Scott Painter of NextCar

Welcome to The Puck, Venture Capital and Beyond, a show that explores the evolving landscape in the venture capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Veer, the managing partner of Veer, Negron, and Troff, and the president of CMEG Advisors. This podcast brings change makers to the table to discover the inner workings behind their decision making strategies and ultimately to how they got to where they are today. Everybody who's part of my team is on that mission to make buying and owning a car easier using technology.

There is no bigger market than vehicles. It's a high velocity, high ticket item, and it's very gnarly, and that's exactly what you're looking to disrupt when you go in as an entrepreneur. You're looking for solving a real problem that you can point to with a real solution. Today on the Puck, we sit down with Scott Painter, the founder and the CEO of NextCar, the newest development in the disruption of the automotive industry. Scott shares his thirty year journey from one eight hundred car search to the creation of TrueCar and Fear with a singular commitment to solving the puzzle of how best to acquire and utilize cars in our daily lives.

Welcome, Scott Painter, to the Puck. We're excited to have you here. Why don't we jump right in? Why don't you tell us a little bit about your background? Jim, we've known each other for a while.

I'm a local entrepreneur based out of, Los Angeles, California. I pretty much believe that great entrepreneurs and great companies solve a particular problem. The one that I've been focused on for most of my adult life has been buying and owning a car. My fundamental belief is that a car represents freedom and mobility, and that's a good thing. Most of the time, if I look back on my life, I get a car when something good is happening.

I'm either moving, my family's growing, I had a good financial event. So cars are a good milestone normally, but yet at the same time, I think most people feel that getting a car, going to a dealership, negotiating with a salesman, arranging for financing, getting insurance, managing the tax, the title, the registration, the maintenance, the repair, the things that go along with getting a car are some of the most high friction, intimidating things that are part of modern life, despite the fact that ride sharing has come along and transformed our thought about how we get around, 75% of people in America still need a car to get to work. So a car plays a pretty vital role and will continue to play a pretty vital role. And if you need any evidence of that, just the pandemic alone has really proven that the demand for mobility persists even in really, really adverse times. You know, right now, the demand that we're having on the used car side is absolutely an offset to the shortage of supply on the new car side, but the proof is real that we need mobility, and we need access to vehicles that we can control.

And so I think that that's where I've spent my time. I am a little bit stubborn. I've come at the same problem more than a dozen times, and all of these companies sort of feel to me a little bit like Groundhog Day. I continue to go back at the same problem, taking what we've learned. And in a lot of cases, we've had some success.

In a lot of cases, we've had failure. These are big capital intensive businesses. You know, the average automobile is a $35,000 thing on the new car side. It's a $20,000 thing on the used car side. You've got 15 and a half or 16,000,000 new cars a year being sold in The United States.

You've got another 50,000,000 used cars. So it's a incredibly large market. It's very high velocity. It involves a lot of moving parts because when you buy a car, you don't just pay for the car. You gotta pay for tax and title and registration, and then you gotta get insurance to drive it on public roads.

Everybody wants peace of mind. You gotta maintain this thing. You gotta fix it if it gets broken or you have an accident of some kind. So that's where I've decided to really focus somewhere along the way. We gained enough momentum, enough attention, enough interest from investors and partners where most of the companies I build today are filled with people that I've worked with in multiple businesses prior to that.

And so we're really sort of taking that institutional knowledge and carrying it forward. I think where we sit right now is at the very, very interesting tipping point or inflection point of how we all get access to mobility. We can talk a little bit about what we're doing, but all of these companies that I've had from auto access to one eight hundred car search to carsdirect.com to TrueCar and then ultimately Fair and now NextCar, All of these companies are basically the same thing. I've been trying to make buying and owning a car easier using technology. As we move up to you telling us what you're doing with NexCar, do you wanna start in the beginning going back?

I know when we chatted the other day, we found that there was overlap with one eight hundred car search. In terms of moving into this, do you wanna start out and tell us a little bit about how you got into this and what those early companies look like? Sure. Probably worth just giving the backdrop that I am a pathological entrepreneur. I am a multiple time college dropout.

I dropped out of West Point, and then I also dropped out of Cal Berkeley. This was in the early nineties. And at the time, it was just becoming cool to drop out of school and go on and start a business. I was up in the Bay Area. I did not drop out because it was cool.

I dropped out just because I was very, very eager to get started and to solve a problem. And for me, the advent of computers really offered, I think, an opportunity to organize the data and the information differently. My first company was an electronic database of used cars for sale, and it really was only accessible through a 1800 number, and we would fax you the listings. Because you were in the market for a used car, we would also bundle all the things we knew you had to have. So we would help you with extended service agreements and warranties, roadside assistance, insurance, all the things that came along with the natural adjacencies, if you will, to owning and operating a vehicle.

