Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy where I interview entrepreneurs about how they built their businesses for an audience of real entrepreneurs who are listening in, learning, and then often using what they learned to build their own companies. And joining me is a guy who worked at a construction company, saw that cars were being sold at auction and said, “You know what? I think this could be brought online.” And this was back in 1999 when it felt like sometimes everyone wanted to bring everything online and other times it seemed like it was silly to bring everything online. He was the guy who said, “I’m going for it. I think this makes a lot of sense.” And he built up a company that did just that.
His name is Peter Kelly. The company is Openlane. They did online auctions in North America for automotive dealers to buy and sell wholesale vehicles. They’re still doing it. He ended up . . . I say they and speak in past tense a little bit because he sold the company. And I invited him here to talk about how he launched the business, how he came up with the idea, how he got customers, what happened when things were about to fall apart for the internet, and then how he recovered and why he sold.
This interview is sponsored by two phenomenal sponsors, the first will host your website, right, it’s called HostGator. The second will help you hire developers, it’s called Toptal, but I’ll tell you about those later.
Peter, I’m looking at your face as I talk about this. I feel like there’s something that I said that didn’t land right with you that you were like, “I’ll go with it, but not exactly.” What was that?
Peter: No, you got the narrative right, but just those that I guess you did pick up on that. A little bit of a slightly more complex story from construction to cars. So maybe I’ll fill in a little bit of that story if that’s okay, Andrew. I guess, first of all, a little bit of an accent. I grew up in Ireland and grew up in a farm, went to college in Dublin, graduated as a civil engineer. And that led me to my construction career which was in the UK where I worked for a large construction firm for about eight years. Really enjoyed that building, you know, highways and bridges, dams, things like that. I had a lot of fun doing that.
Andrew: Did it kind of come across as I was making you out to be a construction worker who said, “Hey, look this internet thing and . . . ” No.
Peter: No. No. Not at all. But just how do you connect the dots? So I . . .
Andrew: I’m sorry to interrupt, but we’re going to let the story unfold throughout the hour. I know that I oversimplified it. As long as I didn’t get anything right, I’m fine with that. Why don’t we give people a sense of size? How much did you sell the company for?
Peter: We sold a company for $250 million in 2011.
Andrew: Two-hundred and fifty. It was 210 million in cash plus what was it? Was it 40 million on the books? Is that where the other 40 came from?
Peter: Well, in aggregate it was 200 . . . We had some . . . It was 250 including the assets we had on the books. Yeah.
Andrew: Got it. Do you remember the day that that sale happened? I’m trying to give people a little tease for what’s happening and also startup with the exciting part.
Peter: It closed in November of 2011. It was announced in August, I can’t remember the specific dates.
Andrew: There wasn’t one day where you sign you said, “This whole thing, this wild ride that I’d been on,” really was a wild ride at a time, “it’s over. I feel good.” or, “I can’t believe I did this. I could have maybe gone bigger.” You don’t remember a day when you felt any of that.
Peter: You know what? I felt good about the transaction. I felt we’d accomplished a lot. I mean, there’s been a lot of good days in the overall story. But I think as you know, Andrew, I never actually left. I ended up continuing on with the company and today I’m the president of the company that acquired us. So I had promised my wife I would take a year off and we’ll travel around the world and I still owe her that, although we’ve done a little bit of travel since we sold the company.
Andrew: Even though it’s been nine years, you still didn’t take that one year off yet. By the way . . .
Peter: Didn’t take one year off. We took a little time off. Yeah.
Andrew: You mentioned growing up on a farm. What was that like?
Peter: Well, I think that kind of played in a little bit to the entrepreneurial story because, first of all, growing up on a farm was fun. It’s kind of, you know, in some respects, I guess it’s the only childhood I knew, but it was kind of an idyllic childhood in some respects. But I remember my dad, as a farmer, you’re essentially self-employed. It’s not exactly entrepreneurial, but you are your own boss. And I remember my dad talking to me or to all of us about the satisfaction he got from being his own boss. I can remember those conversations. And not having to sort of listen to anyone or be told what to do. And that always sort of was in the back of my mind as, you know, be your own boss, start your own business, was kind of somewhere there in the background. Right? And I think that played into my ultimate decision to ultimately start a company. I think that that was part of it. Yeah, for sure.
Andrew: By the way, it wasn’t an easy job that he had or an easy existence that he had. Didn’t you have to go get side jobs because it wasn’t enough money from the farm?
Peter: Well, my dad had . . . My dad in addition to being a farmer had another job to support the family. Yeah. So he compared and contrast his two jobs, his farming life, which I think he enjoyed the most and the other job which he kind of did help put food on the table. And as kids, yeah, we were kind of the free labor on the farm. We all learned the value of hard work at a young age on the farm. I think that was pretty typical for families like ours in that environment.
Andrew: Do you relate to any of what I felt? My dad was a lifelong entrepreneur, but I remember the low periods where he couldn’t pay the phone bill for one period. And that made me realize it could always go away at any moment and I had from the beginning in addition to unbridled optimism, this unexplained fear that it could all go away and it made me work harder, later and at times less out of enthusiasm and more out of a sense of potential disaster. Did you get any of that from your childhood?
Peter: Perhaps a little bit because my dad . . . I mentioned he was a farmer, but one area he was, I’d say, somewhat entrepreneurial, he actually acquired other farms and he built his farm into a bigger farm, right? So a neighboring farm might come up for sale and he would take out a loan and buy it and put it together and the farm kind of grew over those years. But then I remember, and this is probably in the mid-’70s in Ireland, interest rates went through the roof. Our interest rates went up into the 18, 19, 20% level. And when you have multiple loans out on multiple properties, your debt becomes a challenge. And, you know, frankly, our parents protected us from the details of that as kids. We didn’t see the numbers, but we could tell that things weren’t as comfortable as, you know, that there was certainly some tough decisions. And I think my dad said, “I’m not doing that again.” After his last farm he was like, “Okay. I got this one paid off. I’m never going to put myself in that situation again,” because he probably . . . And again, I didn’t have . . . I was 10 years old or something. He probably was at risk of losing some of it and just didn’t want to share that with us. Yeah. So that may have played into something. I think I never actually thought about, but it’s possible.
