December 3, 2020- In today’s episode, we chat with George Arison, founder and CEO of Shift, an online peer-to-peer marketplace for buying and selling used cars. Topics discussed include:
- His entrepreneurial background, key experiences building Shift and the milestones that elevated his business
- Why he chose the SPAC structure for his company and other options considered in going public
- Identifying the right SPAC sponsor and whether it’s a competitive process
- The value Shift offers its customers and its advantage over competitors
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Transcript:
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.
Julian Klymochko: All right, great. Welcome George to the podcast. We’re happy to have you on The Absolute Return Podcast. How are you today?
George Arison: Good, thank you. How are you?
Julian Klymochko: Doing well, thanks. Let’s start things off just by giving us a quick overview of your background. Tell our podcast listeners your entrepreneurial experience throughout your career. And what brought you the experience that brought you to being the founder and CEO of Shift?
George Arison: Yeah, well, thanks for having me. So, I’m originally from Georgia, the country. I moved to US when I was 14 to go to high school and have lived here pretty much ever since with the exception of about a year and a half, when I went back to Georgia to run a political campaign. I did not think I was going to do a technology or a kind of company building. When I got out of college, I had studied political science and that’s what I thought I was going to spend most of my career on. But after the campaign that I did in Georgia, it felt like it made sense to learn some business because a lot of reasons, but kind of just seemed like a right transition. And, you know, from that standpoint, I went to work at BCG, which kind of opened up, you know, the rest of my career in terms of what I do now and where I’ve gone.
It was a really amazing experience to be at BCG in terms of learning about business. Drinking a lot of from the fire hose for the first six months, obviously, because I didn’t have any clue of what I was talking about or doing but learned a ton. And you know, then my mentor in life when whatnot named Tom [Inaudible 00:01:38] and my co-founder at Shift and also my bedroom College Toby Russell and a few other folks and I also started another company called Taxi Magic in 2007. This is you know, very early days of mobile. The Blackberry is still the primary phone. iPhone not even close to exist. You can’t really push apps on a Blackberry in an easy way and whatnot. But we had this view that, you know, mobile was going to be the next big platform.
And that ground travel was a really great area for mobile technology, right, because kind of on-demand services perspective. So, we built a company that allowed people to book a taxi on their mobile phone, integrated with the dispatch systems of cab companies. And so, you would put the reservation directly into the system and then would allow you for payment through that system as well. The product worked really, really well. But consumers is the part where it differently from how we envisioned, we thought that you would need to do both booking and payment, but people only went to booking. And of course, the issue of how do you enable this on Blackberry was always very complicated and hard. And when the iPhone came out, you know, it got a lot easier for now, there was known an app store you could, you know, have people download quite easily.
The first day we were live in the iPhone app and store, we had like 35000 downloads, which back then was there massive, massive number. I mean, I guess it’s still a big number today, but in 2008/2009, it was really high. And we were one of the first kind of on-demand apps on the iPhone and Apple who was using newspaper ad and other commercials. But ultimately, we had a massive dependency on the cap companies and that was a problem because the quality of service that we’re providing was not great. So eventually, obviously the reason Uber and Lyft really, Lyft in particular worked very well because they improved on that dramatically. And then Uber copied Lyft, and you have the kind of current PE iteration of the ride sharing world.
My Green Cup was rejected in 2009 and I need to decide what to do before my HOB ran out. And then, so I actually left Taxi Magic in 2010 because of that issue. And I ended up joining Google because both, I felt with any good learning experience, but also because I could go to a place, it was really good at green cards. And so, spend a little bit more time there. Got my green card spent a little time, met a lot of great people, but I knew that I was going to start another company. And so then, you know once that was all over in 2013, I started working on Shift and launched Shift as a business in December of 2013. We raised that first capital and then we sold [Inaudible 00:04:21-22].
Michael Kesslering: Did you raise capital at Taxi Magic?
