Zipcar
Upon receiving first round financing of $1.3 million, Zipcar is, as CEO Robin Chase describes, “poised for action”. The measures that the company intends to take moving forward will likely determine its future viability as the dominant player in the relatively untapped market of car sharing in North America. Currently, Chase is testing the concept in the single market of Boston, and has ambitious goals to break into other markets along the East and Mid-coast by the end of next year. Having received preliminary positive customer responses, Zipcar has potential to establish a secure market foothold and revenue traction; however, the start-up company is not without problems, namely the short lead time on their competitive edge, the lack of a strong, committed and experienced management team, and the absence of a focus on building-up assets. These are significant issues to be addressed before any attempts should be made to raise second round funding for expansion capital.
THE MARKET FOR CAR SHARING
Before discussing Zipcar’s problematic issues, a brief examination of the market in which the company is operating in is important to put the situation in perspective. The concept of organized car sharing originated in Switzerland in 1987, and has since gained popularity in neighboring regions. Consequently, there is an established and functioning market in Europe, but no such market exists in North America. Whether this is an untapped market potential waiting to be exploited or that there is no market because there simply is no demand for it, remains to be determined.
Something of note to be considered is the niche quality of the market – customers will generally be college-educated urbanites who are employed, catch public transport to work, and are forward-thinking enough to not feel the need to have private ownership of a car. The implications of this is that there will likely be a “cap” on the expansion possibility of the customer base, but revenues are likely to remain stable as it is based on a customer’s lifestyle (i.e. a car will always be needed to go grocery shopping). Keeping the uncertain nature of the market in mind, Zipcar will need to act quickly to capture a majority stake before competitors are attracted to the steady and generally certain income, and there should be a strong focus on marketing, customer retention and innovation to maintain that stake in future.
THE BOSTON INITIATIVE
Zipcar has secured series A financing of $1.3 million. How these funds are allocated to initiate the next steps of building the company is the all-important decision that Chase must make. As mentioned, Chase intends to use $1 million to develop the Boston market and $300,000 to reduce debt. However, unless the debt is going to mature within the next 6 to 12 months, it is a secondary concern during this crucial time and a different expenditure structure should be employed to obtain maximum use from the capital. Between $850,000 and $900,000 should be allocated to developing the Boston market, which entails expanding the membership base and geographical reach, employing staff for local operational support, increasing Zipcar’s car fleet, and developing an aggressive marketing strategy. Given the niche market, marketing tactics such as advertising in media and on public transport is fundamental to differentiating the company from potential competition. Furthermore, taking advantage of the “freshness” of the business concept in North America, establishing a dominant identity and presence in which Zipcar’s target customers can identify strongly with now will be an additional barrier to competition in the future. Also of note is the attitude held by Chase that “they wouldn’t be our type of members”. This immediately limits Zipcar’s scope of reach by “pigeonholing” the customer base and should be changed going forward.
This is also the time to address the issues of competitive edge and management team, as the ultimate goal that Chase should have in mind during this crucial period is to obtain second round funding opportunities. Zipcar’s “edge” is garnered from two factors: the novel idea of car sharing and the software enabling wireless transfer of information and control. It is the latter, however, that will determine the company’s long-term ability to remain competitive. Currently, the software that Zipcar is using is certainly innovative but simply not complex enough to create several years of lead. Whilst obtaining a patent on the technology will usually protect it for 20 years, there is no guarantee that this will deter competitors from entering the market if prospects appear to be lucrative; nor will it impede them, particularly given the potential competitors of car rental agencies and car manufacturers, both of whom have the resources to develop a competing, if not more sophisticated, technology. Given these concerns, Chase will want to consider allocating $300,000 removing any technology risk from the current “wave” and driving a third wave that focuses on innovation and creation of unique attributes that can be associated specifically with Zipcar cars.
In terms of the management team, it is clear that Robin Chase is “running the show” single-handedly, having committed to the venture on a full-time basis. However, her partner Antje Danielson has maintained her Harvard commitments and is due to give birth in the coming month. If Chase intends to seek second round financing, having a committed and cohesive leadership team will become imperative if she intends to make a positive impression on venture capitalists. Thus, it is strongly recommended that there is a restructuring of management. One suggestion would be to bring MIT engineer, Paul Covell, on board as he has the strong technical background and engineering vision appreciated by VCs. In addition, $150,000 to $100,000 of funds should be directed towards recruiting a new COO (more aligned with the Zipcar values) or industry consultant that could bring to the table expertise and credibility, and add to the overall quality of the management team.
THE NATIONAL ROLLOUT PROJECT
Chase is particularly eager to launch Zipcar’s strategy for expansion in the future, which involves penetrating markets in the East Coast and possibly Midwest within the next year or two. This will be the fundable event that justifies the series B round of funds. In preparation, Chase has generated a projection of the income statement. In examining the document, it becomes apparent that vehicle leases become a significantly large operating expense, and hence, drain on revenue. This stems from an absence of focus on building-up Zipcar’s assets, namely its car fleet, in the company’s business model.
Whilst this is a good policy to reduce the use of capital and turn cash positive quickly in the early years, as Zipcar establishes itself in the market, the company will need to look into building up an asset base. This can be particularly helpful when raising second or third round financing as it is possible that the firm will become more attractive to venture capitalists if there are more assets as collateral. Of course, Chase will need to weigh the cost of acquisition and maintenance of buying cars to the costs of leasing; however, there is likely a profitable balance of maintaining a fleet of cars that are owned and leased, and it is highly encouraged that Zipcar explores this avenue.
CONCLUSION
Zipcar has reached a crucial point in its business lifecycle. Having received a first round of financing, the decisions and resulting actions will determine the company’s ability to grow the business and establish itself as the leading innovator of the car sharing industry. From the preliminary evidence, Zipcar has potential; however, to fully exploit the growth opportunities that are available, Robin Chase will need to drive change in the company’s competitive edge, management structure, and business policy.