Category Archives: Auto Startup Companies

Starting a Car Dealership and Raising Capital

WordPress tells me that some people reach my blog while looking for information on how to start a car dealership and how to raise capital for it. So, I thought I’d try to be helpful and provide some information to help those people out. In the case of errors and omissions, I apologize, but feel free to let me know what I did wrong.

In order to sell more than five cars a year to the public, most states (maybe all) will require that the seller become a licensed dealer. Selling more than five cars a year is known as curbstoning and is definitely illegal.

Most requirements to start a dealership center around a few things: a retail location that has enough space to show at least five cars, a surety bond for around $25,000 and a lack of criminal record. The surety bond is basically just an insurance policy and can be purchased for a few hundred dollars, it’s also known as a motor vehicle dealer bond. Of course, all of these vary by state. The application can take a few weeks to process, cost a few hundred dollars and will require more information about corporate structure and balance sheet.

Once the application is approved its important to get up and running. This will likely mean obtaining liability insurance, signing up for a floorplan, and registering for auction. The company used for the surety bond should also be able to help out with the liability insurance. Floorplans are lines of credit that are used specifically to purchase inventory, a few companies to look at are: MAFS, AFC, Dealer Services Corporation, Auto Use.

Next, and it’s possible to do this while getting the insurance and floorplan, register for auction. Auctions will want information on the dealer’s license, surety bond, corporate structure, and balance sheet. Just call up the closest auction and ask for new dealer registrations. I’m always a big fan of online auctions, so check out OVE, ATCOpen, GMAC SmartAuctionOpen and Adesa.

Before selling cars make sure to have all of the necessary paperwork, this includes, and depends upon the type of dealership, the buyer’s order, buyer’s agreement, odometer disclosure, document to transfer titles, and several more depending on the dealership. It’s also important to order dealer tags: temporary tags and untitled vehicle tags.

Other things to think about are:

  • Website: there are several good web solution providers, SEO experts and blog resources to help
  • Lawyers and corporate structure
  • Marketing plan
  • Why you want to start a dealership in the first place

More Thoughts On Hotswap

When Hotswap launched a few weeks ago it met an initial flurry of activity with bloggers judging its usefulness to the auto industry. Ryan, over Blogproautomotive.com, pointed out its SEO value, but I was less sanguine. I failed to understand it because I failed to question it.

Primarily, who are these twenty year olds that started the company, and why? Well, a little digging yielded some easy answers. Hotswap was started by a couple of 20 year old former grad students from UC Berkeley. Connection to the auto industry? Maybe none…?

Instead, they developed a new compression technology for high definition video, and more importantly, recognized that the mainstream video market is saturated. Therefore, they looked at unexploited opportunities that could make use of video, where they could grab a niche and expand from there. Props to these guys for making something happen.

The Voice of Carliquidators Speaks

John Possumato, founder of Driveitaway and Carliquidators, finally took some time to give some insight into Carliquidators and, in doing so, provided some great thoughts on the used car market, remarketing and its evolution over the past 20 years. It’s clear he has a depth of knowledge about the car market that far surpasses mine.

He lays out a strong business case for Carliquidators based on past experience and strong numbers. Also briefly described is an initial go-to market strategy of starting small and adding auctions as they grow. The post, like most of John’s, is on the longer side, but well worth the read. It’s packed full of good thoughts and information.

Read about Carliquidators and check out the videos.

Hotswap Review Party

I’m late to the Hotswap review party, I know. Frankly, after reading about them on TechCrunch I was surprised they raised 2 million dollars. 2 million? For sales videos of cars? That must have been a great presentation. I think most dealers are slightly confused by Hotswap, or, at least, I am. The idea makes sense to me in one particular sense, and that’s when the cost for the customer to acquire more information about the car is greater than the dealer’s cost to provide the videos. Said another way, when the consumer does not have easy access to the car videos make sense, i.e., eBay.

