Go on call with Ernest Chew, CFO of Carro, a company leading the way in reshaping the used car industry with its AI-driven car buying experience.

They recently announced record profitability in Q1 for FY 2024 (3x the entire last full year), the latest achievement in the company’s journey becoming now one of very high-growth tech start-up that is profitable across all metrics, with growth driven interestingly by their ancillary businesses in financing, insurance, aftersales and mobility (60% of their gross profit).

In Part 2, he shares his thoughts on EVs, unlearnings from two years as CFO, advice for finance professionals venturing into startups, and much more.

Part 1: How to Bring Balance to Profitability and Growth

Timestamps

(01:50) Carro’s record quarterly profitability;

(04:57) Carro’s ecosystem approach to balance growth and profitability;

(11:03) Carro’s approach to unlocking greater ecosystem growth through strategic partnerships

Part 2: How to be CFO of a AI-driven used car online platform

Timestamps

(01:00) Ernest’s views on EVs and other emerging trends around cars;

(02:18) Ernest’s unlearnings from two years as CFO of Carro;

(05:21) Managing a cross-border organization;

(07:15) Ernest’s advice for finance professionals venturing into startups;

(08:14) Rapid Fire Round;

The content of this podcast is for informational purposes only, should not be taken as legal, tax, or business advice or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any ⁠⁠⁠⁠⁠⁠Insignia Ventures⁠⁠⁠⁠⁠⁠ fund.

Transcript

Part 1: How to Bring Balance to Profitability and Growth

Paulo (Host): Hi folks, welcome back to On Call with Insignia, where we go on call with leaders innovating the future of Southeast Asia, as we like to call it, as Innovation. I’m your host Paulo Joquiño, and we are here in today’s episode with Carro’s CFO Ernest Chew. For our long-time listeners, you may remember Ernest from a previous episode we had with him almost 2 years ago now, and he had just joined the company then in the midst of the pandemic, and it was really a great conversation. 

Learning more about how Carro was able to swiftly navigate those waters and come out really strong. And now this year, there’s a lot more that has happened with the company, and for those following the news, you may have already seen the headlines that just this week, as of this recording, Carro achieved its best quarterly profitability since inception this Q1 of financial year 2024.

This episode we’ll be really excited to talk more about that, what is really happening behind the curtain, and how Carro has been able to engineer that profitability while still growing at scale as a venture-backed company. Thank you for coming back on the show again, Ernest. Great to have you on.  

Ernest Chew: Thank you, Paulo. Great pleasure.  

Paulo: So I think we just hit it off the bat and start with the rundown of all the highlights from the past year that really shape the trajectory of Carro. 

Ernest: Thank you. Yes, indeed. We reported record profits last quarter or reported quarter, which was 3x the entire full year last year. We are well on track to achieve more than 10x yearly compared to our entire last financial year. On top of that, we grew our gross profit margins. We pretty much doubled that to close to 20%. 

We were well ahead in terms of meeting our profit targets. I dare say that we are one of very few high-growth tech startups that is even profitable, and it’s across all metrics. And reflecting back, it’s been a pretty incredible last 12 months since last year where we shifted gears. We are amongst the first to pivot towards optimizing to achieve profitability and possibility whilst maintaining strong, reasonable revenue growth.

A couple of things I would highlight that we’ve been very focused on: So number one, increasing unit economics. I’ll say it’s not very difficult to build a fast-growing business that burns even more money as it grows, but it’s pretty darn hard to build a sustainable company with strong profitable growth. Simply put, if a company generates $1 revenue but incurs two dollars of costs, then anyone could do this.

Secondly, optimizing productivity. We took a very long, hard look at whether every part of our business and OPEX structure is creating or destroying value. Are we busy digging our graves, or are we busy building skyscrapers? We have various dashboards to track, improve processes, automate, and multiply productivity.

Number 3 would be building up ancillary and recurring income streams. In the last few quarters, nearly 60% of our gross profit comes from ancillaries, which are mostly very sticky recurring income.

