich with interesting detail and how you managed through

• 3:11Patrick O'Shaughnessy?

  it. But maybe you could just bring us back to sort of right in the middle of the battle to get through all the COVID-induced strangeness in the business and then get it back on its trajectory.

• 3:21Speaker 02

  Sure. I'm going to take a step and a half back just to set context, and then let's get to those moments. I think we started in 2013, and we were a startup out of Phoenix that couldn't raise venture capital money. And I think we really had to scrap and claw to get a little bit of momentum. And we went public in 2017. We were the worst IPO of 2017. I believe we went out at 15 bucks. We were down to eight in a couple of weeks. And I think that's important because basically for a large part of Carvana's life, I think that we were fighting to get by. We were never blessed. We were never a company that was viewed as having an easy path and being a sure bet. When COVID first hit, that was a scary moment, for sure. That was a time when transactions dropped very rapidly, and we're a transaction business. So all of your expenses are still running and your revenues fall off. But luckily, that only lasted a couple of months, and then it turned into

• 4:06Speaker 02

  a positive. And I think from mid 2020 to nearly the end of 21 was the one period in our life when we were viewed as a sure bet, and we were viewed as a company that was going to be large and had a huge opportunity and had the right makings of something that could be a very interesting story. And I think that was fun. It's fun all of a sudden to be the cool kid at the business party. So we got to enjoy that for a short moment. And then I think late 21, a lot of things happened. I think supply chains were all breaking post-COVID and cars are a complicated product that are manufactured around the world where different COVID waves were creating various disruptions. And so car prices were going up and it was getting hard to supply cars. So supply was tight. That made cars less affordable. I think rates started to go up in 21 as well and in 22 especially. And that started to make cars less affordable again.

• 4:50Speaker 02

  I think the combination of all that, along with us being a business that was growing on average triple digit rates, basically from inception through that time, meant that we were massively overextended. Customers all of a sudden were struggling to afford cars. Demand dropped a little bit. There were a lot of other things happening in the economy. I think also led to an industry-wide reduction in demand. And we had just completed a big acquisition of a company called Adessa, which I'm sure we'll talk more about later. But that acquisition included taking out $3.2 billion in debt. And then investors, I think, at that exact same moment, as things got tougher across the whole economy and especially in technology, I think they switched from growth is the only thing that matters, the only thing that's valuable, to cash flow is the only thing that matters, the only thing that's valuable. And we had just positioned ourselves very poorly for that moment.

• 5:32Speaker 02

  And I think that that put us in a precarious spot where everything, all the winds started blowing against us. And that was the start of us going from finally being the cool kids at the business party to being reminded of what reality is and maybe who we really were for a second. And we had a tough time. The next year, year and a half was an absolute battle. It included a stock price drop of 99%, which is a comical number, basically. And I think importantly, to try to make it feel a little bit more real, 99% is one thing. But if you think about what it takes to like compound yourself down to 1% of your previous highs, it's 20, 20% drawdowns. And every 20% drawdown is just an absolute punch in the face for everyone in the business. So absorbing a punch or two is something a lot of people can do, but absorbing 20 big

• 6:16Speaker 02

  punches is really hard. So that was undoubtedly a tough time.

• 6:20Patrick O'Shaughnessy?

  I have a big overarching question about those 20 punches, which is just the literal things you were doing day to day, week to week, to keep the team focused and motivated, given what was an onslaught of not only price declines, but headlines and just fog of war around the business, given what was going on with COVID and Omicron and all these exogenous variables that just seemed like some of the punches just came from out of nowhere. And I'm just dying to know what you were saying, how you were running meetings, how you were running the business and how that changed, like the captain navigating the storm stuff? And what stands out most as having been important that you did in hindsight?

• 7:00Speaker 02

  Let me start with the intellectual part of that, which I think is important, but maybe less important, and then we kind of get to the people part of that. And then I think luckily we're a team where I think there's a lot of co-captains, which I think is very helpful for many reasons in a moment like that. The intellectual part of that is I think if you look over business history in general, there are very few businesses where they have a linear ride to whatever success is. Rarely is it a linear path to get there. Generally, if you want to measure it in stock price terms, because that's like such an objective, visible measure, there are generally many large drawdowns. Amazon, I think famously went down 96%, give or take, in 99 or 2000. Most other companies that people would talk about as great companies go through a period like that. And if you accept that that's basically part of the path from zero to where you want to go,

• 7:45Speaker 02

  I think it also becomes true that whenever that storm comes, that's going to be the most important point in the company's history, because it's going to be the moment where you're most likely to break for all the obvious reasons, but also the moment where you're going to create the most value. Because if you make it through that storm, that's where you get to success that's on the other side. And I think every company has to go through that. So we try to tell that story. We tried to set that up ahead of time. We tried to point to other companies that we all have a ton of respect for and say, let's put ourselves a little further back in time and look at their moment where they struggled. And then remember that this is our moment and they fought through theirs. And if we fight through ours, we'll be in a good spot. So this is an important time to be here. And if what motivates you in life is trying to make a difference in the world, then the moment where you can have the biggest impact is the moment that's most important and hardest. And this is our moment.

• 8:29Speaker 02

  So that was the way that we tried to articulate what was going on. And I do believe that's true. And I do believe for all the companies out there that fight through their moment of difficulty, I think that's an important time. And that refrain is helpful to remind people that other companies have been through the same thing, and it's not unique. It's part of just what the journey is. I think the other thing that was extraordinarily helpful, and I think it was circumstantial, and I don't want to take credit for it because I think it wasn't something that we knew we were designing for, but I think it's something that we stumbled into. The people that we accumulated early on that made up Carvana were basically just a very resilient group of people. They were people that I would describe as fighters. There's this saying that I think is really correct, which is confidence is preparation. And it's very hard to be confident in a tough moment unless you're prepared, and it's hard

• 9:12Speaker 02

  to find reps for preparation of difficulty. I'm a parent, I've got three kids. One of the places where it's easier in life to go get prepared for difficulty is sports. The reason for that is it's the only place you can go and spend 45 minutes, and you either win or you lose. Every once in a while, you have a comeback, and every once in a while, you're ahead, and the other team comes back on you. But you get lots of reps at going through emotional roller coasters that are hard, and you see all the various outcomes. We happened to accumulate a number of people that either played a lot of sports or had a sports mentality, and I think that that fed back into the entire group of people that we accumulated at Carvana. I think we just have a group of fighters who are very resilient. That was enormously helpful, because

• 9:53Speaker 02

  I think when you're going through that first 20% drawdown, the intellectual story works. And when you go through the second one and the third one, maybe it works again. But when you get to the fourth, fifth, the 10th, it's much more emotional than that. It's much more about whether or not people can stay level and stay focused on what they're doing and can have more faith on the people around them than the signal that they're getting from the outside world that says that you're doing something that's valueless. And that just requires grit and resilience, and it requires respect and trust among the team. We were very lucky to accumulate a group that I think had the critical mass necessary to have that be the feeling internally. So when it was hard, people stood up, and they were ready to fight, and they looked at each other, and they knew that everyone else was ready to fight, and that kept us together. And then it almost turned into, we're going

• 10:38Speaker 02

  to prove the world wrong, instead of, we're nervous the world knows something we don't. And I think that was tremendously helpful. I think that that's a huge part of what helped us ride it out.

• 10:47Patrick O'Shaughnessy?

  Do you have a favorite anecdote involving someone on your team from, let's call it drawdowns 15 through 20? That stands out in your memory?

• 10:55Speaker 02

  Every 20% drawdown is an event. You have earnings and you get smoked, or there's some brutal article out there that makes everyone afraid and reduces your story a little bit further to something that's clearly negative. And those are generally events that are big enough to where you want to communicate. And you need to pull the team together and talk about, hey, here's what's going on. Here's why we still feel okay. Here's why we're on a good path and we just got to keep marching. And a lot of times as we were going through that, my memory of it was you'd be pulling together teams from all over the country. So you'd be on Zoom and you'd be looking at faces and you'd have your materials prepared. But the most important thing that was happening on those Zoom calls were just the faces. You just got to look at the faces and see how it's being received. And you would see on faces resolve and collective productive frustration. That was like, we're going to overpower this.

