- Elon's "thought exercise" for Scott - Scott's entrepreneurial journey - Inspiration & The Innovator's Dilemma - The economics of a subscription-based model - Autonomy's ideal customer - What does Scott drive?
This transcript has been edited for brevity and clarity
Elon’s “thought exercise”
CarDealershipGuy: Scott Painter on the pod. Scott, welcome. I have a question before we get started on anything car-related – you've suddenly gotten active on Twitter. I've noticed you've been tweeting a lot, sharing some pretty based opinions, which I love. Can you tell us about that? What's going on?
Scott Painter: Well, I've been friends with Elon for a long time. And if he's going to own Twitter, first of all, I need to be on it. And I think what I really have figured out is that, there's a lot of opportunities to say things that are interesting. I think that much of what's happening right now in the auto industry is both interesting and misunderstood at the same time. I was asked by Elon at the end of 2018 as he was really beginning to ramp up production for the Model 3. He does this thing where he asks people around him, thought exercise. The thought exercise he gave me was how could Tesla sell half the cars in the U.S.? And at the time I said, you're talking about 8 million cars. I don't think you can make 8 million cars. He says, okay, well, assume that we could. And that's really been his personal focus. He just thinks about manufacturing square footage and how many cars can he make per minute. So he's been on a tear to just build as much production capacity as possible. And I said, let me think about it. I'm going to write you a really thoughtful response. And it all came down to, if you want to sell half the cars in the U.S., you’ve got to be priced below the median price point, which is a super geeky but very right on the money answer. And he said, I agree. What's the median price point? And I said, when I founded TrueCar, we introduced transparency around what people paid for a car. And this idea of transparency was about progressing everybody to the mean, because in part, the person who paid the most for a car and the person who paid the least for a car varied by as much as about 30%, and you could be buying the same exact configured car at the same dealership on the same day from the same salesperson. So there was this massive disparity based on information asymmetry. And when we introduced TrueCar, those prices tended to narrow from 30% to 3% in about 90 days. And that was a big source of friction between me and the auto industry. And so, I said, what's changed since we launched TrueCar is the whole game was about price. And now today, if you really think about how a car salesman sells a car, there's this methodology called the foursquare, where you basically draw two lines on the page. You say, okay, it's going to be about the price of the car. It's going to be about the down payment or trade in value of the car. So how much money's in the deal is going to be about the interest rate and then it's going to be about monthly payment. And ultimately, car salesmen are trained. You can give the customer three of the four squares, depending on how much they come to the deal, knowing and what they don't know. And at the end of the day, if you give up three of the four squares, you can still make your back end gross. And so today where we are at–
CDG: And just for the listeners, when you say backend gross, you mean the added ancillary products to the juicy margin, additional stuff that gets sold with the car.
SP: It's all of those things combined. So, the backend gross is how much money are you making on this customer when you clear everything away? A dealer doesn't need to make all the money on the sale of the car, they can make their money on either the trade in or the down payment or the interest rate. And actually doing indirect auto financing or packing the deal with all of these things that you're talking about. So by thinking about how the game has changed, it really comes down to monthly payment. And what we did at Fair, which was the first used vehicle leasing app and what we're doing at Autonomy, it's all about understanding the importance of monthly payment. So my answer to him was it's not about the price, it's about the monthly payment. He said, okay, I agree. What is the monthly payment that we have to target? I said $500 a month. And that was true at the time when we were speaking. Literally a couple of days later, they announced the Tesla model three lease at $499 a month, and that was the beginning of the scaling moment for the Model 3. Today, if we look at what happened over 2022, Model 3 pricing crept up, Model Y pricing crept up almost 20 to 25%. And what's fascinating is that because the used car market for these electric cars is also supply-constrained – and Tesla now has taken the policy: Do not let your cars go to auction, keep those cars in your bloodstream, control the secondary and the tertiary market – It was a fact that up until November, a used Tesla was more expensive than a new Tesla. That is a phenomenon that most people, if they don't understand what I'm talking about, just have no concept that's happening to them. And that does not persist anymore for Tesla, because when they decided to discount, they also did something else very important. In September of 2022, Tesla decided to just make as many cars as the factories could produce. And they switched not just from building to order and having an average nine month wait list, but to building to inventory. They just said make as many cars. Forget the fact that we have been a build to order company from inception and we're going to now sell from inventory. A Model 3, for example, only has five paint colors, two battery combinations, long range and regular, and then you've got two tire and wheel combinations. You've only got 20 permutations of Model 3 and he overproduced 40,000 cars in the third quarter. So what they did is went from a nine month wait to a five day wait. They basically just said your car's available exactly the way you want it. And what they did is they eliminated this dynamic where a customer who is looking for a new car would then say, I don't want to wait nine months. I'm going to go look for that that car in the used car market. And because there were more people looking for a used car than there were used electric Tesla Model 3s, for example, the price was higher and in fact it was about 18% higher. That is a super hard dynamic for most people to get their head around.
Scott’s Entrepreneurial Journey
CDG: You're working on a company now called Autonomy, which we'll get into shortly. Before we even start there, you're working on bringing subscription in a big way to the EV space. Explain, how did you get here? You've had many different companies throughout the years, you've been a serial entrepreneur, and you've been very focused in the consumer space. Walk me through a brief rundown of how you got to this point.
SP: Yeah, I think great entrepreneurs, great companies have to solve a problem. And the problem that I've been focused on solving for my entire career is that I believe buying and owning a car should be amazing. It turns out that buying a car is one of the most high friction experiences that we all have to go through in modern life. And it's not just the car, it's the car, the financing, the insurance. 90% of people do not pay cash for their car. They need a car loan or a car lease because the average automobile costs about a third of the average consumer's total net worth. No matter where you live on planet Earth. So, auto finance is a super important part of the overall buyer's journey, if you will. And I've been focused on trying to make that journey something that's easier using technology. And I've done it now through over 15 companies in automotive. They've all had the same mission.
CDG: What's the mission?
