Takeaways

Takeaways from conversation with Carro CFO Ernest Chew

Timestamps

1:42 Ernest’s story from HSBC exec to Carro CFO;

4:06 Lessons on corporate to startup transition;

7:44 First Day as Carro CFO;

10:58 How Carro stayed EBITDA positive in the past nine months;

11:53 Thought process behind Carro raising debt financing;

13:49 Will the used car market growth last post-pandemic?;

15:43 Advice for building ecosystems / flywheeling marketplaces;

16:29 Advice on balancing risks with spending;

17:32 Reaching billion dollar run rate by 2022;

18:22 Carro’s exit options;

19:29 Rapid Fire Round: 3 skills of CFOs, recommended books, places to travel, etc.;

Transcript

Paulo: Today joining us on call from Singapore is Ernest Chew, Chief Financial Officer at Carro Group, the largest and leading automobile marketplace in Southeast Asia. So I’m really excited today because Ernest is the first CFO on our show, and I’m really interested to know more about what tech startups look like from the CFO perspective. So I’m really glad to have him on the show. Welcome to the show Ernest — how has 2020 been so far you?  

Ernest: Hi Paulo, thank you for the invitation. How is 2020? In one word “extraordinary”. I joined Carro early this year. It’s been a roller coaster journey, full of challenges but exhilarating.  

Paulo: Yeah, I’m really glad that 2020 has been a year of new beginnings for you. And it has certainly been a year of change for all of us. And before I move on to the story behind how Ernest joined Carro early this year, let me share more about his background. 

Before joining Carro, he spent more than a decade working at HSBC, where he rose through the ranks to become Head of the Capital Goods and Automotive Investment in Asia Pacific. He received his bachelors from the University of Nottingham and his masters in Engineering from Cambridge University. 

He now brings his broad experience in capital raising, financing and M&A advisory to Carro and that’s exactly what we’re going to talk about today, how he brings his broad experience from banking and investments to scaling a tech company and what it looks like from his perspective as a CFO. 

So first things first, I’m sure our listeners would be interested to know how you made the jump from investment banking executive at HSBC to startup CFO at Carro. What’s the story behind the transition? 

Ernest: It had been a great 14-15 years in investment banking. Grueling but a great experience. For many investment bankers, it’s a lifetime where burnouts are quite common. 

I have learnt as much as I could in banking. I’ve worked at three financial centres across three continents: HK, London, New York. I’ve worked on landmark, complicated and cross-border deals worth billions of dollars. I’ve rebuilt up the Asian team at HSBC. Along the way, I’ve met incredible and inspirational people.

But I was far from burning out. In fact, I was full of energy and I wanted the next chapter to be even more exciting. I wanted to meaningfully contribute to building something with strong growth. Something future-proof and tech-related. At the same time, leverages on my strategic, automotive, banking and capital raising experience. Ideally but not as important was going back to South East Asia, where I’m originally from.

When I came across Carro, this reminded me of an advisory mandate for a private equity firm in their acquisition of a Western used car auction business. I watched that business grow 5-6x to a GBP2bn business over a decade, despite it being in a mature geography.

So, the opportunity was a perfect match. First, tech and strong secular growth. Second, the role leverages on my experience. Third, going back to Southeast Asia, in itself a vibrant region with strong growth markets.

I was full of energy and I wanted the next chapter to be even more exciting. I wanted to meaningfully contribute to building something with strong growth. Something future-proof and tech-related…Ideally but not as important was going back to South East Asia, where I’m originally from.

Paulo: Yeah, I think it’s really inspiring that even after you mentioned like a lot of your peers would experienced burnout after decades of working in this space, but then you still felt really energized to find new challenges right.  Professional standpoint. And also even from an industry standpoint, looking at what are the opportunities in the automotive space.

And it’s interesting how the insights you’ve gained from working, as you mentioned, working across three continents, the past decade has helped actually inform your decision to eventually transition your career to Cairo. So taking from this experience, what would you advise other, you know, finance professionals coming from big banks or MNCs, who are thinking about transitioning to a startup environment?

Ernest: So I had, over the course of my work, dealt with larger start-ups. Also during my garden period, I read a lot of books about start-ups. I spoke to friends from start-ups. What’s the big deal, right? But all I’ll say is that nothing could prepare you fully for the startup experience.

