ACV Auctions Article | Upstate Venture Connect

The Buffalo News: Is ACV Auctions Buffalo’s first tech goliath?

” ‘We have a huge number of familiar brands that were started by upstate people someplace other than upstate,’ said Martin Babinec, the founder and chairman of the regional startup networking group Upstate Venture Connect. Think Airbnb, Priceline, Android and Nvidia – to say nothing of Larry Jacob’s $3 billion multiple sclerosis drug, Avonex.”

By Caitlin Dewey | The Buffalo News

The frosted-glass conference rooms at ACV Auctions no longer fit the startup’s fast-growing sales team, so employees crowd one end of their open office to click through March numbers on a three-foot flat screen.

11,939 cars. 2,375 buyers. 160 new hires in the past three months – roughly half of them in ACV’s downtown Buffalo offices.

The 50-odd salespeople at this afternoon’s meeting applaud, uninvited, after each number is read. They wear sweaters, plaid button-ups, ACV T-shirts; they cluster around long work tables and standing desks.

Some gave up jobs at established firms to work here. Others stayed in Buffalo for ACV after college. Already, the company – whose app lets car dealers buy and sell used cars online – has expanded to 100 markets, hired more than 680 people and raised $147 million in venture capital.

Investors now value the company somewhere north of $600 million and say it’s on track to become Buffalo’s first $1 billion software firm. When the company goes public, which it expects within the next two to three years, it will test the hypothesis that a breakout startup could transform the economy here.

Riding on the answer are hundreds of employees, dozens of investors, and a fragile scaffolding of other young startup firms that have sprung up in ACV’s image. “If ACV can fulfill its potential,” predicts the venture capitalist Jordan Levy, “it will change the landscape of Western New York forever.”

So as sales director Jim Honsberger paces before the flat screen at his biweekly team meeting, he exhorts his employees to think bigger: “It starts here and it only gets better,” he says, like a cross between a cool dad and motivational speaker.

“I don’t know if you think it’s all chaos,” Honsberger says. He’s projecting over the distant clatter of a construction crew once again expanding ACV’s Ellicott Street offices.

“But we have an idea, we have a plan, we know what we want to do. I’m just telling you now, because I like to set expectations: It’s going to continue.”

An ‘unsexy business’

ACV is a tech company only the Rust Belt could produce. This is not, in other words, a cool or sexy product; Silicon Valley has not vied to improve the lives of the people ACV cofounder Joe Neiman calls “crusty old” car dealers. Neiman and his cofounder, Dan Magnuszewski, remember early meetings with coastal investors who grappled with the very concept of a used car. “Doesn’t everyone buy new cars?” they’d ask, bewildered. Or: “Don’t you think all cars will soon drive themselves?”

In reality, car dealerships bought and sold $105 billion of used cars in 2017, according to the National Auto Auction Association. And the wholesale marketplace for those cars is “like a zoo,” Neiman told judges during the finals of the 2015 43North competition.

“I think the interesting thing with Buffalo and what we’re doing is we’re going into unsexy businesses that nobody in Silicon Valley or New York City knows about,” Magnuszewski said. “… [They] don’t understand these boring, ugly, real-world problems.”

For new car dealers, those problems begin the moment a customer trades in their current car. In the past, dealerships resold those vehicles to used car dealers at one of the country’s 300 physical used car auctions. Sometimes the system works and everyone gets what they want. Other times the cars don’t sell – or they do sell and they’re junkers, or they sell at huge losses.

ACV, on the other hand, attempts to move that system online by allowing dealerships in cities from Albany to Austin to list their used cars for sale on a mobile app. (ACV stands for “actual cash value,” or the market value of a car purchased at auction or as a trade-in.) Once an ACV inspector has checked and documented the car, dealerships around the country place bids in 20-minute, real-time, mobile auctions. ACV makes its money by taking a cut of every sale on its platform.

Inside the used car sales office at Northtown Toyota Volkswagen, an entire key box is devoted to cars being sold through ACV Auctions, almost all of them coming in as trade-ins. (Derek Gee/Buffalo News)

Back in the Buffalo offices, the sales team breaks out in raucous applause any time a new customer buys his first car, the milestone flashed on flat-screen TVs placed amid rows of low work tables. Alerts fly from desk to desk via the chat app Slack. One man in a plaid button-up high-fives the woman next to him.

“These are all, like, business development reps,” says Magnuszewski, watching the ruckus from a glass-walled conference room. “So these are first-time buyers, something like that.” After a few moments, the clapping fades out – only to begin again a few minutes later.

‘Suddenly we’re not the underdog’

Like many veterans of Buffalo’s tiny and hard-won tech scene, Magnuszewski remembers a time when no one got this excited about local startups. A computer engineer by training, he graduated from the University at Buffalo in 2005 and took jobs at M&T Bank, Synacor and the tech incubator Z80 Labs while tooling around with a few projects of his own: a social feed for sharing your favorite things, an “Airbnb for sailboats.”