SP: To make buying and owning a car easier using technology. And, whether it was, one of my first companies where we had this, 1-800 car search and auto access where people were really looking to get automotive information. We were the first company to put an upfront price on a car on the Internet. This was, you know, with carsdirect.com. I was an Idealab CEO. We ended up raising a lot of money for that company, almost $600 million. This was in the Webvan era, ‘98, ‘99. And then, that really ushered in a transition for how people went to market and how dealers went to market. Dealers were still at that point using the classifieds. And now the classifieds have totally digitized with cars.com and AutoTrader. Those didn't exist at the time. So we were sort of in that transitional moment where dealers were going to market digitally and then TrueCar was about providing transparency by actually publishing what everybody else paid for their car. The whole concept was based on the fact that the Freedom of Information Act meant that we could see registration data. So it had about 90 days of latency, but we could look back with perfect clarity and see all of the information about what people were paying for cars. And it started with this concept that if we could provide transparency on a new car, which is a commodity, because every new car configured in the same way should cost just as much as every other new car configured the same way. And we just started to understand that once you get to about 10% of the market reporting, you were statistically a high enough sample size to be very, very insightful almost within $10 or $20 of what you should pay for a car. So, the benefit of a TrueCar was that somebody who was a first time car buyer, and I've got you know, two little girls in my family. I've also got mother, sisters, so lots of females. And I thought it was a sad state of affairs that 75% of women felt they needed to take a man with them to go buy a car. And so this idea that you could help a disadvantaged buyer and there's plenty of disadvantaged buyers, you could be older, you could just be less informed, you could be financially impaired. All of those things sort of bring people to the table with a fear and anxiety of going into a car dealership and trying to negotiate for something where a car salesman just has a lot more information. So TrueCar was really about making people feel empowered and giving them the tools they needed. And car dealers didn't like it because they felt we were sort of forcing transparency and publishing The Magician's Handbook and forcing everybody to the bottom. But in reality, we sort of progressed everybody to the mean because we didn't just have dealers that resisted it. We had some dealers that embraced it and used it as part of their sales process. They would introduce the TrueCar report as a way of building trust. And trust reduces friction, and reduced friction reduces costs and creates more margin. So there was good and bad. It was a very tough company to build and run as a CEO. I ultimately resigned from that.
CDG: Why did you resign? Why did you resign from TrueCar?
SP: There was tremendous pressure. We were a public company and I had in particular one dealer, Mike Jackson, who was running AutoNation at the time. Mike really felt that the amount of information we had was unfair to car dealers. And so he took us on in public. Much of it was just a perception issue. But dealers and the industry resisted and we were at that very important moment where if we were going to have a marketplace, we had to play by the rules, the same rules with everybody. If somebody wasn't going to give us information, then they couldn't stay there. And TrueCar also had a very interesting business model. We did not force car dealers to pay us upfront for advertising. They would give us access to all their information, put prices on cars and have to honor those prices. And then when somebody bought a car, they paid us $300, not $30.
CDG: So, paper sale.
SP: Performance based marketing. Yeah.
CDG: Interesting. Why $300? What was the logic? Was that just the average CPA or cost per acquisition for a dealer?
SP: According to the National Automobile Dealers Association, the average car dealer was spending closer to $1,000 per car sold. We felt $300 was that sort of Goldilocks number. It turned out it was very true. I mean, a dealer paying $300 is clearly saving money over their traditional marketing, and $300 is what we needed to be able to make it worth our while. When we started, we really got started as an affinity marketing channel. We worked with USAA and Capital One, and those two organizations has members and customers who are much more brand loyal. And when we would bring those customers to the car dealer, they would buy a very high percentage of the time. So it was just about migrating deeper in the funnel and talking to a customer who was closer to making a buying decision and checking price was what you tend to do before you make that buying decision. So I'd been on this almost crusade-like journey to make buying a car, you know, and owning a car easier. Fair was one step further. At Fair, we said, what if we owned the car? What if we made it so that you don't actually have to buy a car at all? And it really started with this recognition that leasing is a big departure from traditional auto finance. If you think about the last hundred and ten years of the auto business, we've pushed almost all the risk to the people who can least afford it. All the depreciation risk goes to the person who's financing or buying a car. And so, if you look across the spectrum of credit scores, the average credit score in buying a car is about 10%. I'm sorry, the average customer who's buying a car gets about a 10% loan. And the average term is about six years. So they're paying more money to the bank to borrow the money than they are for the car. And we felt that we had enough insight in terms of information about what a car is worth to take that risk more institutionally. And so at Fair, we became a balance sheet buyer of the car. It was focused on used cars. We had to raise a lot of money, so we raised a couple of billion dollars of debt and equity to launch the business. SoftBank was one of our partners. We had a number of big OEMs in there. And what we were doing was buying the car and then effectively renting it back to the customer in the form of a subscription. But what we've learned is that nine out of ten people have no idea what a subscription is.
The SoftBank Saga
CDG: So why didn't Fair last? Why didn't make it? And I'm not looking to get into the 100 different technical reasons, but conceptually, what was it? Did the thesis just not play out, or what happened?
SP: No. It's sort of like marrying the wrong woman I think. We brought in SoftBank as an investor. SoftBank is an interesting organization. They invested $380 million in the company through the Vision Fund, which is just a tremendous amount of capital. Their only interest was seeing if this could be a disruption. But at the end of the day, SoftBank's objective investing in Fair was they wanted to provide cars into the rideshare business. They had a very broad bet globally on ridesharing. So, not only were they big investors in Uber, but also OLA, Didi, Grab. So around the world, almost a $50 billion investment in rideshare. The rideshare equation is not just drivers, it's drivers plus cars meeting customers and generating gross revenue from the the fare revenue. Not Fair (f-a-i-r), but fare (f-a-r-e) from the actual rider. And as good as those economics are, drivers are the biggest expense in that equation. And so they wanted to make sure that the drivers who wanted to think of it as a side hustle and get out there on the road had a car that they could use because as they were scaling these businesses, they found that this concept of just using drivers who had cars wasn't going to scale enough. And so they wanted to open up the supply side because as excited as everybody was about rideshare, nobody knew how big it could be because it was always supply-constrained.