Andrew: You spent eight years at Taylor Woodrow. That’s the company you were starting to tell me about. Doing what?
Peter: Yeah. So Taylor Woodrow was the company. They were a large construction firm and I was in what’s called a civil engineering division. So I was basically a project manager or working on a construction site but in a management capacity, building, I would say infrastructure. So my first project was some bridges and London highway and some bridges in London. I did some water treatment plant. I did some environmental projects, highways tunnels, moving around the UK. Very fun. You would go into a new project, which often meant moving to a new town or a new city. And there was a piece of property or a greenfield and you had to basically build something. And over the course of 6, 12, 18 months you had to pull together a team, get to community, hire workers, project done and try to make money for the company, so on and so forth. So, yeah, that was the role.
Andrew: And one of the things that our producer told me about you was that you were someone who was still very creative and entrepreneurial within the job. In fact, at one point, you said cost accounting for a project yourself in Excel and there was something about that tells us about how you were thinking back then. Do you know what I’m talking about? What did you do?
Peter: I’d forgotten that. Yeah. So, again, if you think of the timeframe here, it was the ’90s. Right? So we were starting to get the bent at least in the UK back then and personal computing was coming on more strong, Excel, Lotus1-2-3, WordPerfect [inaudible 00:09:14] personal product too. So I was very . . . I guess I was very conscious of two things. One, I’ve got a project that I’ve got to get built here, so there’s something real we’ve got to build. But secondarily, we have to make money because at the end of day, the company is here to execute this project but to make profit for shareholders. So I was really kind of keen to how does that financial equation work for this project? I can understand pouring cement or putting up steel, but how do I know that we’re doing it productively, making money?
And there used to be a role back then called the quantity surveyor which is kind of like an accountant. You’d have an accounting person on your staff. But I guess I kind of figured out that if you just were good at Excel and could kind of model this out yourself, you may doubt that person, but also have a deeper understanding of the economics of your project. And, you know, I tried to do that. I just felt that was kind of valuable to do. Yeah.
Andrew: I feel like there are people today who are doing that with, say, programs like Zapier or Airtable. They’re recognizing that there are ways to get things done in a company by cutting out other people in the company and speeding it along using software. And if you’re aware of it, you’ve got an advantage. But it says something about you that you were also into technology. In fact, didn’t you go to New York or was it . . . Where was it? In America where you were working with a client, had a huge set of construction documents, you emailed it back to the UK, and there was a . . . They didn’t even understand exactly what you were doing. Am I right?
Peter: Yeah. So that’s an interesting one. Again, in this era, yeah, we had an American client who was one of my later projects. So I came over, it was Kentucky at the time. We had a very nice visit out there. It was my first trip to the U.S. I believe. And I got to see some of their plants here in the U.S. and they wanted to build a similar plant in the UK. So I was hanging out here with a construction firm, we got a bunch of construction documents, digitize them. And then we basically said, “We’ll see if we can email these across to the UK.” And I think it was kind of a revelation for all of us, the clients, the U.S. construction firm, the UK . . . We were kind of . . . I remember I was back in the UK at the time where they’re saying, “We’re hitting send now.” And then, like, five minutes later a file shows up and we’re like, “We got it.” So, you know, it’s something we all take for granted, but back then we just hadn’t done that before. And being able to digitize these big drawings and send across a package and just see them appear on your screen. Yeah.
Andrew: You know what? I wonder what your motivation is. I think we all have these friends who will get Google Glass when Google first makes it available or sign up for the virtual reality this or that. And some of them you feel like they’re just wasting their time getting distracted by technology and others are thinking about it differently. I feel like you were getting into these new technologies for a reason, but I don’t yet know what. What was it? Was it that you just loved technology? Were you looking for an edge? What was it? What does it say about you?
Peter: Yeah. I would say that I’m not at the bleeding edge of technology. I’m not the . . . I’ve never owned Google Glass. I’m not the first to buy a new iPhone. I’m just not. So I’m probably somewhere . . . I’m not at the other end of the tail either, but I’m not at the core. I’m not going to . . .
Andrew: Because of what? Because you’re . . . You’re still further ahead than most people.
Peter: Yeah.
Andrew: Because of what? What are you looking for out of technology?
Peter: I think what I’m looking for is how can that make me more effective, make our organization more effective that would solve the customer problem? Particularly, you know, if we’ve got routine, lower value-added kind of tasks, how can we just get this digitized and kind of move on? So I think . . . I guess while I’m not an early adopter of the device, I don’t need to have the smartest thing in my hand. I am always, and I think in my role today, still look very much of, “Okay. Where is our industry headed? How is this business process going to evolve? What’s the vision of the future? And then why can’t we be the people to make that happen? Why do we have to wait for somebody else to do it? Why can’t we just go on and get that done?” And I think that’s something that I try to bring with some success and some failures you might imagine. I haven’t been successful in all of these things, but that’s the kind of thinking I try to bring it. And frankly, I think in the role I’m in today, I think it’s even more important to do that.
Andrew: How? How do you do it today? What’s the role today and then how do you do it today? And we’ll come back to your story in a moment.