George Arison: We raised money at Taxi Magic. Not provisional venture capital money our chairman and co-founder Tom [Inaudible 00:04:34] had done many companies previously and all of them had done very well. And so, he got good investor to invest basically on a PowerPoint. This is again 2007, you know, you didn’t raise as much on PowerPoint now you do more, but back then you actually had to have more traction. We raised a quote, unquote Series A, which was really a series seed, but, you know, it’s the same thing. And then we raised some additional capital from a company called Concur which was a booking tool for hotels and airline tickets. And for them, you know, for corporate travel, which is what Concur did. Ground travel was a really big deal. And so, they really had a lot of interest in figuring that out and moving it with cash. Cause in our thesis initially it was business primarily for corporate users. So yeah, we raised quite a bit of money while I was there. And then after I left, they raised some additional capital, but you know, part of the thinking behind moving to Google and moving to the west coast was that east coast companies just think very differently about things like this. And I think we were very constraining ourselves in terms of investment and spend and were looking at duty to become better, which totally make sense why we were doing it because that’s how it works on the east coast. But, or [Inaudible 00:05:51] east coast, but what I want to do next was different. And so, I think the west coast was better. I’m guessing five years from now; it’s going to be a totally different world because this whole idea of a west coast companies, they’re disappearing.
Julian Klymochko: Right and that’s a whole another topic in and of itself, but George, I want to focus on how the idea for Shift came about. And can you give us a bit of insight into the early days at Shift and its development such as putting together a team, fundraising, product, market fit, et cetera?
George Arison: When I to the west coast, Toby stayed on the east coast and we, you know, we’re very good friends outside of work. And so, we would talk a lot, but we would actually do a formal, like weekly, let’s talk about business ideas that we want to go after. And he’s the one who actually first raised the idea, hey, let’s look at the automotive space. He and I have both just gone through a corporate experience, it was really not great, mostly on the financing side of things, like the process of getting financing was pretty painful and frankly did not make any sense to us. Because we were, not quite, you know, getting a loan from a bank was really tough unless you went to a dealer and we’re like, why does that happen?
And so, we kind of put that on the list of ideas to work after, and then we spent a ton of time on the, you know, learning about it. I became a high-power industry expert in some ways without really knowing anything about cars. I actually don’t even drive, learned a lot about where the issues were. And then I actually put together a team in 2013, that started to just run experiments. They will post cars on Craigslist; just see what kind of feedback they get from potential buyers. They would reach out to people on Craigslist to see what kind of feedback they would get from potential sellers to try to understand pain points, but you can do a lot of surveying, but that’s different from like what actual real consumers feel. And that was really, really helpful for us as well.
So, you know, it was it was a lot of research into figuring out what the business idea should be. As far as an automobile, we kind of developed into the foreign idea, which was you know, we would take the car away from the consumer and then sell it for them, right. So initially we thought, hey, we’d come into the existing transaction and help you with financing and warranty and whatnot. But ultimately it became clear that some them didn’t want that, they wanted us to do the full purchase experience. As far as you know, I knew nothing about fundraising, frankly, because I mentioned, I didn’t really do much. So obviously I had a sense of what VCs did from the side, but it wasn’t really my job at Taxi Magic. And I just perfectly heard about what was going on. And you know, when I moved to the Bay Area in 2010, you know, I would spend a reasonable amount of my free time getting to know VCs and learning about that. And you know,
For a while I was just kind of funding everything on my own, but eventually the money was going to run out. So, we had to raise money, my future Co-Founder John [Inaudible 00:09:14] was the one who like, hey, I think you should raise a convertible note and I’ll kind of help you do that. And he knew I work in Glen Oaks, because he had been at and associated [Inaudible 00:09:24]. So obviously he had dealt with that a lot. And so that’s how we went out raising the first fund and capital. You know, didn’t really have a clue about what raising it convertible note meant, but just kind of said, okay, let’s start by going out for all the people we know, because we want people who we work with in some way to invest in us. That’s a good signal to send, so let’s go raise money from them and then snowball from there. And then we ended up raising, you know, $4 million for our seed round, which in 2013 was a lot of money. 2014, 13, 14, obviously today that’s a more medium sized seed round, but you know, seven years ago it was really big.
