Why Avis just made a big bet on the future of cars as a service

On the morning of Zipcar’s (s ZIP) IPO in the spring of 2011 I wrote “the year of car as a service has arrived.” Close to two years later, car rental giant Avis Budget Group announced on Wednesday that it will acquire Zipcar for $500 million in cash. It’s proof of the continued maturation of car sharing as a business — despite the difficult economics of that market — and shows how the old school car rental companies are using technology to increase decentralized distribution and on-demand services for their cars.

But beyond the implications for car sharing as a business, the news is an important indicator of the global and infectious trend of sharing stuff and resources. Airbnb — home sharing — is now looking at a $2.5 billion valuation. With 9 billion people set to live on the planet by 2050, and much of that growth happening in cities, sharing — enabled by IT — will be one of the most important tools to emerge. The companies that are creating massive brands now will be well positioned to capitalize on this future.

The little business that could

Car rental companies are indeed the original champions of cars as a service. Hertz at one point reportedly considered buying Zipcar, but instead launched its own service. Many of the major car rental companies are either testing, or have launched, modest car sharing trials in select cities.

But Avis’ acquisition is one of the largest financial bets to date on the undertapped potential of the more modern version of car sharing. The acquisition price was $12.25 per share, or a 49 percent premium over Zipcar’s stock closing price on Monday.


Zipcar has 760,000 members in 20 metro areas in the U.S., Canada and Europe — but that’s not really all that much considering Zipcar is more than ten years old. Modest estimates project as many as 7.5 million users for car sharing services (not just Zipcar) over the next few years in the U.S. if there are supportive policies in place, and up to 20 million in the maximum case scenario, according to an analysis from RAND Corporation.

The biggest problem for Zipcar was access to capital to help grow its user base. Maintaining and expanding a fleet of cars is expensive. Zipcar only first became profitable at the end of 2011, and its stock price has steadily declined (hovering around $8 most recently) since its IPO in 2011 — back then it had a high of $30 per share.

So in that respect, the Avis acquisition is great news for Zipcar and will provide it with deep pockets. The company will be able to grow more quickly in a sector that has seen increased competition for the rental car companies from new startups with innovative takes on car sharing (like Getaround), and even from some creative auto makers like Daimler.

However, as Felix Salmon points out Zipcar’s brand is really strong with its customers and is a well-liked company. Rental car companies, on the other hand, generally are disliked by their customers for things like inconvenient service, hidden fees and the like. The Avis brand could really taint Zipcar, especially if Avis starts to make Zipcar act like more of an old school rental car company.

Zipcar CEO on How the IPO Hopeful Has Weathered the Recession

Avis needs to just let Zipcar operate its business as it has done and not try to change the brand or the service too much. Avis can also use Zipcar as a model for making its rental car business even more distributed (away from the centralized car rental hubs at airports) and even more on-demand. The backbone of this car as a service model is IT, and Avis is acquiring the leader that invented all those easy to use reservation systems, mobile apps, and key fob locks.

A win for investors

The Zipcar acquisition also shows how some of Zipcar’s early investors made a very long-view bet on the trend of car sharing and mostly won that hand. Zipcar had raised at least $67 million in venture capital funding from Revolution Living, Benchmark Capital, Greylock Partners, Smedvig Capital and Globespan Capital Partners, reports Fortune’s Dan Primack (in his email Term Sheet). Benchmark led an early round of funding back in 2005. Revolution (Steve Case’s firm), Benchmark and Greylock will walk away with $150 million.

It’s one of the better exits for VCs that invested in transforming transportation. Most electric car and biofuel investments have struggled. But car sharing is based on using the web, mobile, computing and wireless tech to manage the on-demand use of cars, and that’s historically a more natural investment for a VC to make.

Still Zipcar returns have taken longer than, say, most web companies. Zipcar is almost 13 years old and went public at 11 years old. The multiple is also not all that high in the VC world.

It’s a sharing world

While Avis might not know it, the rental car company is stepping solidly into the global trend of sharing stuff. Some call this trend collaborative consumption, and others call it the mesh. Examples of these companies include everything from home sharing company Airbnb, to the emergence of co-working spaces, to baby clothes exchange site thredUp.

Airbnb neighborhoods San Francisco screenshot

The easiest and most obviously shareable goods are big expenses that are underutilized and that can be managed with IT. So homes and cars are good examples — most cars sit idly throughout the day. Regular stuff that’s cheap and easy to own aren’t that sticky for sharing (I think the whole tool or neighborhood sharing movement has been over hyped).

The really great thing about car and home sharing is that it also has a sustainability slant. Car sharing reduces car ownership and makes the use of a single car much more efficient. It’s almost like the merger of public transportation and personal cars. Same thing for Airbnb — the more homes and apartments are shared, the fewer new ones get built.

Young, urban people all over the world will┬ábe embracing this trend. As cities get more cramped — and as world growth happens in cities — owning a car and finding a place to park it will become harder. Zipcar CEO Scott Griffith told us that it’s the Millennials (18-34 year olds) that will truly embrace car sharing. Millenials think “access is more important than ownership when it comes to transportation and car ownership,” said Griffith.

Betting on the habits of the next-generation of consumers is a pretty good place to be. And Avis — an old school rental car company — just got pretty good access to that new set of customers.