Last fortnight, used car marketplace CARS24 raised $200M becoming India’s newest unicorn of 2020.

An Unexpected Sharp Turn

Vikram Chopra and Mehul Agrawal, both soon to be ex-consultants, were itching to do something of their own.

Vikram had spent a few years at a VC firm, in the early days of the internet boom. Having seen, presumably, many pitch decks the idea of starting up would have been incepted over his time at the firm.

Mehul, on the other hand, was helping large businesses optimize their processes at a consulting firm. The two met through a common friend, clicked, and started FabFurnish. 

Throwing their hat into the ring with Urban Ladder and PepperFry, the duo were able to raise capital due to the large market and the team’s cred.

But within 2 years, having raised capital, the heat of competition made things turn off the map.

In the summer of 2015 the  co-founders of FabFurnish had to “step down” without much of an explanation.

In just a few years, the two of them had quit successful corporate careers to build an online home furnishing startup. Backed by prominent international investors they had raised $30M and were competing aggressively with other well funded players. 

Perhaps it was destiny, perhaps foresight but that’s where the story of Cars24 begins.

In stealth.

We wouldn’t know it for a few more years but Vikram and Mehul were working on a new problem. They realized that the $18Bn used car market in India was already larger than the new car market and rapidly growing at 25% per year. 

Used cars were sold at a rapid pace of 3MM a year. 

India, the world’s third largest auto market, after the US and China, was expected grow to $125Bn over the next decade. Out of this, $100 Bn is the estimated share of automobile sales and the remaining $25 Bn includes services.

Of the 3MM used cars sold in India every year, only 400K was part of the organized sector. 

The number of used cars was expected to cross 15M in the upcoming decade. The reason behind this projected growth is that in India, the per capita ownership of cars is extremely low, 50 cars per 1000 people, compared to developed economies, where there are 500 cars per 1000 people.

A huge disorganized market was for the taking.

Driving with Blinders On

Vikram and Mehul teamed up with Gajendra Jangid and Ruchit Agarwal to start cars24 in 2015.

For the next three years the founders went into stealth mode so they could focus on what mattered most: the people, the culture and the company's purpose.

This was in stark contrast to the years at FabFurnish where they had raised money rapidly. The company was well capitalized, yet the founders had to leave.

The learnings from the experience would drive their new company’s ethos of being under the radar. 

Being under the radar helped the team to keep competition unawares of what was happening. But while competition would find out, at some point, the quietness would help them in a bigger way.

It would allow them to build a team, without external pressure. 

Building a strong team is the biggest ingredient in an entrepreneurs growth story. Ideas are easy but you need a team to execute and building a team takes time. As second time entrepreneurs, it was an investment that the founders believed many first time founders overlooked. 

Rather than looking at the team as a “cost” center, they looked at it as an “investment center”

A deep customer focus was ingrained in the culture right from the beginning. Without having to worry about external pressure the team could focus on creating the best possible experience for their customers and channel partners.

The team was driven by the same purpose. Car24 would simplify used car transactions - but to do that they would have to solve a difficult problem. Used cars as a market was systematically plagued by a lack of trust. 

So much so, that it was a deeply studied economics problem. 

Steering Away from Lemons

Buying a used car is plagued with major trust issues.

Unlike a new car, two identical second hand cars can be worth different amounts depending on how well it was maintained. This is true even if the two cars are exactly the same model, bought at the same time. 

This is information that the seller has and the buyer does not. 

This asymmetry of information is called the lemons problem and has been the bane of both physical and virtual market places. But it is nowhere as strong as used cars. 

Let’s take an example of a simple market with 100 identical cars. Everyone knows that 50 of them are in great condition and worth 10 lakhs while the other 50 have some defects and are worth 8 lakhs.

A buyer doesn’t know what type of car they will get, so the perceived price of the car would be 9 lakhs. 

At that price the seller who has more information on the cars would only sell bad cars a.k.a lemons. In American slang, a lemon is a car that is found to be defective after it has been bought. 

