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UMKC Zipcar Debt Financing Equity Financing & Bootstrapping Case Study

University of Missouri Kansas City

Question Description

I’m working on a Business exercise and need support.

Answer questions below.

1.How did the company utilize debt financing? -4pts

   1.Identify the instances of debt financing in the case and the amount that was borrowed.

   2.What stage was the business at each of these instances?

   3.Why was debt utilized in this instance? What factors made this a good or bad choice?

2.How did the company utilize equity financing? -4pts

  1.Identify the instances of equity financing in the case and the amount that was borrowed.

  2.What stage was the business at each of these instances?

  3.Why was equity utilized in this instance? What factors made this a good or bad choice?

3.How did the company utilize bootstrapping? -4pts

  1.Identify the instances of bootstrapping.

  2.What stage was the business at each of these instances?

  3.Why was bootstrapping utilized in this instance? What factors made this a good or bad choice?

4.In your opinion, how well did Zipcar utilize the different funding sources? Did they use each source appropriately? - 4pts

5.Based on the information you have read by the end of this case, is Zipcar a good investment? Is Zipcar making a good decision to seek the funding they are seeking? - 4pts

*Clarification on question 5: If you were an investor at the Springboard 2000 New England venture forum, would you be interested in participating in a $1.3MM funding round for Zipcar? And then, from the Zipcar perspective, do you think they should be seeking $1.3MM and do you think this is the right type of funding to be seeking (equity financing from a venture capital forum)? Explain your answers and provide supporting facts.

