ZipCar preps for IPO; are the world's cities ready for car sharing?

The race for the urban short-term car rental has begun.

Boston, Mass.-based startup ZipCar announced on Tuesday that it filed documentation with the U.S. Securities and Exchange Commission related to a proposed initial public offering of shares of its common stock.

Early reports pegged the potential offering at $75 million. The company, which was founded in 2000, is backed by venture capital firms such as Greylock Partners and Benchmark Capital.

One problem: ZipCar has never gotten out of the red, and loses money every year.

The startup was among the first to popularize the short-term car rental in cities, allowing for by-the-hour rentals after becoming a paid member. Since its founding, rival services have sprung up, including Mint in New York City, Car2Go in Austin, Texas, OccasionalCar in Denver and PhillyCarShare in Philadelphia, among others.

Here's a quick summary of selected risks the company outlines in its own filing of Form S-1:

"We have a history of losses, and we may be unable to achieve or sustain profitability."

We have experienced net losses in each year since our inception, and we expect to incur net losses in 2010...we expect to incur significant future expenses as we develop and expand our business, which will make it harder for us to achieve and maintain future profitability.

"Because many of our expenses are fixed, we may not be able to limit our losses if we fail to achieve our forecasted revenue."

The build-up of our fleet in advance of actual reservations exposes us to significant up-front fixed costs. If market demand for our services does not increase as quickly as we have anticipated, or if there is a rapid and unexpected decline in demand for our services, we may be unable to offset these fixed costs and to achieve economies of scale.

"Car sharing is a relatively new market, and the rate of adoption and our associated growth in our current markets may not be representative of rates of adoption or future growth in other markets."

To date, we have targeted expansion into markets we believe are the most likely to adopt car sharing. However, our efforts to expand within and beyond our existing markets may not achieve the same success, or rate of adoption, we have achieved to date.

"We face significant risks as we expand our operations internationally, which could harm our business, operating results and financial condition."

Our efforts to expand our operations into new international markets involve various risks, including the need to invest significant resources in such expansion, the possibility that returns on such investments will not be achieved in the near future or at all and competitive environments with which we are unfamiliar. Our expansion into new markets may not prove to be successful in those markets where public transportation systems are limited or where awareness and adoption of car sharing by the local population is limited.

Any future international operations or expansion efforts may also fail to succeed due to other risks, including: difficulties or delays in acquiring a critical mass of members, vehicles and/or convenient parking locations; different driving expectations and patterns than those in North America; different legal and labor practices and customs; the need to adapt our systems and member interfaces for different languages, currencies and financial accounting practices; different data protection and privacy laws; different methods for checking the driving records of new members; and difficulties in staffing and managing new operations.

The company also listed the following as risks, along with many more:

• Growth may place significant demands on its management and infrastructure.
• Future acquisitions could disrupt its business.
• It faces residual risks related to the value of vehicles in our fleet disposed of through auctions and dealer direct sales and increased costs of acquiring and holding vehicles in its fleet.
• Manufacturer safety recalls could create risks.
• It faces risks related to liabilities resulting from the use of vehicles by members.

It's not all bad, however.

The "world's largest car sharing network" plans to take advantage of several transportation challenges it sees in cities:

• Urban residents who do not own cars, but aren't adequately served by public transportation, especially for regional travel.
• Urban residents who do own cars, but aren't happy with the expense or hassle for a vehicle they use infrequently.
• College and university community members who aren't allowed to park on campus.
• Businesses and government agencies located in cities who maintain fleets but see them as too expensive.

Are the world's cities ready for car sharing?

ZipCar says they are, based on certain global trends that support their business proposition:

• Increasing urbanization. The percentage of the world's population living in cities reached 49 percent in 2005 and is expected to rise to 59 percent by 2030, according to the United Nations.
• Urban affordability. The consumer price index in the top ten cities in the United States has risen by an average of 29 percent since 1999, according to the U.S. Department of Labor.
• Self-service and pay-per-use consumption is trending in consumer behavior.
• Focus on sustainability. Car sharing reduces greenhouse gas emissions.

ZipCar currently operates in the U.S., Canada and U.K., with more than 67 metro areas covered.

Another problem, at least in North America: the bigger rental companies have started swinging. Hertz recently unveiled Connect by Hertz, leveraging its existing network of brick-and-mortar locations to its advantage.

Meanwhile, Enterprise is testing a pilot of its WeCar service.

The car rental business is a tough one, with high upfront costs. Can ZipCar scale to succeed, or is it doomed to fail?

This post was originally published on Smartplanet.com