This further pushes down the perceived price over time as buyers only get lemons resulting in a market where only lemons are sold. The natural equilibrium in this market would be a market of defective cars.

Or, a market of lemons. 

This issue was partially resolved by using car dealers, who operated in an offline way. Not only did Cars24 have to solve the trust problem, they also had to keep that trust while selling online.

Cars24 had to educate the customers, and win their trust. 

Cars24 attempted to solve the problem by creating value for both the individual car owners and pre-owned car dealers. Instant valuation, free car inspection, instant payment, and support for the registration certificate transfer made the process faster and easier.

Sellers were even assigned a dedicated relationship manager who takes care of all the background checks, verification, arranging meetings and paperwork while saving customers from all the hassle that they might face while selling a car on their own.

By owning the entire transaction Cars24 was bridging the information gap and creating trust in the used car market.

Still building quietly, without having raised any venture capital, an external storm 

Crashing into Cashless Speedbreakers

Vikram Chopra, an avid poker player, knew that he had not played his hand well during his time at FabFurnish. 

When he co-founded Cars24, he knew he was a late entrant to a red ocean. In 2015, the online used-car segment had existing players - CarDekho had been operational since 2008, CarTrade since 2009 and Droom since 2014. 

As expected, the start wasn’t great. Cars24 could sell only 18 cars in its first month.

What Chopra did not anticipate, was that this would not be the only time he would be dealt a bad hand. Sometimes external events on which he has no control, can deal a powerful punch. 

That punch came, not once but twice in the span of a year. The first one was in November 2016, in the form of demonetisation. 

Almost overnight the entire cash circulating in the system went out. As with every crisis, consumers delayed their decisions of making discretionary big ticket purchases to prioritise items of daily requirement. 

Hit hard by the cash crunch in the market, sales of new and used cars went down. It hit used cars much harder than new cars.

While 70% of new cars are bought with an auto loan, that share for used cars is less than 15%. Lenders find financing a used car to be a tedious process - they need to assess the quality of the car, the creditworthiness of the buyer and also manage the title transfer process. 

As a result, a large number of cars are bought and sold in cash.

Post the demonetisation announcement, web traffic for used cars declined greater than 30%, while that for new cars declined ~20%. Car sales typically experience a slow-down during year-end. Further burdened with a sudden shortage in liquidity, cash-dependent used car sales bore the maximum impact of demonetisation.

Evidently, revenues of Cars24 nosedived. Given the circumstances, there was little indication of how things would pan out.

Before Cars24 could fully recover from demonetization’s blow, came the second punch.

An Unending Obstacle Course

The aim of GST announcement was to bring uniformity to the Indian tax regime. 

Uniformity it brought - the tax rate for new and old vehicles was now the same, at 28%. The rate for used cars ideally should be lower than new cars, since the government would have already collected tax at the time of the first point of sale, exactly how it happens in VAT regime. 

A breakdown of the complex tax environment revealed that while it was great news for new car buyers post GST implementation, it had the exact opposite effect on the used car market. 

Under GST, uniform taxation brought down prices of new cars. Consequently, the value of used cars as a by-product would also drop. The family car and hatchback segment saw the biggest fall in value, as their new counterparts became ~10% cheaper. 

As more buyers found it extremely appealing to upgrade to a new car, more and more used cars were pushed into the market. While this solved one half of the problems of Cars24 by improving depth of supply, surplus supply forced resale value of used cars to decline by 10-15%.

In 2017, the used car market saw annual sales of 2MM units. Post GST, there was an increasing likelihood that this market would undergo a massive destabilization.

All these bumps made Cars24 look like it was driving on a road laced with unexpected speed breakers. 

They ended FY17 with ₹418Cr in revenues, and ₹76Cr in losses. 

Turning it Around

The founders faced numerous rejections from multiple investors. 

They were questioned for being a late starter in a capital-intensive business model. Coupled with the sucker punches dealt to them, one every year since inception, Chopra and his team had to ace multiple roadblocks before they could find their first institutional investor. But they didn’t lose heart.