SP: And so they came to us with this idea. They loved the idea that you didn't have to borrow money, you didn't have to buy the car. It seemed like a perfect product for their cohort of possible drivers. It turns out that no matter how you slice it, the low-end uber driver is somebody who's got basically minimum wage income otherwise, and they are in the 500 FICO range. So it's a very subprime, deep subprime credit cohort. And the other fact is they drive the wheels off the car. And so if you are basically owning the car and giving it to an Uber driver, you have to be prepared for that car to depreciate very heavily. To get into that business, we bought Uber's exchange leasing business in 2018. We started advertising heavily and we grew the business from a brand that nobody knew to almost a hundred thousand cars out on the road in under 800 days. So by almost any measure, it was one of the fastest growing companies in history in terms of top line and in terms of actual monthly subscription revenue. It got to as high as $50 million a month in that first two year period.
CDG: How long did the average customer keep a car?
SP: Turned out to be about 16 to 18 months. So one of the things we didn't know when we launched the business is, if you let customers go month to month, empirically, how long do they keep the car? And it turns out that Uber drivers had a different sort of behavior. People with bad credit aren't bad people. They just can't do a thing consistently over a long period of time. What we started to realize about the Uber driver population is they in particular needed the car from week to week, not month to month. But everybody else, which we were really building the business for, wanted month to month. And they they stayed for 16 to 18 months. The Uber drivers were willing to pay us almost $300 a week to have a car. And if you think about the sort of dynamics of, you know, generating somewhere in excess of 1200 dollars a month from an Uber driver who's making minimum wage, that's $8,000 a year, sort of a magic trick. But we did not launch Fair to be a rideshare supply system. That's what more what SoftBank wanted out of us. But that business developed a fleet of vehicles, almost billion-dollar fleet of cars. They were $10,000-$12,000 cars on average. We were buying used cars. What I would tell you about that business, it ultimately got taken over by SoftBank, where they bought all of our debt at 100 cents on the dollar. They wanted to own that fleet. We had a lot of positive equity, so we had a billion-dollar fleet of cars and only about a half a billion dollars of debt. One of the problems with a subscription business, though, is if it's out in the field, you can't recall those cars very easily. And so they wanted to disincentivize people to stay with it and literally about two weeks before the pandemic, they went ahead and removed the insurance from all the cars. About 50,000 cars came home right into going into lockdown and their auctions were closed down as well. So a fleet of cars that was generating $50 million of revenue became a much smaller fleet of cars. It was generating 10x less revenue. So it really killed the business. And as they were sitting on these cars and the lockdown started to loosen up, in their infinite wisdom, they decided to to sell the fleet of cars to recoup some of the value trapped.
CDG: So let me understand this. You bring in SoftBank, right, this big investor, and what? You lose total control of the company, or what happens at this point?
SP: It's interesting. There's three sort of narratives around control in a startup. You've got the shareholder vote. I had a super class of voting stock, so I actually owned the shareholder vote. They do have some protections. There's also the CEO job. I was the CEO and then you have the board and I controlled the board. I had five or seven seats. So you would think that I had the trifecta of power and control in that company. And in many ways I did, except for I did not understand how important capital is and or how capital could be used as a weapon. So as we got into the fall of 2019 – this is after Uber went public – We were, good news, bad news. We were growing very quickly, but we were providing over $100 million worth of cars on top of everything else to Uber every month. So I needed a lot of capital because when you go borrow money to raise a balance sheet to be able to buy those cars, it's about 10% of the value of the car has to come from equity, 90% comes from debt. We did not have a hard time raising the debt, believe it or not. But as SoftBank recognized that we needed more capital, they gave us a lot less than we needed. And then they went ahead and bought all of our debt. And in buying our debt, they controlled the capital stack. They controlled the equity side of the business with about a third of the vote. But I still had power there. And then they also ended up controlling the debt side of the business and they became effectively the senior secured lender in March. As we go into the pandemic, everybody asked for forbearance with lenders because nothing was moving and nobody could pay those bills. That became the beginning of the end for us. With SoftBank, they had total control over the business. Ultimately, what they used the fleet for was to force the liquidation of cars to be able to pay themselves back first because debt gets paid before equity.
CDG: I read something that you guys were going to buy a Walmart or K-mart or something. What's that story about?
SP: Well, the business of supporting drivers and growing as fast as we were also meant that we had to be able to buy cars directly for consumers because consumers are the the lowest cost market to buy cars. So you've got directly from trade ins. Then you've got wholesale, then you've got the retail market, and then you've got the advertising market where customers are hoping to get a lot more for their car. We knew that if we could buy cars from consumers on a trade-in basis, that would be the lowest source. So we needed to create a reconditioning muscle, very much like what Carvana did. In fact, I would argue that Carvana's core competency has always been the reconditioning of vehicles and that is really their throttle in the business. They've been able to recondition cars and then distribute them more virtually. So we needed a footprint and so we had rented a former Walmart store just it had enough footprint up in the Bay Area where we would then buy cars, recondition them locally and then put them back into the market.
Inspiration & The Innovator’s Dilemma
CDG: You've gone through so many different companies and ventures. What inspires you to keep going? I clearly see you live in a nice house in sunny California. What gets Scott Painter up in the morning and says, I want to start another subscription-focused company? What is that for you?
SP: Well, I really have this existential angst about solving the problem, and I know it's solvable. This is not what Elon's doing with rockets. I mean, this is just blocking and tackling. It's business building. You know, I think, entrepreneurs over time develop a core competency at a thing. I certainly am not going to be exposed to much of the early stage things that plagued most CEOs or founders. I can get a client running pretty quickly.
CDG: Why is that?
SP: I can raise money. I've got a reputation. I've been able to turn investments into returns consistently. And so I think that that has given me a lot of credibility to go back into this space. I'm 54 now. I've had well over 16 companies in the auto space. All focused on this same mission. I'm a little bit frustrated that it has taken as long as it has. I think the whole concept of being a visionary is that you have a vision for something that people don't otherwise see. And unfortunately, the problem with pioneering new stuff is that they often fail because customers aren't ready. I think timing is everything, whether you look at Google or Uber or any of these disruptive businesses, they were in the right place at the right time in terms of people's change in behavior. And I think that people are changing right now because of the electric car transformation in a very, very big way.
CDG: Do you really believe that, or is that like a California thing? Do you really think that electric cars is having a societal change? Why do you think that? I'm not saying I don't do or don't. I want to understand your perspective why you see that.
