A new way to buy and sell cars

Auto enthusiast and founder of Zag, Scott Painter, on raising $37.4 million

In this segment, Bambi Francisco interviews Scott Painter, CEO and founder of Zag, an online auto-buying service that saves consumers money when buying cars. The Santa Monica-Cali. company recently raised $37.4 million, most of it coming from financial services behemoth USAA.

(Here is the interview, partly edited.) 

BF: How was the fundraising in this environment?

SP: Fundraising takes a lot longer than most people realize. We were fundraising on this round for almost a year. There's been a lot of the turmoil in the economy, and a lot of things that have happened in the automotive industry have really only happened in the last six months. So I think the fact that we got the financing done is a real testament and that we are doing well despite the decline in auto sales. Fundamentally, because people want to save money on a car and that's what we are all about. The fact that we were able to maintain those dialogues through the downtown and then close the financing is obviously a positive proof point to the company. And it obviously sticks out now, given not just the venture capital community and what's happening in terms of new funding but in terms of automotive.

BF: GM just announced that they are laying off 10,000 people. There are many consumers not buying cars. How is this affecting your business?

SP: There's no question that the top-line demand is dead; demand is down for car sales across the board and credit is harder to get. We are a growing company, so we can sort of paddle through just in terms of new acquisitions, new customers, and new partners. But, we're also really honing our business and we are seeing that our conversion rates are 10 times traditional lead-gen than some others in the market. But we are seeing some of the customers we have now, we are able to retain, and we find that we are selling more cars because we are able to offer more of a better service in this kind of a market. We are learning a lot and I think that companies who know how to redefine their business in a downturn and really come out of that downturn is encouraging.

BF: Where do your customers come from?

SP: We have two very primary constituents. We've got dealers that we work with who pay us just based on sales, so our interests are aligned with theirs. Our second constituent is affinity groups and their members. We work with Triple A, USAA, and  American Express. They do the marketing. They private label these programs to their memberships. They pass on the good will and trust of their brand and then their customers come in and buy a car through that channel.

BF: So do you take any fee from both sides?

SP: So we're not taking any fee from the affinity group and we're not charging the customer at all. We get paid by the dealer and it's a flat fee and it doesn't matter if its a Hyundai or a Porsche. It's not commission or a brokerage type situation. It's performance-based marketing. In a lot of ways, I don't think Web 3.0 is a term yet, but I think the idea of advertising becoming more accountable is certainly consistent with the times. Going up to a business owner and in our case a dealer and saying, "You don't have to pay unless we perform." is a pretty valuable proposition model.

BF: So how many cars did you sell that year? You doubled from the year before?

SP: So last year we were just under 30,000 cars and obviously its a 10 million new car market. We sell for both new and used cars. We think there's tremendous opportunity to grow.We've seen a large pick up in interest in used cars in the last four or five months. So I think that there's a lot of things about our business that revolve around the new car value proposition upfront pricing in terms of the commodotization of the car that we really excel at. I think that it's harder on the used car sale. With that said, a lot of these affinity groups and their brands really gain a loyalty from their members. It does work for used cars as well and our members do save an incredible amount of money as well.

BF: What kind of flat fee are you getting from your permanent dealers per cars sold?

SP: So the average dealer spends between five and seven hundred dollars on a per cars sold basis. But some dealers spend alot more. This is just in general. We charge just under $300 when a car is sold so we represent about a 40% reduction cost. So the key is the dealer has to be disciplined enough not to spend the other money as well because then they have a higher dollar coast average. I think dealers are looking for accountable forms of advertising.We work closely with our partners and dealers to make sure that if we bring them sales that they begin to bring back their cost in another area so that they can bring in more sales. 

BF: So you made $300 for each car sold, which was 30,000 last year?

SP: We bring in revenue from a number of different sources. We do a number of different things to generate more revenue in many states but this does not apply in every state.There are several states that have different laws. In some states we work as a subscription model based on the laws there.

BF: How much revenue are you generating?

SP: We're  a private company so we don't disclose our revenue in numbers but we are growing year after year at a pretty good pace.

BF: So I'm in the market for a car, how do I go about finding good deals using Zag?

SP: So I think as we are able to roll out these affinity groups. If you are a Capital One customer, an American Express card holder, an overstock customer, a Triple AAA member, if you are a USAA member, all of these organizations are part of the Zag network today. If you go to any of those brands, you will be able to tap into our savings and get that better experience better process and special dealers.

BF: So I would be able to go to Triple AAA and say I am looking for a car? I wouldn't go to a dealership.

SP: We offer all of our programs via the Web. If you are a USAA member you would go to their site. They have an autos tab and you will be able to go shopping from there.

BF: What type of savings are you getting a consumer?

SP: It really depends on the car I guess. In general we have sort of a metric that we watch which is sort of the general overall savings on a per sold car basis.So we're saving the average consumer that uses us about $1500 on a per car sold basis.

BF: Maybe I will have to use your service to look for my next minivan. Scott, we wish you all the best of luck.