As far as team-building, you know, I think I learned at Taxi Magic and more importantly, I learned at Google, that great teams are really, really critical. And so, we did want to build an awesome team. Some of us have some of the organic learning you know, so Joel kind of joined in to help me with the raise and then he’s like, hey, I want to stay and work in this full time. So that made a ton of sense to us or to me. Then my old boss at Google, [00:10:32] invested in us in our very first seed round. And she like, you know, I’m getting really interested in what you’re doing. Like what if I come and help you with some product and then kind of got sucked in and sucked in and joined in full-time. I’ve been recruiting an engineer to join us for a long, long time. And then, you know, eventually got, [Inaudible 00:10:49] to on board in I think April or May of 2014 as a co-founder. So, once you kind of [Inaudible 00:10:54] people as your initial kind of founding team, then it’s a lot easier to hire great talent. And that’s sort of the strategy that we took.
Julian Klymochko: It’s interesting in that early days of Shift development, and obviously your recent going public transaction is a massive leap forward in terms of the development of the business. Over time, have there been any other key milestones that you achieved that you felt really elevated the business onto the next stage?
George Arison: I mean, for me, [Inaudible 00:11:28] going public is the biggest thing you’ve done in your life. And I don’t think, I mean, it’s obviously massive. I don’t think it’s the biggest thing I’ve done in my life. Cause I do think that raising the Series A was the single biggest thing in my kind of professional career because that kind of like created basic validation for the business. But until that point, your kind of like puttering around almost, and then like you’re actually playing the real game. And you know, most of the money I’ve raised as an entrepreneur has been not in Silicon Valley, but the most important money I raised was on Sand Hill Road. We were driving our new car yesterday as a test. And we took our kids on the highway and to get to [Inaudible 00:12:11] you kind of go through Sand Hill Road from our house. And so, I’m like telling my one year old, well this is Sand Hill Road, I’m like, Shift will not exist had we not successfully raised money right here. And so, there is this like rite of passage a little bit in doing that. And you know, I think that’s really, really critical. And you know, I think most founders don’t actually appreciate the extent to which that initial capital is really important, not just from the point of view, like they get stuff done, but also like the recognition that it sets you up for as a business moving forward. And so that is probably the single biggest, like big factor in Shift, you know, success, I think, had we not done that well, then there be no Shift. From then on, you know, I think for us you know, weird way COVID accelerated what we had anticipated would happen in the market for a long time in a much more rapid way. And so suddenly people started to value out of e-commerce and in ways that they previously did not. And, you know, dealers who previously would ignore the idea that, hey, there’s going to be some shift happening here. Starting to be like, oh yeah, there’s clearly a shift happening here, and et cetera. And so, I think that was a really big tipping point for us as in terms of accelerating the move towards being a public company et cetera, because we obviously always plan on being a public company. It always made sense, but this environment, it made sense to go faster. And we’ll move in that direction quicker because the demand for our product is so high.
Michael Kesslering: So, when you looked at going public, you mentioned the importance of moving quickly. Was that one of the main determinants on choosing a SPAC over an IPO or direct listing or another form of RTO? What were some of the other factors that you looked at in the go public process?