Peter: Yeah. I think, you know, in the role I’m overseeing an organization of 15,000 employees. Trying to set a vision for the future so that people can align around, “Okay. What are we trying to accomplish here? How do we know if we’re being successful or not?” And I think in all industries today, and ours is no exception, I think our industries are being fundamentally transformed to digital technology. And that’s taking place over multiple decades, but it’s an ongoing continuous process. And frankly, if you don’t keep up with that as an organization, you’re going to get left behind, you’re going to get killed, right? So, instead of that, you have to kind of make the best decisions you can around where do we think the future is going to be for industry for the things we do? And how do we need to start to look like that type of organization? What changes do we need to make today?
Andrew: So what are you seeing for the future and how did you come up with it? By the way, we’re looking at a business right now that’s a publicly-traded company. It’s worth what? 2.8 billion, 2.9 billion market cap . . .
Peter: Yeah.
Andrew: . . . that you’re leading? So what are you seeing that’s changing and how do you know about it? Again, I’m always looking for your thought process to understand how you arrive at your decisions.
Peter: I think . . . I’d say, first of all, I think our industry like many others, fundamentally is moving in an ever more digital direction. So, you know, for example, we sell about three and a half million cars a year through our platforms, digital and physical, but every year we see incrementally more of them selling to digital buyers. Right? So that’s an ongoing trend. We’re starting to have a discussion now. Do we see a point where all of them sell to digital buyers where the whole buyer experience becomes a digital experience? I think that’s going to happen in my lifetime.
Andrew: Meaning that individuals will not go into a dealership to buy a car?
Peter: No. Actually, sorry. In our environment . . .
Andrew: Dealers.
Peter: . . . our buyers are always dealers. Our buyers are . . . So we’re a B2B company, our buyers are always dealers, but those dealers are increasingly doing their transacting online.
Andrew: Okay.
Peter: And data. We run a large network of physical automotive auctions where cars are brought to transporters, these auctions cleaned, reconditioned, repaired, running auctions, physical events at the site with dealers attending in person. That world is evolving in a more digital direction, but basically, I think we see . . . I think we have this neat mix of physical assets and network of physical assets across North America, large volumes of vehicles, digital platforms, and how do we bring those together in a way that makes sense not just today, but in the future. And I think viewed to that lens, the technology footprint within our business will continue to expand, the data footprint within our business will continue to expand, things like artificial intelligence, valuation, tools, damage recognition of vehicles. These are technologies. Those become very important to us. They’re important today. They’ll become more important in the future. So, you know, how do we establish this vision? I’d say a lot of dialogue, dialogue with customers, directly talking to our customers, our sellers and our buyers, trying to do some market research, competitive analysis, and then just dialogue with our team, trying to build a company. Do we all see this the same way?
Andrew: Forgive me, Peter. You’re still talking to your customers and when you’re talking to them, how are you leading the conversation in a way that lets you see the future and know what you need to do?
Peter: I always like to . . . In any conversation with a customer, I like to ask open-ended questions like, “How are we doing serving you? Are we meeting your needs?” And let them tell us . . . Generally, customers want to tell you some good things like, “It’s going great here, but I have a problem here.” Right? “What are your biggest challenges?” A lot of our customers are global OEMs motor manufacturers. “What are your key priorities for your organization this year in 2020? What are you trying to accomplish? How can we help you accomplish that?” I think those types of conversations can be insightful. And then, of course, sharing with them, “We’re thinking of these types of investments. What do you think of this? Is this something you would be potentially interested in? Would you like to be a pilot customer with us on this new initiative? Let’s learn together.” Those are kind of opportunities we look for with our customers.
Andrew: So, truthfully, the types of stuff that even new entrepreneurs with a brand new business are doing you’re still doing it on a bigger level. Let me take a moment to talk about my first sponsor, and then I want to come back and ask you about Stanford and how at Stanford you found your business idea and how you used that experience to help you flesh it out.
My first sponsor is a company called HostGator for hosting websites. I talked to a woman yesterday, Peter, who told me that when she was a mom, when she got pregnant, she decided she wanted to work from home. She decided to be a virtual assistant. And she did something that other people who are virtual assistants don’t do. She put up a website and said, “Here’s my business.” And then when other people who interacted with her said, “I’d like someone like you,” she said, “Well, here’s my website. If you want help, I can help you find someone.” And at first, she did it for just a couple of bucks an hour, and then what she started to do was professionalize it and go out and recruit customers. And then she ended up with this business is now doing $1.6 million a year. A side business, lifestyle business, fantastic company for her and her family. And the reason that she was able to get it off the ground was this idea that she had she didn’t just do, she got a website for it, which made it feel more real for other people who were interested in working with her. And that turned this side gig into a real business.
If you’re out there listening to me and you have an idea, go take it to hostgator.com/mixergy. When you do, they’re going to give you the lowest rates possible. Frankly, HostGator is already super low price, but if you use my URL, you’ll get it even lower. And they’ll allow you to build your business right and they’ll grow with you. hostgator.com/mixergy. And of course, when use that /mixergy URL not only do you get the discount, but I get credit for sending you over, which is phenomenal support for me and the work that we do here at Mixergy. Thank you, HostGator. hostgator.com/mixergy.
When you went to Stanford, how did you come up with the idea for Openlane? What was your process for coming up with the business idea?
Peter: Well, thanks. Yes. So I guess part of the attraction of Stanford was, again, that technology thing you mentioned and Silicon Valley. And . . .
Andrew: Sorry, Peter. Are you touching paper or something on your table? Your mic is super strong, it’s picking up everything.
Peter: Okay. My bad on that, sorry. Having spent a few years in construction, I really felt construction was a risky business to try and be entrepreneurial in. It was a tough business, low margin business. And I had this interest in technology and Silicon Valley, Stanford, I was fortunate enough to get the opportunity to go there. And I said, “All right. Let’s go.” When I got there, I ended up teaming up. It was in . . . It’s a two-year course. So, in my second year, I teamed up with a couple of classmates and we said, “Hey, why don’t we make the focus of our second year this effort to see if we could start a company. We’re probably not going to start a company. Let’s do everything as if we were. Let’s see if we can come up with an idea and let’s see how far we can take this thing and let’s just see what happens. We’ve got nine months. Let’s just go do that.”
