Cazoo: Car Crash or Speedster?

Cazoo, an online used car retailer and the fastest UK startup to ever gain unicorn status has recently announced itsintention to go public via Ajax I, a US SPAC. Its success is only one in a longline for founder and CEO Alex Chesterman, a man who founded both LoveFilm and Zoopla and is one of the most active tech angel investors in the UK with a net worth of around £360 million.

Cazoo’s pitch is that they take the car-buying process fully online, delivering to your door within 72 hours. They are also working to fix the lack of transparency and trust that has pervaded the industry for years by fully reconditioning every car they buy and offering a 7 day money back guarantee. It claims to have delivered 14,000 cars by February of this year.

A winning prospect, or so it seems, and one that has thrived in the lockdown economy. After a rocky start in April, Cazoo took advantage of a customer base that wanted more flexibility and less reliance on public transport without shelling out for a whole new car, and ended up ahead of its projected sales despite an overall downturn in the car market of 48.5% coming out of the first lockdown.

Perhaps this (along with a buoyant stock market) is the reason for their $7 billion valuation, or perhaps Cazoo is yet another tech-company being overvalued as a result of the hype surrounding the sector. It’s important to note that, despite being a UK company, Cazoo made the decision to list on the New York Stock Exchange. When asked why this was, Chesterman replied ‘The UK is an amazing place to build a business but the IPO process is challenging for companies investing in high growth. It is just better understood by investors in the US’. Many traditional London investors claim this is simply code for a company that doesn’t yet have the evidence to back up its valuation and is sailing on the back of its ‘tech-startup’ branding.

If this is the case, perhaps listing in the US is the right way to go (for the company at least). Though Chesterman denied that it had any bearing on his decision, the London Stock Exchange is known for its conservative listing rules, particularly regarding SPACs (though the London Stock Exchange is undergoing changes to counteract this). There were just three SPAC listings in Europe last year, raising $495 million in total, while in the US there were 244 SPAC IPOs that raised a total of $78.2 billion.

To determine whether Cazoo is worthy of its valuation, it helps to look at its closest competitors. Those who oppose Cazoo’s high valuation site Pendragon, a physical car dealership with fully online options for delivery. Cazoo currently has around 3,400 cars listed online, while Pendragon has 16,000. Despite this, it is only valued at £252 million. Chesterman of course thinks the comparison is unfair: He argues Cazoo will make$1 billion in revenues in 2021 and disrupt the used car market in Europe in a similar way to Carvana and Vroom in the US. Only 2% of the $700 billion European used car market is currently online, and Cazoo is already a similar size to Vroom which is valued at $5 billion.

Cazoo does seem to have escaped the fate of many recent tech IPO's that have fallen below their initial price, or failed to come together, including WeWork and Deliveroo, but whether its success will continue depends on whether they can keep breaking records and deliver on their lofty ambitions.

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