Nicholas Hinrichsen, Co-Founder of Clutch and Carlypso, went to Stanford University in 2011 after studying in Chile and Germany. At Stanford, he co-founded Carlypso, an online marketplace that gave consumers access to vehicles usually sold in wholesale markets. After graduating from Stanford Business School in 2013, he joined the startup accelerator YCombinator, raised Venture Capital in 2015, and eventually sold the company to Carvana in 2017. In this episode of Be EPIC podcast, Hinrichsen gives insight on his entrepreneurial journey and EPIC advice for those wanting to do the same.
00:07 Matt Waller: Hi, I'm Matt Waller, Dean of the Sam M. Walton College of Business. Welcome to Be Epic, the podcast where we explore excellence, professionalism, innovation and collegiality, and what those values mean in business education and your life today. I have with me today Nicholas Hinrichsen. And Nicholas is quite an entrepreneur, he has a vast experience. He's worked from Chile and studied in Germany and eventually got his MBA from Stanford. He's worked with Bain, Merrill Lynch, and then has a series of startups, but he started, after his MBA, he started a company called Carlypso, and three years after starting and almost four years, he sold it to Carvana. And at that point, he already had over 30 million in revenue. Actually, that was Carvana's first acquisition. Is that correct, Nicholas?
01:15 Nicholas Hinrichsen: That is correct. Yeah.
01:17 Matt Waller: Well, Nicholas, thank you so much for taking time to join me today, as I mentioned to you, entrepreneurship is one of the three strategic thrusts of the Walton College of Business. So I really appreciate you taking time to visit with us.
01:34 Nicholas Hinrichsen: Thanks for having me, Matt. I appreciate it too.
01:37 Matt Waller: So, you know, I do wanna ask you some questions about some of what you're investing in and about your experience with Carlypso, but also, if you wouldn't mind, we're an educational institution and of course teaching entrepreneurship is important, so here's a question for you. How do you teach entrepreneurship?
02:00 Nicholas Hinrichsen: That's a good question. Entrepreneurship, a lot of it is courage that you really have to just start something and then you find out what you learn. Would be helpful if you're authentic to the space, so if you have a hobby or you're an expert in a certain space. In my case, my co-founder, Chris is a huge car enthusiast, and so naturally he wanted to do something in the car space, but step one is to have the courage to do something. Have the conviction and try to sell something. In our case, we started the business Carlypso by selling our classmates' cars, which we had the courage to detail them, take photos, put them on Craigslist at the time, talk to potential buyers. So, the courage to do it, and then the willingness and ability to listen to customers is actually the most important thing of a start-up.
02:47 Nicholas Hinrichsen: There's a process you can follow though. We took a class taught by Andy Rachleff, the founder of Benchmark Capital and Wealthfront. He made a point where he said, "The most important thing is to find product-market fit." Oftentimes, what you think people want is not what they want, but they'll tell you what they actually want.
03:03 Matt Waller: I would agree. I mean, to really get product-market fit, you've gotta get your MVP out there early and a lot of times, entrepreneurs or... They don't want to get it out too early, they're afraid to.
03:21 Nicholas Hinrichsen: That's true. We had a class with Steve Blank, and Steve Blank always says, "If you're not embarrassed about the product you put in front of your customers, you've waited way too long."
03:32 Matt Waller: That's... I've never heard that, but I like it.
03:35 Nicholas Hinrichsen: Yeah, it's true. If you asked me for one of our super-powers, we're never embarrassed. We've put out products that were far from being mature, and the interesting thing is, if you put it in front of a mass market, people will laugh at you and will not consume it, but if you find that early adopter who is really excited about what you're doing, then that person is proud of being the first one to try out what you have, because it's a hack, and that person is really excited about being the first one. Lesson one is put it out there really quickly and have the courage to do it, and don't be embarrassed. Lesson two is you need to identify your audience, and you need to know who you're talking to.
