Dead Unicorn Series: Shift Technologies

Selling $1 for $0.5 is not sustainable

SAN FRANCISCO, Oct. 06, 2023 (GLOBE NEWSWIRE) -- Shift Technologies, Inc. (Nasdaq: SFT), a consumer-centric omnichannel retailer for buying and selling used cars, today announced that it and its subsidiaries (collectively, “the Company”) intend to file a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court (“the Court”) to implement an orderly wind down of its business.  

To facilitate the process, the Company will utilize cash on hand and cash generated by the liquidation of inventory through wholesale channels to provide the necessary liquidity to support the wind down and closure of operations during the Chapter 11 process.

The Company’s two locations in Oakland, CA, and Pomona, CA, and the Company's website have ceased operations as of the time of this press release. 

Ayman Moussa, Shift’s Chief Executive Officer, said, “We deeply value our employees, customers, partners, and the communities in which we have operated. This was not the outcome we had expected or hoped to achieve. This decision follows months of trying to raise capital and restructure the balance sheet to allow the Company to operate unencumbered in this challenging environment. Ultimately, the extensive efforts of our senior leadership team and advisors were not successful. We want to thank all our dedicated employees, customers, and vendors who have supported us over the years.”  

Shift, an online peer-to-peer marketplace for buying and selling used cars, was started by George Arison, Toby Russell, Minnie Ingersoll, Christian Ohler, Joel Washington and Morgan Knutson in 2014 and officially launched in San Francisco in 2015. Buying a used car was a draining experience. People hated the in-person used car buying experience so much that there’s this used car salesperson stereotype that they are dishonest, untrustworthy, and are willing to lie about the condition of a car, hide defects, and use high-pressure sales tactics to pressure customers into buying a car. Shift was created to change that, to cut out the middleman and to make buying a used car as delightful as getting an Uber ride. People downloaded the shift app, found the car they wanted, paid the deposit and Shift would  deliver the car to the customer's door. The customer had a few days to test drive and determine if they wanted to keep the car. People don’t have to deal with the used car salespeople any more to buy a used car!! Selling a car on Shift is also a hassle-free experience. Sellers would get a quote online and a mechanic would come to inspect the car to give the final quote and Shift would prepare the car and deliver it to the buyer. Sellers would  then get paid through an online bank transfer. Shift took a cut from the sale and everyone is happy.

Venture capitalists had been really interested in marketplace startups since Uber and Airbnb burst to the scene. Uber and Airbnb’s meteoric rise contributed to a big funding boom for marketplace startups. During the 2014-2017 period, all kinds of peer-to-peer marketplace startups got funded. We have got Doordash for food deliveries, Instacart for grocery deliveries, Bloomthat for flower deliveries, Luxe for valet parking, Poshmark for shopping, Shyp for courier service, Eaze for marijuana delivery, Minibar for alcohol delivery, LendingClub for personal loans, TaskRabbit for one-off tasks, Kitchit for personal chefs, Bannerman for bodyguards and many many others. Unfortunately, most of these marketplace startups didn’t survive due to fundamental flaws of their business models.

Marketplaces are operationally challenging because they have to balance the supply and demand to make the marketplace function well. Marketplaces also have to provide enough value as the middlemen between buyers and sellers. Otherwise, buyers and sellers could just transact directly. In order to make the business model work, marketplaces have to extract value from transactions to cover operating costs, marketing costs, customer refunds, frauds, etc. The math is not easy. For example, if a marketplace takes 20% of the transaction value and its amortized customer acquisition and operating cost per transaction is $30. Average transaction value has to be $150 to break even. At the time most marketplace startups focused on growing GMV (gross merchandise value) and many of the marketplace startups were running at negative contribution margins or even negative gross margins. But the popularity of Uber and Doordash normalized the negative margins for a while. Venture capitalists put billions of dollars into various marketplace startups, hoping some of them will become the next Uber, AirBnB or Doordash. But most marketplaces died young because there was not enough demand. After all, the total TAM (Total Addressable Market) for valet parking, bodyguards or personal chefs is not big enough and the growth was usually too slow for these marketplace startups to raise next big venture rounds.

The used car peer-to-peer marketplaces are one of the few categories many investors still had faith in after a myriad of marketplace startup failures. Tens of millions of used cars are sold every year and the order value per transaction is quite significant, usually in the tens of thousands of dollars, so there’s potential for used car marketplaces to reach venture scale. By 2020, there are a few big players emerging,  including Carvana, VRoom and Shift. Shift, being the No. 3 player in the market, was able to raise approximately $220M of equity capital prior to its 2020 IPO. The company generated a lot of revenue but had abysmal profit margins. Venture capitalists at the time didn’t care much about profitability though. Investors primarily wanted big revenue and big growth.

Shift had a lot of revenue but still needed more growth to get to an IPO. But the COVID-19 pandemic accelerated its trajectory to the public market. People sat at home all day long but they suddenly wanted to buy cars.  The global supply chain snag and chip shortage during the pandemic made new cars less available. Shift saw its used car sales skyrocketing. Its revenue was $166.2M in 2019 and $195.7M in 2020 but grew 200+% to $636.9M in 2021. The amazing revenue growth enabled the company to IPO through a SPAC merger in October 2020, raising another $300M with the company valued at $1B+ post-IPO.

Shift’s profit margin has always been abysmal. Though, the company seemed to be on a good trajectory with gradual improvement. GPU (gross profit per unit) was -$213 in 2019, $1,283 in 2020 and $2,098 in 2021. However, the company was burning cash at an alarming rate. By June 30, 2022, the company was practically insolvent with $329M of assets and $353M of liabilities while losing more than $50M per quarter. By the end of September 2022, the company only had $44M of cash on its balance sheet. In the meantime, the pandemic used car boom started to fade. Shift’s 2022 revenue was $670M, a paltry 5% increase from 2021 and GPU fell to $1,208. Without meaningful growth and margin improvement, it was very difficult to raise additional capital. Shift managed to merge with another struggling used car seller Carlotz in December 2022. As a result, Shift boosted its cash position from $44M in September 2022 to $96M in December 2022. But their path to cash flow breakeven proves to be elusive.

