Guazi Used Cars: Turning Capital into Competitive Momentum

#IfYouAreBuildingInAnEnormousMarket #UseCapitalToCreateMomentum #OpenTheGapQuickly #CaptureTheMarket #SpendingIsNotTheProblemBuildingBarriersIsTheKey #ThinkBigPictureAndWorkBackwardFromTheEndgame ----- Yang Haoyong is a serial entrepreneur. He founded classified-listings site Ganji in 2005. In 2015, after fierce competition, it merged with rival 58.com. At the end of 2015, Yang spun used-car platform Guazi out of 58–Ganji and began his second entrepreneurial venture. Guazi initially matched transactions, then evolved toward a B2C model and later physical stores. Yang has since established Chehaoduo Group, covering both new- and used-car transactions. Yang described how Guazi, a late entrant at the end of 2015, used capital to attack first mover Renrenche. He believes Guazi overtook Renrenche because his first entrepreneurial experience taught him something beginners had not learned: in a major market, simply concentrating on a good product and your own execution is nowhere near enough. The decisive factor is the momentum that a major player can create. This was a painful lesson from Ganji’s prolonged battle with 58.com. Starting again, Yang became extremely concerned when he saw a rival of similar capability and size. He would do everything possible to widen the gap and gain momentum rather than fight street by street. Even if street fighting inflicts a thousand casualties, it costs you eight hundred; the attrition never ends. More importantly, it prevents you from watching the whole battlefield. A broad view lets you work backward to determine how to deploy capital and resources. Guazi beat Renrenche through this momentum advantage. It began as a copycat project within Ganji, following Renrenche into used-car transactions. But Ganji’s attention was on its battle with 58.com, so Yang had paid little attention to Guazi. Only when spinning it off did he study Renrenche. In August 2015, Renrenche announced$50 million in funding from Tencent, Shunwei, and others. Its monthly used-car volume exceeded 300, while Guazi’s exceeded 200. They were still in roughly the same league. Yang immediately understood. Having fought a major war and considered the bigger financial picture against 58.com, he recognized a market where capital-driven momentum offered a strong chance of winning. At the first board meeting after the 58–Ganji merger, he requested capital and resources for Guazi. He then ordered a stealth expansion: enter 40 cities within one month before Renrenche realized what was happening. Renrenche then covered only a dozen or so cities. The board supported the request. The 58 and Ganji teams had fought for so long that both understood the painful resource consumption of a prolonged war. If the same thing was about to happen between Guazi and Renrenche, a massive investment to end it sooner seemed preferable. Yang told the team to disregard efficiency initially. Per-person output did not matter; the first objective was coverage of 40 cities. Reach that scale before worrying about anything else. Guazi began the plan in August. In September, it allocated more thanRMB 100 million to blanket the market with advertising. Within months, monthly transactions jumped from over 200 to over 1,700. In November, Renrenche saw the volumes Guazi had purchased through heavy spending and reacted with its own advertising. By then, Guazi had a two-month head start in brand visibility. It kept advertising but changed tactics to shadow Renrenche: wherever Renrenche bought ads, Guazi bought ads too. The main objective was no longer Guazi’s brand momentum but disrupting the effectiveness of its rival’s placements. Renrenche’s monthly volume rose to over 700, a substantial increase, but still nowhere near Guazi’s 1,700. With that initial result, Yang became confident. In November, he decided to make Guazi his new entrepreneurial venture, formally spin it out of 58–Ganji, and raise external capital. A 1,700-to-700 volume gap allowed him to tell investors that Guazi led the industry. Around Lunar New Year 2016, it completed a Series A exceeding$200 million. At that point, peak daily transactions had already exceeded 1,000. Investors did have some reservations about the spending. During Guazi’s 2015 stealth expansion and early advertising, it had not fully separated from US-listed 58–Ganji. The advertising budget contributed to a quarterly loss of$20 million–$30 million and substantial share-price pressure. But by November, with 1,700 monthly transactions, Yang could say: do not question efficiency now; this stage requires scale and momentum. Once we gain momentum, efficiency will improve. Investors considered the argument and agreed. Advertising created momentum,1,700 transactions created momentum, and more than$200 million of financing created momentum too. As the volume leader, Guazi’s valuation and financing would constrain Renrenche’s next raise: If industry leader Guazi is worth$1 billion, the runner-up cannot reasonably be worth more. Investors might value it at only$300 million–$400 million. At that valuation, it cannot raise$200 million like Guazi; it may raise only$30 million–$50 million. How can a company with$30 million–$50 million fight a rival holding$200 million? These doubts accumulated, delaying Renrenche’s next round until 2017. The companies were no longer competing merely in marketing; their overall momentum beneath the marketing was clashing. Yang said that if he could turn back time and were Renrenche founder Li Jian, he would immediately spend the$50 million received in July 2015 on the market. Then, when both companies next raised capital, Renrenche rather than Guazi would have secured more than$200 million. That, in Yang’s view, decided the contest. A celebrity entrepreneur did not defeat an unknown entrepreneur; fully deploying capital-driven momentum defeated short-term penny-pinching. He notes two common entrepreneurial claims about competition: “We only need to do our own job well, without looking at rivals,” and “The market is large, so everyone has an opportunity.” The first is what a CEO tells employees to keep them focused and unaffected by outside events. The second is what a CEO tells investors: a large market with many opportunities makes investors more willing to believe there is room for you. But is that reality? No. Major players can mobilize greater momentum. That advantage prevents a stable 6:4 market split; capital momentum pushes it toward 7:3,8:2, and ultimately 9:1 before it stabilizes. An entrepreneur who can obtain substantial capital but is too frugal to spend it is therefore making a mistake. Strong entrepreneurs understand that capital should immediately become other forms of momentum, such as a better team or broader advertising, to widen the gap and take the company rapidly to its next stage. That is the proper use of capital. Yet Yang considers wars won through capital the most basic kind. If capital determines the outcome, the company has not differentiated itself for users. The truly differentiating advantage is the moat of data and algorithms built on transaction volume. That is the deepest layer of the moat, a view he continued developing from 2018 to 2020. ----- #Dedao #CaiYuBusinessReference