Solving A Clear User Need Lies at the Core of All Business Models
During its series A round, we had some concern about Guazi (瓜子二手车)’s decision to adapt an e-commerce business model for the used vehicle industry and directly connect buyers with sellers. To be honest, those worries were not completely resolved even in the series B round.
Investors are known to be attracted to models with precedents set in the United States. They tend to feel more confident about a Chinese start-up once they find that its model is shared by an American counterpart.
But we discovered during the series A round that similar models had not been proven successful in the United States. Further considering that Guazi had yet to face a large sales volume, we could only rely solely on rational analysis: we reduced our assumption to its most basic form, and then made the investment decision by looking at a set of minimum criteria. This is the “principle of primary qualities” that I have long advocated.
Sellers are concerned with how they can sell their cars, while buyers are interested in securing cars of high quality. How might that be possible? By understanding what the used car industry caters to, we realized that Guazi’s business model is extremely valuable, as it strives to deal with what the consumers care most about in every stage from selling to buying, and to make all the stages as smooth as possible. In this way, Guazi satisfies the most essential consumer demands.
Moreover, there are positive effects associated with establishing an all-encompassing platform. In the case of CarMax, a retail store, however big it may be it can only showcase a portion of all the used cars available. On Guazi’s platform, consumers have access to as many used cars as the market offers, and therefore have the most options.
After the series A round, we continued to observe how Guazi performed in the next 12 and 24 months. Our investment team stayed in close touch with the start-up’s management, and sought to collect industry data to evaluate our previous judgment.
We were delighted to see a year later that in its transition from series A to series B, Guazi met our requirements in most of the key performance indicators, and even surpassed expectations in many of them.
In fact, we found that Guazi, as well as the used car industry overall, grew at a faster pace than was predicted by the consulting company which we hired before the series A round to assess the development of used car industry in China.
Fundamentally speaking, we believe that Guazi employs a reasonable and optimized business model that revolves around consumers. This is the main reason why we, after the series A round ended, arranged for a huge amount of additional investment in the series B round.
The Most Valuable AI Companies Have Both Scope and Big Data
I have been paying attention to AI projects for the past two years ago, and have watched their popularity soar within the investment community this year. While companies just can’t stop talking about AI, I still feel that the technology itself is futile if there are no occasions where it can be used.
At the same time, AI is only powerful in conjunction with big data, the absence of which will render AI incapable of creating value for its users and consumers. In the end, only companies such as Guazi, which leverages big data and has a use case for AI, are able to create the most value for consumers.
In today’s China, both a strong management system and a strong technology platform are necessary for companies with a large personnel system to enter into traditional tertiary services. We have now arrived at the point where by efficiently collecting and analyzing data, and understanding what they mean, it is possible to raise efficiency and to create more value for consumers.
Technology + Management = Rapid Development
Businesses in China develop at an incredible speed, which necessitates that companies excel in both management and technology.
Every company needs the technology to perform real-time analyses of where its problems lie, thereby offering personalized services to its consumers. I find this particularly relevant in the case of the used car market, where each car is a different product that demands individual treatment of consumers, a process through which the value of data is maximized. This might be one reason why no large Chinese e-commerce companies specializing in used vehicles have emerged in the past, when the necessary technology was not yet mature, and the data lacking.
By examining its progress in the previous year, we have a good understanding of Guazi’s technological and managerial capabilities. While it took CarMax around 10 years to reach a turnover of 200 thousand vehicles, and 20 years to hit the 600-thousand mark, Guazi completed in a year what CarMax did in 10, and in two years what CarMax did in 20.
Backed by today’s technology, it is possible to achieve high-speed development by taking advantage of technology + management, as well as of the economies of scale made possible by the Internet. We have moved past the stage where it is necessary to spend 20 years opening one retail store after another in order to expand, as it was practiced in the United States.
This explains why we continue to think favorably of Guazi and to increase our investment in it. Thanks to its scope, Guazi accumulated user data and maximum turnover, which in turn allows it to improve consumer experience. And thus, I believe, Guazi should rightly feel motivated to expand its business to cover the array of additional services associated with secondhand vehicles, which will be even more beneficial for Guazi’s scope, data, and performance. Guazi has just started to spread its wings.
To select which businesses to invest in, we consider whether companies are able to find a sufficiently long ‘track’ on which their entrepreneurs can build up potential energy and accelerate. Only when the entrepreneurs get going do their businesses have the prospect of snowballing.
I feel that Guazi has found a remarkably long track, and we have much confidence in its founders’ capabilities. So we believe that Guazi will witness even faster development and create more and more value.
This article was originally shared by Ji Yue via Sequoia Capital China's Wechat public account on August 14, 2017. Translated by Frank Huang.
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