SP: You know, in order for us to do what we do, we have to believe a couple of things. I fundamentally do believe that we're all going to be driving an electric car. And I see that based on a number of different vectors, whether it's regulation, whether it's the will of the auto industry, which the incumbents for a long time resisted flipping over and saying, we're going to build electric. They did everything to resist it. Now, just about everybody except Toyota has said they're all in on electric, not just I'm going to build one or two. You've got literally hundreds of models scheduled for the next 18 to 24 months. So, I do believe that the industry, in part because of Tesla's success rate, they looked at Tesla and said, how did this guy come in here and just eat our lunch and, you know, create a trillion-dollar enterprise value thing? And they are really studying that. I just got back from a conference with McKinsey where literally everything is about what did Elon do and what can we do and what won't we do and why? And I think it's just fascinating to see how Elon wanted to force everybody to build electric cars so that we could save the planet and that we could create a sustainable future. And I would say largely he has succeeded. If you're not building an electric car and building, you know, a business that is focused on electric, you're just not going to make it. There are way too many flywheels inside of what he's done, whether it's modular manufacturing, whether it's direct distribution, whether it's a completely electric, ground up system. Cars are going to become software with wheels versus hardware that has a very specific application. I heard a really amazing analogy this week where they said, what Tesla has done is sort of like the iPhone versus the old Motorola flip phone. Everyone else is saying, we're going to we're going to take Tesla on, but we're going to not change our hardware architecture. We're going to still push people the Motorola flip phone and see how it goes. I think that the the reality is that it's not just about understanding that we're all going to drive electric and that all this legislation and all of these incentives that are pretty historic, the Inflation Reduction Act is really just the tip of the iceberg. People just don't understand on a state by state basis how many additional incentives, rebates and other things that are available to them. If you make below $75,000 a year in household income, you can actually qualify in California for another $9,500.
CDG: So what happens when that goes away? I mean, that spigot can't last forever, right?
SP: Well, now let's start with the Inflation Reduction Act. Those are 20 year tax credits. I don't think they're going away. It is designed to really help in that transition. I do believe that at some point it theoretically normalizes. But you got three 300 plus million cars on American roads and only 3 million of them are electric. So there is a massive imbalance between new and used and electric versus non electric. I think theoretically we'll find equilibrium. But, you know, historically in the U.S., we make somewhere between 14 and 18 million cars a year on the new car side, and we sell another 50 million used cars. If you just think about that dynamic, even if 100% of new cars were made as electric cars, you wouldn't reach equilibrium in the car park, which is 300 plus million cars, for another 20 years. So there is going to be this great transformation. I do think it's going to come in waves. I think that there is still lingering resistance by the car business. They don't really want to do this because in part, internal combustion engines and the infrastructure that supports producing internal combustion vehicles is sort of at that point in the arc where they're now making massive amounts of profit. These factories and all of these things have been amortized over 30 years and they're right in that sweet spot for profit. So, you know, take Ford or General Motors or any of these incumbent carmakers, for example. They're losing tremendous amounts of money in their electric car side of the business and making massive amounts of money in their ICE-side of the car business. It's not very easy to say I'm just going to stop making ICE cars. It's where almost all of their throttle comes from in terms of profitability.
CDG: Well, I think that there's a serious innovator's dilemma here. I mean, the car manufacturers, I do think that's a great point. I mean, you see how much money Ford is losing on EVs, being in their position and trying to make this transition. It's obviously extremely difficult.
SP: I think Farley in particular, though, has done a number of very provocative things. He said to car dealers, we're going to do everything different with electric cars. It's almost as though he said we should split off the electric car business as a totally separate division, allow Ford as the mothership to just be a disciplined, profitable business and then come over here to the electric car business, do what Elon's done, break all the rules, be greenfield, think from the ground up. That's not so easily done. I don't think that anybody has necessarily gotten that right. But it is hard what he's done just from a product point of view. And it's not easy for incumbents. It is a true innovator's dilemma. They don't want to tip over their applecart to get over to the other side.
CDG: So give us an intro to Autonomy. I want to dive deeper at Autonomy and also just tell us, you know, give us the high level, how much funding, how big is the company right now where you guys see everything?
SP: Yeah. So first of all, I think that, you know, your question about electric really is the beginning of autonomy. What we learned in doing fair is that we had a product market fit that was profound. I mean, fair went from nobody knew what we were and nobody really understood what a subscription was to having 4 million app installs in 800 days. Those 4 million app installs resulted in a fleet of cars that was nearly 100,000 in total in under two years. That I think really inspired my partner and I to say, you know, post SoftBank, what do we believe? If you believe that we're going to be driving electric? The question was what are the real big risks in the subscription business? Because you're you're basically taking the risk away from the consumer and you're financing a fleet of cars based on a sort of a particular point of view that you understand how that car is going to depreciate. It doesn't even matter if the car depreciates aggressively or not as long as you get it right. The biggest cost in putting a car on the road is depreciation and interest expense. That that's true of whether a customer is financing it with their own money or we're financing it more as an institutionally oriented thing. The reason I like what we're focused on with electric and autonomy is an electric only subscription business. It gives people access to an electric vehicle without having to buy the car or borrow money. What we're doing with electric is based on the fact that we think we're going to be driving electric. We think that companies like Tesla are going to produce enough of these cars. Everybody's making the shift. We know what we study. When things are all coming to market. It's happening again a little bit more slowly than when anybody thinks, but it is coming and I think that there are these historic incentives, rebates, credits that we can sort of use to bring down the cap cost or selling price of the car. So there's a lot of I think, headwinds and there's a lot of tailwinds to this business. But the EV only focus is based on the fact that we think and this is very simply that there is going to be a shortage of late model electric cars in the used cars market used car market for at least a decade or more.
CDG: Tell me more.