So that’s kind of what we did. And we started in a pretty, I don’t know, somewhat academic, somewhat clinical way. We said, “Why don’t we all just go away and jot down whatever ideas we have here and come back in a week?” And that’s what we did and got together over a few beers and filtered through this list. And one of the ideas which actually was one of the other guys’ ideas was an automotive-related idea in Europe because we were European. And we filtered down to two or three ideas. This was one of those and we started to research these a little more. And as we researched this one, we started learning about this wholesale used car auction industry that none of us had been aware of. And we started to learn about things like automotive auctions. And eBay had just gone public, so auctions was a thing we’d been looking at. And as we kind of researched this industry, we just . . . And none of us had relevant experience here. None of us had relevant domain experience.
So we’re looking at it purely as a bunch of, you know, kind of, you know, MBA students. I said, “You know what? There’s a real opportunity here. There’s a real opportunity here.” We were still on a European focus. We went back to Europe and toured around and I remember I spent three weeks on the ground in the UK, met with customers, met with some dealers, met with some venture capitalists, and we concluded that, you know, the internet just wasn’t as far developed in the UK as it had been in the U.S. That was true then . . .
Andrew: Meaning what? The dealers did not have internet access?
Peter: Just in general people were not on the internet. The U.S. was probably two years ahead of the UK in just general adoption in the population or in any representative business like a dealership. Plus, you know, Silicon Valley is a very entrepreneurial place. There’s a lot of capital for entrepreneurs. This was the beginning of the dot-com era or was the dot-com era. There was a lot of capital around then. That was not true in London. So we basically came back somewhat disenchanted, let’s say, about the European idea and then we said, “I wonder, could we do this in the U.S.?” And that was something we had never really thought of up to that point because we kind of thought, “We’re here for two years, we’re going to go back to Europe and do something else.” And then we kind of said, “Do you think we could do this in the U.S.?” And we basically kind of redid our business plan and said, “Let’s go talk to some investors,” because we needed capital. We had no money. So we did that and we started knocking on some doors on Sand Hill Road and, you know, eventually we were able to secure some capital to get this business going.
Andrew: Which is just a few miles away from Stanford.
Peter: Yeah. It’s not even a few miles.
Andrew: What was the conversation like back then? We’re talking about . . . I think you were in Stanford ’97 to ’99, so we’re talking roughly at the period when the internet was at its first big boom. Were they embracing it? Were they . . . What was it like?
Peter: It was a fun time to be there. Yeah. There was a lot of entrepreneurial ideas kicking around. Frankly, I think the guys from Google were probably starting Google just, you know, a few buildings over.
Andrew: In Stanford also.
Peter: Yeah. The Yahoo had come out of Stanford, Cisco had . . . A lot of those company had Stanford kind of origins, right? We ended up . . . After we came back from Europe, we redid our business plan and there was this event at the school, “Pitch Your Idea to a Real-World Venture Capitalists.” So we went to that. So it was kind of like a VC pitch, but in a low-pressure kind of environment. You were just in presenting your . . .
So we pitched these venture capitalists and one of the gentlemen, David Marquardt, ultimately became our seed round investor. He was the general partner at August Capital. Dave was an incredibly successful investor. Had been the seed investor in Microsoft and the seed investor in Sun Microsystems back in those days. Had done incredibly well. And Dave was kind of intrigued by this idea because he had . . . We were pitching a different process for an off-lease vehicle and he had recently returned an off-lease vehicle and the process just seemed kind of weird to him, you know, very manual, not very customer-focused. So it kind of resonated with him. And then he followed up with us and said, “If you guys are serious about your idea, here’s a few things to look at.” And he kind of started almost mentoring us in a little way, which was very valuable to us. Yeah.
Andrew: And around the same time you were doing something that you told our producer you called ham and eggs. What’s the ham and egging that you were doing?
Peter: Well, yeah. So, in addition to doing these projects and trying to get this business off the ground, we also took entrepreneurship classes, the classes around entrepreneurship at Stanford. So I took some of those. And one of the classes the Professor Grousbeck was his name, he talked about this concept of ham and eggs. And it’s something that a lot of entrepreneurs do. It’s like, you know, where you don’t really have anything, but it’s, if I could do this, would you do that?
So going to a customer with an idea and saying, “Hey, I don’t have this platform yet, but if I could build this, would you entrust me with some of your business?” And then going to an investor and saying, “Hey, I’ve got this idea of a platform and I’ve got a customer over here that’s sort of interested, but I don’t have money. If you could . . . If I could bring this customer would you give me some money?” And then going back to an engineer and saying, “Okay. I’ve got a . . . It looks like I can get some money. I got a customer. Can I convince you to leave your job and join me and help me build this?” You don’t have the ham and you don’t have the eggs, but somehow you managed to build a breakfast. That was really the analogy there.
Andrew: And that worked out. You managed to get who? Who are the two parties that you managed to get to say yes?
Peter: Well, I mentioned Bank One. So I’d say a few things happened. Dave Marquardt, he encouraged us to build out a team and try to get some more relevant North American automotive expertise into the team, which was a very obvious thing, you know, in retrospect. So we did that. Trying to secure customer commitments so we were pitching a bunch of customers and one customer seemed interested. And then employees and venture capital trying to make it all happen, right? Trying to make it all happen.
