#402: Nicholas Hinrichsen on How To Build A Successful Startup

Nicholas Hinrichsen started his first company, Carlypso, in 2013. He participated in YCombinator and raised $10M in venture funding, before eventually selling the business to Carvana in 2017. Nicholas is now building a new company in the automobile space called Clutch. In this conversation, we discuss learnings from building Carlypso, vertical integration, margin competition, propensity for action, neobanks, and the financialization of everything. ============================== Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link https://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. ============================== Coinbase Wallets are adding support for .crypto and .zil domains through their partnership with Unstoppable Domains. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in the dapp browser to register and manage your domains. ============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

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

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Nicholas Henriksen started his first company, Carleepso, in 2013. He participated in Y Combinator and raised $10 million in venture funding before eventually selling the business to Carvana in 2017. Nicholas is now building a new company in the automobile space called Clutch. In this conversation, we discuss learnings from building Carleepso, vertical integration, margin competition, propensity for action, neo-banks, and the financialization of everything. I really, really enjoyed this conversation with Nicholas, and I hope you do as well.

• 0:43Anthony Pompliano?

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• 1:20Anthony Pompliano?

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• 2:03Anthony Pompliano?

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• 2:50Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:16Anthony Pompliano?

  All right, guys. Bang, bang. I've got Nikki here with me. Thank you so much for doing this, sir.

• 3:20Speaker 02

  Thanks, Pomp, for having me.

• 3:21Anthony Pompliano?

  Absolutely. Let's jump right into your background. Where did you grow up and what did you do before you started building companies?

• 3:30Speaker 02

  Sure. So I'm from Germany originally. I was born and raised in Munich. My parents are from Argentina, so they moved from Argentina to Germany. I was born and raised in Munich. So were my two brothers and we spent a lot of summers. German winters, Argentinian summers in South America. Went to school in Germany, ended up, fast forward, playing golf on the German national team for a while. So I used to, there was a time when I thought I'll be a professional athlete. Didn't pursue golf much further. Instead, went to college, studied computer science and finance, took a job in a renewable energy startup in Germany and traveling to Asia a lot. And then in 2011, I moved to the US to go to business school. And then at business school in Stanford, that's where I met my co-founder and we started

• 4:15Speaker 02

  our first company right after.

• 4:17Anthony Pompliano?

  So, talk a little bit about Stanford and going to business school there. You obviously had this amazing experience. You got close with somebody who previously has been on the podcast, Andy. Maybe just talk about the experience a little bit and kind of how that served as a foundation for some of the stuff you've done professionally.

• 4:35Speaker 02

  Yeah, so you go into business school expecting a lot of things and then you find you're getting something completely different out of it. So I don't, it's not a crazy academic experience. So it's not like you learn accounting unless you want to, like you can make your choices. Instead, in my case, I really wanted to absorb everything around technology and venture capital, entrepreneurship. That was one of the reasons why I moved to the US. I really wanted to get into tech and thought business school in Stanford in the Valley would be, would be a good way to do so. And like, I couldn't have set higher expectations and yet everything was way exceeded, including because I was lucky and had a class with Andy

• 5:16Speaker 02

  Radcliffe, where we really dissected startups and looked at startups and understood why some of them are working and what to strive for when you build your own company.

• 5:26Anthony Pompliano?

  Yeah. And so for those that don't know, Andy, who previously came on, is a co-founder of Benchmark and has been in Silicon Valley for, at this point, 30 years probably, and just had this epic, epic career. Talk a little bit about when you said, okay, I do want to go start a company. Where, did you know who the co-founder was already going to be? Did you already have the idea? Or kind of what process did you guys go through to kind of select co-founder and then also to settle on an idea to go after?

• 5:54Speaker 02

  I think, I think you'll laugh. So first of all, no startup story, like they're all look so romantic with hindsight. No startup story is like, I had the idea, I did it and it worked. So in my case, I was like desperate to start a company, just didn't know what to start a company in, like which industry, because you really want to be authentic to the space. And the space I'd been most authentic at that point was golf. Like I was good at golf, but I didn't want to start a golf startup. And so I was looking around and trying to have insights and trying to learn and realize I'm, I'm not learning anything that gives me a crazy edge and a crazy space. And part of business school is going on a lot of trips with your classmates. And so Chris, my co-founder and classmate at the time,

• 6:40Speaker 02

  and a bunch of friends and I traveled through Vietnam. And then I got him to talk about cars and he's a huge car enthusiast, like crazy. His first car was a DeLorean, the one from Back to the Future. He had just gotten back from the UK where he interned at McLaren. Cause he wanted to work for a Formula One company, went there, loved the product, didn't like the type of business and like the culture. And so he was a little disappointed because he job after business school was going to be a Formula One company. And then he went and it's like meeting your childhood here. Like he wasn't very impressed after all. And then I asked him, so what, what, what do you find interesting in the car space? And he, like I pressed the right button. He just kept talking about everything he understood and knew. And I was so impressed. He knows everything I thought.

• 7:26Speaker 02

  And then he said, there is one model that he particularly finds particularly interesting. It's the what's called buy here, pay here model where, where underbanked Americans or immigrants go to the car dealership to get a loan in the car. So they don't go to their bank because the bank wouldn't give them an extended loan. Instead, the dealership does it. And he said, that's a space that's ripe for disruption. It's a very messy customer experience. And if he had a, if he had entrepreneurial ambitions, that's something he'd look into. And I said, well, I got some.

• 7:58Speaker 02

  And then we started looking into the space. Like we started visiting these dealerships pretending I'm this poor guy from Germany who just moved here and needs a car, no credit and started learning. We quickly found that that's not a space where you want to start. But while we were exploring the space, all our classmates knew that we were exploring something in the car space. And Chris was the one to talk to about cars. And when we graduated, all our classmates needed to sell their cars. So naturally they asked us for advice. And then we went from giving advice to selling our classmates' cars on Craigslist very quickly.

• 8:32Anthony Pompliano?