SP: So our our theory here is that until there are as many used electric cars as there are used ice vehicles, that market will be out of equilibrium. And if consumers on the new car side are more dominantly preferring an electric car that persists into the used car argument as well, it just is at a lower price point. The average new car in America today is approaching $50,000. The average used car in America today is approaching $30,000. Obviously, we've had a lot of volatility in that market over the last couple of years and sort of black swan events, but we just don't think there's going to be enough electric cars for the people who can't afford a brand new one. And so they're going to shift their focus to the electric car market. And for us, that's where we get liquidity on the car. So if we're financing the car from the time we buy it to the time we sell it, it's important to understand how a subscription business works. We intend to own these cars for up to eight years and that car is going to see two, three, five subscribers over that period of time. Unlike unlike a rental car company, we don't want to have a large fleet of cars out in the world. We want to have a a very focused, you know, fleet of cars that are being utilized. And so we don't have a utilization curve like a rental car company would. If we own the car, it's because it's out there working. So in many ways, we look like a mobility reach. We borrow money, we buy a fleet of cars, those cars go out, generate revenue. On the average car we're buying today is a $50,000 car. The Tesla model three is the dominant vehicle in our fleet. We chose Tesla to launch in January of 2022 simply because they're the only at scale mass production electric car that was available.
CDG: So you're buying you're sourcing all your vehicles brand new from Tesla today.
SP: We are. The idea, though, is to be sourcing vehicles from everybody who's making an electric car. We do have some bare minimums. For example, one of the things that we love about electric cars is that they all tend to be 5G connected cars from a fleet. And asset management point of view, knowing where your cars are is a game changer. At fair, we had nearly 100,000 cars. These were 8 to 10 $12,000 cars. We only had GPS on some of them. We couldn't tell you, Oh, I know.
CDG: We sold a lot of cars through fare, so I know very well.
SP: So that was probably one of the, you know, the real pioneering blank sort sort of, you know, blind spots in that business. We had all these cars and traditionally fleet leasing companies or, you know, large lessors and lenders don't require that. They know exactly where the car is at all times with autonomy. I can actually with a simple UI look and see where the entire fleet is, how it's being driven, where where those cars are. If we need to collect those cars, it's a it's a much different thing than with a, you know, a loan or a lease because we own the car.
CDG: Give me the simple stuff. How much am I paying per month? What's the deal over here? Right. How do I do this? How quickly can I get it done?
SP: Yeah. So, you know, back to the comment that I made to Elon. I think affordability is everything and I don't think that consumers necessarily in mass act on sort of I want to drive that brand or that car. I think they they.
CDG: Act I agree. I agree that they.
SP: Act they act rationally with their wallet. And I think affordability is that key pivot point. And, you know, to what I said to Elon in November of 2018, the average car payment was at about $500. You got to be below that if you want to sell half the cars. And today, the average monthly payment on a car payment is, about $650 no matter what.
CDG: You're not even higher than that. Even higher. It's closer to.
SP: 700 on a new car. So, you know, there's a couple of things that are really interesting about sort of the new car side of things with with the new car, you know, you've got to get a seven to Geico in order to get into a new car lease. And so it means that everybody who doesn't have a seven TIKA, which is about 70% of the market, is not really eligible for a traditional new car lease. Those customers are going to go and look for a loan. One of the real headwinds for lending today and you see and I've seen it on you know, on your Twitter feed, lenders are going out of business or pulling their their business lines all together for indirect lending because interest rates are so volatile and so high. You're going to see exactly what we did in 2009. It doesn't make any sense to get a car loan. So let's talk about, you know, if you wanted to get a model three, a Tesla, model three, that car has gone through a wild sort of ride as it relates to price point over the last year. It started at sort of $42,000 in mid 2021 and sort of rose over the course of 2021 into late 2022 to almost $50,000. But this affordability thing means that if you wanted to go out and get a Tesla model three, even if you're borrowing $40,000, you got to think about when you buy a car, you got to pay tax on that car's about 10%. So you're really borrowing $44,000. Most loans come with a down payment requirement of 5 to 10%. So you're coming out of pocket to get into a car loan, usually about 8 to $10000. And you're spending 1200 dollars a month at a 10% interest rate on a 40, $44,000 total car. So the affordability of a model three, even with all of Tesla's discounts, is still out of reach for somebody getting a traditional car loan with near Prime or not prime credit. So, again, going back to that sort of, you know, monthly car payment, what is the average? So it means that that sub $650, $700 a month car payment is eligible if you have really good credit, but only through a traditional lease. And Tesla has always wanted to offer shorter terms that, you know, they went from a three year lease. They also introduced now the two year lease. Those leases are all heavily subsidized. If you look at the matrix of how Tesla has priced, it really tells you a story about how disciplined they are about delivering affordability. They have basically said we will take a higher residual risk depending on those terms in the lease to be able to get people into that car. It's it's very, very telling when backs of all the numbers that Tesla has basically said, the most important thing is that our cars are affordable right now going into its period of high interest rates austerity and they do that through their leases. What we've seen is that for our business, if subscriptions are nothing more than an open ended lease, so it's a full service lease where we bundle the car with title registration. We also have the customer pay tax monthly. We do not have to pay tax. We buy the car on the front end. So that's about a 10% arbitrage for us. On just the CapEx that we have to extend. We then can bundle the car with roadside assistance maintenance so the consumer doesn't have to worry about tires, brakes, windshield wipers, which are really all part of the traditional ownership experience.
The economics of a subscription-based model
CDG: So what happens if and I'm sure I would imagine investors and yourself, everyone has asked you this question What happens if Tesla introduces their own subscription? Does that crush your business? What happens.
SP: Now? I've been I've been trying to tell Elon to get into subscriptions for years.
CDG: And by the way, Elon is a friend of the pod, so, you know, he's listening.
SP: Yeah. You know, I think it just makes too much sense that the big saw that subscriptions deliver is getting a car loan is a gnarly process. Not only are lenders going out of business because interest rates are so volatile and they can't make money, the inherent problem between a lender and a customer who borrows money is the customer is entering into a fixed rate contract, so they borrow money at an X percent interest rate over a long period of time. But if the lender is pulling down capital, they live in a floating rate world. And so you can never reconcile a floating rate source of capital with a fixed rate sort of outflow of capital. And this is what led to the collapse of that sub. And it is a huge problem. And really, so what we've had to do and this really hit us very hard at the end of last year, you know, we had nearly a $100 million fleet of cars and Tesla dropped our prices. And well, the day prior to Tesla dropping their prices by the way, a used Tesla model three that was 2 to 3 years old was selling for 20% more than a new one. So a $49,000 MSRP, brand new 2022 model, three $49,000. A 2019 model three with 50,000 miles, $57,000. I think that the big hit for us was the day that the discount occurred. They also stopped selling build to order. They sold from inventory. Those two things combined meant that when a customer who was thinking about getting a car didn't want to wait nine months, all of a sudden could get a car in five days, didn't go think about buying a used one. So all of the demand for used model threes was completely directed on to new ones and those used model threes came down in price. So everybody in the car business started. I mean, this didn't just affect us. It affected lots of dealers across the country selling these cars. They took a bath on model threes, but our lenders in particular came back and said, well, what we thought was about 10 million of positive equity as of today is about $10 million of negative equity.
