January 17, 2011ZipCard (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 startupso 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 capitalo 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 loseo Get past the gut instincts (because they are often wrong) and learn the

wisdom from otherso Forget about acquisitions as a small company to growo 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 Conventionalo Value innovation

- Comparison by the numberso Conventional: 86% launches = 39% profitso 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.

ZipcarIs 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 seeo 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 Bostono 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 raisedo Income statement: not making money

Revenue = $22000/month Costs = $59000/month

o Assetso Number of memberso Technologyo People : uncommitted partner; inexperienced founders

- Fundraisingo 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

COST

High Taxi Own CarLow Public Transit

Low HighFREEDOM

Issue IdentificationAs 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 PlanEight 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 TechnologyIn 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 DriversIn 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 EffectWhen 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 StatusWorking 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 ModelThe 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

- Valuationo Valuation = cash flows = revenues x return on invested capitalo Higher return on invested capital always = higher valuation higher revenue

growth often, but not always, increase valuationo Different growth strategies = different valuation increases

- Raising fundso Different sources for different stages of growth o Constant: cash from suppliers, customers, and by selling part of the firmo Great pitch = value innovation + compelling financials and valuation