So I've been in this space for a long time. And as the Internet came along, we were really forced to say, how could we take a service business that was only accessible with a 1800 number and flip it to a digital business? That was a pretty easy transition. We were already in the mindset of thinking, what does the buy side or the sell side need? How do we serve them?

The computer and, really, the introduction of the GUI, the web interface in sort of 92, 93 time frame. And as soon as we launched, really, the browser and the ability to see visually pictures, you know, the early days was really about adoption. You could build these sites, but nobody could really upload the pictures. You were still on dial up. It was really important to have robust, almost just, you know, semantic information that you could use to organize this stuff, and this was really prior to the search engines.

I mean, the first search engines, Inc. Me and Yahoo, were just coming out at that time. So this was really early in the game, but, again, all these companies, same exact journey. One eight hundred CarSearch was really one of the first alternatives to the classifieds. Our primary competitor was the LA Times.

The LA Times at that time on the auto side was being run by a guy named Chip Perry. Chip Perry ultimately went on to build AutoTrader. I went on to build carsdirect.com as an Idealab CEO. So we competed both at one eight hundred car search. And in fact, one of the things that they did to compete against one eight hundred car searches, they ran full page ads in their own newspaper to say we're better than one eight hundred car search, which really precluded us from having to spend any money on advertising.

Chip and I, you know, have been friends and in the same space for a long time, ultimately hired Chip to come in and take over TrueCar when I retired from TrueCar in 2015. The space has really evolved from the early classifieds and people wanting information about cars for sale. The size of this market is just enormous. You've got, at any given time, about four and a half to 5,000,000 used cars for sale by as many as 60,000 car dealers. So depending on how long you're in market to buy a car, the sort of conventional wisdom that there are roughly 40 to 60,000,000 in market car shoppers knocking around on all of these sites and in all of these different marketplaces.

And today, that world has largely consolidated into about a half a dozen really core marketplaces like AutoTrader, cars.com, KBB, Edmunds, CarGurus, TrueCar, AutoWeb. But everything else is really all, at this point, relying on syndicating all of that listings information and then appending all of the other things that go with that used car transaction. Lead generation came out of that entire introduction to consumers. And today, the adoption of that kind of technology is really complete. If you're a car dealer, you go to market digitally.

And if you're a consumer, you use technology to find the car you're looking for. That is as close to a as a 100% true statement as possible. And it's almost not an option for a car dealer, for example, not to be listing their vehicles digitally. They're just not in the marketplace if they don't. I do know that, as you said, a lot of people now are going online, they're shop comparing, they're finding that car they want, but they're still going into the dealer and they're checking off the boxes and they're buying insurance they sometimes don't need or they understand service agreements they're buying they don't understand.

In terms of where we are today and where Nexstar wants to take us, how are you seeing the next evolution playing out? I've been doing this for nearly thirty years. Right. I have been asked from the very first company that I launched, Auto Access, when are we gonna be able to buy a car digitally? I think everybody has really tried to capture that flag, and certainly right now, folks like Carvana and others are getting the market or enterprise value, the market credit for making car buying as digital as possible.

But it turns out that purchasing a car is one of the most highly regulated retail transactions that exists, and there's a couple of reasons for it. You've got the purchase of a very expensive item. And so in the name of consumer protection, we have all sorts of laws, and these are laws that exist in all 50 states, and they're all different, to protect the consumer from getting taken advantage of. For example, one of these laws requires that if a dealer is gonna advertise a car for sale, they must advertise that car with a VIN number so that they cannot do what's called a bait and switch. They can't advertise and say, hey.

We've got a car for 15,000. The customer comes on down and says, I'm here to buy the car, and the dealer says, oh, that wasn't a real car. We sold that car. The dealer must have that car available, and by law, they publish the VIN number. And that way, the customer knows it's true.

Well, when those laws were first put on the books, the advertisement the actual laws in the state of California, for example, required a 12 font. That meant that if you're gonna advertise in the newspaper, it had to be at such a size so that the customer could make sure that it was legible. When that law was written, nobody anticipated that you would be in a world of infinite resolution where the font size doesn't really matter, and you can obviously see the VIN number on any kind of a digital advertisement, but that 12 font law still exists. Right? The second set of laws is really to make sure that the states are able to capture their tax revenue.

The sale of automobiles is one of the largest tax revenue generators for local municipalities and states that there is, period. And so the knock on effect of the government wanting to collect its money is that they have created a taxonomy around cars, not just based on VINs, but based on registration data and transaction data. And given the Freedom of Information Act and one of my companies, TrueCar, for example, we published what everyone else paid for their car because we could see all cars that were being purchased by VIN, and we could begin to deconstruct those transactions and know what everyone paid. And once you know what the herd is paying and you can distribute all of those prices on a Gaussian curve, we started with new cars under the assumption that a new car is a commodity. It shouldn't matter what dealer you buy the car from.