CDG: And how many Tesla's Japanese stock?
SP: Over 1200. So and we just took.
CDG: A $20 million swing in equity overnight.
SP: Yes. And, you know, we're a young company. We you know, I think company building starts with you raise your seed round and then you have sort of a formal a round and you get some traction, some momentum. You start to see the business begin to build. At 1200 cars were the second largest Tesla fleet out there. And our goal is to get to 100,000 cars inside of four or five years. So I think that, you know, in 100,000 cars in a market where you are selling 55 or 60 million total cars is not a very big percentage. It is not a winner take all market. We can be a very big business. The economics of our business are that we buy a $50,000 car. We generate about 25% of the capacity of the car in year one subscription revenue. And our revenue comes from not just monthly payments, but we also charge a start fee, which is very much akin to a tax.
CDG: That to me, like I'm a third grader for a second. Okay, So you buy a $50,000 car? Yeah. What do you generate in year one?
SP: We're generating about $12,500 in year one, and that's a combination of monthly payments which are on average between 400 and $600 a month and a start fee, a start fee in a lease.
CDG: I always love how you branded that a start feeling. I always love that even at fair. That's a it's a really good way to brand that so.
SP: Well it is a true feat right? I mean it's not technically a cap cost reduction or a down payment. And so we need to give it a name that was a reflection of what it really is. Makes sense in a traditional lease, if you have a $300 lease payment, you have a $3,000 cap cost reduction and your total out the door price in a lease is misunderstood by most because everybody, starting with has an order fee, they have an acquisition fee, a disposition fee, they have all sorts of fees. It's confusing. It's the actual drive off costs. And they they're nobody's really forced to be super transparent about these fees. But at the end of the day, if you want to get into a Tesla model three lease, you're going to be at drive off looking at 6 to $7000. Almost nobody understands that because Tesla says our cap cost reduction is 4500. You can also go in there in slider around and get your, you know, cap cost reduction to zero. There is no way to get a Tesla model three in a lease from Tesla with zero drive drivers. You no matter what you do if you if you floor your cap cost reductions, you're going to have a much higher monthly payment and you're still going to be a couple of grand out of pocket to get that car, you know, idle license.
CDG: So going back to the economics, right. How much are you making on an average customer?
SP: We see about a 20% contribution margin. So this is actually a profitable business, but that's to offset for the risk that we take in owning the car.
CDG: Right. So and what's that 20% in actual dollar figures? What does.
SP: That. Yeah. So you've got a $50,000 cap cost that we're putting out in the form of debt. We see about a 25% gross revenue off of that number and then we have a 20% contribution margin off of that. So we see about $2,000 a year or about $200 a month in contribution. Coming back to us, when you amortized the start fee and the monthly.
CDG: And how what's the break even point for a customer? Like how long do they need to keep that subscription for you year be profitable on a unit basis.
SP: Well again, we don't think of customers as a fixed term. So because we are a subscription business, we don't mind churn if a customer brings back a car, that car goes right into another contract. We've got a wait list of customers. And so we do not want to have cars sitting idle. The only time a car sits idle for us is if it's on its way into the fleet and getting prepped and ready for activation on the way out of the fleet and getting sold, or in some kind of a reconditioning mode about 4% of our fleet at any given time is idled in that way there on the shoulder, if you will. They're not there. They're an asset that we own, but they're not generating revenue for us. But because we have this waitlist function, you know, waitlists are not something that the car business has really seen a lot of over its history. Waitlist have really emerged with electric cars. And, you know, a lot of what I'm doing on Twitter, for example, is sort of mansplaining what's going on with, you know, product market fit and weight because, you know, companies like Rivian and, you know, these are all great companies that get great product, but they are going to be relegated to being niche manufacturers. They're not going to achieve scale because they they don't give a shit about affordability. They do not qualify for any of these tax incentives or rebates or credits. They are well above of that sort of Mendoza line of what people think people should pay for a car. They're not worried about affordability, they've got good fan clubs. And if you talk to any one of these founders, they're all very comfortable in the knowledge that they've got these big waitlists. They're like, No, I can't make enough cars. And my point to them, all of them, is they're in the wrong business. They should not be manufacturing and retailing your car because that is a one and done mentality. The two narrative they need to have is better asset utilization over time and they should be generating revenue from every car they ever make, not the cars that they make. So I think that, you know, this sort of revenue for life notion started with a guy named Jim Sewell in Dallas, Texas, a car dealer who just basically said, never, ever lose your customer, because the hardest thing in the car business to get as a new customer every time and I think that Rivian's done, for example, just a phenomenal job of creating a brand following. They've got a cool product. It's priced ridiculously high. They're not going to get to sort of scale in a mass market way at those price points. Same thing with Lucid and unfortunately, Fisker I think is going to be in the same box because Fisker came out with a $35,000 option that they ultimately decided to make only the $70,000 version. I think what's going to happen to their waitlist of customers is that's going to evaporate as they get closer to pulling the trigger and saying we're ready to go to market.
CDG: I fully understand. Now I see that look. You're basically saying, hey, I'm offering you know one, two types of car, whatever it is, like the specific model. And so because of that, I just never have a car sitting idle, which was, I would assume, a big issue that Fair had when it came to asset utilization and efficiency because boom, that car comes back, gets put into the hands of another person.The car continues earning money and everyone's happy and you have profitable unit economics.
SP: That doesn't mean that we don't want to have a buffet of cars, right? We want to have a lot of choice within consumers, but.
