What this Bengaluru-based start-up did when its business model didn't scale

NEW DELHI: Imagine you convince venture capitalists to invest several millions of dollars in your start-up. Even before you've finished spending all the money, you realize things aren't working out, and don't want to keep throwing good money after bad. Would you be brave enough to tell your investors you want to give them back their cash? Well, that's exactly what GoZoomo - a Bengaluru-based online used car market - decided to do recently.

GoZoomo returned more than half of the $7 million venture capitalists had given them, after coming to terms with the fact that their business model wasn't sustainable. They shut shop last month, after two years in business.

While TOI was unable to get inputs from the founders - IIT alumni Arnav Kumar, Himangshu Hazarika, and Aniket Behera - company sources close to them told us GoZoomo's story. The journey began when the three founders resolved to connect car sellers directly with their buyers, and remove the middlemen - dealers - from the equation. They founded their company in Bengaluru in 2014, but later expanded to Mumbai, Delhi, Pune, and Chennai.

The idea to deal exclusively in end-to-end transactions was certainly original. But in the end, sources said, the company simply didn't have enough sales. Why? In the absence of a single pricing standard in India, GoZoomo's buyers and sellers haggled over car prices. GoZoomo tried to convince them to sell or purchase at the fair price, which it calculated using its own pricing software - called pricing engines. But it didn't work out for them.

The right decision?
One of TOI's sources thinks GoZoomo took the right decision, but qualified his praise. "Returning the money is better than burning it. However, they (the founders) could have tried harder," he said. They had the investment. They had the product. They had a bit of the market share," he added.

But a high-profile venture capitalist - who wished to remain unnamed - acknowledged that GoZoomo's problem wasn't an easy one to solve. "Usually price discovery happens when there are a very large number of buyers trying to purchase at a certain price, or a very large number of sellers willing to sell at a specific price," he explained. In any used goods market - it's difficult to build early liquidity because the price discovery doesn't happen quite so easily. One of the reasons for this is that two identical products used by two different people may not be equally valuable after a couple of years, he said.

Ideally, there would be a pricing standard, but if there isn't one - as is the case in India - companies will have to build their own pricing engines, he added.

Solving the challenge of price standards
A standard pricing resource can be hard to create, as Rajat Sahni, CEO of CarDekho.com and Girnarsoft points out. First, the used car market is fragmented and transaction prices are not reported to one central institution. Companies need a lot of information on buyer-seller transactions, and deal with the fact that a number of factors determine prices - including age, demand-supply, ownership history, and maintenance, he explained. However, with time, as more data becomes available, pricing standards will evolve, and buyers and sellers will start referring to a single standard, he added.