George Arison: Yeah, I mean, direct listing, I just don’t understand this focus on everybody’s [Inaudible 00:14:11] there were three coming in last 12 months that did direct listing and like, you know, all those are unique and exceptional companies that, you know, have been either around for a really long time or have a founder who is you know, worth billions of dollars or both, or have a massive user following, right? Like Spotify has a massive inherent investor base because they are and you know, millions and millions and millions of people use it every day. And obviously like it might work for some companies, but that’s just not realistic for the vast majority. So, I think choices really are between a SPAC and a normal IPO. There are a few reasons why a SPAC, I think makes sense for a company. One is speed for sure it is a faster process if you’re starting from point zero. Now if you’ve done a ton of work to get ready for an IPO, you’ve written your perspectives, your S1 has already been filed, kind of privately with the SSC, et cetera, et cetera. That’s a different story, but if your kind of going to be like, hey, day zero, I’m going to start working on my S1 now, right. At that point that IPO path is much longer than a SPAC path. And it also allows you to kind of time the market really well because frankly, like, you know, a lot of IPO is not just about how well the business is doing, is how well the market is doing. And so, you might start an IPO process and not feeling great, but every time you’re ready to actually go out with marketing in [Inaudible 00:15:32], right. Is a real thing, like DoorDash and Airbnb were able to IPO in the next few weeks here. We had a truly contested election, right. Kind of like 2000, the market would be in the 12 tailspins right now, and you wouldn’t be able to go public. But they have been working on that for months and many quarters now. So timing is definitely bizarre, so speed is definitely one factor around SPAC.
Second factor is around the fact that you can probably raise more capital in a SPAC transaction than you can in a traditional transaction. Because usually, you know, underwriters are willing to underwrite, something like 10, 50% of your enterprise value in an IPO. In fact, you can get more. So those are kind of the two big things that for us mattered a ton on when we thought about you know, SPAC versus IPO.
Michael Kesslering: You’ve decided upon a SPAC and you’re looking at different SPAC sponsor teams. What were you looking at when you were comparing? Because there is plenty of SPACs out there. There’s a couple of hundred SPACs out there currently, you know, what were you looking at for when you were looking at the different vehicles?
George Arison: Yeah, so when we were [Inaudible 00:16:49], there were not a couple of hundred SPACs out like an explosion, like right after kind of our deal was announced, frankly. Not that it was correlated by any means, but so for us, you know, our bankers a kind of look at the SPACs that are out there and cut them by size and by who are the sponsors of this SPAC and whatnot. And, and you know, what the subject matters of the SPAC put up. Cause some of them actually had it there. Like, hey, I’m in real estate or whatnot. For our enterprise value, a SPAC was like $150 to 200 million dollars, made the most sense. There’s actually not that many SPACs at that price frame. So, a lot of this SPAC fund raising have been happening as in pushing crisis, like, month’s raise to be higher and higher 250, 300, 350,400, but for us it was too big.
And so, and then we wanted a really quality sponsor. So, I think we really luck out with the fact that the [Inaudible 00:17:46] did have a SPAC of like 155 or 150, something like that and [Inaudible 00:17:50] had quality sponsor. And the way you define a high-quality sponsor, like they’ve done this before. So, they know what these SPAC pop are like, because quite frankly they’re raising the money for a SPAC is the easy part, is running the process afterwards, is the really hard part. Like, you know, there’s a lot of very detailed work and you’re almost like running a marathon, but at a sprint pace from the time when you kind of sign it on the line until you’re ease out, we sign it on the line June 7th or something like that, somewhere around then, and we [Inaudible 00:18:22] on the 15th of October, I believe. And so, like that period of time was just an insanely intense period. When you do a ton of work that in a normal IPO, you would do prior to the IPO. And so, having somebody who had gone through that process was going to be really critical. And obviously we lucked out knowing that we got quite well.
Julian Klymochko: That’s an interesting, the way that business development, you raised a Series A, which was the seminal event really kicked off, made the business real, due to build the team and start building the company. Then roughly seven years later, it’s time to go public. You really did a carefully selected SPAC sponsor in insurance acquisition with the Cohen there. And they seemingly just had the right amount of cash for you guys. Now you’re fully public company. So why don’t you tell us about that? Perhaps from a customer’s perspective, once you tell us about the appeal of utilizing Shift for the customer versus, you know, potential other ways they could go about the same process or some of your competitors?
