The opportunity almost slipped through our fingers.
It was mid 2016, and a friend had asked whether I’d do him a favor by sending someone from Bessemer to a demo day in New York City for Buffalo-based startups. I’d all but forgotten about it. But at the last minute, on his insistence, I asked one of our associates to attend. “You'll get a free glass of wine and maybe a little something to eat,” I told him. “You don't have to spend more than an hour.”
He ended up spending much longer. After CEO George Chamoun pitched his fledgling dealer-to-dealer marketplace for used cars sales, ACV Auctions, our associate cornered him and peppered him with questions, monopolizing his attention so no one else was able to get to George at the event. He returned to the office brimming with excitement. “You’re not going to believe it, but there was this one really interesting company,” he told me.
As it turned out, George almost didn’t go to the demo day either. The next day he was expecting a term sheet for ACV’s Series A, and only went to the event as a favor to the same friend, a seed investor well-known in the Buffalo startup scene.
Testing the waters
Soon after the event, George and I started talking by phone, discussing the industry and the opportunity. Dealer-to-dealer used car sales are a messy, large market — some 50,000 dealers buy and sell approximately 20 million vehicles annually — dominated by a couple of legacy players. Most sales happen through in-person auctions, where dealers place bids, often without knowing the full details of the vehicles they’re bidding on. ACV had started to disrupt that market with an online marketplace. It operated only in Buffalo and Albany, where ACV reps had convinced dealers one-by-one to join and try the product.
ACV was already selling about 250 cars a month, and the traction was enough for us to invest $100,000 as part of the company’s Series A. It was a way to keep a close eye on a business that showed promise. The biggest issue in our mind was whether ACV could overcome a major obstacle that could stunt the marketplace’s growth: trust between buyers and sellers.
Building trust between buyers and sellers
By then, George also knew that trust was the critical issue for ACV. He’d gone to the University of Buffalo, and while there, founded what would become Synacor, a technology services company that George had taken public and that catered to media and communications clients. In 2015, he had made a seed investment in ACV, and, a year later, the founders asked him to join as CEO.
George was intrigued by the idea but hesitated, in part, because he knew little about the car industry. Then a neighbor distilled the main challenge facing AVC in simple terms.
“Imagine buying a diamond on the internet without knowing your four Cs: cut, color, clarity and carat weight,” the neighbor told him. “Well imagine buying a used car on the internet without knowing your four C's equivalent.” With clarity about the task at hand, George accepted the job that night.
A low-tech solution to a complex problem
The company founders, Dan Magnuszewski, Joe Nieman and Jack Greco, had already built mechanisms for dealers to upload photographs of various parts of a vehicle so buyers would have a sense of what they were bidding on. But within weeks of joining, George decided ACV had to do much more, and began building a team of inspectors that could manually evaluate each vehicle in a way that would give buyers certitude.
There were some questions and pushback, of course. Was the approach scalable? And what would it do to margins? George understood those were concerns, of course. But he also understood that if he didn’t solve the trust problem for both buyers and sellers, he wouldn’t have a winning business.
Today, ACV has one of the largest networks of vehicle inspectors in the country, who perform their work aided by proprietary technology that, for example, allows undercarriage inspections without lifting a vehicle and lets buyers hear the sound an engine makes. George understood that obsessing over margins early on would stymie the company. It was more important to solve the problem for customers and then commit to using technology to make the solution scalable and a source of profits.
“We had a large addressable market to put the resources behind this,” he says. “So why not go after it with the best solution? Buyers are getting the car they thought they were getting, and sellers are getting a much larger audience. When you can satisfy both sides of the marketplace you win.”
Getting the right unit economics
After our initial investment, George and I started meeting face to face in a borrowed office in New York. While the inspections were the right thing to do, we had taken something of a leap of faith that George would be able to scale the business profitably over time. So as ACV was gaining momentum, I asked George to come equipped for a full-day discussion on unit economics. Over the course of that day, our two teams dissected every aspect of the business to understand how a manual process could be replicated in market after market while keeping costs in check.
I came away convinced ACV’s approach was the right one, and the meeting turned out to be a seminal moment in a couple of ways. First, we cemented the financial model for ACV’s growth trajectory. (“We came up with the unit economics slide and description of how we're going to invest that we still use today,” George says.) Second, I asked George, who wasn’t yet thinking about new financing, to come pitch Bessemer. We led ACV’s Series B and C and remained fully involved in subsequent rounds.
Scaling to a nationwide business
From then on, it was a matter of moving fast and turning ACV from a regional player into a national one. George, who had spent hours courting dealers face to face in ACV’s first few markets, came up with a playbook. He would expand by going from one adjacent market to another, so new dealers would be likely to know some of the dealers already on the platform. In several states, he shifted his focus from individual dealers to dealer associations, who could open doors across an entire state. (Learn how ACV was able to scale nationally surprisingly quickly.)
At the same time, George got busy strengthening ACV’s core marketplace with additional services that have continued to differentiate the company from its rivals, including financing capabilities for buyers, transportation of vehicles and a “Go Green” program that gives sellers assurances against claims for defects that we didn’t identify in our inspections. The results speak for themselves: ACV has been on one of the fastest revenue growth trajectories of any company.
ACV’s IPO is just the beginning. It’s exciting that the company has transformed from Joe and Dan and Jack's early idea into an innovative business that's operating nationwide in a very big market. And I love that George and his team are committed to building a really big long-term business that’s already transformed an industry and will continue to do so. I'm as excited about the future as I am about the past. And I’m really glad we didn’t skip that Buffalo demo day.