But nothing seemed to take off, and investors looked down on small-time players from Buffalo. In 2008, the total value of investments in upstate New York’s early-stage startups was a paltry $1 million, according to local attorney and angel investor David Colligan. Many of the serious coders Magnuszewski knew from meetups and hackathons left the area.

To economists and development officials, such departures were alarming. Buffalo is no Silicon Valley, of course, but a ream of studies by the likes of the Small Business Administration and the Kauffman Foundation suggest that virtually all net U.S. job growth in recent years has come from small, young, nimble firms. In Pittsburgh, tech startups increased median incomes, stemmed brain drain and attracted hundreds of millions of dollars in outside investment – a rarity in many post-industrial regions.

“We have a huge number of familiar brands that were started by upstate people someplace other than upstate,” said Martin Babinec, the founder and chairman of the regional startup networking group Upstate Venture Connect. Think Airbnb, Priceline, Android and Nvidia – to say nothing of Larry Jacob’s $3 billion multiple sclerosis drug, Avonex.

But Magnuszewski thought ACV might prove the exception: a disruptor in a messy, blue-collar field could thrive upstate. Neiman, a jaded ex-car dealer himself, had dreamt up the idea on grueling twice- and thrice-weekly drives to the auctions around his Albany dealership. Soon after he moved to Buffalo and called Z80 Labs with his idea for ACV, Magnuszewski began working overnights to code the app into being. He also recruited a third cofounder, Jack Greco, who later left the company.

All three men took huge risks in those early months: “This is not for most people,” Neiman said. Between December 2014 and January 2015, Neiman, Greco and Magnuszewski all quit their day jobs to work full-time on the project, and Magnuszewski sold his “dream house” to cover the pay cut.

From left, George Chamoun, who progressed from investor to CEO in 2016, with ACV Auctions founders Joe Neiman and Dan Magnuszewski in the company’s expanding offices at the Innovation Center. “I think the interesting thing with Buffalo and what we’re doing is we’re going into unsexy businesses that nobody in Silicon Valley or New York City knows about,” Magnuszewski said. (Derek Gee/Buffalo News)

Many potential investors said no. New York venture funds questioned the founders’ experience and credentials. The Buffalo Angels, a prominent local investing group, “didn’t think the idea was going to take off,” said Jack McGowan, their executive director.

But Magnuszewski knew a number of other investors from his time in Buffalo’s fledgling tech scene, and one by one, several came on board: George Chamoun, Magnuszewski’s former boss at Synacor; Ashok Subramanian, the cofounder of Liazon; and Z80 Labs, where Magnuszewski worked, which is run by Levy and Ron Schreiber and funded by New York State’s Innovate NY Fund.

By the time Neiman and Magnuszewski appeared on Shea’s stage as 43North finalists in October 2015, ACV had already raised $1 million, sold 650 cars and hired a dozen employees. In video from the event, the two men take turns pitching a panel of judges – each shifting from foot to foot in front of a royal blue curtain, their hands in their front jean pockets, their voices echoing across the auditorium.

To locals who hoped to see more startups here – like PJ Tudisco, then an assistant vice president at M&T Bank – ACV’s founders were becoming something akin to patron saints.

“A lot of us are Buffalo born and raised, and so we always root for the underdog,” said Tudisco, who joined ACV as a senior manager last October. “Then suddenly we’re not [the underdog]. Which is kind of cool.”

‘People are moving for the opportunity to become a part of this’

Today, the ACV offices hum from 9 a.m. to 10 p.m., with plans to stay open an hour later once Honsberger staffs up another sales shift. Sprawled across the third floor of the Beecher Innovation Center, the space – with its long worktables, tall windows and exposed pipes, some festooned with black and orange streamers – embodies the aesthetic one design writer termed “startup minimalist.” No one here sits in an office, not even George Chamoun, who progressed from investor to CEO in 2016. The filing cabinets, chairs and flat-screens have wheels, the better to move them as new hires start. The conference rooms are named for luxury cars.

In the “Maserati” room on a recent Tuesday, product manager Casey Iannone presides over a group of six engineers, brandishing a purple whiteboard marker. A casual, clean-cut Canisius grad in an oatmeal zip-neck sweater and an Apple Watch, Iannone planned to leave Buffalo for Boston before he saw the jobs opening at local startups.

His current job involves coming up with new and better ways to manage ACV’s expanding legions of remote vehicle inspectors. The company hires inspectors in each market it operates, and it tracks everything from the accuracy of their car reports to the routes they take between dealerships. Iannone and his team bat around a few ideas for improving this system before assigning one engineer to look into it.

“But it’s not a priority if you have other stuff to work on,” Iannone tells the engineer as the meeting breaks up.

“There’s always other stuff to work on,” the engineer says. Incidentally, the engineering team moved across the street two weeks later when ACV ran out of space in its current offices.

The ACV Auctions office. (Derek Gee/Buffalo News)

Today, the company is focused on scaling: both growing into new markets across the country and persuading more dealers to adopt their app. By years’ end, Chamoun predicts, ACV will be available in 140 markets, representing most of the United States.

