Ernie Garcia - Leading Through Crisis

Patrick O'Shaughnessy introduces the new Colossus Review, a publication exploring business and investing ideas, featuring profiles like Graham Duncan. He highlights Ramp, a fintech company backed by notable investors, emphasizing its mission to help businesses manage expenses and time efficiently. The episode features Ernie Garcia III, CEO of Carvana, discussing the company's remarkable turnaround after a 99% stock price decline. Garcia credits his team's resilience and focus on efficiency for navigating the crisis. They delve into Carvana's vertical integration strategy, operational improvements, and maintaining morale during challenging times.

• Ernie Garcia III, co-founder and CEO of Carvana, discusses the significant challenges Carvana faced, including a 99% stock price decline, and how the company emerged stronger.
• Carvana's journey from a startup struggling to raise venture capital to a public company and the worst IPO of 2017.
• The impact of COVID-19 on Carvana, with initial transaction drops followed by a period of being viewed as a "sure bet."
• Challenges in late 2021 due to supply chain disruptions, increasing car prices, and rising interest rates.
• Acquisition of Adesa and the subsequent $3.2 billion debt, coupled with a shift in investor focus from growth to cash flow.
• The importance of resilience, prioritization, and efficiency gains in navigating the crisis.

"Carvana is one of the most remarkable business turnaround stories in recent history, and Ernie gives us a raw and candid explanation of navigating through a 99% stock price decline and ultimately emerging stronger on the other side."

• The quote highlights Carvana's significant recovery and the leadership needed to navigate such a downturn.

"We started in 2013 and we were a startup out of Phoenix that couldn't raise venture capital money... We were the worst IPO of 2017, I believe."

• This quote sets the context for Carvana's challenging beginnings and the initial public offering struggles.

"When Covid first hit, that was a scary moment for sure... But luckily that only lasted a couple of months. And then it turned into a positive."

• The quote indicates the initial impact of COVID-19 on Carvana and how the situation turned favorable over time.

"Late 21, a lot of things happened... We were massively overextended."

• This quote outlines the challenges faced by Carvana due to external economic factors and internal strategic decisions.

• Ernie Garcia emphasizes the importance of maintaining team morale and focus during crises.
• The role of intellectual understanding and preparation in navigating business challenges.
• Carvana's team was described as resilient and composed of individuals with a "sports mentality."
• The importance of collective resolve and avoiding blame in maintaining team cohesion.

"We try to tell that story. We try to set that up ahead of time. We try to point to other companies that we all have a ton of respect for."

• This quote reflects the strategy of using historical business challenges as a motivational tool for Carvana's team.

"The people that we accumulated early on that made up Carvana were basically just a very resilient group of people."

• The quote highlights the significance of having a resilient team to withstand business adversities.

"You just got to look at the faces and see how it's being received. And you would see on faces resolve and collective productive frustration."

• This quote illustrates the importance of gauging team sentiment and fostering a positive collective mindset.

• Ernie Garcia discusses the importance of staying calm and focused amid external pressures and negative perceptions.
• The shift in narrative from being a successful business to facing skepticism during economic downturns.
• Emphasis on the true story of Carvana's mission and the challenges inherent in ambitious business models.
• The role of confidence in leadership and the belief in the company's long-term vision.

"The story was we always got it. We were geniuses. Everything we touched turned to gold... And then I think that all of a sudden, in 22, the story became we were a zero interest rate phenomenon."

• This quote captures the dramatic shift in external perception of Carvana's business model.

"The story that was true was we took a big, ambitious swing at a customer problem that we thought was important."

• The quote emphasizes Carvana's core mission and the inherent challenges in achieving it.

"Once you feel confident that you're like, okay, we're on the path and all there is left now is we just got to go march, we just got to go shovel."

• This quote reflects the importance of maintaining focus and confidence in the company's direction despite external challenges.

• Emphasizing resilience involves building a business that can absorb challenges and setbacks while maintaining a focus on long-term averages.
• Variability in business factors, such as consumer demand and macroeconomic conditions, is inevitable, but the focus should be on creating value over time.
• Feedback loops in business growth can both positively and negatively impact company performance, necessitating a resilient structure to manage these fluctuations.