The attachemnt fave the Zipcar case

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rP os t 9-803-096 REV: MAY 9, 2005 MYRA HART MICHAEL J. ROBERTS JULIA D. STEVENS op yo Zipcar: Refining the Business Model It was October 14, 2000, and Robin Chase was leaving yet another meeting with potential providers of capital for her fledgling venture, Zipcar. Chase was CEO and cofounder of the company, which she and Antje Danielson had started some 10 months before. The idea behind Zipcar—a sophisticated form of car sharing—was simple, yet potentially revolutionary. Chase and Danielson had conducted some initial research during late 1999, and by the end of that year, the two had developed a business plan. They had incorporated in January 2000 and raised their first $50,000 from one angel investor. tC By June of 2000, the two entrepreneurs had leased 12 cars and were ready to open for business in Boston. By October, the fledgling company had 19 vehicles, nearly 250 members, and the founders had raised—and spent—an additional $325,000 to fund the early stages of operations. Yet, even with this demonstration of viability, Chase and Danielson had not succeeded in raising the equity capital they needed to really grow Zipcar. No Beginning in early 2000, Chase had made a series of presentations to potential investors in which she sought $1 million in capital to prove the business model in Boston and, eventually, to set the stage for expanding the business to other U.S. cities. Potential investors seemed intrigued and enthusiastic about the Zipcar idea. While Chase hoped to close on this first round of financing in the fall of 2000, she continued to look for funding alternatives because the money was not yet in the bank. At the end of October 2000, she and Danielson would have the opportunity to make their pitch at Springboard 2000 New England, a venture forum for women-led enterprises. Chase commented: “I am anxious to raise this funding and focus my energies on really trying to grow Zipcar. I want to put our best foot forward with the VCs who will be at Springboard. I need to review our presentation and make sure we’re making the strongest argument we can on why this business deserves funding.” Background Do In September 1999, Chase’s friend, Danielson, returned from a trip to Germany with an idea for a new start-up. While in Berlin, Danielson had been impressed with a car-sharing concept that seemed to be catching on across Europe. Under this new concept, car-sharing companies provided short- ________________________________________________________________________________________________________________ Professor of Management Practice Myra Hart, Senior Lecturer Michael J. Roberts, and Research Associate Julia D. Stevens prepared this case. This case draws upon portions of an earlier case, “Zipcar,” HBS No. 802-085 (Boston: Harvard Business School Publishing, 2002), written by Professor Myra Hart and Research Associate Wendy Carter. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use only by Phillip Gonsher until October 2012. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860. Zipcar: Refining the Business Model rP os t 803-096 term, on-demand use of private cars conveniently located and easily accessible to service subscribers. She believed that such a business could be equally successful in urban areas in the United States. Danielson, a Ph.D. geochemist who supervised undergraduate energy policy research at Harvard, saw both the environmental and convenience implications of the service. She turned to Chase, who had an MBA from MIT and substantial business experience, to partner with her in the start-up. The Founders op yo Chase agreed that car sharing provided an exciting opportunity, and she was confident that they could build the technology infrastructure to make it work. She committed to the project and began developing the business plan. When she met with Glenn Urban, the former dean and a mentor from MIT’s Sloan School of Management, in December 1999, he not only encouraged her to go ahead but also urged her to move quickly. He noted, “This idea is much bigger than you are imagining. You have to do this at twice the speed and think twice as big.” Chase majored in English, French, and philosophy at Wellesley College. While a student, she also held several positions at the college newspaper and was president of the philosophy club. After graduating cum laude in 1980, she joined the Boston-based health care consulting firm John Snow Inc. tC In 1986, she received her MBA in applied economics and finance from MIT’s Sloan School of Management. She then joined a private school as director of finance and operations. Over the next 13 years, Chase continued her professional career, taking some time off after the birth of each of her three children and structuring her work schedule to accommodate her desire to raise a family. Chase returned to work for John Snow during some of this time, ultimately serving as interim director of the international division. In 1995, Chase left to become managing editor of the 110-year old scientific journal Public Health Reports. Throughout that time, she often thought about the possibility of starting her own business. No In 1998, Chase and her husband came to the conclusion that the pressure of maintaining two highpowered careers and caring for three children under age 10 was increasingly difficult to manage. She retired from her position at Public Health Reports to spend more time with the children. During the next 12 months, Chase devoted herself to organizing her household and becoming more involved with her children’s school activities. As a result, she made many new friends—most of them the parents of her children’s playmates. Danielson was among these. Do Danielson worked for the University Committee on the Environment at Harvard University, directing interdisciplinary research on energy consumption and greenhouse gases. Prior to receiving her Ph.D. from the Freie Universitat Berlin, she had held several jobs, including two years in car sales and three years as a research assistant at the Hahn-Meitner Institute working with semiconductors. When she completed her Ph.D., she went to Rand Afrikaans University in Johannesburg, then on to Harvard in 1991 on a NATO research fellowship. Danielson’s husband was finishing his Ph.D. at MIT, and their five-year-old son was enrolled in the same kindergarten that Chase’s daughter attended. Chase did not hesitate when Danielson proposed the venture. She had wanted to become an entrepreneur for years. The opportunity was exciting, and she and her husband believed that the time was right to take on such a venture, given that they had made enormous strides in getting their family life working well over the past year and all three of their children were now school age. In the 2 This document is authorized for use only by Phillip Gonsher until October 2012. