How two car startups ushered in innovation

Founder of CarsDirect and Zag shares his lessons on disrupting the car industry twice in a decade

In this segment of "Lessons for Entrepreneurs," Bambi Francisco interviews Scott Painter, who founded CarsDirect in 1998 and founded Zag in 2005.

BF:How has the online car industry changed in the last 10 years?

SP: I am definitely on a mission. I do believe that buying a car is the most time consuming, frustrating task that we all share and everybody has a bad car buying story. I think the introduction of technology and transparency into the process is all about making car buying better. It turns out that it's about making car selling more efficient as well. I think there are two sides of the equation. I think the introduction of CarsDirect and what we did in 1998 and 1999 was really about upfront pricing and getting information that would help you in the negotiation of a car other than from the dealer. So that really introduced a fundamental shift in consumer behavior in terms of how they shop. In 1998 and 1999, five or 10% of people were going online. Whereas today, just about everybody who shops for a car goes online, they get informed and educated and then they go into the dealership. Well that has a profound change on the conversation of the dealership and so I guess what I would say is auto retail is changing quickly. The last 10 years have been the most dynamic decade for auto retail. 

It's very hard for a dealer to stay on top of that evolution. You also saw the introduction of publicly-traded dealerships about 20 years ago. You've seen a certain percentage of dealers that are hyper-sophisticated by comparison to the single point, family-owned-legacy dealerships. And of the 40,000 dealers, only about 10 % are publicly traded. I think that in the long run, selling cars, new cars especially is a commodity business and is about volume, efficiency, and making sure that you control your costs. I think the online automotive relationship that dealerships have with the companies is absolutely core for the ability to grow because that's where the customers are. 

BF: Now you have changed your model with CarsDirect. I think you said that earlier you actually sold cars and actually delivered cars. This is not a model that actually worked.

SP: I believe that it worked. I think the original mission at Cars Direct was really a way to build a brand very quickly. I think that everybody had so much immediate recognition and that the dealer equaled pain. So with CarsDirect, that was the original mission and we built the brand around that. And I think that the world changed in 2000 when technology went through its own downturn and companies of all kinds including CarsDirect had to make important decisions about where do you spend your money and how do you grow your business. So CarsDirect shifted away from that mission and really focused in the discipline of making money which I think in the right respect it had to do and it focused on advertising and lead generation. Fundamentally, I have a problem with lead generation as the businesses shifted because lead generation does not include the customer experience. In the end, if you think about what you don't like about buying a car, it's the salesman. It's about not knowing the price. And the whole premise about lead generation is "give me your name and I will have a dealer call you with a price." And unfortunately it becomes five dealers and they're calling you at home during dinner time and that's the person you want to avoid in the first place. Why not just give you the price? So I think as the market has shifted towards transparency and towards upfront price, the fundamental value proposition of lead gen is diminished. It's a multi-billion dollar category. There are many bug players in it and I think they have to pretty much examine what is happening in online automotive and how that's evolving and I think that we are sort of at the forefront of that.

BF: What have you learned from your experience at Cars Direct and how are you applying it to Zag?

SP: So this is my 28th company and i think that every mistake that I've made in every other company, I hope not to make again.So we try to avoid the same mistakes as best as possible. We also try to emulate the lessons we've learned at CarsDirect because there was a lot that we did right in that company. But I'd say in general, startups make more mistakes than successes and you just have to make sure that you don't do them twice.

BF: Please share one mistake or one lesson.

SP: I would say that the biggest regret is that we did not foresee the change in the  technology landscape  really affecting everything the way that it did in 2000. And as a result, we were not set up properly. We were spending money to generate market share and building a brand. Luckily we did it when we could raise a lot of money. We had to very quickly shift as I turned the company over to a great and disciplined CEO who focused on revenue.

BF: So now you're more disciplined and you're more focused on revenue

SP: You can't not be disciplined at this point. The capital is just not there. Even though we've raised a lot of money for Zag, I think it reflects the fact that the business is the real deal

BF: How much have you raised altogether?

SP: $100 million in debt and equity

BF: Well thank you for sharing your lessons.

SP: You bet.