"Value creation in the world is about what's going to be right on average. And I think that every path, all of the various quantities that matter to how you're performing at any point in time, there's going to be variability around them."

• The quote underscores the importance of focusing on long-term averages in business strategy, acknowledging the inherent variability in performance metrics.

• Startups often say 'yes' to many opportunities, which can lead to overextension and inefficiency.
• Learning to say 'no' is crucial for focusing on high-priority projects and avoiding unnecessary complexity and conflicts.
• Saying 'no' can streamline operations and enhance productivity by reducing hidden conflicts and bureaucratic slowdowns.

"In those hardest moments, I think we really learned those two lessons. Finding a balance between yes and no is certainly an art. That's not a science."

• This quote highlights the challenge and necessity of balancing enthusiasm with strategic restraint in business decisions.

• Effective project management involves breaking down projects into granular milestones and regularly checking progress against these benchmarks.
• Weekly check-ins on project, operational, and financial milestones ensure accountability and rapid course correction.
• Focused project management can significantly accelerate progress and improve operational efficiency.

"Let's take the project, let's convert the project into milestones from a product perspective. Let's convert that into milestones where we think it's going to impact ops from an operations perspective, where we think we can get operationally more efficient."

• The quote illustrates the structured approach to project management, emphasizing the importance of detailed planning and accountability.

• Hierarchical structures can impede progress; leaders should be deeply involved in projects to understand ground realities and drive momentum.
• Leaders as 'player coaches' foster a collaborative environment where they actively participate in and influence project outcomes.
• Momentum and enthusiasm in project involvement can transform work from being laborious to engaging and fun.

"I think there's a big misconception inside of all of corporate America that moving up in an organization with up generally being defined as climbing the corporate ladder and getting further, further away from doing things, is progress."

• This quote challenges traditional corporate hierarchies, advocating for leaders who are actively engaged in day-to-day operations.

• Vertical integration can enhance financial resilience and streamline customer experiences by reducing decision frictions across business layers.
• The ADESA acquisition aimed to strengthen Carvana's position by integrating wholesale auction capabilities, improving supply-side advantages.
• Strategic acquisitions can serve as pivotal decisions that shape a company's trajectory and competitive positioning.

"We want to be vertically integrated. The reason is twofold. One, if you're vertically integrated, you have access to more economics in the transaction and that puts you in a better spot financially."

• This quote explains the dual benefits of vertical integration, highlighting both economic advantages and improved customer experiences.

• The acquisition of ADESA was seen as a strategic move to enhance infrastructure and business model through vertical integration.
• The acquisition was aimed at increasing the capacity to sell cars, with a vision of significantly expanding the business.
• Vertical integration is considered essential for providing a seamless customer experience and differentiating the business economically.

"Now with Odessa, we have real estate capacity to sell about 3 million cars per year. And that's certainly inside of our aspirations over time."

• The acquisition aimed to dramatically increase sales capacity, aligning with long-term business goals.

"Vertical integration is necessary to our customer value proposition."

• Vertical integration is crucial for delivering a simplified and transparent customer experience, enhancing customer satisfaction and loyalty.

• Vertical integration presents a complex challenge due to its inherently attractive economic sense but the complexity involved.
• It requires a strong alignment with company culture, leadership conviction, and a clear vision of the end state.

"Vertical integration has this insidious property where it always makes economic sense. So that always makes it superficially attractive."

• Despite its economic appeal, vertical integration demands careful consideration of its complexities and alignment with business strategy.

• Businesses need to manage external factors like macroeconomic conditions and interest rates, which can impact operations.
• Building resilience involves preparing for a wide distribution of outcomes and focusing on long-term averages rather than transitory problems.

"You only have so much energy and if all of a sudden you're taking energy inside the company and you're pointing it to solve transitory problems, you're wasting energy."

• Emphasizes the importance of focusing on long-term goals and building resilience against external fluctuations.

• Resilience is built through overcoming challenges and maintaining a strong foundation of personal and professional support.
• Personal life independence and finding escapes, like sports or meditation, are crucial for managing stress and maintaining balance.

"I think you need parts of your life that are as independent as possible."

• Highlights the necessity of having personal aspects of life that provide a break from professional stresses.

