Venturing Where Others Before Him Have Failed
Meet Scott E. Painter, “new-economy” Teflon man.
The former boss of online auto store CarsDirect.com is reinventing himself as the next independent auto maker since John Z. DeLorean flamed out 19 years ago. And despite a slowing economy and sluggish auto sales, some prominent business leaders are behind him.
The Ecompanies incubator has provided more than $1 million in seed money--enough to develop a book-length business plan and commission auto designs. Painter also is getting advice from Robert Lutz, a former Chrysler vice chairman, who thinks the business needs new blood.
But is Painter, 32, the right guy? His entrepreneurial record is spotty at best. Before the UC Berkeley dropout discovered e-commerce in 1998, he ran an unsuccessful dental seminar business. A used-car advertising business led to years of messy litigation. Investors pressured him to step down in November 1999 as chief executive of CarsDirect, which laid off 90 people two months ago.
“He didn’t have the skills to operate a large, complex organization and we didn’t have enough time to teach him,” said Howard Morgan, a general partner at Idealab, which controls nearly two-thirds of CarsDirect’s stock.
Painter nonetheless has clicked with investors hungry for the next big idea.
He says his troubled “old-economy” ventures helped him land the coveted chief executive spot at CarsDirect, one of the region’s most richly funded dot-coms, with more than $300 million in private capital. E-commerce guru Bill Gross of Idealab viewed Painter’s previous mistakes as a form of on-the-job training for the online car seller, Painter said.
“He saw I could raise money [and] that I could build a company,” said Painter, who admits management isn’t his strong suit. “He could tell I was a true entrepreneur.” Gross wouldn’t comment for this story.
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In his role as CarsDirect CEO, Painter moved in an exclusive world where he rubbed elbows with Lutz and other corporate bosses. Painter counts computer mogul Michael Dell as an advisor; dispatches from Dell dot Painter’s e-mail log. EarthLink founder Sky Dayton financed Painter’s company, Flint, through the ECompanies incubator he co-founded. Dayton declined to comment on Flint, saying the company hadn’t been formally announced.
Few industries are as complex as auto manufacturing. It is heavily unionized and governed by a tangle of federal and state regulations. Its capital needs are intense.
Under ideal circumstances, it would take Painter three years and $35 million just to develop a prototype that meets government safety regulations, experts said. It would take close to $1 billion to launch an auto company, experts said.
Still, industry veteran Lutz thinks Painter has a shot at it--as long as he hires top-flight managers and designs compelling built-to-order cars. By selling vehicles only on the Internet, Painter can save the cost of a dealer network, which typically accounts for 15% to 18% of a vehicle’s price. But he’d have to find other ways of providing warranty service and showcasing his models to prospective buyers.
“I like him,” said Lutz, who also is chairman and CEO of battery maker Exide. Though he hasn’t yet invested in Flint, he spends an hour a week reviewing Painter’s plans. “I like to see people try something new.”
Next to his big-name connections, Painter’s greatest asset may be his knack for salesmanship.
Idealab’s Morgan said Painter played a key role in persuading Michael Dell and Kathryn Gould of Foundation Capital to invest in CarsDirect; both declined to comment. And Morgan credited Painter with laying the groundwork for the company, which employs about 600.
“He has a strong enthusiasm, an almost evangelical style,” said Morgan, who serves as chairman of CarsDirect. “He gets you caught up in his enthusiasm for what he is doing. . . . You need people who can articulate the vision.”
But fund-raising won’t be easy in a market that is losing faith in e-commerce, sending stock prices plunging.
Painter has already run into investor fatigue. Last year, he and a partner formed a dot-com that invested in an online boat seller and attempted to launch a Web site that sold motorcycles. After pitching dozens of venture capitalists, Painter and his partner closed Direct Inc., along with Boats Direct and Motorcycles Direct, after failing to raise enough money for them. Forty people at Boats Direct lost jobs.
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The duo wrongly assumed that their “knowledge and experience” would overcome investor skittishness, said Painter’s partner, Robert Buce.
“The market changed harder and faster than we believed,” said Buce, a former KPMG partner who previously consulted at CarsDirect. “There were a lot of questions as to whether it was a sustainable model.”
Similar questions are being asked about CarsDirect, which purchases vehicles from dealers and sells them to consumers--an arrangement with built-in disadvantages. The company offers low prices, but it cannot underprice an aggressive dealer without losing money on the transaction.
In the quarter that ended March 2000, the last period for which figures are available, the average cost of cars procured by CarsDirect exceeded what consumers paid for them. The company said that ratio has turned positive, but declined to provide figures.
“The online broker [model] is not sustainable in the long run,” said J.D. Power analyst Chris Denove.
