Founder Focus: How Curiosity Drove Justin Davis to Create $425M Startup

Welcome to another episode of Founder Focus with Steve Greenfield, founder of Automotive Ventures, This ASBN original series dives into the inside stories behind some of the most impressive entrepreneurial journeys. In this segment, Greenfield sits down with Justin Davis, who is the founder and CEO of BacklotCars, an online wholesale marketplace for vehicles in the auto retail industry. Last fast, BacklotCars was acquired by KAR Global for a staggering $425 million.

Transcription:

Steve Greenfield:
Founder Focus takes us on an intimate conversation with innovators and entrepreneurs and the great companies that they’ve built. This is Steve Greenfield from Automotive Ventures and thanks for joining us.

Steve Greenfield:
This week, I’m excited to welcome our guests, Justin Davis. Justin’s a University of Kansas grad who found himself deeply embedded in the wholesale space prior to founding BacklotCars back in 2015. BacklotCars is an online marketplace for auto dealers. Through BacklotCars auto dealers, auto finance companies, and rental car companies can transact well without having to go to physical auctions.

Steve Greenfield:
Late last year, BacklotCars was acquired by KAR Global for a headline price of $425 million. Today, we’re going to peel back the layers a bit to understand what motivates Justin, how he thinks about innovation and entrepreneurship, and how he built this business. So you’ve certainly had tremendous success, it’s been an interesting ride for you, I’m sure, but let’s start out going back a little bit to how you originally got into the auto industry to begin with.

Justin Davis:
Yeah, so I grew up in and around the industry. My father owned a number of franchise dealerships in the Atlanta area, and then sold out in the early 2000s and went back to his roots of wholesaling cars. That’s where he got his started the business. And so I was the young kid hustling to sales guys on the lots for candy money, and then quickly I became the chubby kid at the auction lanes eating the donuts, but I’ve always been in around the industry. And so that sort of sparked my love for the industry. And after graduating from university, as you mentioned University of Kansas, I got on and learned the auction business from the other side. And so I learned total auction operations, and it’s been a wild ride.

Steve Greenfield:
So then now take us through the evolution of the company. So what sparked the idea and give us a little bit of context around where it came from the evolution?

Justin Davis:
Yeah, so during my years working in the industry, I always saw cars being transacted online, but a lot of these cars were the factory cars or the fleet lease cars, and that exposure existed. But when thinking through dealers and the dealer cars, most of them were really bound to the local physical sales. And so I had that aha moment of like, “Whoa, why can’t we just transact these cars online?” And then that was sort of the birthplace for BacklotCars.

Justin Davis:
I also saw really quickly that the price transparency in the market, with all of this automotive tech coming into the space was really consumer focused, but there was little to no technology to really help the dealer grow their business. And one thing I saw learning the auction business and being in the industry is this core transaction for the dealer of buying and selling cars.

Justin Davis:
If they couldn’t buy cars effectively on the wholesale market and sell cars effectively at the wholesale market. Well, the regional operation really didn’t cease to exist. And so we felt there was an awesome opportunity to really bring in the dealers, get to know them, create this awesome mission about making wholesale easy so that dealers can be more successful and build a platform for them to be able to transact 100% online.

Steve Greenfield:
Very cool. Very cool. So looking at your background, I mean, it seems like you had a very positive experience with 500 Startups. Tell us a little bit about 500 Startups and specifically your experience with them.

Justin Davis:
Yeah, so 500 Startups is an early stage investor and an accelerator in the Bay Area, so I’m in Kansas City, and at the time of starting BacklotCars, there was just a little early stage investing in and start up here in Kansas City. And so as a first-time founder with deep industry knowledge, I needed some help.

Justin Davis:
And so I did what any silly entrepreneur would do is, I cold email people. I mean, we’ve got connected, I got connected with the number of other people just networked in and I got connected into 500 Startups and this was a program started by early PayPal, Google, Facebook employees that have been there and done that. And so what we did was said, “Hey, look, we know the automotive industry really, really well, but we need some help on scaling a platform, building the technology, raising venture capital.”

Justin Davis:
And so what we did is we applied to the 500 Startups program, we moved out to the Bay Area in early 2015 and went through their program. I mean, it was a huge success for us and it was an early bet, right? No one had bet on us like that, and it was really an opportunity for us to learn and continue to grow and sharpen the knife on the offering that we are really ready to bring to market.

