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David Friedberg: Hey, everybody. Hey, everybody. Welcome to another episode of This Week in Startups.

SPEAKER_05: I'm super excited to have our next guest on because George Arison is the founder of Shift, Shift.com. We're going to talk about that and the company going public via a SPAC. There's been a lot of spectacular companies going public, and we're going to talk about the whole SPAC movement, which everybody's very interested in. But in addition, George created Uber years before Uber existed or Lyft with something called Taxi Magic.

SPEAKER_06: So we're going to get into the history of that and what it's like as a founder to create a game-changing company but not win the big prize. Welcome to the pod, George Arison. And I'm pronouncing it correct. It's Arison, A-R-I-S-O-N, correct?

SPEAKER_08: That's correct. And thanks for having me. Excited to talk to you.

SPEAKER_06: Yeah, so I led off with it. It's got to be an interesting moment. A lot of your friends probably bring this up and family members.

SPEAKER_04: You created Taxi Magic, which, if my memory serves me correct, was a way to get a taxi and have it dispatched. Sounds very familiar to me. And you did that back in 2007, which was a couple of years before Uber existed, correct?

SPEAKER_12: Yeah, we started Taxi Magic in February of 2007 and launched it as a product, first on the East Coast and then in San Francisco as well.

SPEAKER_08: You could book a taxi to come to you through your phone. At this point, it was a BlackBerry and a Palm device, Windows Mobile. iPhone did not yet exist. And then you could also pay for the taxi through the phone as well, all connected to the dispatch systems at the taxi fleets.

SPEAKER_04: I didn't realize you also had payments because that was Uber's and Lyft's big innovation as well. But you did it with taxis, not with Lincoln Town Cars.

SPEAKER_16: Take me back to that decision to do taxis and not Lincoln Town Cars.

SPEAKER_08: Yeah, so we actually did Lincoln Town Cars in New York. But the thinking was we wanted to appeal to the broadest segment of the population and taxis made a lot of sense. The concept for the business came out of B2B use, actually. It was for business travelers first, and they would not want black cars, right? The travel manager would want to limit what you spend. And the idea was to kind of have you do taxis rather than black cars. That was kind of part of the concept. And, you know, we came up with a lot of great tech. And my co-founder and now my co-CEO at Shift, Toby Russell, calls it the, you know, Netscape of the automotive on-demand space because we came up with a product and then obviously others won, which is fine. We still learned a ton and it was a really great experience. But for us, the really big kind of challenge came when Lehman Brothers went under, actually. Because we, Lehman Brothers was going to be our first New York customer with all the black cars in New York kind of using our tech to do the pickup from the bank and take you home at night product, which was very popular. You know, back in the day, a lot of black cars were circling out of the banks to pick people up.

SPEAKER_04: Yeah, if you lived in New York, you saw down from any major high-priced building, Class A office space, whether it was Goldman Sachs or, you know, a famous law firm or Sherman Sterling or something,

SPEAKER_23: there would just be tons and tons of Lincoln Town cars circling to take people home for $100 a pop to Brooklyn.

SPEAKER_12: Yeah, that's exactly right. And so, we were going to be managing that for Lehman Brothers and then, like, literally, we signed the contract to do that about two weeks before they went under.

SPEAKER_08: So, that really kind of messed the New York plan up. But we were going to do black cars in a much more aggressive way in addition to taxis in New York in particular. But, you know, I think the really big problem for us was the fact that we never gave a product away for free. Like, the team at its core, and in particular, our co-founder, Tom DePosquale, who's a super amazing businessman, but he had done a bunch of enterprise businesses. And so, he really believed the notion that, hey, you've got to charge for everything right off the bat. And that was a mistake that we made. We should have gone freemium, offered the product for free, gotten a bunch of users, and then kind of…

Chamath Palihapitiya: So, that throttled your growth because people didn't even know you existed. And the only way they would know you existed is if they gave you money. So, there's a huge lesson learned. And then, what's it? What's it?

SPEAKER_34: Okay, continue. Here's the really crazy part. So, Bill Gurley found us through Michael…

SPEAKER_12: Sorry, through Adam Dell, Michael Dell's brother. Of course. I knew Adam when I lived in New York. I'd say I'm at Bungalow 8 at 3 in the morning. So, he found us, and then he told Bill Gurley about it.

SPEAKER_08: Bill Gurley kind of started to get really interested. This is all, like, way before Uber is even around. And he really wanted to do a round of funding and shift.

SPEAKER_12: And ultimately, Tom, our leader as a founder…

SPEAKER_40: Wait, no, in…

SPEAKER_12: In Taxi Magic. Taxi Magic. Tom really didn't want to do that because he… You know, they disagreed on this kind of consumer freemium versus enterprise approach. So, you know…

SPEAKER_43: So, it's even worse than not hitting it. You literally have the guy who did the Series A in Uber would have given you the money. One of the 10 greatest venture capitalists in the history of venture capital was on your doorstep.

SPEAKER_45: And because of your co-founder not agreeing with him about something Bill Gurley was clearly right about, and you understand now, it killed the deal.

SPEAKER_12: I was kind of in the middle between the… Yes, that's exactly right. And it was a… Oh, my God. You know, it probably cost me personally, like, hundreds of millions of dollars. No, no, billions.

SPEAKER_25: Maybe billions.

SPEAKER_48: Well, you were a co-founder of the company?

SPEAKER_25: Yeah. Yes.

SPEAKER_48: So, I mean, if you're a co-founder with 10%, Uber's worth $65 billion right now. I'm going to say, even if you got diluted down to 2%, you would be worth $1.2 billion right now.

SPEAKER_12: Yep. So, it was a tough, tough, tough process. But anyway, you know, look, I… You know what?

SPEAKER_06: I think about that sometimes because I could have put $50K instead of $25K into Uber, and then you know what I did? I looked myself in the mirror and said, don't get greedy. Get back to work.