George Arison: So, look, the used car market is massive, right? Like it’s nearly $150 billion dollars and there’s going to be many, many different ways in which a person can buy a car for a long time. So, this is not a winner take all type of situation. The vast majority of the market is you have a private party sale. So, like I buy a car from you or you buy a car from me or, you know, smaller dealers and these smaller dealerships can be either individual like used car only lots, or, you know, smaller groups of franchise dealerships. I own three Ford stores in, you know, Northern California or something like that. And and you know, the big dealership groups like AutoNation, Lithia, Penske whatnot, they are tiny in the ecosystem overall because the market is so big. So, for you know, that’s the traditional kind of way of doing things. And then you have three up and comers that are of different sizes, Carvana, Vroom and Shift that are doing the digital kind of transformation of this model towards a more e-commerce transaction. You know, I think all three of us just fundamentally different from the traditional way of buying a car, because we all do it online, by the way, like all of us have great NPS scores compared to the traditional dealers. And so, customers clearly love the experience, but all three of us combined are like less than 1 percent of the market by a lot. So, a ton of market share to capture here.
Between the three of us. There is no fundamental differences from the consumer point of view where Carvana and Vroom are more alike and Shift is quite different. We offer a test drive to the consumer versus they don’t. So, with Shift, if you want to buy a car, you can do a test drive before buying the car, and then you can buy a car in your driveway with Vroom and Carvana you buy the car sight unseen, and then it’s shipped to you. You can do that with Shift as well, meaning we will give you the choice to buy car online and then we’ll ship it to you, but that’s not kind of the core offering. The core offering is the one with a test drive. The result of that difference in the kinds of ways we sell a car with is that we actually you know, differ [Inaudible 00:21:35] the type of inventory that we sell. So, Shift inventory is generally speaking older and we have a segment of cars that we call value which are a car that are below, oh sorry, cars that are over eight years old or 80,000 miles. In those cars, you know, you really can’t sell without test drive, and that’s something that’s very unique and differentiated to us that you know, most people don’t have.
Julian Klymochko: That’s interesting, you mentioned this massive total addressable market. Used car market in the US is just huge, and obviously no one really has much of a significant market share at all, so that opportunity is clear. Why don’t you give us and our listeners the quick investment pitch and your case for why an investor should consider Shift shares?
George Arison: Well, I mean, it’s probably this very diverse inventory, right? That we sell a full spectrum of inventory and we can capture, share from a ton of different kind of parts of the ecosystem. Secondly, we are more localized in our model, meaning we go after deep penetration in each market that we open into. So, we’re not national. That’s obviously, you know something that is more expensive to do if we’re going to go national versus going local. And so, our focus is to capture as much shares in the markets that we are in versus being everywhere. And then you know, thirdly, like we have really amazing technology. Often times I’m ask like, how do you prioritize investments? Well, we’ve always been under kind of capitalized as a business until now, or that we’re out public. And so, we’ve always had to make very tough choices and that’s actually good because it forces you to be very careful with spend. But for us, you know historically speaking, technology was a really big part of our investment. We thought that we had to kind of build this baseline of tech that we could then build on and now moving forward, it’s happening less as a percentage of total spend will be coming down. But that’s one differentiator between us and everybody else is the fact that we have this focus strong technical layer.
Julian Klymochko: Interesting. Well, thanks so much, George, for coming onto the podcast before we close things out today, where can investors see more of you online, whether it be social media you know, YouTube, your website.
George Arison: Yeah, so investors.shift.com is our investor relations page, obviously all the press releases and [Inaudible 00:24:07] are there. I’m George Arison on LinkedIn and Twitter as well. I’m not a heavy Twitter user by any means because I actually have to run a business. And so, don’t have the time to be on Twitter but more and more heavy in [Inaudible 00:24:24] because frankly, I don’t know how people book companies before on LinkedIn. It’s like one of the most amazing things for my job. But those are the two places I [Inaudible 00:24:33].
Julian Klymochko: Okay, perfect. Well, thank you so much for coming on The Absolute Return Podcast. Definitely enjoyed your insights into entrepreneurship, the building of Shift, the SPAC process and all the key insights that you shared with our audience today. So, thank you very much, George.
George Arison: Awesome, thank you very much.
Michael Kesslering: Thank you George
Julian Klymochko: All right, bye everybody.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