A black Corvette z r one with a certain option package is just like every other black Corvette z r one with the same option package. The problem was when we started looking at the data is that the price distribution between the customer who paid the most and the customer who paid the least for an identical car could vary by as much as 30%. What was more shocking is it could vary by as much as 30% at the same dealership at the same day with the salesperson. So it was really this asymmetry where you had customers who just largely were not informed. They didn't have the power of information.

And then once we unleashed that information, transparency is a really, really important thing because because that price distribution narrowed from 30% to 3%. And when we launched TrueCar, we could measure that usually within ninety days of launch in a new market that that price distribution would narrow, and we would sort of progress to the mean price. Of course, car dealers did not like that. They felt as if it was a race to the bottom. What we were hoping to do was remove friction from the process.

If a customer trusts a price, they show less resistance. They close a higher percentage of the time. They're very confident that they're getting a fair deal. It did take out the opportunity for the car dealer to have bell ringer deals with uninformed customers. You could be a first time car shopper.

You could be a disadvantaged car buyer. You could be somebody who traditionally feels like you need to take your dad with you to the dealership. You know, I've got two daughters. This idea that almost three fourths of all women feel they need to take a man with them to go car shopping, I just thought was completely ridiculous. And so when we introduced TrueCar, that price distribution would narrow and dealers sort of felt like we were publishing the magician's handbook, that they were at a real disadvantage.

Of course, some dealers leaned into that, and, really, the key to dealership profitability is to remove cost because if you're selling a commodity and another dealer's competing with you on the same exact wholesale price on that commodity Right. You win if you can sell it at a lower price and make more money. And so we had dealers who really did lean in, and they did very, very well on the program. Talk about polarization. We had some dealers that were huge fanboys.

We had some dealers that were just absolute detractors, wanted us to go away. It created a very high friction experience for me as an entrepreneur, but all part of that journey. Today, we operate in this highly regulated environment, and then you add to that auto finance. 95% of people don't pay cash for their car. The average automobile, no matter where you live on planet Earth, costs about one third of the average consumer's net worth.

So a car loan or a car lease, auto finance, is absolutely essential to getting into a car. As difficult as that, half of all consumers cannot afford an annual auto insurance policy. That's at odds with the fact that if you're gonna drive a car on public roads, you have to hold minimum collision and liability to be compliant with the law. So operating in these really compliant environments, if you're in the business of building software, is a great thing. We don't have to wonder what the law says.

Usually, laws get broken when you give it to a person and allow them to interpret the law. I have long felt that given that automotive and auto finance is very, very highly regulated, it's a wonderful way for us to apply technology and to write code that is completely legally and regulatorily compliant. And the way that we ultimately landed on what we're doing at NexCar is really around this issue of, can we make it easier and make it legal? What we landed on is similar to a lease. In a lease, which was introduced about thirty five years ago on the new car side, it was originally introduced by Mercedes Benz and then BMW, and George Bauer, my partner at both FAIR and then here at NexCar, is sort of widely considered the father of modern car leasing.

But a lease is phenomenal because you as the customer aren't buying a car. All you're doing is paying for the depreciation plus fees. So the magic trick with a lease is it tends to be cheaper for the lessee because you're not paying for the whole car. You're just paying for the depreciation plus expenses, and it also tends to be more profitable for the lessor. But it does change the business model because rather than being a manufacturer of a thing where you make a product and then you wholesale it or you make a product and then you retail it, and it's a one off transaction, which is what the auto industry has sort of been thinking it's in the business model of doing for the longest time.

The business model with the introduction of leasing began to shift because when you own the asset, you're in the fleet management business and the asset management business. At the end of a lease, the lessor owns the product. So they gotta be very good at estimating depreciation. That is more of an art than a science along the way. When I was building TrueCar, we also acquired a business called Automotive Lease Guide, ALG.

ALG is the dominant residual forecasting business in The US. Over 93% of manufacturers rely on ALG's residual forecasting to understand what a car is gonna be worth in two to three years. The average lease term is thirty six months. So this idea of understanding how a new car depreciates and really understanding what its future value is gonna be is a very, very important thing. And when we bought ALG, I started looking at all this data, and I noticed a couple of really interesting things.

The first was that cars don't depreciate to zero. Cars have a very long life, and as cars have been getting better and being produced in a more, you know, advanced way, these cars have a longer lifespan, mostly twenty years in many cases, but they tend to depreciate to about 10% of their original selling price. And the depreciation curve on every car, doesn't matter what brand, what make, is sort of a banana slide. It's very steep at the beginning when the car becomes a used car initially, and then it sort of slows down over time. So take a ten year old car.

It doesn't really depreciate much from year ten to year eleven. And if what you're financing is depreciation, the theory would be what you really wanna do is own used cars that have already gone through their most severe depreciation hit because most of the rent you could charge for access to that vehicle would be contribution margin. The other exciting thing about a lease is that because the customer doesn't buy a car, it is a much easier contract. Leasing started to get regulated about thirty years ago. It is deemed a financial contract.

