November 12, 2024 • 1hr 12min

Ernie Garcia - Leading Through Crisis - [Invest Like the Best, EP.396]

Invest Like the Best with Patrick O'Shaughnessy

Ernie Garcia, co-founder and CEO of Carvana, joins Patrick O'Shaughnessy to discuss navigating one of the most remarkable business turnaround stories in recent history. The conversation covers leading through crisis, building for the long term, and maintaining operational excellence through difficult times. Garcia provides candid insights into managing a 99% stock price decline while emerging stronger on the other side.

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Key Takeaways

Remarkable Turnaround Story: Carvana experienced a 99% stock price decline but emerged stronger through ruthless prioritization, operational efficiency gains, and maintaining team morale
Leadership Philosophy: Focus on being a "player-coach" rather than distant management, maintain calm during crisis by focusing on fundamentals and long-term vision
Operational Excellence: Achieved through vertical integration, granular weekly metrics tracking, and continuous efficiency improvements across all business functions
Team Building: Success attributed to accumulating resilient "fighters" with sports mentality who could weather difficult times
Business Evolution: Transformed from high-growth, negative economics to profitable operations with $3,900 EBITDA per unit while maintaining competitive customer offering

Introduction

Ernie Garcia, co-founder and CEO of Carvana, joins Patrick O'Shaughnessy to discuss navigating one of the most remarkable business turnaround stories in recent history. The conversation covers leading through crisis, building for the long term, and maintaining operational excellence through difficult times. Garcia provides candid insights into managing a 99% stock price decline while emerging stronger on the other side.

Topics Discussed

The Journey from Cool Kid to Crisis (6:23)

Garcia describes Carvana's evolution from a scrappy startup that couldn't raise venture capital to becoming a market darling, followed by a dramatic fall:

Early Days: Started in 2013, went public in 2017 as "worst IPO of the year"
Peak Period: Mid-2020 to late 2021 was only time viewed as a "sure bet"
Perfect Storm: Combination of supply chain issues, rising rates, and overextension led to crisis
Stock Decline: Experienced 20 separate 20% drawdowns, compounding to 99% total decline

Leadership Through Crisis (10:03)

Garcia shares his approach to maintaining team morale and focus during the most challenging period:

Historical Context: Reminded team that most successful companies face similar challenges in their journey
Team Composition: Built around resilient individuals with "fighter" mentality
Communication Strategy: Regular team meetings to address concerns and maintain collective resolve
Avoiding Blame: Focused on preventing finger-pointing and maintaining team unity

Operational Excellence and Prioritization (22:21)

Discussion of how Carvana improved efficiency and learned to say "no":

Project Selection: Developed better framework for choosing which initiatives to pursue
Resource Allocation: Identified and eliminated hidden conflicts between projects
Team Size: Found that smaller, focused teams often achieved better results
Decision Speed: Emphasized making decisions "now" rather than later

Project Management Methodology (30:10)

Garcia details Carvana's approach to project management and accountability:

Weekly Metrics: Track product, operational, and financial milestones
Granular Review: Regular Monday meetings to assess progress across all metrics
Accountability: No hiding from missed targets, required explanation and adjustment
Leadership Style: Emphasis on "player-coach" model with leaders deeply involved in operations

Vertical Integration Strategy (35:23)

Explanation of Carvana's approach to vertical integration and the Odessa acquisition:

Economic Advantage: Access to more transaction economics improves competitiveness
Customer Experience: Removes decision frictions in transaction process
Infrastructure: Acquired capacity to sell 3 million cars annually
Strategic Vision: Long-term focus on building differentiated infrastructure

Business Economics and Efficiency (53:49)

Detailed discussion of unit economics and operational improvements:

Average Transaction: $25,000 car price with $1,000 in reconditioning costs
Profitability: Achieved $3,900 EBITDA per unit in recent quarter
Efficiency Gains: Improvements in car movement, scheduling, reconditioning, and customer service
Future Potential: Still sees significant room for additional efficiency improvements

Lessons on Investors and Leadership (58:43)

Garcia shares insights on managing investor relationships and maintaining perspective:

Investor Psychology: Understanding anxiety that comes from distance from operations
Learning Approach: Focus on finding what others are right about rather than wrong
Emotional Independence: "Don't outsource your emotions to people who know less about this than you do"
Pattern Recognition: Value investors' broader perspective while maintaining own conviction

Origins and Family Influence (1:02:14)

Discussion of Carvana's origins and Garcia's relationship with his father:

Industry Knowledge: Early exposure to auto business proved valuable
Market Opportunity: Identified customer experience gaps in car buying process
Family Dynamic: Balanced desire for independence with value of industry experience
Personal Growth: Learning that successful people are "just human"

Conclusion

The conversation provides a masterclass in crisis leadership, operational excellence, and building sustainable competitive advantages. Garcia's calm demeanor and clear articulation of Carvana's journey offers valuable lessons for other business leaders facing significant challenges. The company's transformation from high-growth but unprofitable to efficient and profitable while maintaining just 1% market share suggests significant future potential.

Key lessons include the importance of building resilient teams, maintaining focus during crisis, implementing rigorous operational processes, and balancing growth with efficiency. The story demonstrates that even a 99% stock decline can be overcome with the right team, strategy, and execution.