CDG: We want to have a waitlist for every single car that we have. Yeah, I would assume.
SP: Going into the Memorial Day holiday, we launched a partnership with American Express. American Express went out to their cardholders in the five states that we operate, and they offered them an opportunity to get $1,000 back for every thousand for the first thousand that they spend with autonomy. Subscribe to our car. So this went out to 20 million cardholders. It was a passive campaign, meaning the card holder had to find it in their member benefit area. It wasn't an email blast that happened sort of mid-month, but we took a thousand reservations for eight different cars. So many of these cars we know are coming. We don't have them here. So the Chevy Silverado, the Ford Mach-e, the entire Mercedes Q lineup.
CDG: But are these real reservations? How much does someone have to put down or what's the commitment here?
SP: Yeah, so all we need for really sort of that early signal and I'm going to apply the same sort of, you know, reservation attrition math to what we do, but what we needed was an early signal of is there interest? So we need a name, contact information, phone number, and then they go ahead, make a reservation, tell us exactly what kind of car they want and what market. Once we do that, then we push we push those customers into installing the app. Once they install the app, that's where we get their driver's license and their credit card. They set up their account. So, you know, for us, a thousand reservations in five days is sort of an astounding avalanche of interest at the highest level, one level higher, which is how many people even go into the member benefit area and say they want to be eligible for this promotion. So we've got about 25,000 out of the 20 million that happened to do that in the first five days. Now we have to go back and find out how that funnel sort of shapes up. But it is about getting people closer and closer to an actual transaction. But I do think it's a valid demand signal for, you know, what percentage of our sort of upper funnel wanted a Tesla model three, for example, and it was about 40%. Not everybody though, you know, we had a lot of customers from that American Express cohort who wanted to drive a rivian a vinfast.
Autonomy’s ideal customer
CDG: One second who is the perfect customer for an autonomy subscription. And you know, it's interesting, as fair, you were doing used cars. I sold cars through fair, you know, we did on our dealership. And I can only imagine it's a completely different type of customer than who you're focusing on with autonomy especially. You're telling me, you know, you promoted to Amex cardholders. It feels like two different dimensions.
SP: It is. So, you know, partly because of the SoftBank investment and the focus on ride share, we started slipping very much to the subprime vehicle market. Right. And I think that is in large part what sort of led Phair to just a very tough day, right? Where if you are working only in that market, you're going to see a lot of delinquencies and defaults. And even though it's not credit and we're not lending your money, people take off with the car. We had people sleeping cars, whereas with a, you know, $50,000 on average electric car, you're just talking to a different cohort of customer. But there's a really big reason why we've chosen the credit card companies to focus because we navigate a thing called Reagan. Reagan is the federal law that governs leasing disclosures, and leasing disclosures are pretty gnarly. If you are a Reagan lessor, you have to comply with not only the law that says you're going to have to disclose the cap cost of the car, the money factor, the residual forecast. You have to calculate all of those things to the penny and then put them into a certain type of form. It is intentionally a very high hurdle, high friction experience. And historically, leasing was only really done for the tax arbitrage. But the big value proposition of a lease is that you pay less money because you're only financing depreciation, not the entire cap cost of the car. The downside is you don't own the car, but in most cases this is a depreciating asset. This is not like a piece of property that appreciates. In fact, almost no new cars appreciate in value the way that we think about you know, owning electric cars, we think they will depreciate more slowly than their internal combustion engine counterpart. So it's a good asset to own generally. But I think that navigating Reagan was a big, big sticking point to making this thing totally digital. So because we are not a fixed term financial contract of greater than four months, which we are, we're we're not lending your money. We do not have to disclose interest rate. We do not have to disclose money factor, we don't have to calculate it. We don't have to share with you the cap cost of the car because we're not selling you a car because we're not selling you a car and because we're not lending you money. The whole thing can happen on your phone. You can sign for a subscription with your finger on your phone. All you need is a credit card and a driver's license. It is a higher cohort of customer just based on the price point alone. But this is uniquely something you can pay for on your credit card. You cannot pay for a car lease or a car loan with your credit card. So because you can put this on your credit card, it is natural for us to market into large credit card audiences. And so it's not just Amex. We've got three other national credit card providers that will be launching staggered over the course of the next 12 months. But these are, you know, what we've definitely seen with the Amex promotion for example, is that it is the perfect market for us because almost everybody who went ahead and reserved a car when they gave us their credit card is qualified just based on Psycho alone. We're not marketing into a gene pool of people who are credit challenge. We're marketing into specifically a gene pool of folks who have by by definition, good credit, good psychos and are good payers.
CDG: I mean, I think I think it's genius. Look, I think about this from a business perspective. I say what were challenges with fair? And you mentioned skewing subprime. And then I say, okay, how do we solve that? Well, clearly, if you go if you go prime, that's one way to solve it. How you go prime, you can go prime by attracting a better customer and with an electric vehicle. Oh, and by the way, that better customer has an American Express. It makes total sense.
SP: Yeah. And I think that, you know what we're going to learn, and not just with Amex and with all these other, you know, credit card partners, is that this just becomes about removing as much confusion and friction as possible. You can get your entire automotive expense because when you get a subscription, you're you're not just getting the car. We're handling the car, the financing tax title, registration, maintenance, repair. You don't have to worry about any of those things. So when you really look head to head, what are the true costs of automotive vehicle ownership? It's not just what's my monthly payment. Only half of what we spend on mobility actually goes to the car itself. You know, for years I I've been playing this game with folks where you can pretty much guess what people drive based on their monthly car payment. And well, you know, we spend in general somewhere between 12 and 13% of our gross income on mobility. And the mobility includes the car title, tax and registration, insurance, maintenance, repair and either fuel or charging. Those expenses sort of are true no matter how you look at it. And we're putting people into generally high interest debt where they have to go finance that. It's absolutely inefficient. We no longer think, for example, that we're competing with car loans. Car loans cost twice or three times as much interesting as a subscription. So, you know, what we're seeing in this implosion.
CDG: Where we are, where are you taking market share from?