Number four, I would say, building liquidity watches. Whatever we build will come to a standstill if we don’t watch our cash positions, our total liquidity, as well as current and future cash flows. We simply cannot avoid the topic around cash flows.

The key word across all things that we do is balance – not overgrowing and burning excessively on one end, nor becoming extremely profitable above all else, destroying customer satisfaction, etc.  

Paulo: I really like that point on cash flows and that keyword of balance. It’s not just about becoming profitable but also scaling the business as well, because Carro has been indeed growing really fast over the years but still able to achieve profitability as we mentioned.

I wanted to double down on the third point that you brought up, which is really building up your ancillary and recurring income streams. You mentioned it represents nearly 60% of your gross profit, and you even noted in a press release prior to this latest one that Carro would still be profitable without even selling a single car. And even today with that recent milestone on the Q1 profitability, you also talked about how Carro is under no pressure to sell more just to meet profitability targets.

I wanted for you to really discuss this whole concept of building an ecosystem business. For those watching the podcast, you can see in Ernest’s background the whole AI-driven car buying experience and how Carro has been able to really develop this ecosystem at scale and benefit from these ancillaries, in contrast to many companies that have today that have had to scale down, close some business units to be able to focus on the car business in today’s world.  

Ernest: At the heart of what we do is we sell trust. The idea is to cross-sell as many products, for instance, financing where we get commissions or monthly interest. We cross-sell insurance and target yearly renewals.

We build products and services that our customers want and capture returning customers, including after-sales service every 6 months and, as I said, insurance renewals every year. Whatever car that we sell, whatever product that we sell, we always look to somehow cross-sell, up-sell. Essentially, many of the things we do strengthens and reinforces the customer lifetime value.

Last quarter, our annual gross profit grew nearly 200% for mobility, nearly 150% for after-sales, and 50% for financing and insurance. We don’t operate these businesses in silos. We look to synergies and, as I said, building a very sustainable, sticky revenue income stream.  

Paulo: I think the key word is really experience – building that experience and that trusted experience as you mentioned at the beginning, which means that everything has to be connected. And we do have a lot of finance professionals listening in to our podcast, and I’m sure they’d be curious to learn more about what this means.

We talked about it from a product and user management perspective, but how about from a finance perspective as well? What are some of the considerations or even pitfalls to take note of when growing a business like Carro with multiple ancillaries? Maybe you can share a little bit from your perspective as CFO.  

Ernest: At the surface, a platform-based business model seems quite straightforward and very intuitive. Whenever we sell a product or service, we want to be able to cross sell and up-sell more products across our ecosystem to improve overall unit economics and recurring income streams.

We want to build a flywheel which powers all our business sides so that we don’t operate in silos, as I said earlier. We monitor attachment rates very closely so that we can cross-sell more and more products. We want to make sure that we capture value across the entire ownership and usership life cycle end-to end.

And from a finance perspective, there are a couple of things to be mindful of. While complementary and interlinked, the operating drivers of each business are quite different. For instance, to sell a car, probably the key drivers are competitively sourced buy vehicles, cost-competitive reconditioning, effective marketing (not nonsensical marketing that some of our peers deployed), conversion, aging of vehicles.

To be able to cross-sell financing, we will need competitive bank financing lines, strong product listening, and attachment rates, effective collection and recovery processes. Or whatever to cross-sell insurance, we will need a very differentiating insurance platform. We need to bring on board strong insurance partners with market-leading products, good traffic, improved attachment rates, particularly for renewals.

The operating drivers for after sales and mobility segments are also different. Then you multiply these four-five segments across all the geographies we are in. It can get a bit more complex, but at the same time, we just need to be mindful and understand what’s happening, all this while ensuring that the OPEX is lean and there is no duplication of cost in the various business segments.

So the key point here is it’s incredibly important, even in the finance function, to build a very strong commercial understanding of building a business.

Secondly, what I’ll say as well from a finance perspective is: watch the P&Ls, cash flows, and liquidity very carefully. All the businesses will have CAPEX and capital requirements, whilst some, which are profitable from the beginning, will require much more working capital at the start.