However, subscriptions, which are synonymous with leasing, it's also synonymous with rental. In all three, rentals, subscriptions, and leasing, the customer doesn't own the car. The lessee or the lessor or the fleet leasing company owns the vehicle. If the theory of being a good entrepreneur, being a great company is that you have to solve a problem and you remove friction, By owning the car, we eliminate our drivers having to worry about title, registration, the payment of taxes. What we ended up bundling into our subscription at Fare and now at NexCar is maintenance, repair, roadside assistance.

So if you get the car and we we applied this whole concept, really, that took off in new cars to used cars. In the new car side of the business, leasing today is over 40% of all new cars, but more importantly, over 92% of all luxury and premium cars are leased. So this notion that people don't have equity in their cars is something that we're all used to. We pay for access to mobility, and, you know, I've got four kids. I've got one who's now 19 years old.

The worst thing that you could do as a parent is to tell your child to go out and borrow a whole bunch of money, go into soul crushing debt to buy a depreciating asset. What's really important to recognize is that 99.9% of cars are a depreciating asset. Very few cars appreciate in value. What we were able to do with subscriptions is allow customers to get access to mobility without having to go into debt and without having to buy a car. And because of that, we don't have to meet many of the legal and regulatory requirements that car selling or auto finance do.

We're not lending you money. We're not selling you a car. It's our car. We are effectively also now able to do the entire contract on the customer's phone. We can give our subscribers flexible access to mobility.

They can stay as long as they want, return the car when they have no longer a need for it. Great for college students, great for military, great for anybody who's gonna be in a remote city for work. The flexible need for mobility is also becoming a bigger and bigger part of modern life. But this idea that you don't have to go into debt, Today, the average car loan in America is seven years at 10% interest, and half of what everybody pays for their car payment is going to the money, not to the car. So you've got a real problem with debt in general.

I I think the pandemic has highlighted that as well. So getting access to mobility, and now we've got this short supply of used cars because we have a shortage of new cars. All of that demand has shifted onto the used car space. How you get access to mobility is becoming even more acute than ever before. So, Scott, when you refer to this, for instance, would you use the term leasing a car or renting a car?

I personally would use the term subscribing to a car because that's what we do. Okay. You know, and sort of subscriptions are part of modern life and everything else that we do. We subscribe to our content. We subscribe to pretty much everything.

A subscription is really the right term for it, but it is effectively a rental. It's just a flexible term rental. It's all inclusive. You can keep the car for years. You can keep the car for months.

We do require a three month minimum because we don't want people to think of it like a short term rental partly because we've priced it at half the price of a rental. If you wanted to go get a similar car, and these are not rental cars, these are cars that are otherwise for sale at a car dealer. This is a financial contract. You can buy a car or you can subscribe to the car. It's the same car, but you get the benefit of going out and shopping and having all the variety of four and a half million cars being offered for sale by 60,000 dealers.

We're sort of a new form of lender that is willing to buy the car and then simultaneously rent it to you in the form of a subscription. 100% digital, managed all on your phone. There's only two things that you need as a subscriber. You need a valid driver's license and you need a digital form of payment. By the way, this is the exact same thing you need to rent a scooter.

You simply download the app. You scan your driver's license. We're doing all of the background checks. Almost everything that you would normally have to do at a car dealer to get a car loan that takes hours and hours is happening instantaneously today. The technology is so, so far advanced.

Dealers are shocked when they see how much information we have and how much we can do right on the phone without having to go through a traditional credit application or traditional process. But you can get this entire thing on a credit card. You cannot pay a car loan, for example, with your credit card or a car lease with a credit card because you cannot pay debt with debt. But you can subscribe to a car with a credit card. So, Scott, one of the things I'm interested in is we're going into this and understanding the subscription model.

How do you handle the issue of inventory? It's important to first recognize we're talking about a massive, highly fragmented market. You've got 60,000 car dealers that sell cars, and those car dealers fall into roughly two categories. You've got about 12 or 13,000 franchise car dealers that sell new cars of a particular brand, but they also all sell used cars. Aside from that, you've got another almost 50,000 independent car dealers that sell only used cars.

And car dealers can sort of vary in size from 10 cars on the lot up to thousands. The average car dealer in America has about a 120 cars for sale. So you've got this very, very robust market of sellers, and a lot of these dealers feel pretty much left out of the party. You've got companies like Carvana who have all of a sudden gone from being a $1,000,000,000 unicorn two years ago to being a $50,000,000,000 company today. It is really a fascinating story of how the capital markets reward potential and growth ahead of profit.

Carvana, on an adjusted basis, has made profit, but it is not yet a really profitable business. It has just been growing at extraordinary rates. And, really, they are trading on the zeitgeist, the enthusiasm for delivering a car to your house. Obviously, in a pandemic, for the first time, the industry realized, oh, people aren't gonna come into the car dealership for hours and hours and get trapped in a room in the back of the dealership in the way that they were once used to. So the industry has really given up the resistance to saying, we're gonna go ahead and make this consumer friendly.