SPEAKER_12: Don't worry. Don't sweat the small stuff. I agree. And look, I think I learned a ton at Taxi Magic, and we built a great company, even though we made a ton of mistakes.

SPEAKER_08: And, you know, I'm taking a lot of those learnings and doing things differently now.

SPEAKER_58: Everybody who you know says you could have built Uber. What's that like at Christmas or whatever, you know, New Year's Eve?

SPEAKER_59: That was asked a lot more back in the day before the kind of shift was, you know, fully humming.

SPEAKER_12: Today, not that many people ask that anymore. I think for us, to be honest, beyond that specific mistake, not being in the Valley got in the way as well because we were based in Virginia. And that really kind of the mentality of like enterprise only, don't give away for free, et cetera, back then was very much like only in Silicon Valley was that a thing.

SPEAKER_62: So, you weren't bold. Basically, East Coast companies at the time were very conservative.

SPEAKER_04: They were thinking, and the VCs on the East Coast, with some notable exceptions like Fred Wilson, were so obsessed with downside protection and not losing their money that they didn't swing for the fences, did they?

SPEAKER_08: Yep, that's exactly right. So, I think that, you know, kind of even before Gurley, like we should have thought about moving the company out to San Francisco or Bay Area broadly and doing it here. Actually, that's why I, after Taxi Magic, my green card was rejected while I was at Taxi Magic. So, I had to figure out another way to stay in the U.S.

SPEAKER_12: And you were from Georgia?

SPEAKER_67: Was that a former part of the USSR?

SPEAKER_07: Yep, it's the former USSR Republic called Georgia.

SPEAKER_68: Yeah, and then you immigrated to America or Canada?

SPEAKER_12: No, so in 1992, well, in 1991, I applied to prep schools and got into a couple of U.S. prep schools.

SPEAKER_08: Wow. I was the first Soviet kid that they allowed to leave to go to a U.S. private school.

SPEAKER_75: What time frame was that? Was that late 80s, early 90s?

SPEAKER_12: Like 1991. Wow.

SPEAKER_76: So, the Cold War is just ending.

SPEAKER_12: Exactly. And by the time I got to the U.S., like by the time it was time for me to come to school, Soviet Union had already fallen apart and Georgia had become an independent country.

SPEAKER_08: So, I lived in Maine for four years for prep school. So, not quite Canada, but, you know, felt like you were in Canada in terms of cold.

SPEAKER_79: And then…

SPEAKER_04: I'm just curious. How did your students look at you? Did they think that you're a Russian spy or you're part of the Cold War effort?

SPEAKER_43: Were people cautious around you, I guess, is the way I would say it?

SPEAKER_08: I was pretty fortunate because I spoke English really well. Yeah. So, my dad was a little bit insane when I was little and he forced me to study English starting at age two. So, I was like not quite fluent, but like pretty close to fluent.

SPEAKER_82: What led him to do that?

SPEAKER_12: My dad, who had never been to the West, had this really strong view that the Soviet Union is going to fall apart.

SPEAKER_08: And if you don't speak English, you will not be able to escape. And so, his children were going to learn English and escape.

SPEAKER_84: So, he might have been insane, but he was right.

SPEAKER_62: And he did a huge mitzvah for you.

SPEAKER_85: Yep.

SPEAKER_62: He basically saved your life. You could have been stuck there and you didn't know how to speak English.

SPEAKER_04: You would have never had the chance to not become a billionaire with Uber or not create your second company. Take all those lessons. When we get back, let's hear all about Shift.com. When we get back on this week in startups.

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SPEAKER_04: Go to squarespace.com slash twist. Hey, everybody. Welcome back to This Week in Startups, where I have the distinct pleasure of talking with founders. And because I'm a fellow founder, and because I got a lot of scar tissue, and because I'm not a gotcha journalist, I can sit with somebody like George Harrison.

SPEAKER_06: And he trusts me, and he'll be honest with me, and we'll have a great conversation. And this has already started out as a great conversation. You were very honest about the taxi magic myth, and getting here into America. Wow, what a great story.

SPEAKER_05: But you lost your green card, and then you somehow figured out how to stay in America.

SPEAKER_52: Well, so I didn't get my green card approved while it was a taxi magic.

SPEAKER_12: Ended up eventually joining Google, moving to the West Coast and to Palo Alto. And I've been here ever since now. It's been 10 years. Wow. And you worked on Fiber at Google? You worked on their Fiber project? That was one of the – this was the first thing I worked on.

SPEAKER_08: And so then I actually met Minnie Ingersoll, who is my co-founder at Shift, on that project. She was my boss, and then we started shifting that.

SPEAKER_67: Was Larry driving that project or Sergey? I know one of the two was obsessive about it.

SPEAKER_12: I think both actually were. Both of them were obsessing about it. By the time I got to Google, the project was really far along.

SPEAKER_08: So the whole towns applying or cities applying to be part of the test had already happened. We were actually just kind of working on city selection and what the product would be in actuality.

SPEAKER_12: Because that was really critical. But I joined, let's say, late into the project already happening.

SPEAKER_78: They were thinking – I remember talking to either – I can't remember if it was Larry or Sergey,

SPEAKER_06: but during that time period, I had talked to one of them about it. And they were like, yeah, Jay, we're literally figuring out how to use hardcore equipment to rip up parking lots to put fiber in and figuring out how to do – and I was like, what? And they're like, yeah, it's this thing, first principles, Elon talks about. And I was like, okay, explain. And they're like, yeah, the first principle is we have to be able to get fiber underground.

SPEAKER_48: So we're literally in the backyard of Google. And he was telling me at Google he had one of those machines that rips up the earth.

SPEAKER_105: And either Sergey or Larry was driving the machine trying to figure out how it worked to rip up the earth. This is a true story, correct?

