November 27, 2022

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Automotive to Us

How This Mexico-Based Used-Car Seller Became The Most Valuable Startup In Latin America

Used-car sales unicorn Kavak is expanding to Chile, Colombia, Peru and Turkey, espousing transparency and efficiency in the fragmented used-car market. Founder and CEO Carlos García Ottati explains how the company is tackling multiple challenges.


Carlos García Ottati was living in Bogotá when he got a new job in Mexico City. He tried to sell his car, but wasn’t successful, so he left it for a friend who took six months to sell it. After moving to Mexico, García Ottati bought a used car, but later discovered that it had several mechanical problems.

“I realized the risks that exist when there is no transparency or guarantee for these transactions,” García Ottati, a 39-year-old Venezuelan who is a founder and the CEO of Kavak, tells Forbes Colombia. “At that moment, I realized the opportunity in that market.”

Kavak was formed in October 2016, when García Ottati, along with his cofounders Loreanne García and Roger Laughlin, with a team of 15 people, decided to start a company in Mexico that would eliminate the problem of fraud and guarantee its mechanical repairs so that customers could feel comfortable buying used cars.

Now, Kavak is the most valuable startup in Latin America, worth $8.7 billion—based on funding from private investors like SoftBank and General Atlantic. It has more than 5,000 employees and 40 reconditioning centers for used cars. And it’s on a mission to rectify the inefficiencies of a gigantic, fragmented market with a business model that seeks to guarantee secure, transparent transactions.

International expansion is a natural step for emerging companies that grow at this speed, even in times of economic uncertainty. While many companies in the region are pausing new moves, Kavak has decided to add to its presence in Mexico, Argentina and Brazil by launching operations in Colombia, Peru, Chile and Turkey. The company has not disclosed its revenues, but says it has an inventory of 25,000 cars for buyers to choose from.

To buy a used car in Latin America has long meant dealing with the headache of a complex web of potentially risky and insecure steps. Early on, García Ottati determined that for used-car sales, different emerging economies shared two main problems. On the one hand, transactions are highly vulnerable to the risk of fraud; on the other, access to purchasing a car is limited by few available financing options.

“In Latin America, no formal player has more than 1% of the market and 90% of transactions occur between individuals, causing some type of irregularity to affect more than 40% of [sales] and increasing the risk for the user of being a victim of financial, mechanical or other fraud” says García Ottati. “Under these conditions, it is difficult for institutions to take the risk of financing automobiles, thus generating prohibitive barriers that prevent citizens from improving their quality of life by not being able to purchase a car.”

In more developed markets such as the U.S., less than 10% of used car transactions occur informally, while more than 90% of sales are financed, which allows seven out of ten U.S. citizens to own a car. In contrast, in Latin America only 1.5 out of 10 inhabitants own a car, according to calculations from Kavak’s research team.

“In countries with emerging economies there is little legal visibility in car transactions, in addition to the low rate of access to financing. So only people who already own a car can acquire another. For this reason, the priority within the industry in Latin America is to break down those barriers that affect 90% of people who cannot improve their quality of life, because they cannot access a car,” the Kavak CEO explains.

Prior to founding Kavak, García Ottati obtained an MBA from the University of Oxford’s Said School of Business, followed by a two-year stint at McKinsey & Co. working with Latin American clients. Then he moved to Latin American e-commerce firm Linio, where he served as chief marketplace officer and was part of the management team. All that experience came into play at Kavak, where he created a model that controls every step of the process, from inspection (looking at 240 mechanical points in each car), through the purchase, reconditioning and sale of the vehicle, as well as warranty and after-sales services.

García Ottati was very likely keeping an eye on U.S. online used-car seller Carvana, which was founded in 2012 and went public in 2017. Carvana stormed the U.S. market during the first two years of the pandemic; revenues more than doubled to $12.8 billion in 2021 from the prior year. But the company has yet to turn a profit. In May, it laid off 12% of its employees.

The Kavak CEO realized that to transform the industry, he needed to support the enormous complexity of the operating model with data, technology and artificial intelligence (AI). Thus the creation of the Kavak algorithm, an advanced technology tool that uses public information from the automotive industry plus Kavak’s own data generated with each transaction. It’s also able to predict market prices for used cars, to establish fair and up-to-date values ​​for users both in their buying and selling processes.

“From the beginning, Kavak was born with the aim of solving the underlying problems of this highly fragmented industry, and we knew that if we were able to successfully formalize the Mexican market – a territory that accounts for more than six million annual transactions, and where only 5% of used car sales receive financing–it would allow us to change the lives of Mexicans, and, even more, take our solutions to all of Latin America and the rest of the world,” adds García Ottati.

In its first four years, Kavak focused its efforts on building its operation in Mexico to hone a business model that could be exported to territories with similar complexities. García Ottati led the company to develop its own financial solution that would provide financing options to users, based on the calculation of their payment capacity through data algorithms and AI. With it, the company managed to build the necessary infrastructure to formalize the used car market in countries with emerging economies.