I've been trying to make buying a car in your driveway possible through a lot of these different businesses. Carvana really was the first that built the logistics network to be able to deliver on that promise. They really are, at their core, a reconditioning business. They have these large regional reconditioning facilities, and they are in the logistics business of delivering that car to your driveway. But make no mistake, they're a car dealer.

When you buy a car from Carvana, you gotta fill out all the same paperwork. Most people get a car loan. You gotta get car insurance. It is identical to all the other stuff. So I would say that to the answer of the question, you know, when are we gonna be able to buy a car digitally, it is no time soon in terms of a traditional car purchase.

But the brick and mortar car dealers, the other brick and mortar car dealers other than Carvana and then maybe a couple of other entrants like Vroom and Shift, all of these other brick and mortar investments that these car dealers have around the country are largely getting not rewarded. Right? You've got Carvana and these guys that are getting a massive enterprise value relative to what is happening in the brick and mortar world. Take companies like AutoNation, Penske Automotive Group, Sonic, Lithia, Asbury, Hendricks. These are all traditional automotive consolidators that are generating not just top line, but they are generating cold, hard train ride in cash net income.

You know, you've got a company like AutoNation, for example, that drops a billion dollars of net income, pure profit to the bottom line every year. They're massive. They're still larger than Carvana, and yet they are one fifth as valuable of a company. So what that does is it creates a lot of angst amongst car dealers, which are generally very successful business owners, no matter what size they are, in all parts of the country, operating in their regional areas. And if you're a franchise dealer, you have certain protections because you're a franchisee.

If you're just an independent car dealer, you gotta comply with all these laws. But it's very hard to break in to the market as consumer behavior is shifting so rapidly. The pandemic really was a catalyst for this change, and to see how the capital markets have really reset their bet from traditional retail distribution to this new model is fascinating because they're just saying, we think the future of buying a car is gonna be much more digital, but depending on which state you're operating in, you cannot, for example, sign the contract electronically. You have to have a wet signature on a contract, and it's really in triplicate. There are all these very, very real impediments to being able to purchase a car online, and, really, what's happened is much of the shopping experience has become digital.

You know, hats off to folks like Carvana and others that have made shopping for a car very, very simple. You do it from home, but you're looking through a subset of the total inventory, and you're just looking at those cars that they have control over. And then you pick a car, they bring it to you, or they find the car that you're looking for. It's a very, very interesting logistics and reconditioning business. That's their core competency, fundamentally different than a traditional car dealer, but they are being valued for that potential that they represent.

I think that in our business, it's created a sort of black swan event where we are now able to partner with traditional brick and mortar car dealers to do things that prior to the pandemic, they never would have done. Almost every car dealer today, at no cost, will deliver a car to a customer's home on our behalf. That's a big deal. That means that we can be competitive. We can work with folks like Carvana.

We can work with folks like AutoNation. We can work with even smaller dealers. And if they're perfectly okay to deliver on the in your driveway promise, what we've got in terms of a contract is fundamentally easier because when you're not buying a car and you're not borrowing money, the contract can live entirely on your phone. We do not have a triplicate or offline wet signature required. There's no further negotiation.

Because we're not lending you money, there's no interest rate, there's no money factor, there's no residual, there's no term. All of these things are hyper simplified in a subscription because we're also not selling you a car. We don't even have to have a selling price on the car. We can just show the car as a monthly payment. If you go back to the high level numbers here, 95% of people do not pay cash for their car.

If you talk to a car salesman about how they sell the car, they sell the monthly payment. Because if people are getting financing, it's really what can they afford. And this is also structurally why car loans are becoming longer and longer because the denominator in the math problem that drives to a monthly payment is term. What was a three year car loan, four year car loan, five year car loan has now become a seven or an eight year, and now we're starting to see nine year car loans. People are getting married to their car.

They are upside down on that car for most of that car loan's life. And so today, you've got a situation where almost half of everybody who's in a car loan is in negative equity on their car. They're upside down. Now what the auto industry has tended to do is figure out a way to allow you to roll your negative equity into your next transaction. So we're just sort of accumulating all of this negative equity and pushing it off to consumers.

Subscriptions really sidestep all of that. The way that our business works is because a 100% of dealers are already going to market digitally, we do not have to ask them to do anything exotic or unique or different to be able to present all of their inventory in our environment. What we do is map those cars by VIN to all of the original brochure where from when that car was new, all the information, all the maintenance history. So we can put a very robust presentation together. It's a very new car like shopping experience, but for a used car.

Once you select the car, we also can get, on average, between thirty and forty actual photos of that car, and we do not require any individual dealer integration. We're looking at all of the APIs from those marketplaces that I referenced. So a lot of that work and the state of technology today really does enable a completely different shopping experience that allows you to not just shop for 20,000 cars or 40,000 cars like at Carvana. We can show you millions of cars. We basically turn every car that is for sale into a subscription ready car.

