Kavak: a story of success and perseverance

He is Venezuelan, 40 years old, and the founder of the company that broke all schemes: Carlos García Ottati, CEO and founder of Kavak, who in an interview with Luis Miguel González, Editorial Director of El Economista, reveals how, in just seven years, he managed to transform the traditional used car industry, focusing on two objectives: eradicating fraud, and giving greater access to a car, but to achieve this, it was necessary to build from the ground up a complex infrastructure capable of formalizing a market as fragmented as it was insecure.

The entrepreneur of the new generation born into a family with young parents who moved constantly, traveling at least 14 cities as they moved from one place to another, Carlos, seeing his parents give up everything in every country they came to, decided to enter the world of entrepreneurship at a very young age, through a couple of restaurant and liquor businesses, at a time when Venezuela was going through political and security dilemmas.

It was at that time when Carlos looked for opportunities in Rome, Italy, to start a much less uncertain future in which “without any kind of strategy, I got on a plane without a return ticket and went to look for opportunities,” García Ottati shared.

At that time, the founder of Kavak was 24 years old when, supported by the Italian nationality he had from his grandfather, he traveled to the European continent to learn Italian and French, but during his trip, in 2008, a very strong global crisis arose that radically changed his plans.

Under this scenario, Carlos got an opportunity to work at Amazon in England, where he was responsible for investigating ways to build a marketplace for third parties who wanted to sell through the platform, as well as the potential impact it would have on their business. It was there that Carlos realized the opportunities involved in digitizing a traditional industry.

The idea of a Latin amazon at that point, Carlos was focused on returning to Latin America and launching an Amazon in the region, however, he had no experience undertaking in the digital world, up to that point he had worked in liquor, retails and more traditional businesses, so, on the recommendation of his sister, Loreanne Garcia, Carlos decided to continue his education through an MBA, which he did at Oxford University, however, he never abandoned the idea of building a digital marketplace.

“I returned to Latin America with the idea of building a digital marketplace, I worked for the first time in my life as a consultant at McKinsey and had the opportunity to visit more than 11 countries, and first hand I realized, talking to the CEO’s I was working with, that no one had digital on their agenda, it was like coming from the future to the past and working with the largest companies in their respective countries, but digitization was not a priority,” said Garcia Ottati.

With this experience, Carlos ended up leaving that job to join the founding team of Linio, an e-commerce company that reached an operation in 8 countries in Latin America, and was later sold to the Falabella group in Chile.

“When we started the business in 2012 there was absolutely nothing in Latin America. There were no digital processes; no digital payment gateways outside Brazil and Argentina, and no expert talent. We started very naively wanting to launch an e-commerce business, and something we learned, which later helped me at Kavak, was that if you are going to set up a business in Latin America, you have to create about 20 other businesses,” said Carlos García Ottati.

“In Latin America there is not the infrastructure that you can get in the United States or Europe to do the basic things. We had to create our own payment system and our own anti-fraud system. If you wanted to send a product to your home, there was no DHL or FEDEX in Mexico, so we had to buy trucks and deliver the product in an economy where people were not used to having someone to receive the product, but with the support of a young team, we learned quickly and managed to consolidate the business,” he added.

As a result of working at Linio, Carlos experienced the growth of a company that went from zero to three thousand people, with an operation in eight countries and people who, after leaving the project, went on to create other companies. Carlos would be no exception.

A fragmented market with barely 5 years of experience in the startup world, Carlos gathered his family and told them his plan. “I went back home and told my wife that I planned to bet everything we had built, that we were going back to eating beans and that the people who would work with me would live in the house because I had no money to pay them,” Garcia Ottati recounted.

After presenting his idea, Carlos received the unconditional support of his family, because his initiative proposed to solve the problems of an obsolete industry that had been perpetuated for decades, and that the Venezuelan entrepreneur had experienced firsthand.

“I was living in Colombia, I had a car that I did not use because I was a consultant and I decided to live in Mexico, to launch Linio, and when I sold my car the money appeared in my account, and five minutes later it disappeared. Later I landed in Mexico with that trauma, and the first thing I did was to contact a couple of people in India. We got to work on how I could have done that process better, and we created Kavak’s first pricing algorithm,” said Carlos.