• 11:37Speaker 02

  And you would see on faces nervousness and anxiety and wondering if we were off and the rest of the world was right. And you just had to hope that the resolve was going to be the winning emotion that was going to come out of those calls. And I think more often than not, that's what happened. Undoubtedly, there's some hand to hand combat there where you have influential people that you could see they're a little more nervous. And you got to go address that and talk to them and walk them through why you feel confident and why you feel like we're in a good spot. But the key is just managing that collective feeling of how we're getting through this and trying to ensure that at no point in time, does it ever just disintegrate into blame. Because I think when people get nervous and things aren't going great, you've all been fighting together for a long time. You've made thousands of decisions.

• 12:18Speaker 02

  Everyone can easily look back on decisions other people made that were probably wrong with the benefit of hindsight and start to point their finger. And if that ever happens, it's a disaster. So I just think you have to make sure that you never let that happen and that you stay together. And the adversity brings you together instead of forces you to fall apart. Like I said, we worked really hard to try to make sure that that was the case. I would like to think that the team overall did a pretty good job of managing that. A huge part of it was also just that we had accumulated a team of very resilient people and it made the job a lot easier.

• 12:46Patrick O'Shaughnessy?

  When I've talked to some of your larger investors, some of whom bought a lot of their stake in Carvana during this difficult time, they all said some version of the same thing, which is if they went on a walk or had dinner with you around, let's call it November 22, that you were extremely on top of it and calm. We were joking with Neil Maida from Green Oaks that he left one dinner with you and he said to his team, Ernie's either got this totally under control or he's a psychopath. And you quickly said, yes.

• 13:13Patrick O'Shaughnessy?

  I'm curious where the calm for you came from in, let's call it, fall of 22. And where, if anywhere, you did not feel calm, that you felt leadership is about holding the line and navigating through stuff like this. But I'm sure there must have been times, maybe not, when there were aspects of the story or what was going on that felt less in your control and some things that felt more in your control. So where did you get the calm from? Was there anything you weren't calm about? Just a little bit more about that nater point.

• 13:40Speaker 02

  Something that's true of the world, we all do it in every walk of life. And then I think it's very true with investors is the world's a complicated place and there are many data points. And a lot of times to find understanding, we're grabbing a subset of data points. We're trying to draw lines and those lines that we're trying to draw and extend are the story of what we think is happening. And to me, what was hard is in that moment where we were the cool kids at the business party in 21, the story was we always got it. We were geniuses. Everything we touched turned to gold and we had this inevitable walk into some incredible outcome. And the business that we had built was just superior in all these ways that we were going to win and it was inevitable. And then I think that all of a sudden in 22, the story became we were a zero interest rate phenomenon.

• 14:24Speaker 02

  We were only able to grow because we were giving customers unsustainable deals. The business model never worked. The variable costs never made any sense. And just like that swing was so violent. And to me, the place where I think, hopefully for most of the team, the calm came from is just that in our minds, neither of those stories were true. I think the story that was true was we took a big ambitious swing at a customer problem that we thought was important. We thought customers wanted a simpler way to buy a car. We thought that if we use modern technology to try to match modern customer preferences, we could build something that gave them a great experience and had lower variable costs and higher fixed costs and at scale would be really powerful. But the scale of the ambition of the swing was such that it was necessarily always going to be very hard.

• 15:06Speaker 02

  And I think that's the shortest story that I can tell that I think is true in the good times and in the bad times. When you felt that story changing, all of a sudden, all the stories in the news were very different and the stories that you felt like you were hearing relayed from investors were very different. It was helpful to just say, the story that was true is we're building something that matters that customers love, but it's hard. And every business that tries to build something that's hard goes through tough times and we're in that tough time and that's the truth. And every business wouldn't go through tough times if there weren't this recurring thing in the world that is people that are on the outside when like the feedback gets negative, they can respond violently and things can feel very, very negative and it can feel like the wheels are falling off. But the reality is many of these companies

• 15:50Speaker 02

  do ride out the other side. So in my mind, that was the true story. It was like, okay, this was always going to be hard. This is our hard moment. We've got the right team. We've got the right customer offering. We've got the right business. We can see how to do it and we've got a ton of work to do and the environment's difficult, but all you can do is do the work. And in a way, there's a little bit of peace that comes from just knowing what to do. Once you feel confident that you're like, okay, we're on the path and all there is left now is we just gotta go march. We just gotta go shovel. And if we just do that over and over again, either we're right or we're wrong, but we're gonna find out. And I was pretty confident we were right, but I think that's the best way that I could reduce why I felt good. There were a lot of people on the team that felt the same way. And I think that's important because I do think we have a team of people that I've got a ton of respect for. And I think that we would sit there and have that discussion

• 16:35Speaker 02

  during those moments. Like, hey, are we off here? It's important to be able to question yourself and wonder if you're wrong when the outside world is pushing against you. And we collectively were like, hey, listen, we know what the story is and it's okay that the world doesn't really see it the same way we do right now. But we know the story is we know what to do and we just gotta keep marching.

• 16:52Patrick O'Shaughnessy?

  If I zoomed to what from the outside looking in seemed the most volatile point, it was some combination of lots of debt and animal spirits around demand, just raw demand for the service and for cars, just like get cars. That was like in the single digit thousands per month or something below the advantages of big scale economies that you earn as you get bigger and bigger. And it was that combination, just low demand that's from this weird thing happening in the world. Omicron, I think was happening in the fall of 22, plus just this company has a bunch of debt from the Odessa acquisition. That was the investor narrative, thinking back on it. How did you talk about the combination of those two variables, if at all, internally to your team?

• 17:32Speaker 02

  Just that they would pass. Value creation in the world is about what's going to be right on average. And I think that every path, all of the various quantities that matter to how you're performing at a point in time, there's going to be variability around them. The number of cars that people are buying, where interest rates are, what's happening in the world from a macro perspective, which Omicron's an extreme version of that. But there's always going to be variability, but in the long run, the average situation is going to be, consumers are going to have their average confidence, they're going to be buying cars at average amounts. Macro economy is going to be in an average place. And you've got to build toward that average. And then I think you just have to be resilient enough to absorb when those quantities go negative on you. And I think our business, any scale business really, but I think our business in particular, it does have feedback in it.

• 18:16Speaker 02

  So when you're growing, it gets better. For example, the simplest way where it happens is just as we grow and get bigger, we buy more cars. We have more selection for our customers. They're more likely to find what they want. Their conversion goes up, so we grow again. And that feedback cycle occurs over and over again. And there are other areas of feedback in the business as well. But when it's going the wrong way, it's the opposite. All of a sudden, its demand has been reduced. You're in a little bit of a worse spot. You're overextended. The world's giving up on you a bit. There's a bunch of negative articles out there that are harming your brand. And now you're shrinking your inventory and a customer that shows up on the site is less likely to find what they want. And conversion drops. So you have to be able to absorb that. But on average, it's going to be the average. And so I think that the key to building a business is just build something that you believe is going to be good on average. And then make sure that you're able to absorb the blows that come inevitably when things go against you a little bit.

• 18:59Speaker 02

  And I think the market probably believed that we weren't going to be able to absorb those blows. And we believe that we could. And I think that was the difference.

• 19:05Patrick O'Shaughnessy?

  If I was to pull all of your senior team that was there during that time and ask them something like, what was Ernie doing that you think was the most important to keep driving towards progress and towards the other side of this storm? What do you think they would say?

• 19:19Speaker 02

  Well, I think first of all, it would be the sum of that team. But what I would say is, and then I'll circle back to exactly what you're trying to get at. A company's been around for a really long time that is generally doing the same thing and turning the wheel. They basically say no over and over again. And I think that what that inevitably leads to is a slow death. And I think that's the history of business. Eventually, companies get big enough, they accumulate enough bureaucracy, they say no often enough in really mature ways. And they eventually die off. And I think startups say yes all the time and that's why they're more likely to die of indigestion. We were a company that was enthusiastic and ambitious and aggressive and creative. And we found tons of things that I think we were right about that made a lot of sense. But we said yes a lot. And I think in those moments when it was hard, we had to kind of learn the skill of saying no.