The one assumption we make as a business is that if a dealer is advertising a car for sale, that that car is retail ready, which means it's subscription ready. That car does not need any kind of additional work to get on the road. What's fascinating to me, as I hear you talking about this, Scott, is I think back about timing in life is everything. And when one eight hundred car search started, it was a brilliant concept, brilliant execution, but the world wasn't quite ready for it at that time. When I look at my history as a consumer, but also as a lawyer and restructuring person, I think back to one.

When cars came out years and years ago, they broke down a lot. They had a much shorter life span. There was the depreciation, of course, off the lot, but I was an early adapter. I started buying used Porsches and cars like that where they did last for a long time, but you've got a huge savings when you bought it that way. If you fast forward now and you look at companies like Commerce Hub, which were the backbone for the Internet where they solve the inventory problem for drop shipping by having 3,000 suppliers, 10 box retailers, where essentially you could go on to the retailer site.

They didn't have to own anything, but they could have you shipped a Montblanc pen or wine glasses from anywhere with no inventory costing. Commerce Hub was basically the hub that put all that together. What I hear you doing is you're saying, okay, we have all these regulatory challenges, but the new generation, everybody else, they're less in the ownership. The bottom line is they're all saving for houses. They all are looking for value and a way to get in and out with simplicity.

They're very Internet savvy, and at the end of the day, you're taking this asset where in a sense, it has not really changed in terms of its life expectancy after a year or so, but you're giving people an opportunity to get into a very high end product where it's got much of its useful life there to go. Its price point has been drastically reduced because you've taken away that depreciation, and you've given them a simple entry point. It sounds like you are literally gonna revolutionize how people see cars. Well, again, if you think about how leasing started, it was introduced as something for the high end consumer because they could pay tax monthly. So in a lease, you don't pay tax upfront.

You pay taxes. You use the vehicle, so you pay it every month. So rather than buying a car and paying 10% tax, you would just pay 10% a month. That was the primary original advantage of car leasing. And so it was really available to executives and people who had a car allowance usually at work, and they would go ahead and lease a car.

Today, leasing is the number one way to get a car because it gives you more car for less money because you're not financing the whole car. We think the same is true of used cars, but I'll make a very, very bold prediction. I think that how we get access to mobility is literally about to change because today on planet Earth, you've got 1,550,000,000 cars. These are all used cars now, and you're adding 80,000,000 new cars on top of that every year. But you got 1,550,000,000 used cars.

They change hands 15% a year. So you've got a very high velocity market. And because of the nature of debt and what has to happen, you're issuing a little over $6,000,000,000,000 of consumer automotive debt, and that debt is really upside down in terms of the people who can least afford to go into debt are paying the most for the money. So you've got a really big issue that is a growing problem for the car business. I also think when you add on top of that, as cars become more autonomous, more connected, more electric, the cost of the car goes up.

And when the cost of the car goes up, and it's been going up more dramatically over the last five years than it has over the last hundred on a ratable basis, When a cost of a car goes up, it becomes unattainable for a bigger and bigger segment of the population. You've really got this issue of how are people gonna be able to afford going into debt to buy an ever more expensive thing going forward? And then you complicate that with the fact that electric cars, one of the big, big fundamental beliefs is that they last longer and they cost less to keep on the road, which is a great value proposition. It really does make an electric car a perfect candidate for a different financial contract, like a lease, where as a subscriber or a lessee, you are just paying for the depreciation. The depreciation curve should be slower because the lifetime value of that car is longer, but the original cap cost is higher.

So having a different financial contract where you're only paying for a portion of that vehicle is much, much smarter. Our belief is that look at all the new electric vehicle entrants, whether it's Fisker, Canoo, Lucid. They do not promote their selling price. In the case of Lucid, people aren't gonna pay close to $200,000 for an electric car that hasn't yet hit mass market. In the case of Fisker, they haven't even published what that price is gonna be.

They publish a monthly payment. And, really, what they're looking to do is become fleet operators. They're They're no longer gonna be in the business of manufacturing and selling a thing. And that's actually really important because take a company like Rivian. They're completely oversubscribed.

They cannot make enough cars, but the reality is they need to think differently about their business model. It's not as though Silicon Valley beat Detroit. It's that the business model is fundamentally different. If you can get recurring revenue from your customer base over the lifetime of their need for mobility, you're gonna be much better off than just selling them a product, having them go into debt, and taking that risk off of your hands. In cases like Rivian, when they can't make enough cars to satisfy the demand for their product, the ability to take cars back off of lease effectively and then give them to a new cohort of customers who can afford a used Rivian into a subscription, creates a used car factory that's as big as their new car factory was three years ago.

