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Online car sales network Zag.com Inc. has raised $13.5 million in a fourth round of venture capital led by Capricorn Management LLC to expand a network of dealers and affinity groups that link member buyers with sellers in a system that offers consumers extensive information and transparent pricing. Palo Alto, Calif.-based Capricorn put $7 million into the deal and was joined by previous investors GRP Partners of Los Angeles, Capital One Financial Corp. of McLean, Va., Anthem Venture Partners of Los Angeles and Arcturus Capital of Pasadena, Calif., to bring total funding in the two-year-old company to $67 million. The deal is expected to take Santa Monica, Calif.-based Zag to profitability in mid-2008 and allow it to build out technology and services to offer consumers information on car features, inventory and pricing as well as arrange financing online. Zag CEO Scott Painter formed the company after founding online car sales Web site CarsDirect.com to extend the vast amount of information now available to consumers on the Web to transparent pricing. He said the Internet has completely changed the car sales industry in terms of advertising and consumer education, but that the process of buying cars has not yet evolved, and he formed Zag to try to change that. "While the rise of paid search has increased consumer education and is a great business model, it hasn't improved the car buying experience," Painter said. "There are 43,000 car dealerships in the country that spend $8 billion on advertising, about half of that coming out of traditional media and going online, but it hasn't fundamentally changed the process of purchasing a car." Painter said consumers now typically walk into dealerships knowing what cars should cost and understanding what features they are looking for, but dealers have not changed the way they do business. Zag works with dealers that are facing up to the fact that pricing has become more transparent and are willing to trade off some profit in favor of easing the process of selling cars. The company links dealers to consumers who are garnered from Zag's partnerships with affinity groups such as automobile clubs and commercial sponsors including Capitol One. As the largest direct car lender in the country, Capitol One invested in Zag and formed a partnership to direct its customers to sellers without fear of losing them to dealer financing. He said that after approving consumers for financing, Capitol One has typically lost about 60% of consumers to dealer-financed loans, even though most are at less favorable terms. Painter said the company will seek additional lender partners to join its network as well as insurers and other trusted brand partners. He said that dealers who partner with the company are seeking to engineer sales transactions that require less than 30 minutes of their time. Painter said in fundraising for this round he was looking for a partner with innovative retailing background and was drawn to Capricorn, which was co-founded by former Ebay president Jeff Skoll. Capricorn's other co-founder, Ion Yadigaroglu, said he was drawn to the investment based on Zag's unique extension of Web capabilities to the Internet platform. "We get excited about companies that improve online and retail experiences for consumers while making it more efficient for all involved," Yadigaroglu said. "Zag has a unique solution that we believe will change how cars are bought and sold." Painter said the new funding will likely be the company's final private round, though he said it is possible it would raise additional money if it finds attractive acquisition properties. He said the company was unlikely to acquire other online sellers but would consider purchases to acquire new technology. Zag did not use an outside financial adviser in putting the round together and had legal work on closing the deal from Marty Corman and Troy Foster of Wilson Sonsini Goodrich & Rosati PC in Palo Alto.  Deal Video
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