CarWoo Runs Out of Investment Cash, Closes Shuts Down
Published February 1, 2014
Our CarBuyingTips.com consumer advocate team stunned as well-liked site closes
One of our favorite automotive car-buying web sites has shut down, dealing online car shoppers a devastating blow, burdened by unmanageable growth, a rapidly rising cash burn rate, and lack of new investment. Last week we received the disappointing news from our friend and CEO of CarWoo, Tommy McClung, that they were shutting down forever.
What was CarWoo and why was it so good for car shoppers?
You never heard of CarWoo before? We had been recommending this powerful new car shopping service for the last 3 years. CarWoo was an online car shopping pricing and information website that allowed us, consumers, to buy new cars without pressure by dealing with car dealers in a semi-anonymous online reverse auction, like eBay. Their strong selling point was instead of us haggling and bidding the vehicle selling price up, the car dealers would bid the selling price down.
We felt Carwoo was the best new car buying web site to date
In all our years educating the car buying public since 1999, our consumer advocate team here at CarBuyingTips.com unanimously agreed that CarWoo was the best of all the online car buying services, which is why their closing still had a big sting for us. That automated online reverse style auction they ran was very powerful in getting car buyers the lowest price they could ever dream of on a new car, particularly on lackluster selling cars that dealers needed to dump to recover their capital investment.
Just months ago, one of our CarbuyingTips.com visitors named Les told us that CarWoo saved him 11.8% on his new truck purchase, an $8,000 savings on a Toyota Tundra. Now you see why we're going to miss this service so badly. We enjoyed hearing from our visitors who saved a massive amount of cash buying their new car.
We knew their top managers from other big car buying sites
The employees that we knew at CarWoo were some of the top pedigree from the auto buying space. We know top management employees who back in the day worked for big names such as AOL Autos and CarsDirect. CarWoo was originally a competitor to TrueCar, who you've seen us mention numerous times, which is also a discount new car pricing site similar to CarWoo, but TrueCar has a different style of helping car buyers with a negotiation-free car buying service.
How did Carwoo save new car shoppers money?
New car buyers using the CarWoo platform would pay either $19 or $49 to sign up, which was used to prove to car dealers that the buyer was a serious buyer instead of being just another tire kicker.
After CarWoo car shopper clients registered online and paid, competing car dealers could see what car the buyer wanted, and also what the competing selling price quotes were from other dealers. Salespeople could then lower their price quote to be the lowest selling price.
Business model was vastly different from other car shopping sites
What Carwoo brought to the table was it allowed car buyers to remain anonymous to the dealership salesperson while online negotiations took place until a suitable selling price was offered by one of the car dealers. Then the buyer's contact information would be given to the car dealer once the buyer accepted the offer, but not before. This reverse auction was the opposite of eBay where instead of buyers bidding up the price as eBay does, car salespeople bid the selling price lower.
The beauty of this system for new car shoppers is you didn't have to do a thing or lift a finger or haggle of new car prices. You just sit there with your feet up on the desk and let the car dealers fight it out, driving the selling price down to your happy price.
Your car price sort of settles itself down, like a self-leveling concrete poured down to flatten your floor.
History of Carwoo
Here's a chronological history of CarWoo for those of you who like to follow Silicon Valley startups, and crash and their subsequent closings.
CarWoo was founded in Burlingame, CA by Tommy McClung, a serial entrepreneur who had previously co-founded IMSafer.
Early employees were from sites such as CarsDirect.
Carwoo then received seed money and advice from Y Combinator, which is a seed incubator and accelerator company in Mountain View, CA. McClung and company spent a year developing their reverse auction new car marketplace platform.
On October 13, 2010, CarWoo officially launched their online reverse-auction marketplace for new cars and received Series A round of financing. This is around the time our consumer advocate team analyzed their business model and recommended them to our CarBuyingTips.com visitors.
By the end of 2011, CarWoo received a Series B round of funding of another $6 million and had amassed a network of 11,000 car dealerships.
By July 2012, CarWoo had amassed a network of 13,000 car dealerships.
CEO McClung spent most of 2013 working with investors and attempting to raise additional capital, but financing deals kept failing.
CarWoo winds down business operations and closes.
Venture Capital Investments in Carwoo
An undisclosed amount of seed money investment was provided in 2009 by Y Combinator, Blumberg Capital, Accelerator Ventures and several angel investors to get Carwoo off the ground.
