Auto dealer lot

Earlier this year, Sarah Lacy called Cornerstone OnDemand “a rare $2 billion LA tech win.” In a market that’s desperate for corporate role models, or tentpole companies as they’re often called, Cornerstone is exactly the kind of company that Los Angeles should be celebrating. What makes Cornerstone such a fascinating case study is that it reached this billion-dollar-plus summit with almost zero fanfare. Even today, many members of the LA tech community – not to mention those in Silicon Valley and other markets – would struggle to tell you what Cornerstone does or ballpark its valuation.

There’s another nearly 10-year-old Los Angeles company that has followed a similar playbook, and appears poised to achieve its own massive outcome despite the lack of attention being paid. To the extent that you can say a company is flying under the radar after having raised nearly $190 million in venture capital, automotive pricing and data company TrueCar is doing just that.

I caught up with the company’s founder and CEO Scott Painter at last week’s LA Tech Summit conference hosted by Cornerstone OnDemand and was impressed by the company’s progress. TrueCar has grown to more than 350 employees (250 of which are in LA), according to Painter, and is generating “hundreds of millions in revenue” and operating profitably – he declined to offer specifics. Given the amount of capital TrueCar has raised and this level of financial performance, it would seem that an exit or liquidity event is imminent. When that happens, don’t be surprised if TrueCar is the second “surprise billion dollar tech company” to come out of LA this decade.

Painter is a serial entrepreneur who has founded 37 companies over the last two decades, including more than a dozen within the auto industry, and has raised more than $1.25 billion worth of debt and equity in total. From that perspective it may not be a huge surprise that he’s built TrueCar into a big player, but the road there has been anything but smooth.

When TrueCar first launched in 2005, the company focused on delivering leads to auto dealers, while directing consumers to the dealer that would offer the lowest price on a particular model of car. It worked for a while and TrueCar eventually grew to more than 6,000 dealership partners. But the model was creating a race to the bottom in terms of price, something that consumers welcomed but that already cash-strapped dealers couldn’t sustain. Eventually, they revolted.

The year 2012 “really was hell,” Painter says. “We went from 6,000 dealers to 3,000 overnight. And when your revenue comes from dealers, that’s pretty tough. It almost killed us.”

TrueCar had to reposition its business as a partner to both dealers and consumers, not just consumers. Today, the company has evolved into an intelligent Kelley Blue Book (KBB) alternative, with its vehicle value information backed by real sales data. It still delivers insights on industry-wide automotive pricing, but the messaging has that new car smell.

“We’re no longer about getting the lowest price possible on a car,” Painter says. “Now it’s about never paying too much. That may seem like a subtle distinction, but to dealers it makes all the difference in the world.”

Painter describes his company’s mission as “delivering the truth around automotive pricing.” This is in stark contrast to his century-old competitor KBB, which Painter claims publishes new car values that are, on average, 13 percent higher than what people actually pay.

Behind the scenes, the company collects auto transaction data from thousands of sources including the majority of insurers and automotive lenders nationwide – something it has been doing all along, even before the dealer revolt. With this data, TrueCar can see what prices consumers are actually paying, not what dealers label as “MSRP,” “Invoice,” or other industry standard terms of spurious meaning.

The company then takes this a step further by providing consumers a Guaranteed Savings Certificate based on real average sales prices across the industry. Each of the company’s 7,000 dealer partners is contractually bound to honor the prices on these certificates without hassle or negotiation. Consumers pay nothing for this service, and dealers pay TrueCar a flat fee on each completed sale, but nothing if a sale doesn’t close.

Surveys of auto buyers indicate that the average consumer believes dealers rake in 25 percent profit on a typical sale, according to Painter. At the same time these buyers believe that 8 percent would be a fair profit. The reality is that dealers make less than $1,000 on the average car sale, he says, representing a profit of just 3 percent on a $30,000 sale. That means dealers make less than consumers think is fair. There’s a disconnect, one that results from a lack of transparency.

TrueCar’s business is built on delivering transparency and rebuilding trust in the car business. Business is good. Dealers are back on board because the company has helped them make up in sales volume what they may be losing in slightly lower prices. The company now represents 3 percent of all US car sales, according to Painter. Earlier this week, the company announced its one millionth car sold through its platform, representing over $3 billions in savings below MSRP, and consumers are discovering the service at a rapid clip – although the company’s business is still heavily concentrated along the coasts in typical technology early adopter markets.

TrueCar’s backers include Capricorn Investment Group, Upfront Ventures, Silicon Valley Bank, Keating Capital, GSV Capital, Passport Capital, Allen & Company, International Investment House, USAA, DealerTrack, Anthem Venture Partners, Arcturus Capital, and Capital One Financial Corp. With the company recently crossing its eight birthday, and more than two years passing since the company raised $200 million of debt and equity in a September 2011 Series E funding, the clock is starting to tick on a liquidity event.

Painter and his company have not crossed the finish line yet, and there are still plenty challenges. As the events of the last two years proved, things can change rapidly. Above all else, the company will do well to continue holding the needs of consumers and dealers in equal regard. Also, TrueCar will have to build out its network of partner dealers even further if it wants to truly solidify its market leading position. For example, Audi (and other manufacturers) does not allow its dealers to participate in the TrueCar platform. The more comprehensive and ubiquitous it becomes, the better TrueCar can serve consumers.

Finally, the company generates a disproportionate percentage of its revenue from affiliate partnerships with companies like AAA, American Express, Consumer Reports, and the USAA military credit union. Adding more affiliates would at least de-risk the potential loss of one or more of these partners. At the same time, Painter’s describes a future TrueCar where there is more balance among general public sales generated through its website and mobile apps, and those coming from affiliate partners.

It seems that Painter has navigated TrueCar through the storm that was its 2012 dealer revolt. The result has been a return to nine-figure revenues and profitability, as well as reaching a major sales milestone. Those people looking for tentpole companies in Los Angeles could do worse than to add TrueCar to their list of local standouts.

[Image via DealerFraud]