• 20:00Speaker 02

  And saying, these are the fewer set of things that are most important to making progress the absolute fastest. And I think that it's really hard to pair a natural inclination toward yes with a recognition that no is very valuable. And I think that we learned how to do that. And there's other things that are a little bit unnatural to startup type teams as well. Startup type teams tend to be enthusiastic and they struggle a little bit when things aren't working out as well as you'd like. Especially things you know makes sense. If you've got some projects that you're working on. And you know, all the economics makes sense and you know that the consumer offering makes sense, the product is great, but it's just not quite performing. Having the ability to have that honest conversation that this isn't working and there has to be some reason why. Is it the way that we're organized? Is it the way that we're attacking the problem? Are we not holding ourselves accountable enough?

• 20:44Speaker 02

  Is this a project we shouldn't be taking on? What exactly is going on? It's important to have that ability to step back and have a harder conversation. And one of our relative weaknesses was that we said yes too often. And we probably didn't hold ourselves accountable enough when things weren't working out as well as we wished. Because of the enthusiasm that I think was a strength in many ways, but I think can also show up as a weakness sometimes. In those hardest moments, I think we really learned those two lessons. Finding a balance between yes and no is certainly an art. That's not the science. There's no right answer there. But I think that we got better at it and I think it was super helpful. And then I think once you get better at saying no, there's a lot of benefits that are very hard to foresee ahead of time. Because what ends up happening is oftentimes you take on projects because you can imagine that they're going to work and it makes a ton of sense.

• 21:26Speaker 02

  And you imagine them as simpler than they are, because that's the human error that we all make and especially optimistic people make. What you don't appreciate is that when you take on all these projects, there's going to be conflict somewhere. You're going to have a team of designers and product people and engineers. And you think it's eight people in a room that you can just have really focus on this thing. You're going to march forward. But some technical problem will come up somewhere and you're going to have some sort of requirement for some other engineering resource somewhere else in the company. And at the same time, seven other projects are going to need those same resources. And all of a sudden you're constrained and then momentum gets lost because it's not just people in the room who are always working on something now. Instead, they're waiting for someone else to get something done. And I think when we started saying no. All of a sudden, all of those hidden conflicts started to evaporate a little bit. And just all these projects throughout the company started to get done way faster.

• 22:09Speaker 02

  And I think that that's like a very interesting finding. And maybe it's right, maybe it's not. But my strong guess is most companies out there, the simple thing that you think of is, okay, if I can think of enough projects that make sense, we should do them because we're well positioned to do it. And then the way that we do it is we hire more people that are super talented and we give them these projects and we get it all done. And it's just like an investment and you think that that's how it's going to work. In real life, it's not quite like that because these hidden conflicts emerge and momentum gets lost and the whole business slows down. And then you end up accidentally creating a bunch of rules. You see like problems emerge in the business and so you start generating rules to avoid those problems and those rules end up effectively becoming bureaucracy over time and you just get slower and worse. And I think all of a sudden, when you shrink your priorities, our team was also shrinking

• 22:53Speaker 02

  at the time, which was a difficult thing to be going through. But you turn back into a startup. All of a sudden, it's just seven people in a room with far fewer conflicts. And the moment where decisions are getting made is always now and you just get better. And my guess from that experience that we had and the errors that I think we were making, I bet most companies miss on the high side in terms of the number of people that they've got and the number of projects they take on. Because I think an incredibly valuable resource is enthusiastic, small groups of people where the moment they're working on things, the moment they're making decisions is always now. And I just think that the further you get from that, the slower you get. And I think that that was extremely helpful for us when we went through those difficult times. We said no more, the team got smaller and the moment that we were making decisions became now and progress just massively accelerated.

• 23:38Patrick O'Shaughnessy?

  I have two follow up questions. One is around how and what to say no to. And the second is around what's become, I think, the Carvana approach to project management, which from doing my research, sounds like something that is incredibly tactical, aggressive, carefully managed, et cetera. So I want to ask about both. I'll start with what to say no to. Does an example come to mind of something that seemed maybe at the rosy times, something you would have said yes to as a project that contributes to the mission, but in this new mentality, you said no? And what the reasons were that you said no? I just want to really understand when you do say no, why and how you're saying no and the sorts of things you're saying no to.

• 24:16Speaker 02

  Well, what we try to do is we try to assess what did we think our error was. Trying to be right all the time is basically an impossible bar to clear. But I think trying to recognize what direction your error is on average is a much more surmountable problem. So I'll speak for myself. My error without question is to say, yes, my error is I want to do all the things and I want to do them all now. I think they all make sense. So I think try to identify that inside yourself. An example that I'll give you that is something that interestingly we're working on a little bit more right now. But an element of our business is a marketplace component that allows us to work with natural sellers of cars to try to more efficiently get cars to their next owner and is very helpful on the supply side. And I think allows us and the sellers to do a little bit better economically.

• 24:58Speaker 02

  If we partner up in intelligent ways and cut waste out of the system. And I think the fact that that project should work was basically obvious from day one of Carvana. We kind of knew that that was something that as long as we got enough momentum, it had success, we should take on. And I think that that's the fundamental truth of that being something that should work and can work. I think it was true day one. I think it's true now. I think it's been true every day in between. But I think that our enthusiasm for tackling it too early, when there were still too many other things we had to work on that were more centrally important to building the foundations of the machine was probably a mistake. So we took it on to a degree that we probably shouldn't have in late 2020 and 21. And I think that once you've taken on a project, it's even harder to say no, because now you're not just saying no to starting something.

• 25:41Speaker 02

  You're saying we need to actually go backwards on something that we're working on. And that's an example, or just to be totally honest with it. I personally was the one pushing that more than anyone else, because I thought then, and I think now that it made a ton of sense. And I didn't appreciate the indirect cost that might have on the rest of the business. And then I think when you find yourself in that moment where you have to make those hard choices, you make one or two and you see the benefits of it, because all of a sudden you see the conflicts start to fade away and you see the teams starting to get things done more quickly. And you appreciate that focus is a valuable thing and it's very, very hard and knows are powerful. And then I think you just keep doing it. Like I said, it's really hard to get answers completely right, but I think it's easier to get directions right. So when you say no to the first thing and things get better, say no to something else. And then if things get better again, keep saying no until all of a sudden things.

• 26:25Speaker 02

  Get worse and then you can turn around and that's really hard for me. Luckily, there's other people inside the business that I think are better at saying no. And as we were going through that tough time, it became clear that they were right in that moment more often than I was. It was easier for me to put more faith in them. And when I saw them making an argument, recognize I got it a little wrong last time. I might be wrong on this one, too. And we just got to keep moving in that direction until we've gone too far.

• 26:46Patrick O'Shaughnessy?

  So now it's assuming we've said yes to some project or something that you're working on. The project management methodology, the frequency with which you check in on projects has started to become a thing of legend. If you ask around about Carvana, can you talk about how it works today? I'm a new person in the organization. I come to you. You're teaching me how to project manage here at Carvana. What would you tell me?

• 27:08Speaker 02

  So I think the goal was to take the extra focus that existed in the company that meant that now you had small rooms that were making decisions right now all the time. And then create maximum accountability to ensure that we were making the hard decisions that we needed to make. We were recognizing when things weren't working the way that we wanted them to, and we were adjusting course rapidly. In the moments where we were saying yes to things, the way that we would hold ourselves accountable, we've got a great team of strong, intelligent people. They were always working hard. They're always holding themselves accountable. But I think the way we were holding ourselves accountable was more about, are we getting the project done? It was like, we designed a project. We imagined what the answer would be. Are we getting it done? If the answer was yes, we felt like that was good. I think that when we went through the more difficult period and we said no to more things, we said, let's take the project.

• 27:53Speaker 02

  Let's convert the project into milestones from a product perspective. Let's convert that into milestones where we think it's going to impact ops from an operations perspective, where we think we can get operationally more efficient. And then let's convert that into financial milestones where we think getting better operationally is going to flow into dollars and cents. And let's try to break that down, those three steps, project, operations, and then financial impact. Let's try to break them down as granularly as we can, and let's create weekly targets for ourselves. And that exercise is a little burdensome. You got to be careful that that exercise doesn't become the bureaucracy that you want to avoid so that you can get things done. But the benefit of that is once you have it and you create these weekly meetings where you're having conversations and you're checking.