04:13 Matt Waller: Well, you know that process of talking, conversing with potential users, there is some skill in that, because I think... There's a couple of things. One, there's a tendency for entrepreneurs to maybe put product out too far developed, but even if they do it early, there's a tendency to not want to get enough eyes on it. It's kinda like after the 10th person, they're like, "Okay, I've got it." Really, if you really keep going and get information, pivot a little bit, test it, pivot, that's the only way to really get product-market fit, but it's exhausting.
04:56 Nicholas Hinrichsen: I agree with both of those statements. So the process, [chuckle] we call it customer discovery, and that doesn't mean discover where the customers are, it's more discovering what they need. If you want something that people... They would be really upset if you took it away from them again. Those are good signs of product-market fit. You want people to rave about it, tell everybody about this experience of how they just sold their car, it was incredible. And so you don't get that if you don't continuously ask for feedback, you ask a few questions, you make real offers and then you wait for the reaction of customers. They'll tell you what they want, they'll tell you very bluntly what they don't like also.
05:34 Matt Waller: So Nicholas, product-market fit, I wanna... You mentioned it, 'cause you said that's really important, and I agree with you. I've heard it said that you know when you have a product-market fit when you've got customer traction, what do you think about that?
05:51 Nicholas Hinrichsen: That's partly true, but not entirely true. Customer traction, you can buy. I can spend on marketing dollars, and then some people make it through the funnel and then I can lie myself into believing we're a product-market fit. I think, first of all, you should distinguish between B2B and B2C, if you're B2C, if you're talking to consumers, product-market fit means they're raving about it in front of other people, they're voluntarily writing positive Yelp reviews, they're sending emails, they're making introductions although you didn't ask for it. Direct to business, B2B, it's slightly different, it's... If you wanna use numbers, if you can, if your sales team can sell a product and it's... You make more revenue than the sales team costs you, that's a good sign of product-market fit. The better sign, however, the one to get to easier is if you give the product away for free, like a four-week trial phase of freemium phase, and then if you start charging, you take it away, and the company really, really, really screams and yells, "Don't do it." And so those were obviously a little bit simplified but heuristics that worked for me in the past.
06:58 Matt Waller: Yeah, so just saying you have customer traction, it's true, but it's not sufficient to explain it, and your distinction between B2B and B2C, I hadn't really heard it explained that way before, but I like that, you're right. If customers, consumers really like it, they start commenting on it, reviewing it positively question.
07:22 Nicholas Hinrichsen: Yeah.
07:23 Matt Waller: And for companies like your two metrics there, I'd like to drill into that just a little bit. The second one, you let the business use it and then you say, "Okay it's time to give it back." It's a way of measuring the opportunity cost they have, and because that's always a great way to measure opportunity cost.
07:48 Nicholas Hinrichsen: The problem with businesses is like a lot of people sell to them, they have deep pockets they can write big checks, and so for business, it's really hard to assess from a conversation, "Oh yeah, you're addressing my needs right now." And so that's why I really like the model that a lot of SaaS companies use, including Salesforce, including, you name it, most of Dropbox. A lot of these SaaS software companies give you a little bit of the product for free and then you start using it, or it's a trial phase for four weeks, and then the timer says, "Okay log in credentials, don't work anymore," because it... Enterprises really need to start using it and see and feel the benefits of your tool versus a different one.
08:30 Matt Waller: I would say, with SaaS companies that works with consumers as well, and then your first one for the B2B, you didn't say it like this. But basically it's, if you're making a profit on it, at least a gross profit on it.
08:46 Nicholas Hinrichsen: Yeah, exactly yeah. The norms is if you sell to the enterprise, usually it is, it's very sticky, so once an enterprise is used to a product, switching it is usually hard for them. If you think about it this way, you can think about it as a concept of customer lifetime value. So if your salesperson costs you $10,000 a month and you only make $1000 in profit from the product, that means you're to spend 10,000 to acquire one, but if this product is sticky and stays for more than a year, then you have a lifetime value out of that product that exceeds the sales cost. And so there, I think it's a bit nuanced, but fundamentally, you're right, is there a gross profit, if I assume all the money coming in versus the cost of selling it.
