How to Get Funded in the Recession: The Frugal Mechanic Story
On Monday, Seattle-area startup Frugal Mechanic closed a round of seed funding from Founder’s Co-op, an early-stage investment fund for Internet companies. Frugal Mechanic is an online search engine for auto parts, so people can find the best price for an air filter or muffler, and get the right part to match their car quickly and easily. It doesn’t exactly sound like turbo-charged technology, and the size of the investment (between $250,000 and $500,000—exact amount undisclosed) is barely enough to buy a couple of Tesla Roadsters. But the business lessons for launching a company in the current climate are immense.
I spoke with Frugal co-founder Eric Peters to get the story. Peters and fellow co-founder Tim Underwood were college roommates at the University of Washington. Peters went on to work for Amazon and Microsoft (MSN Search), while Underwood logged time as an Amazon developer. Last June, they were both laid off from their jobs at Bellevue, WA-based Second Space, an online marketplace for vacation homes and retreats.
Peters and Underwood decided to start something new, and spent time looking at different possible Web businesses. They settled on auto parts not because they were car enthusiasts, but because they noticed it was inefficient to go to existing product-search sites like Froogle and find what you need in a niche market, and then match the right part to your car. “The space is very fragmented. There are different sites for different parts,” Peters says. “We wanted to just focus on doing auto parts better, and be more agile.”
The key to their success so far has been their revenue model. (Hint: not much advertising.) For each auto-part transaction on the site, which averages about $100, Peters says, Frugal Mechanic collects a fee of 8 to 15 percent. Because the company connects buyers with sellers, Frugal doesn’t have to worry about managing customers’ credit card information, and so forth. On the flip side, Peters says the company also has been pursuing a “white label” service, whereby Frugal hosts another auto website’s subdomain on its server and makes it look like the partner’s website. That helps the company’s partners monetize their traffic, and boosts traffic for these publishers—there are six of them so far, including CarDomain, LeftLaneNews, and CarType.
For the first few months, Peters and Underwood had consulting gigs to help pay the bills. They then connected with Founder’s Co-op in October, and found the fit as snug as a synchromesh transmission. The peer-to-peer investment firm is now helping the entrepreneurs with its considerable startup expertise and extensive network, Peters says. “They’re bringing a lot of contacts, from a LinkedIn standpoint. Especially through the white label side, to engage new car sales.” Helping make connections with a site like AutoTrader, for example, would be ideal. “These are super-smart guys,” says Peters. “We presented to them about two weeks ago. They were very supportive.”
The funding “gives us years and years,” Peters says. The company is still two guys, and Peters says the money should last them more than two years with no growth rate. They are not quite at cashflow break-even yet, but it’s approaching.
I asked Peters for his lessons learned. “Everyone’s been excited by a revenue stream,” he says. “We had not only a revenue strategy, but a distribution strategy. We’re not going to sit on our laurels and wait for Google to index us higher. We have a pretty compelling site that helps other sites make money on their content, and gives them additional content.”
The recession also seems to have worked in Frugal’s favor—at least for now. “People are keeping their cars longer, which means they need parts,” says Peters, who adds that he got a flat tire last weekend (and installed his own spare). “It’s been beneficial for us.” Next up for the company? Branching out to all-terrain vehicles, motorcycles, boats, and other water craft. “And then the huge world of international,” Peters says. There are a lot of parts that need replacing out there.