Why used cars are winning the e-commerce sales race

Editor's note: The report has been corrected to accurately state Carvana's annual run rate.

Secondhand cars are like snowflakes: Every one is different.

With their dents, stains, smells and leaks, used cars might seem more difficult to sell online. Yet startups Beepi, Carvana, Shift and Vroom, which sell only used cars, are growing far more quickly than new-car specialists.

According to CrunchBase, a website that tracks startup funding, Beepi, Carvana, Shift and Vroom have raised $530 million in debt and equity financing since 2013. Most of them don't disclose data on transactions and revenues, but it's safe to say these companies sell thousands of cars a month.

Roadster, which has raised $4 million, sells about 100 vehicles a month.

"The used-car companies are about 18 to 24 months ahead of us in terms of personnel and funding," Roadster CEO Andy Moss said. "We see them as kindred spirits at different phases of the life cycle."

Why are entrepreneurs and investors flocking to used cars? The main reason, said Ari Kantrowitz, a former corporate strategist at Audi who now works as a San Francisco-based consultant to automotive startups, is that used cars are a free-for-all.

Automakers control the supply of new cars. Even if they were willing to sell cars online through third-party e-commerce websites, they would need to worry about blowback from dealers, which exert heavy influence over local distribution thanks to state franchise laws. Used cars face few such barriers.

"It's an easier nut to crack," Kantrowitz said. "The barriers to entry are considerably lower."

Used cars have their challenges. While a new Honda Civic is something of a commodity, the value of a used car varies widely based on condition. To buy and sell used cars, or even just list them as an intermediary, a startup needs to quickly assess cars, repair them for sale and price them appropriately.

San Francisco-based Shift focuses on those logistical challenges, Minnie Ingersoll, the company's co-founder and COO, said during a February interview at a hub near the San Francisco airport where mechanics fix cars for sale.

In its garage, Shift installed a turntable with a white backdrop so photos can be quickly taken in exactly the same position for every car. Many car dealerships have a team of people constantly editing photos and managing listings, but Shift saves money by outsourcing that work to Georgia -- the country, not the state.

Ingersoll and co-founder George Arison, who worked at Google before starting Shift in 2013, conceived Shift not as an e-commerce company -- it never owns the inventory listed on its site -- but as a "car concierge."

"We aim to give both buyers and sellers more money," Ingersoll says. "I know that sounds like marketing, but it's absolutely what we're doing. If we break even on the car but we're able to make money on ancillary services, that's a value add."

These startups, and smaller rivals, want to show exponential growth. Phoenix-based Carvana brought in $4 million of revenue in 2013 and $40 million in 2014. Its annual run rate has since risen to $300 million per year. 

It is tempting to imagine that one of these companies outruns the rest. Ernie Garcia, CEO of Carvana, warned against thinking of e-commerce as winner takes all. He said the used-car market is big enough for multiple sellers to coexist with different specialties.

"There are customers who still prefer the traditional experience, so I don't think the dealership business model is going away," Garcia said. "It's also important to remember that CarMax is the largest player in the country with 1.25 percent market share. You can build an absolutely massive business with a minuscule market share."