Scaled and Failed #18 – Carvana and Beepi

Hit the Gas, to the Moon

Jun 04, 2021

Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.

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TLDR

Today’s Topic: Car Ecommerce
Scaled: Carvana; Created as a subsidiary of DriveTime, spun out independently upon gaining traction, expanded online car purchase and delivery platform across the US, IPO’d in 2017, and saw record gains in the pandemic as used car purchases online spiked.
Failed: Beepi; Strong entry into the market with plenty of funding and growth, but mismanagement of funds, heavy burn rate, poor execution on some services, and an investor pullout led to the company running out of capital and liquidating.
Lessons Learned: It’s not impossible to shift traditionally in-person purchases into online behavior, but startups need to either substitute the traditional value of the physical transaction experience or replace it altogether with something more appealing to the consumer; combining both can be a great way to promote digital adoption.

Today’s Topic: Car Ecommerce

I am not a fan of the traditional process of buying a car. I hate the haggling over prices and extra features, the driving between dealerships, and all the time it wastes. I would’ve loved Saturn’s “no-haggle” pricing model if it was still around, but unfortunately, it isn’t. I’m also not the type of guy who cares too much about buying a new car; seems like a waste of money when half the value is lost after driving off the lot. Fortunately, you can buy just about anything online and get it delivered nowadays without worrying about negotiations, including used cars. The used car market is facing a surge in prices right now but remains much larger than the market for new vehicles. There’s no shortage of places to buy and sell them, from traditional dealerships and direct listings to various websites online that will send a car to your doorstep after purchasing it.

Carvana, founded in 2012, is one such website well known for its used car vending machines and has been one of the fastest growing auto retailers since its IPO in 2017. With its safety net of a 7-day return policy, it’s an easy sell to many. You can go online, find a make and model you like, check out the car, get your purchase financed, handle paperwork, and schedule a delivery or vending machine pickup very quickly and efficiently in comparison to traditional dealerships. Like Carvana and many other competitors, Beepi was attempting to create an online marketplace for used cars but took a more hands-off approach by creating a vetted peer-to-peer marketplace. The company would inspect the cars and handle the pickup, delivery, and administrative side of things for the marketplace. Unfortunately, intense burn, mismanagement of funds, and poor execution led to its downfall in late 2016.

Scale: Carvana

Carvana was founded by CEO Ernie Garcia III, COO Benjamin Huston, and Chief Brand Officer Ryan Keeton in Tempe, Arizona. Garcia, the son of billionaire auto businessman Ernie Garcia II of DriveTime, had the idea for Carvana while at a wholesale car auction:

All these people from different dealerships were buying cars, and it only took all of 30 seconds for them to decide to purchase a car and actually buy it. If that car had an issue that wasn’t reported, you could return it. I thought, could we get customers closer to that 30-second experience instead of the four-plus hours that was the status quo for car buying? If we could do it that fast and with lower costs, could we also make it simple…maybe even fun?

Garcia began working at his father’s company, DriveTime, in 2007 after graduating from Stanford. For several years, he learned the ins and outs of the industry and ideated. Carvana was launched as a subsidiary of DriveTime in 2012, purchasing its inventory from the parent company and getting further assistance with auto loans, technology, and other resources. Things were going well; the first iteration of the company’s iconic car vending machine was created in Atlanta in 2013. With ample momentum and growth, Carvana was spun out as its own independent company in 2014. In 2015, the first fully automated car vending machine and realization of the original concept was built by Carvana in Nashville as a part of its incredible growth. By this point, Carvana had garnered over $300M in funding and was rolling out in new markets left and right as it changed the way people bought cars. The next year brought more milestones, with another $160M in funding to fuel expansion in the US and the second automated vending machine opening at the end of the year. Revenue growth was on track as well, from $130.4M in 2015 to $365.1M in 2016.

2017 was an even bigger year for Carvana; they IPO’d in April with unicorn status and acquired automotive tech company Carlypso for its data solutions. 2018 saw the acquisition of Car360 for its 3D computer vision technology (used in capturing 3D vehicle images for consumers to view online) and many more of its iconic vending machines as it rapidly pushed into new US markets. The growth story continued, with the company taking leaps toward profitability in just a few years. Like most public companies, the market cap sank at the onset of the pandemic, but the rebound was intense as restrictions benefited the company’s business model. Test drives and visiting dealerships weren’t ideal for many in the pandemic, but an online solution like Carvana filled the need perfectly. While dealerships were bleeding cash, the surge for used cars pushed Carvana further ahead (and prices for used cars up). Carvana decided to invest $500M earlier this year into new reconditioning centers and thousands of hires, betting that the demand they’ve seen for online car purchases will outlast the pandemic. Just a few days ago, Carvana became one of the youngest companies to join the Fortune 500, beaten only by Amazon and Google.

Despite the company’s massive success, a quick Google search will reveal plenty of detractors throughout the years who have remained steadfast that traditional dealerships can easily outcompete Carvana and that the online auto retailer has no real competitive advantages (sounds like denial to me). Garcia has some wise words about how to deal with that:

If nobody thinks you’re crazy, you probably aren’t on to anything truly novel. Naysayers are helpful. Who else are you supposed to work so hard to prove wrong?