  And so when you're doing this, is it a thing where, okay, let's go look like, let's start a company and let's go figure out the car space? Is it our classmates keep coming to us and asking us to sell cars for them? And so we get like pulled into starting a company because it's just like such a no brainer. Once you get started, like, like, at what point are you like, okay, this goes from like an intellectual exercise around the car industry could use disruption to we're starting a company?

• 8:59Speaker 02

  Yeah, I think that's a really good question because I wasn't realizing at the time that we're in the process of starting a company. Like I, I thought you need to have so much conviction and you have to have products and you have to have customers and then you can call it a company. So I didn't, I didn't know what we're doing. I didn't know we're slipping into starting a company. The one thing we had learned and taken to heart was what Andy Reckle taught us is that the most important thing about starting a company is finding value. Like you need to find product market fit, you need to find something that if you put it out there, people talk about it and they come and beg you to provide that. And Chris was the one who had the insight or the realization quicker than me. I was just laughing at my classmates who started asking us, can I sell their cars?

• 9:44Speaker 02

  Cause I'm also graduating from Stanford, like I'm not going to sell your car. Why would I? And Chris, like, I think there's value here. I think people want us to provide, provide a service that I know I can provide. And that sounds very much like product market fit, or at least like a chance at discovering something. So why don't we do it? And like, it took him maybe 10 minutes to convince me, okay, let's sell one car. So we detailed it, took photos, put it on Craigslist and then indeed found buyers. That person was paying for the car. We returned the money to the seller and he couldn't believe how much money we got for this car. Cause he had the benchmark he had was what dealerships were offering. And then like a light pop went down when we realized this is value we can provide. So now the question is, how can we provide it to more people?

• 10:29Speaker 02

  And it wasn't even then, it was when, when Andy and I grabbed a beer and I told him, hey, I've been selling cars all summer, but now I need to figure out with my life. When he said, I think you should be selling cars and he has $50,000 to get started. That's when I realized that this might actually be a startup.

• 10:46Anthony Pompliano?

  And so, did you think that this was like, hey, we're doing this manual and we can go build technology to do it better? Or was it, well, if we're already doing it, we're making some money, we'll just do more of it and like, we'll just hire a bunch of people. And then at some point down the road, you figure out, oh, technology is a better solution. Like, how intentional was this, a technology company versus just like, let's serve the customer and kind of solve this pain?

• 11:08Speaker 02

  Yeah. No, the intention was to find value no matter what. We did a lot of things that didn't scale and we didn't care. Like, the, the goal was to provide value. If somebody pays you for what you do, you clearly provided value. If you can attract other people who may not be in the Stanford network, that's a really good sign too. So we ended up just walking into the Tesla dealerships because Tesla didn't have a trade-in program at the time. And we told the sales guys, hey, do you have a problem with people wanting to trade in cars? And like, yeah, it's a huge problem. Our experience is so clunky. We said, just put them in touch with us so we'll sell their cars privately and hopefully give them a lot of money back. And so these were all really good signs.

• 11:47Speaker 02

  And then at some point, we realized the incremental car that we needed to sell was so much more effort because we, like, we weren't there in person doing test drives. And so that's when we asked ourselves, how can we leverage technology to remove friction or scale this business? And the conviction we had, if we create an experience like Zipcar where you can swipe your ID and let somebody test drive by himself, we wouldn't have to be there in person for people who either didn't show up or showed up late. And in reality, we're creating a much better experience if we let customers test drive these cars by themselves. And so that's where technology came in and all of a sudden scaled the, the business or the operations by a lot because we could have forty, forty parallel test drives versus

• 12:31Speaker 02

  having to be at all of these test drives in person and spend an hour with somebody who might not even buy the car.

• 12:37Anthony Pompliano?

  And so as you're doing this, one of the things that's always fascinated me is, and we'll get to kind of the financialization of everything, right, is it's just digital commerce in many cases. When this first started out, people wanted to buy books or electronics or kind of toiletries or whatever on the internet. And that was like a pretty big leap, like, okay, I'm not going to go to the store. I'm just going to like use the internet and then it's like somehow show up. Okay. But I don't think people thought you're going to buy cars or homes or anything, you know, kind of big life purchases on the internet. Now we see that right through a whole bunch of different companies. But you guys kind of held on to this one part of the experience that made it not 100% digital, which was you started to go test drive the car, right? And so talk a little bit about was that like a point of

• 13:22Anthony Pompliano?

  we are not going to compromise on this. We know that people want to test drive these. And so we have to bake that into the experience. Or how did you guys kind of hold on to that, even though you were really building kind of a digital technology enabled buying experience?

• 13:34Speaker 02

  Yeah, you're completely right. So we, we just tried to marginally change the status quo to create a business. And so we actually went through Y Combinator and scaled the business to an extent where it started breaking. The next customer experience wasn't as good as the previous one. We were frustrated. We weren't providing good customer experiences. There is a seller and the buyer. We always, every time we had a deal come, come to fruition, both our customers were unhappy. So clearly we somehow like found something that was interesting, but it wasn't going to be a big, be a big business. And then we took a big step back and asked ourselves, so if we can't serve the seller and the buyer at the same time, what if we focus on one of them and figure out how to make it an exceptional value proposition

• 14:18Speaker 02

  for them? And so we looked into can we offer sellers more money through technology? And the answer was no, it's a commodity. And then we looked into how can we help buyers? And we realized, well, there is the wholesale auction. That's the marketplace where dealerships get their inventory from. 200,000 cars every day, a lot of them in really good condition, need very little reconditioning, should and could go directly to the consumer, but due to the structures in the space, needed to first go to the dealership and then to the customer. And we said, okay, so this may be crazy because our whole bet was on scaling the test drive. What if we just remove the test drive and allow people to have access to a channel where they usually don't have access to to get inventory? And so we we were in every

