Saturday, April 16, 2011

The week in review - Zipcar

Last week Zipcar had one of the more successful IPOs of the year - first pricing above its expected range at $18 per share, and then soaring out of the gate on the first day of trading. By the time it was all said and done, Zipcar had risen 60% and settled at a market cap exceeding $1 billion - an impressive feat for a company with around $180 million in revenue. Congratulations are certainly in order to management, the investors, and the founding team that developed an innovative concept almost 10 years ago.

Much was written over the last week about what it all meant. After taking a few days to ponder it - here's my take:

(1) "[ ___ ] as a Service" has gone beyond IT
Over the last decade, customers have moved away from ownership; paving the way for "as a service" business models. The first iteration of this was software and storage, which made the leap to "The Cloud". Today, we are realizing that the benefits of non-ownership, such as ease of maintenance, capital efficiency, and upgradeability, can extend beyond IT.

The success of Zipcar is one more example of that trend - and we shouldn't expect it to stop there. At Novus we have seen a number of business derivatives of this kind making their way into cleantech. Will consumers accept "lighting as a service" from LED companies, or "solar as a service" from solar leasing companies? Time will tell - but I for one am bullish.

(2) Hold the champagne...for now
Make no mistake - an IPO is a significant milestone for any Company and its investors. To reach that point is a mark of success that the majority of startups will never experience. But it is not the endgame. Successful IPOs are measured in months and years - not in days. Investors in Zipcar have a 6-month lockup, and even when that lockup is reached, they will likely offload their shares over time. While Zipcar has a lot of room to grow, unprofitable companies have historically not fared well after their initial IPO bump (I must admit, we at Novus, have had first hand experience of this).

For late investors that paid over $15 per share in the last private round, a successful story will depend on Zipcar's ability to hit growth targets and move to profitability rapidly. So I congratulate everyone again on hitting a key milestone - but I'd keep the champagne on ice for a few more months.

(3) To the CEO: "With great [market] power comes great responsibility"
Yes I took that from the movie Spider-Man. Valuations are based on expectations, and a $1 billion valuation comes with a helluva lot of expectations. I have heard CEOs describe the burden of their company being valued above what they thought they could deliver. High valuation multiples are a double edged sword. The best thing management can do is execute according to their plan, and not be focused on unreasonable expectations in the short term.

(4) The IPO market is strong - but VCs should be wary of rushing companies out the door

This year, 40 companies have gone public raising more than $16 billion - that's an incredible statistic given we are only in April. These sort of numbers make people wonder if we are in the midst of another bubble. However, unlike the last tech bubble, a great deal of the companies going public today are profitable or approaching profitability. Whenever we talk about exiting companies in our portfolio at Novus, I always tell my colleagues - "You can only go public once". In my view, taking a company public before it is profitable or without having a fully funded business plan is risky. You need almost perfect execution to pull it off. Public investors are a tough combination of exceedingly sophisticated and impatient. As someone said recently "VCs invested in my business. Public investors invested in my stock".

So yes the IPO market is hot and the window is open - but nothing closes that window faster than a series of bad performing IPOs. So whether or not Zipcar is good for the market will depend on Zipcar.

All that being said - I think Zipcar is a great company and I am confident they will continue to have success.

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