Carlotz was also a unicorn when it went public and suffered the same profit margin and revenue growth challenges. The merger of the two troubled companies didn’t make things better. Revenue dropped 75% year-over-year and the company lost $73.8M for the first half of 2023. The company only had $23M of cash left at the end of Q2 2023. Shift laid off 34% of its workforce to stay afloat but the writing was on the wall and the company finally filed for bankruptcy on October 12, 2023.

Why couldn’t Shift make it work after raising so much money? The fundamental issue of Shift’s business model is that a pleasant user experience is expensive and in direct conflict of profitability. The business of selling used cars is hard. Traditionally, its success depends heavily on the used car salesmen’s sales tactics. The business model is to squeeze out as much profits as possible based on customers’ ignorance on pricing and salesmen’s pressure selling. The profit margin becomes a lot thinner with a sleek app where pricing information is so transparent and buyers cannot be easily manipulated. On top of that, door-to-door deliveries and inexpensive returns further dented its profit margin. To make the business work, Shift needs to maximize GPU and to minimize the marketing and operational costs. It’s the same old business model like used car dealerships except Shift was subsidized by venture capital and the company never actually made any money. In fact, the used car dealerships have a much stronger business model as many dealerships sell both new and used cars. The dealerships can acquire used cars on the cheap as a customer usually trades in their old car when they buy a new car. The marginal cost of selling used cars on top of the new cars the dealers are already selling is minimal as they can display all the cars on the same lot. Shift’s main advantage was the pleasant user experience and competitive pricing subsidized by venture capital. But when venture capital dried up, they could no longer afford competitive pricing. Apparently, the good user experience by itself is not enough. Shift’s demand plummeted and the company spiraled into bankruptcy. 

What about Shift’s competitors like Carvana and Vroom? Well, they are also struggling. Vroom is very likely to bite the dust in the near future. Carvana is trying very hard to make it work. It restructured its debt just recently and the company’s GPU is $5000+ at the most recent quarter. I suppose it could work if they provide good car buying and selling experiences but charge the customers a premium for it. There are people who are willing to pay up so that they don’t have to deal with used car salespeople. But it’s yet to be seen if Carvana can become a sustainable business in the long run.

It’s worth noting that fluctuations on used car prices accelerated Shift’s demise. The company started as a pure marketplace operator by taking a percentage of the car sale on a consignment basis but then switched to buying cars outright and reselling them directly to buyers. This asset heavy model made its business susceptible to price volatility. During the pandemic, used car prices skyrocketed. Holding inventory was advantageous but the acquisition cost also shot up. Then the used car prices fell 15% in 2022. Shift’s gross margin was high single digit during its heyday. Unsold inventory became unprofitable inventory fast. Shift recorded $17M of impairment charges in 2022 while its gross profit for the year was $25M. Trying to make money from a laser-thin margin business with price volatility was mission impossible.

If you ask me what the moral of the story is for Shift, I would say Shift is a product of the easy money era. Easy money and zero interest rates encouraged unproductive use of capital. Growth at all costs became the norm. Companies like Shift are basically selling something that’s worth a dollar for fifty cents. In retrospect, Shift should have folded at series C or D. At the very least, Shift should have adjusted its business model by providing good user experience while charging customers good money for it. Then, they would have known if the sustainable pricing could generate sufficient demand for used car buyers and sellers to be a venture worthy business. Instead, Shift rode the easy money gravy train all the way to the IPO without testing a profitable business model. In the end, Shift burned $500M+ of cash without showing a dime of operating profit. The majority of the loss could have been avoided if venture capitalists had pulled the plug earlier. But I suppose they cashed out at the IPO and left retail investors holding the bag.

Over one thousand tech unicorns, tech startups that were worth $1B+, were created during the easy money era of 2008 to 2022. Investors originally attributed this wealth creation to rapid technological progress. But the presumed wealth creation looks increasingly more like asset inflation or, shall I say, pump-and-dump schemes? VC pumped tens of millions dollars into a startup and the startup used the money to sell a dollar for fifty cents to generate a lot of revenue growth. With the amazing revenue growth, VC pumped hundreds of millions more dollars into the startup and marked up the company’s valuation. Rinse and repeat for a couple of times. A unicorn was born. Rinse and repeat for a couple more times and the company went IPO, preferably through a less onerous SPAC merger. VC cashed out the investments in the public market and moved onto manufacturing the next unicorn. This playbook made a lot of rich people richer for a while. But fast forward to 2023, investors suddenly realized there are a lot of zombie tech unicorns walking around in the arena but the money spigot has stopped. Most of these zombie unicorns are going to die in the near future and hundreds of billions of *wealth* will be officially wiped out. Venture capital industry itself is in deep trouble due to these excessive investments and now massive wealth destruction. Chances are it will take a long time for venture capital to recover from this mess. I believe this mania was primarily triggered by easy money and zero-interest rate policy. It’s hard to not get caught up in the valuation markup game if your job was to invest in high growth tech startups when money was cheap.    

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Author Note: Dead Unicorn Series is a collection of stories I am working on by deep diving into the stories of once high flying tech unicorns that flamed out. In tech we celebrated successes. But success is a lousy teacher. In my opinion, lessons learned from failures are more valuable and these cautionary tales are more interesting. Hence, the Dead Unicorn Series.

All the stories I share here have no villains. They are just failed (expensive) experiments that advance our knowledge.

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