• 28:35Speaker 02

  In on how are we doing versus these three measures, product, ops and financial? There's no hiding. When you're missing things, you have to say why. And maybe your expectations were wrong at the beginning and that's in a way unfortunate, but that's the easiest one to address. But more often than not, it's you start to realize that a lot of the conversations that you're having are, well, it's because we're also trying to work on this. And this person that we need for this is tied up on that because they got called into this other project for whatever reason. And all of a sudden, when you dive all the way into the absolute granular detail of exactly what's happening every single day, the cost of those conflicts becomes so much more apparent. And it gets a lot easier to then say, okay, that means that across the company, there's still too many yeses and we need to say no to more things. And that's going to accelerate us or we need to adjust course a little bit on this project.

• 29:18Speaker 02

  This didn't quite work out the way we wanted to. We still think the idea is good and maybe need to alter the product a little bit, given whatever learning we just had. But it creates a very rapid feedback cycle. So we starting in 22, we started this operating cadence where basically all of our major clusters, which are the various operating groups in the company. We started to have these weekly meetings generally on Mondays, although some are different days of the week, but Mondays primarily when we have them. Where we would just say, okay, what are the key projects we're working on? How are we doing against our project milestones, our operational milestones and our financial milestones every single week? And what are we going to change? And that doesn't sound that innovative, but I think pairing that with focus and then extreme accountability and resolve

• 29:58Speaker 02

  on the part of everyone in the team to make sure that we hit the numbers with, by the way, pressure from the outside world because we had to get better fast. It just created a very productive environment where I think we got a lot more done than we ever had. So I think that's something that we're going to seek to maintain for as long as we possibly can. And we're going to seek to replace the outside pressure, which I do think is a big part of it with internal pressure, which I think is very hard to ever make as powerful as outside pressure, but that's our goal.

• 30:24Patrick O'Shaughnessy?

  Does it get exhausting doing that? Does checking in, assuming you're personally managing a bunch of projects, as are many of the senior team, et cetera. Does it get tiring checking in on people multiple times a day or week? Does that feel sustainable?

• 30:37Speaker 02

  So here's another thing that I think is different about startups versus big companies. Hierarchy, I think, is a disaster. I think there's a big misconception inside of all of corporate America that moving up in an organization with up generally being defined as climbing the corporate ladder and getting further away from doing things is progress. And I think that in reality, you want your leaders to be player coaches. But the player part of that is tremendously important. And the coaching part of that, the most important part of coaching is basically just leading by example. It's what you do every day. You want your best people to be deep in the weeds of every project. Ideally, you're sitting there with engineers and designers and the people that are actually impacting the product on the ground and the operators that are doing things. So you see reality every day instead of operating at levels of abstraction that are just way less predictive of where things are going.

• 31:21Speaker 02

  So I think we really try to push people to go deep at all the various levels inside Carvana. We try to push people to go deep. And you could call that exhausting if it starts to feel like it's the boss checking in. But if it starts to feel like it's a member of the team enthusiastically being involved in the project every day, and you pair that with a bunch of rapid progress, all of a sudden, it's fun. It's fun to go check in on those projects. My favorite thing, I love it when it's like Sunday night and I'm excited about my couple Monday morning check-ins because I know the stuff that people were kicking off over the weekend and we're going to get to check in on Monday. Whenever you feel like that, that's because momentum is addictive. It's contagious. And I think that the more that you can get into the weeds of actually moving the real business forward and then being a part of that every day, it's almost the opposite of laborious.

• 32:05Speaker 02

  I think it becomes really fun and it creates its own momentum.

• 32:08Patrick O'Shaughnessy?

  Can we go back all the way to the Odessa acquisition and talk through what was going on, what you saw, why you did it, and the role that a big decision like that you think can play in the trajectory of Carvana?

• 32:21Speaker 02

  Well, first, I'll say I think one of the areas where we have deep conviction it's important to differentiate ourselves versus other car retailers out there is we want to be vertically integrated. The reason is twofold. One, if you're vertically integrated, you have access to more economics in the transaction and that puts you in a better spot financially. I think it makes you competitively more powerful and it makes you more resilient because you have more ability to absorb difficulty. So I think that that's an important part of vertical integration. And then the other important part is it Removes decision frictions. When you have many horizontal layers in a business, everyone has different incentives and it can get hard to create very simple customer experiences because there's a bunch of other companies or people you have to check in with on elements of a transaction to a consumer as a single transaction. So we've always viewed it as vertical integration is very powerful.

• 33:05Speaker 02

  It enables us to make customer experiences simpler and it gives us this economic advantage that we think is important. And at the end of the day, the entire automotive ecosystem, or at least the retail component of the ecosystem, the way that it works is there's 270 million consumers out there driving cars around. And basically every once in a while, they decide they want a different car and they're swapping with each other. But there's all these businesses in between that are touching the car before it gets to the next owner. And one of these businesses is wholesale auctions. And Adessa was the second largest of the wholesale auctions. And vertically integrating there and acquiring that capability means a bunch of things. But it means that we can be better buyers for our customers when we're buying their car, whether we're going to retail it or if we're going to wholesale it. It means that we can partner more deeply with natural sellers of cars to have advantages on the supply side.

• 33:48Speaker 02

  It means that Adessa can benefit from some of the assets that Carvana has to make their business better. So that vertical integration is a big part of it. And then I think the other analogy that I would use is as an e-commerce business, these big, flat 50 to 100 acre parcels of land that are ideally somewhat close to city centers where we can recondition a car and put the parts and labor into it that are necessary to make it ready for its next owner. Those are sort of like our manufacturing slash distribution centers for a traditional e-commerce business. And it turns out in many places in the country, it's really hard to get zoning to be able to, one, have industrial use, but then two, to be able to have auto use. And to build a business of the scale that we wanted to build, we knew that we were going to need a lot of that. And Adessa also has a tremendous amount of that land.

• 34:32Speaker 02

  Today, we just announced our Q3 earnings a little bit ago and we sold a little less than 110,000 cars. So that's around 440,000 run rate. Now with Adessa, we have real estate capacity to sell about 3 million cars per year. And that's certainly inside of our aspirations over time. So we thought that that acquisition was going to put us in a position to have a very differentiated infrastructure and an even more differentiated business model through more vertical integration. So we were tremendously excited about that acquisition. Today, we are tremendously excited about that acquisition. I think it's likely to benefit us even more than we imagined at that time. But undoubtedly, I think that that was the moment that many investors would look at. And pairing that with 3 billion of debt was maybe the thing that tipped things over in the wrong direction from a story perspective.

• 35:15Patrick O'Shaughnessy?

  I want to ask about the required conviction from the leader, from you, to be a vertically integrated business. I just had this fascinating conversation with Toby Lukey from Shopify. And at some point, they were beginning to proceed down that direction, building this huge logistics network. And they've gone back the other direction. And he talked to me about it through the lens of, yeah, it wasn't really a decision, the vertical integration strategy that was aligned with them as a culture and personality and product. And it turned out to be wrong. And they've gone the other direction again. And it seems to vertically integrate, which is a very long game to play and includes moves like the one that you just laid out with Adessa, that you need the personality of the leader and the company and the culture and the conviction of what the end state looks like to be extreme.

• 35:57Patrick O'Shaughnessy?

  Is there any advice that you would give on that whole notion to other business builders that are lucky to be able to contemplate whether or not they want to vertically integrate versus stay a thinner horizontal, high margin layer in the stack?

• 36:09Speaker 02

  First, I think it's extraordinarily hard. I think that it gets back to this question of balancing yes and no. Vertical integration has this insidious property where it always makes economic sense. So that always makes it superficially attractive. And then you've got to make sure that you're not tackling a problem that is not worth the complexity of the problem you're tackling. So I think it's a hard one. I think for us, what makes it in general easier, and this is a more of a statement of vertical integration across the entire company than about a desk in particular, but I think it is true there as well. I think that vertical integration is necessary to our customer value proposition. When a customer buys a car, they don't think about, there's a function that is going to deliver this to my door. There's a function that's managing the website. There's a function that's managing title registration. There's a function that's going to manage my financing

• 36:54Speaker 02

  for this car. There's a function that's valuing my car when I trade it in. They're just, hey, I got my car. I want a new one. Here's what I can afford. And they want to go buy it. And they want to be confident that the decision they made was a good decision. And they want it to be transparent and straightforward. And then they want it to be fast and easy because they're excited about the car. They're not excited about the transaction. They're excited about getting through the transaction to get to the thing they're excited about. And our view was that in order to give customers that very simple experience that was transparent and fast and easy and fun, we needed to be vertically integrated. And then in order to give them an experience that didn't require that we made money in all kinds of creative ways that maybe can lead to customers having a little bit of a stomach ache after the process of buying a car and probably ultimately is the root of some of

• 37:36Speaker 02

  the frustration that some customers at least have had with some dealers over time. We needed to have differentiated economics because if you don't have different economics, it's very hard to solve problems in materially different ways. So I think for us, vertical integration was a core part of our customer value prop. It wasn't a nice to have extra. So I think for us, the choice was a little easier.