Finally, that moment came in June 2018, when they disclosed a massive round of financing of $50MM, a few months after they disclosed a seed round. 

The company may have actually raised money earlier, which is why it could fund those losses in 2017. The strategy of laying low, though, was consistent with the ethos from day one.

The aha moment came for Cars24 when they realised that incumbents played the game in a  fundamentally flawed way. Every one of their rivals was focusing on car buyers. 

Focus was predominantly on listing, classified advertising, cold-calling and having an asset-light model. There was zero ownership of addressing the problems a seller faced. 

That was the play for Cars24 - ensure a stupendous seller delight. 

It targeted all the activities a seller would have to undertake to sell the car. It offered to take care of the pain points - car documentation, transfer of ownership certificates and offered to settle loans, if any. As a result, speed of transactions got a boost and processing time came down to hours from weeks.

The inspiration for solving the supply side was from familiar territory. 

Cars24’s differentiated offering and proposition was largely inspired by the FabFurnish experience. Supply was a more critical piece to solve, and that is where the real differentiation took place. 

At Cars24, the flywheel had begun to spin.

Setting up a Smooth Ride

To understand why the flywheel was spinning, it is important to understand how Cars24 works.

CARS24, by addressing the growing customer pains of selling old cars and creating value for them, aims to be the sole leader in this market space.

Reduced customer anxiety towards the pre-owned car segment, penetration in smaller towns and demand for used luxury cars, is enabling the used car market to slowly become bigger than the new car market. 

A time consuming and laborious process, spread over several months, involving interactions with prospective buyers, test drives and price haggling was being transformed forever.

Through CARS24, car owners can drive down to the nearest branch and sell their vehicle in under two hours, with the company claiming that it gets owners the best price for their vehicles. 

A thorough yet concise process follows. 

The scientific car inspection is done first. Tyre gauges, paint thickness gauges and on-board diagnostic scanners help the evaluator not only identify but also calculate the possible remedial costs of the malfunctions (if any). 

This inspection is followed by the online live auction. The inspection report is uploaded online to kick off the auction, which lasts for around 30 minutes. Thousands of authorised buyers and dealers participate through the CARS24 Business Partner Application, ensuring high demand in a very short span of time. 

The final step begins after the customer accepts the highest bid in the auction. The paperwork begins, and the payment process is initiated to transfer the funds almost instantaneously. 

CARS24 also takes all the liability of the cars sold to them and provides the sellers free RC transfer. They charge a nominal service fee based on the value of the car.

What differentiated CARS 24 from peers was a C2B model which helped them take an edge over the competition while tackling the problem of supply.

Solving for the pillars of Best Price, Instant Payments and Free RC Transfer, CARS24 was revolutionizing the used car industry. 

In just three years of inception, CARS24 had bought over 100K cars across all its branches. It had also partnered with over 10K business partners across 100 cities for the proprietary online auctions by 2018. 

With an extraordinary growth trajectory, CARS24 had 110 branches across 20 cities by the end of 2018, targeting 1000 branches in 100 cities by the end of 2020, with a run rate of over 1M transactions. 

After the initial bumps, the company had put the foot on the gas. 

Entering Sixth Gear

By 2019, Cars24 firmly had its boosters on.

With over 1.5L customers across the country selling their used cars to CARS24, the company rocketed to new heights, recording a growth of 150% and reporting a revenue of Rs 1,654 Cr ($200M) 

They claimed to be doing 13K+ transactions monthly, with an average order value of INR 3.5L. 

Four out of ten potential car sellers were trying their services when selling a car, a true sign of customer’s trust being built in such a short time frame. 

Furthermore, with less than 15% penetration of financing in the used cars segment, CARS24 sensed a massive market opportunity. 

They moved to get an NBFC license to start a new venture - CARS24 Financial Services. This would facilitate loans to customers/buyers who had been long unable to fulfil their dream of owning a car due to a lack of funds as well as limited support from banks. Partners wishing to expand their own businesses could also leverage funds to grow.