I can recall, actually, we took out a small office, you know, I don’t know, 1,000 square feet, just some open space, some tables. And that’s where the three of us were kind of working or the four of us at that point were working. And we had three or four engineers that were working for us at night. We weren’t paying them, but they were helping us write code and . . . And then we had this customer coming to visit. They wanted to see our office. We basically told these four people to take a day off work and maybe bring their spouses in as well. And we set up, you know, eight computers and we made it look like we had something more substantial than we actually had as you might imagine what that was like. So we did a little bit of that. And yeah, so I managed to make it.
Andrew: And this was a bank . . .
Peter: Those are the fun days, right?
Andrew: Did it feel like fun days back then?
Peter: Oh, yeah. It was totally fun.
Andrew: So this was a bank. I don’t know if you feel comfortable saying it, but you told me before we got started, it was a bank that had a lease portfolio, meaning that these are cars that were leased out at the end of a couple of years when the lease was over, people returned them, they needed to sell them. They were using your platform to sell them to dealers online. Am I right?
Peter: They were using auctions. So, basically, the process up to that point was car comes off lease, goes to a dealership, gets moved to an auction, gets stored there for a week or two, gets put into an event sale, gets sold, gets moved back out of the auction to the buying dealer. And our process was, why do you need to move that car around like that? Instead, the car gets returned to a dealer, take some photos of the car, digital photos, put them up on a website in an auction and then sell the car in a day, and then move the car once. Don’t move the car to an auction and then move it back out. Just sell the car sooner. Take time and cost out of the chain, out of the supply chain. That was basically the model. So we convinced a bank to be our pilot customer in that regard.
Andrew: How hard was it to get the dealers? What did you do to get the dealers to go on and bid?
Peter: The dealers actually were . . . We were able to find some dealers who were fairly open to that. Dealers were not going to go on a website unless there were cars. So, you know, when you’re building a marketplace, there’s kind of a chicken and egg. Another egg analogy here. But in our case, dealers are busy, they’re not going to come to a website and say, “I’m here. Now send me some . . . ” The cars have to be there. So we had to get supply figured out first. Right?
Andrew: Okay.
Peter: And then dealers were willing to come. I will say I underestimated how difficult it would be. I thought this would be very natural and logical to dealers. We didn’t do a lot of market research to be candid. We were running . . . We were kind of drinking our own Kool-Aid a little too much. A lot of the . . . The objection I heard from dealers the most was, “I need to kick the tires. I need to see the car. I need to smell. Is it a smoker car? I need to kick the tires before I can buy this car.”
We were kind of thinking, “Hey, you’re a dealer. You’re buying 30, 40, 100 cars a month. It’s just a piece of inventory. Buying it online for you is different than a retail customer who’s buying a car once every three years.” But the flip side of that is, “Hey, this is a $20,000 asset and the dealer has a fairly low margin on the retail sale of that vehicle so they need to be confident in what they’re buying.” And we still wrestle with that today even 20 years later, building tools that give dealers comfort around, “I’m looking at it on the screen. How do I know that this is the car I’m going to get?”
Andrew: What did you do in the beginning in the very early days to reassure them if anything?
Peter: We did the best we could. Got the best condition report we could, got the best photos we could, really tried to take care of them if there was an arbitration. And that happens, right? If the car shows up and it’s not what they thought, we want to step in and make that right for them so that they weren’t aggrieved with us. So that was part of it. Yeah.
Andrew: All right. It took about half a year to build the first version of the site. You told our producer . . . And I never seen this before. I thought you were kidding. You said, “The launch went textbook.” It just worked.
Peter: Yeah. We had . . . The first 9 to 12 months of our business because, again, we’d done these entrepreneurship classes and we’d heard all these stories of entrepreneurs and all their struggles. And here we were, we had this idea, we had some slides, we managed to raise money, we got a customer, we got the technology built, we’re selling cars, and we executed a Series B. And I was a Series B financing. And I was . . . I remember thinking, “This is easy.” I mean . . . Or, “This has been easy.” And I think what happens is pride comes before a fall. What transpired subsequently, gave the lie to that. But up to that point, yes, the first nine months were as close to textbook as I could have wished for. Yeah.
Andrew: The fall was not your fault. The dot-com crash happened. The market just collapsed. People went from believing that everything was going online including toothpaste was going to get delivered before the infrastructure was in place before people had mobile phones, even high-speed internet on their desktop, to suddenly thinking, “This is never going to work out. We were all bamboozled by a bunch of fast-talking internet people.” And as a result what happened to your customer? What happened to your business?
Peter: Yeah. So what happened . . . That’s exactly what happened. And the one fortunate thing I mentioned, we raised a Series B. We raised a Series B financing a substantial one right before the dot-com crash happened and that was just good fortune. That was not planning. That was just the way it played out.
Andrew: You would have been out of business if you had waited a little bit longer.
Peter: We would have been out of business. Yeah. We would have been out of business. We would not have the capital to survive it. But we raised a bunch of capital and then the dot-com crash happened and every day every week that went by the story just got worse. Here is Excited Homes just gone and somebody else has gone and eToys and eBags and God knows what, they all kind of just died on the vine. But basically, all these dot-coms and we were considered one, they were all kind of tarred with the same brush. They were all, “These guys aren’t going to be around. This was a fad. It’s never going to work.” And of course, there were a lot of naysayers in our industry. A lot of naysayers. “I need to kick the tires. Buying online is never going to work. You’re never going to get the same value.” And frankly, in customers’ organizations, their e-commerce initiatives all kind of got frozen, right? A new management team came in. Actually, the bank ended up taken over by another bank.
Andrew: Your client get taken over by . . .
Peter: Yeah. Yeah. They got taken over by . . . And in that process, this new bank was looking for cost efficiencies and said, “Hey, I’m selling 90% or more of my cars to this established process, but I’m spending a bunch of energy over here on this little internet thing that’s only selling 5%. Let’s shut that down and let’s focus on the 95%. And that’s what they did. And it wasn’t . . . Our contact of the company was no longer there. And that customer went away. So we suddenly went from textbook to, basically, our volume went back to zero. Twelve months in, we had no business, we had no revenue. And that was a real problem for us.
