January 17, 2011

ZipCard (and Funding a Startup)

Today’s Class:
- Sources of funds
- Compelling valuation
- Compelling idea – value innovation

* getting the compelling idea is the hardest.

Sources of Funds:

- If we’re logical investors, we would want a part of the company and usually, a big
chunk of the company
- VCs in North America are virtually non-existent in the market today for startups
o It is not that there isn’t money but rather because everyone is scared to death
about losing money.
o Therefore, money is going more towards buying and selling established
companies or turning around distressed companies. However, they will not
for a chance invest in a new idea.
- Venture capitals, IPO and bonds are all very difficult
- Most companies turn to financial institutions (assed based loans)
o Rarely, there are also loans from banks that are backed by the government
- The primary motivation of a bank is to avoid risk!
o That’s why they ask for collateral.
- IS YOUR LIFE MORE GEARED TOWARDS AVOIDING PAIN OR GAINING
PLEASURE when it comes to your money?  refer to this on reflection paper!

Valuation
- Even as a big company, should still go after high growth!
o Look at Apple, Steve Jobs would not be happy with a 4-5% return on capital
o All comes down to timing and execution.
o If you’re a retailer, return on capital is generally low. Instead on focusing on
growth through sales, look to improve your return on capital!
o If you’re in technology, software, or CPG, when the return on capital is
already high, focus on revenue growth!
o If you’re suffering problems with returns (profitability issues), fix those first
before moving onto improve sales.
o The “value Firm based on Revenue Growth and ROI” chart is the most
important!
- There is a extreme sense of nervousness around about going big and actually doing it
– especially the entrepreneurs since they have so little to lose
o Get past the gut instincts (because they are often wrong) and learn the
wisdom from others
o Forget about acquisitions as a small company to grow
o The return on capital for a small company is extremely small so unless you
have a HUGE HIT product to get that high ROI, then don’t even bother
 o “the Added value to firm for every dollar spent” graph is most important!

Value Innovation
- Conditionals of 1997 are very familiar to nowadays
o Downsizing, intense competition, tough to grow profitabily
- Two strategic logics
o Conventional
o Value innovation
- Comparison by the numbers
o Conventional: 86% launches = 39% profits
o Value Innovation: 14% launches = 2% profits

* when you analyze a company, state the facts from the case to help dimensionalize their
performance.

- In all examples, value innovation was created by trying to create a customer

experience.

Zipcar
Is the senior team going after the highest potential bucket of cash (or is there an alternate
source with high potential that they are ignoring)? Now focus on the VC meeting that Robin
Chase is preparing for. This is her one crack at these dollars. She needs to find 2 or 3
powerful arguments to secure the funds. Use the readings and your analysis of this case to
find those arguments and craft her elevator pitch.

- What investors want to see

o Compelling business idea (value innovation)
o Compelling financials and valuation

Introduction
- Who is the “star” of the case?
- What’s her key focus at the time of the case?

Analysis
- Where did the idea of Zipcar come from? Sweden
- What is the size potential of the firm?
o Current customers at 1000 in Boston
o There are a total of 20 cities she is considering to expand so a total potential
of 20000 customers
o Currently, making $1600 per customer. At 1000 customers, $1.6 million
revenues annually.
o You’re asking $1.3 million for revenue (NOT PROFIT) of $1.6 million.
Reaslistic?!?!
- What stage of growth is Zipcar at?
o Early stage – creativity stage ( stage 1 or 2)
o Already used savings and angel money, now going after VCs for money
- How is Zipcar doing?
 o Movies raised
o Income statement: not making money
 Revenue = $22000/month
 Costs = $59000/month
o Assets
o Number of members
o Technology
o People : uncommitted partner; inexperienced founders
- Fundraising
o Why has it been so tough?
o Currently, she is losing money! She is asking for another round of funding to
cover her operating losses. Investors will be reluctant to fund Zipcar.
- How should you pitch the investors?
o What is the value innovation in the company?
o How do you solve the cash burn?
 Pricing Structure: Increase revenue by changing the pricing
structure to reflect a customer that uses the cars less often, but for
longer periods of time. Included would be an increase in the daily
rental rate. In addition, the number of free miles should be
reduced. As shown in Figure 2, a $44 price ceiling with 125
included free miles creates little incentive for the customer to use
the car for only small increments of time – it is much cheaper for
the customer (per hour) to borrow the car for 24 hours.
● Other revenue streams: Use the cars as moving billboards as quick
revenue streams. Eg. put Macy’s logos and ads on the cars. Multiple
revenue streams are an important part of setting up a start up.
They help to distribute risk more evenly, thus creating a more
stable operation.
o How do you value the firm?