In December, ACV closed a record $93 million funding round led by Bain Capital Ventures and Bessemer Venture Partners, both multibillion-dollar firms. The round marked the largest single investment ever made in a tech company from Western New York, and it sparked something like hysteria among local startup boosters.

Already, tax documents show, Series A investors have seen their investments climb 1,600 percent from two years ago. New York State, and many regular ACV employees, are also current or potential shareholders. Observers say this infusion of sudden wealth could transform Western New York: “It’s the only way we’re fixing this place,” said Patrick Whalen, the former chief operating officer at the Buffalo Niagara Medical Campus. “… Because nobody else is coming here, right? There is no other savior.”

“The early success of ACV Auctions,” echoed Somak Chattopadhyay, the managing partner of ACV investor Armory Square Ventures, “proves our thesis that hands-on venture capital investments in Buffalo and other parts of Upstate New York can serve as a model for other startups and drive economic growth.”

To date, the company has created 300 jobs in Buffalo, with starting salaries ranging from $30,000 to the low six figures. It has recruited executives and engineers from eBay, Amazon, Intuit, Compass, Boeing and Lockheed Martin.

ACV employees swamp Seabar during business lunches and Ulrich’s Tavern at happy hour.

“We’re actually keeping people here and we’re moving people back,” said Joe Peacock, ACV’s vice president of engineering, who left Facebook for ACV when its valuation rose high enough to promise him a hefty payoff when the company sells. “People are moving for the opportunity to become a part of this.”

Changing perceptions

There are skeptics, to be sure – though few want to criticize Buffalo’s first true tech darling or its benefactor, 43North, on the record. Among other issues, they say, ACV still faces steep competition from established industry players, like Manheim and Adesa, who own most of the physical auction industry in the United States and have ventured into online auctions as well.

Some observers also look at ACV and see a company that never needed the state help it received. They complain that 43North and its emphasis on high-growth companies have diverted resources from less privileged local entrepreneurs who lack the capital and connections that come easily to a firm like ACV.

According to ACV and Empire State Development, the company received a combined $1.9 million in state investment via 43North and the Innovate NY fund. Thanks to an incentive program called START-UP NY, many of its employees do not pay personal state income taxes – a benefit that in 2017 totaled $182,266.

“If people want to go out on their own and be entrepreneurs, then God bless them,” said the Rev. Kirk Laubenstein, the executive director of the Coalition for Economic Justice. “I just don’t know if it’s necessary for the government to be funding ventures that just puts more money into rich people’s pockets.”

But Chamoun, ACV’s CEO, bristles at the suggestion that ACV has done anything but boost the region. The son of Lebanese immigrants, Chamoun abandoned his plans to go to law school in order to help put three younger siblings through college. After founding Synacor, a technology services firm, from his UB dorm room, Chamoun made enough money to fulfill his father’s lifelong dream of owning a Tim Hortons.

Titles specialist John Stephenson works in the title department at the ACV Auctions office in the Innovation Center at the Buffalo Niagara Medical Campus. (Derek Gee/Buffalo News)

ACV’s numbers speak for themselves, Chamoun said: At the company’s current valuation, New York State’s combined 4.9 percent stake in ACV already tops $29.4 million – more than the entire five-year budget for the 43North program.

ACV has less measurable local impacts, too, Chamoun said, from the rooms it books each week at downtown hotels to the interns it hires out of UB’s computer science department. Some of its executives have become regulars at local hackathons and tech meetups, encouraging other would-be entrepreneurs to quit their jobs and pitch their businesses.

“I want to enable the next Jack or Joe or Dan to make it,” said Greco, ACV’s third co-founder, who now serves as executive director of the Buffalo chapter of Techstars. “We broke through, but there needs to be a hand down to grab the next person.”

Who that “next person” may be, of course, is anybody’s guess; in startup land, conventional wisdom holds that at least five of every 10 investments fail. Upstate New York attracted $284 million in venture capital investment in 2018, according to the global accounting firm PwC, up 350 percent from two years before. While ACV accounted for almost half of that, other parts of Buffalo’s tech sector are expanding: M&T Bank announced plans in February to hire 1,000 new technology workers, and Armory Square Ventures, an early ACV backer, recently promised to redouble its investments in upstate New York.

Investors also say they’re bullish on young Buffalo companies like CleanFiber and PostProcess Technologies. Magnuszewski, the ACV co-founder, both advises and invests in the local startups Material Exchange and Drone Energy. That next generation of entrepreneurs, he said, knows it has options in Buffalo. At a recent meeting of the WNY Venture Capital Association, he nodded encouragement as Material Exchange’s young CEO pitched an eager crowd of lawyers, accountants and investors.

“It’s about changing people’s perception of Buffalo,” Magnuszewski said. “I hope people look at ACV and say, ‘Oh – Buffalo can build the next generation of great businesses.’ ”

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