• 15:03Speaker 02

  pitch conversation, every conversation around how do you think the car space will evolve? We changed our opinion overnight from there has to be a test drive to there can't be a test drive. And then we needed to prove it to ourselves that we can sell cars 100% online without test drive and just guaranteeing seven days money back in case there's something wrong with the car. And so the first conversation, as you can imagine, were were, what are you doing? No, I'm not going to buy a car sight unseen and hang up. Other people thought we were scam and left Yelp reviews. And we're like, oh, shoot, we need to figure this out. And then the first person to buy a car from us was an older gentleman, 65 years old,

• 15:42Speaker 02

  who had a car on lease, the lease ran out, and he was offered to buy the car at a lease. But we were offering the car so much cheaper because we had gave him direct access to the wholesale inventory that he said. It's so, so cheap compared to what I'm being offered. I can't say no to this. Like, if you guarantee the condition, I'll buy the car sight unseen because it's the same car that I already had. And so this person walked in, wrote a check, drove away and had a phenomenal experience. And then we said, holy moly, we need to sell cars online. Like, we need to do this online and disrupt the value chain, compress margins. And that's actually a much better business that skills much better. And so that's how we kind of slipped and serendipitously fell into the online car retailing model, if that makes sense.

• 16:26Anthony Pompliano?

  Yeah, what's so interesting to me here is like you found a place where there was value. You kind of wedged yourself in, began to really, really understand it and become experts at this one piece of the car market. And then you figured out how to scale it. And then you figured out how to make it efficient and how to have good margins and things like that. And really, like, that is the way that if you kind of drew it up, it's supposed to work, right? It is kind of you. You almost have to do this stuff sequentially. And it feels like so many people try to just jump to the finish line and have this grand plan. But you don't get that journey along the way to kind of really dial in what the value proposition is.

• 17:00Speaker 02

  Yeah, I think there's actually. There's two ways to start a company. And one is the very lean way. How do we did it? Spend very little money. We really nimble and just iterate, iterate, iterate. There's the other extreme, which is just be a visionary and tell you, I, I know how the future is going to look like. I'll just build it. And then I think the truth is the combination of both. Something I admittedly learned from Ernie Garcia, who started Carvana. He always, he always had the future in mind, but he was, he was willing and scrappy to iterate to a place where he tested, learned, tested, learned, tried out things. And then he came up with crazy ideas like vending machines that all of a sudden everybody loved. So he, he does a really good job in combining the two things.

• 17:44Speaker 02

  And I feel like having gone through the experience, being really scrappy and doubling down too much on let's iterate until we find something. That was a good learning and it taught me that part now. And the new business that are starting, I have a clear vision in mind on what I want to do and what I want to achieve. And I need to figure out what's the best angle to get there. And we can talk about this in a second too.

• 18:04Anthony Pompliano?

  Absolutely. And so as you guys are building, just talk a little bit about how you actually scaled the business, right? So you figure out, okay, this is what we're building with this technology we got to build. Now comes the execution of just, we got to do it. And so how does that play out and kind of how big did the company get?

• 18:17Speaker 02

  Yeah, so we, we pivoted from the peer to peer model to the direct to consumer model. That company, that business value proposition started taking off and we had a lot of advisors and ABCs. We had been in touch with very closely in, in, in, in regular communication with and giving them updates on how we're doing. And all of a sudden I wrote an email and I didn't even notice I did that. I wrote an email, if we had more capital, we could grow faster. Like I, I'd never said that for two years because I didn't believe it. And subconsciously I felt, okay, so the next thing that will run out of the next bottling we'll have is capital. Cause we had to finance these cars for a week that were on our balance sheets for a week. And then one investor calls back and says, I've been in touch with you guys for a year and a half. I love how scrappy you are.

• 19:01Speaker 02

  You've never asked me for money and you just wrote, if you had more money, you could scale faster. I want to invest. And so that kicked off a series A and that happened within four weeks. Just because we had the relationship with the investors and I said the right thing without knowing. And then the transition from scrappy founders, literally working out of a garage where it's hot in the summer and cold in the winter, and two or three team members to building a company that scales, that was a transition where we started to hire the executive team. We hired somebody who had had sales and marketing. We hired somebody who did took care of financing because when you when you buy and sell cars, you move a lot of money very quickly. And then we we brought in head of operations. Actually, our first employee became the head of operations

• 19:46Speaker 02

  just to scale everything. And then we built in a team. And so the next step was to validate that we can produce growth predictably. That's then the target for the Sears A Capital at the time at least. And so what we found, we scaled to, I think we're selling 150 cars a month. That doesn't sound like a lot in absolute terms, but that's three and a half million dollars in revenue that we're turning every month. Each unit was profitable. Our problem was two things. Number one, we we every sale incremental sale became harder not easier because the first people we talked to were Uber drivers, Lyft drivers, people who had a car lease, wanted to replace it with the exact same car and own it. And then

• 20:26Speaker 02

  after we hit 150 sales a month, we tapped into the market where people had saved for this car for a year or two and became really emotional around the purchase. Urban is very emotional. And so we underestimated that that was hard. And the the reason that was especially hard is we couldn't finance anybody with credit scores below 700. So we could only finance customers through our credit union network that had exceptional credit. And if you can't finance people buyers with credit scores below 700, you're you're excluding the majority of Americans out of the equation. And that's why the model wouldn't work.

• 21:00Anthony Pompliano?

  Got it. And so as you're doing this, you obviously build a pretty big business, right? The sense of you're doing three and a half million dollars a month in revenue. Did you kind of get to the point where you realized, wait, this can be a really, really big business? Did you get to the point where you said, hey, we actually think that kind of partnering up with somebody makes sense? Like, how did your thought from, I want to start a company. Okay, now I got the company. Now I know what I want to build. We're scaling. Like, what was the next thought in that journey?