Andrew: How did you recover from that? What did you do?
Peter: Yeah. I think what . . . I’m trying to think back to those days, it’s hard to remember them. But obviously, we had been in discussions with other customers. We were at various points in the sales cycle with some other commercial entities, motor manufacturers, a rental car company. And I guess we just managed to . . . Despite this unfortunate circumstance, we managed to convince them that fundamentally what we were doing was going to create value for them, was going to represent a better process. And we probably had a newfound dose of humility around it too. And we were able to convince first another small bank, then our rental company, and ultimately a motor manufacturer within the subsequent 12 months or second year of existence to trust us with some of their business. And that wasn’t enough for us to be profitable, for sure.
And I’d say the other thing we did in parallel with that is we had to get very tough on costs and we had to look and say, “Okay. There is no more capital. We’re thankful we’ve got a good stash here in the bank, but this has to last over multiple years so now let’s address our burn rate.” And those were tough days. But we did manage to start to build the volume back up.
Andrew: By the way, just watch out as you’re moving the desk. I do too. I pound the desk so much. I finally put a shock mount on my microphone because it keeps getting picked up by the microphone. But I want to understand why clients said yes. As I was researching and preparing for this, I had this theory that they were also looking for efficiencies. And even though this wasn’t going to revolutionize their business, if it could help them cut costs, then they were more open to it because they were going through financial trouble. Am I right in that theory?
Peter: Yeah, totally. I mean, our clients were absolutely looking for efficiencies and they saw an opportunity. And again, you know, I talked about listening to your customer. I can remember discussions, again, with the motor manufacturer, in particular, where we had pitched them our idea and their reaction was, “Listen, there’s a lot I like about your idea. I also think we’re spending too much money in our current channel. I think there’s a better way we can do it. But I’d like something a little different to what you just pitched me. How about this?” Right?
And what they pitched, frankly, was they wanted what I’ll call a private label type remarketing channel. They wanted us to build . . . So think of a motor manufacturer with their brand. They wanted a branded remarketing platform just for their vehicles and just for their dealers. And what we said is, “You know what? That’s actually a great place for us to start because a number of things.” Between that manufacturer and their dealer, there’s a lot of business taking place today, there’s a lot of trust in that relationship. So where dealers are uncomfortable buying cars online, this is the easiest place to start, right? In a . . .
Andrew: Because they feel comfortable with the company that’s selling it. So, instead of being an eBay where anyone could sell on one platform, you became a white label product where one company could sell on what looked like their own platform to their own customers. Got it. And this goes back to listening to your customers and they reshaped the business that way.
Peter: So then once we sold that first OEM, we basically said, “Let’s go after all of the OEMs.” So we went after all of those global OEM accounts. We won more of those accounts over the next few years than anybody else. Nobody else was really looking at that as an opportunity I think and quite the way we were. And then we were able to build up a critical mass of these customers on our system which ultimately we were able to translate into a more open market further down the line, let’s just say.
Andrew: What’s an OEM? What’s an example of one that you worked with?
Peter: Both Wagon, Honda, Toyota.
Andrew: Got it. Okay. Let me take a moment and talk about my second sponsor. And then I wrote a note here about your salary. You’re still not flying high then because your company is not profitable. I’ll come back in a moment. I’ve got to tell you that I live in San Francisco. Where are you right now, by the way, Peter?
Peter: I am in Indiana, but I used live in San Francisco.
Andrew: Indiana?
Peter: Yes. Yeah.
Andrew: Yeah, right. Near Stanford. Do you guys have scooters everywhere the way that we do here? It kind of fits into my ad.
Peter: There are a lot of them in Indianapolis. Yes.
Andrew: There are. So, in San Francisco, there was just one scooter company that puts scooters on the Embarcadero at random times when there would not be any tourists there and it didn’t work out for them. What we’ve discovered is scooter companies need to know where people are going to be and move the scooters to where they are going to be, not where they happen to have landed.
Anyway, there’s a company that they use called Quant Collective. Quant Collective uses artificial intelligence. I happen to meet the founder here on my floor as I went to get coffee the other day. And he said, “You know what we do is, we use Toptal to hire these data scientists, these engineers, these artificial intelligence experts. We don’t have it all on board. It’s a bootstrapped company.” I said, “Why Toptal?” He goes, “Andrew, we use 10 different places trying to find the best people we could. They couldn’t find the solutions that we needed. We ended up going with Toptal and now they’re doing so well for us that if you talk to Toptal about us, about Quant Collective, they’ll know how good a customer we become.”
And the reason they’ve become such a good customer is because Toptal really does have the best of the best developers. If you don’t have an expertise in something and you want to hire people who’ve done it, who have an expertise, who’ve proven themselves already, that is when you go to Toptal. And if you go to toptal.com/mixergy, they’ll give you 80 hours of Toptal developer credit when you pay for your first 80 hours. I’m not from San Francisco. I’m a New Yorker. I talk too fast so I’m going to tell you very slowly. It’s top as in top of your head, tal as in talent, toptal.com/mixergy, toptal.com/mixergy. What was, like, your salary issue at that point?
Peter: Yeah, I don’t know I had a salary issue. We were young entrepreneurs. We were being paid a salary, but we were really in it for the equity value creation. We were in it . . .
Andrew: And years and years and years working for a company that was, yes, starting to get its footing, but also not yet solid. From what I can see, you weren’t doing as well . . . Like, your salary wasn’t what it was when you were working with Taylor Woodrow. Right?
Peter: Oh, no. It was. It was. Yeah.
Andrew: It was. Okay.
Peter: No, it was.
