Hedge fund managers aren’t exactly the most popular people in the world, especially after the Wall Street collapse. But since David Sturtz gave up his hedge fund gig to start a website that helps consumers avoid getting ripped off on car repairs, he’s making lots of new friends.
Auto websites like Sturtz’s RepairPal have become popular as a growing number of consumers try to make their old cars last longer. New car sales in the United States plummeted from 16 million units in 2007 to an estimated 9 million units this year.
“From the owner’s perspective, there is much greater interest in how to take care of their cars and manage the asset more effectively,” says Bob Ackerman, managing director of Allegis Capital.
Earlier this year, Ackerman led a $5.3 series B investment in DriverSide.com, a startup dedicated to helping consumers with all aspects of car ownership, including free advice from mechanics and information on parts and accessories.
“This is a very large sector of the U.S. economy, over and above the buying and selling of autos,” says Ackerman. “It measures in the hundreds of billions of dollars, but has never really been penetrated.”
Sensing a similar opportunity, like-minded car sites such as High Gear Media, Mota Motors, RepairPal, TrueCar and vLane have also landed venture and angel funding. Market conditions have served as a catalyst for their near-simultaneous arrival on the scene.
From the owner’s perspective, there is much greater interest in how to take care of their cars and manage the asset more effectively.”
Since the start of 2008, at least 11 auto-related Internet companies have raised a combined $60 million, or an average of $5.5 million each, according to VCJ publisher Thomson Reuters (see table).
Will these startups race to the front of the pack or crash and burn?
“I’ve been in this business for 10 years, and I really can’t think of any startups that became a raging success,” says the founder of a technology-oriented auto company that was launched in the dot-com era and is still in business today. “Honestly, I’ve met a lot of entrepreneurs in the auto sector who start out with high hopes for their business models, but a few years later, they realize that things didn’t pan out like they imagined.”
The big problem, says the founder, who asked not to be named, is that the auto industry moves very slowly. Yes, consumers have gone online in a big way. But the auto industry supply chain, and the people who work within it, remain very resistant to change. “If I was starting a business again, I would really think twice about the auto sector,” the founder says.
That said, startups probably have a slightly better chance of survival today because they launched in a recession. If times were better, says Mark Silverman of Catamount Ventures, another investor in DriverSide, there would be 15 or 20 companies all trying to do the same thing, instead of just half a dozen.
One company that stands out—not least because it has passed up offers of venture money—is RepairPal. The startup, as its name implies, is focusing almost exclusively on car repairs. In fact, it aims to become the Kelley Blue Book of the auto repair industry.
There were about 12.5 million owner sales [of cars] in the U.S. this year. Imagine if Mota could monetize anywhere from $55 to $220 dollars per transaction.”
It has developed the first consumer database of its kind, providing estimates on the 125 most common car repairs. RepairPal spits out prices depending on the make and year of any given vehicle. It also factors in the cost of parts and labor for all 42,000 zip codes in the United States. All told, the database can generate 70 billion individual price points.
The company has also shown a knack for monetizing the data. Once consumers get an estimate from the site, they are shown listings for repair shops in their area.
RepairPal lists 170,000 shops and dealers in its online directory. But in just three months of selling, the company has signed more than 800 service shops as paying subscribers. They pay a fee ranging from $50 to $200 per month for preferred placement on the site. Shops that pay the full $200 also get top placement on RepairPal’s iPhone application, which has been downloaded 550,000 times as of this writing. The RepairPal site is rapidly approaching 1 million visitors per month.
“Until now, the only form of lead generation for service shops was the Yellow Pages or the newspaper,” says RepairPal CEO Sturtz. “We are defining an entirely new channel of customer acquisition for a very large industry.”
Sturtz, who defines his personality as “prickly,” says he’s been up and down Sand Hill Road, but ultimately decided not to take venture money because he couldn’t see eye-to-eye with any of the venture capitalists he met. Instead, he raised $3 million in seed capital.
Sturtz previously ran a small hedge fund and was able to leverage some well-heeled connections in that community. He is currently on the verge of closing another $2 million round from angel investors, but does not rule out taking venture money. “I am always open to discussions if I find the right institution,” he says.
There are car startups spending hundreds of millions of dollars to develop power trains that get 200 miles to the gallon. With a deal like DriverSide, we still have a chance to impact a huge market, but without a huge investment.”
Not every auto website site is shifting into top gear. VLane, which raised $1 million in angel financing last year, has had to scale back during the recession. The company has developed an application that leverages social networks like Facebook and Twitter to help consumers decide what kind of vehicle to purchase.
A new mother looking for a minivan, for instance, can poll her Facebook network to see which vehicle gets the most recommendations. Company founder Herman Paek says these are the kinds of consumer-review features that carmakers would love to access, especially from an advertising standpoint.
Paek says he is adding new community features to vLane and is focused on building a big and loyal user base before he worries about monetization. “Once you establish the user base, everything follows from there,” he says.
Paek is not actively pitching VCs, but hopes to enter the fund-raising market once usage spikes and he’s ready to accelerate growth.
Another attractive niche that has bubbled to the surface during the recession is peer-to-peer auto sales. “This market is moving online in a big way,” says Jim Counihan of Prism VentureWorks, which invested $5.4 million in Mota Motors last year, according to Thomson Reuters (publisher of VCJ).
Before buyers plunk down their hard-earned cash for a pre-owned car, Mota can refer them to service shops like PepBoys for an inspection, thereby earning a referral fee. Car buyers can also buy warranties and eventually even insurance through the site.
I’ve been in this business for 10 years, and I really can’t think of any startups that became a raging success.”
Anonymous CEO of auto-related company
“There were about 12.5 million owner sales in the U.S. this year,” says Counihan. “Imagine if Mota could monetize anywhere from $55 to $220 dollars per transaction. That’s a multi-billion dollar revenue opportunity.”
Instead of strictly pinning its hopes on becoming a destination site, Mota is white-labeling its technology to leading car sites like AutoTrader and Kelley Blue Book. “All these guys want to push deeper into the used car space,” says Counihan, “and we have the infrastructure to help them do that.”
It also makes sense for new car websites to partner with the entrenched leaders because those are the companies most likely to acquire them. Anyone from Edmunds to Internet Brands, the corporate parent of Auto.com and CarsDirect, is capable of snapping up a promising startup in the space.
Counihan believes a company like Mota could reach cash flow break-even with less than $15 million in venture capital. He’s confident the company could then be sold for about $150 million, which would earn VentureWorks a tidy return.
For High Gear Media, the opportunity isn’t just that consumers are holding on to their cars longer. It’s that they’re becoming more passionate about their vehicles. High Gear publishes more than 30 auto-related websites for car aficionados, including AllAboutPrius.com and MustangBlog.com. It raised $5.5 million in July from Accel Partners, DAG Ventures and Greylock Partners.
“High Gear has the opportunity to aggregate the best of what is available on the Web from not just a few good sites, but thousands of them, and do it in a very targeted manner,” says Andrew Braccia of Accel.
Despite the inherent risks of the auto business, investors in the current crop of car sites remain optimistic, primarily because startups like High Gear, Mota and RepairPal are relatively inexpensive investments that could potentially yield big dividends.
“There are car startups spending hundreds of millions of dollars to develop power trains that get 200 miles to the gallon,” says Mark Silverman of Catamount. “That’s not what we’re interested in. With a deal like DriverSide, we still have a chance to impact a huge market, but without a huge investment.”