The future of car ownership: Building an online dealership

Buying a car is painful. Dealerships are the worst, and the options are endless. The rise of the Internet produced powerful tools for shoppers, but in the end, most buyers still have to trudge down to a car lot.

For this series of articles, TechCrunch spoke with several founders and investors attempting to rethink car buying. It’s clear these startups are the underdog in this fight. Most consumers buy cars the same way as their grandparents did and for good reason. Dealerships nationwide fought for years to enact laws and regulations that protect their businesses.

Several young companies are attempting to put the dealership online. Companies like Carvana, Shift, Vroom and Joydrive are putting the entire car buying process online, allowing customers to buy, trade-in and even test drive vehicles without talking to a salesman in an oversized golf pullover.

In the next part of this series, we’ll look at companies like Fair that are moving consumers away from purchasing and into short-term leases. Even automakers are trying something new. Tesla sells directly to consumers while Volvo, BMW, Mercedes and others are launching subscription options to give owners even more flexibility.

The three new dealerships

Several companies are building online car dealerships. Shoppers find and buy a vehicle solely through these sites, and often, the cars are delivered to the buyer. These online dealerships even take trade-ins.

Three services dominate this space, and they were all founded in 2013. Carvana, Shift, and Vroom hit the market at the same time but have experienced different paths. One thing is clear though: it takes hundreds of millions of venture capital money to build an online dealership.

Emily Melton, co-founder and managing partner, Threshold Ventures (formally known as DFJ Ventures), points to consumer’s changing expectations and an optimized process across all kinds of vehicles. She co-led Shift’s Series A in 2014.

“Consumers expect transparency, optionality, and an on-demand experience where the customer is at the center of the process,” Melton said. “Technology has enabled a variety of products to be bought not sold. Traditional auto dealers will need to embrace new models of engaging consumers to meet these expectations or consumers will seek out alternative platforms where they have the autonomy and personalized experience they expect from other next-generation retail experiences.”

Carvana is the largest of such marketplaces. The Phoenix, AZ-based company raised $960 million before going public in 2017. The service is a one-stop-shop for car buyers, allowing them to trade, finance, buy, and sell used cars. After a buyer purchases a vehicle, it’s either delivered to them, or they can pick it up.

Carvana stands apart from other online dealers in its vehicle discovery platform. It’s superb, allowing countless varieties of search queries. Other sites look similar, but often lack the ability to search or sort by granular details.

Co-founder and CEO Ernie Garcia told TechCrunch that Carvana’s mission has remained the same since its founding. They’re not in the business to sell cars per se, he said, but rather to provide the best buying experience through good selection, good price and a simple experience. Our goal, he said, was to get [the buyer] into the car and get out of the way.

The publicly-traded company recorded 94,108 unit sales in 2018 according to its 10-K, which is just 0.25% of the total used car market. CarMax, the largest traditional used car retailer, has the most market share in the industry at only 2%. Over the last year, CarMax sold 748,961 vehicles according to its most recent financial disclosure.

Garcia said that in the first quarter of 2019, its profit per vehicle sold was $2,400, up from the previous year of $902. CarMax’s profit per vehicle was $2,166 over the first quarter of 2019.

Carvana’s stock doubled since its initial public offering price. Still, the company seems to be burning through cash as it grows. Remember, Carvana purchases the cars it sells so, to get more vehicles on the platform, it needs cash flow. The company has a history of busting revenue expectations, but expenses seem to be increasing at an even faster rate, and investors are now facing a substantial amount of dilution. Yet Garcia defends the practice, telling TechCrunch that growth costs money and that his investors remain confident in Carvana’s strategy.

Meanwhile, Shift was founded the same year as Carvana and offers similar services, but offers buyers more options. Most of Shift’s inventory is purchased from consumers rather than auctions like Carvana’s. Shift works with the sellers and cleans the vehicles, lists them on multiple sites and handles test drives.

Shift has distinct differences with Carvana. Shift allows vehicles up to 10 years old on its platform whereas Carvana focuses on cars less than four years old. Because of this, Shift’s marketplace has a greater variety in price and quality as the vehicles can be older and have up to 120,000 miles on the odometer.