Andrew: The company wasn’t profitable, though. You were doing a little bit better. You were starting . . . Did you start to ease up? Did you start to feel like, “All right. I can take a breath. I’m doing okay”?
Peter: Yeah. I mean, our company, we were growing pretty much every year in that era. We were winning some customers, our business was growing. We were managing the business fairly close to break even. And then as the revenue would grow, we would typically hire more developers and lean more into, you know, investment and innovation and investing in the platform. And our board was very supportive. We had a board. I mentioned David Marquardt. There were some other board members. Very supportive of us and our strategy and generally pleased with what we were accomplishing. We did then in, I think, roughly 2007 . . . Oh, sorry.
The other thing I should say, Andrew. We weren’t the only group out there that had this idea. So part of our growth in those years as well is we rolled in or combined with two digital competitors, all right, two other businesses that we were competing with and we saw an opportunity to bring on some talent, bring on some customers, put these businesses together, increase our scale. So we did that as well.
And then around 2007, we really felt we had this great install base of customers, our transaction volumes were higher, we were . . . I can’t remember the revenues, but let’s say we were $50 plus million of annual revenue, breakeven or slightly profitable. And we felt now was the time to lean in and make a big investment in trying to grow that open marketplace model and that was our original business plan. And to enable that, we did another financing at that point and brought in a later stage investor and a fairly substantial amount of capital to help us execute that.
Andrew: How much was it?
Peter: My recollection was around $20 million, but I can’t recall exactly.
Andrew: Okay. All right. Boy, by today’s standards, that’s not that much.
Peter: Yeah. By today’s standard is relatively small. Yeah. So we started executing that plan.
Andrew: And then is this around the time when the great recession hit?
Peter: Yeah. So that’s what we were doing. And we were feeling pretty good about our business, and obviously, making these investments and trying to grow this open marketplace concept and having some success with that. And then in 2008 after we’d raised this money, we started to notice things weren’t quite going to tracking to the plan anymore. We noticed that our buyers, our dealers started to be less bullish around purchasing vehicles. I think they were noticing weakening retail demand. And we all know what happened in 2008 that the economy went into a deep recession. And the automotive industry is kind of an early predictor of that in some extent because when consumers aren’t feeling confident around the personal situation, one of the first things to get put off is a car, you know, “I’m not going to buy that car.”
So we noticed that flowing through our business and as that played out over the next 12 months, what we saw was new car sales dropped to I think from 17 million to 10 million and leasing as a percentage of new car sales got cut in half. So the number of leases originated or written dropped by 60%, let’s say, a substantial dropping. And we were selling off leased cars, so we could see that our pipeline of cars which was healthy in the here and now was going to severely contract in two to three years. And our business which had been growing pretty much uninterrupted for 10 or 11 years was now going to go through a pretty severe contraction. And that was . . . That, let’s just say, focus the mind on, “Okay. What are our options here? What do we do about this?”
Andrew: Was it scary before it got to focus? I’m looking at you. You look like a person who’s like you’re in a comfort zone right now in life. You’ve got more swagger at least looking at you now than I’ve seen in all the things photos of you that I’ve seen historically. At the time, though, were you freaked out?
Peter: A little bit. I freaked out is probably overstating it. But, you know, I’m a fairly pragmatic kind of guy somewhat analytical. It was like, “Hey, we’ve got these great customers. The relationships are still strong, but the volumes are going to go down. And it’s not just for a quarter. They’re going to go down and they’re going to stay down for many years. And that creates some risk.” And I think you alluded to this, the beginning of the conversation is, you know, in those early years of being an entrepreneur, at least in my particular case, I had nothing to lose, right? So it’s . . .
Andrew: Again, just to watch what’s going on on the desktop.
Peter: I’m going to put that away. I’m going to put that away.
Andrew: What is that thing that you’re using?
Peter: It’s a pen. I was just clicking on it.
Andrew: Oh, you’re clicking on the cap of the pen, turning it on and off. Okay. So, yeah. In the early days you had nothing to lose, but now . . .
Peter: But now you’re 12 years in. There’s a company that’s getting close to 100 million in revenue. You know that has value and you know that you’ve got an ownership in that, but now that company is going to go through some sort of a tough time or maybe a crisis, let’s just say, a tough time, a challenging time. What do you do? And, you know, in that lens when I thought it through in those terms I thought, “Okay. The environment is getting more competitive. We’ve got these four or five global OEMs as customers, but people are trying to compete that business away from us. I can perhaps deal with this contraction of volume if it rebounds. But if we lose some customers in the middle of that, maybe we never come back. Right? Maybe this company never comes back. And how do I feel about that personally?” And I guess that made me somewhat risk-averse. Being candid, it made me somewhat risk-averse because as you kind of alluded to, Andrew, all of my net worth was tied up in equity. We hadn’t really been compensating ourselves very highly. And I wasn’t prepared to contemplate a situation where all that effort would end up as zero for me personally.
Andrew: Truthfully, that’s when I went back and thought, “Maybe his dad’s experience shaped his decision at this point.” Like, you saw your dad go from buying farms after farms and then doing well and suddenly one bad economic situation turned things downward.
Peter: Well, I have never ever thought of that. But, hey, who knows what your formative experiences tell you. I used to talk to . . . My dad passed away since, but he was alive back in those . . . He’d asked me how business was going and he was always kind of pleased with . . . I recall telling him the day we sold the company and he goes, “Why did you do that?” And then I told him what the number was and he was like, “Why didn’t you do that three years ago?” So, anyway, yes. Who knows? But it’s possible. You could be right.
Andrew: How proud was he to know that you’d sold the company?
Peter: He was a proud father. Yeah, he was.
Andrew: Throughout.
Peter: Oh, yeah.
Andrew: He wasn’t scared when you decided to start this company after having a good job for so long and going to get your MBA from Stanford?
Peter: No. No.