Firstly, there’s the size. I was part of a giant banking corporation. I was used to dealing with much larger businesses and deals. Start-ups are a lot smaller, in many senses. In one instance, I had coffee with an ex-colleague who is now a country head of banking. When I probed on their lending appetite, she asked if I was missing quite a few zeroes – we had a good laugh over coffee, and we remain friends. As a CFO, I would query about the $1000-2000 cost here and there, but back in banking, this is frankly a tiny fraction of travel expenses for bankers!

Second, growth in a startup. In a big MNC, when people talk about growth, attractive growth means double digit % year-on-year growth. A few hundred % growth, it’s pretty much unheard of. Given our size, Carro doubling or tripling in revenues is actually quite feasible with the right planning and team.

And now on the third point, speed of communication and decision-making. At big MNCs, decisions take quite a bit of time — plenty of analysis, sometimes quite complex and complicated. Then plenty of discussions with many stakeholders, across the globe and across many businesses. Even one senior hire will take weeks if not months. 

At Carro, discussions are done with one or very small group of relevant people. Whilst in the past Blackberries kept me hooked to my work, now we communicate via Whatsapp at Carro. And the responses generally are very quick. We are very nimble. Decisions are made almost instantly. In fact, I’ve come to learn at Carro that a bad decision is better than no decision at all. Frankly, a complete 180 degree compared to corporate who tends to want to perfect the plan before deciding on something. 

Then the fourth point, it’s the culture of experimentation. To innovate, we need to experiment and learn – even a bad decision will give valuable lessons. The fear of standing still at a startup is greater than failure. The great Peter Thiel once asked a contrarian question: “What important truth do very few people agree with you on?” Now, despite the fact that cars have been transacted in a certain way for decades, the truth is there are plenty of pain points for both consumers and dealers. So, we challenge ourselves every day – to make the car purchasing experience better, faster and safer.

I’ve come to learn at Carro that a bad decision is better than no decision at all…To innovate, we need to experiment and learn – even a bad decision will give valuable lessons.

Paulo: Thanks for really outlining the differences from your experience and, MNCs and bigger companies compared to. Startups. And I think this is something that draws parallels to previous episodes that we had with Manisha, who’s CMO at Carro and a colleague. 

So speaking of new beginnings, let’s go back to your first day at Carro. Where was Carro at, in terms of its finances? When you came in as CFO vis-a-vis today, were you faced with any significant challenges to overcome or opportunities to unlock?

Ernest: Significant challenges. But really because almost immediately after I joined, there were Covid19 lockdowns across all our core countries. Of course, there were fleeting thoughts: “Had I joined a start-up at an awful time?”, “Could this lockdown last for a year or longer?” and more crucially “Will we run out of cash?”. So even during the global financial crisis almost a decade plus ago, economies don’t come to a grinding halt – so it was a rather unprecedented period. 

I leaned back on what I’ve learned from the GFC, from businesses that failed because they ran out of cash and from the used car auction business which we advised our PE client to purchase in the midst of an economic crisis. 

We looked at our toolkit. A few things that we did immediately: we went to conserve cash, slash all expenditures and cash up. We very meticulously went through expenses line by line. We cut down marketing immediately. We looked at payrolls. We monitored our cash position very closely. And we looked at monetising inventory as well. We went to banks to borrow even though we didn’t need to yet. 

In terms of finances, we were okay. We were barely profitable, but we had to pull the handbrake and jam the brakes immediately, or risk even more potential losses. Now on hindsight, we were too conservative coming out of the lockdown. We lost a bit of momentum, but we were okay. More importantly, we were “not swimming naked” – we had okay fundamentals. Most importantly we had cash and we were not over-levered. 

The bad times can bring out the best in people – we switched to “survival mode” in those crucial months. We have a great team who worked very collaboratively. Together, we looked at our opportunities, our processes, we looked at switching gears and repositioned coming out of this. 

For example, we talked about opportunities. In periods of economic uncertainties, now you throw in the pandemic, how do we make used car purchases safer, faster and the natural economical choice? The other opportunity was our subscription business, which really appeals as there’s no long term commitment, no residual value risk but addresses a population segment who needs a car for basic needs and do not want to take public transportation given the pandemic. 

The bad times can bring out the best in people – we switched to “survival mode” in those crucial months. We have a great team who worked very collaboratively.

Paulo: Yeah. I really think that all these initiatives that you’ve taken from, as you mentioned, slashing expenditures, cashing up and even rethinking how you look at the core business of Carro, which is really the used car purchases. I think all of these things that you’ve set in place along with the rest of Carro’s leadership has been paying off.