And, really, everything compounds. So instead of selling a 100,000 cars a year, in three years, they're selling 300,000 cars in terms of revenue. They're actually compounding their ability to generate revenue. The two narratives for the car business going forward are gonna be better asset utilization, recurring revenue from customers over time. And I think that we're seeing that, not just in leasing, but I think that subscriptions are gonna become a bigger and bigger part of that.

I've got a 19 year old. He got one of our first subscriptions at fair, and he's about to get another car at NextCar. He came to me after his first turn through a car, and he just said, dad, prior to subscriptions, how did kids going to college get cars? And the answer is your parents got you the darn car. I mean, getting started in life, a car is a really big, vexing, intimidating thing.

So this idea, though, that you can subscribe to the car, give it back if you can't maintain those payments, and just use it for what you need is really at the core of what we've built. It is a perfect fit. We do think that it is going to transform everything. It turns out that the revenue per user and this retention of customers and their ability to generate more revenue is a much, much better business model than manufacturing and retailing a one off thing. It's a very exciting time.

So what we're doing on the used car side, we think, is gonna be pervasive on the new car side as electric car companies continue to get introduced. These companies are well capitalized. They're gonna have to do what Tesla did. Tesla is guaranteeing residuals. They took massive risk on guaranteeing the residuals on their cars.

It was the only way that they could get the monthly payment on a model three and a model y down below the threshold of the median price point for a car in America today. That is pretty simply a magic trick. The four variables that go into a modern lease are the selling price, the interest rate or money factor, the residual, and the term, and they couldn't mess with any of the things other than the residual. So they took huge residual value risk. They wanna take these cars back, put them into their robo taxi fleet.

They've overestimated what that car is gonna be worth relative to market comparables, and that was a risky position that has paid off for them. It's an amazing story to watch. But what companies like Tesla, I think, are also gonna be looking at is how do we allow a whole new cohort of customers who don't have access to a 100,000 brand new Tesla the access to a heavily depreciated vehicle that's still good and great to drive an electric car, they're now producing at scale. I mean, nobody's even close to matching their sort of size or volume. That is gonna open up the door to use vehicle subscriptions in a very big way for them as well.

So, Scott, in terms of where the puck is going with the sale of cars and making the buyer experience much easier, if you had to prophesize in terms of where the world is going, how does self driving vehicles play into this? Well, again, I think there's this whole trend towards more technology going into the car. Certainly, it starts with batteries and electric cars. It is also at an accelerated pace happening in terms of the connected car, autonomous technology. So as we see cars that are more connected, more autonomous, more electric, the cap cost goes up.

I think it definitely changes the role of a car dealer. It changes the role of a car manufacturer. It changes the importance of a fleet operator. What we are at NexCar is basically a new kind of automotive bank. We're willing to finance the fleet of cars and own those cars over multiple subscribers and get them back out on the road.

We wanna work with manufacturers to do that. Really, we operate like a mobility REIT where we don't own these cars. We're helping our dealer partners to participate in this transformation that's going on. I think that smart dealers are really fundamentally changing the game and understanding that this is just a new financial contract. It's totally digital.

The cool thing about what we're talking about is this is a sold transaction for a dealer. When a dealer puts a car into subscription, they sell the car. So it's not as though the dealer's business is changing. We are really complementing what they're doing. We're reducing their customer acquisition cost.

We're bringing them customers. We're leveraging their inventory. It allows them to be very, very successful, and so there will be winners and losers in that. There are a lot of dealers that are running for the exits. I think there are a lot of dealers looking for how to participate, a lot of dealers looking to majorly transform themselves and be part of this ecosystem like a Vroom or a Shift, and there will be others that follow for sure.

It seems like a perfect hedge though. I mean, it's another distribution channel for them. You were talking about how for dealers, the most important thing is how do they control their cost. And at the end of the day, it seems to me, other than the inventory cost of holding that car, you're making it very inexpensive for them. And if somebody walks into their dealership, I'm assuming, right, that person can still buy the car off the lot, But can I be on your network and at the same time have the ability to sell it and then pull the car off?

I mean, do I have that optionality? Yeah. For what we're doing, we think of cars as bags of cash. And the keys for us are never being negative equity on the car and also be able to get in and out of that car very easily. So most consumers can't buy and sell cars easily.

It's a pretty gnarly transaction. It's complex. It takes time. They don't have the advantage of having wholesale access to inventory. They don't have the access to a retail outlet to sell their car when they're done, so we do.

That's really, I think, part of the arbitrage in our business. We're taking a lot of risk. It's very capital intensive. We have a balance sheet. I was having a super interesting conversation just yesterday with a celebrity here in Los Angeles.

For whatever reason, because I keep building these companies in LA. I'm sort of everybody's friend in the car business. And so anybody who needs a car calls me, and the celebrity called and said, I get followed by the paparazzi with every car I get. And so I'm changing out my cars every two or three months so that they don't know what car I have, and it's a pain in the ass. I gotta pay tax.