• 37:56Patrick O'Shaughnessy?

  If you think about stuff happening in that whole chain of things that the consumer needs, like you said, financing, there was a moment at which, I can't remember when it was, the Navy Federal Credit Union was offering 3% rates on auto loans when the risk free rate was 4% or something. It was fundamentally unsustainable or seemed unsustainable, but nonetheless, you could go get a 3% rate on your car or something. How do you deal with exogenous variables like that, that that's not in your control, but maybe that indirectly or directly affects your business and manage around things like that? Prevailing macroeconomic conditions, interest rates? How do you think about buffers in the business? So that you said you got to manage to average over time. It's going to swing around that average. You want to make sure that no swing hurts you too bad. How do you structure things or think about structuring things to deal with those kinds of variables?

• 38:41Speaker 02

  So I think that's really hard. Everyone always talks about being long-term focused. It's like, what does that mean? I think one of the things that it means is building for the average and recognizing there will be variability, a lesson that I just think constantly gets hammered into my head. And I think it's a really hard lesson for any person to ever learn in the ways that you need to ultimately learn it is just that the distribution of outcomes is wide and it's because things like what you just outlined happen in the world. And I think correlations in the world are much higher than people think. Usually if something goes wrong, many things will go wrong. So in your Excel model, you look at your resilience and you're like, oh, man, look at how much stress we can absorb in XYZ variable and still be in a great spot. What you don't appreciate is if XYZ variable moves that negatively, 20 other things are going to move negatively too.

• 39:24Speaker 02

  So you're nowhere near as resilient as you think you are in your Excel model. And I think that just trying to have the simple heuristic in your mind that outcomes can always be a little bit wider than you think in moments of Stress. So you're not as resilient as you think, and therefore you need to prepare a little extra resiliency in the business is a very good heuristic. But I think you've got to build for the average because it's like too hard to allow yourself to get distracted by things that ultimately disappear in the averages. You only have so much energy. And if all of a sudden you're taking energy inside the company and you're pointing it to solve transitory problems, you're wasting energy from a long-term perspective. You should just stay focused on the average, but you also just need to make sure that your machine is resilient enough to absorb those inevitable wide distributions of outcomes that are hard to foresee.

• 40:07Patrick O'Shaughnessy?

  Thinking back in the last three years, I'm sure you feel more resilient now than you did three years ago. Is that true? Do you feel similar? If you do feel different in terms of your personal resilience, how does it feel different to you?

• 40:21Speaker 02

  First little micro commercial for the company. I think the company's way more resilient in a simple economic way, which is just, we were growing at tremendous speeds for the vast majority of our life, like negative aggregate company level economics. And today we've got severely positive economics. And I think that you can think of your cushion as being the amount of cushion you have in your unit economics, plus your cash. That's your ability to absorb pain. And we've got more liquidity we've ever had as well. So our ability to absorb pain as a business, just from an economics perspective, is tremendously different than it was heading into 22. Another thing that I think is basically true, and I think this is true of individuals, most importantly, but also of entities, like collections of people. In general, people are as strong as the hardest thing they've ever been through is a reasonable reduction of how it actually works.

• 41:04Speaker 02

  And I think when you go through hard things and you make it out the other side, that ends up being preparation that leads to confidence the next time you face a hard thing. We were lucky that I think we had accumulated a lot of people inside Carvana that had that preparation in their life earlier. And then I think that as a group of people, we went through a hard thing together and we all learned that individually, but also it became part of our story that we went through a hard thing together. So I think now at the entity level, at the collection of the people inside Carvana level, I think that there's an additional resilience because it's like, okay, when a hard thing comes, we know what we do. We stand up, we rely on each other and we work hard to prove everyone wrong. And we've done it before. We can do it again. And I think that that doesn't show up in economics, but I think it's very important.

• 41:42Patrick O'Shaughnessy?

  One of the things that I've always struggled the most with during the hardest periods is trying to maintain some separation in my personal life with my friends, with my family. I have two kids, four, eight and 10. In the hardest times, I find that almost impossible. I've had to just let it all blend together and count my lucky stars that the people around me are who they are. How did you manage the personal side of all this during a protracted period of insanely hard work? And any advice that you would give to others that face that same situation?

• 42:11Speaker 02

  The advice I'll give first is I think you need parts of your life that are as independent as possible. I think trying to be part of a team that's building a company is a very, very consuming thing. And I think in the vast majority of cases, there are moments that are very hard. So it is hard to predict when your hard moment will come. It is not that hard to predict that hard moments will come. So there will be times when you go through very difficult, personal times where you're lying in bed late at night, you can't fall asleep because there's too much on your mind, there's too many things you got to get right. And you wake up in the morning and there's already three problems on your mind that you didn't even understand. You weren't thinking of last night and they somewhere in the middle of the night showed up there and they're there when you wake up and that happens over

• 42:53Speaker 02

  and over again. I think you need an escape from that. That's very important. I think people can find it in different ways. Not one who meditates, but you hear people talk about meditating a lot. One of the ways that I think is super replicable that other people lean into, I play pickleball, like all truly tremendous athletes. Sport is helpful there because when you're competing in something, you're not meditating in the sense that there's absence of thought, but it's super limited thought. You're focused on trying to win. In the case of pickleball, you're looking at your opponent's paddle, you're watching the ball, you're seeing how it's spinning. Your brain is completely absorbed by what's right in front of you right now. And it creates a gap where all of a sudden you're not thinking about all the million problems that you've got. And I think that that's helpful. I would say too, this is hard to label it advice because different people live different lives

• 43:36Speaker 02

  and with the different experiences and all these things aren't replicable. But you talk about your family, I think that I think I'm very lucky in my life is that I met my wife in high school. And I think when you meet the people that are closest to you in your life, there's actually a decent amount of meaning in that because the things that are important to you in different parts of your life are different. And high school has all of its strengths and weaknesses and there's things that are good and bad about it. But if you meet someone in high school, a lot of what it comes down to is that you enjoy spending time together. You have fun, basically, together. And I think that that's a pretty good relationship foundation. Later in life, I think it's easy to unintentionally have relationships be caught up with things that are maybe a little bit less fundamentally human. It can be more about your intellectual connections, or it can be about your professional life, which reduces to status.

• 44:20Speaker 02

  Or the fact that you both can afford to go on cool trips and so you get to go hang out together, whatever it is, which reduces to stuff. If your core relationships in your life have elements of them that are connected to status or stuff. It's hard because when things start to go off the rails a little bit in your professional life, it can bleed into everything else. But I think if your personal life is as independent as possible, I think that's just very helpful. Because it just gives you a break. It gives you a place where you can go home and just be dad. And you can just be normal and your kids don't care about your problems at work. They don't care that the stock is down. So you can go just have a normal day. And I think that's super helpful because sometimes that break is just something that you have to have, or you'll be driven insane. Like I said, that's hard advice to give, but I do think it's very helpful.

• 45:05Speaker 02

  I think it was very helpful for me to have family and key relationships that I think were really unrelated to Carvana, so I had a break.

• 45:13Patrick O'Shaughnessy?

  What was the turning point? When did you feel for the first time again, you had ball control or had your mojo back? Or people had stopped saying mean things about you in as many ways as they could muster?

