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Used-Car Startups Lure Buyers Online Away From Dealer Lots

Used-Car Startups Lure Buyers Online Away From Dealer Lots

Transactions in the used-car market have always been a bit unpleasant. Dealerships typically make low-ball offers. And buying or selling on your own can create the angst of getting stuck with a lemon or a bounced check.

Enter the new wave of used-car companies.

Four of them — Shift Technologies Inc., Beepi Inc., Vroom Inc. and Carvana LLC — have piled into the business in the last few years, aiming to carve out a middle ground: providing much of the transaction security associated with dealerships and price competitiveness found online. They’ve attracted more than $850 million in venture-capital funding from investors including Goldman Sachs Group Inc., Redpoint Ventures and General Catalyst Partners. Their challenge is securing a big enough slice of a highly fragmented U.S. industry that includes franchised and independent dealers and individual sellers.

People have demonstrated they’re willing to purchase vehicles online, with technology “taking fat out of the distribution channel, providing savings for the buyer and the seller,” says Jeff Brody, a Redpoint partner. The Menlo Park, California-based firm was the lead funder in Beepi’s Series A round, a participant in its B round and “we’ll be enthusiastic and active investors when and if the company needs more money.”

Peer-to-Peer Networks

Beepi, in Mountain View, California, and San Francisco-based Shift are essentially peer-to-peer networks, facilitating transactions between buyers and sellers. Phoenix-based Carvana and Vroom, in Grand Prairie, Texas, operate more like traditional dealers, purchasing models directly from owners and reselling them. All do detailed inspections, list offerings online, deliver vehicles to buyers and provide financing choices and some type of money-back guarantee.

Those services help distinguish them from other online options — including Craigslist, EBay Inc., TrueCar Inc. and Kelley Blue Book Co. — and from brick-and-mortar independent retailers and franchised new-car dealers.

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Shift sold 1,702 used vehicles in the San Francisco Bay Area during the first half of this year, more than at least eight of the top local franchisees, according to data Shift provided based on reports to the California Department of Motor Vehicles. Shift projects revenue will increase sixfold this year from 2015, without proving details. It has raised $73.8 million from investors.

 Expand Operations

Carvana closed a $160 million funding round last month, bringing total investment to $460 million. It said it will use the money to expand physical operations. Chief Executive Officer Ernie Garcia projects revenue will rise to $315 million this year from $4 million when the company started in 2013.

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