Steve Greenfield:
Cool. So if you can speak to other entrepreneurs that they’re tuning in, I mean, what advice do you have pros, cons of participating in accelerators? And if you could go back and give your earlier self advice on the accelerator space, any advice you’d be given entrepreneurs out there?

Justin Davis:
Yeah, so I think the benefit of leaving from Kansas City and going to the Bay Area and like leaving my family behind was, I was 100% focused, and 500 Startups is also known for bringing companies in from around the world. And those entrepreneurs also left their families to come and build. And so what happened is we had a group of people that were 100% focused and 100% bought in. And so we were working hundred hour work weeks trying to figure it out and racking our brain and working our pitch against each other and just collaborating.

Justin Davis:
And so I think oftentimes people can see some of these early stage companies and think like, oh, going and doing the networking events, it’s less about the networking events and more about the hard work it takes into tenacity and the ability to be able to fail and be okay with it, and then work with your fellow entrepreneurs in these close-knit environments and how that trust is bounce your most vulnerable ideas off, off one another.

Justin Davis:
And I think that’s very important and it’s just having that ability to open up and then collaborate with others because it ultimately helps elevate your game and it elevates their game as well.

Steve Greenfield:
Very cool. Very cool. So, you pick up the press today and we see a lot of digitization in the automotive space, both on the consumer facing side and definitely in the area that you’re participating in the B2B side. So as you reflect back to 2015 was the timing right? And why was the timing right to launch your concept?

Justin Davis:
Yeah, so I would say yes, I would say the timing was right. Looking back when we started, I think people looked at us as we were sort of crazy, but there other companies coming into this space doing similar things. And I think there were companies before us that tried to accomplish this, but again, maybe the timing wasn’t right. A lot of it is the market timing and bringing the right solution to the space.

Justin Davis:
But I feel that there was a huge unlock early on, like we felt that, “Hey, if we could nail some of the intricacies of the marketplace and what dealers really needed to be successful online.” I felt past versions of this business didn’t succeed because they didn’t deliver a high level of success, we knew coming from the auction industry, that dealer consignment converted at X percent in a physical environment. Therefore, in order to replace that and digitize this, we would need to continually provide that success at a high level.

Justin Davis:
And so what we did is we continually racked our brains and said, “Hey, how can we sort of overachieve and beat that? And then what’s the information needed?” And it took a lot of testing, and testing on a small area here in Kansas City, a lot of really patient dealers, we tested on fertile ground and we found the right recipe to build that success and build that trust and transparency on our marketplace and then it was sort of time to scale up.

Justin Davis:
But yeah, I mean, I would say there was a couple of other players in the space that we all got started around the same time, and then we’ve seen this really, really, really crazy growth because again, the market was ready and then we had the right solution at the right time.

Steve Greenfield:
And this might be strange, but I think often about our communities being in a bathtub and having the aha or the Eureka moment, right? Where it’s like, “Oh, the breakthrough moment comes at an odd time sometimes.” But was there a big or did you have a couple of big aha moments as you built the business?

Justin Davis:
Oh, I would like to say there’s one silver bullet, but there’s not one silver bullet, there’s a lot of lead bullets that really helped. So a lot of these series of events and series of decisions helped us get to where we were. Again, listening to our dealers, we shipped our first version and it was extremely embarrassing to go out and to like quit a job, a well-paying job to go out and do this.

Justin Davis:
And I quickly realized the model that we had didn’t work at scale. Dealers, this was a core part of their business, they had to be extremely efficient. So therefore, maybe we had to manage a lot more of the process in between listing the car to then selling the car then to transporting the car. And so we needed to create this full end-to-end solution.

Justin Davis:
So I think there were some aha moments on like, how do we reduce the friction in the transaction? How do we get close to the money right on our initial model was this subscription marketplace? But we wanted to be closer to the transaction because then we can have more influence and drive more transactions through the platform.

Justin Davis:
And so again, just reducing that fruition, I think the aha moments early investment into our inspection model. Our inspection model is very, very different, we have mechanics that are going and looking at the cars. And so this is extremely a huge unlock for dealers, because now all of a sudden if I was a dealer going and looking at cars previously at an auto auction, well, I could go and look at a car maybe two to three minutes, max. Now we have the mechanic spending 15 to 20 minutes per car.

