Cracking the Code of Car Subscriptions: Part 3, A Perfect Storm — The Year Everything Changed

2019 ushered in significant turbulence for the car subscription industry. Fair.com, the giant in our realm, came under immense scrutiny when Uber's IPO failed to meet investor expectations, achieving only half the projected market value. With both Uber and Fair having the Japanese behemoth SoftBank Investment Advisers as their major investor, the tough questions were unavoidable. Amidst SoftBank's involvement in the WeWork debacle, the pressure on FAIR for tangible outcomes was enormous. Doubts about the car subscription model only intensified.

Against this tumultuous backdrop, we achieved the unthinkable in Brazil. We demonstrated our capability to manage a substantial fleet of over 2,000 vehicles and secured an investment of $90 million. This infusion was set to propel VAI to 10,000 cars, bringing it tantalizingly close to unicorn status. But as we were still basking in this achievement, the comet of the Pandemic struck. No one had a Plan B for endless lockdowns (which in Brazil spanned nearly six months) or a world where people hesitated to use cars. The perfect storm had arrived, sparing none.

Already grappling with profitability concerns from investors, FAIR couldn't withstand this new onslaught. Scott was ousted, interim leaders tried in vain to resuscitate the business, ultimately offloading its assets to Shift. VAI managed to hold on for another two years and now awaits a multi-million-dollar judicial decision to finalize its exit.

While it might be convenient to blame the pandemic for this massacre in the car subscription space, that would be oversimplified. And while I've focused on VAI and FAIR, during this period, at least 12 other similar companies shut shop due to analogous challenges. The pandemic didn't kill these companies. Robust businesses can weather even pandemics. What brought them down was a failure to grasp the intrinsic intricacies of car subscription operations.

I will outline the primary errors here, but we'll delve deeper into each in upcoming articles. Four main reasons led to these companies' downfall. The foremost, and often overlooked, was the "One stop shop" approach — a single all-inclusive price. Simplifying the model with technology was the key to scalability. Yet, to remain competitive, you inevitably had to suppress your product's price. Offering a car for $400, inclusive of maintenance, insurance, and more, constricted profit margins to a point where the business unit economics went negative. Silicon Valley's investors might tolerate negative unit economics in the early stages, as long as there's a clear path to positivity. But what was the evident path to positivity for car subscription companies?

1. The insurance industry needed a quantum leap, crafting low-cost products specifically for car subscription businesses.

2. Automakers had to innovate, producing more reliable cars that didn't require costly maintenance before hitting 100,000 miles.

3. The used-car market needed unprecedented stability, ensuring residual values followed a never-before-seen trajectory.

Relying on this scenario was more a fairy tale than a business plan. Whether this was the over-optimism of the entrepreneurial spirit or a childlike naivety we clung to, the truth remains: The pandemic exposed these gaps, necessitating immediate profitability — an almost impossible task for businesses designed to run at losses for years before turning profitable.

Join me as we delve deeper into each of these mistakes in the next article. Stay tuned.