• 45:23Speaker 02

  I think a deep reality of the world is that negativity gets amplified more than positivity. So you just got to make peace with the fact that people are going to not say great things about you. There's maybe two steps in the process of digging out of a hole. I think one is find the path and make sense of what do you think is possible? In all these different areas of the business, in terms of how much you can improve results and improve how you're operating. And then I think step two is start to collapse the distance from where you are to that goal. Step one is very helpful because that's the step where you have resolve and you have visibility into what the plan is. And you get to that place where you're like, okay, from here, we just march. We know what we're doing and we just got to march. I think once you start to see the gap between where you are and where you want to be collapse and then the Reality of what happens there is that creates momentum and excitement. So it oftentimes accelerates.

• 46:07Speaker 02

  Once you start to see that, I think you're in a really good place. So like I said, I think we started in a more resilient place than most because our story was that it was always going to be hard. And we are at least somewhat prepared for the negativity. And then I think we pretty quickly realized, okay, the market just gave up on us. So we can't rely on them for capital. So we need to build a plan that allows us to be totally capital independent. And that plan, it took a little time to put together, but not that long. And I think that gave us the confidence that we knew where to march. And then we started to say no to things and we started to see the feedback there. And we started to see that was enabling us to collapse the distance between where we were and where we wanted to be more quickly than we ever had. Honestly, pretty quickly by mid 22, certainly late 22, it was like, okay, we're on a good path here. And we knew we had work to do, but my personal feeling at least was this is going to be fun.

• 46:51Speaker 02

  Internally, we were talking about this is going to be a comeback and we're going to have fun telling this story to the other side. Because you could see that it was going to happen and you could see that the rest of the world didn't think it. So yeah, I think that happened a lot earlier internally than it did externally.

• 47:05Patrick O'Shaughnessy?

  In very literal sense, and if you just think about the whole machine that you've built that is Carvana. In what ways are you most more efficient today than you were in late 2022? What are the literal things that you've been working on? And maybe this shows up in your unit cost. I don't know what the right metric is, maybe you can pick one. But what has literally happened to the efficiency of the business from that point until now?

• 47:26Speaker 02

  So it's everywhere in the system. We're much more efficient moving cars from one place to another. We're much better with our scheduler to make sure that we have higher utilization of any given route on our network. We're much smarter about where we move cars. So we minimize the total miles that are moved. We're much better at determining which cars to buy to ensure that we can turn those cars more quickly. We're much better at reconditioning cars. We're much better at spending less money to build a higher quality car. That takes many forms. It's about the process flow through the inspection center. It's about being better at inspecting a car. A car is a very complicated machine and being right about what things you do need to fix. And what things you don't need to fix is actually a very complicated problem.

• 48:06Speaker 02

  It's about building systems to make sure that when we have a part for a car that we need to buy, that we intelligently source that. Part which has a couple of dimensions to it, but one is what do you pay for it? And one is how quickly can you get it? Because cars are depreciating in time and so time matters. So you need to build systems that are aware of that. We're better at answering customer questions in automated ways. And I think we're better at building systems that help our advocates who answer customer questions when they call in, answer customer questions in ways that are more complete and that get in front of questions that are going to come later. So I think throughout the entire business, cars move less, people move less and everything moves faster with less cost. I think it's throughout the entire machine. People imagine that building a business about having good ideas. The ideas are really the easy part.

• 48:50Speaker 02

  It's really not that hard to think of machines that should be more efficient than existing machines. But collapsing the distance from nothing to a machine that operates close to as efficient as the theoretical machine you're trying to build should operate is really, really hard. And I just think throughout the entire business, we've really collapsed the distance to that theoretical machine. And I think the exciting thing is we have a ton more distance to collapse, which is fun. That's why you get up every day to try to get a little better. So I think we still have a lot of work to do, but our machine is much more efficient than it's ever been. And I think at the risk of being overly optimistic about our own situation, it's a more efficient machine than anything else that's in the industry by probably a pretty long way. So I think that's fun, too.

• 49:29Patrick O'Shaughnessy?

  If a hundred points out of a hundred was a perfectly efficient, no mile wasted, no hour wasted Carvana machine, what score would you give yourself now? How much room is there left in that efficiency build out?

• 49:40Speaker 02

  I'm going to pick the biggest cop out here ever, but I'm going to say 50 just because it's in the middle. And what I'll say too is something that I think is exciting. We talked a bit before about these various types of companies. When your collection of people is creative and ambitious, I think one of the cool things about a company like that is you uncover new opportunities faster than you solve previous problems. So I think that you're always at 50 because every time you solve a problem, you see two new opportunities. And then I think that's the part where learning how and when to say no is a tremendously valuable skill. But I think it's fun because there's no finish line. You're always marching, you're always seeing more opportunity and we still see a ton of opportunity in front of us. And I think we'll probably see more opportunity in a week than we see today, then we just got to do a good job managing what we do.

• 50:23Patrick O'Shaughnessy?

  There's two really interesting charts that I saw, one that goes down and one that goes up in some of the recent numbers around Carvana. One is the SG&A cost per unit is going down quite nearly. And then just like the profit per car is going up in the direction that you'd hope it would go. Can you talk about those two things, the financial side of all this? And maybe this is just a unit economics discussion, but really like how you think about economics and the major drivers of it?

• 50:47Speaker 02

  The term that we use to try to capture both of those things is, or at least major components of both those things, is fundamental gains. And the way that we define a fundamental gain internally is basically, how can we get more efficient such that our customer offering stays the same and there's lower cost and/or higher monetization? And then what that means is either we get to make more money or we get to make our customer offering better. And we get to decide how we invest that fundamental gain, but we want to try to make a fundamental gain. And I think in general, that's just about making the machine more efficient. So we talked a bit on the expense side, it's move cars less and more efficiently and faster. And on the people's side, do the same. And then I think on the revenue side, oftentimes it's about making better decisions. Let's talk price for a second.

• 51:32Speaker 02

  I think a lot of times people think, okay, you buy a good at cost X and you sell it at Y and your margin is Y minus X. So in that simple mental model, which is correct, if you want to make more money, you either need to pay less for the car or you need to charge more for the car. Those are the only ways to make more money. But in reality, when the way that your machine looks is you've got 20, 30 locations around the country where you're storing and reconditioning cars, and there are hundreds of cities around the country where customers are selling cars, and that's where you're sourcing them. And then you've got customers distributed all around the country who are buying cars. And that demand is variable in terms of what cars they want. And it's also variable in terms of the implied transport costs that any given car is going to have, depending on where the car is stationed. You now have these very interesting questions about which car do you buy where, which is

• 52:17Speaker 02

  kind of like independent of how much do you pay? And it's a very complex problem. It's very, very hard to be good at that problem. And then that problem gets more complex when there starts to be feedback in that problem with the way that it impacts financing. Certain cars depreciate less, certain cars, even if you give them to the same Customer, maybe because they have lower maintenance costs are less likely to default. So there's feedback into the ultimate economics that you'll get on a finance receivable for any given vehicle that you buy. And the more intelligence you build into the system that helps you to figure out which car you buy where, at what price, such that it creates a very valuable transaction and it turns quickly, there's just more gain to be had. Trying to thoughtfully think through that machine and then recognize that there's a hundred problems you have to solve to do that really well.

• 53:01Speaker 02

  And trying to do your best to size and sort them from most important to least important is, I think, a huge part of what success is. And then just left foot, right foot, tackle them one at a time. I think we've been tackling many of those problems and it's led to reductions in costs that are very significant. And it's led to increases in GPU that are very significant. And generally speaking, those gains have been fundamental in the sense that our customer offering has been very similar across that entire period where you're seeing costs go down and economics go up. And that's the ultimate win win. If you can do better without imposing worse on someone else, then it's a true win win.

• 53:34Patrick O'Shaughnessy?

  What are just the average numbers? What is the average dollar spent on a car from a consumer in the U.S.? How much money do you make on average for a car? What does a normal transaction look like? How much do you spend moving around refurbishing it, et cetera?