09:27 Matt Waller: So I'll ask you this once you have product-market fit, and I agree with you. That is absolutely critical. And during the dot-com boom of the '90s, which I was involved in, that was the problem with venture capital funding, they were funding companies too early, companies that didn't have product-market fit.
09:51 Nicholas Hinrichsen: Do you think that has fundamentally changed thinking about, WeWork for example?
09:56 Matt Waller: I don't know, I think it's better than it was.
10:00 Nicholas Hinrichsen: They're doing better, yeah.
10:00 Matt Waller: But the reason I mentioned it is just kind of going a step further, even after you have product-market fit, even if it is true that the company has a high opportunity cost for giving up the solution, or they're willing to pay a profit in amount that is good. Before you can start scaling even at that point, you've still gotta get a business model that works.
10:29 Nicholas Hinrichsen: That is true.
10:31 Matt Waller: Whether you're B2B or B2C, and sometimes that can be as tricky as getting product-market fit.
10:44 Nicholas Hinrichsen: That is true, sometimes, and this is crazy, but sometimes you just need to survive long enough as a company to find the revenue stream that makes it a business. Like a very good example is Twitch, the streaming service that Amazon acquired for 1 billion dollars. It started out as Justin.tv, and I happened to know that because Justin was a partner at Y Combinator when we were there, until Justin would just basically make his life a reality show, he was running around with a camera every day and thought that people would watch him, nobody did. And then he made the TV channels available online, and that wasn't super super kosher, and then he kind of walked away from it slowly but surely and his partner took over, Emmett, who then pivoted towards allowing gamers to record themselves online.
11:35 Nicholas Hinrichsen: And so there was no revenue early on, but it scaled incredibly quickly, just like Snapchat as well, or Instagram, these businesses didn't have any revenue for a long time. But the good news is for these, and that's an exception, like the users became the product and then somebody else found it valuable to have used Twitch or Instagram or Snapchat as a platform to market to these users, and so these are the exception, these social networks or businesses with networks where users may become the product one day, that's when you can, at least with some level of confidence say, "I don't need revenue for a long time for as long as I see that users are coming and staying and engaging," just having users use your product, it doesn't mean that you have a business.
12:23 Matt Waller: And coming up with a business model that really works, that is scalable, 'cause right there's the question of, "Can you scale the product or service, but can you scale it from a business model perspective? And you know, I've noticed some people are just really clever, coming up with business models. I've known people that just seem to be able to come up with them. Now, I kind of believe that when it comes to product-market fit you have no choice, you gotta put the product out there, the service, getting lots of feedback. With the business model part of it, once you do have product-market fit, I think simply being aware of lots of possible business models is important.
13:12 Nicholas Hinrichsen: Agreed, I would argue it's part of the discovery process, customer discovery and customer discovery doesn't end when you find product-market fit 'cause what you notice and we're finding that right now in our process. We're starting a digital platform to refinance auto-loans for example. We thought we'd have to beg credit unions and banks to work with us because the product we wanted to give away is money and so we wanted to act on behalf of these lenders. But in these conversations we're discovering, I know we're solving their problem too. And so initially we thought we're making revenue from one side of the market but now we're realizing by creating a platform where demand and supply meets, we're creating a value for both parties so both parties could pay us and the only reason we found out is because we're listening to customers and we get a good sense for who's the problem are we actually solving?
14:03 Matt Waller: So I wanna talk to you a little bit too about raising money because this is a really tricky business here, first of all I think we might wanna talk about when you should raise money if you're going to not everybody needs to raise...
14:24 Nicholas Hinrichsen: I agree, I think it depends on a lot of things including the business you wanna build. So I was just thinking and pausing for a second, venture capital is really, really wonderful if you wanna build a really, really big business, Venture capital is money plus network and so that's why it's valuable to raise from venture capital funds that have really strong names. We just closed around with some... Not with announce but with a firm, a very big firm from Silicon valley, the interest we're getting... The people that they bring on board to be involved and have aligned interests are so incredible. It's almost an unfair advantage. And so if you get cash you give up a certain persons of your company but you buy in people who are fully vested in your success that will help you build a really massive business. And so that's why the model itself I think works. The big question is for what type of business is it suitable? And I'm going to give you an extreme examples but I think it helps make the point.