• 21:28Speaker 02

  So this is, I'm going to tell you a story that usually entrepreneurs don't tell you. We wanted to build a really big company, but we felt stuck. Like we had this really nice trajectory and had you drawn out how our sales grew and how they became more predictable, it would have looked really nicely. And then we had a ceiling, like it was more obvious to us than to anybody else. We could have squeezed out more sales, but it wasn't growing like that. It was growing like that. And so we said, shoot, we have a problem here because we could raise more money. Like I'm sure we could have raised more money, but I don't think we'll do the hockey stick. And so at the time, we then reached out to what felt like competitors, but we were all on the same mission to change how US cars are being bought and sold. And got in touch with our now friends at Carvana and

• 22:11Speaker 02

  just said, let's compare notes, we're in the same space. We showed them what we had built. We had become really good at describing vehicles 100% online because we had to describe the vehicle, vehicles in our inventory because they weren't in our physical possession. And that's something Carvana had planned on building out soon. And then they said, why don't we just team up? Like your tech is really great. Why don't you want to apply it to a much bigger base? And we're growing like that. And we can finance customers below 700 credit score and we have the full vertical integration. So we're able to provide an even better customer experience. And then it was pretty compelling to just merge the efforts and we brought our whole team, mainly product engineering and then joined forces with Carvana in 2017.

• 22:54Anthony Pompliano?

  All right. So this is the part of the story that gets crazy because you merged with Carvana, still very good situation for yourself, the employees, investors. And then all of a sudden, Carvana goes public. I guess, one, did you guys have an understanding that that was gonna happen? Or maybe it was like some at some point in the future. And then two is, once you get public, the stock price takes off and like, you know, it's this kind of crazy situation. But just talk a little bit about kind of going from startup founder to founder who's scaling, to founder who sold their business, to next thing you know, you're basically running a division inside of a publicly traded company.

• 23:31Speaker 02

  Yeah, things happen really quickly, but that's true for everybody at Carvana. So the way I tell the story is that usually you either ride it through, you start a company and you make it, and then you have the full journey, or you hit some bump in the road, and then you sell it or you find a way to get out. And then you do something new. And so we were incredibly lucky because we we had this whole journey for four years to a certain point. And then instead of getting out because we couldn't grow much further and starting something new, we just switched lanes. Like, we continued our journey more or less exactly where we ended it with our own company and then continued on what became a rocket ship. We knew that Carvana was going to go public

• 24:14Speaker 02

  when we first talked to them. That made the the transaction a lot more interesting for us too, because we knew, like, we had equity in these businesses and we wanted to make sure that we have for for the four years of suffering, underpaying ourselves, that we get something out of it. And so knowing that Carvana was going to be public was compelling. The company went public at fifteen dollars and it didn't take off immediately. It actually went down to eight dollars. And so nobody tells that story and Ernie laughs about it now, obviously. By the time our first cliff ended, so after a year, the first time we could sell shares, we were at fifty five. And at that point, it was pretty clear this was a good deal for us.

• 24:55Anthony Pompliano?

  So what are you thinking when the stock goes from fifteen to eight? And then what are you thinking when it goes from eight to fifty five?

• 25:05Speaker 02

  So from fifteen to eight, we weren't thinking a lot because it happened so quickly. Okay, I guess it's eight, not fifteen. When it goes from eight to fifty five, we we wanted to prove ourselves. I think especially Chris and myself, the two founders, we really wanted to prove to Carvana it was a good decision to bring us on board. Like, they extended a lot of trust to us and they made a bet, what felt like a big bet on us. And so the first year, we were just really, really busy. Chris was integrating what we had built at Calypso. And I was looking into areas where I could be influential. And so what felt really good is that after a year, actually, the six month mark, it started to become obvious that we could actually contribute to what they're building and doing. And so

• 25:47Speaker 02

  that got good. We became really good friends with the founders and executives over there. And it felt like ours. It started, that usually doesn't happen or doesn't happen often. But we had our babies within this big company, which in like in these sales of companies or acquisitions, oftentimes the founders feel like, oh, my baby is now somebody else's. And so we didn't feel like that very much. Instead, we felt the opposite. We felt like we had ownership of a really interesting areas of the business. We felt like we were contributing. And then by the time we could sell for the first time, it felt a little bit like a relief because we had, we had been massively underpaying ourselves for four years when we ran the company.

• 26:26Speaker 02

  That and so that helped a little bit. And then the other thing is we, we needed to convince our team that making the move to Carvana was a smart decision. And more than looking out for ourselves, we actually looked out for our team quite a lot. And then knowing that they had a good outcome felt really good. And now they're our good friends and we're like we take a little bit of credit for them being successful financially and being a lot, lot, lot more independent than they were before. And so that felt really, really good. And then it became interesting to go from fifty five to a hundred and twenty. And then go from a hundred and twenty to I think twenty five when COVID hit over two weeks. And then, then, uh, yeah, now I don't know where the stock price is, but it's a lot higher than that.

• 27:09Speaker 02

  And now it feels like a relief that like the, like this initial vision we all had that used cars should be bought and sold online is actually happening. Like COVID, COVID accelerated that process as well, just like it accelerated a lot of other, other e-commerce and digitization efforts. The same is true for car sales.

• 27:29Anthony Pompliano?

  The story of kind of stomaching that level of volatility in a stock is incredible. So kudos to you guys for, uh, for stomaching as much as, as you did.

• 27:39Speaker 02

  Have to look away for weeks. You can't, like, I know people who track the stock price every day. Like the fact that I don't know just speaks for the fact that I'm really looking away and I hate when people tell me where it is because it's like that. But I'm like small compared to other shareholders in Carvana. So I feel for them too.

• 27:56Anthony Pompliano?

  Absolutely. So talk a little bit about, uh, kind of COVID obviously accelerated a lot of these digitization trends, right? So things that were kind of already underway, buying cars online is a great example. It feels like we just got thrown forward, you know, three to five years into the future. And it really COVID forced these trends to accelerate. How, how has it played out kind of from your perspective?