• Carvana has become more efficient in various aspects, such as logistics, car reconditioning, and customer service.
• Efficiency gains lead to lower costs and improved customer offerings, contributing to better unit economics.

"Throughout the entire business, cars move less, people move less, and everything moves faster with less cost."

• Describes the comprehensive improvements in operational efficiency across the business.

• Focus on reducing SGA costs and increasing profit per car, indicating improved financial health and operational efficiency.
• Fundamental gains are achieved by enhancing efficiency, allowing for better customer offerings or increased profitability.

"The term that we use to try to capture both of those things is, or at least major components of both those things is fundamental gains."

• Fundamental gains represent the efficiency improvements that lead to better financial outcomes and customer experiences.

• The business is continuously identifying new opportunities for improvement, maintaining a mindset of ongoing development.
• There is always room for growth, with the company striving to reach higher levels of efficiency and performance.

"Every time you solve a problem you see two new opportunities."

• Emphasizes the perpetual nature of improvement and the continuous pursuit of operational excellence.

• Success in business involves identifying and solving numerous problems, prioritizing them from most to least important, and addressing them one by one.
• Significant cost reductions and increases in GPU have been achieved by tackling these problems, leading to improved customer offerings without imposing additional burdens.
• The goal is to achieve a "win-win" situation where improvements benefit both the company and its customers.

"Trying to thoughtfully think through that machine and then recognize that there's a hundred problems you have to solve to do that really well, and trying to do your best to size and sort them from most important to least important is I think a huge part of what success is."

• This quote highlights the importance of problem-solving and prioritization in achieving business success.

• The average cost of a car has increased from $20,000 pre-COVID to around $25,000, with $1,000 spent on reconditioning.
• Profits in the automotive industry range from $1,000 to $2,000 per transaction, with additional profits available in finance and wholesale.
• Carvana achieves around $3,900 of EBITDA per unit by integrating various business aspects and simplifying the customer experience.

"Last quarter we had around $3,900 of EBITDA per unit, which is an incredible number."

• This quote demonstrates Carvana's financial success through efficient business integration and customer experience simplification.

• Investors are intelligent and have a broad perspective from studying numerous companies, but they lack direct control over company operations.
• Effective investors manage anxiety from their distance to operational levers and trust management teams to execute plans.
• Entrepreneurs should learn from investors' insights but not let investor anxiety dictate their emotions or decision-making.

"Investors come sit in a room and talk to you, and they try to figure out what your marching plan is, and then they go away and they fret."

• The quote illustrates the challenges investors face due to their lack of direct involvement in company operations.

• The speaker's father played a significant role as both an investor and a personal influence, teaching the importance of recognizing successful people as human and fallible.
• Observing a successful person closely can inspire confidence and the belief that success is attainable for anyone.

"Being able to live a whole life with someone who is very successful and see that it's attainable, I think is enormously confidence inspiring."

• This quote emphasizes the value of personal relationships and observations in building self-confidence and ambition.

• The desire to create something independently led to the founding of Carvana, despite initial failures in other ventures.
• Familiarity with the automotive industry was crucial for success, as starting a business in an unfamiliar area proved challenging.
• Identifying customer experience improvements and questioning industry norms led to the creation of Carvana.

"I always wanted to do something. I always, like imagined myself as an entrepreneur."

• This quote reflects the speaker's entrepreneurial spirit and determination to create something impactful.

• Key uncertainties in business should be resolved as inexpensively as possible to attract investor financing for growth.
• Early challenges included convincing customers to buy cars without test drives and valuing cars sight unseen.
• The ability to tell a compelling story and hit key milestones is vital for securing funding and achieving growth.

"You want to identify what are the key areas of uncertainty in the business that a reasonable person, hopefully yourself included, would be uncertain about whether or not it's going to ultimately work."

• The quote underscores the importance of addressing uncertainties to build a successful business model.

• Carvana experienced significant market challenges, including a 99% drop in market cap, but managed to recover through team resilience and effective decision-making.
• The team's belief and collective effort were crucial in overcoming external doubts and achieving success.

"The team not giving up...is something that is unbelievably cool, that I'm extremely grateful for and proud of."

• This quote highlights the importance of team unity and perseverance in overcoming business adversities.