15:26 Nicholas Hinrichsen: After selling our business we had some liquidity and so I met old friends who do real estate investments. And so I started investing in properties that they were flipping and remodeling and then that became bigger and bigger. And so I started helping them raise funds for that business and it's a one-by one project-by-project business. And so they're in the opposite, I am really risk-taking when it comes to building my own business but really risk-averse when it comes to deploying capital because when you do real estate, you can put... You know what you're getting, you're investing in hard assets, you know what you're buying land and the property and so raising money for real estate means you wanna have full downside protection and you have zero downside protection when you invest in a Venture. So you really need to understand, okay, what are the dynamics, what are the business models of each of the projects you're investing and is it a business that lends itself for venture capital versus more one that lends itself for slightly more fixed income type of capital forum.
16:24 Matt Waller: So you had experience as an intern with Bain and Company and Merrill Lynch big companies then you went to work for a company in Germany.
16:36 Nicholas Hinrichsen: Much further, yeah. I studied abroad in Australia but I grew up in Germany and then all my peers, I looked into banking and consulting, all my peers spoke so highly of these roles, consulting was super fun, great lifestyle, really interesting people, fun people. I like the problems we're looking at, I didn't like the fact that we couldn't execute. There was advice and no implementation, I'm more of the guy who gets things done. Banking, I just never understood what a lot of people like about it. I didn't like it a lot and so instead I went and joined a renewable energy investment firm that invested in renewable energy projects in China and India. So I spent a lot of time in Asia that was before I came to the US.
17:19 Nicholas Hinrichsen: And then I came to the US, got my MBA and between first and second year business school, I interned with a payment company, with a tech company in the payment space and so that's really where the entrepreneurial bug bit me 'cause I felt like this is so interesting and fascinating. And like a startup, it was a little bit of a research project, you have a conviction that there is something that should be different, you get money to explore and I thought that was really cool and that's why I then... That's what compelled me to actually do it myself after graduating in 2013.
17:53 Matt Waller: Wow, well, it's pretty remarkable you get out of your MBA program and then start a company and less than four years later have a successful exit and...
18:05 Nicholas Hinrichsen: Better lucky than smart, I think. [chuckle]
18:08 Matt Waller: What's that?
18:11 Nicholas Hinrichsen: I'd rather be lucky than smart.
18:14 Matt Waller: So backing up a bit, how do you know when it's the right time to start a company?
18:19 Nicholas Hinrichsen: Yeah, that's a good question. A lot of people think I'm this huge risk taker, I wouldn't even say that about myself, I wish I was more risk-averse than I seem. But my parents they just taught me early in life how important education is and education for me I see it as my plan B, I will always land softly, I will always find a role and a job in a big company, thankfully through the education I received and Stanford was the same when we left. Our last lecture was a professor and an entrepreneur himself who said, "Hey, you'll could go to the big companies and make a lot of money, consider that your plan "B", 'cause that's your safety net. Instead take big risks. There's no better time to take a big risk than now, because you know, like if it doesn't work out, A, people will cheer for you because they're impressed by you taking a risk and, B, that job that you wanted to have, you could still have it." And so that's why I think for as long as you have some sort of plan B and education is a very, very good plan B, you're actually always in a good place. And then I highly encourage people to take the leap and come up with some courage and try to explore something.
19:29 Matt Waller: So tell me a little bit about Carlypso and why Carvana was interested in it?
19:38 Nicholas Hinrichsen: Yeah, good question. So we started out as a peer-to-peer marketplace, so I would help you Matt sell your car to somebody else, and we started because all our classmates asked us for advice and help. We've raised, I think, $1.2 million based on that model went through Y Combinator, it's a startup accelerator program raised another $800,000. And then realized that we're actually dealing with two customers who have very, very opposing interests. The seller wants to get the most for the car and the buyer wants to pay as little as possible. And as a result, we find ourselves squeezed in the middle, and if we made deals happen, both of our customers were uNicholas Hinrichsenappy. And so that's not a great place to be if you wanna build a big company.