• 28:18Speaker 02

  I as sad COVID is for many reasons. I think there's, there's a little bit of excitement that I'm feeling about like humanity making progress, like from a tech perspective. Carvana was really, really good for us and to us. After three years, Chris and I ended up deciding to move on. The, the, the reason we moved on is because we, we felt like this is a huge opportunity. We, we've always felt that customers are overpaying on car loans. Like when people bought cars from us and we found a loan for them, which that's true for eighty percent of the car loans that originated the dealership. We knew that you could give a customer a loan that's not ideal for the customer, but pays the dealership the highest referral fee.

• 28:59Speaker 02

  And so we always felt car loan refinancing should be a bigger thing than it is. And then when we heard about um when COVID happened and we talked to a lot of customers and realized they're, they're having financial difficulties. We again came up with this thought, if you refinance, if you only refinance your car, you could tap into the positive equity in your car. It's actually a really creative way to, to access cash. And then the third insight we had, and I'll tell you where I'm going with this in a second, the third insight we have is people who make their payments when they, when they take out a car loan, they're migrating credit. And so for people with exceptional credit, the difference isn't that big, but if you migrate from a six twenty credit score to a six eighty to a seven hundred,

• 29:42Speaker 02

  you can literally go from ten percent to four percent on your car loan. And nobody helped customers. And the main reason I think nobody helped customers refinance their car auto loans. So the main reason people didn't do it is because it used to be a fully offline process. Part of refinancing is auto loan refinancing is, is the DMV. So the DMV is part of your funnel. And if you have to exchange paperwork, like you can't provide a good value proposition. Yet now there is like this big inflection point of, of transactions moving online and branches being closed. You create incredible opportunities for fintech, for in our case, refinancing of auto loans.

• 30:21Speaker 02

  And we felt it was so compelling to, to double down on that, that we ended up leaving Carvana in June, I think, to start or work on starting a new company.

• 30:30Anthony Pompliano?

  And so really what you're kind of writing is two different trends, right? One, the digitization of a lot of things, if not everything, and also the financialization of everything. Talk a little bit, just at a high level, how you see these two things kind of merging or kind of moving side by side and really kind of taking over. I laugh and say that the saying of like, software is eating the world. It feels like these are the next two trends, right? Between digitizing things and financializing them. So talk a little bit about that.

• 31:02Speaker 02

  Yeah, I think Carvana is a really, really good example. Fully vertically integrated business. It's a tech company. It's a car dealership. It's a logistics company, but it's also a bank, basically, a lender. And so Carvana creates an incredible experience also because you can get your loan on the spot. It's like, it fuels the transactions. It's what we were missing when we were selling cars in our business and we didn't know it at the time. In fact, it took Chris and me probably a year and a half to fully understand the power of point-of-sale financing when you do online car sales. Like a firm is a good example. Think of a firm within Carvana. That's what Carvana is practically. And so, actually in 2000 or 2001, there was a company called iMotors that, okay, internet,

• 31:47Speaker 02

  let's sell cars online. They build these used car factories. I think part of the reason that didn't take off, it was a little bit too early, but you also need to be fully vertically integrated. You need the fintech, the financing portion of the business to really fuel the business. And nobody has done it better than Carvana is doing it. And so it's one of the examples that I think show how important fully integrating financing in your solution is to actually disrupt a certain market.

• 32:17Anthony Pompliano?

  I feel like the whole idea of like this vertical integration, really what technology companies are realizing is you can have the best technology in the world, but when you are still relying on vendors and kind of different suppliers and different service providers, they just aren't the same, right? They have different expectations of how they interact with their customers. They kind of just treat them in a very different way. And so if you could start to vertically integrate your technology with the type of customer support or care that you want with the financialization or kind of financial resources that they need, you really start to like own the customer experience from the second somebody says, I want to buy a car all the way through. And that to me feels much more defendable or much more of a moat.

• 33:01Anthony Pompliano?

  Because literally you own the entire funnel, right?

• 33:04Speaker 02

  Yeah. It's interesting because I think you mentioned it earlier in the conversation. Now even houses are like, houses are sold online. Open Door is such a good example of, they call it the full stack, owning the full stack of what is necessary to provide a good customer experience. Open Door started as a data company, like the guys, and we talked to them early because it was so similar to our business, selling cars and buying cars and selling and buying houses is so similar. Open Door pitched itself as like a data company, knowing prices and nuances of prices and properties better than anybody else. And I think if you asked them today, they would admit, no, no, no, the secret is full stack. Having the full stack of everything that's connected and necessarily do a house transaction, a property transaction

• 33:47Speaker 02

  under one roof allows you to extract more margin. That means you can compress margin more. That means your offering becomes more compelling and it's the better experience. And it clearly seems to be what's winning in the, in the property space. But it is guaranteed to be what, what compelled Carvana or makes Carvana so compelling because it's like you own every bit of the transaction. It's really hard to do because that means you're running multiple business at once. But if you get it right, you have a moat, a hundred percent.

• 34:15Anthony Pompliano?

  How do you think about sequentially building that, right? Because there's a lot of people who say, okay, I want to own the full stack, but it would be near impossible to go out and just build it all from day one. So is it a thing where let's start at the very top of the funnel, kind of dominate there and then kind of move downstream as we go? Do you start downstream? Do you try to pick kind of where in the funnel you're going to start from a strategic standpoint? Like, how do you just think sequentially building it out to eventually eat the entire funnel?

• 34:40Speaker 02

  Yeah. I, I don't think I have the perfect answer. I think the, the examples that we see that are very successful, Open Door is a good example. You require a little bit more capital than you otherwise would require to build a startup. It's, Open Door was very well funded. Carvana was very well funded.

• 35:00Speaker 02

  So I don't have, I don't think I have the perfect answer for you. These businesses, I think, cannot be started by first time founders because you can't, you can't raise the money that you need to raise for some of these businesses. Um, which that's not a problem, but because somebody will do it, it's great. If you do it, you need a little bit more capital. And I think the other thing you need, you need to have the courage to potentially acquire somebody else, like a vertical that you can quickly build and bring it in-house much earlier than you would otherwise. And so actually a good example is Vroom. Vroom is the other online car seller. They started out trying to sell used cars online and they quickly noticed they could get like a huge, huge, huge acceleration in the business if they just bought somebody else who's already good at doing it.