Painter’s successor, Robert N. Brisco, a former Los Angeles Times executive, has slashed the company’s cash-burn rate by two-thirds and predicts it will become profitable. But the Culver City-based company recently withdrew plans for an initial public offering, an ominous sign that also reduces Painter’s chances of quickly cashing out his 6% stake. Of uncertain value today, Painter’s stake was worth at least $60 million during the dot-com mania of a year ago.
The market tumult hasn’t much affected Painter’s lifestyle, which includes a Bel-Air home with a view of Catalina, a boat and three luxury cars with dealer plates, including a Ferrari 550 Maranello.
In April, he joined the Cedars-Sinai Medical Center board of governors, a magnet for deal makers whose 280 members include Hollywood power broker Michael Ovitz and takeover artist Leonard I. Green. Painter paid $1,500 in annual dues and committed $25,000 over five years to join the club of wealthy fund-raisers. Painter said he is interested in genetic research.
At the same time, Painter is saving on other expenses. He’s taken up painting, decorating his home with abstract watercolors because he considers original art too costly. And Painter said he hasn’t invested much money in Flint, though he intends eventually to do so. “I’m not very liquid right now,” he said.
Even as a teenager in rural Placer County, Painter was in search of the next new thing. He earned extra money waxing classmates’ skis between weekly school-sponsored outings. After that he operated an auto-detailing business from the driveway of his parents’ home.
While attending UC Berkeley, he ran several short-lived businesses from a house he rented near campus. For a while, he published coupon booklets promoting local merchants. His most ambitious endeavor was InfoAccess, a used-car listing service he formed with childhood friend Kirk Uhler, whom Painter later hired at CarsDirect.
The company, which charged dealers to list vehicles in a database that shoppers could access via an 800 number, closed in 1993. Uhler said he and Painter agreed to reimburse the investors each brought into the venture.
From there, details of Painter’s career are murky.
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Painter claimed in an interview and on his resume that he sold InfoAccess to Los Angeles-based Vehicle Information Network, which hired Painter for its now-defunct 1-800-Car-Search service. Painter valued the transaction at $450,000. The co-founders of Vehicle Information Network, whom Painter later sued, say the sale never happened.
“We never bought his company. We never bought his contracts,” said co-founder Mark Brenner, noting VIN never operated in the Bay Area.
Said co-founder Joel Hecht of Painter’s claim: “It is an absolute fabrication.”
There are other, smaller discrepancies in Painter’s background.
* A CarsDirect regulatory filing states Painter was a marketing vice president at VIN. But people familiar with VIN said Painter did not hold that title. Court documents filed by Painter say that in his 17 months at VIN, he rose to director of call operations. Painter, in an interview, reiterated that he had been marketing vice president and said he had never been director of call operations.
* A CarsDirect Securities and Exchange Commission filing states that Painter majored in economics at UC Berkeley. According to the university, he had not declared a major before he dropped out in 1993. Painter said he took economics courses toward that major.
* Painter said on his resume that his efforts at Santa Monica-based Futuredontics resulted in a 30% gain in gross revenue. But Futuredontics founder Fred Joyal said the figure is inflated and many people are responsible for the company’s growth. Painter said he isn’t privy to the company’s numbers and would not dispute Joyal. Painter worked as marketing director for Futuredontics, which operates the 1-800-Dentist service, between stints at VIN and his dental seminar company.
In October 1994, Painter, along with other department heads, was laid off by VIN in a cost-cutting move. After that, his relationship with Vehicle Information Network turned nasty. He registered several Internet domain names incorporating “800 Car Search,” and VIN sued in federal court to recover them. Painter gave up the names in return for about $5,000.
Painter said he registered the domain names “to get [VIN’s] attention.” He also sued VIN and its founders in Los Angeles Superior Court, claiming they owed him money. In a suit he eventually dropped, Painter claimed the founders didn’t give him stock or help him cover InfoAccess’ obligations, as Painter said they had promised.
Painter said that Brenner and Hecht had promised him 5% of VIN and agreed to make payments in excess of his $40,000 salary to help him pay InfoAccess’ debts. He viewed this verbal agreement as a “sale” of InfoAccess, he said.
“It is not a traditional sale, I agree,” Painter said. “I didn’t know anything about selling a company. I was naive.”
But Brenner and Hecht said in court and in interviews that Painter’s claims were untrue. Brenner told Painter that he’d become wealthy if VIN succeeded, Brenner said, “but we thought we all would.”
Painter dropped the suit against Brenner and Hecht in 1999, saying it was “without merit” in a court document. Painter repaid InfoAccess investors in either cash or CarsDirect stock, he said.
VIN’s creditors, meanwhile, put the company into bankruptcy liquidation in 1997.
Even before the VIN lawsuit ended, Painter’s dental seminar company had run its course.