SPEAKER_08: No, it's 100% true. And I think the goal was to try to force the traditional telecom providers to have faster internet, right? And that's actually happened. So you can look at Google Fibers and all that did it fully succeed. It didn't – in some people's eyes, it didn't get there.

SPEAKER_103: But from the perspective of what really mattered, which was to have better internet for consumers broadly, very much actually happened.

SPEAKER_06: Ah, and I had written about that at a time. In a way, it was like a short – a shot across the bow to the telecom companies. If you're not going to increase the speed of cable modems, DSL, well, we have unlimited capital and we have a money printing machine at Google. Maybe we'll start just, you know, pick a couple towns. And maybe a couple towns becomes a couple cities. And let's see what happens. And it did push people to go faster.

SPEAKER_30: That's exactly right. So tell everybody in the audience, what is Shift.com?

SPEAKER_07: Shift is a way to buy and sell a car. So if you have a car to sell, you come to Shift.com, submit your car info, we price it for you, and then we buy it from you and take it away.

SPEAKER_08: And if you want to buy a car, you come find the car you'd like and then click on a button, book a test drive, and it shows up at your house. Or you can buy a car on the site itself and then have it be shipped to you, and then it's yours.

SPEAKER_05: And how do people do this beforehand?

SPEAKER_113: They went to a used car lot or they tried to find some random stranger and get them to meet them in a parking lot at McDonald's or something?

SPEAKER_72: Yeah, so the U.S. car market in the U.S. is massive. It's $850 billion, and it's split about 50-50 between private party sales where, like, you and I meet up and sell a car to each other.

SPEAKER_08: Which is dangerous and insane. Correct, but it's about 15 million transactions a year.

SPEAKER_84: What? 15 million cars trade hands a year, person to person, and 30 million overall?

SPEAKER_08: Yep, and well, 30 million on top of that is dealer sales.

SPEAKER_07: Half of those dealer sales are auction sales, so this is where they sell a car to another dealer at an auction. Oh, I see. And another 15 million is sales directly to the consumer.

SPEAKER_84: So there's close to 50 million used cars getting sold in the U.S. a year?

SPEAKER_118: Yeah, it's 40-50 a year, depending on the year.

SPEAKER_05: So that means, I mean, there's 330 million folks in America, 70 million of them will be kids. So that means, like, one in four adults or one in five adults is buying a used car a year.

SPEAKER_51: So on average, an American household changes the car every three years.

SPEAKER_08: Got it. Because on average, they have more than two cars, but even if it's in two cars, they kind of move through cars every six years or so. Wow. And every time you buy a new car, like a brand new car, something has to happen with a used car as well, right? So there's a lot of trade-ins, and those are sold, et cetera. But it's a massive, I mean, cars in general are a huge market. Used cars are the largest retail market in the U.S. And even though the vehicle itself has been completely changed by technology, even though how it's configured is very different and it's become a computer, technology hasn't really touched the sales process that much until about six, seven years ago when Shift plus a couple of other companies really started to go after it from the digital perspective and try to bring e-commerce to car sales.

SPEAKER_04: And so is the major innovation in your model that you buy the cars themselves, clean them up, and then have the inventory there?

SPEAKER_07: Well, dealers do that too, right? Dealers buy the car and then it's trying to bring it online is that one major innovation.

SPEAKER_08: Number two is kind of putting the entire purchase process into the control of the consumer so the customer can apply for financing on their own, on our website, get approval, finish the transaction, right?

SPEAKER_07: That's really easy. And then thirdly, the real magic for us is the test drive delivered to the customer, where instead of you having to go to the store, i.e. to the dealership to see the car, the car shows up on your doorstep, and then you can try it out and see if you want to buy it and then, you know, either buy or send it back.

SPEAKER_05: I noticed you have a bunch of Teslas on the website. I was just looking at it now. Are those easier to sell or harder because so many, I know they're in demand, but I know that Tesla makes it really easy. I just traded in my Model 3. So, is that a hard market to be in, the EV market or the Tesla market specifically, and how have they impacted the sort of used sales?

SPEAKER_34: EVs and hybrids are very popular on our website because we have, California is a huge portion of our sales, and so in California they're very popular.

SPEAKER_08: We used to actually not sell Teslas at all because pricing them was a little bit difficult, but now there are enough used Teslas in the market where you can actually be certain about the price, and we started to sell them again. Generally, they take a little bit longer to sell, but we do very well on them from the gross profit perspective, so that's why we do them.

SPEAKER_06: And on the consumer side, they just come to the website, they see a Jeep Wrangler they want, and they can just set a test drive, and then who brings the car to them? Your employees?

SPEAKER_12: Yeah, we have a team of employees that are called concierges, and they are full-time W2 employees, and they bring the car to you.

SPEAKER_07: They are not car experts, so they're not meant to know a ton about the car. They're meant to drive the car to you and be really good at customer service. And then we have a sales team that's on the phone, so if you have more complicated car questions, you go to the sales team with that.

SPEAKER_06: Got it.

SPEAKER_05: So this could be like a college kid or something getting paid $20 an hour to just drive the car to you, and that creates whatever, $50 to $100 in cost per test drive for you, something in that range, I would guess.

SPEAKER_06: Okay, just guessing, I just did $20 an hour times, whatever number of hours, pretty easy to do the math. But just that step alone, that I'm not putting myself in harm's way with some random person.

SPEAKER_05: I remember when I got married with my wife, she was going to sell one of her cars, and I was like, she's like, I keep getting harassed, and my wife's beautiful. And she kept getting harassed every time she was trying to, I said, that's enough.

SPEAKER_04: No more of you selling the cars, I'm going to handle this. Because every guy who came to see the car started hitting on her, and then they'd have her mobile number, start texting her, and ask her if they want to have dinner. And I was like, well, this is unacceptable. That's a big part of it, is it's scary to meet people in parking lots.