• 35:43Speaker 02

  And so Vroom early on raised venture funding to buy a company called Texas Auto Direct. They were the biggest used car seller that sold cars purely online, mainly through eBay at the time. And so for them, they, they bought the stack and then optimized, then built a really big business. I think that's one way to do it. But again, serial founders, it was the founders of Wix who started Vroom. And they had, they had the ability to raise enough money to actually pull it off, I think.

• 36:11Anthony Pompliano?

  Is that the main advantage to second or kind of multiple time founders is the ability to access capital?

• 36:20Speaker 02

  I'm early in my second journey, so I can't speak for myself. I can tell you that the things you said, people start believing quicker. And so you need to do a little, little less convincing. I think this is something that Andy said, and I think it's true. I'm now very authentic to the space. Like I've, I've just through seven years in the car space, learned so much that when I talk, I can reference things and data points and players and names and companies and behaviors that I couldn't have referenced seven years ago. And I think that makes the pitch really compelling. Like even if I had nothing and tell you what I want to work on, I think you'd, you'd understand that I understand the space very well. That doesn't mean I'm successful. I think it just means that I'm very authentic and being authentic to the space is very

• 37:05Speaker 02

  helpful in starting businesses.

• 37:07Anthony Pompliano?

  That makes sense. And as you think about building the next business, are there things that you specifically are going to do different? Or kind of our lessons learned from business number one that you'll implement for business number two?

• 37:18Speaker 02

  Yeah, I think this A, don't repeat the same mistakes because there were many. B, I mentioned that earlier. This time around, it's I want to have I do want to do a better job communicating, telling myself in the team and reminding myself what the mission is. Back then, we just said, let's change how used cars are being sold. But this time around, we want to save Americans a lot of money around cars, like around car ownership. Car ownership is complicated. It's more expensive than it should be. And so the mission is save Americans money in car ownership. The way exactly how we get there, I can't tell you quite yet. We could go directly to consumers. We're having a lot of conversations with financial institutions,

• 38:01Speaker 02

  including credit unions, believe it or not, who have really, really great products and who struggle to get them to customers. So I can't tell you whether they'll end up being a direct to consumer business or whether we'll end up working with credit unions and help them in their digitization efforts. But I can tell you that this time, the North Star is very clear.

• 38:19Speaker 02

  And I think part of the reason why it wasn't so clear back then when we started for the first time was like when you leave business school, you're really eager and you have these peers and you want to be successful really quickly. While if you have this North Star, it might take longer, but at least you have good direction. And I think I was lacking that at the time. And then frankly, Ernie always says you can't climb up a hill or hike up a hill. If you continuously look at your feet, you need to remember where you're going. And so he uses that analogy a lot, and I think it's a really good one.

• 38:51Anthony Pompliano?

  I love that answer. Talk a little bit about the impact to the car industry from where you guys sit, whether it is Uber, Lyft and kind of ride sharing or self-driving cars and kind of the promise of that, you know, always seems to be kind of two or three years away.

• 39:06Speaker 02

  Yeah, it's funny. When we raised money for the first time in two thousand thirteen, inverse society, yeah, building a car retailer, that's not a good idea because there'll be autonomous cars and everybody will drive Uber. This time around, that question never came up. Timing was also interesting because people are shifting to car ownership and not away from it. So through the pandemic, car sales are through the roof because people want to have their own cars. Autonomous cars had some incidents over the last three years that slowed down that progress too. So I'm not worried about autonomous cars or car or car sharing or Uber or Lyft.

• 39:48Speaker 02

  I think it'll always exist and has a place to exist. I think some of the trends take a little bit longer. But Americans own so many cars, it's insane. There's a hundred million car loans out there. So a hundred million people owe money on cars and a large percentage of them are overpaying. So I'm just trying to help these people and if I get even only a fraction of the market, it's going to be a big company. People underestimate how big the market is. Carvana has a market share of, I think, point six, point seven percent, not more, not even one percent of the car market, used car market. And you can see how valuable they are. So it's a huge market.

• 40:24Anthony Pompliano?

  That's incredible. Like, just to think of how big that market is, right?

• 40:29Speaker 02

  It's insane.

• 40:30Anthony Pompliano?

  Yeah. You've got some very interesting thoughts around, I'll call them fintech-type businesses. It seems like everyone today may not have started out this path, but they're all trying to be neo-banks. And that's everything from go get the actual banking license to do everything you can to be like a bank without actually having to get the license. I think you guys kind of have a different perspective. Explain maybe why that may not be necessary or you see a different path.

• 40:57Speaker 02

  Yeah, I'll take a little segue to end up where at the conversation you have. When I left Germany, the reason I never started a tech company in Germany was because in Germany, entrepreneurship and tech companies meant cloning a business that worked somewhere else. And so the conviction always was if it works in the US, humans are the same, the internet the same all over the world. We'll just take these same businesses and bring them everywhere. And in some cases it worked and others it didn't. You had these scooters in some places, actually in the original places in China, they didn't work, but then everybody tried to do it everywhere else. And so neobanks, I think a little bit like that too, where you have a few examples,

• 41:38Speaker 02

  like Brazil, for example, where absolutely necessary, incredible company will definitely exist and needs to exist, but then there's other markets that are not like Brazil, where you probably don't need a neobank, but you're still getting the valuation and your fundraise like the other ones, because it looks so similar. The US, I don't know it so well, so take what I'm saying with a grain of salt, but I know the lending space really well, the auto lending space. And so if I wanted to start an auto lender, which would be, we could be full stack and become an auto lender, that would not be a good business, because the existing lenders are really good at what they're doing. The best product in fact are products that credit unions are offering, especially for people who have exceptional credit. They just have a different problem.