Fail: Beepi

Beepi was founded in 2013 by Ale Resnik and Owen Savir, not long after Carvana got its start. Rather than purchasing the cars directly from consumers and wholesalers, Beepi sought to arrange a marketplace connecting buyers and sellers of used cars while providing the same safety net Carvana did. With their 10-day return policy and thorough inspections of each vehicle, they provided much of that same derisking value. However, they did not provide their own financing, although one could use more diverse payment methods such as Bitcoin and work with their partners. Beepi would take nine percent of the transaction value to make money. Resnik got the idea for the peer-to-peer online auto marketplace after his own poor experience purchasing a vehicle. Only a few months after graduating from MIT in 2013, Resnik raised $1.3M to develop Beepi. Early in 2014, he managed to raise another $5M and officially launched in California not long after. By the end of the year, it was expanding out of the San Francisco Bay Area into Los Angeles and raised another $60M to fuel this growth. It also opened shipping into a few neighboring states that year with its delivery service, Beepi Prime ($999 delivery fee outside of California). Business was good as Beepi continued to grow through 2015, with expansion to further cities in states like Texas and Florida. Satisfaction was high too; less than 1 percent of cars were being returned by customers.

Things seemed to be going well at the start of 2016, with Beepi opening a leasing service as well and expanding delivery nationwide. Beepi had raised another $70M round late in 2015 led by Chinese automaker SAIC, but things quickly fell apart after key investors pulled out of the company (not confirmed, but speculated to be SAIC). By December, operations were winding down in anticipation of a sale. Beepi shut down in all markets outside of California and laid off 180 workers ahead of it. The company shopped around, approaching its competitor Shift, but ultimately cut a deal with a new startup on the online auto scene, Fair. Unfortunately for Beepi, a dispute over the conditions of the sale caused a cancellation. While pursuing a second deal with DGDG, a car dealership chain from the Bay Area, Beepi burned through its remaining capital and shut down. DGDG pulled out of the deal at this point, leading to a liquidation of assets to pay off Beepi’s creditors in early 2017.

TechCrunch’s sources point to several internal problems that contributed to the downfall. The company had an extremely high burn rate at the peak of its success, with little regard for frugality. Salaries that were far too high, expensive sofas, and nonbusiness expenses billed to the company were all pointed to as examples of wasted funding. Beyond this, the company also faced serious issues in its services. Beepi was struggling with getting titles and plates to new car owners on time, causing numerous problems for customers. The synthesis of operational and spending issues certainly didn’t help Beepi at all; every competitor in the space has proven extremely capital intensive, and every dollar counts.

Lessons Learned

The traditional model for buying cars is a more involved experience than purchasing online; it may be slower, but it’s a much more visceral experience for customers. People like test-driving cars, sitting in the driver’s seat to feel for comfort, and do a thousand other things in the dealership that can’t exactly be replicated via a website. Carvana has had to create similar substitution value to overcome the lack of those sensory experiences. Part of that value has been captured in Carvana’s perks, efficiency, and time savings. However, car vending machines also play a significant role. Given that the company can deliver to most people’s doorsteps, the vending machines aren’t the most critical facilities. However, the gimmicky and ceremonial nature of inserting a coin into an automated vending machine with the help of Carvana staff to get your new car is Carvana’s attempt to capture the magic of getting a new car. While the vending machine has some practical benefits as a fulfillment center in areas that delivery is difficult, it also presents a huge opportunity for the brand to differentiate itself. When someone sees those vending machines, they know it’s Carvana; getting your car from one is an even more memorable experience than driving away with one from a dealership due to the novelty. From my own experiences with Carvana and the experiences of friends, they seem to have great customer service. Whenever there were issues with cars, they were quick to schedule pickups and replacements with discounts and other perks offered for the inconvenience. This is reflected in the return policy; if you don’t like the car for any reason, you can send it back. In one case, the Carvana rep recommended returning the car as it wasn’t up to their standards. In person, you would be able to inspect the vehicle and identify smaller issues that may not be clear online, such as smelly interiors. Outstanding customer service and the return safety net are replacement value for the consumer rather than a substitute for the dealership experience since they can’t determine quality for themselves until they have the vehicle. Without the return safety net in particular, traditional dealerships would have stomped on Carvana years ago.

There are still a lot of spaces that people tend to shy away from online purchases, such as expensive jewelry and tailored clothing. It’s not impossible to digitally transform purchasing habits in spaces like these, but there’s a physical experience providing value to the consumer that needs to be substituted by founders. Providing more value digitally can present a huge obstacle for many companies. People don’t prefer in-person purchases for no reason; find what that reason is and translate it to fit your business model or provide something even more enticing than the benefits of a physical purchase. Substitute value and replacement value together can create a powerful contender to incumbent businesses. At the end of the day, consumer habits will shift towards greater perceived value and ease of use given enough time to adjust.

Scaled and Failed