- Auto1 kicked off Europe’s 2021 tech IPO season when it floated earlier in February.
- The used car marketplace went public at an approximately $8 billion valuation.
- Insider spoke to two venture capitalists who invested 8 years ago when it was worth $17 million.
- DN Capital’s Steve Schlenker and Nenad Marovac explained why they saw potential for Auto1 to deliver outsized returns.
- Visit the Business section of Insider for more stories.
Venture capital is a risky business, reliant on occasional moonshots that can return a fund while the bulk of investments fail.
Early-stage venture fund DN Capital has a winner on its books, with the $8 billion IPO of portfolio firm Auto1.
Auto1 is a used car marketplace and platform which has disrupted the €600 billion ($730.5 billion) used car market in Europe.
DN Capital first invested in 2013 at Series A at a $17 million valuation pre-money, and continued to back the firm through further funding rounds until its IPO.
The proposition was simple enough — when buying or selling a car the process was mostly done somewhat anonymously. It was hard to get a good price for a car you were selling because the buyer didn’t know the seller and was unlikely to trust that the car was as good as advertised.
Founded in 2012, Auto1 brought that process online and essentially acted as the counter-party for the trade, helping to inspire confidence in buyers and sellers, alongside the dealerships and other parties involved. That didn’t make it immediately compelling for investors, however.
“The idea of buying a car with VC money and selling to someone else was crazy,” DN Capital partner Steve Schlenker told Insider. Despite the size of the market and quality of the company’s founders, Christian Bertermann and Hakan Koc, Auto1 had been passed over by other investors who believed the business was potentially too “asset heavy” for venture capital. The trend in VC at the time was towards “asset light” models such as Airbnb and Uber.
Auto1’s secret sauce was tech. “If you can figure out what people want, flipping inventory so fast it effectively becomes asset light,” Schlenker said. The startup’s scale meant that data on sales sped up the company’s entire process but also helped Auto1 predict which cars would sell where and to whom. Through its digital marketplace the startup was soon able to sell cars even before they arrived at its branches.
DN Capital’s first meeting took place in a dealership in Berlin in 2013. “You could see Hakan lived and breathed cars,” Nenad Marovac, DN Capital partner, told Insider. “We’re the only one who took on the Series A and we had trouble getting co-leads on the round. People said, they are just used car salesmen. Well yeah they are, but they are using technology.”
Series A to IPO
Auto1 brought in $1.4 billion in funding from investors including SoftBank’s Vision Fund in the intervening years before its IPO.
As the business grew, DN Capital brought in Yuri Milner’s DST Global to lead the company’s Series C round in 2014 at a $450 million pre-money valuation. DST also led the company’s $117 million Series D a year later.
In 2018, the business caught the attention of SoftBank, the investment behemoth behind WeWork, Uber, and DoorDash. The Vision Fund led a $560 million Series F while Auto1 was doing some $3 billion a year in revenues.
One condition of the Vision Fund’s investment was that it would take a 20% stake in the company, meaning that investors would have to trim their holdings for the deal to happen. Several took the opportunity to exit with the deal valuing the startup at $2 billion. DN wanted to stay the course.
Some investors sold 100% of their stake, but DN only parted with 33%, Marovac said.
“You can understand why others want to sell, but the founders didn’t want to sell,” Marovac added, saying that his other DN Capital partner, Schlenker, was disciplined. “He said, ‘In VC if you sell your winners early then you’re dead,’ you need a third of your companies to succeed or you don’t get your money.”
In 2019, the company increased revenues to $4.25 billion and looked confident going into 2020.
But the business, like many others, took a significant hit during the initial months of the COVID-19 pandemic.
“Last March and April they had to close down branches and revenues fell off a cliff. For a small fund like ours it was petrifying,” Schlenker said. “This a company with a massive workforce, one of the biggest for a startup in Berlin, and we had to work very closely with the management team.”
Auto1 was able to take advantage of the German government’s “Kurzarbeit” (short time work or furlough) scheme which helped the company protect jobs. The company’s financial statements for the period reflect the damage done by by the pandemic. In the nine months to September 2020, Auto1’s revenues fell by €500 million ($606 million) year-on-year.
The business began to recover, however. The company’s third-quarter revenues were up 90% year-on-year, and the firm reported an 82% increase in the number of cars sold. The company also reported adjusted EBITDA of €16 million ($19.5 million), while gross profit margin grew from 9.5% to 11.3%.
And Auto1’s IPO on the Frankfurt Stock Exchange on February 4 ended up being priced higher than the $5-6 billion the market expected.
As Insider reported in January, the company’s strong performance and the growth of US rivals such as Carvana and Vroom brought its valuation to around $8 billion come the IPO. Auto1’s shares also rose as much as 49% on the first day of trading.
For Schlenker and Marovac, two former Harvard Business School classmates who have known each other for more than 25 years, it was an outsized result to go alongside other DN Capital successes such as Shazam (acquired by Apple) and software startup Endeca, which was bought by Oracle for $1.1 billion.
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