SPEAKER_12: No, and I mean, Minnie, actually, one of my co-founders, she had this very same experience.

SPEAKER_08: She had a BMW, she went to sell. She had people show up at her house, they're like, can I go drive it, and do I get in the car with this person, or do I wait for them? And if I wait for them, they might steal the car. If I get in the car with them, who knows what they do while I'm in the car with them. So there is a huge kind of factor there. Craigslist is a massive portion of the sales, which is still kind of crazy when you think about it. But about 7 million cars peer-to-peer sold through Craigslist a year. But, you know, us, Carvana, Verum, are all kind of trying to change that. And the complexity of this market is that it's a huge market. So no one company can kind of capture all the market. You know, CarMax is the largest used car seller in the U.S., and they are barely over 1% market share.

SPEAKER_05: Wow. So this is a lot of work. And what about, you know, the thing I always hear about, and, you know, they make Sopranos episodes about, is there's a big market overseas for the used cars in the United States. Is that true? It is.

SPEAKER_145: And if so, do you do that as well, where you just buy, you know, 100 Priuses and send them to South America or Russia?

SPEAKER_12: We don't touch that. So we will make an offer for any car from a seller. So even if it's a 15-year-old car, we'll still make an offer for it, even though we will not sell that car to another consumer.

SPEAKER_103: We'll then take that car to auction. Someone will buy that car to auction, and that's the car that goes shipping.

SPEAKER_148: So you'll buy any car. That's kind of like, we'll buy any car is like the slogan. And that's because you get to pick the price, right? So you could do a low offer.

SPEAKER_129: So for cars that, say, are 8 years old or 2 years old or 10 years old, we'll give you what we call a retail price because we'll sell that car to another consumer.

SPEAKER_07: But for cars that are over 10 years old, oftentimes we'll give you a wholesale price, which will be lower, but we'll still be able to at least help you get rid of the car.

SPEAKER_05: So you get rid of the car same day or same week or something like that, which is like, they used to always have this, like, when I was in New York, these radio commercials, you probably remember, cars for cash, get your car here.

SPEAKER_119: But you knew you were going to get, like, if it was a $10,000 used car, they were going to offer you $7,500, you were going to get screwed. Yep.

SPEAKER_07: And we try to, I mean, our prices are generally above where a dealer would offer you if you traded a car in.

SPEAKER_08: Because our concept isn't to be, you know, we want to be fair to the seller, fair to the buyer, and then, you know, use technology to drive the cost of the operation down so that we can actually do it at a lower cost.

SPEAKER_05: All right. When we get back from this break, I want to know the economics. If I was selling a $10,000 used car, how much would you make? How much does the seller make, et cetera? And then I also want to know, why did you choose to go down the SPAC path when there is unlimited amounts of venture capital sitting around in the market? When we get back on this week at Startups.

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SPEAKER_05: All right, George Arison is with us. He created Taxi Magic, was co-founder there, and then a co-CEO and founder of Shift, which is Shift.com. And they're buying up cars. They'll give you a decent price and sell it and let you, if you want to buy a car, do a test drive in your home. So if we were selling this like, you know, $10,000 used Prius, and I'm the person who wants to sell it, and let's say somebody would buy it for $10,000.

SPEAKER_148: Yep. I sell it to you for what?

SPEAKER_12: Yeah, so we will probably offer you somewhere between $8,000 and $8,500. Okay. Kind of depending on how much reconditioning that car requires. Got it.

SPEAKER_13: So I sell it to you for $8,250.

SPEAKER_07: Yep, and then we'll turn it around and sell it for $10,000. Got it. Maybe a little bit more because normally private party prices, so what a buyer buys a car from another individual are lower versus what they buy from a dealer.

SPEAKER_171: Because they haggle.

SPEAKER_08: Yeah, well, not just haggle, but also just the trust level, right? Like with us, there's a higher level of trust. Got it. People kind of, you know, pay for the experience they're getting. That said, like our prices are generally somewhere in the range of, you know, 95% to 98% to market list.

SPEAKER_07: Because everybody lists and you can kind of see where the list prices are, and then everybody reduces the price from the list price during haggling.

SPEAKER_08: We don't haggle. We are one price, but we kind of know where everyone else comes out. Carmex, on the other hand, sells at like 102% to 104% to market.

SPEAKER_174: Got it.

SPEAKER_08: So everyone thinks they're getting a really great deal at Carmex, but they really are not because they're actually overpaying. But our prices are meant to be a little bit above the private party price because you are getting a special experience and ultimately you got to pay for it.

SPEAKER_05: Right. And so, like the concierge, bringing the car to you is just an amazing innovation. So what about having to then, in this model, you have to clean the car, get it inspected, you do work on the car to make it better, do you change the tires? We do all that. So what do you typically spend, you know, rehabbing or prepping, I guess would be the way to think about it, prepping the car for sale?

SPEAKER_12: Total. So this is all public in our financials.

SPEAKER_08: We've released that. Right now, we're kind of on average in the $1,100 per car in terms of reconditioning spend. Got it. We want new, not what, we will be getting that down to about, you know, age 50 over the next three years. That's sort of the goal. Ideally, that's the number you're at. Part of the challenge for us is that we are California-based and the cost in California is a lot higher than in a lot of our places. And so as you expand into our parts of the country, you know, your cost base on reconditioning will come down. That's probably the single biggest set of, you know, this whole business was built on a test and learn model because at TaxiMatch, we didn't do test and learn. We thought we knew what the product was and then we just kind of build it. Here, we've done the exact opposite. Like, let's do it one at a time. I did not think we'd be doing reconditioning. If you had asked me in 2010 or 11, when I was starting to think about this first, like, you know, you'll have all these mechanics working for you. I'd be like, you're completely crazy. That's not what I want to do. But you kind of learn that if you don't do reconditioning, consumers don't buy the product. People really want that trust and faith in the reconditioning of the car. And so we have to have our own reconditioning capabilities and it's a huge competitive advantage to do it really well. One of the things we figured out about 18 months ago is that we were over-reconditioning cars that were older than eight years old or that had more than 80,000 miles on them. So we actually-

SPEAKER_179: You were doing unnecessary reconditioning.

