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Carzaty: The realistic exit

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Carzaty: The realistic exit
Hassan Jaffar and Marwan Chaar, co-founders of Carzaty

The used car market is worth over $16 billion in the GCC alone, but it is a highly fragmented sector, with mostly small resellers and individuals selling their cars on platforms like Dubizzle or Facebook. Several startups have emerged across the region to try to disrupt the sector, but it was Carzaty, founded in 2018 in Oman by Hassan Jaffar and Marwan Chaar, that became an acquisition target for Kavak, the Mexican used car platform last valued at $8.7 billion. 

Exiting within four years of launching may sound like a swift success story, but for Jaffar and Chaar, it is a story punctuated by several near failures and a lot of stress. When the pair launched their operations in Muscat and secured a $2.3 million Seed round in 2018, their growth trajectory was firmly in place, placing emphasis on healthy unit economics and steady path to profitability. Carzaty’s digital-first, omnichannel used car platform proved popular and the next stage was to expand to the UAE. The launch date was set for March 2020, but then the pandemic hit and “everything fell apart” according to Chaar. 

The Dubai operations were shut down before launching, pushing the entire company into furlough and downsizing the business by 30 per cent. 

“We went into lockdown and had to raise emergency capital, but coming out of Covid, the world had changed,” says Chaar. “Used car sales went through the roof, we were well positioned to make the most of that with really healthy unit economics. We were not building a unicorn, we were building a business that would sell for $100-$200 million for the region.”

This mentality of focusing on a path to profitability and maintaining a realistic sense of the company’s value and expectations is what allowed the pair to survive, but it was not easy. 

“Almost every VC in the region turned us down. The feedback was very similar, they told us 'we don’t like an asset heavy business model, you’re not growing fast enough for VC', which was true, but [our] business model is different, you can’t grow as fast as a typical SaaS model. Getting rejected by everyone was demotivating,” says Chaar. 

It was a US-based hedge fund that took a chance on Carzaty initially, followed by two family offices with interests in the automotive space and then in the third quarter of 2020, things began to look optimistic for the startup. 

“When Covid hit, three issues popped up - ride-hailing crashed, new car supply crashed and there were less new cars in the market and third, pockets became a lot more tight and the best way to save money was to buy a used car,” says Chaar.

This all opened up the opportunity for Carzaty and its competitors as consumers increasingly turned to buying used cars instead of waiting months for a new one. 

In its third round of funding, Carzaty raised $2 million in equity and $4 million in debt from the Oman government. 

“Debt was more of a success story than equity. We raised this as an asset-backed debt facility, we had the inventory to back it to raise this debt which was Shariah compliant and that was what allowed us to scale the business before the acquisition.”

One of the biggest challenges facing used-car retailers is the lack of car financing available for the business, also known as floor plan financing. This is primarily down to the lack of transparency and data available in the market according to Chaar. 

“If I want to buy a BMW 4 Series, what price do I pay? Who determines that? In developed markets, you have standards of what used car prices should be, the price is set by the market, it’s clear and transparent,” he says, but no such thing exists in the region. “Without that data, you’re open to corruption and theft and you’re open to incompetence and that destroys used car businesses.”

So the pair decided to build their own database to determine the right price for cars available on the used car market. 

“All our focus went to generating a source of truth on pricing. Our data doesn’t just tell you how many of these BMW 4 Series are on the market, it also gives you the history of prices. We gather this from public sources and if you know what the selling price is, you’re guaranteed to make a margin.”

Carzaty built its entire tech stack around this fundamental purpose of bringing data and pricing into its business, which gave it a “huge competitive advantage”.

The founders were introduced to Kavak’s founder Carlos García Ottati, when they were raising their $15 million round. 

“In November 2020, we spoke with Carlos on Zoom and at the time, they were not yet a unicorn. They were relatively unknown, but they were two years ahead of us,” says Chaar. “Fast forward four months and Carlos called us and said ‘we’re coming to the region, we’re either going to buy you or compete with you’.”

Kavak raised a whopping $1.1 billion in 2021 and almost instantly went from being a young Mexican startup to a global company that scaled to 10 countries, with a vast pool of cash to continue to scale and acquire others.

“We wanted to partner with an emerging markets company. This was not the American large player coming in with head up high, this was the emerging markets proving that we too can build a global multi-million dollar business. We liked the diversity, the culture fit really well and we signed all the initial contracts virtually,” says Chaar. 

The acquisition and due diligence took place during the month of Ramadan, when both founders were fasting, battling hunger and low energy to negotiate a good deal for their company. There were several tense moments when both founders questioned their desire to sell, but ultimately they recognised the opportunity they had at hand. The alternative was to compete with Kavak and Indian unicorn Cars24 which launched its operations in the UAE in September 2022. 

While it was hailed as a merger, Kavak bought Carzaty outright for an undisclosed sum in October this year, with Chaar keen to point out that they made healthy returns for their investors. Kavak has pumped $130 million into its GCC operations to build the largest used car retailer in the region. Carzaty’s operations has grown from a 30-person company to now employing 120 people with another 80 expected to be hired over the next few months. 

Both Chaar and Jaffar have remained at Kavak, going from being co-founders to employees at a unicorn. 

“The stress levels are much less now, you’re not worried about running out of money,” says Chaar. “Twice at Carzaty we ran out of money, that’s not going to be the case anymore. Both Hassan and I had to reinvent our skillset, you go from being a startup to a scaleup and that is a mindset shift you have to learn.”

Part of Carzaty's success was down to the realistic expectations of its founders. 

“Overall being a startup founder is very, very challenging. This mindset of aiming for a billion dollar exit is one that is completely flawed. When you set [unrealistic] expectations for entrepreneurs, if you aim for that, you may fail," adds Chaar. "The region needs to be focused on the $100-200 million valuations."

 

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