ACV Auctions filed to go public. (Who says Buffalo, NY does not have a tech community?!) Its S-1 is a masterclass in building a marketplace. The S-1 should be required reading if you are building a B2B marketplace.
I cannot do the business justice in one blog post, but I’ll try by skipping the financial analysis and leaving that to S-1 teardowns. I want to cover what makes ACV a prototypical B2B Marketplace.
Marketplaces thrive where the markets are:
- fragmented on both sides
- buyers and sellers need discovery and transparency
- and where savings from going online can be substantial.
That describes the US used car market in a nutshell!
The ACV Auctions S-1 has a great graphic describing the enormous US Automotive market:
The right-hand side of this graphic (B2C), especially the new car sales (green box), get all of the glory. But ACV Auctions plays on the left-hand side (B2B) between dealers and commercial wholesale (off-lease, off-rental, and repossessions).
Offline to Online Auctions
Even more advantageous for ACV Auctions, is that ACV is not having to introduce the concept of auctions to this market, ACV is just migrating the format online. According to the S-1, about 50% of the existing wholesale market is already served by traditional physical auctions from companies such as Manheim (Cox) and KAR Auction Services. ACV is making an existing process easier. This advantage may help explain why ACV Auctions has grown so rapidly relative to other B2B marketplaces. After all, ACV’s first transaction was in 2015 and it already has $200 million in revenue. That’s a fast ride for a B2B marketplace.
The Revenue Sources: Auction Fees
ACV Auctions’ varied revenue sources impress me. ACV has revenue from:
- Auction Fees. As with many auction marketplaces, ACV makes money from both the buyer and supplier for facilitating the transaction. Buyers pay a variable fee ranging from 10% at the high end (for a $50 transaction!) to 2% at the low-end (for transactions of $15,000 or more). Sellers pay a flat auction fee and an optional fee for an elective condition report on the vehicle (credentialing). In 2020, Auction fees represented $99.2 million on marketplace GMV of $3.3 billion, so a take-rate of about 3%.
The Other Revenue Sources: Value Added Services
- These are services ACV offers to buyers and sellers in conjunction with the auction. As the S-1 states these services are:
- ACV Transportation. “Through our nationwide network of carrier partners, our technology platform, and dedicated service teams, we move vehicles both locally and long-haul in a cost-efficient and timely manner.”
- ACV Capital. “We offer short-term inventory financing for buyers to purchase vehicles on our digital marketplace. Our financing product includes straightforward pricing, allowing our customers to know their inventory costs upfront.”
- Data Services. Every marketplace desires to sell its data to market participants, few actually do. ACV Auctions already sells data in the form of its True360 reports. These vehicle inspection reports are then integrated into vehicle history reports (think CarFax). Note that this inspection service and data can be sold even to non-market participants. ACV also sells market reports, so participants can better set prices (e.g, Kelly Blue Book for wholesale). (This latter data is not unlike the data CCC Information services began selling to insurance companies in the 80s.)
ACV’s ancillary fees were almost $74 million in 2020.
- Embedded Insurance. ACV sells embedded insurance in the form of a product called Go Green. As ACV describes it: “We provide the seller with an assurance against claims related to defects in the vehicle that we did not identify in our condition report and otherwise may have exposed the seller to loss as a result of arbitration with the buyer.”
Go Green is charged on a per-vehicle basis. This revenue, plus other “price guarantee” revenue sold to sellers amounted to $35 million in 2020.
Putting it all together, here’s what ACV Auctions’ revenue streams looked like in 2020 as best I can tell:
As with many marketplaces somewhat location-based markets before it (e.g., OpenTable), ACV Auctions approaches each territory sequentially to build a critical mass of buyers and sellers. As auction volumes increase in each market, ACV tracks and discloses how those cohorts are progressing over time in terms of cost-efficiency.
It’s easy to see from the S-1 that as with all good marketplaces, ACV is obsessed with metrics. Besides the cohort analyses, ACV provides unit and dollar GMV, auction revenue per unit, the total number of marketplace participants, and even vehicles transacted per active seller and per active buyer. That last metric is one you rarely see as I have written about here.
One way I evaluate a B2B Platform is through the lens of how many of the Nine Value Propositions it offers. On this score ACV is exceptional, especially considering that it has only been around five years. Through its:
- logistics offering, ACV provides Supply Chain Automation
- core marketplace, it provides Matchmaking
- inspection reports, it provides Credentialing
- capital offering, it provides Transaction Financing
- data services, it provides Industry Big Data
And ACV goes one better by offering embedded insurance. (Which I may need to add to my nine value propositions!)
This is a huge market with a ton of competition from physical auction providers, peer-to-peer marketplaces such as eBay Motors, and new entrants such as Carvana, and Vroom. I can’t say these guys are going to win, but I’m rooting for Buffalo to finally have a winner!