Who is Kavak – Mexico’s first unicorn?

Mexico finally has its first unicorn, used car platform Kavak, which confirmed its latest fundraise at a $1.15 billion valuation last month. 

The Mexico City-based startup has raised over $400 million in total funding since its founding four years ago, with SoftBank, DST Global, and U.S.-based Greenoaks Capital leading the recent round.

Kavak is an online platform for buying and selling second-hand cars with operations in Mexico and Argentina (and plans to launch in Brazil in early 2021).

Business Model

Just like other used cars platform, Kavak is trying to address two of the classic problems that people have when they want to buy or sell a used car: the first of these was their ability to prevent the fraud that salesmen commonly do with the vehicle’s invoice, by checking the ownership of the vehicle, and, the second through careful analysis, they managed to prevent cars in poor condition, mechanically speaking, from falling into their hands.

Kavak’s core business model is based on acquiring used cars from individuals and then reconditioning them and selling them to the public. They run a transactional platform with various ancillary services offered.

For car sellers, Kavak provides a flexible inspection schedule. Sellers can pick their preferable time and place. They also have 4 different offers: instant payment, leave the car on account, payment on consignment, and amount on credit.

They provide financing plans for buyers with various automotive credit options. Insurance is provided along with those financing plans and it’s also offered to the buyers who prefer cash purchase. 

All the cars sold have a 3-month guarantee. Additionally, buyers have 7 days or 300 kilometers of the trial period to return it and Kavak will refund 100% of the money, without any kind of penalty.

We can see used car platform players in Southeast Asia such as Belimobilgue (thus renamed OLX Autos), Carro, and Carsome, also use similar business models (C2B2C) to reach more customers and more revenues. And as we have discussed in our used car report, the transactional model (instead of the listing) makes more sense currently as it brings a wide variety of advantages to the customers.

Used Car Market in Mexico

Similar to Southeast Asia’s used car market, the market in Mexico is fragmented.  For example it is well known that a dealer usually buys used cars, but what is not very well known is that the offer can vary a lot between dealer and dealer depending on many factors. 

People tend to go to the C2C listing to check out the used car price as initial steps to start their buying process. It’s quite different to the US where the used car industry is considered as more mature. 

People in the US and China are familiar with buying used cars online. In the US, consumers want less haggling plus reduced paperwork, and the online experience enables that. Platform Carvana managed to be popular for its car vending machine which makes consumers experience an efficient purchasing process – while that might be a gimmick, the company has managed great feats in both collection and distribution of used cars. 

Whilst purchasing used cars online is yet to become the first choice for people in developing markets like Mexico and Southeast Asia, the opportunity for transaction-based used car platforms is there.

Competitors

In Mexico, there are several online sites people would love to check if they want to buy a used car. Many of them are listing companies. Mercado Libre, Vivanuncios, and Segundamano are famous listing sites where people would search for almost anything they need.

They provide various items and this certainly generates quite huge traffic, which means those sellers get to reach more audiences and potential buyers get to easily search for a used car that they need.

Other than the big three, Solutions and Seminuevos are also getting recognition. Both are dedicated c2c listing platforms for used cars. 

However, our research in used car platforms schemes in Southeast Asia stated that C2C listing is not good enough for the buyers. It costs potential buyers a lot of time to make sure that the price is worth the money especially when the buyers are not familiar with the buying second-hand process (who would be, you only do it once every 3-5 years, if at all). 

The issue of transaction security also arises after both buyers and sellers agree to seal a deal. These listing platforms don’t guarantee money transfer security – and you are at your own risk. (Remember Alipay started by mediating trust via an escrow service). 

In Indonesia, OLX holds the number 1 listing site as well as a go-to place for people to look for used cars. And eventually this year, OLX “acquired” BeliMobilGue, a C2B used car platform. Is this a sign that the ads subscription revenue model is “not enough” to satisfy both buyers and sellers? 

What we knew is general listings are far ahead of dedicated used car listings. Eventually, these listing sites are pushed into consolidation and vertical expansion.

Challenges and risks ahead

Becoming a unicorn is not the end for a startup, but a new beginning, especially in this economic downturn.challenge to increase inventory: the plan is to offer 20,000 used autos in Mexico in the next 12 months, up from 2,000 now available. 

Some buyers come from households that already have one car, and opt for a second as an alternative to the subways and buses where passengers are more vulnerable to picking up the virus.

On the other hand, when providing financial services to buyers and sellers, it is particularly important to control financial risk, especially when the number of transactions is rising rapidly. At the same time, Kavak needs to strengthen the service system of the entire platform, including the improvement of vehicle inspection services, accessory services, and other capabilities, so as to adapt to the ever-changing market environment.

Is regional expansion viable? 

In 2016, 18.4 million second-hand units were sold in Latin America. By 2022, unit sales are expected to reach 22.4 million, a compound annual growth rate of 3.4%, although the used car market varies from country to country in the region, depending on factors such as the domestic economy, market informality, emission standards, and regulations.

The second-hand car market is undergoing a series of transformative changes. New regulations have gradually normalized the second-hand car market. At the same time, the influence of new channel distribution and technological innovation has also put the second-car market in a state of steady growth. Even under the impact of the COVID-19.

Kavak entered Argentina in August through its merger with local used-car platform Checkars. After building the business gradually in Mexico, entering and scaling up business in Brazil, Latin America’s biggest economy, is not an impossible thing but it demands them to handle their localization well. Because the ecosystem in each market, while similar at the macro level, has a lot of different frictions when you actually start operating. 

And if Kavak can keep the growth in the next couple of years, they might have the potential of going public too. So, another Carvana in the making?