SPEAKER_08: Because we were trying to get them to, like, near new level. But it turns out that people who buy those types of cars actually don't care about that. Yeah, they're trying to save money. They're not interested in this. They want to get a safe car, but they don't need it to look really great. So we actually changed our reconditioning standards, created a segment we call value. So it's a cheaper segment. Reduced our reconditioning costs, which dramatically helped our unit economics because now we're spending less money doing reconditioning. And the cars still sell really well and consumer feedback is really positive. So it's been a really interesting experience, but it's a way more operational business than I initially thought I'd be creating. I thought it was going to be, like, software-only, no kind of people involved.

SPEAKER_103: But, you know, it turns out you actually need a lot of people to do this.

SPEAKER_185: And so this idea of testing and iterating as a founder, where else have you done that in this process?

SPEAKER_34: Well, across the board, you know, delivering-

SPEAKER_08: Just to start with, initially, the thinking was, you, Jason, have a car to sell. We will come in, like, Airbnb and help you sell the car by helping you list, having a warranty on the car, maybe helping you sell a loan to a buyer as well.

SPEAKER_07: But you would actually keep the car and do the sale on your own. We started to do that in 2013, 2014. And the feedback we got from consumers was, hey, actually, this process is so difficult. Why don't you just take the car away from me and sell it for me?

SPEAKER_08: And the fact that people were, like, asking us to do that was a huge impetus to kind of taking cars away and storing them on our own. I would not have done that had it not been very direct kind of user feedback to do it this way.

SPEAKER_190: It turned out people just don't want the headache. They just want you to handle everything.

SPEAKER_08: They do it on their own because they don't have a better way of doing it. But when you offer them a better way to do it without losing too much money, they're very willing to take on an alternative.

SPEAKER_14: Got it.

SPEAKER_05: And what cars are the most popular today? Which ones hold their resale value the most? Which ones are the most in demand?

SPEAKER_155: I'm just curious from a make and model perspective, where are the businesses?

SPEAKER_08: It all depends on where you are. I mean, for us in the Bay Area in particular, BMWs do extremely well. Superus do very well. Prius do extremely well as well. But it really depends on the market. And probably our consumer base is not necessarily the same as the consumer base across the entire region that we might be in, whether it's Bay Area, LA, Portland, or anywhere else. Because we appeal more to a millennial customer. Almost half of our users are millennials. So we appeal to younger users who want to do a technology solution. That said, you know, what we noticed post lockdowns or right around lockdowns is that the demand for cheaper vehicles rose dramatically. So through August, year to date, the demand on our value cars, so these are cars that are over 80,000 miles or over eight years in age, was massive. 29% of the cars we sold were value. When steady state, our expectation was it'd be closer to like 20%, so almost 50% more value sales than we had expected. Because people in a recessionary environment want to pay less for a car, right, which makes kind of sense when you think about it. And so it all kind of depends on time of year, where you are, etc. But generally speaking, foreign vehicles hold their value a lot better versus domestic cars. And we do a lot better with, you know, Japanese vehicles, etc. than we do with U.S. mix.

SPEAKER_11: So tell me about the decision to do a SPAC and where you're at in that process.

SPEAKER_08: So we're very close to being done. On Thursday last week, the SEC approved our S4. And the shareholder vote for the SPAC is set on October 13th. So we're, you know, nearly at the finish line, which is exciting. We, I have known about SPACs for about a year. Last year, around this time of year, one of my board members, Manish Patel, sent me a deck about SPACs. And he's like, hey, you might want to learn about this because it might be an interesting option for us long term. So I started to kind of research and learn and then talk to a few SPACs in terms of learning how it all works. But didn't kind of put that as, hey, this is the thing we're going to do until the pandemic happened. Our plan was to raise a regular private round of capital in the spring of 2020 and then wait for about a year and go public in, you know, the fall of 2021. That was the intention. Shift, we've always built to be a public company. I'm not one of those like, hey, let's wait to go public. I think this business would actually do better as a public company in many ways. And we always intended to go public. But, you know, as the pandemic hit and we were right around and we're thinking through like fundraising and getting our round started, it became clear that the public markets were holding up a lot better versus the private markets.

SPEAKER_07: And since our expectation always was to go public within, you know, 12 to 15 months of raising that round, then why not pull the trigger and do it right away?

SPEAKER_08: And especially with Carvana, which is an analog company to us, doing so well in the public markets, that actually made it even more appealing. And then lastly, we saw the public markets kind of split into winners and losers and winners were e-commerce businesses. And so that also, you know, made us think like, hey, going public sooner makes a lot of sense. And then if you want to go public sooner and you're a little bit smaller in size versus the ideal kind of public size, a SPAC is a really great option to go public.

SPEAKER_15: It allows you to get the process done really fast and it allows you to raise more capital, which is also advantageous in our case.

SPEAKER_05: Yeah, and I see Carvana is now at a $38 billion market cap with looks like $4 billion in sales last year. Who knows what they'll hit this year, but you would assume it's growing.

SPEAKER_07: Somewhere between $6 and $8 is what I would guess.

SPEAKER_145: Yeah. Oh, wow. So growing 50% is pretty impressive.

SPEAKER_07: They've done over 100% growth every year so far since they've been public. It's been really incredible.

SPEAKER_05: Wow. And then what's your revenue footprint now?

SPEAKER_07: We'll do $200 million this year and then we'll do $400 million next year.

