Your margin is my opportunity.

– Jeff Bezos

A recent business article from the Wall Street Journal caught my eye, detailing the intense battle for talent in the self-driving car industry.  A few years ago the idea of self-driving cars seemed incredibly futuristic and unattainable.  Now, it is basically inevitable.  Every company from traditional carmakers like GM, to ridesharing companies like Uber, to tech titans like Google has an autonomous-vehicles strategy.

What we discussed a lot when I worked in venture capital were the knock-on effects of self-driving cars.  Yes, self-driving cars will create billions (or maybe trillions depending on who you believe) in value for the companies that successfully implement and deploy this technology. That is why the talent war is so fierce, with salaries often exceeding $1 million for skilled engineers.  The future potential market looks to be unlimited.  However, several times that in value will be created in knock-on effects.  For example, if travelers or truckers no longer need to stop on cross-country trips, who will stay in motels? Will there be drone-to-car deliveries to allow cars to fuel up (themselves and their passengers) without needing to stop at predefined gas stations? What if a network of high-speed charging stations are created? What will they look like? All of these ideas and more will help reshape the transportation economy in a future of autonomy.  For venture capitalists, that presents a real opportunity to invest 10 years ahead of schedule and reap a massive payout.

Along these lines, Peter Johnson and Prashant Shukla (at my former employer Jump Capital) wrote up a great piece about the future of insurance.  One of the things they hinted at was that the explosion of data from semi and fully-autonomous vehicles will completely remake the insurance value proposition.  I highly recommend going and reading that piece.

But my target for today is a different knock-on industry I love discussing: rental cars.  For anyone who has rented a car, you will have invariably had the same experience.  After landing at an airport, you go to the rental car counter (or take a shuttle to the rental car counter), and… wait.  There is a line, and once you get to the front of it a kindly attendant takes your name and information and clacks away at a keyboard.  After some awkward silence, your car options are announced (“I have a Kia Optima or a Hyundai Elantra for you, does either work?”) and you get a set of keys.  You also get a bill (printed on paper at most locations) that includes a bunch of hidden fees and services (liability, collision insurance, etc.) and some other unintelligible information.  You sign in four different spots, drag your luggage to the car, and you’re good to go! And that whole experience does not even cover booking a rental car which happens through hundreds of on and off-brand channels[1].

My proposal is simple: build the next brand in rental cars.  I would argue that today’s consumer favors speed and simplicity over choice and cost-optimization.  Instead of focusing on offering every car under the sun and massive channel discounting, this new rental car company would focus on the experience, and meet the need of the “extended-stay-rider”.  Imagine this: your plane lands at the airport.  Using publicly available flight tracking information, an app sends you a notification, “Hey, we just saw you landed at O’Hare, are you still interested in renting your Hyundai Elantra?”  If you say yes, you walk to arrivals where (similar to how ridesharing currently operates), an autonomous vehicle (or gig-economy driver) is waiting for you.  You unlock the car with your phone (or the key), load up, get in the car, and head off to your destination.  Everything operates as a flat-fee[2], and advanced loyalty and price discrimination schemes can be easily implemented on top.  On the backend, advanced logistics technologies like those employed by Lyft and Uber would route the cars far more efficiently than having massive parking lots where cars sit idly. This would also lower the required PP&E investment from parking the cars and maintaining the rental counters.

Which begs the question: with the advent of ridesharing, would anyone even want this experience? This is the discussion (read: argument) that my venture capital co-workers and I had repeatedly in the office.  Why on earth would anyone rent a car when I can call one on-demand from my phone?  To these colleagues, the world would consist of two types of riders: “stable-riders”, who would own their own car and require amenities and personalization to keep them engaged while the car was in autopilot; and “on-demand-riders”, who would use some form of app to hail a car as needed.

But I firmly believe there is a vast middle.  We can call these folks “extended-stay-riders”.  Much as extended stay-style hotels cater to a niche ($1.3 billion in revenue) clientele that require something in between a hotel and motel, there will always be consumers who need a rental-car-like experience.  Families traveling with children and pets that need to make stops, cost-conscious travelers who do not want to be squeezed by on-demand supply shortages, and business travelers who accumulate rewards and build loyalties with brands.

This is the billion-dollar brand that I can’t wait to be launched.  We could call it, “Disrupterprise” or “Self-Drivertz” and it would have curb-side service of extremely clean, self-driving cars, all for a flat fee.  If you want to run with this idea, take it! I have the feeling it will exist eventually, and after looking through the 2017 financial statements of Avis there is more than enough margin to make it happen[3].

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[1] The 2017 financial statement also reveals hundreds of marketing partners and resellers that the company relies on, as opposed to a strong direct-to-consumer brand appeal.  This does not even get into the weeds of company-owned vs. licensed locations, which adds another layer of complexity and cost obscurity.

[2] This is one thing I truly loved about the Zipcar service.  They made booking/re-booking so simple and transparent.  In addition, gas and insurance were not an issue when renting.  I was convinced they would disrupt the rental car industry, but after the Avis takeover it looks as if the company has stagnated and focused on cutting costs.

[3] Avis-Budget’s financial statements reveal a staggering $1B+ in yearly SG&A on only $6B or so in core revenue.  In addition, they carry $10B in car assets on their books, net of depreciation.  This is all financed heavily by debt, which carries about $180 million per year in interest payments (half of Net Income).