• 53:46Speaker 02

  There's a lot there, but let's say these days, the average is probably around a $25,000 car that customers are buying. That was more like 20,000 pre-COVID. And today that car is a little bit older and more expensive. It's inflated like everything else in the economy. On average, it's around $1,000 of parts and labor that goes into reconditioning that car and getting it ready for the next customer. On average, in our industry, the profits that have been achieved by many of the best in class operators in the past are around $2,000, give or take, maybe more like $1,000 to $2,000 per transaction is the economics that have been available to generally the dealer machine. For lack of a better description. And then I think in the finance machine, there's oftentimes

• 54:28Speaker 02

  a thousand dollars, I would say maybe also a thousand to two thousand, depending on time and what part of the credit spectrum, everything else that are available to that machine. I think there's many hundreds of dollars available to the wholesale machine. So I think what we've tried to do is stack those machines and then have the decisions that connect them be as thoughtful as possible. And last quarter, we were extremely excited to be continuing to give our customers an offering that is very competitive compared to our competitive peer set out there and still have last quarter, we had around $3,900 of EBITDA per unit, which is an incredible number. And I think it comes from building that machine in a way that is more efficient and then stacking what historically has been many different businesses in the automotive industry that are all making a little bit of money, but stacking those up so

• 55:10Speaker 02

  that we're doing more of the work overall, which results in more economics, but also simpler customer experience because there's less decision-making frictions.

• 55:17Patrick O'Shaughnessy?

  If you were imagining yourself in a seminar room at Stanford or something and you were teaching a class and the class was full of other CEOs that were public companies or about to be public. And the topic of the class was what investors are like, the good, the bad, and the ugly. What would you talk about based on your experience? I think you probably saw the very best and the very worst of investors through this journey.

• 55:41Speaker 02

  I think investors are very smart. I think there's a massive selection effect for intelligence and not just intelligence, but outcome. I think that convincing people you're right and being right are actually reasonably separable things. And I think given enough time, being right is identified in investors. And so I think that they end up being the kind of smart that is real as opposed to like the articulate, sound right kind of smart. I think that investors have pattern matching, to use that cheesy term, where you as an entrepreneur, you're never going to be able to be inside of 50 companies. You're never going to have enough time to really deeply study 50 companies. But every investor necessarily is going to study at least that many companies over their career. So I think that they have a perspective that you oftentimes don't have.

• 56:24Speaker 02

  I also think that investors, they're inherently handcuffed. They don't have access to the levers of the machine and the distance from those levers. We talked earlier about knowing the plan creates a calm confidence because I know what I have to do. You have a marching plan. Investors don't get to do that. Investors come sit in a room and talk to you and they try to figure out what your marching plan is. And then they go away and they fret. That distance from levers, I think, creates a little bit of anxiety. That I think is one of the skills that investors have to create. Some are good at it and some aren't, which is they have to manage that anxiety. Their version of peace has to be, I'm accepting that this management team has a plan. And that they're going to go march and try to get that done. And I'm putting my faith in them and I'm going to go walk away and think about something else for a while now.

• 57:08Speaker 02

  Because I think that that distance from those levers creates anxiety. And I think anxiety is a very ineffective and unproductive emotion. That causes you to start generating alternative stories that fit whatever it is that you're observing. And I think it's very easy to make bad decisions when your anxious brain is generating new stories to fit the data. And I think I would tell entrepreneurs, you can't blame them for that. The way that you learn from the world around you is you try to find what the world's right about. There's a version of smart that I think is very unhelpful, which is the version that always listens for where other people are wrong. And then condescendingly corrects them. That's not helpful. The version of smart that is helpful is listen to people and try to figure out where they're right. What is the thing that they're saying that you may not have known before where they're right?

• 57:53Speaker 02

  And who cares if 95% of what they said is wrong? If there's 5% of what they said that's right, you just grew, you just got better. And I think that investors, they are very smart and they do have pattern matching and they have a history that you don't have. So try to learn from them. But also, this would be the last piece of advice. I think people that have never had exposure to investors, investors can feel like this master of the universe. Class of individuals that know things that no one else knows. So it can be easy on days when your stock price goes down for all the people that are sitting in an office in Phoenix, Arizona. To think investors know stuff that we don't know. They're smarter than us. And that can cause you to question things you shouldn't question. And I think that you need to set up the company to know, hey, the history of success is that at some point investors fret. At some point they're going to panic.

• 58:37Speaker 02

  And in the examples from history that are successful, oftentimes that fretting is proven wrong. So when that inevitably happens, don't worry about it. Make sure you pay attention and try to learn from it, but don't let it control your emotional state. Don't outsource your emotions to people that you don't know who know less about this than you do.

• 58:56Patrick O'Shaughnessy?

  What a great line. This may be an aside that we take out, but I just genuinely, I'm curious. What have you learned from your dad about business and building things? And obviously he's been a huge part of Carvana. I worked with my dad for a long time, 15 years. What have you learned from or from working with your dad?

• 59:12Speaker 02

  So here's what I'd say. I think there's a lot there. He was our initial investor and he is today, remains our biggest investor. So his role is big investor, which is actually like a relatively limited role from an actual company operating perspective. But then for me, he's dad, which is obviously an enormous role. So what would I say? I think there's so many directions to go there. Here's one thing. My dad's a very capable person. I think he's got a broad skillset and I think I was lucky to observe that in action throughout my life. But then what I would also say is my dad, like everyone else on this planet, is a human. And one of the lessons that I think is most valuable and that I think is most transferable to everyone listening to this, because everyone else isn't going to have a dad that, short story, my family was pretty successful.

• 59:54Speaker 02

  I didn't even know it when I was a little kid, went through personal bankruptcy when I was eight or nine or 10, through middle school and early in high school, I think was doing fine and coming back. And then by the time I was late in high school, was very successful. But I think for most of that, I didn't realize any of it. I was just a kid. I had no idea. They did a great job sheltering me, I think, from even caring about those things or knowing that it was going on. But then by the time I was later in high school, I was obviously aware that my family had done pretty well and my dad was very successful. And I think that something that I think is a lesson that is enormously valuable is just seeing him as a human every day and knowing that he is a person. He makes mistakes. He says things that are wrong. He's right a lot, but he's wrong a lot and he's just a human being.

• 1:00:35Speaker 02

  Being able to see someone that close and personal every day that has a level of success where you see other people look at him and imagine that he's something different. You see them laugh too hard at his jokes that are funny, but not that funny. And you see them nod too hard when he says something it's right, but not that right. And you see that they imagine that he's something superhuman, but you know, he's just a human. That gives you confidence that you can do it too. Cause we all know that we're just human, right? I know that I'm just a human. I know I make mistakes all the time. You know it. Everyone knows it. But we imagine sometimes that people that are really successful are Different than us. And I think being able to live a whole life with someone who is very successful and see that it's attainable, I think, is enormously confidence inspiring. That's something that I wish the whole world could get. A very small subset of the world is going

• 1:01:17Speaker 02

  to get to get that kind of a lesson. But I think in moments where you doubt yourself, it's very helpful to know that other people who have been successful are just human too. So I think that's probably the most important one that I would take away.

• 1:01:29Patrick O'Shaughnessy?

  I don't think I've ever heard you tell the literal origin in your own brain of Carvana's story, where the idea and the motivation to start the thing, the first moment that it popped into your mind and what was happening around that moment.

• 1:01:43Speaker 02

  So I always wanted to do something. I always imagined myself as an entrepreneur and I always, to be honest, I wanted to have distance from my dad. I wanted to do something on my own. I wanted to do something totally separate because we've all heard stories of families that are multi- generational in a business or whatever. And there's always a little bit of an asterisk next to what anyone accomplishes when you hear that it's part of their family. I knew that happened in my own mind. I didn't want that to happen with me because whatever, I guess, my fragile little ego. So I imagined that I would do something different. And I did start a different business with actually a subset of the team that is still at Carvana today. And we flamed out tremendously. But one of the lessons that we learned from that was it's really hard to start a business in an area that you don't know deeply, because there are many things that would take people that are

• 1:02:25Speaker 02

  close to the industry two minutes that take you two months. And giving up that speed to try to learn everything from scratch is basically, I don't want to call it insurmountable, but it's very, very hard. And luckily, I had grown up in and around the auto business. When I was 16 years old, I felt bad for myself because I was making GL entries in an accounting department in auto finance business while my friends were going to movies and hanging out over the summer. I was always getting exposed to the auto business. So I started thinking about, okay, what could I do in automotive? And I think that forced me to this place that I was going to have to have a little more proximity to my dad because that's the business that he was involved in. So I was going to have to sacrifice that little piece of my ego, but it gave us a chance to succeed. It was an area that we were more familiar with, or at least I was more familiar with. And then I

• 1:03:07Speaker 02

  think it is just the truth. I don't mean to vilify anyone in the industry, but it is just the truth. If you like, look at surveys, buying a car is one of the consumer experiences that is the most lowly rated experiences out there. And I think that there's a lot of reasons for that that would take us too long to talk about to dive into in a deep way right now. But then I just remember I would ask questions to people like, why does this part of the business operate this way? Why does this part of this identify things I thought were frictions? And I would ask people, why does this work the way it does? And they would always give answers that I either just didn't find compelling, or I found a little bit, for lack of a better description, lazy. Like it's too hard to build that bridge to make that easier. Or they were basically like things that reduced to because it's always worked that way.