Andrew: No.
Peter: Never. Never . . .
Andrew: Supportive.
Peter: Yeah, supportive the whole way through. Yeah.
Andrew: How did the sell come about?
Peter: So, you know, in the industry we’re in, you know, it’s a fairly big industry in terms of scale, but it’s a small industry in terms of participants. There’s only a handful of companies, let’s say, and, you know, not an awful lot of people. A number of hundreds of people making the decisions that really go around automotive remarketing, let’s say. So we were a known entity. We knew who the likely strategic buyers of our company were the most rational strategic buyers. And those were companies we’d met at conferences, we competed against. It was that type of a situation. And we had various inbound interest in the years prior around, you know, would we be interested in being acquired and nothing had ever come of those, let’s say. But in this environment, we were more receptive to that discussion, let’s just say.
Andrew: And it’s you reaching out to them saying, “You talked to me in the past about a buyout.”
Peter: Or in the case . . . One of our board members played a role in that too who had his own personal investment to the company. He had probably concluded that his risk profile he preferred an exit than trying to ride this trough through for the next three or four years. So there was a little bit of a dance as you probably know from talking to other entrepreneurs of, “We’re not for sale, but . . . ” and, “We’re not looking in buying, but . . . ” And a discussion . . .
Andrew: What? What comes after the but? It’s but we’re considering our options?
Peter: Yeah. Yeah. Considering options or we really see a great fit. You guys could probably really benefit from this. We see some of the challenges you’ve had in executing X, Y, Z, and this company could help you solve that. It was that kind of situation. And then ultimately, there was an inbound, I guess, indication of interest. A written offer came over and at that point, we had something for the board to sort of consider and react to.
Andrew: Why would they want to make the acquisition? They’re seeing the same future that you’re seeing. Why were they willing to make an investment?
Peter: Well, the company was KAR where I am today. And I give credit to their CEO, Jim Hallett. They saw the same digital future for our industry that we saw, although they also saw . . . And I think I probably shared this at that time as well is that ultimately, the real winning solution here is a combination of physical assets and digital platforms. So they had physical assets. They had digital platforms, but their investments in digital platforms hadn’t brought them the ROI that they hoped. They just hadn’t been as successful. Right? It’s difficult sometimes for a legacy company to make those types of investments. So they just saw a great fit. They saw an ability to consolidate, take customers off their digital platform, which was, let’s just say, not as good as ours. We migrate them across, you know, exit those investments there, save money, and have a better solution and, you know, kind of a lot of wins in that process.
So, and probably for them, in some respects, the fact that it was a more challenging economic environment meant that the price tag was actually more affordable. And they were willing to take a longer view and say, “You know what? We can ride out this trough. Two, three years seems like a long time to these young entrepreneurs, but to us, it’s just another cycle. It’s going to come and go.” And probably had that point of view in the transaction.
Andrew: And they were right. Yeah. I see here they had . . . The subsidiary that bought you had dozens and dozens of physical locations across North America, so it made sense to partner up with a digital company. And now you’re at the top of a publicly-traded company. We’re kind of closing this story out at a high note.
Peter: Yeah, yeah. So, like I said, Andrew, if you’d asked me on November whatever it was 2011, I’d have said, “Hey, I’m going to work here, get this integrated, make this a success for a year or two, and then I’ll try and figure out the next company to start, whatever that is, after I take a year off with my wife.” That was kind of the plan. And it, you know, played out a little differently to that, but, you know, it’s been fun.
At some level, I think, you know, I embarked with my co-founders on a journey that fundamentally was about transforming an industry through digital technology. That’s at the core, leaving brand aside, leaving investors aside. That’s at the heart of what we’re trying to do. We’re going to try and take technology to change an industry. And I think what I do today is just a continuation of that. It just happens to be on a bigger canvas. Right? And that’s kind of a unique opportunity and we’ve got a great team to sort of help us . . . A great team, great set of customers to help try and make that a reality. So that’s kind of the thread that I think is consistent through the various chapters of the story.
Andrew: I see that too. I see a guy who set out to do something . . . A guy who loved technology but not for the sake of technology, loved technology for the sake of improving productivity, of doing something meaningful who goes out there, invest in this, continues, and through setbacks, goes back to customers and ask them, “What are you going through? What do you need? How do we adjust? How do we fit?” And now is sitting at the top of a company and . . .
You know what? I like talking to people who run publicly-traded companies, people who are at publicly-traded companies. The thing that I don’t like is the thing that they don’t like to talk about, which is, like, “Where is the company going? What’s the future?” I always want to know how you got here. I’m fascinated that when I look at here, by the way, stock price is up. I’m fascinated as I look at here the company is in good shape and this all happened for a farm boy who would never have expected to be here.
Congratulations on all your success. Is there a way for people to, like, follow up with you see, what you’re thinking, where you’re going on a personal level? Obviously, they could follow your stock, they could follow the company in lots of ways. Do you have a website? Do you need to go to HostGator and sign up for a page?
Peter: I don’t have a personal website. I am on LinkedIn. So, if you look me up on LinkedIn, Peter Kelly or KAR, you’ll find me there. I’m not the most . . .
Andrew: I see.
Peter: I’m not the most prolific poster, but feel free to connect with me on LinkedIn.
Andrew: All right. Thank you so much for doing this interview. And I am grateful to the two sponsors who made this interview happen. The first, of course, HostGator. Peter, if you ever need a website, go to hostgator.com/mixergy. When you add that slash URL will save you a few bucks. And then number two, if you need to hire developers go to toptal.com/mixergy. And in all seriousness, I’m grateful to them for their constant support here at what I’m doing. Thanks, Peter.
Peter: Andrew, thank you so much. I enjoyed this. Thank you very much.
Andrew: Congratulations. Thank you. Bye, everyone.