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860. 803-096 rP os t Zipcar: Refining the Business Model fall of 1999, she committed to the venture full time. Danielson, on the other hand, continued working at Harvard, spending evenings and weekends on the new venture. The two founders divided the tasks along the lines of their respective areas of expertise. During the fall of 1999, Chase refined the concept, researched the market, wrote the business plan, and built the assumptions necessary to create a budget. She created the list of critical business and financing contacts. As she began to build the organization in the spring of 2000, she designed and wrote the Web site and, with the help of contract engineers, started work on the online reservation system. Pursuing the Idea op yo Danielson’s car experience and her connections with Ford, one of the major funders of her research group at Harvard, made her the natural choice to focus on building car industry relationships. She also took responsibility for specifying the necessary in-car technology and negotiating the first car purchases. In addition, Danielson worked on any environmental issues related to the business and served as editor for the documents that Chase created. The business of organized car sharing originated in Switzerland in 1987 when two separate cooperatives (subsequently merged in 1997) were founded. Within a year, similar operations came into existence independently in Germany, Austria, and the Netherlands. The cooperatives were created to provide both convenience and cost savings to the users. tC Organized car sharing was the coordinated use of vehicles by various subscribers in succession and independently of one another. The concept was not unlike condominium time sharing, except that the “real estate” had wheels and the prescribed usage time was not fixed. Additionally, any member could reserve any vehicle in the network. Typically, members of the service paid a large upfront deposit, an annual fee, and a per usage fee that was determined by time and mileage. Members could reserve car time regularly or ad hoc. Though most subscribers used a car for a few hours, it was possible to reserve longer blocks of time. Members made reservations for the closest available car. Because cars were not housed at a central location but were parked in designated spaces in neighborhoods convenient to the users, the subscriber rarely had more than a five-minute walk to a parking location. No Car sharing was best suited to urban locations where there was a dense base of potential users, parking was expensive, and the need to drive was limited. Research indicated that, among urban dwellers, college-educated individuals were the most receptive to the proposition. Do Chase believed that there was a strong demand for this "niche" product in the United States. It could provide a new, low-cost, convenient alternative to owning an automobile for drivers who logged less than 6,000 miles per year (see Exhibit 1 for car ownership economics). She observed, “For those who don’t own a car, taxis can fill the need for short trips. Rental cars are available for daily or weekly usage, but the hassle factor keeps people from using them as often as they might like. So there is a big hole in the market: short-term, on-demand private car access.” Sizing the Market Chase’s early market research indicated that penetration in Western Europe was relatively small (0.01% of all drivers) but growing rapidly. In 1999, approximately 200 car-sharing organizations operated in 450 cities in Switzerland, Germany, Austria, the Netherlands, Denmark, Sweden, 3 This document is authorized for use only by Phillip Gonsher until October 2012. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860. Zipcar: Refining the Business Model rP os t 803-096 Norway, the United Kingdom, France, and Italy.1 Although car-sharing organizations had invested very little in marketing, usage was growing at 30% annually. In 1999, there were more than 130,000 members2 in what was estimated to be a $200 million industry.3 Volkswagen, one supplier of the shared vehicles, projected that 2.45 million shared vehicles would be in use throughout Europe by the year 2007 and that they would serve approximately 0.04% of the general population.4 op yo Chase’s research indicated that the U.S. market was large and virtually untouched. In 1999, 66 million Americans lived in the top 20 metropolitan areas, and 20 million Americans used public transportation to get to work.5 (See Exhibit 2 for data.) Competition In 1999, the two largest car-sharing organizations in Europe were Swiss Mobility CarSharing, with 1,400 cars, and Drive Stadtauto (formerly StattAuto Berlin), with approximately 300 cars. Swiss Mobility CarSharing, the product of a 1997 merger of two independent cooperatives, operated in 700 locations and had more than 30,000 members. It had concentrated its expansion efforts on building its network in Switzerland. Drive Stadtauto was launched in 1988 and operated in 110 locations with approximately 7,500 members.6 tC Chase’s research turned up three potential competitors already operating in North America. There was a start-up operation in Canada, CommunAuto, which was launched in Quebec City in 1994 and in Montreal in 1995. Like Chase, the founder had developed the business after studying 15 different car-sharing organizations operating in Europe. U.S. competition consisted of two West Coast companies: Portland-based Car-Sharing Inc., founded in 1998, and Seattle-based Flexcar, launched in January 2000. Though both were for-profit companies, they focused on the environmental impact of car sharing rather than on its convenience and cost effectiveness. No Chase also anticipated that traditional car rental agencies, such as Hertz or Avis, might enter the market if they saw it as a substantial new business opportunity. Chase believed that they generated an average of $10,000 to $12,000 per vehicle per year in revenue. Car manufacturers were also potential competitors. Volkswagen had already conducted its own studies of the market potential. It could participate as a supplier or could consider entering the market directly. Developing the Business Plan By late 1999, Chase’s research had convinced her that the car-sharing idea was viable, especially in the relatively uncontested North American marketplace. Chase completed the first draft of a Do 1 Daniel Sperling, Susan Shaheen, Conrad Wagner, “CarSharing and Mobility Services, An Updated Overview,” CalStart, February 2000. 