I gotta title. I gotta register. I'm always moving through inventory. I've always got four cars out front. I'm moving them around.

I'm like, well, why not just subscribe and flip out of one car and flip into another car? It's really perfect. I mean, it's such a fringe application of this whole thing, but a flexible need for mobility that's all on your phone, that's totally digital, perfect for this person. Well, and Scott, when I was younger, and you see this today obviously with wealthy people that have garages full of cars, I'm thinking back to, you know, when I was younger. If I could lease a car for three months and then change it in and get another car for three months, I mean, there's something to be said about.

We don't all like going to the same restaurant. And yes, you know the statistic. I don't know what the average person owns their car, but it's gotta be at least three years, that lease schedule you're talking about. If all of a sudden, I can have a car for three months, some people it's just a mode of transportation. But there's a number of people that are still car people.

Right? And the idea that they can lease one car for three months and then another car, I have to think there's a part of the market that would love that as well. You know, it's interesting. So I've got a garage full of cars. Somehow that doesn't surprise me.

And my cars fall into two buckets. I have cars that are appreciating. They're collector cars, and I own those cars. And I love those cars, and they are all nonelectric cars but one, and they are all sort of special things that I love. And then I have leases on another three cars.

One of them is a subscription, and the other two are a lease. So I have the need for mobility. I've got a large family. I've gotta be able to get everybody around. So all of my transportation needs fall into those two buckets.

I think this idea, though, of going into soul crushing debt for the average person to buy a depreciating asset, it's a horrible trade. Again and again, the allure of I'm gonna buy the car, own equity, and I'm somehow that's a good trade is quite literally 99.9% of the time. That is not a good idea at all. It can all be priced out. We take a lot of that risk out of the equation, and it does work for the existing industry.

So the prediction is it's gonna be fundamentally different. You're not gonna have to go through the headache and the brain damage of buying a car, negotiating for a car, getting a car loan, going into debt. It's gonna happen entirely on your phone. It will get even easier. Everything will be just simply as shopping, seeing the monthly payment.

You know, one of the things you still cannot do today on the web is shop for cars based on monthly payment with an actual monthly payment. Everything's based on, would you like us to estimate your car loan? What a nightmare. What we're really focused on being able to enable is this shop by monthly payment and see actual cars, and they're not rental cars. These are cars you could otherwise buy.

Well, and Scott, what's fascinating about that is I don't even remember who told me this, but I'm sure it's true, and you'll tell me if it's not. That again, the average American, when they're looking at their buying of a car, the swing of 10 or $20 a month is material to them. The notion that you can tell them, at this price, this is what you can get into, and they can take that to the bank. That's gotta be a huge anxiety saver and a really practical advantage. Yeah.

It is all about monthly payment. It's really what it comes down to. It turns out the longer that you wanna hold a car, the more your monthly payment can come down, but then you're into this transaction where you're upside down on the car. A rental car, for example, is the easiest way to get a car without putting money down. You don't have to put a down payment down to get a rental car, but a rental car tends to cost you on average between 1,500 and $2,000 a month for an average car.

That is just prohibitive for most people. And then when you move into a subscription, we're about half the cost of a rental, but more importantly, we're about 20 or 30% less than a four year car loan. So the ability for you to get a car for cheaper through a subscription is really a new option. We think it really to take off, the dealers have to be offering this at the point of sale too. I'm not expecting everybody to change their front end shopping behavior.

We really wanna partner with dealers on a brick and mortar basis, give them access to a customer, and meet them where they're at in a different way. And there is nobody else doing this. I mean, it is literally a white space in the market. All the manufacturers are gonna be doing it on the electric side, and as cars become more expensive, subscriptions will become more and more and more prevalent. But it's happening in Europe.

There are already 40 subscription platforms that have emerged in Europe in the last eight hundred days. 40. Wow. Yeah. Look at it.

It makes complete sense to me, and this has been very exciting, Scott. The moral to the story is when we were talking about this interview, you said, you know, you wanna tell us about what you're doing. I said, I'm just doing the same darn thing I have been doing for thirty years, and we're on the same mission. Everybody who's part of my team is on that mission to make buying and owning a car easier using technology. We believe that subscriptions are the way to do that.

We're heading into quite literally the biggest market that there is. There is no bigger market than vehicles. It's a high velocity, high ticket item, and it's very gnarly, and that's exactly what you're looking to disrupt when you go in as an entrepreneur. You're looking for solving a real problem that you can point to with a real solution. Scott, listen.

Thank you very, very much for this today. This has been very exciting, and I've learned something, and I now know I have some options in terms of my own life, because I can see this play out in so many different ways for people. It's clearly an evolution. They always say revolutions fail, evolutions succeed. You have been evolving the auto industry for thirty years, and I'm excited to watch the next period of time and see where this goes.

Jim, thanks for having me.