• 42:23Speaker 02

  They can't reach their customers, they can't engage their members good enough to make sure that members get their perfect products. To put things in perspective, so even if you have a credit union, but you work with a credit union, a member of a credit union, and you qualify for, say, 2% auto loan, the second you go to the dealership, there's more than 50% chance that the dealer will talk you out of the credit union loan and into another loan. And then the credit union ends up with having tons of members who have loans, worse products with other lenders and other institutions. And so I believe that for the US, at least in the lending space, the goal is not to vertically integrate and become a lender. The goal is to help credit unions, and this is an example, digitize their efforts so they can engage their members better,

• 43:07Speaker 02

  reach out to them better and create a better and more engaging experience. And then it's almost a white labeled neobank, other than having the full bank on your side and then trying to compete for customers, although your product is ultimately fundamentally not better than the existing ones. So that's how I think about it.

• 43:24Anthony Pompliano?

  Yeah, so really, it ends up at the same place. It's just a matter of is it you as a software company or technology company being at NeoBank? Or do you basically put the pieces together to offer that experience to the customer? But maybe you don't have to do it all yourself, right?

• 43:37Speaker 02

  I think for the consumer, you end up at the same place. You get the right product with a better experience. The businesses that are being built are very different in the different scenarios. That's why when I said earlier, one thing I'm excited about is having this long-term vision of how I want the world to look like. It's very customer-centric. I want the experience, the auto lending and auto expense experience for customers and borrowers in the US to be much better. But I can't tell you yet whether or not I'll be fully vertically integrated and provide everything from a car loan to warranties and insurance products. Or whether I use the existing products and just do a much better job engaging the customer and giving these providers who have good products access to these members and customers. And so that's where we are in our thought process too.

• 44:22Anthony Pompliano?

  That makes sense. What's been the biggest surprise so far in starting the second company? Like what the first company, I think everyone expects founders to kind of go in eyes wide and kind of bushy-tailed and very naive and they get tons and tons of surprises. Most people don't talk about the second company, though. And although you guys are just starting, have there been any surprises yet that stick out?

• 44:44Speaker 02

  I think I was about to say, we come across it much more credible. And I'm like, I'm at the same stage of the company as I was last time when I got all the no's. No, people are more inclined to say yes, just because I happen to have been at the right place at the right time a few times. But the more valuable lesson is how you're still learning so much. Like there's, I've heard that from a lot of, I've heard two dangers when starting your second company multiple times. Number one, you jump into the first opportunity quickly because you really want it. And then you feel like you know more now and so you're listening less. I think the second one is a real risk and we're proving to ourselves that listening

• 45:25Speaker 02

  to credit unions and customers and members and other partners proves really valuable because you have so many surprises that you otherwise overhear or don't take seriously. And so we spend a lot of time on the phone, which is great because you can talk to so many people over Zoom there, learning and learning and learning. And we're learning so much, like our learning curve is much steeper still than we expected. And so I'm enjoying that part actually quite a lot.

• 45:52Anthony Pompliano?

  Talk a little bit about kind of how you see consolidation in the space. You know, it's very obvious, I think, that lots of people want to go and now want to sell cars online, for example, they see Carvana's success and like, that's a great idea. I'm gonna go raise a bunch of money and go try to do that. And what we've seen across tech companies or industries is they can get access to capital. They want to go buy things and sometimes they buy each other. Other times they buy the incumbents or kind of smaller players that have legacy models. Is there a world where maybe we see the reverse, like in the car industry, where some of the larger players say, nope, we're gonna buy the tech companies and integrate them. And so it's not necessarily the tech companies being the acquirers? Or do you think that the DNA of kind of a startup, venture-funded tech business

• 46:37Anthony Pompliano?

  is just so different than kind of these legacy businesses? That it's unlikely the older businesses, the more established businesses will be the acquirers?

• 46:45Speaker 02

  Good question. The car space is unique because it goes back to you really need to own the full stack to be able to provide a compelling value proposition. And so what you're seeing is that the existing players, existing car dealerships and groups, they're trying to figure out how can they play in the online car retailing space? And I don't think they've figured it out. I don't think, I don't think they can acquire companies because it has to be the DNA that changes. It's actually a very good example of the innovator's dilemma. How CarMax is a great example. CarMax is returning one and a half billion dollars to its shareholders every year. Yet Carvana is selling a third of the car and is worth three times as much.

• 47:27Speaker 02

  And so CarMax is now have, they're now faced with this dilemma. Should I just continue this business that returns tons of money to my shareholders? Or should I invest money into projects, initiatives that change the DNA, that change the return profile of my stock in my business? That don't pay off short term, but position the business more successfully long term? And I don't think, I don't think the car space has figured it out to how to, how to react to somebody like Carvana quite yet. And then this advantage of existing players is the longer you wait, the bigger Carvana gets. And the bigger Carvana gets, you know, this flywheel, the more powerful it gets. Like it's a little bit like Amazon in reality.

• 48:11Anthony Pompliano?

  It really is an interesting thing to kind of see a fully vertically integrated business attack kind of a market where the incumbents have been caught on their heels a little bit. Because I think to your point, the longer and longer they wait, actually, the harder it becomes to to kind of change course, right? And if they wait too long, you know, we know how that ends. And that's not pretty for anyone involved with the incumbents, right?

• 48:33Speaker 02

  I think I think car dealers will play a different role in the future. You have the manufacturers who build cars. They're not very good at selling and neither are they allowed to. So they have their dealership networks. Tesla already tried to change that and made some strides, but didn't fully get through. They're still having dealer licenses in different states. And then the dealers used to make 10% gross margin on the car that's down to 8% now, which doesn't sound like a big difference, but that means 20% less profit on a car now than 10 years ago. Back end revenues are going up in margins. That means for financing and insurance products.

• 49:11Speaker 02

  But now the financing products are becoming more transparent and now they need they have feel more competition on that level.

