Editor's note: In an earlier version of this story, the surname of Gaurav Misra was misspelled in the third paragraph.
Internet used-vehicle retailer Beepi Inc. folded most of its operations last week, marking a growing pain for a burgeoning business model that is trying to convince customers it's OK to buy used vehicles sight unseen.
The 2-year-old startup said it plans to merge with Fair. com, a soon-to-launch online vehicle retail platform founded by former TrueCar CEO Scott Painter and other industry veterans. As a result of the deal, Beepi cut 180 employees. The remaining 80 employees and CEO Ale Resnik will move to Fair.
"It's disappointing," said Gaurav Misra, chief marketing officer for Vroom Inc., a competing online used-vehicle retailer. "We were collectively working to make a massive industry better. I was in support of what they were trying to do -- to bring more visibility to us all."
Beepi, of Los Altos, Calif., is part of an emerging group of startups that includes Vroom, Shift Technologies Inc. and Carvana, looking to sell used vehicles directly to consumers through the Internet. Each of the retailers has a slightly different business model.
Under Beepi's model, the company inspects and photographs owners' cars and posts the vehicle profiles online. Owners keep the vehicles until they are sold, and buyers do not drive the vehicles until making the purchase. Beepi inspects the vehicles again just before delivery, handles the delivery and offers a 10-day money-back guarantee. If vehicles are not sold in 30 days, Beepi offers to buy them.
Although the used-vehicle market has ample space for new entrants among peer-to-peer operations, dealerships and independent stores, it's difficult to succeed, said Alan Haig, president of buy-sell advisory firm Haig Partners in Fort Lauderdale, Fla.
"Everyone who has been successful has realized that used cars are unique, depreciating assets, and the margins are shrinking because the Internet allows consumers to choose more freely between vehicles," Haig said. "You have to be a good retailer, not just a software developer."
Total U.S. used-vehicle sales for the third quarter were 9.8 million units, up 3.1 percent from the year-earlier quarter and up 6 percent from the third quarter of 2011, according to Edmunds. Investors have shown faith that online start-ups can capture this growth -- Beepi, Shift, Vroom and Carvana have raised more than $740 million in total equity financing since 2013, according to CrunchBase, a website that tracks startup funding.
One of the big problems Internet sellers have to overcome is that customers can't "kick the tires," Haig said. Indeed, nearly 90 percent of vehicle shoppers said they would not buy a vehicle without a test drive, according to an Autotrader survey of 4,000 consumers released in March 2015.