Dental Advantage folded after its first seminar, a four-day event held at the posh La Costa resort in February 1998. Though Painter insists otherwise, investors and dentists said attendance at the Carlsbad Calif., seminar was poor.
Seminar speaker David Hornbrook, a cosmetic dentist from San Diego, said that he had expected to go water-skiing with dentists who had paid an additional fee to hang out with him. The outing was canceled, he said, because no one had signed up.
Painter spent too much money, too quickly, investors said. He had recruited prominent cosmetic dentists by promising to pay them $15,000 for each appearance--three times the going rate. In addition to the seminar operation, he acquired two dental consulting firms and a barely profitable newsletter that had been published by a retired Connecticut dentist.
The company’s October 1997 launch party had set an extravagant tone: A Hollywood stylist spruced up the dental stars for a black-tie gala at which entertainer Eddie Money performed. It was held in Washington, to coincide with an American Dental Assn. convention.
Painter blamed investors who had put about $400,000 into his firm for pulling the plug before his business got rolling.
“I’m not one to throw good money after bad,” said Canadian dentist Steve Small. He said he invested $180,000 in Dental Advantage because Painter “had the stars of dentistry . . . a very elaborate plan and a grasp of the numbers.”
Dental Advantage left Painter with debts exceeding $250,000 on 12 credit cards, he said. Yet Painter maintained the appearance of success, with residences in the toniest neighborhoods.
He got a bargain on an oceanfront Santa Monica condominium with a panoramic view of the Pacific through a clever classified ad. He offered to repair damage caused by the January 1994 Northridge quake in return for reduced rent. He said he paid $500 a month.
After that, Painter moved to an estate in Beverly Hills owned by an elderly man whom Painter said had moved to a retirement home. Painter found the $1,000-a-month rental by stuffing mailboxes in the stately, tree-lined enclave with house-wanted fliers showing him with his wife, a lawyer with Sullivan & Cromwell--an attractive, athletic-looking couple.
After the demise of Dental Advantage, Painter refashioned himself as an e-commerce consultant. Though an Internet neophyte, he considered himself expert in the direct-response business.
He sent a pitch to WeddingChannel.com, which forwarded it to one of its chief investors, Idealab. By a stroke of luck, Painter’s resume ended up with Gross, who wanted to start an online car company. Among the skills Painter listed on his resume were “letter writing” and “public speaking.”
An Idealab spokeswoman said the company had no comment on its hiring practices. But Idealab general partner Morgan said that Painter’s qualifications included his experience as an entrepreneur and his work at InfoAccess and VIN, both auto-related companies.
Painter left CarsDirect in a “dispute” with CarsDirect and Gross, according to a regulatory filing. A revised contract gave him a salary increase to $165,000, the title of co-founder and a $75,000 loan, secured by stock. As CEO, he had earned $142,800 and a bonus of $75,000, according to a regulatory filing.
Morgan praised Painter’s success at guiding CarsDirect from zero to 400 employees, its size when Painter stepped down. “Usually at 100 employees, our CEOs max out,” he said.
“Scott is an incredible visionary,” said boyhood friend Uhler, the fourth employee hired at CarsDirect. “The company was born in a time that is different [from today]. He didn’t have to worry about the bottom line.”
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Painter thinks Flint will attract investors because it isn’t a pure dot-com. At Flint, Painter aims to produce 200,000 mid-priced coupes, sedans and sport-utility vehicles a year, loaded with such gadgets as MP3 players. General Motors sold about that many Chevrolet Malibus last year, with a retail value exceeding $3 billion.
If Painter makes it to market years from now, he may find that the Internet is a crowded place. Already, the global auto giants are beginning to dabble in online sales. Plus, he’s dangling high-tech vehicle options to a customer group that has made the plain-vanilla Toyota Camry America’s best-selling car four years in a row.
“He is going where everyone else is, and they all have more money than he does,” said entrepreneur Malcolm Bricklin, whose namesake auto company failed in 1976 after falling short of its 12,000-cars-a-year goal. “God bless him.”
As for Painter, he is confident that consumers will want Flint cars. His previous failures have prepared him for the role of auto mogul, he said. “By most measures, I am not a success. But it’s all been worth it because I’ve learned so many lessons.”
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Scott E. Painter
Age: 32
Education: Attended UC Berkeley, West Point
Career Highlights:
Co-founder, chief executive, CarsDirect.com, 1998-1999
Founder, chief executive, Dental Advantage, 1997-1998
Director of marketing, Futuredontics, 1995-1997
Director of corporate development, director of call operations, Vehicle Information Network, 1993-1994*
Co-founder, president, InfoAccess, 1992-1993
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* Painter said he also was a marketing vice president.
Sources: Company records, court filings