“This algorithm threw up real-time bids on cars, and the idea was to share it with dealers so they could improve their processes and create a mechanism that would prevent the consumer from facing the informality that I experienced. However, when I decided to buy a car in Guadalajara, after two months the police stopped me to inform me that the car was illegal. That’s when I realized that there was a deeper problem that we had to solve,” he added.

From this experience, Carlos dedicated himself to understanding the industry, and identified that the market he was getting involved in was the largest in the world, where new car transactions represent between 6 and 8 percent of a country’s GDP, and where the great challenge lies in combating informality and the lack of access to financing.

“Mexico has very different characteristics from developed countries, since 90 percent of transactions are informal deals, 40 percent of which involve some type of fraud. Because of this problem, banks never wanted to provide access to financing credits, and for this reason, in Mexico, only 5% of cars receive financing,” García Ottati said.

A complex but effective solutionWith a red Audi A1 purchased by a Monterrey native from his phone at 3 a.m., Kavak’s journey began in 2016, cemented by a business model that guarantees security and transparency by buying cars from individuals; reconditioning them in their own workshops, and then selling them with the backing of warranties and after-sales services.

This model caught the attention of the most important venture investment funds in the world, such as Softbank, General Atlantic, Nazca, Founders Fund and Kaszek Ventures, among others, who by investing more than 1.6 billion dollars, through 5 rounds of capital raising, allowed Kavak, between 2020 and 2021, to reach not only the status of the first unicorn company in the history of Mexico, but also the highest valued private startup in Latin America.

With the backing of these resources, Carlos was able to accelerate the company’s growth and focus on creating an infrastructure capable of restoring security to one of the most important transactions in a person’s life, and expanding financing options so that citizens, through the purchase of a car, could improve their purchasing power.

To achieve this, Carlos installed the largest vehicle reconditioning centers in Latin America, with the capacity to process more than 20 thousand cars per month, and thus guarantee the correct operation of the units, in addition to establishing alliances with authorities and governments to verify and follow up that each car that the company buys and sells is properly in order.

In addition, the company has incorporated a robust coverage package to support its customers in the event of used car failures. However, to build this infrastructure, Carlos had to consolidate an international spare parts supply network and a team dedicated to maintaining an inventory of more than 30,000 cars in constant rotation.

On the other hand, the company has invested in data technology and artificial intelligence, to incorporate tools that take advantage of the data from the thousands of cars that have passed through its workshops, in order to streamline and speed up the reconditioning processes, and through the numerous transactions carried out by the company, they have achieved that its pricing algorithm is able to forecast the supply and demand of each car, so they can set fair market prices.

This technology and logistical capacity has also allowed the Mexican unicorn to create a financial ecosystem in which traditional banks, by having a company that backs the quality of the cars, can grant greater automotive financing for the used car market.

In this sense, Kavak also created a proprietary financial solution that, based on calculating the payment capacity of its customers, can generate plans tailored to each financial profile, so that, by not limiting its approval to criteria such as the credit bureau, the company has been able to finance more than 70% of its sales, allowing 40% of these people to access their first car. This contrasts with the reality of the traditional market, where less than 5% receive financing.

A promising futureDespite being a company that in less than 7 years managed to fulfill its initial promise, Kavak does not work thinking about capital rounds, or technology and data, but in their customers, and how to use their infrastructure to serve them better, because as they went along they realized that, when transforming a market, the consumer forgets very quickly what it was, and demands more and more.

“To think about the future, the first thing is to zoom out and see what has happened. In the last six years we went from being in a parking lot to being in 10 countries, from growing the business 10 times in an abysmal way, particularly in the last two years, and that is why I am excited to think about my clients and what I can build for them,” said Carlos García.

The company has a very clear goal in mind, that customers stop seeing Kavak as a place to buy and sell cars and start seeing it as an ecosystem for them to use their car as a financial tool, and although they recognize that there is still a long way to go, it is clear that they have known how to grow.

Kavak’s story is something unusual in the Mexican entrepreneurial ecosystem. Going from a company with 250 employees and presence in a single city, to more than 6 thousand people operating in 10 countries in just 3 years, is not seen every day, and although now the challenge is to manage its growth, its founder sees a promising future on the horizon.

“In the first six years I did not know what I was doing, and if we did what we did when we had the world against us, the learning processes on top of us and without capital, what we are going to do in the next six years, with the infrastructure we have built and the learning we have in 10 markets, I can’t even sleep with the excitement,” García Ottati said.