Zipcar and Value Innovation

High Taxi Own Car

COST Low Public Transit
Low High
FREEDOM

Issue Identification
As a relatively new start-up, Zipcar is still going through a period of unanticipated obstacles
and continuous learning.

- Continuous refinement of business model as original assumptions and calculations all

based on European market
- Both partners do not have extensive background in managing an entrepreneurial
venture nor a complex organization. They also do not have experience in automotive
 or leasing industry. Though president trial was a fail, still need to bring someone with
credibility into the management team to gain more financing.
o Replace Danielson she does not have the time nor experience to add value to
the company. Chase should consider buying out Danielson’s 50% of the
company shares.
- Used up her current $375000 in loans and is now seeking an additional $1.3million to
continue to grow the business.
- They have a high potential to create value innovation because they are offering a
completely new product/service to a virtually untapped market. Superior and more
unique service compared to what customers currently have to accept – rental cars
(avis, hertz), public transportation, or high parking fees.
o Where they went wrong was that they took their industries’ conditions in
Europe as a given and set strategy accordingly. To gain that quantum leap in
value, Chase should have looked for blockbuster ideas that
Financing the Plan
Eight months after first developing the idea for Zipcar, Chase began to rethink her
business model. Through additional research, she learned that she would not be able to
obtain free parking. She also learned that customers would not be willing to pay a high
annual fee, but would be willing to pay more per hour. Last, she found that her vehicle
costs would be higher than originally anticipated. Although Zipcar received multiple
loans in the beginning, they struggled to find an additional $1.3 M in financing.
Lessons Learned:
- While Zipcar offered a service that was previously almost non-existent in the
U.S., the lack of focus on customer feedback prevented them from fully
understanding the public perception and therefore, the customer value of such a
service.

Zipcar Technology
In order to fully implement Zipcar’s vision and goals, its founders developed new
technologies, which they intended to patent. Although this advanced system would have
allowed the Zipcar model to integrate more seamlessly, the founders started the business
without the initial technology in place.
- Technology that is not delivered on time does not help to accomplish the
company’s goals. The patent pending technology is what allows Zipcar to operate
in a customer-centric way, while keeping costs low.
- Although there is a desire to begin a new venture as quickly as possible, there are
also many rewards for the company that does their homework. Customers would
have had an overall more positive first impression of Zipcar if they had waited to
launch until their technology was more solidly in place.

Cost Drivers
In order to create a convenient and easy to use service, Chase included gas, parking,
insurance, and the car lease in Zipcar’s rental fee. These costs are mainly all variable and
all considered Zipcar’s cost drivers. As Chase developed the business model, she often
had to adjust overall costs as she understood more about the cost drivers.
 ● Cost drivers are an important part of the overall business model. It is very
important that cost drivers are fully understood and that options are explored to
help keep them as low as possible.

The Founder Effect

When a new venture is set in motion, the founding members have high expectations;
however these often come with compromises. For example, the two founders of Zipcar
declined to take a salary in its early years, but if these compromises are not made, the
company would suffer. Although Danielson did come up with a strong business idea, she
was not always prepared to make sacrifices in her work or personal life.
● In order to be successful navigators of a new business, each founder must agree to
set the business as a top priority. As commitments within the business grow, new
responsibilities may need to be defined. If not all parties can agree to meet their
portion of the responsibilities, a renegotiation process must take place, so that
everyone is in agreement and the best interest of the company are kept in mind.

Current Venture Status

Working virtually by herself, Chase has made large strides to push the business forward.
She has almost single handedly developed a business model, secured funding, and taken
care of daily operations. With this in mind, Chase’s experience alone is not enough to
bring this business to its full potential. To continue to expand the business, Chase should
consider the following analysis.

