Would You Buy a Used Car Online?

NEW YORK (TheStreet) -- Chances are you don't have the best associations with a used-car salesman. Experiences at dealerships tend to be strenuous, time-consuming, taxing, and overall unpleasant. But when you're looking for a used car, what else are you going to do? 

Two startups are attempting to create an alternative to the traditional used-car dealership by taking the entire process online. The idea is that you can order a used car from your computer or phone and have it delivered to you. The challenge, though, is convincing consumers that they can trust a startup to provide them with a solid deal without testing out the car ahead of time.

New York-based Vroom and Phoenix, Ariz.-based Carvana aren't fazed by the challenge. They're willing to bet they can offer a superior enough experience online that consumers won't mind purchasing a car sight unseen. Just a few years ago someone might have laughed when you said consumers would purchase an engagement ring online, but online jewelry site Blue Nile (NILE) did $473.5 million in revenue in 2014, up 42% from 2011. Vroom and Carvana are betting that used cars are up next.

"There's still that stigma of people would rather get a root canal than buy a used car," said Allon Bloch, CEO of Vroom, who is on track to do $300 million in sales this year and just announced a $54 million Series A round of funding from investors including former Nataional Football League player John Elway and former CEO of Autonation (AN) and Blockbuster Steve Berrard. "People love cars but they hate buying cars. We want to make this to a fun experience. There's no reason why it shouldn't be a fun experience."

Both Vroom and Carvana, who is on track to bring in $120 million in sales this year, realized that digitizing the experience was the way to improve it. Through the startups, consumers can order a used car on their phone, and the car will be delivered to their house. If the consumer is unhappy with the car, she can return the car at no cost within seven days.

There are some differences between the two startups -- Vroom offers competitive financing options from 30 different lenders and doesn't charge for delivery anywhere in the continental U.S. while Carvana only works with one financing lender and charges certain fees depending on how far away the location of the delivery is, though it is reportedly raising $300 million to expand free delivery to more locations. But at the end of the day, both are working towards the same goal: create a more pleasant experience for consumers who are looking to buy a used car.

The U.S. used-car market is valued at around $107 billion, according to IBISWorld, and, lucky for Vroom and Carvana, that market is incredibly fragmented. Even CarMax (KMX), which sells used cars from physical dealerships and is arguably the largest player in the space, only holds about 2% of the market, according to SunTrust analyst Robert Higginbotham.

That means that there is certainly room for these startups to break in and gain some valuable market share. "There's a lot of share to grab for unique value propositions," Higginbotham said.

However, it certainly won't be easy competing with the incumbents.

While CarMax, for example, has around 47,000 different cars in stock, Vroom and Carvana have about 1,000 each. Plus, there will always be the traditional folks who simply want to touch and feel the car before committing, especially since it's used. "That'll be a difficult hurdle," Higginbotham said.

And it certainly doesn't seem like CarMax and the like are starting to panic just yet. When asked about competition from Vroom and Carvana, CarMax EVP of Stores Cliff Wood declined to specify if and how the company was responding to competition and simply responded: "Without a doubt, CarMax is the best way to buy a used car...We will continue to lead the industry by providing what customers want: a worry-free car-buying experience."

Nonetheless, Vroom and Carvana remain confident there is a demand for their services.

"People are getting more and more comfortable buying large-ticket items on the Internet," said Steven Berrard, the Vroom investor and former Autonation CEO. "The opportunities are unlimited."

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