The model has been a magnet for some of the world’s largest investment funds, including SoftBank of Japan, Greenoaks, Kaszek Ventures and General Atlantic. In its first three capital injections, the company raised $500 million, breaking records in raising venture capital and becoming the first Mexican unicorn, after surpassing a private valuation of $1.15 billion in October 2020.

Just one year later, through Series D and Series E investment rounds, the company raised more than $1.1 billion, reaching a valuation of $8.7 billion. This is how it managed to become the most valuable private startup in Latin America.

From its base in Mexico, Kavak expanded to Argentina in 2020, where it merged with a startup called Checkars. In 2021 Kavak executives also began to speak Portuguese with the company’s arrival in Brazil, a market in which they decided to invest $500 million and where they built the largest vehicle reconditioning center in the region, located in São Paulo.

“Our vision is global, and our challenge is to build a platform that is attractive and reliable enough so that any citizen can solve their mobility problems, but that also allows them to use the car as a tool to improve their financial situation,” says García Ottati.


CONQUERING LATIN AMERICA

García Ottati says the strategy to guarantee safe access to a car is not focused on dominating the largest markets, but on solving the problems of fragmented industries in countries with emerging economies, since that is where Kavak’s solutions can make a significant change in people’s quality of life.

“The car is an asset capable of changing people’s lives. For low-income families, owning a car increases the possibility of obtaining a job and, automatically, their purchasing power, since the car can be used as a financial tool, which, unlike a property, can be traded on numerous occasions, either for an emergency or to acquire more goods and services,” says the Kavak CEO.

Kavak’s finance offering—it charges annual interest rates of 14% to 20%—has proven popular. More than 50% of its sales include financing from the company, compared to a 10% average of the traditional industry within the region.

“It has become an icon in the automotive technology industry in the region for its constant focus on creating value for its users, as well as for its courage to face the millions of challenges involved in setting up an operation as large and complex as Kavak is today,” Nicolás Berman, a partner at Kaszek, an important Latin American investment fund, told Forbes. Berman has supported the startup from its earliest days, when it first raised seed funding in December 2016.

“Unlike other companies, Kavak has had to innovate in multiple industries, which implies innumerable challenges and high complexity, from solving car reviews using machine learning, vehicle routing optimized by artificial intelligence, to a credit scoring algorithm for financial products, among hundreds of innovations that have been necessary to generate real value for the consumer,” Berman says.

Berman, who knows the entire founding team well, says this is just the beginning. In Colombia, Peru and Chile, the company has announced an initial investment of $120 million. The move will expand Kavak’s presence to 80% of the automotive industry in Latin America.

The operation in the three new Latin Amerian countries is headed by Jaime Macaya, CEO of Kavak for Argentina and the Andean region. Each of the three new territories will be led by experts with more than 15 years of experience in the industry: Luis Eduardo López, former director of South America at e-commerce company Linio, will lead the operation in Colombia; Alonso Núñez, former CEO of food delivery firm PedidosYa will lead the company in Peru, and Andrés Vizcarrondo, former director of online clothing firm Dafiti’s Marketplace, will become country manager of Kavak for Chile.


KAVAK IN LATIN AMERICA

From its start in Mexico in 2016, Kavak has expanded to six countries in Latin America, which it says represent 80% of the continent’s car business.


“We are convinced that our business model can ensure transparent and secure transactions, in a country where more than 4,000 complaints of some type of irregularity are registered annually. We focus on raising the standards of safety and experience of people when acquiring an asset as important as a vehicle,” says Kavak Colombia’s López.

Colombia is one of the most important pre-owned car markets in Latin America, with an average of 1.2 million transactions annually. The majority –as in the rest of the continent– are carried out informally, which opens the window for some type of irregularity.

Kavak’s operations in Colombia are concentrated in Bogotá, where the company opened three experience centers, located in the Plaza Central, Atlantis Plaza and Paseo Villa del Río shopping centers, with an inventory of 500 fully reconditioned cars ready for sale.

In Peru, Kavak general manager Alonso Núñez says that “the company seeks to transform the customer experience by providing security throughout the buying and selling process, with the support of Kavak to build trust in our auto reconditioning process. We are committed so that more people can have their first car and renew their cars with us.”

Kavak Chile director Vizcarrondo tells Forbes Colombia that “the arrival of Kavak will revolutionize the local automotive industry, since we will not only improve the experience of buying and selling used cars, but also, thousands of people will be able to access a financing option to purchase their first car, with the guarantee that the vehicle is in perfect condition.”

To strengthen its leadership in the Andean region, a market of more than three million transactions and with a value of more than $24 billion annually, Kavak will install the largest vehicle reconditioning centers in Chile, Colombia and Peru, which will have the capacity to process more than 3,000 cars per month, a figure that is expected to increase as the operation progresses. “There is nobody in the industry that offers real guarantees for used cars, and that is why the market is profoundly inefficient,” says García Ottati.

“This is precisely the problem that we are solving, so that citizens can acquire one of the most important assets of their lives,” adds García Ottati. “We will not rest until we achieve the transformation of the industry.”

Jose Caparroso is an editor at Forbes Colombia covering tech, venture capital and startups. Follow him on Twitter at @josecaparroso and email him at [email protected]

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