Of course, I’ve already seen videos on eBay Motors, which is why Hotswap confused me. Revenue opportunities have to be limited, because, as Jeff pointed out, few dealers area going to take the time to make videos. And this makes sense, as a dealer’s goal is to get people down to the dealership to see the car in person. I would, however, love to see video used on online vehicle exchanges like OVE, ATC, et cetera.

Buying across state, from dealer auctions, engenders a little anxiety before every purchase; in some cases, there may be only one picture and a condition report of the car. Finding more about the car is difficult, and seeing more the interior, exterior, and, importantly, hearing the car startup, idle, and if possible, run, provides great value to the dealer before purchase. Video is a great opportunity to reduce the risk associated with purchasing a vehicle out-of-state and consignors that provided videos would likely obtain a premium for their cars.

When Industry Veterans Innovate

I’ve been following Carliquidators for a few months now when I accidentally stumbled on to the site, really stumbled, as I have no idea how I found it. Carliquidators is selling used Crossfires directly to the public from rental fleets. This another one of those Carless Car Dealers but offers a slightly different business model as they are, at least right now, specializing only in rental fleets and only selling crossfires – correction, it looks like you can now buy anything. There certainly seems to be an undercurrent in the industry right now to change the buying process, standardize the flow, reduce prices and improve customer experience.

One of predominant fears I have with this blog is becoming the guy who finds fault with everything, so I recognize that this is an early stage of development for Carliquidators, certainly for the niche of the used car industry that may be “Used Cars Direct”. Getting the right product offering and promotion is likely to take time, money, and a good idea or two. Probably because Driveitaway, the company that started Carliquidators, has a blog I’m partial to the company. I also like them because they are taking the time to invest in their site as even over the past couple of weeks I’ve seen some really positive changes in their site.

One of the dominating issues with this direct-car concept is how comfortable the consumer will feel buying the car site-unseen. Most consumers are definitely not ready to take that step. In addition to letting consumers test-drive a car before buying, dealers serve another valuable function: helping with financing and accepting trade-ins, there is a monthly payment calculator but I’m not sure if this connects up with a financing company.

The biggest issue I see Carliquidators having is that (I think) most of the experience of the management team has been focused on B2B. Certainly they know the auto industry, but Carliquidators is more of an Internet company than an auto company. This lack of consumer experience shows up in some of the basic navigation and site development. For example, the nav bar links completely change depending upon the part of the site one is on. They have links to ‘wish list’ and ‘transport’, but they take almost random clicking to find. And if he hasn’t yet, I’m sure Ryan from Blogproautomotive.com will try to contact the owners to offer help with some major SEO needs.

Another concern is how much Driveitaway will focus on this part of the market. Certainly, if they could provide a liquid venue for rental companies to sell their cars to the public, Driveitaway could create a disruptive innovation in remarketing and steal some major business from Manheim. At this stage of the market, Manheim is unlikely to view Carliquidators as a threat, and if Carliquidators moves fast and quietly, in a few years, it could really turn the industry on its head. But, this needs to be balanced with the other needs of the business internally and serving the business community will require different resources than meeting consumer demand. This seems like a case out of Clayton Christensen’s The Innovator’s Dilemma, and likely shares some parallels with Manheim’s OVE experience.

I’m looking forward to seeing how things shake out in the coming years in this market segment. As a side note, Evenlevel updated its homepage design and has a new logo…

Carless Car Dealers

I took a little break after my Autotrader posting to let things die down a bit, but that reprieve gave me a chance to think about car dealerships in general. Exploring my thoughts, about the changing nature of the industry, makes me believe the only sustainable advantage a dealer has right now is access to cars. Finance, warranty, and insurance companies are all reaching customers directly and more consumers are buying cars from other consumers than ever, eventually, and I mean maybe 20 years from now, dealers will see their inventory limited to lease, rental, fleet, and trade-in vehicles (for people who absolutely need to sell their car right away). At some point, a dealership may consider forgoing inventory altogether and just giving consumers access to vehicles still at auction.