SPEAKER_05: Amazing. So you'll be going public. And then what I want to know is when you do these SPACs, do you also do a pipe, a private investment and a public entity? Answer that question when we get back on this week at startups.

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SPEAKER_05: Hey, welcome back, everybody. George Arison is our guest today on This Week in Startups.

SPEAKER_119: You can follow him on Twitter, George, A-R-I-S-O-N. He's on Twitter. I'm not sure how active he is. Not very active, but I'm-

SPEAKER_05: Not very active, busy actually running a business as opposed to having Twitter derangement syndrome and being distracted. As part of the SPAC, that entity gives you some money.

SPEAKER_06: Yep. And the entity is already trading, so you don't have this market manipulation, I guess, would be the most cynical look at the traditional IPO process. You basically don't leave money on the table because they underprice your shares. But then there's been this debate of if you should do a PIPE, which is a private investment in a public entity. Obviously, the PIPE is something Bill Gurley maybe wasn't interested in or his position was-

SPEAKER_25: He wrote this blog post saying you shouldn't do a PIPE.

SPEAKER_06: What was his reason for that?

SPEAKER_08: I think it's probably the underpricing because the PIPE creates a possibility of underpricing. But the reality is you actually should absolutely do a PIPE. SPACs have kind of like on a second wind now. They were popular, became unpopular, and now they're popular again. And a big reason for them becoming popular is actually the PIPE. Because previously what would happen is that the SPAC sponsor and the company would agree to a crazy valuation, become merge, and then all the shareholders in the SPAC would be like, hey, this valuation doesn't make any sense, we don't like it, and the price would come down, and everyone was unhappy. The PIPE allows for a validation of the price because you go out to a smaller set of public market investors, you pitch them the business, and they come back to you with, yes, this makes sense or it doesn't. And if they say yes, then they invest, and that kind of validates the price for the overall public market, which is really beneficial.

SPEAKER_12: The other thing is that most people-

SPEAKER_148: But you could underprice. So because you're negotiating that price, if you say, hey, $10 a share, you could come out, and all of a sudden it pops of $20.

SPEAKER_08: Yes, and it happens a lot. I mean, our share prices range from $12 to $14 since we announced the deal.

SPEAKER_07: A second reason you need to do a PIPE is that most people who invest in a SPAC IPO when a SPAC goes public are actually hedge funds that are looking for special situation deals. So they're not people who are long-term holders of the business. Once the merger is complete. And so a really good de-SPAC process of you actually kind of finishing the merger involves those shareholders selling their ownership to people you actually want to have as your long-term holders.

SPEAKER_08: So, you know, for someone like an Opendoor or us, like a TRO price, for example, is a great holder, right? We want that investor, not a hedge fund that's kind of there for the short term.

SPEAKER_04: So, just so I understand here, the hedge funds are backing all these SPACs because the SPAC has a 12 to 30-month window to do a transaction, and then they just want to get out of it.

SPEAKER_05: And so they have this 24-month window, let's call it 18-month window, where they're hoping to double their money or go up 50% or 25%?

SPEAKER_12: 25%? No, yeah, not even double, probably like 20-25% because you invest money, you think you'll kind of sell it like, you know, $12, $13, $14, you invest at $10.

SPEAKER_08: And then you also get a warrant for every share you buy initially at $11.50. So, the assumption is that if a share price eventually is performing at above $11.50, you will, you know, use that warrant to buy into it and you'll make someone on that as well.

SPEAKER_185: So, you basically have this option with this warrant at $11.50.

SPEAKER_06: So, if you were to sell all your shares and make that 25% return, that would be 12.5% a year or something like that, call it, or 10% a year, whatever. Okay, that feels pretty good. But then you also have this lottery ticket over here. Hey, what if the company goes to $50 a share? You have the warrant. And how long do you have typically on the warrant to execute it?

SPEAKER_07: I don't know how long, but it's pretty long. It's over a couple years. So, it's definitely a lot.

SPEAKER_05: That's nice. So, that's a nice little yum-yum. If it does hit, you get this other, you know, nice hit. And also, when you do the pipe, the SPAC promoter, in the case of Chamath or Mark Pincus or Emil Michaels doing one, former business development exec at,

SPEAKER_04: Uber, they get 20% carry, basically, or promote on the money they put in?

SPEAKER_12: It's between 20% and 30%, but that's into the – it's not into the money they put in. And so, when a SPAC is issued, let's just use round numbers, it's a $200 million SPAC, there will be – so, you'll issue 20 million shares at $10 a share. There'll be another 60 million shares issued to the sponsor that did the deal. Got it. So, that, you know, that 60 could be 40 on the low end, 60 on the high end. So, the actual valuation of a $200 million SPAC is $260 million. That's what merges with a private company. The pipe comes in on top of that. So, it's an additional set of dilution. But the pipe, like I said, one, validates the valuation. Number two, it allows you to raise additional capital.

SPEAKER_08: And number three, you want to do a pipe where you have interest in a lot more money than you actually sell in the pipe. And then, a lot of those shareholders or potential buyers run out and buy money – buy equity in the company in the public market, right? So, they become holders of the SPAC itself instead of the hedge funds, which then ensures you have longer-term holders, which is what you want.

SPEAKER_07: So, pipe is actually a really critical part of the instruments here that you need to use to be successful. And raising the SPAC itself is easy. The really hard stuff is the execution.

SPEAKER_08: And so, I think we work with a team, the Coens, Betsy and Daniel Cohen. They're a very prominent SPAC issue. They've done many of these.

SPEAKER_103: I think it's been really awesome for us to have that support because the execution here is really important and really critical.

SPEAKER_08: So, a lot of folks are getting into the SPAC business, but many of them don't actually know what the process is like on the D-SPAC. And that's where, you know, if a founder is looking at a SPAC, kind of getting the right folks who know how to D-SPAC a business is really important.