In October 2010, CarWoo received its first major Series A round of financing of $6 Million. This was led by Interwest Partners, Comcast Interactive Capital, Blumberg Capital, Accelerator Ventures, Raymond Tonsing, and Dillon McDonald. By December 2011, they had over 11,000 car dealers in their network, and they had announced a third funding round of $6 million, bringing the total amount of funding to date to over $12 million. CarWoo received this additional funding from mostly the same investors who had participated in their first Series A funding, led by InterWest Partners, Comcast Ventures, Blumberg Capital, Raymond Tonsing and other venture capitalists.
It was somewhat scary to us that McClung had told us that CarWoo quadrupled the number of dealers using the service in 2011 to 11,000 dealers nationwide, but we thought they had a handle on this massive rate of growth.
Here's what happened when they closed
In January 2014, CarWoo CEO Tommy McClung announced that CarWoo was shutting its doors and a small group of CarWoo employees would be hired by their competitor TrueCar, the negotiation-free car buying platform.
CarWoo had run out of capital and was unable to secure any new investment funds, despite the fact they had raised $12 Million during their 4 1/2-year existence. CEO Tommy McClung stated they needed $50 to $100 million to meet the demands of their growing operation and rising customer care costs, which was a complete surprise to us since other car buying web sites thrived on a lot less investment.
In the end, the assets of CarWoo were quickly acquired by TrueCar, their leading competitor in the online automotive space. TrueCar also hired nine of CarWoo's laid off employees, including CEO McClung, adding them into its product and technology teams.
McClung is currently serving as Chief Technology & Product Officer at TrueCar, Inc. That is still a pretty good gig to be CTO of a publicly traded company.
Why did CarWoo go out of business?
We received feedback from our CarBuyingTips.com visitors every now and then that there were no CarWoo dealers in that person's area, so they were unable to use their car buying service. If you can't provide dealer coverage to a car buyer, then you can't get any revenue from that car buyer, and they take that revenue elsewhere.
Other site visitors of ours told us that certain model vehicles would not show up on the CarWoo new vehicle menu system, like Ram trucks, for example. The complexity with Ram options had been a real challenge for Carwoo and led to bad experiences for dealers and consumers, so they dropped Ram trucks completely from their lineup. There went more potential sales. All these little logistical issues add up to big losses.
It seemed to us that CarWoo was just growing too rapidly and could not handle the inrush of customers and get them placed with new car dealers in time. The burn rate of their cash investment was increasing because it is very costly to operate a logistical business like this serving finicky car buyers.
Also, CarWoo was not generating cash flow at an equal rate to offset the rapidly rising costs of doing business and the rapidly dwindling $12 million cash on hand. Normally this would not be a problem with startups, investors expect this, and they know that startups often require lots of cash with high burn rates. With about $12 million or so raised up until now, it seems to us like a very impressive feat for Tommy McClung and CarWoo.
When we spoke with McClung at the NADA conference last year, like we do every year, he mentioned he would be spending a lot of 2013 on the road trying to raise additional capital, which we thought would be a piece of cake, seeing how much he had raised so far. I guess all the investors were tapped out or unwilling to pony up additional cash without seeing profits or an IPO soon.
But McClung stated that they might need $50 million to operate their cash-hungry business model. You and I would kill to get our hands on a $12 million investment and be happy with that, but it just wasn't enough for CarWoo; they were broke, but at a higher level than you and I.
A good company that simply lost the race of time
CarWoo had raised $12 million, but in hindsight, we now know they really needed more like $50 million or more. It's like the hourglass running out of the sand, there was just too much month at the end of the money, with no new investment money in sight, a predicament where time is your enemy.
CarWoo was such a brilliant idea and was maturing along after 3 years of action, I'm still bewildered why they could not get more investment money especially in an improving economy recovering from the financial crisis. Perhaps if this had been a couple of more years in the future with more companies recovering from the financial crisis, and more high-risk hedge funds popping up again, things might have been different for CarWoo.
We really miss their business model and still hope that someday TrueCar will resurrect this model and bring it back to life for a new generation of car buyers.
About The Author: Jeff Ostroff
A lifelong consumer advocate with over 20 years of unparalleled expertise, Jeff is the Founder, CEO and Editor-In-Chief of CarBuyingTips.com. As chief consumer advocate, he oversees a team of experts who cover all aspects of buying and selling new and used cars including leasing and financing.
For decades, Jeff has been the recognized authority on vehicle purchasing, sought out often by the media for his decades of experience and commentary, for live call-in business radio talk shows and is cited often by the press for his expertise in savvy car shopping methods and preventing consumer scams and online fraud. Jeff has been quoted in: CNN, MSNBC, Forbes, New York Times, Consumer Reports, Wall Street Journal and many more.