They will take time to build financial track records that banks want to see before they consider lending at competitive rates. For that, equity shareholders will want to see the upside.

So this means I will have to watch like a hawk where the cash flowing out is creating value or going to waste. In many times, pacing and balancing growth versus capital allocation appropriately is critical to the survival of every startup.  

Paulo: Again going back to that keyword of balance that you mentioned earlier. And also, I really like what you brought up with needing to have that strong commercial understanding in order to really build a lean but fast-growing business.

Another part of the ecosystem that Carro was building goes beyond the acceleration and towards the company’s ability to make strategic investments and partnerships, the latest of which in the headlines has been with insurance, ZA Tech, as well as a blue-chip company, established automotive player JCNC Jardines. So can you share with us how Carro’s approach to investments and partnerships over the years fits into this whole ecosystem play? 

Ernest: We could share a couple of examples. Over the years, prior to ZA Tech and JC&C, we are indeed one of very few startups invested by blue-chip strategic partners. 

The more recent investment by Jardines represents validation by one of the largest Asian blue chip companies with strong automotive experience. We are working with Jardines across multiple areas in Indonesia, where Jardines has a dominant automotive positioning, Singapore, Malaysia, Thailand, and other future overlapping geographies.

Generally, our strategic partners, be it Jardines or others, they are centered around supply ecosystem enablement, digitalization, amongst others. We also secured an investment from ZA Tech, which is working with us to strengthen our insurance platform across the region. We are indeed humbled and honored to have giants alongside us in our journey.  

Paulo: Definitely a lot of giants that Carro has had the privilege of partnering with over the years and continue to be very valued partners for the company. So I’m wondering, what is the thought process or what have been the considerations behind evaluating and then setting up these opportunities for Carro’s success?  

Ernest: I think at the heart of it, we are very partnership-driven. We embrace partnership wholeheartedly. We recognize that it’s easier to build trust in the used car ecosystem if we can learn and work with the best partners. For instance, in insurance, we have learned significantly from MSIG and ZA Tech, strengthening our insurance business.  

Paulo: I think you have a more even more holistic view in terms of how you’re able to strengthen Carro’s insurance business. So there’s definitely that build-up there in terms of capabilities for the company. I’m also curious to know how these partnerships are strengthened over time, for these are not just like one-off transactions but really evolve over time as well, and how does this eventually tie back into Carro’s profitability narrative and growth?  

Ernest: You’re right that these partnerships are not meant to be transactional. They are holistic, and it’s meant to be long-running. You know, it’s very important to build partnerships that leverage on each other’s strengths to deliver a strategic win-win outcome. That is the tenant of sustainable partnerships.

For instance, how can we help our new car dealer partners to sell more new vehicles by providing used car trade-in solutions? Or how do we help them navigate and address inventory management? These are some of the things that we have complementary strengths that we lean on each other. We learn and we grow together.  

Part 2: How to be CFO of a AI-driven used car online platform 

Paulo (Host): In terms of even technological developments and really setting itself as a pioneer for how cars are bought and sold, so zooming out and looking forward to what economic and technological developments will impact Carro the most in your opinion, as it continues to scale its businesses? 

Ernest Chew: Firstly, for sure EV is coming, but it doesn’t always mean jumping on the bandwagon to sell EVs. We need to look at the opportunities and figure out where we can benefit and play to our strengths. Without being too specific, we believe it’s a tailwind for us.

Secondly, we have always looked to AI, machine learning, automation, and more recently generative AI in a lot of what we want to do. Would like to do more, but it’s important to know what they achieve, what is the business case, do we need this, is it simplified and optimized?

Paulo: Yeah, going back to that question of “are you digging your grave or are you building skyscrapers” as you mentioned earlier. Our last chat was in 2021. As I mentioned earlier, less than a year into your role. Two years on, how would you say your own role and leadership approach has evolved since you joined? What has been the biggest thing that you’ve had to unlearn? 