And the company has been EBITDA positive for the past eight to nine months, which is almost, since lockdown started in Asia, was this trajectory planned out? What were the factors that enabled Caro to sustain this balance sheet?

Ernest: To our CEO, co-founders and senior management’s credit, we had always planned our businesses to be profitable or have a path to becoming profitable. We used the lockdown to seriously look at our OPEX, our fats and ways to improve our efficiencies. We came out of the lockdown leaner and meaner. In fact, our cash position did not deplete during the lockdown and we were free cashflow positive.

Paulo: Right. And speaking of cashflow position, another interesting development in Carro’s capital raising journey is that you recently also raised USD110 mn in debt financing. So what was the thought process behind pursuing debt financing at this point in its growth as a company and given the current market environment.

And I’m sure founders would be interested to know since this has been a topic that’s been discussed a lot. Especially over the pandemic. What advice would you have for founders who are looking to raise capital this way?

Ernest: Debt financing is actually a very important source of liquidity plus a cheaper form of capital than equity. We had a lot of assets going into the lockdown, whether in the form of financing receivables or vehicles that can be asset-backed. We didn’t want a “gun to our head” and suddenly be forced then to fundraise at unattractive valuation at, frankly, the wrong time. 

From a signalling perspective, the ability for a start-up to secure close to S$150m debt financing facility really demonstrates strong conviction from banks who are generally very conservative backing startups. 

So in a nutshell, I think that it’s important to think about that. But my advice is to raise that it’s important to have high quality assets as collateral and think about being profitable, amongst other factors as well.

From a signalling perspective, the ability for a start-up to secure close to S$150m debt financing facility really demonstrates strong conviction from banks who are generally very conservative backing startups. 

Paulo: Right. Yeah. I think it’s sort of a self-fulfilling prophecy in a way that you have to have the profitability to then raise that debt, which then signals that trust and conviction from more conservative investors.

And in another answer, you mentioned about how to navigate this period of uncertainty leadership had to rethink how to deliver the used car offering in a COVID era.

And, you know, accompanying that you also mentioned in a previous interview that the used car business is countercyclical in the sense that the downturn has converted what would have been new car purchases into more short-term use car purchases. So how do you see this trend reverting, if at all?

Because for example, in the US we’ve seen how this trend of higher use car purchases has boosted the growth of a lot of comparables to Carro, right? Like Carvana, CarMax? Do you see this trend lasting beyond COVID and how would economic recovery impact this used car market in Southeast Asia in particular?

Ernest: No, I do not see this reversing. There are at least two major factors in our favour. Firstly, there’s plenty of structural growth in the used car industry in Southeast Asia. Car penetration, as well as used car to new car ratio, is still low. In mature markets, the used car to new car ratio is about 2-3x. In Southeast Asia, we are about one or less in most countries. 

Secondly, increasing penetration of e-commerce and digitalisation, including for car purchasing. Carro is one of very few groups with tech in our DNA. We are not just building a marketplace platform and ecosystem, but incorporating big data, AI and machine learning in our processes. This will enable us to deliver superior customer experience.

So in short, we believe the pandemic and economic crisis accelerates the growing acceptance of used cars and trading of used cars via ecommerce and digitalization.

Carro is one of very few groups with tech in our DNA. We are not just building a marketplace platform and ecosystem, but incorporating big data, AI and machine learning in our processes.

Paulo: Right. And I think that’s a really good sign for the business cause a lot of change has been happening because of the pandemic, but we’re not really sure if that is going to last, but from your perspective, at least this growing acceptance of used cars will last beyond the pandemic itself.

And aside from being a marketplace for used cars, Carro has also had a lot of different business lines. So you have Genie financing and B2B business, right? So we’re seeing a lot of similar tech platforms that initially started out in low margin businesses find a path to profitability by “flywheeling” into adjacencies. 

So as a CFO, how would you advise founders to think about this kind of growth trajectory, this kind of ecosystem building, so to speak, how would you advise founders to think about that so that it is cost efficient and effectively widens margins for the business?

Ernest: You are absolutely correct. So the way we think about a marketplace is like the Alibaba for Southeast Asia for cars, then you build the verticals around that to monetize and increase the profitability of the business. The adjacencies need to fit into the ecosystem, capture more profits, and a natural organic expansion that give customers a seamless experience.

Paulo: Right. And getting into this kind of growth trajectory, often involves risk, especially if you’re doing it at a really fast pace and this risk comes along with spending a lot on marketing, growing the team, hiring, product launching. So how do you balance this risk, from a financial perspective while at the same time being prudent with spending?