“Our model is really online to offline,” Shift co-CEO and co-founder George Arison said to TechCrunch, noting that with Shift, buyers get a test drive before committing to the vehicle. That means Shift users do not buy a vehicle on its site; they order a test drive. The purchase comes after the shopper drives the car. Arison said 70% of its purchases are on the spot during the test drive.

In April 2019 Shift announced it closed a $40m equity round of funding and told TechCrunch that the funding will allow the company to work towards a planned IPO in 2021.

“Given Carvana’s trailing revenue of $350 million when they went public as a benchmark, we’d be well-positioned for IPO if we can hit $300 million to $400 million,” Shift co-CEO Toby Russel told TechCrunch in April 2019. “There’s nothing in stone yet, and IPOs depends on a lot of factors like market conditions, but that benchmark is where we’ll be positioning ourselves in the next two years.”

Emily Melton of Threshold Ventures invested in Shift’s Series D and sees the company’s advantage in its white glove concierge service and pricing algorithm.

“This helps people who aren’t ready to buy a car sight unseen on the internet,” she said, “and it also streamlines the process to provide a comprehensive, intuitive digital experience.”

Arison explained that he and his co-founders set out to build a financing platform for used cars. They discovered along the way that the only way to offer the best used-car financing was to own the transaction, which led to Shift’s current model of buying and selling vehicles.

This test drive-first model forces Shift to pick its markets methodically, as it needs staff in each market. The company currently serves all of California and part of Oregon. The idea, Arison said, was to enter a market and gain as much market share as possible.

Shift tells TechCrunch the company is projected to see substantial growth by sales volume — going from selling 8.5k cars last year to 15k this year.

The company and Carvana share a common competitor: the traditional used car business. Between small neighborhood used car lots and mega car dealerships, there are 35,000 new and used car dealers in the US, and they’re responsible for 15 million transactions each year.

During Shift’s most recent funding round, it netted an investment from Lithia Motors — the third largest auto retailer in the United States. Along with the investment, Shift gained a partner, as Lithia is helping Shift recondition used vehicles and store inventory, which will help it scale to new markets at a faster rate.

Finally, let’s turn our attention to Vroom. Today, in 2019, Vroom looks a lot like Carvana and Shift. Buyers shop for vehicles online, and they’re delivered to their front door. At launch, the company experimented with letting buyers have a so-called test drive through virtual reality headsets in popup shops.

The New York City-based Vroom has raised $440m through eight rounds since its founding. Its most recent raise, a $146m Series G, closed in December 2018. Earlier in the year, the startup laid off 25-50% of its staff as it exited several markets. Two years prior, the company brought on former Priceline.com CEO Paul Hennessy to take over from co-founder Allon Bloch.

“Many Americans are still in the process of learning about and being introduced to the online purchasing model,” Hennessy tells TechCrunch, “so for Vroom, our biggest challenge is creating awareness of the benefits of our model and getting people comfortable with making a purchase this large online. Once they are over the hump, we continuously hear from customers that they’ll never buy a car the old way again.”

Hennessy reinforces Carvana and Shift’s outlook. Vroom’s primary competitors are the thousands of “traditional, locally fragmented car dealerships” but notes that some traditional dealerships are investing in online companies. One of the largest, AutoNation, invested in Vroom’s latest round of financing.

“We’re also seeing larger traditional car dealers — for both used and new cars — bring more of their processes online and even test delivery models like ours,” Hennessy said.

The legacy juggernaut: CarMax

Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images

CarMax is the little giant in the room. The brick and mortar dealership was born out of Circuit City, eventually outliving its parent. CarMax launched with the promise of a low-stress, hassle-free car buying experience and seems to have held to that model.

According to a May 2018 report by Automotive News, CarMax leads the used-car market in volume, profits and margins. Despite this dominance and its 203 dealerships, it only accounts for 2% of all used car sales. CarMax’s stock is up 20% on the year and racing towards an all-time high.

The used-car giant offers a distinct advantage over the new online car market: warranties. CarMax offers a fantastic, though expensive, warranty on vehicles it sells. To some buyers, this offers peace of mind knowing that there is a physical location to take a vehicle that needs repairs.

