Painter says Fair needs SoftBank’s help

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Scott Painter says Fair — the used-vehicle subscription service from which he stepped aside as CEO last week — has reached an “inflection point” that requires hard choices, including removing his brother as CFO and cutting 40 percent of Fair’s staff, to get on a path toward profitability.

In a telephone interview, Painter said he continues to believe in Fair’s concept: allowing consumers to pay an open-ended monthly subscription for late-model used cars that Fair purchases from dealers, including a “start fee” large enough to keep consumers from constantly turning over their vehicles. But, he admitted, the underlying finances have proved challenging at his latest venture as an auto-retail disrupter. 

“The jury’s out on whether or not we were going to be successful, you know, and whether or not we’re going to be long-term profitable, but that’s obviously what we’re hoping and what we are working towards and what we are committed to getting to, for sure,” Painter told Automotive News.

Fair was founded in 2016 in Santa Monica, Calif., by Painter and fellow auto industry veteran Georg Bauer. The company developed a mobile app that lets consumers obtain vehicles online as an alternative to a short-term rental or a long-term lease. According to Fair’s website, it now operates in 17 states. Early investors included BMW i Ventures and Penske Automotive Group Inc. 

Painter resigned Oct. 30 as CEO, saying in a memo to employees that he had “concluded that new leadership is needed to sharpen the company’s focus on its core strengths and to pave the way to profitability,” according to The Wall Street Journal. Adam Hieber of SoftBank took over as interim CEO. 

Painter indicated in the memo that he planned to remain as chairman of Fair’s board of directors, a role originally held by Bauer. Bauer — former financial services executive at Tesla Inc. and BMW before that — is now Fair’s vice chairman and president, a spokeswoman clarified Monday for Automotive News

SoftBank is one of Fair’s largest and most active investors, The Wall Street Journal reported. The Japanese tech giant owned by billionaire Masayoshi Son, led Fair’s $385 million funding round in 2018, boosting Fair’s valuation from $450 million to $1.2 billion.

Last month, Fair announced that it was laying off 40 percent of its staff in an effort to become “a profitable company.” It also removed Painter’s brother, Tyler, as  CFO as part of the moves.

Painter said the executive shuffle was required “because we’re going through a scaling moment and we need to prioritize. … I invited Adam and the team from SoftBank in. The whole reason we chose SoftBank in the first place was really how capital-intensive this business was, and, to some degree, I’m relieved that I’ve got partners that are here to help me figure this out right now.”

Painter said there’s “absolutely no drama, no negative story about it. Georg and I still go to work and do the same things we did. I’m focused on the product now more than ever, and I don’t have to figure out every month how to continually refinance and structure all this debt. I’m very, very excited to have Adam on the team.

Honestly, if it wasn’t for SoftBank, we couldn’t go through this. It’s really important. They continue to support me and support this company.”

Fair’s business model, Painter said, works somewhat like an automotive version of a real estate investment trust, which uses borrowed money to purchase and operate income-producing commercial real estate. 

In Fair’s case, it borrows funds from lenders to purchase used vehicles for subscribers, who pay an upfront cost and monthly fees to Fair to use the vehicles, as well as cover costs of registration, taxes and maintenance.

The interactions, from choosing a vehicle to making payments, are conducted through a phone app. Painter said about half of Fair’s 65,000 active subscribers are ride-hail drivers and that the average monthly payment among Fair’s subscribers is “north of $500 per month.”

The rub

One problem, Painter said, comes in the rub between traditional finance and Fair’s business model.

“I think that one of the things that we are absolutely focused on is making sure that we are able to get debt structured in the right way. That is one of the most important parts in this business; we have to have the right kind of debt partners, and because we aren’t lending customers money, and because we don’t have a term, that means we have to have a totally new set of covenants and a new set of rules in all of those things,” he explained.

“Over time, we have been able to work with our banks to make that more supportive of a flexible subscription, but we’re still on that journey. And this is also one of the best parts about having SoftBank as a not just equity partner, but also as an overall partner for the business. It’s very capital-intensive.”

The company’s financial woes were evident in online comments about its app. Customers complained about rapid increases discovered in Fair’s “start payments” — nonrefundable upfront payments that consumers make with each vehicle they obtain through Fair. Comments indicated that start payments that had been $800 jumped to $3,000, or a start payment that had been $1,400 was now more than $5,000 for the same vehicle.

Need for patience

Painter asked for patience from Fair’s customers.

“I would probably give us a couple of weeks, maybe even a month, to figure out how to remap all of the pricing. So almost everything that you see in the app, I really wouldn’t even worry about in the near term,” Painter said.

“We’re hitting a scaling moment — 65,000 cars is over $700 million worth of cars. We have facilities that are well over a billion dollars now. The dollars involved mean that we have to get it right, now, more than ever. It’s just the reality of our scale. We’re not an experiment. This is no longer a startup. And if you don’t have everything lined up to scale, you shouldn’t hit that button.”

Painter’s altered role within Fair recalls his controversial 2015 departure from another startup he founded and ran, TrueCar.

Painter led TrueCar through a period of rapid growth, built around offering consumers a low-price promise without the hassle of negotiating with dealers. That was followed by a near collapse in 2012 that saw thousands of dealers exit the TrueCar network amid complaints about bidding wars that caused them to sell cars at a loss. TrueCar also faced legal challenges in several states on grounds that it violated auto-brokering and advertising laws. 

AutoNation cut ties with Painter and TrueCar in a contract dispute over control of customer info in 2015. But Painter and the auto retailing giant were able to mend fences and last year formed a partnership between AutoNation and Fair.

“I gotta tell you,” Painter said, “it’s been refreshing for me to not be at war with car dealers. I never realized how much of my time and energy was spent trying to convince everybody that we weren’t the bad guy in all of this, and Fair has been a completely different thing.”

Painter said he thinks the company can get its house moving in the right direction in one to three months and that he believes it can be profitable and cash-flow positive by the end of 2020.

“Subscriptions are not going away — consumers love them,” Painter said. “We do need to structurally figure out how to finance them, and we are going to do it with a priority on sustainable and profitable growth.”

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