This type of service, known as car brokers or vehicle locators, has existed for years. However, the past couple of years have seen a few more sophisticated players enter the market. One of the main issues with brokers in the past is that consumers were unable to pick out a specific vehicle; a few new companies are starting to change this. I spent some time looking at some of those companies, specifically, Evenlevel, Motobidia, and Autoauctionexpress.

Problems common to all three are marketing, inventory selection, and the buying process. However, more interesting to me is the individual challenges of their business models.

Evenlevel looks like the newest of the three, and it uses a slightly different model than the other two. It shows a buy it now price that the consumer can click on to see the wholesale price and the evenlevel fee. When I looked there were roughly 200 vehicles across all major makes. It looks like most of the vehicles come from fleet companies but there are some from other dealers as well. One neat feature is the ‘Popular models’ that shows some of their more popular cars, the number available, and the lowest price – it makes it easy for people to quickly click to the cars they like. They also show the available condition report. Motobidia is a little different.

Motobidia actually has two rounds of bidding, for example. A buyer must register for Motobidia, first, bid on a car, and then if theirs is the winning bid, Motobidia will the bid at the actual auction. Seems a little confusing, and introduces more variability in the process. They offer free shipping as well, but I couldn’t find out how much Motobidia actually charges for the service. It looks like they obtained their dealer’s license in 2005, so they must be making some money.

Autoauctionexpress is neat because it lets consumers view actual auctions as they happen. I bet this inside view gives people a better understanding of what the whole process is like. According to their site they operate primarily in Southern California and work with credit union customers, so it looks like they have some actual sales going. The site design itself is a weaker aspect – it looks like they are using clipart curtains for their virtual showroom. It’s also possible they are no longer in business since I didn’t see a single purchase of a car newer than ’01.

Of the three, Evenlevel looks to have the easiest process: see a car, like the price, and then buy it. The consumer doesn’t have to wonder if their bid will win, and it they lose, possibly wait weeks for another, comparable car to show up. Autoauctionexpress’s relationships with credit unions could drive a decent amount of sales, though.

Two big obstacles still remain though: marketing and sales process. Many of the main classified sites specifically forbid advertising a car not in the dealer’s possession, this rules out some of the main advertising sources for dealers. Of course, there are enough alternatives to classified sites that this should not be the main problem. Rather, it is likely the sales process.

In order for these types of services to be successful they will have to find a way to overcome key objections about trust, risk, and consumers delaying gratification.

Keeping Private Party Sales Private

TheInternetAutoMall.com, a company launched Thursday, provides a safer way for individuals to sell cars to each other. TheInternetAutoMall.com will provide users with anonymous email address, voicemail, and a non-renewable sales listing for 45 days for $59.

The company has some notable features, and I can see a market demand, but I wonder how it will compete with the free service of Craiglist. Craigslist is free to list and provides anonymous email. Or, Autotrader, a new Gmail account, and Jangl provides another alternative.

New Pricing Tool for Dealers

I would like to say that my blog posts have been slow in coming because the startups have been slow, but there were three interesting new companies and deals announced this week (probably a lot more) so I will get started.

Dealerskins, a Dominion Enterprise company, partnered with DataOne to provide a pricing tool to dealers let dealers know how their cars a priced relative to the competition within a 100 mile radius. If the price is out of line with the market an email is sent to the dealer. One way the partners see this being used by dealers is by making sure the cars are priced less than competitors and show up first on Autotrader.

I think this would actually be more useful as an inventory-buying tool than a price-setting tool. To a certain extent, most dealers price on a cost plus basis, as opposed to market pricing. Depending on how the product works, if it’s possible to add a number of cars to the list and see the average market price, it would be easy to compare market sale prices to auction buy prices and spot the best profit opportunities. This paired with an inventory optimization product like Point could be a great combination for dealers.

The Ease of Launching a Website

Autoremarketing.com has a press release from a new site called CarGurus.com, it’s a user generated, car review site that offers an interesting new product called the Web Price Index. CarGurus.com wants to become the Wikipedia of the auto space, a title that should belong to Carfolio.com.

The Web Price Index aggregates prices from multiple sites and shows the residual value of a car, letting people know how well a car retains its value. Perhaps interesting for those who are concerned about the residual value..?