SPEAKER_05: And how important is the promoter in terms of, you know, you've got somebody, a good friend of mine, Chamath, who's doing these. He's obviously very eloquent, well-spoken, incredible track record. Then I'm seeing some people, maybe, you know, maybe they were, you know, famous in the 80s or 90s and they are kind of retired and feels to me like they're trying to get one more hit or one more payday when they're, you know.

SPEAKER_08: I think the promoter is important. There's two kinds of promoters, though, right? There is the one who is, like, appealing really well to a retail investor, Chamath's an example of that. But then, you know, a retired senior executive at a public company will probably have a lot of respect from more institutional investors and that can work really well as well. So I think kind of both sides make a lot of sense. And, you know, I think repeat issuers, so people who've issued many SPACs, work really well and or people who've been through the process already. So, you know, CEOs or founders of companies that have gone through a SPAC are also a really good place to look. You know, Paul Ryan just raised a SPAC, but the CEO of that SPAC actually led a SPAC company that became public through a SPAC a year ago.

SPEAKER_103: So that type of group of people is also really good.

SPEAKER_04: Well, what is the reaction by, if you know it, the traditional IPO process to this spectacular speculation that we've seen recently? Did they come to you and say, hey, hey, pump the brakes, we want to take you out?

SPEAKER_12: No, banks love SPACs because banks actually make more fees in SPACs than they do in. Really? So, yeah, because you they issue. So many banks issue SPACs and they raise money. They get money from that as a typical IPO payment to them. And then if they represent a company in merging with a SPAC, they collect M&A fees on that.

SPEAKER_156: Got it. So they get the M&A fees as opposed to the green shoe or whatever.

SPEAKER_12: So they do really well. I mean, there's a lot of positives about the SPAC speed.

SPEAKER_08: The amount of money you raise are two really big ones. But the negative is that the bank fees are actually higher and the legal fees are higher as well because you're paying two lawyers. Right. The SPAC lawyers and your lawyers have to be paid on both sides.

SPEAKER_12: And so there's a little bit more fees that you have to deal with in this type of transaction.

SPEAKER_06: So famously, I guess, in 1996, we had 8000 public companies and now we're, you know, whatever, 4000. This has been kind of crazy that people don't want to go public. And I know that a lot of founders are coming to you from growth companies and saying, hey, what's your experience?

SPEAKER_05: Yep. I guess a two-part question here. What do you think the world looks like in three or four years if we assume the spectacular speculation continues?

SPEAKER_06: And I see no reason why I wouldn't. What does the world look like for, you know, venture capital, angel investors, CEOs and public markets and retail investors?

SPEAKER_185: Let's pick five years from now.

SPEAKER_72: I think SPACs are here to stay. I think you're going to have a lot more companies using that method to go public.

SPEAKER_08: SPACs are especially good for companies in the kind of half a billion to $2 billion enterprise value range, but not for the, like, Airbnb doing a SPAC makes no sense. Why is that?

SPEAKER_12: It's just why they can easily go public on their own without a SPAC. And they don't have this issue of time that, hey, I need to go public sooner. Right.

SPEAKER_08: So I think for companies over $2, $3 billion, SPACs don't make as much sense. The SPACs are ideal for kind of the smaller companies because the best team at Goldman and Morgan Stanley is going to take Airbnb public. We will not necessarily get that level of institutional support if you are a $1 billion or $2 billion company, right? And that's also critical. So I think SPACs are here to stay. I think that we had a little bit of an aberration where there was so much money in the private markets. But everybody was kind of staying private for a long time. Yeah. That's changing. And I think it's going to long-term change because it makes more sense to have companies that are six, seven, eight years will be public rather than private.

SPEAKER_04: Much better for me.

SPEAKER_103: And for everybody else, I think.

SPEAKER_04: Well, I'm just concerned with myself, to be totally honest. I mean, I had to wait like 10, 11 years for Uber to go public.

SPEAKER_05: And I'm being slightly facetious here, but for somebody who invests when the company is $5 million, that's when I invested in Uber, Com, and Thumbtack at a valuation of $15 million, George, combined.

SPEAKER_06: They were $4 or $5 million each. Yum, yum. But, you know, the amount of time between when, like Thumbtack, Uber, Datastax, are invested in all those companies at the same time, and only one of them is public right now.

SPEAKER_04: And can you imagine how quickly I could have returned money into the seed stage and angel phase if I could have been more liquid, you know, and gotten liquid earlier?

SPEAKER_05: This is going to have an effect, I believe, on entrepreneurship in the United States that is going to be wicked because, man, if Robinhood was public right now, or Com was public right now, man, yum, yum, I would be out there doing twice as many angel investments.

SPEAKER_04: My velocity would go up. Yep. But I'm sitting here holding and waiting, you know?

SPEAKER_12: No, I think, you know, I've been of the mind going public sooner is better. And I'm generally thinking companies that stay public. Because, A, I don't, look, for me, building a company needs to get to success, right?

SPEAKER_08: And I don't think another fund marking up an older fund is the release success yet. That's something I've been telling my team a lot, like raising money does not equal success. Being public, especially for a while, that's kind of like recognition from a much broader market that you've actually succeeded and built something that can stay there for a long time. So that's, to me, really important. I mean, that's why I like to build is to kind of get to a certain destination. And for us, this is a really big destination. I mean, frankly, like, I still haven't fully cognized the fact that seven years ago we were working in my tiny apartment in San Francisco in our, you know, on my, kind of, in my living room. And that now we're going to be a public company that's still, like, not fully cognizant, but it's happening.

SPEAKER_04: Well, it's a big deal, right? Like, for our generation, Gen Xers, getting to run a public company was an incredible goal, an incredible sign of success.