• 49:19Speaker 02

  Servicing is still in an opportunity for franchise dealerships where you go back and return your car. But if it becomes electric, you don't have a lot of service. So I think the structures will continue to exist. I think car dealerships will figure out slightly different business models. If it was for me, I think they should try to innovate around ownership. Like it would be really nice if car ownership could be temporary and could be a subscription type of model. And you need to be vertically integrated to offer that. And I think dealership is actually in a really good position to innovate on that front. But I haven't seen anyone do something really impressive in that space quite yet. And I, yeah, I'm curious. I'm actually curious myself.

• 50:02Anthony Pompliano?

  Before I go into the rapid fire questions to to wrap us up, what would be your best piece of advice to first time founders?

• 50:12Speaker 02

  There is a piece of advice for people who want to be founders and have yet to figure out what to work on. That piece will be you just need to get started. It's really important to get started because the second you have conversations, you learn something that you didn't know. And it's so easy to talk out, talk yourself out of starting if you only start the company in your head and you're not doing anything. So step one is to you need to get started and force yourself to figure out how can you provide value. That forces you to have conversation and that allows you to learn. Once you're already starting, I think you need to be a lot more patient. Like companies, if you look at companies, you always think they're an overnight success. They're always 10 years in the making. And so you need to be in it for the right reasons. I feel really good about what we're doing

• 50:57Speaker 02

  right now because I have this North Star and I don't, I don't care how long it will take. I have the luxury to think like that. I wasn't the same person seven years ago when I started it because I was like ambitious and impatient. If I were talking to myself seven years ago, I would tell myself, spend less money, keep the burn lower for longer, keep learning and really, really find out what product market fit means for you and then double down. And don't, don't think you have it when you're not sure because that's dangerous.

• 51:29Anthony Pompliano?

  That's a great piece of advice. I asked the same two questions to everybody and then you get to ask me one to finish. First is what is the most important book you've ever read?

• 51:38Speaker 02

  Most important or most recent? I read a book that I really enjoyed is Don't Split the Difference or Never Split the Difference. It's about, I'm not sure if you've read it. It's about this FBI hostage negotiator who realized after iterating on how to best negotiate that this is really applicable to business. I really enjoyed that book, not only because it's entertaining, because I think it's, it's really, really, really teaching a few valuable lessons. And so most important recently, putting it into the whole my life's perspective, it's a little hard, but that's a book that I think of very often and I really enjoy it.

• 52:12Anthony Pompliano?

  It's really good too, because he almost uses, he uses like real life scenarios, right? To kind of explain the, the different lessons, which is pretty cool. Second question is more fun. Aliens believer or non believer?

• 52:26Speaker 02

  So I still want to go to area 51. I've never been to check it out. I want to see with my own eyes. I have seen no evidence. I don't think they're out there, but I don't think I think the chance is a non-zero that they exist somewhere.

• 52:42Anthony Pompliano?

  I think that's a very fair way to look at it. It's like the number one answer for no or explanation for no, I don't believe is I haven't seen one, right? And then the number one answer for yes is mathematically, the probability is they exist, right? So you nailed both of them, which is not what most people say. What's the, what's the one question you have for me to, to wrap this up?

• 53:05Speaker 02

  I'm, I'm really curious to get a sense for what, what you feel like you're getting out of these podcasts. Obviously there's a lot of people listening to you and I listened to a podcast two weeks ago, three weeks ago. I really enjoyed it and it's clearly a big investment and time and effort on your end. What are you getting out of it and what excites you about it?

• 53:22Anthony Pompliano?

  This is the most selfish thing I do. Like I, I tell people all the time. It's great. I enjoy that everyone else finds these valuable, but if nobody listened, I would still do that because you just sat down and gave me a crash course over an hour in the car industry and building companies, right? Kind of all the things that you've learned. You're gracious enough to spend your time with me and I get to steal all the information, right? I feel like I like extract it from you and like run away. And so, you know, and I mean that in a positive way, but like that's basically what happens in the conversation because so one-sided, right? It's so unfair. The guest basically is, is providing, you know, majority of the value and I'm just asking questions and learning. And so as I've thought through it, I'm like, if I didn't have the

• 54:07Anthony Pompliano?

  audience, right? One, it wouldn't be a very compelling thing for a guest to come on. So having that audience is kind of the, the gifted back in exchange, if you will, for hey, you give us information, I'll give you this big platform. But also two, I think is more and more, as I pay attention, like why people say they come on the podcast, like, yes, there are kind of self, you know, benefits, right? In terms of I can promote my company, I can promote what I'm doing. But I really do think people have this inherent. Desire and enjoyment from giving back to others, right? So it's like, hey, I learned this thing or I spent all day thinking about this thing. Like I can go with, you know, 45 minutes to an hour, kind of tell a whole bunch of people about it. Like, that's awesome, right? And I enjoy doing that.

• 54:50Anthony Pompliano?

  And so I don't know why it is people that are like investors and entrepreneurs. But for some reason, that feeling of kind of wanting to give back or kind of share knowledge is really special, I think, to these industries. And so it's cool to kind of be able to help facilitate that.

• 55:05Speaker 02

  Yeah, very cool. Well, thanks for having me. I feel very flattered to be here.

• 55:08Anthony Pompliano?

  Absolutely. Where can we send people to go find you on the internet? Or find more about, I don't even know if we're allowed to say the name of the company, but you.

• 55:15Speaker 02

  The name is Clutch. The URL is withclutch.com. It's a prototype. So whatever you see, take it with a grain of salt and give me the benefit of doubt that it's still a prototype. And then ideally connect with me on LinkedIn. Look for my name, Nicholas Sinex, and you can put in the show notes. I love to connecting with people, share thoughts, ideas. If somebody has feedback for me, I think feedback is a gift. So be kind, but generous. And then if you want my thoughts on something, if you happen to be in the car space, which is a space I've gotten to know quite a bit, feel free to reach out.

• 55:49Anthony Pompliano?

  Awesome, man. Listen, thank you so much for doing this. I really appreciate it. I think people are gonna love this.

• 55:53Speaker 02

  Thanks for having me.