Two Loops and One Unicorn

Cazoo, a company that enables customers to buy a used car online and get it delivered for free “in as little as 72 hours” raised £25 million, turning it into a unicorn in record time.

From Sifted:

Cazoo, the used car marketplace, has become the UK’s latest billion dollar company in record-breaking time. It has raised an extra £25m in funding from venture capital firms Draper Esprit, General Catalyst and DMG Ventures, bringing total funding raised to more than £200m.

That’s an impressive amount; the company was founded just 18 months ago — and there’s not even any SoftBank cash in it.

Cazoo has some traction in the £50 billion "used car market" with thousands of cars sold to date and “record sales levels over the past few weeks”.

But they didn't raise at a billion-dollar valuation because of the impressive traction. They raised because they have the opportunity to reinvent an industry by executing a proven playbook.

The Cazoo marketplace

Marketplaces are fantastic businesses.

They act as middlemen between buyers and sellers, facilitating discovery, creating liquidity and enabling transparency in an otherwise fragmented market.

If they work.

Startup-land is littered with the corpses of young marketplaces who died trying because, well, scaling a marketplace is tough.

As in every transaction with two sides – buyers and sellers – there's a no value to one side without the other one.

Hitting scale and ensuring enough liquidity so that buyers always have supply and sellers always have demand requires iterating on a bunch of different thing, of which most of them don't really scale that well.

So let's look at Cazoo.

Cazoo is a typical marketplace, or what Robin Dechant from Point Nine Capital calls The Middleman Structure.

From The Case for B2B Marketplaces:

"In these cases, both the supply and the demand side are highly fragmented and connected through a lot of middlemen, e.g. traders or agencies. Besides connecting supply and demand, these middlemen often provide additional services such as logistics, insurance or trade financing."

On one side you have car buyers and on the other, sellers. Sometimes they interact directly but in many cases there's a broker (used car dealerships) facilitating discovery and enabling the transaction.

The problem with the used cars market is information asymmetry –

• buyers don't know which car to buy,
• buyers don't know how valuable their existing car is,
• buyers don't know if that car you want to buy is any good.

The last one is particularly important.

Since buyers don't know if the car they are buying is a piece of crap, they price that uncertainty into the purchase.

This tilts the power towards the seller and drives the good cars out of the market because the average price between a good car and a bad car is lower than the expected price for a good car.

A typical marketplace (like the now-defunct Beepi) would solve this information asymmetry between buyers and sellers by becoming the middleman and standardizing the transaction.

But Cazoo is running a different playbook. They are not becoming the middleman. They are aggregating demand first-hand, leveraging that to buy a shit-load of quality supply and building trust with the consumer.

That's a much, much better playbook.

Generating Demand with content loops.

The first step is aggregating demand, but doing it in a marketplace with low transaction frequency is hard.

Cazoo is solving it by making the entire process more transparent, starting with helping you decide which car to buy.

Below you are looking at Cazoo's chief page.

Yup, reviews. Good, ol' car reviews.

Guess who searches for (and really appreciates) detailed car reviews? Car buyers.

If you are looking for an Audi A3, the first thing you'd do is open up Google and search for "audi a3 2020 reviews".

Now imagine this at scale: there are dozens of car makers in the UK market, with hundreds of car models, and thousands of combinations of said models.

Cazoo is building detailed and helpful reviews for each one of them because every one of those reviews is internet real estate that ranks in Google when interested buyers search for reviews.

This dynamic feeds positive SEO loop that engages car buyers way before they are ready to perform the transaction.

• Buyers search for reviews
• Buyers click on search results
• Buyer finds Cazoo lovely and very helpful
• Cazoo's brand and authority increase
• Buyers purchase car when they are ready
• Cazoo uses new resources to generate new listings
• And we are back to where we started

Thing about SEO is that it's a Success of the Successful dynamic. If you are first mover it's very hard to displace you as backlinks accumulate at a faster rate the more successful you are.

Here's a not-so-fancy chart illustrating that loop.

And it doesn't have to stop with reviews.

One of the big challenges of buying a car is that buyers usually you need to sell their existing car. And selling it is a pain in the ass, starting by not knowing how much the car is worth.

Cazoo can (and should) build is a calculator that helps buyers decide how much their car is worth, spinning a "valuation estimates" for every make, model and year.

But I'm rambling now.

What Cazoo is doing is securing demand and turning itself into an Aggregator, a companies that collect a critical mass of users and leverage access to those users.

One of the main benefits of becoming an aggregator is that it makes new user acquisition a lot cheaper. But aggregation doesn't transform value chains, integration does.

Buying Supply and generating more Demand

Let's go back to the information asymmetry problem: car buyers don't know if a car is any good.

A great way of solving the information asymmetry between two unknown parties without becoming a middleman is replacing the unreliable party with a trusted party – in this case, Cazoo itself.

Cazoo doesn't connect buyers and sellers and takes a cut out of the transaction. Cazoo buys selected used cars, puts them through a 150+ point inspection and sells those cars.

They don't need to beg people to list their cars to generate supply. They are the supply. So the model looks more like this.

What makes everything work is trust.

With Cazoo being the single point of failure in the transaction, it needs to go to ridiculous extents to generate confidence in the buyers.

They are doing a fantastic job at it:

• They only buy selected cars (and make it VERY clear)
• Each car is test-driven by their team
• Expert mechanics perform a 150+ point inspection
• Comprehensive 90-day guarantee if something is wrong with the car
• 7-day Money Back Guarantee if you don't like your new purchase

They know that if this fails, their entire business collapses. No wonder they put it front and center on their site occupying valuable above-the-fold real estate.

What Cazoo is doing is buying confidence and then selling it back to consumers in the form of used cars.

But here's where the magic starts.

Cazoo leverages the first demand loop to kick off a second supply loop, and as expected, both work very well together.

• Reviews generate initial demans
• Buyers purchase car when they are ready
• Generate resources to buy more supply
• Generate new listings (and new real estate)
• Cazoo as an offering becomes more attractive.
• More demand coming from organic traffic (because there are most listings)

This allows Cazoo to leverage an initial user experience advantage with a relatively small number of users into resources to generate supply, enhancing the user experience and attracting more users, setting off a virtuous cycle of an ever-increasing user base leading to ever-increasing supply.

In short, more transactions helps them buy more inventory which equals a much better Cazoo experience for buyers AND more real estate for Google.

Here's a more complete version of the Cazoo model.

Risk and Opportunity

Like any business, the Cazoo model has risks.

Cazoo is a low-frequency, asset-heavy marketplace that requires a lot of upfront capital that's not always available and whose demand comes primarily from Google.

But I'm more interested in the opportunity.

The £50 billion used car buying process is far from optimal and Cazoo is doing a great job by adding software, transparency and trust. But you don't change an entire industry by adding a tech layer and a 7-day Money Back Guarantee.

You need to change the business model and integrate deeper into the value chain.

The next step is following the Opendoor playbook, making it easier for sellers to sell their cars by becoming directly involved in process, regardless of whether they plan to buy a car in Cazoo or not.

Like in real estate, the party with the least leverage is the car seller. Buyers can purchase lots of different cars but sellers only have a single car to sell, which means that the risk is entirely on them.

Cazoo can relieve that risk, offer the seller some certainty and then turn back and offer that same car at a much better margin to their existing demand.

The only thing missing would be sponsoring Liverpool FC.