Ernest: Two years ago, I think I talked about CFO being the chief future officer. I think that is still true. Hindsight is always 20/20, but it’s incredibly important to develop good foresight to anticipate what the plans and actions of today will mean tomorrow, even if we can’t predict what the environment will be. I also think it’s always important to learn and unlearn and relearn that what got us here won’t always get us to where we want to be. 

Firstly, I got to unlearn that revenue growth comes first, profits as secondary. To be frank, we have never really looked at growth at all expense anyway, but since mid-last year as storm clouds were gathering, I’m incredibly glad that we are among the first to pivot towards optimization and profitability whilst maintaining, as I said, strong reasonable revenue growth. We have achieved off the hook. The key word, as I said again, is balance. Going to one extreme will be disastrous.

I recently came across an article that talked about the rule of 40, which states that a software company’s revenue growth rate plus profitability margin should be equal to or greater than 40%. For instance, if revenue growth was 100%, profit margin was -60%, it states that it’s a good IPO candidate. Maybe this works for other tech startups, but I fundamentally disagree with this approach. I think we need to have both growth and profitability to be sustainable and to achieve what the company is meant to reach. 

Secondly, I’m unlearning that cash alone is king. No doubt cash is important, but I found that it’s actually liquidity and cash flows that are king. This includes cash plus all the bank lines and monetizable assets. Too much cash alone is poison, which can lead to wastage. Bank lines and monetizable assets, on the other hand, are harder to acquire, and they are generally not free. Hence, require a conscious decision whether we want to draw or monetize. 

Thirdly, I need to unlearn that all tasks are urgent and important. There is always a time for certain things, and we don’t always need to react. The right thing done at the wrong time is probably the wrong thing. Prioritization is key. We can still be quick and then go on things that are no-brainer, but sometimes it’s better to think about something, then respond, or even choose not to. 

Paulo: Yeah, a lot of great takeaways there for our audience, and especially the third unlearning, which is definitely easier said than done, I’m sure, especially in the startup industry.

As CFO for a cross-border company, multiple business units, multiple accessories as we’ve discussed, we hammered down the importance of not working in silos. And also, you also mentioned the fact that you have to really pay attention to everything that’s happening, especially cash flow-wise, like you mentioned, looking at things like a hawk and keeping your eyes on the money, so to speak.

So how do you manage communications and alignment across all these different functions and businesses to ensure that the financial aspect of growth is stated and in decision making? And maybe extending that a little bit further for entrepreneurs listening, what can they do from early on in the life of the company to make sure that finance is at the front seat of growth and is not some back office that they only remember is there when they start to raise both rounds? 

Ernest: Yes, I think the finance and business will have to work hand-in-glove together to build a great company. As a result, all our business heads must understand their own P&L and balance sheet and their cash flows. Only then will they understand the operating levers to pull that unit economics and the numbers to hit their respective KPIs.

We ensure that everyone understands what, for instance, that it’s not just about revenue growth or bowling world, but what is the bottom line of the P&L? How do they make the business profitable and sustainable? They will need to know how much cash, for instance, is needed to build inventory and invest. At the end of the day, it’s about alignment on measurable KPIs that are often financially driven by positive guitar, which we are reinforcing constantly across all markets. 

Paulo: That’s true. Understanding and alignment really comes with the goals and setting that across the organization. Going into more of a professional career development angle here, and I wanted to ask again, since you have a lot of finance professionals listening in, but what’s your top one-line advice for these folks looking to, you know, especially those who are in banking right now or corporate and have just been thinking about maybe jumping in and making their next career move to go into startup companies like yourself? What’s your advice for these folks? 

Ernest: Commitment to stay the course. Startup life is not for the faint-hearted. Identify what the business needs and find ways to make a positive impact. Don’t apply circular logic in the business. It’s not having a heart attack. The other one is change quickly, but most important is aligning the horsemen to go in a single direction. 

Paulo: Going back to your third unlearning about really not being too reactive and then really being thoughtful about the decision-making and making sure everything is aligned.