2 Ibid. 3 Rachel Geise, “Wheel’s When You Want ‘Em,” The Toronto Globe and Mail, February 2001. 4 “At The Wheel, Volkswagen Pioneers Car Sharing Programs,” Fastlane, October 1997. 5 1990 U.S. Census data. 6 Sperling, et al. 4 This document is authorized for use only by Phillip Gonsher until October 2012. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860. 803-096 rP os t Zipcar: Refining the Business Model business plan for a U.S.-based car-sharing venture in December 1999. The service she envisioned would deliver convenience, ease of use, freedom to travel, and hassle-free “ownership” for urbanites. The cars would provide a solution for people who did not need a car to get to work but wanted the convenience of a private vehicle to run occasional errands, go to appointments, visit friends, or get out of the city for a few days. Though the primary emphasis was on convenience and cost savings, the concept could also be marketed as environmentally friendly. According to European studies Chase uncovered, every car shared would eliminate the need for approximately 7.5 individually owned cars in the marketplace. op yo Chase’s plan anticipated that most paid subscribers would log on to the company Web site to reserve specific cars in specific locations, but she understood the need to provide telephone support as well. Reservations would be taken up to two months in advance but could also be made without notice—subject to availability. One of the challenges that Chase faced was developing technology that would admit only the confirmed driver to the car and that would also capture usage data (to serve as the basis for billing) when the car was returned. Pricing was a critical component of business development. To develop a price structure, Chase looked at variables and variations found in existing models elsewhere in the world. She described her conclusions: It was clear that there are several components to an overall price structure: security deposit, initiation fee, annual fee, monthly fee, per mile fee, and hourly or daily rates. When I looked at how most car-sharing organizations in Europe managed their pricing, they had significant upfront initiation fees—$300, $400, even $500. I later learned that this was because many of these organizations are cooperatives, and they needed that money to go out and buy cars. tC My thinking on pricing was that I needed to cover my COGS [cost of goods sold] and then cover overhead at some target volume and utilization level. And, I had talked to enough people to know that many of our target users—people who don’t own cars—compare our prices to the price of renting a car—say $45 per day. So, I needed to stay under that umbrella. No Chase spent almost two months modeling different pricing structures and cost assumptions. Her first business plan made the following assumptions: potential users would be required to become members and pay a $25 nonrefundable application fee, a $300 fully refundable security deposit, and a $300 annual subscription fee. Additionally, members would be charged for driving time at $1.50 per hour and $0.40 per mile. (See Exhibit 3 for a summary of financials from this original plan.) Members had to be at least 21 years old, have a valid driver’s license, and have no major traffic violations (see Exhibit 4 for Zipcar driver requirements). Do The users were expected to handle simple maintenance themselves. For example, drivers were asked to refuel and submit receipts for reimbursement whenever the gas level reached one-quarter full. They were also required to keep the car clean and to take responsibility for any traffic or parking tickets incurred. The car had to be returned to its original location before the reservation time expired. There was a $20 fine for late return. Chase assumed a renewal rate for members of 95%, which translated into a 5% attrition rate each year. Chase’s research had indicated that mature European companies had found that 50% utilization of each vehicle (i.e., 360 hours per month) was the most that could be achieved if customer satisfaction was to be maintained. Because of uncertainty regarding actual usage patterns, Chase had planned to initially target a maximum of 40% utilization. Chase assumed the average member would take four trips per month at an average of four hours and 22 miles per trip. (See Exhibit 3 for this initial financial model.) 5 This document is authorized for use only by Phillip Gonsher until October 2012. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860. Zipcar: Refining the Business Model rP os t 803-096 Chase planned to launch the business in a single market. Once the basic operations were running smoothly and the business model was proven, she believed that there were at least 14 cities in the United States that would be excellent long-term growth targets. Boston was a logical choice for launching the concept because it met all the key criteria for developing a robust user base. Like most European cities, Boston had insufficient and expensive off-street parking but a good public transportation system. Chase believed that Boston lent itself well to a network of cars positioned close to transit stations. Furthermore, Boston had a large population of college-educated and Webconnected individuals. Financing the Venture op yo Chase believed that a well-designed wireless technology platform would be crucial to Zipcar’s ability to deliver good service to its members. ...
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Running head: Zipcar

1

ZIPCAR
Name
Course
University

Zipcar

2

How the company utilizes debt financing
With the money, the company began building the technology platform of the company by
providing a wireless system of data transmission between the car and the server to authorize
users and to log in odometer readings, mileage, and time stamps the system captured information
about when the car was turned and the number of miles the person has driven and the
information is sent to a central location for billing(Hart,2005).
Instances of debt financing and the amount borrowed
Chase was determined to finance the company she went ahead and obtained a convertible loan of
$50,000 which would be paid back at an interest rate of 1% per month and would convert to
equity at the price per share established in the contemplated series A financing.
Stage...

lindsaysmith (7823)
Carnegie Mellon University

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