Ernest: At Carro, and quite differently to large corporate and large MNCs as I alluded to experiments or small experiments are very encouraged. These experiments don’t cost a lot of money but we can learn and innovate, then a larger, incremental budget to support the product growth. Essentially the culture we have is you need to try and learn something out of these small experiments without deploying huge amounts of capital. So the risk of failures are generally lower.

Essentially the culture we have is you need to try and learn something out of these small experiments without deploying huge amounts of capital.

Paulo: Right. I think it’s a really important point that you brought up about having that culture to really engage in these kinds of low-cost, small experimentation. So I really think,  having that culture at Carro has really benefited how the company has grown over the years and it’s been mentioned that Carro’s projected to reach a billion dollar run rate by 2022. From the CFO perspective, where is Carro on that journey and what are the opportunities that you’re looking forward to taking to reach that goal perhaps even faster than expected?

Ernest: So the short answer is we are well on track for that growth. In September, we had a 500% year on year growth in terms of revenues. The momentum continues to be very strong. The October revenues are at record level, the gross profit level is at record levels and we expect to continue that trajectory. We believe as well when we deploy even more resource into countries like Indonesia and Thailand given the total addressable market, we believe that one billion is easily achievable, within the next two years, plus or so.

Paulo: Right. And how will this affect how Carro is looking at its own exit options?

Ernest: I think all cards are on the table. We are certainly looking at both IPO or M&A exits, but frankly, it’s too early to engage that kind of conversation, except whatever path we get to, we need the business to be in solid shape. We need the numbers to validate that growth. And more importantly, there’s growth potential still in the business because of the positioning and the strategy that the business has embarked on. Crucially you have a team that can deliver all these things.

Whatever path we get to, we need the business to be in solid shape.

Paulo: Right. really boils down to the fundamentals of the business and regardless of what path you’re going to take in terms of an exit or staying private, really looking forward to Carro’s growth in the next three to five years.

And to wrap up our conversation, we always ask our guests to join us for a rapid fire question round, sort of like a fun corner in our interview. That has been pretty serious, right. So just short answers, one-liners no need to elaborate, but if you feel like doing that go ahead.

What are the top 3 skills CFOs should have? 

Everyone knows a CFO as the Chief Financial Officer. A great CFO in my view is also the Chief Future Officer. He / she is a true business partner, advisor, leader as well as critic to guide the company and people to become even stronger and more future-proof. In that context, the top 3 skills are:

1. Be strategic. See the “big picture”. Link finance with strategy, operations and even recruitment. Complement organic and M&A growth
2. Forward-looking. Focus on growth (not just historical numbers) with common sense approach to growth and risk planning 
3. Create a financial culture and discipline: Solid financial skills to create a methodical culture around analysis, interpretation and tracking of numbers and metrics

What is one thing you learned in your experience so far at Carro that you wish you had known earlier? 

Do more experiments, avoid trying to perfect in the first instance, don’t play “too safe”

Who is a CFO (or leader) that you look up to in your career? 

Barack Obama. He shows each and every one of us that ordinary people can do extraordinary things. The future rewards those who presses on.

What is a book that you would recommend for CFOs, or fellow finance/investment professionals? 

Peter Thiel’s Zero to One, although not exactly a CFO book strictly speaking

What was one takeaway from that book that resonated specifically with you?

Experiments, then challenge things that have been in existence for a long time. Because it’s been done for such a long time, doesn’t mean that it’s the right way of doing it. Doesn’t mean that there’s no way to innovate and become better. And there’s plenty of examples, how companies differentiate and become better. The other thing I’ll say is it’s not always the first to market that dominates an industry. Sometimes it’s better to be slightly behind, but learn all the mistakes that your predecessors or competitors have made. then dominate the industry. A startup needs to be contrarian. 

If you had the chance to travel anywhere in Southeast Asia today, where would you go? 

I always like the new frontier. Relatively uncommercialised historical villages or diving at unexplored islands in Indonesia, the old temples of Bagan, Myanmar or Cambodia

Is there anything you’d like to plug / announce on our show? 

It is not so much of an announcement anymore, but really we are hiring massively. Now we are  aware that there are talents in the market, folks that are displaced through no fault of theirs, extremely talented folks, who want to find a new home. Please talk to us. Any one of us, we are very happy to make the introductions or the necessary connections, to get that through. 

About our guest