Justin Davis:
So you get this institutional knowledge and then you get it at scale. And then, so you can ingest in that two to three minutes they previously were looking at the cars, they can ingest 15 years of mechanical insight within that three minute period. And so they can do this quickly and that just allows for them to be more successful, unlocking on our transportation.

Justin Davis:
Most of our dealers had never transported cars before, they bought cars at a local sale and then transported across town. Well, if we wanted to create something special, if a dealer in Kansas City can log onto his app and buy cars anywhere in the nation, how do we create that seamless experience and that connectivity and bring the cars back into Kansas City and do set up, push them about, and then, so a lot of the magic behind the curtains that happened in the offline world and the real world, those are the things that we invested in early to make the experience really seamless online for the dealers.

Steve Greenfield:
So I see this debate often around whether entrepreneurs are born or made, I guess, first, what’s your position on this? And then if you feel like, this got triggered at some point during your life, what triggered that and how do you know this was the right path for you?

Justin Davis:
Yeah, that’s an interesting question. So I think entrepreneurs have this curiosity and they seek to understand. And as a young boy, growing up, I was always seeking to try new things and this creativity that sparked. And so I think that curiosity that we’re probably all born with is in with everyone.

Justin Davis:
I think to take that curiosity and then go and take big risks is the next stage on entrepreneurship. The hardest day of being the entrepreneur is like waking up and saying, “Well, I have this great idea because everyone has ideas.” But then it’s, “Okay, what am I going to do with it? Am I ready to put everything on the line and sacrifice and buy-in 100% on the dream?”

Justin Davis:
And so I think this curiosity everyone’s born with as a child, that’s just what humans have, but the next step up is, can you go out and execute on that? I think that’s sort of the dividing line of making a true entrepreneur, an entrepreneur or wantrepreneur. You can go out, buy into the vision and sit through all the hard work.

Steve Greenfield:
So let’s talk a little bit about selling the business because it’s going to be a really hard decision. You’ve got a great growth trajectory, you’re growing really quickly, and I understand what you said about having the platform and the assets to grow, but take us back to that moment when you decided, do I sell, or do I just put my head down and keep growing this thing alone?

Justin Davis:
COVID-19 was a really interesting point in the industry. In certain point in time, everyone had to shut down and there was only these digital companies that could exist and that could grow really, really fast. At that point in time, KAR also moved and made a move into 100% digital, and I commend them buying in and doubling tripling down, same path.

Justin Davis:
But again, the magic happens, we make a seamless experience online, but a lot of the magic, the magic happens offline. So like thinking about building a very, very big business, the liquidity, as I like to say happens above the line, like an Amazon, for example. Amazon, if you go to amazon.com, you transact, but the hard work that magic happens behind the scenes in an offline real world.

Justin Davis:
And so in order to win this space, I realized very early on that, having the great digital solution and being dealer centric was really, really, really important. That was one piece of the pie, but really, to be able to own the market and dominate the market, you had a re-imagined, you had to stitch the online and offline.

Justin Davis:
And so tapping in to some of the physical assets that KAR had with ADESA, a great marketplace brand, combining that with BacklotCars and then bundling these assets in to drive our mission and vision and to continue to further that was absolutely needed to win the market. That was what I wanted to do, the market validation of buying the company was great but as an entrepreneur my end goal is to win the market and choose the industry forever.

Justin Davis:
And so again, going at it alone is a very tough road in working alongside an extremely progressive company that invests in technology heavily and also has these physical assets was the winning recipe. And keep in mind, KAR is a group of entrepreneurs themselves. And so tapping into that entrepreneurial spirit and saying, “Okay, let’s do this together,” it was almost like a new 500 Startups. They have a huge talent base, really smart people, fueled with entrepreneurs. And how do we create something out of nothing altogether? And it was a no brainer in my books, it just gave us the platform and the opportunities to go really, really big and it was an awesome fit.

Steve Greenfield:
Great. Makes total sense. So tell us a little bit about your most influential mentor.