SP: You know, I think it's two things. We're taking market share from leasing. But I think what we're doing is expanding the aperture to include a non-prime customer, because almost all traditional OEM leases are focused on that prime customer with a seven, 20 or better take up. So we're just expanding access to a lower a lower cohort of customers because everybody can afford a car. They can just a different car payment. But we're very, very focused on studying the OEM car lease programs that are out there. And in the case of Tesla, that requires just constant sort of analysis of what they're doing. They change things almost every single day. But we're we're pretty much, I think, as nimble and studying things the same way we now have, you know, a price point where you can get a car from us for 390 a month and that 390 a month payment does require that you do some things that are a little bit different. We have an 18 month constraint on term because the monthly contribution margin at 390 month is so small and we have a start fee that would be higher than we like, but it's still lower than Tesla. So we want to be able to say with absolute accuracy that we're the cheapest and easiest way to to get access to an electric car and to make that a true statement, we've got to be constantly sort of measuring that, right.
What does Scott drive?
CDG: What car do you own, or what car you drive? Or, do you subscribe?
SP: I’ve got three Autonomy cars – two Tesla Model 3s and one Model Y in my family. I've been a Tesla driver almost from the very beginning. I got my first Roadster in 2009. I was one of the first here in L.A. so I was a Founder Series car. And I've had every vintage of the Model S as it has come through.
CDG: What you do with that Roadster?
SP: Do you know what? I bricked it three times. It was really frustrating because the early Roadster did not have some of the technology in it to tell you when it needed to charge enough. I put the car away for a month or two and the car lost this charge. I had to go and replace the entire battery array.
CDG: So tell me, let's just zoom out for a second. 5 to 10 years, what changes in the mobility landscape? Realistically, what do you what do you think this looks like? I'm not even going 20 years out. I want to know just 5 to 10 years, given how much change we've seen in the last five years alone.
SP: Well, I think given how precise we can be about pricing and residual value forecasting today, I think that that we're going to see the fleetification of electric cars. I don't think people are going to need to own them. Not only are we cheaper and easier, I think one of the big reasons why people are trying us is because they're a little bit hesitant about investing in the technology that's so new. They don't understand how range anxiety is going to affect them. They don't understand if charging is going to be a new pattern that they don't like or do like. So there's a whole bunch of reasons why not committing to a car for a long period of time makes sense, especially as you're transferring from ICE to to electric overall. So we've got a lot of curious users that are seeing if this is what they want over time. I do believe that nobody's going to really need to own a car, but especially an electric car. I believe these are going to be institutionally owned and managed. I think you're going to be able to pay for access for what you want when you want it. I do believe the end of typical ownership for cars is on the horizon.
CDG: Wow. That’s a big statement.
SP: Look, I've got four kids. The idea of telling one of my kids getting into the workforce, go out and borrow a soul crushing amount of money to buy access to mobility. 3 out of 4 Americans need a car to get to work. The argument that we're not going to have cars in our lives or that we don't need ownership, I've been very, very vocal about. I remember when Logan and the guys at Lyft were getting started and sort of, you know, the rise of ridesharing. They said this isn't going to slow down vehicle purchases at all. And in fact, that was proven to be true. You know, ridesharing increased the size of the market in almost every respect because mobility became a thing that was more accessible. But I do think at the end of drunk driving, if you want to think about it that way. I just think ownership is going to be changing. I don't think you're going to have to go into debt to buy a car. I don't think we're going to have to take the people who can least afford to pay the higher interest rate, the people who are younger in life and getting started and put all of that cost on them. I believe that you're going to have access to what you need when you want it, and you'll be able to drive a new one if you want. All of our cars that Autonomy started out as new cars. We're not a rental car fleet. We do not want you getting into the car and saying, well, this isn't new. Many of our customers who are getting cars that have 10,000, 20,000 miles think they're brand new cars. Our whole goal is to make sure that the car is fresh and like new every time you get in it. And we're going to defleet that car once it becomes viewed as a used car.
CDG: I do have one more question before we wrap it up. You started out as NextCar. You rebranded to Autonomy. Tell me about that.
SP: Yeah. So, we started out as NextCar because it was a good name that was available. And we were always thinking about–
CDG: Good founder story.
SP: You know, so my core competency has been about creating brands that have a lower cost, customer acquisition cost, and whether it was carsdirect.com or Fair. These are Clarion Brands that really did lower the cost of acquisition, created trust through information. And really, a big part of our arbitrage has always been - have a brand that people trust, that they can go to without a lot of resistance. Autonomy really sort of reflected where we think people were at coming out of the pandemic. Autonomy is a synonym for freedom. But, it was really an exercise of could we own it? So we were able to buy Autonomy.com, which had been formerly operated by Hewlett Packard as a software division.
CDG: How did you do that?
SP: I knew a former board member at Hewlett Packard, and they had sold that software division to a company in the UK called Micro Focus, and they had global trademarks. We ended up buying not just the domain name Autonomy.com, but we bought 24 country subdomains, we bought the 1-800 number. So we basically have, at this point, a global brand we can build that we own completely. It was couple million dollars but I'm more proud of what we've done with the Autonomy brand than almost anything else I built. I think it's a brand that will help us to transfer trust and give people the ability to come in and feel good about what we're doing. I do believe that the end of ownership is here. I think that cars still symbolize freedom. I've got a 16 year old who's just got his Autonomy car. It's his avatar. It's his ticket to freedom. It's all the same things that a car was to me when I was 16.
SP: But he doesn't need to own it.
CDG: I love it. Scott, where can the audience learn more about you, learn more about Autonomy? Give us the plug.
SP: Yeah, I think, you know, first of all, Autonomy.com, 1-800-Autonomy.
CDG: You have that, too? 1-800-Autonomy?
SP: Of course yeah, and I'm getting obviously a lot more vocal and a lot more active on Twitter. I'm going to continue to do that. I think there's just a lot of things that we have a deep understanding of. It's not just me, but also my partner, George Bower, who was at Mercedes, BMW and Tesla. So there's just a lot of wisdom. There's a lot of perspective that we have, and so we'll be pretty vocal about that. I think, you know, Twitter is sort of the perfect place to be provocative. So a lot of the things we see out there, everybody's got a point of view. We're going to we're going to step into that debate.
CDG: Dude, this was awesome. Thanks so much, Scott. And I'm sure we'll talk soon.
SP: Great. Thank you so much for having me.