Operations and the Business Model

The September actual operating data paints a detailed picture of the validity of the
business model. Overall, the September operations have exceeded expectations, but there
are multiple factors to consider that are described below. In addition, Figure 1 has been
used to project Year 1’s operating data based on September’s actual operating data.
● There has been less attrition than originally projected. The original attrition
estimate described in May was 15%, but September’s actual data showed this
number to be less than 3%.
● The original estimate of the total number of members in Year 1 was 440. The
new estimate (based on September data) shows that the actual number of
members could have the potential to exceed 2,500. This would result in a
membership rate of 650% of what was originally anticipated.
● The total number of trips that each member is taking per month is approximately
1/3 of that originally estimated. However, each individual trip is much longer in
both time and miles. The number of miles per trip was estimated at 22, but the
actual number of miles per trip was approximately 49. The total number of hours
per trip was estimated at 4, but the actual number of hours was 9.6.

It is clear that although the business model did not fully anticipate every outcome that
occurred, the venture was still very successful. All results exceeded the expectations
originally set fourth in the initial estimates.

Suggested Actions
As a result of the September operating results described above, Chase has many
important factors to consider in order to drive Zipcar into first place. Each must be
carefully weighed, to understand which will most fully support the goals and the future of
Zipcar.
Critical success factors for Zipcar include:
● Acquisition and retention of knowledgeable leadership and staff
● Implementation of the developed Zipcar technology
● Ability to appeal to a financially savvy and environmentally conscious customer

Options that Zipcar should consider in order to achieve these success factors include:
● Advisory Board: Create an increased knowledge base through the creation and
development of an advisory board.
● Technology: Maximize the business by deploying Zipcar’s patent pending
technology in its cars. This will increase communication and customer
satisfaction. It will also keep the cost of operating Zipcar low.
● Cost Drivers: Understand Zipcar’s costs through the exploration of cost drivers
such as gas, insurance, and parking. Then, research ways to reduce these cost
drivers.
● Partnerships: Lower Zipcar’s cost drivers and increase their member base by
utilizing partnerships. One example includes a partnership with specific parking
companies in order to lower the overall cost of parking. Another partnership
example is to market toward universities, environmentally friendly groups, and
young professional groups in order to increase overall membership and
awareness.
● Customer Feedback: Utilize customer feedback to not only retain customers,
but to continue to develop a strong brand and a strong business.

Of all of these opportunities, the most important one for Zipcar to focus its energy on is
the development of technology. In order to continue to grow the business at the rapid
rate reflected in September, the technology piece must be implemented in the cars ASAP.
In contrast, if Zipcar continues to use the hand written honors system that they launched
with in September, they will have a higher rate of customer dissatisfaction, a decrease in
company communications, and therefore an overall lower level of success.

Key Opportunity
Chase’s one key opportunity to ensure that Zipcar is a successful venture is to replace
her co-founder. The company not only needs someone who is committed to the
organization and will provide leadership and guidance, but also someone with more
practical experience. Because Danielson developed the original idea for Zipcar, Chase
should compensate her by buying out Danielson’s shares in the company. In her place,
Chase should hire an experienced professional whose strengths complement those of
Chase. For example, ideally she should consider an individual with superior leadership
skills who has prior experience in automobile leasing and start ups. In order to attract
someone of this caliber, Chase will need to offer them revenue sharing as part of their
overall compensation. In addition, Chase should be up front about her concerns such as
keeping costs low and not wasting money on high priced items or meals. This will help
Chase to not only avoid mistakes of the past, but to accelerate her to the finish line.

What Have We Learned?

- Value innovation
o Growth power = shift from incremental/competitor focus to real
innovation rooted in customers
- Valuation
o Valuation = cash flows = revenues x return on invested capital
o Higher return on invested capital always = higher valuation higher revenue
growth often, but not always, increase valuation
o Different growth strategies = different valuation increases
- Raising funds
o Different sources for different stages of growth
o Constant: cash from suppliers, customers, and by selling part of the firm
o Great pitch = value innovation + compelling financials and valuation