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Thursday, January 3, 2013

Zipcar: it's hard to create a stand-alone business

Zipcar sold itself Wednesday to Avis for a half a billion dollars. While that's a hefty premium over final close last week, Dennis Berman of the Wall Street Journal notes that it’s only about half of what the company was worth two years ago at its IPO. The company has $55 million in cumulative losses, but was unable to cost-effectively acquire new customers.

With its greater scale, scope and buying power, Avis hopes to succeed where Zipcar failed. Avis-Budget-Zipcar will be competing with the two other major rental car conglomerates, Hertz-Dollar-Thrifty and Enterprise-National-Alamo-Vanguard-Tilden.

In other words, while Zipcar invented a new business model, it didn’t invent a new industry. It was a failure for public investors and as a stand-alone company. Even several of its venture investors — whether seeking a bigger pop or perhaps having some shred of ethics — hung in with the public investors, hoping for a turnaround that never came.

I think this is symptomatic of a larger problem, which is the difficulty in creating new stand-alone companies that will last. Facebook (and Amazon and Google) will survive, but will LinkedIn and Twitter and Yahoo?

Dan Henninger in the WSJ this morning suggests that the hostile business climate of the past four years is contributing to the problem, but my sense is that it’s hurting low margin businesses — ones that have little margin to spare when faced with higher taxes or regulation. I suspect that the high margin home-run companies work whether the top personal and Subchapter S marginal tax rate is 35% of 2012, 41% in 2013 or 54% now in California).

Instead, I think the issue is whether firms can create new industries, like personal computers, networking, e-commerce, Internet services, social media, biotechnology and the like. The PC and Internet services seemed to catch the incumbents sleeping, and the nature of the e-commerce transformation is overwhelming the incumbent industry more quickly than it could have imagined.

However, Google is meeting the social media challenge more quickly and vigorously than most incumbents. Meanwhile, the long lead times (and huge risks and capital requirements) of the pharma industry have made it difficult for new biotechnology companies to enter without competing with existing biotech or finding Big Pharma is now demanding a high price for access to its channel.

Overall, exit by acquisition rather than IPO is the norm — one more data point that the go-go 1990s were an aberration. Even for companies that do IPO, many of them (like Zipcar) will find their real growth in the bowels of a large, bureaucratic, cash-flow positive enterprise.