SPEAKER_05: And so you carry that with you. Dave Freeberg's an investor, a good friend of mine. Yep. On the All In Podcast. Was he an angel or just early on?

SPEAKER_12: He's an angel. He actually helped me figure out the whole warranty thing really well because he knows insurance, obviously. Yes.

SPEAKER_05: Wow. Congrats on that. He's a great human being. Obviously, very smart. I have a question for you.

SPEAKER_04: Somebody from the former Soviet Union, and you look at America today, and you see a contingent of people, I put it in the Bernie Sanders, Elizabeth Warren, New York Times, anti-capitalist, ban the billionaires, capitalism is bad, Jeff Bezos and Elon are horrible because they're successful. When you look at this as somebody coming from Russia who had to fight for every inch of your existence, I am certain, to get here, and your father, the maniac he was, demanding you learn English to have a better life, what do you think when you look at the last couple of years and the anti-capitalism, the pro-socialism, ban the billionaires movement in America, even though I know it's a small contingent? What do you think, honestly, as somebody from Georgia and the former USSR, what do you think?

SPEAKER_07: Well, I mean, I think Bernie Sanders is nuts, even though I went to college in Vermont.

SPEAKER_08: Well, I guess maybe because I went to college in Vermont, I knew about Bernie Sanders before anybody else knew about Bernie Sanders. Look, America is the most amazing place in the world. Nowhere else could you do what I did. Like, I'm a gay kid born in the Soviet Union, I now live in Palo Alto with a husband and two children and built two companies in my life. That's not possible anywhere else. This is the most amazing experiment in the history of mankind and we have to do everything we can to protect it because we've been left by our forefathers with an incredible gift. And we need to ensure that it's there for the future generations. And I don't think that going the socialism route kind of helps you do that. I think capitalism and Republican government are very intertwined. Free trade is obviously critical to that as well. And I love politics in part because I want to make sure that our system of government perpetuates because it is the most incredible system of government we've ever had before.

SPEAKER_05: When you look at, you know, sort of the interference from the Russians and Putin specifically, what is he sitting there laughing at us that he's been able to find our two weaknesses? I mean, really, if you think about America's weaknesses, one is the terrible racial history of this country and the scar we have from slavery, our original sin here, and the indigenous people here getting rolled over and taking their land. And that is one really sore spot that we need to resolve.

SPEAKER_06: And then you have the second sore spot, which is the polarization of wealth, which, you know, if you're in Russia, you know, if you get wealthy, Putin just takes half your money. Or you run away. Or you run.

SPEAKER_05: So, when you look at his interfering here and the collapse, essentially, Russia is becoming irrelevant, oil is becoming irrelevant, what are your thoughts on the interference and how America has basically fallen for this hook, line, and sink?

SPEAKER_08: Well, he's been, or Russians have been interfering in elections in its neighboring countries forever, right? In Georgia, they interfere all the time. In the Baltics, they try to interfere all the time.

SPEAKER_12: So, it's not per se, like, surprising that Russia interferes in elections. I think we've let him kind of do it.

SPEAKER_07: I think there's a problem in both parties, frankly, that we can't really talk to each other about some fundamental issues.

SPEAKER_08: I mean, politics should end at the water's edge, and we should be able to have a unified foreign policy, right, even if we disagree on what the approach should be. And we've been, you know, making mistakes on that front for a long time. And I'm kind of on the mind that, you know, this election is going to be what it is. But, ultimately, both political parties, especially younger people in both political parties, have to step up and figure out what we're going to do about governing ourselves in a better way. Because what we've been doing for the last, you know, 12 to 15, 20 years is not really working. And, by the way, it's not about, like, oh, things are going to be bad in the United States. If things are bad in the United States, things are going to be really crappy everywhere else in the world.

SPEAKER_06: See, this is a very important observation for young people listening to this podcast who are entitled and have been coddled in America their entire lives, which is, if America is not exceptional, and we're exceptional through capitalism and through creating products, that's how we are exceptional in the world, is the freedoms we have to create the world's dominant companies that spread around the world, whether it's Google or Uber or Tesla.

SPEAKER_04: We need these companies, we need to lead economically, and we need to lead on human rights and on having a just system here. And if we don't, well, then despots and, you know, whether it's MBS in Saudi Arabia or Xi Jinping in China or Putin in Russia or the Kim Jongs in North Korea, this is bad for humanity and human rights globally.

SPEAKER_08: And generally speaking, when a world system that's kind of running well falls apart, it's usually followed by centuries of mass kind of chaos for the world, and that's really bad. So I think that we have a lot of obligations to the world and to ourselves and to our children, right? So I don't know, but that said, I'm super hopeful, right? Like, we figure things out in America, and when we do, we tend to do them really, really well.

SPEAKER_103: And I'm very confident that we'll do this in this case as well.

SPEAKER_78: You know what?

SPEAKER_06: I'm super confident because people like you come to this country, and you call yourself American. That's how you identify. You could say, I'm Georgian, you got a little bit of an accent there, but you speak English perfectly, and you consider yourself an American. And when I grew up, we were told this is the melting pot. Forget about this, like, identity politics nonsense. Like, we said we're Americans. We meld together. We take all of the different ingredients around the world, and we make this beautiful stew. And they literally, in our schools, indoctrinated us to a stew, and they showed a stew with all these different ingredients going in, and they said, this is what makes us strong. Not what makes us different, but what makes us come together. And you consider yourself American. That's an honor for American to have a great entrepreneur come here and identify as American. That's what we need to preserve, is that you or Elon Musk or Steve Jobs' father keeps coming to America and seeing this as the promised land.

SPEAKER_05: And thank you so much for coming on the pod. You've been an amazing guest.

SPEAKER_139: Awesome. Thank you very much.

SPEAKER_05: I wish you continued success, and we will see you all next time on This Week in Star Wars. Bye-bye.