What do Unicorns look like before they grow up?

Looking back in time on Auto1 at its 2013 Series A

by Steve Schlenker, Managing Partner, DN Capital

Markus Boser (CFO), Christian Bertermann (Co-Founder and CEO) and Hakan Koc (Co-Founder and Supervisory Board Member) celebrating their IPO on the Frankfurt Stock Exchange, the largest venture-backed IPO in Germany since at least 2001

Auto1 ringing the bell on the Frankfurt exchange this week brings one of the most successful Berlin startups to a new chapter. Its shares priced at a €7.9 billion valuation and closed the first day at a valuation of approximately €11 billion, making it the largest IPO of a venture backed company in Germany since at least 2001, if not in history.

This IPO underlines Europe’s attractiveness (and Germany’s in particular) to cultivate globally relevant high growth companies. DN Capital is proud to have led the Series A round as its first institutional investor seven years’ ago and to have played a small role helping the Auto1 get from its early stages to where it is today.

We decided to dust off our Investment Committee recommendation from 2013 and see what we liked, and didn’t like, at the time we first invested, in the hopes of maybe understanding a bit more about what insights at the earliest stages indicate the potential for future success. Here is a summary of what we realised:

Management’s Core Insight — Solving for information asymmetry :

When we first met Auto1, the time a used car typically sat in a dealer’s inventory was over six weeks. It’s probably similar today.

Investors refused to believe that a start-up could scale cost-effectively while purchasing inventory priced in the thousands of euros. For this reason, all other venture-backed automotive marketplaces focused on no-inventory business models.

But used car purchasers worry about information asymmetry — how do they know that the car isn’t actually a “lemon.” Buyers either avoid low-touch marketplaces entirely, or low-bid cars listed there, because of this fear, and this is particularly true for professional dealers. So sellers never really receive fair prices on no-inventory marketplaces.

The brilliant insight of the Auto1 founders was that, if you used technology to understand demand in real time, purchasing decisions could lead to inventory turns radically better than those of legacy competitors, measured in days not weeks. And car buyers would be more trustful and therefore pay a market price if purchasing cars from your balance sheet, which meant sellers could get the fairest price selling to you.

This core insight, that technology could make an inventory model both trusted and capital-efficient, made the Auto1 business model venture-backable. DN Capital was not the only VC to meet Auto1, and we certainly were not clever enough to come up with this insight ourselves. But we put in the time to validate that the early data at Auto1 bore this out, and to understand the implications. In particular, our analyst at the time, Thomas Rubens (today a partner at our firm) poured over early metrics to reach this conclusion. Because of this analysis, we were able to see not only how Auto1 could explode into an exceptionally large company, but also how it could achieve this while competitors would be too scared to directly compete, and/or would be unable to match Auto1’s unit economics.

Additional Positives:

Team:

Christian Bertermann and Hakan Koc were, and are, execution machines! This was one of the great benefits that Oliver Samwar brought to Berlin in the mid-2000’s — through his incubation of companies like Zalando and CityDeal, he trained a broad cadre of tech leaders, showed them how start-ups could create substantial wealth for founders while disrupting whole industries, and inspired a whole generation of Berlin entrepreneurs.

In their prior Rocket Internet companies, Home24 and CityDeal/Groupon, Christian and Hakan already proved their ability to rapidly open new cities and geographies. They also lived and breathed automobiles, with their initial office situated on the parking lot of their first branch.

An early branch location of Auto1, or Wirkaufendeinauto as the company was first known

They also managed to attract a high caliber supporting staff of full time team members, angels and advisors who were committed to Auto1's success. Many of these early advocates and supporters of Hakan and Christian have gone on to great achievements themselves, including Ronny Lange (who together with Philipp Magin founded Quandoo, which we also backed), Daniel Glasner and Filip Dames (who went on to found the amazing early stage German fund Cherry Ventures), Felix Jahn (later founder of McMakler, another DN company), Philipp Kreibohn (Home24 founder) and Christoph Muhr (Groupon SVP EMEA).

Market Opportunity / Economies of Scale:

The European used car market is €600 billion annually, fragmented, regional, unsophisticated, opaque and consists of multiple intermediaries along the value chain, the perfect breeding ground for a data-driven, ambitious challenger.

Auto1 was the first auto platform to provide transparency, disintermediation, trustworthiness and convenience through leveraging technology, creating strong network effects.

Rewritten copy of a note from our original meetings with the Auto1 management team (original note is kinda sketch now, and said WKDA not Auto1)

Financials / Traction:

When DN first interacted with Auto1, the business was 9 months old and was transacting under 200 cars a month (compared with 615,000 annually, less than 6 years later). Even at its Series A, the Auto1 team was highly data driven, allowing us to dive deep into their unit economics. DN completely rebuilt their P&L on a car and branch analysis level, creating an operating model later used by management during their first debt financing. We quickly determined a new Auto1 branch could pay back setup costs inside six months including capex and working capital.

Years’ later, we at DN were pitched a number of Auto1 copycats in other geographies, startups in each of India, MENA, Latam, Africa and the US, at least two of which have gone on to successful exits themselves. Not a single one had unit economics comparable with those of Auto1. Not even close.

Risks:

Growth capital:

Even with a model designed for industry leading turnaround times, we knew Auto1 would require significantly more capital that DN itself could provide to continue to scale. Fortunately, as the business demonstrated success across Europe, Auto1 was able to attract great follow-on investors, including our friends at Piton, DST, Target, Princeville and Softbank.

Operational complexity:

Auto1 had to manage a network of local offline branches, working capital, de-registration & registration of cars, and logistics of moving cars from branch to dealer lot (domestically and in the future internationally). Such complexity required an exceptionally focused team to thrive.

Industry gross margins:

The relatively mature auto industry has lower gross margins than typical DN Capital marketplaces. Auto1’s unit economics worked, but it would be imperative to continually tune process efficiency.

Automated pricing engine not fully fledged out:

We knew that at scale Auto1 would be able to collect firsthand data from buyers and sellers, meaning the company was positioned to build a very valuable and proprietary data asset. Of course, this was not fully built at the Series A round.

Decision and Results:

As the positives outweighed the Risks, DN led the Series A. We are honored to have participated in this journey and congratulate all Auto1 employees, advisors and co-investors. A positive externality of Auto1’s IPO will be the emergence of the next generation of Berlin entrepreneurs, and we can’t wait to meet them.

As an aside, Auto1 was the first company to use technology to turn an asset-heavy sector into a fast turn venture backable one, but was not the last. Soon after Auto1 began thriving, American venture capitalists took this concept and launched a similar model to buy and sell homes, which became Open Door. The model has also been imitated in other sectors as well. While in the early days the Berlin tech ecosystem was often criticized as market for US clones, there is no doubt that Berlin was the trend-setter globally in this particular business model.

This is just the next chapter for the Auto1 team, and we look forward to seeing you shift gears once again. You will forever be part of the DN Capital family.

Co-Founder of DN Capital Nenad Marovac with Auto1 Co-Founder Hakan Koc
Hakan presenting at DN Capital Portfolio Day in Berlin, November 2018
Markus, Christian and Hakan with one of the delivery vehicles for Auto1’s consumer proposition, AutoHero

Investor in early stage companies particularly ones that level uneven playing fields, in fintech, autotech, and software

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