• 1:03:48Speaker 02

  And I think that when you see a customer experience where there's room for improvement, and what you feel like you're discovering over a long period of time is that a lot of the rationalizations for why it exists the way that it exists are because it's too hard or because it's always been that way. That's the best case scenario. You're never going to start a business where people are going to go, yeah, you're right. That's just better and smarter, and that's how it should work. If that's how people responded, then it would already be done. So I think that's the best case scenario. So just accumulating that knowledge over many years of my life and feeling like, man, the answers to these questions aren't that satisfying. And this is a really big market. I think it created a huge opportunity. And so it became like the next business that we tried to start that was luckily much more successful than our first.

• 1:04:32Patrick O'Shaughnessy?

  How did you know early on, given that you were going to lose money on a unit basis, to build something that's vertically integrated and scaled? Did you know and how do you know when to work on what parts of the business around unit economics? How long to tolerate a loss for? Or when to take year 23 where there's less unit growth, but tons of efficiency gain? And then when to go back into growth mode like you've been in in 24? Like it looks so smooth when you look at a time series chart now, looking back to the early 2010s or something. But I'm sure there's grueling, hard decisions of what mode to be in, how much loss to tolerate, how to know when you've hit key milestones for scale. Is there anything from that whole body of thinking that you could share that you think is interesting?

• 1:05:12Speaker 02

  I think you want to identify what are the key areas of uncertainty in the business that a reasonable person, hopefully yourself included, would be uncertain about whether or not it's going to ultimately work. So the simplest example for us early on was will people buy a car without a test drive? And then a follow-on question for that is, are you going to have to coax them in with an offering that is so economically enticing so that they skip the test drive that you can never make money? And there's many other questions that exist that follow from there. But I think you need to identify where are the areas of uncertainty and then you have to try to resolve those biggest areas of uncertainty as inexpensively as possible. Another area of uncertainty is people say you'll never be able to buy a car sight unseen. You'll be at such a massive disadvantage because people buy cars, you have these car experts that put a car up on a lift and they evaluate everything that's wrong with the

• 1:05:56Speaker 02

  car and they get the value on the car exactly right. And if you want to build an e-commerce business, you have to value trade-ins and you have to value cars you buy from a customer sight unseen. And the conventional wisdom, consumers are going to lie to you and you'll never be able to value cars sight unseen and do a good job. So there were all these questions and you've got to sort them and say like, what are these uncertainties? And then come up with the cleverest path you can to resolve that uncertainty as inexpensively as possible. Because if you can resolve the ultimate uncertainty in a way that is compelling to investors, oftentimes they will finance the negative spread that you have as you're building the business that is going to ultimately benefit from whatever uncertainty you just resolved. So I think that's like the storytelling part of the business. You have to try to find ways to figure out what are the key uncertainties you have to figure out? And then how do you figure them out inexpensively? Because your first couple of rounds are going to be small and no one's going to want to

• 1:06:41Speaker 02

  finance huge dollars to hope that in the end it totally works out. And then you need to be able to put that into a model that they can follow and they can say, I believe that this works, whether it's a mental model or a physical model, whatever it is. But I think you have to be able to walk them through that. And then you have to raise a round one at a time and then you have to hit your marks before the next round and just keep doing that over and over again. And I think the bigger swing you're taking, the higher your odds are of failure and the harder it's going to be because you're going to have to hit your marks many, many times in a row because you're going to need a lot of capital along the way. We needed a ton of capital to build this out. But I think luckily we did a pretty good job narrowly in many cases, like hitting our marks before we needed more money. Every startup, if you talk to anyone and have like an honest conversation, they're not putting lipstick on the story. Everyone goes through near-death experiences and I think we went through several difficult

• 1:07:25Speaker 02

  times early in our life as we were trying to resolve that uncertainty. But I think the key is just try to inexpensively resolve the biggest uncertainties and then you can finance the rest as long as you can tell a good story.

• 1:07:35Patrick O'Shaughnessy?

  Does it feel to you like you've been through something singular? I know you said Amazon went down 96% and there's the intellectual reason for the first couple 20% drawdowns, but I could not find another company that went down 99% from the market cap peak to where you were down that much and now so much of the way back up with a business that's looking pretty damn good. Does it feel as singular as it objectively seems to be in market history to you? Cause one of the things I would summarize in this conversation is you seem just like very calm about it all and very rational. I know that it was hard as hell. I'm not trying to diminish it. Does it feel singular?

• 1:08:07Speaker 02

  God, that's such an interesting question. I'll say this, just factually, I'm also not aware of similar circumstances. I hope it's singular. I think that that's fun. In a crazy way, going back to the competitive thing, it's like, I don't know, this is maybe a little sick, but it's playing a big game. It's part of what life is. Get up every day and go try to figure something out. And I think we never would have put ourselves in the spot that we found ourselves on purpose. But once you're there, that's your game. And then once you're here, you hope it was the biggest game. You hope it was the biggest challenge. So there's so many different forms of challenge in life and in business and whatever else that who knows how to compare all these things. But I think as defined in certain ways, stock price up and down and the outside world in general, giving up on you. I do

• 1:08:51Speaker 02

  think that we're at least in a short list of challenges that we face. And I think it's cool that the team that we have here was able to stand up to that pressure and play at the level that was necessary to play at to get us to this spot. That's something where when there's more time, I think we should probably take pride in, but I think it's a very unhelpful feeling. So I think in a funny way, we always try to find a balance internally of when you find a success, you have to celebrate and be proud of it because of the human inside you and the human inside of one else around the table. But it's celebrating success just breeds satisfaction and complacency. There's no separating those things. So I think we try to just make sure we're always looking down the field because that competitive hole inside of us that will never fill up demands that that's what we do. So I think that's what we try to keep doing.

• 1:09:35Patrick O'Shaughnessy?

  Well, just to say again, what I said at the beginning, which is so cool to think now about the future, you're at 1% market share, twice the profitability of the next relevant competitor, lots of ambition to make your business more efficient. It's going to be a really cool story to watch. And I hope we get to do this again in another three years and another three after that, just to continue to track the story. Since I've already interviewed you, I asked my traditional closing question. So I'm going to repurpose it this time. What is the kindest thing that someone has done for you in the last three years during this incredible story?

• 1:10:04Speaker 02

  The team not giving up. I think when you're on those Zoom calls and it feels like the world's against you and you've had all these 20% drawdowns and you're looking at faces and you're wondering if people are going to stand up and you believe that we can succeed as long as we all stand together, but you worry that if you don't stand together, you might fall down. You don't know why everyone decides to buy in. You never know exactly what drove that, but when people do, I don't want to make it personal, but it's basically a vote of confidence in the collective that I think is cool. And I think we can call that kindness or we could call it belief, but I think believing in people when they're down is the kindest thing you can do. So I think the team coming together and choosing to fight when the world thought we were fighting, losing battle is something

• 1:10:47Speaker 02

  that is unbelievably cool that I'm extremely grateful for and proud of.

• 1:10:51Patrick O'Shaughnessy?

  Ernie, I'm so thankful for the couple hours together today. What a great, incredible story to have on the record. And to your point, your strength is defined by the hardest thing that you've been through. I know there's no substitute for the experience itself, but I do think stories like this can give people permission or make people expand their mind in terms of what's possible. So I think it's so cool that you've told it with us today. Thank you so much for your time.

• 1:11:11Speaker 02

  No, thank you. This was fun. Really appreciate it.

• 1:11:15Patrick O'Shaughnessy?

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