Connecting buyers and sellers with Joydrive

Dealerships remain a significant marketplace for used cars and Joydrive started in Seattle in 2016 to assist in this market. Though its site looks a lot like Carvana and others, Joydrive does not have the massive overhead. Joydrive doesn’t own the cars available on its website. Joydrive connects buyers with cars at dealerships though still offers a similar online buying experience as other services including test drives, financing and trade-ins.

The Joydrive service lets buyers purchase or lease new or used cars without visiting a dealership. The vehicle is then delivered to the new owner, just like Carvana, Shift, and Vroom.

Talking to TechCrunch, CEO and Founder Hunter Gorham stressed Joydrive’s differences pointing out how Joydrive is the only online service that works with the top dealerships to offer new and used cars. He says this allows for an unlimited selection of vehicles instead of just the inventory of one service.

Gorham was at Ally Financial for 14 years and helped build its digital network around vehicle financing. When he started Joydrive, he wanted to stand apart from other digital marketplaces and knew from his time at Ally that customers want both new and used vehicles.

Gorham explained that getting dealerships on board is a critical differentiator. Not only do dealerships list their vehicles on Joydrive, but they have financial equity in Joydrive. Gorham said this puts them in the same boat much like NFL team owners. They sink or swim together. Right now, Joydrive has 140 dealerships on the platform with a couple hundred in the pipeline.

Joydrive started selling vehicles through its platform in the second quarter of 2018. It won’t release exact sales figures, but notes that its top dealerships are clearing around 60 cars a month through Joydrive while the bottom few sell a couple of cars each month.

Joydrive has raised $8.9m over four rounds of funding. According to figures released to TechCrunch, Joydrive experienced significant year-over-year growth. The service had a 900% increase of listed cars (18Q2 = 3,000 cars : 19Q2 = 30,000+ cars), 833% increase in dealers (18Q2 = 15 dealers : 19Q2 = 140+ dealers), and went from working with dealerships in two states to working with dealerships in 14 states.

For Joydrive to be successful, it needs to court both consumers and dealerships and that can present a problem. It has to serve two masters, though in this early stage, Joydrive has managed to get competing dealerships to work together, something Gorham says has never happened before.

Beepi’s crash

Beepi was founded in 2013 alongside Carvana, Shift, and Vroom and quickly scaled to an operational level before ultimately failing. The aim was similar to the others here: to offer an online buying experience and delivery service for used cars. Beepi shut down in 2016 after raising $149m over four funding rounds in three years.

Beepi’s model was initially different from Carvana and others. After a seller listed their car, Beepi would make an initial offer which it calculated at $1,000 above what dealerships might offer. The Beepi team inspected the vehicle and was said to spend the next 30 days trying to sell it to interested buyers. If they didn’t succeed, Beepi would buy the car for the original price quoted.

The service started in the San Francisco Bay Area and quickly expanded to 16 markets. At one time it employed over 300 people.

With hindsight of its competitors’ success, it’s clear Beepi was onto something but failed at execution. It had been valued as high as $560 million in previous rounds of funding, after raising money from 35 investors, including Yuri Milner, Comerica, Redpoint, Foundation Capital, Sherpa Capital, and Fabrice Grinda.

A source told TechCrunch after Beepi’s closure that the company had wrong priorities and suffered from co-founders that micro-managed decisions and were “very mercurial and hard to predict.”

One investor in the startup told TechCrunch after Beepi shut down that the founders were too aggressive in pushing for higher valuations. Indeed, co-founder Ale Resnik, the CEO, told the WSJ in 2015 that it was looking to raise a “monster round” of $300 million at a $2 billion valuation to fuel its national expansion. This round never closed and the company shut down the following year.

Beepi was founded around the same time as other services and raised enough cash to scale to an operational level. Along the way, management missteps seemingly doomed the company rather than getting beat by competitors.

The used car industry is massive and growing and the most dominant player, CarMax, only claims 2% of the market. Carvana, Vroom and Shift do not need to overtake CarMax or others to be successful.

TechCrunch spoke to several founders throughout the development of this story and one theme was clear: All the founders believe the used car market is large enough for multiple online marketplaces. Right now, these companies are fighting together in a way. They’re trying to reeducate consumers and upheave decades of buying trends. They’re fighting a disjointed and fragmented market full of different players.

And they’re not the only ones.

The second part of this feature will showcase companies rethinking car ownership and turning cars into a service.