Why OLX’s Investment in FCG Spells Trouble for PakWheels

Olx group is investing $89M in Frontier Car Group (FCG), the parent company behind CarFirst. From TechJuice:

OLX Group announced $89 million global investment in the series C funding round of online car marketplace, Frontier Car Group, the parent company of CarFirst. Headquartered in Berlin, the startup is currently operating in six countries.

A joint press conference took place yesterday where OLX announced this investment in the parent company of Pakistan’s first online used car selling platform — CarFirst. This record investment aims to deliver the most comprehensive experience to auto buyers and sellers in the country.

FCG has operations in at least five other markets so not all of the money is going into CarFirst—a significant portion will though. But before we discuss CarFirst I would like to mention how smart this move from OLX is. Facebook and Google are accumulating most of the online ad revenues leaving very little on the edges. Although you can still run a decent business purely on ads, opportunities for long-term growth are always going to be limited. As soon as you start to get meatier you are going to hit the gravity center. And that means colliding with either Facebook or Google.

The antidote is to stay away from the gravity centre as much as possible. And that often means building a differentiated product. Or in this particular case investing in one. The investment makes more sense if you consider the fact that OLX was already in ad business. Which means 1) they were not in the best position to build a vertical integrated product themselves and 2) a company like CarFirst can benefit a lot from their audience. More exciting part of the news, however, is what CarFirst is trying to build. I wrote about the company in passing, when it launched while writing about PakWheels last year. From the article:

Kudos for trying something different but there are more questions than answers here. First, it’s not clear who the strategic partners are and how they are incentivized to stay with CarFirst. Second, this requires a lot of capital and even if you have enough to start things off it’s questionable how long you can sustain it. Cars are expensive. Also, I don’t understand why you want to limit yourself to your partners when you have already done the heavy lifting i.e. buying the car outright. And perhaps most importantly I am yet to understand the business model.

I am less skeptical now than I was a year ago. For one those $89M solve the second problem I sighted. Second, they have matured in their positioning and are not relying on their “strategic partners” narrative as much. That’s probably because they are more sure about what they are doing now than they were a year ago. The business model question is also clear to me now. Although there is no information on their website on what they do with the cars they buy. But it’s clear that provided the operational scale, which seems like they have or going to have sooner, they can buy a used car, fix/renovate it and sell it at a higher price.

It’s an audacious business model with a very high-risk profile. But the upside is equally big. I concluded my article on PakWheels:

So how you compete with PakWheels? You don’t. I mean you can but you will fail if you start from the obvious i.e. a car listing website. You can however if you start with things that are not obvious. Like studying a typical PakWheels’ user. Finding the pain points they have? And figuring out a couple of problems they face while using PakWheels. Every horizontal business model creates an opportunity for a vertical one and vice versa. The way to compete with PakWheels is thus by targeting a niche and owning that particular mindset. Not by creating another listing website.

Two types of people visit PakWheels. People who need to buy a car and people who need to sell one. The vulnerable of the two is the seller. Any buyer has a lot of options to chose from. The seller, however, is stuck with whatever she has. It was always going to be hard for CarFirst to convince buyers to go through them. Because, well why should they? They have lots of other options to shop around. Money is liquid in a way that a car is not. It’s only right that CarFirst is targeting the seller. And provided you create enough happy seller stories, buyers are going to flock in too. At some point in time shopping gets exhaustive.

The very idea behind PakWheels’ existence is predicated on the fragmentation of the market. There was no reliable way to sell your used car online. While PakWheels connects buyers with sellers, the business model relies on for both parties to keep looking. And not necessarily on getting a car sold. Or finding the perfect car. PakWheels was easing out your search. CarFirst is solving your entire problem. The latter is always more lucrative provided you get it right.