2021: The Year Indian Used-Car Startups Went Into Fifth Gear

Over the last one year, four Indian used-car marketplaces — CARS24, CarDekho, Droom and Spinny — have turned into unicorns or startups valued at $1 billion or more.

In the last 12 months, these startups have bagged over $1.5 billion in funding from the world’s top venture investors – Softbank, Tiger Global, Sequoia Capital, Tencent, Accel, Falcon Edge, General Catalyst, DST Global, CapitalG and others.

More funds were raised this year than in the previous five put together, with CARS24, CarDekho and Spinny pocketing most of the investment in multiple rounds.

It's a flying lap in 2021. 4 unicorns. 1 listing (CarTrade). And, one of the newly-minted unicorns — Droom — also on track to go public, having filed its draft papers for an initial public offering (IPO).

During the pandemic, marquee investors have fueled the rise of used-car marketplace unicorns around the world, especially in developing countries.

Consumers preferred commuting in a personal car to taking a bus, shared cab or metro rail. But, with disposable incomes hit, they found themselves short on cash. Add to the problem, pricier new cars with long waiting periods due to the global chip shortage crisis, and the demand for used cars shot up. But, how could one find a pre-owned car during lockdown restrictions?

The online used-car marketplaces. "...Even finding a life partner is enabled by the internet. COVID was a great reminder to everyone that an automobile can be discovered, found and ordered online," said Sandeep Aggarwal, Founder & CEO, Droom, in an interview with CNBC-TV18.

After a brief halt during the total lockdown period, these startups switched to reconfigured engines and returned to the track with virtual walk-around of pre-owned cars, online catalogue of 200+ points inspected vehicles, haggle-free pricing, door-step test rides/deliveries, online payments and cash-back guarantee.

These were, as Spinny’s Niraj Singh put it in a chat with Accel’s Anand Daniel, “Features and tools which helped a consumer make the decision entirely online.”

In a COVID-impacted world, people were against interacting with many sellers and wanted to complete the transaction in the quickest possible time with the least possible engagement, Singh explained.

To get a sense of how these startups raced during the pandemic: In the January-August period this year, Spinny registered over two-fold growth in sales to 11,600 units (YoY). It expects to conclude the year at around 28,000 units. That's three times the 9,000-odd units it sold in 2020.

One of Spinny's investors - General Catalyst - oversimplifies it a bit, but captures the attempt to facilitate online buying of used cars as being “...almost as easy as ordering your favourite coffee.” Investors were excited to ride this digital drive.

Here’s an example: Last year, pre-owned cars marketplace Kavak became Mexico’s first unicorn. In September this year, it drove away with a massive $700 million Series E funding led by General Catalyst, with participation from Tiger Global, SoftBank and others. At $8 billion, Kavak is now Latin America’s second-most valuable startup.

Another one: In South-East Asia, a fast-emerging frontier market for used-car portals, Carsome became Malaysia’s first unicorn in July. A month earlier, a SoftBank-led funding round valued Singapore’s Carro at $1 billion. Now, both are cruising to a possible listing in the U.S.

In India, with Tencent and Falcon Edge by its side, SoftBank co-led the single largest funding into India's first used-car marketplace unicorn - CARS24, writing a $340 million cheque. Now, the most-valued startup in the space at nearly $2 billion, CARS24 may see its valuation surge to $3 billion, as per an ET report.

"We will continue to support this growth given our expertise in e-commerce businesses across markets," said Sumer Juneja, partner, SoftBank Investment Advisers, after co-leading Series F funding in CARS24.

SoftBank is not the only global investor with experience of backing online pre-owned car retailers. Spinny's investors - Tiger Global and General Catalyst - have witnessed their portfolio kids - Carvana, Vroom and Cazoo - scale up and go public. For investors, that's another pull. IPOs.

In fact, this is Tiger Global's second race in the space, after entering as early as 2011 with CarTrade, which became the first used-car marketplace to list on the Indian stock exchanges in August this year.

For investors, proven international models act as a good guide. “We have studied used-car platforms globally and are struck by the similarities we see between CARS24 and analogous businesses that have scaled successfully", said Navroz Udwadia, Co-Founder, Falcon Edge.

CARS24, which is said to be the market leader in India, sells about 100,000 used-cars annually. Global peer, U.S.-based Carvana sold 250,000 units last year and it is only the 8th largest used-car retailer in the country. That shows the headroom for growth.

In India, the overall used-car industry is itself at an early stage of evolution, transitioning from infancy to growth and maturity.

The down-force is great with nearly two used cars being sold for every new one, with the ratio inching up, but still lagging behind mature markets such as the U.S. and U.K.

Currently, close to 5 million used-cars are being sold in India every year. This number could rise over 7 million by FY26, according to an OLX Autos-CRISIL study.

As it stands, the market share of online players is nascent at best. In an interview with CNBC-TV18, CARS24’s Mehul Agrawal said, "It's a $60 billion market and we are hardly 5% of it."

But, the industry is changing in ways that are favourable to the online used-car retailer.

Millennials are leading the charge. They account for 80 percent of sales when it comes to buying pre-owned vehicles in the country, according to CARS24-IPSOS report.

The middle-class in small-town India has shunned the social stigma associated with buying a 'second-hand car'. The heartland of the country – Tier 2 and Tier 3 cities – has become critical in driving volumes for the pre-owned car market with 75 percent of sales in FY20, according to the Indian Blue Book report.