20:22 Nicholas Hinrichsen: What we found there is a lot of institutions out there, it's like leasing companies, rental companies, fleets that are sitting on thousands and thousands of cars of inventory, can't sell directly to consumers and instead sold to dealerships through a marketplace called the 'Wholesale Auction'. And that marketplace has a much, much lower price level per vehicle, but consumers don't have access to it, 'cause it really requires and this is by law, requires dealers to buy these cars from wholesale and then dealers to sell it to consumers. And so our whole idea was making these cars at a lower price level available directly to consumers. And in order to do so, we basically tapped into a supply of 200,000 cars at any given time, advertise them to consumers, and if and when a consumer told us, this is the exact car I want, then we'd go ahead buy it, recondition it and deliver it. To power that, to enable that, we wrote a lot of software 'cause you needed to describe the vehicles very well, these vehicles at wholesale change and rotate all the time, so it needs to be really quick.
21:23 Nicholas Hinrichsen: And then we realized, we thought we'd be building an operating business, but in reality what's most valuable is the software we built. And then when we compared notes with Carvana, which I always recommended if you're in, like people are always very secretive around their start-up ideas, I actually would do the opposite, sharing with everyone like there is no such thing as a secret sauce, you really need to build the business. And that's how we felt, so we compared notes with Carvana, became friends and realized that we had built software they were trying to build and hadn't started yet. And so it was really, A, a mutual fit in terms of software and products we had built, but particularly because the people were great. We got a long really well with the founders and the executives. We saw an opportunity to sky rocket everything we had built, and so this... Once they said they'd invite us to come over, we felt flattered and sold the company and brought the whole team over.
22:17 Matt Waller: Nicholas, I see that you've invested in quite a few companies, how do you personally decide which companies to invest in?
22:25 Nicholas Hinrichsen: They actually choose two different approaches, number one, and this is the majority, these are really good friends of mine. Either friends who supported me in the past, or friends I just think really, really highly of. And I don't even care what they're doing, I just wanna be part of their entrepreneurial journey and so I write a check. A lot of them, surprisingly in South America, I really love South America, my parents are originally from Argentina, and South America is a little behind when it comes to the startup ecosystem and venture capital.
22:55 Nicholas Hinrichsen: In South America, you can basically build companies that worked really well in the US, and if you're the only one who has access to capital, you will win. So friends who I love and respect and who I would invest in, no matter what they did all of a sudden start doing businesses where they have some sort of monopoly, because they have access to capital. So that's why I'm doing it, and I'm very encouraged. And then the other direction I take, a good friend of mine, he runs an agent fund a seed investment fund, and sees a lot of softwares of service deals and companies that I don't even understand, and I'm just blindly following him.
23:32 Matt Waller: Well that's great. Nicholas, would you be open if say some of our students would like some advice from you and they reached out to you, would you be willing to give some advice about entrepreneurship?
23:48 Nicholas Hinrichsen: Of course, yeah, I'd love that. The best way to find me is to connect with me over LinkedIn, maybe you can put my LinkedIn profile in the show notes.
23:56 Matt Waller: Sure.
23:57 Nicholas Hinrichsen: Yeah. And I'd love to hear from students what they're up to, if I can help or give advice or maybe angel invest, like whatever it may be. A lot of people helped me, a lot of alumni helped me get started and so if I can give back in some shape or form, I would feel really flattered and would love to be part of those journeys.
24:14 Matt Waller: Well, Nicholas, this was a great conversation. Thank you so much for taking time and congratulations on your success as an entrepreneur.
24:24 Nicholas Hinrichsen: Thank you so much for having me, I appreciate it.
24:30 Matt Waller: Thanks for listening to today's episode of the Be EPIC Podcast from the Walton College. You can find us on Google, SoundCloud, iTunes, or look for us wherever you find your podcast. Be sure to subscribe and rate us. You can find current and past episodes by searching BeEPIC Podcast, one word that's B-E-E-P-I-C podcast and now Be EPIC.