As you would recall, the lack of trust had stopped lending for used cars, which Cars24 was leveraging.

It was estimated that the average loan ticket size for consumers would be INR 2.5L - 3L. The loans and other value-added services would involve complete transparency and would be 100% digitized.

In October of 2019, the company raised another $100M in its Series D Equity funding round. CARS24 wished to invest heavily in making their technology more robust across both their online auction and the financial services as well as making the processes more convenient and frictionless.

The money would also go towards strengthening the franchise model. The adoption of a franchise business model would help expand and strengthen its presence across the country in Tier 2, 3 and 4 cities in the following years. 

Over the course of the year, CARS24 expanded its operations from 18 cities to 73 cities and added 102 new branches to take it to 202 branches by the end of 2019. 

Swerving Back on Track

Nothing could seem to stop Cars24 as it entered 2020, even competition.

As its competitors, CarTrade (which owns CarWale), and CarDekho (which owns Gaadi.com and ZigWheels.com) went on to secure funding and planned to go public by 2019 - 2020, Cars24 targeted to double its retail footprint. They aimed to add around 200 more branches and 100 new cities to their portfolio, keen to branch out into tier III and tier IV cities in India.

With their unique “home-inspection” feature, Cars24 looked all set to achieve the goal it had set for itself, entering the new decade.

But 2020 didn’t quite pan out as expected. 

The Indian car market had passed through a massive sales slump a few months before the outbreak of the pandemic, which was triggered by the uncertainty surrounding the new BSVI emission norms. 

The lockdown of 2020 came in like a wrecking ball, and the entire automobile industry was smashed. Sales crashed, fuel prices hit rock bottom, and handfuls of employees across the globe were let go.

Cars24’s revenue, user traffic, was all wrecked, as they entered the first few months of the lockdown.

Cars24 acknowledged the crisis at hand, in a report published in May. They conducted a study attempting to understand the consumer sentiments, behavior changes and commuting preferences post the coronavirus lockdown.

Saying that the “results would play to their advantage” would be an understatement. The years of building a team to capitalize when the hands would play in their favour was here.

53 percent of the respondents are likely to buy a car within the next six months as consumers prefer private vehicles for commuting over public transport services like buses, metros, auto-rickshaws, and shared taxi services post the lockdown. 

Among these respondents 25 percent earlier used public transport and taxi services to travel, 50 percent of them plan to drive their own car while 15 percent are expected to use a two-wheeler.

In July, Cars24 Financial Services raised about $1.3 million in a debt funding round. And eight anxious months after the onset of the first nationwide lockdown, Cars24 raised $200 million in a series E round of funding. This would be the slingshot which would propel it into the likes of Razorpay, Unacademy, and Zerodha. 

Cars24 would become the first unicorn in India’s auto segment. 

The near future might look bleak for the automotive industry, but social distancing norms coupled with an economy still recovering from a vicious period of recession may prove to be the reasons behind the quick recovery of the used car industry. 

Incomes being hit, public travel being hit, would push customers to used cars that solved both the problems. 

Given that the world is still straddling between conventionally powered vehicles and an all-electric vehicle utopia, multiple prospective buyers are questioning the timing of their purchase and may opt for buying a pre-owned vehicle for this reason as well.

By October, Cars24’s revenue was 25% higher than pre-COVID, and its traffic was almost 4x that. Clearly, customers were going after used cars. 

Cars24’s founders had been dealt multiple bad hands over their journeys. But as every messy entrepreneurial journey testifies, if you have the resilience and belief to stay on course, the outcomes may be larger than you expect.

As we enter a new socially distant era, this is Cars24’s moment, at long last. 

Disclaimer: Venture Highway, the fund where Aviral works, is an early investor in Cars24.

By Bhoomika, Mazin, Raj, Raghav and Aviral

Audio Version: Behind the Scenes with AJVC

As usual, we have done a behind the scenes format with the writers and host Mazin

Spotify Link