And, the necessities of the pandemic brought more first-time buyers. Their share expanded by 8-10 percent in FY21, according to the OLX Autos-CRISIL report.

Moreover, the availability of a worthy pre-owned car - average age of 4.5 years - is a major draw. It is getting close to being as good as brand new. And, to buy such a car, CARS24 - the only player with an NBFC licence - and others are providing used-car financing at competitive rates.

"Used-car financing in India is massively under-penetrated. When you look at new cars, almost 80 percent of cars get financing for consumers, whereas in new cars, it is not even 15 percent. That's the problem we are really keen on cracking," said Mehul Agrawal, Co-founder, CARS24.

CarDekho, which claims to control 9 percent of used-car lending in the country, has similar plans. Amit Jain of CarDekho told CNBC-TV18, "Looking forward to forming our own NBFC and helping instant digital journeys for used-car loans.”

All macro factors aside, as Spinny's Niraj Singh explained, car buying in India remains 'a highly-aspirational, super-duper emotional purchase.' Only 3 out of 100 people own a car in India vs 80 in the U.S.

"Within your limited budget, you want a car which can match your aspiration and that is why you start looking for options in the second-hand," added Singh.

But, for years, buying a pre-owned car has been one of life’s most stress-inducing transactions, riddled with fears of bringing home an overpriced vehicle, perhaps stolen, with faulty parts, rigged odometer, forged papers and unpaid challans.  It’s a trust-deficit category, according to Elevation Capital, one of the earliest backers of Spinny.

In India, only one out of every five pre-owned cars is sold through the organised channel, which includes the tech-driven online used-car marketplaces and other players such as Maruti Suzuki True Value and Mahindra First Choice.

While the online marketplaces brought greater transparency to the industry, trust remained elusive. To solve the persistent ‘trust issue’, these used-car marketplaces are turning into used-car retailers, where they give company assurance to the buyer, with 1-year warranty and 7-day replacement guarantee.

For this, they must control the entire used-car value chain, starting with a thorough 200+ points inspection of the pre-owned car. Much like Licious and Fresh-To-Home suggest, “Control over the source determines the freshness of meat.”

Most of the funds raised are being funnelled to meet this end-to-end strategic shift: To sell pre-owned cars directly to buyers, with the involvement of fewer or no dealers at all.

To provide the buyer with a good selection of quality cars requires great investments from undertaking detailed inspections of a pre-owned car and refurbishing it at company-built factories to delivering it at home. End-To-End.

The full-stack model, CarDekho's Amit Jain admits, is a capital-heavy business, which requires a catalogue of 10,000 cars. "You will have to invest a decent amount of capital, which is not funded by debt," he said.

The other area that requires significant investment is, "A used car should be as great as a new car. So, we are heavily investing in reconditioning centres, which will allow us to refurbish everything in-house," said Mehul Agrawal, Co-founder, CARS24.

In 2018, when Spinny pivoted to the full-stack model - buying, refurbishing, selling, financing, transporting and delivering - not many investors were keen.

"Back then full-stack businesses were not appreciated. People were fans of asset-light and fast-growing business models," said Niraj Singh, Founder, Spinny.

Now, with successful examples of Carvana, Vroom and Cazoo, investors are far more encouraging despite the asset-heavy approach.

By March 2022, CarDekho expects to take its full-stack model to 12 cities, up from 6 cities today. And, eventually, expand to 30-odd cities. Spinny, which already runs the ‘online-to-offline’ model, is looking to expand to 20-25 cities shortly.

On the unit economics side, a full stack model allows Spinny to capture maximum value in the chain, which earlier was being split across 3-5 intermediaries in the used car supply chain. “Over time, this will also allow Spinny to offer better prices on the supply side and offer a much larger and diverse catalog to its consumers”, explained Akarsh Shrivastava and Mukul Arora of Elevation Capital in a blog. It’s a long drive.

The pivoting CARS24 and CarDekho have begun to claw back on some of their offline stores to buy cars, moving to a home-inspection model, which is more cost-effective and efficient as proven during the pandemic. It’s a start. Both are planning to list over the next 18-24 months, and that means questions on profitability. Reportedly, all four unicorns are loss-making, while the recently listed CarTrade is profitable.

Facing a rough ride in trade since going public, CarTrade has received a thumbs up from Citi, which initiated coverage of the stock with a buy recommendation, for the used-car portal’s “asset-light, dealer-centric, profitable business model.”

For the asset-heavy peers, the allied services are expected to turn profitable before the core business. At the time of turning unicorn in October, CarDekho said its new auto and financial services verticals were profitable, with InsuranceDekho.com close to breakeven point. It is hoping to hit operational profitability next year.

In their respective DRHPs, both CarTrade and Droom listed ride-hailing – Uber and Ola – as threats. However, in a pandemic-induced move, SoftBank-backed Ola has entered the fray, with Ola Cars selling 1,000 cars over the weekend leading up to dhanteras. It announced perks such as Rs 1 lakh discount, free servicing for up to 2 years, 12-month warranty and a 7-day easy return policy.

"Huge competition! I think it's healthy for category-creation because the category doesn't exist. It is dominated by unorganised players," said Amit Jain, Co-founder, CarDekho.

"There will be 8 million cars sold five years out. There is a huge used-car market remaining untapped. Each one of us will have some piece of the cake and expand in different segments. Strategies may be different, which segments and which cities you will attack. We will have our own and they will have their own. That's how it'll look like," he said.