Justin Davis:
Yeah, that’s a tough one. There’s so many influential people throughout my life, I mean, look, my family, my mother and my father, they come from very little and then provided everything for me to be able to have this success. I think thinking through my father, my father grew up as a small farm kid and got into the car business, it was a very unlikely series of events.

Justin Davis:
And then grew his business to where he could provide and help us. And the drive that I see from my mother and father, that helped me get to the point where I am now. I mean, that’s one portion, there are so many different areas. Going to 500 Startups, learning from the best in the business and attaching on [Hijin-Sha 00:17:20] was one of our early investors. And he said really influential things to me that helped shape how we run the business. And just latching onto these little soundbites over the years, help for me and drive me in the future.

Steve Greenfield:
Cool. And so what was the best piece of advice you ever received?

Justin Davis:
So that’s a hard one too. So I think there’s two that stick with me, Steven Dietz. He was an investor at Upfront Ventures, he had done a number of automotive, big automotive tech deals. And so we are fortunate enough to pitch Steven and he was unfortunate enough to pass on BacklotCars, which is totally fine. You’re going to hear a lot of no’s in this world and he will see a lot of deals. But the best piece of advice he gave me and it was free advice, he said, “Look, don’t scale your business out too fast. Focus on your dealers, make sure they love you, make sure they continue to come back. Because again, if you scale too fast, now you’re going to have to change functions in 50 different states versus just one. And so focus on making sure your dealers love you and continue to come back.”

Justin Davis:
So that resonated, that still resonates the need today. And it’s still a soundbite I always pull out.

Steve Greenfield:
So it sounds like, I mean, you’ve learned a lot, but it sounds like you yourself probably are and are going to be important mentor to entrepreneurs in the future. Where do you see yourself in five years in terms of like the community maybe in Kansas City or even beyond, and how will you continue to be engaged in helping entrepreneurs on their journeys?

Justin Davis:
Yeah, that’s a great question. I think this was relatively new when I started BacklotCars in Kansas City, again there was no early stage environment, very few early stage investors, not like a big accelerator scene and all that. And so again, creating the success, allowing others,, there’s 150 folks here in Kansas City that we gave this experience to it and we did it together, we all learned together.

Justin Davis:
And giving that knowledge and then some wealth from the deal back into the community. So people feel bold, they feel empowered to go do their own thing. I’m a big proponent of meeting with other entrepreneurs. And again, the words that are coming out of my mouth are simply data points, it’s their job to get others many data points and make an informed decision. But I feel it’s extremely important to take this opportunity to give back to the community, because I think that’s how Silicon Valley is built, sharing knowledge, and then… I mean, really is that knowledge sharing and that collaborative nature.

Justin Davis:
And so investing back into the communities, whether it’s in Kansas City, Atlanta. Any area that has a budding entrepreneurial environment, it’s important to give back and then continue to invest back into the ones that are coming after you, and work closely with them. That’s really near and dear to my heart.

Steve Greenfield:
All right. So I’ll wrap up here with an auto question. So since you’ve been in the industry for a while, I assume that you’ve got a bit of a passion or a streak for vehicles. Tell us either one of the cars that got away that you wish you still owned, or if you could go out and own any car on the face of the earth, which car would you own?

Justin Davis:
Oh man. Well, there’s a lot of interesting new technology coming into automotive, so I’ll let you know. Any car, I probably don’t even know some of this stuff that’s coming out. I have a soft spot for all these and for big car. So 1967 Lincoln Continental suicide doors.

Steve Greenfield:
Nice.

Justin Davis:
You know what the soft top, I don’t know, low and slow and cruise around. So I’m a big guy, so I need something big to accommodate me.

Steve Greenfield:
Original or you restomod it?

Justin Davis:
Original.

Steve Greenfield:
Oh, nice. I like it. I like it. All right, cool. Well, Justin, thank you so much for making time today. I mean, this has been really great, very, very thoughtful advice for the entrepreneurs out there. And I know you’re a busy guy, so really, really appreciate you spending time with us.

Justin Davis:
You’re so welcome. Glad to be here.

Steve Greenfield:
So that’s it for this week’s Founder Focus, our dive into the inside stories behind some of the most impressive entrepreneurial journeys. Please feel free to contact me any time, I look forward to catching up with you to discuss the industry. Thanks for tuning in for this week’s Founder Focus and we’ll see you next week.

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