The most interesting part of this company, to me, is the management team and board of directors. Notably, the founders seem to all come from TripAdvisor, Simon Rothman is a director, former Vice President of eBay Motors, and a member of a private equity group is also on the board. A team that seems equiped for success in this space. My only question is what value the site currently provides.

Almost every research site provides values to cars and reviews of cars, some even from users. It’s highly competitive, and the other, established sites, all have more name recognition, content, and users. However, as Guy Kawasaki, entrepreneur, venture capitalist, and more, recently pointed out it’s easy and cheap to launch a new site, so in a sense, why not go for it.

Without knowing the management’s plans, I have a hard time seeing it become an established name, but it doesn’t need to be to make money. They are using a combination of affiliate programs and Google Ad Sense, and if they are able to promote their affiliate programs in an effective way, it could be interesting.

lanelogic founder is an evil genius

I’m convinced that Bruce Thompson, founder of aaXchange and lanelogic, is an evil mastermind bent on changing the auto industry as we know it. I first heard about him a few years ago while “consulting” for DrivenXChange (an online bid/ask marketplace for wholesale cars) and researching into potential competitors, aaXchange was loosely a competitor.

aaXchange, for those of you not familiar with the company, helps dealers optimize their profits by analyzing what cars sell the best, and then recommends those cars to the dealer. I’ve heard they also take into account outside data, potentially from AutoCount or other services. From the time line I’ve been able to reconstruct, aaXchange started in ’05 and sold out in ’06. But, the genius behind aaXchange, and what Thompson did with it, was not the quick exit, but what he set himself up for.

I’m not sure if it was a precondition of the sale, or just some good negotiation later on, but for his next venture he made the data primary part of the business – that company is lanelogic. lanelogic is the first market maker in the wholesale industry that actively trades cars between dealers, bringing liquidity the market, improving how efficiently cars are distributed among dealers, and bringing an industry first – the “Put Bid”.

lanelogic is easy to use:

  1. Sign up as a dealer and let them know how many cars you sell a month
  2. As a precondition of using their service, you allow them to purchase inventory on your behalf, up to 30% of your total inventory
  3. lanelogic has a 45 “Put Bid” on the car, that is basically a european put option, allowing the dealer to sell the car back after 45 days at a given price
  4. When a customer wants to trade in a car, the dealer can “launch” it to their trading deks, where the dealer receives a guaranteed buy bid within about five minutes

lanelogic has built a great system for dealers, and for themselves. Dealers can now take almost any in car in on trade, and know at what price they have a guaranteed buyer. Trade-in values are important to most buyers, and an objection to overcome during the sales process. Plus, the inventory that lanelogic does purchase for the dealership will usually be high quality inventory, and if not, lanelogic will take it back. The real beauty is what Bruce has built up.

I’ve read that lanelogic makes about $200 a trade, essentially moving cars between groups of buyers and sellers that are forced to take the vehicles, but, with the aaXchange data, the traders know what cars the dealers can sell. This limits the risk that a dealer will exercise their ‘Put Bid’. More than just a single smart move, Bruce has built up an ecosystem around lanelogic that enables dealers to buy cars, and turns the company into a comprehensive application. Partners include: Copart (a salvage auction company), Cross Country (a vehicle transport provider), SGS (Inspections), DSC (dealer floorplans), and Great American Insurance Co. (I think the company that provides the Put Bid).

 

All of these companies together work to improve the buy and sell process for dealers. If a dealer is forced to buy a car, they need a line of credit with which to buy – DSC. Once they buy a car, they need to be able to transport it – Cross Country, and before lanelogic ever takes possession of car, they need to verify the condition – SGS. And, in those instances where LaneLogic is unable to dispose of a car, they can use Copart’s Virtual Bidding 2 platform to auction off the car to the highest bidder. Bruce’s vision?

“At some point, we go to the consumer.” Pure. Evil. Genius.

LaneLogic is backed financially by Copart (CPRT), HBK Investments L.P., and Cain Capital, L.L.C