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Innovative Business Development
For this assignment, read the case study on pages 377 and 378 of the eTextbook. Once you have read and reviewed the case scenario, respond to the following questions with thorough explanations and a well-supported rationale. Do not use the question-and-answer format. Instead, use an essay format with headings for this assignment.
What legal structure would you recommend for Lula? What are the benefits of this legal structure?
Describe employee legal classifications, and determine which best fits these employees.
Analyze the role of an entrepreneurial mindset in opportunity recognition related to this case.
Differentiate innovative business strategies that are or could be associated with this case.
Appraise the use of design thinking toward innovative ideation related to this case.
Determine the type of entrepreneurship associated with this case, and compare it to social entrepreneurship. Then, apply creative thinking skills to restructure this venture into a social entrepreneurial venture. From a social entrepreneurship perspective, how would the business model change, and what business model would you use for this new venture? What legal structure would you recommend for this social entrepreneurial venture?
Your case study should be at least five pages in length. References should include three additional credible sources. Adhere to APA Style when constructing this assignment, including in-text citations and references for all sources that are used. Please note that no abstract is needed.
Reading:
Case Study Matthew Vega-Sanz, cofounder, Lula
When he came to Babson College in early 2016, Matthew Vega-Sanz did not want to start his own company; he wanted to go to Wall Street instead. He started a student consulting firm with his brother and two of his best friends. It was a branch of one of the biggest student consultancy organizations in the world, 180 Degrees Consulting. Through this consulting experience, Matthew got the chance to work with tech companies and started to think to himself, “Wow! Startups are cool.” Two years later, Matthew found himself dropping out of Babson because his own startup, Lula, was growing and he couldn’t do college and entrepreneurship at the same time. The business was getting too big.
During a crisp spring evening in 2016, Matthew and his brother were craving pizza. “We didn’t want Domino’s; we were sick of it already and none of the Papa John’s around would deliver. I tried calling them and bribing them but none of them would deliver to Babson,” Matthew laughed. When he realized that Uber would charge him $30 to deliver an $8 pizza, he decided to stick with Domino’s. While waiting for his pizza to be delivered, Matthew walked outside and saw the parking lot filled to capacity and thought, “Wouldn’t it be cool if I could take one of these cars and go pick up the food?” The idea of Lula was born.
Lula is a first of its kind peer-to-peer car sharing platform where college students can rent out cars from their peers and others registered on the platform. While companies like Turo focus on drivers above the age of 25, Lula targets college students. When the brothers look back, the story of its origins is quite entertaining.
After the infamous pizza spark, Matthew mentioned the idea to friends, who liked it but didn’t inspire him to take action. A few months later, Matthew’s brother, Michael, was hanging out in his dorm and told Matthew about Babson’s BETA Challenge. BETA stands for Babson Entrepreneurial Thought and Action. It is an action-based challenge in which new ideas are judged on actions taken and milestones achieved between the semi-final stage and final stage of the competition.45 Even though the application deadline had passed, the link was still live and the brothers decided to apply. Matthew recalls, “I go to Michael’s room and we draft up probably the world’s worst executive summary and submitted it. I had forgotten about it and was already planning to do an internship in a company like J. P. Morgan. Around the first week of April 2016, I’m walking out of the library and one of my friends comes up to congratulate me on getting through to the semi-finals.”
The brother duo had the only business idea in the competition that had not generated any revenue. They lost the competition that year; however, they received a lot of positive feedback and concluded they “were on to something.” Michael asked Matthew if he was interested in working on the concept of Lula over the summer break. That summer they raised some seed money, started developing the app, and ultimately launched a pilot in early 2018. The pilot was 8 weeks long and targeted Babson and a few other campuses around Babson. The conclusion? Users liked the app! There was customer validation.
The positive feedback and early traction from the pilot helped the brothers raise $620,000 to develop a newer version of the Lula app. They launched the app in September 2018 and were aiming to be in 30 campuses in five states and have about 90 registered on the platform. However, within the first week of the launch, they were in 200 campuses and surpassed all projections that they had for Year 1. Within the first 2 weeks of the launch, they were listed in the top 100 apps in the iOS App Store and even getting ahead of Zipcar in the ranking. As Matthew explained, “The only marketing we were doing was a couple of $100-a-day on Instagram. It was mostly word of mouth. We realized that kids need cars and there was not really much competition since car rental companies prefer people aged 25 and up.” Today Lula is in more than 400 campuses across all 50 states in the United States.
Matthew credits a lot to his advisors in the extended Babson network. Lula won the SoFi Entrepreneur Pitch Competition at Babson and went to California to be part of the program. There they developed a relationship with the founder of SoFi, the leading provider of student loan refinancing, who then came on board as an advisor and, later on, an investor in the company. Matthew and his brother were also able to leverage the services of the law firm that visited the Babson campus on a regular basis, and this free legal advice saved the brothers and the company “a bunch of money.”
Lula, as a company, had to resolve significant challenges if the business was going to truly start. Their greatest challenge was insurance. The brothers were at a legal crossroad: The app was ready to launch, but they couldn’t launch the app because they didn’t have insurance. If they didn’t have insurance, they could not legally operate.
Initially, Matthew and Michael thought that they would just need regular car insurance, but they quickly realized that companies like Geico or Progressive did not want to insure a startup—especially one that caters to young, high-risk drivers. Insurance experts suggest they speak to brokers that focus on specialty insurance lines.46 “We were rejected by over 40 insurance brokers over 16 months because nobody wanted to listen to a company that wanted to provide rental services to people below the age of 25,” said Matthew. Although some companies provided rentals to people ages 21 to 24 at a premium, asking for insurance for students 3 years younger than 21 sounded “crazy” to insurance companies. Insurance experts advised the brothers to stop working on Lula because it was not possible.
It was a frustrating period for the startup. As Matthew recollected, “Even the companies that were willing to listen to us were only providing us insurance in case the company got sued and not insurance on physical damage to the car. We were in legal battles because insurance companies would try to use confusing language, hoping we would not catch onto the fact that they weren’t going to give us physical protection. We had to call our lawyers because what they were stating in the email was completely different than what was offered in the policy. Not just that, they were pushing us to sign, saying they wouldn’t accept the deal otherwise. Luckily, we were able to catch them.” In other words, Matthew quickly learned that the insurance they were being sold only protected Lula in the case of a lawsuit.
To resolve the ongoing insurance battle, Matthew decided to treat the insurance companies as their investors and made a pitch deck for them. He sent out emails saying that if they would invest in and work with Lula, they could potentially generate $55 million in revenue over the next 5 years. Within 2 weeks, they got positive responses from insurance companies and three firm offers. “The first insurance company to bite gave us probably the worst insurance coverage. If I was a student and knew what the insurance policy covered, I would not rent a car. We basically had no protection. Thankfully, we didn’t have any crashes and we took this data to other insurance companies showing that 18-year-olds aren’t as bad they thought.” Lula is now partnering with the same insurance company that works with Lyft and Airbnb, with a multimillion-dollar protection policy. They now have 20 times the coverage for half the price. The major hurdle to the successful startup of Lula was overcome.
Other issues arose. One of Lula’s competitors, Getaround, had filed for a patent on the peer-to-peer car-sharing model. The patent was loosely based on renting a car through a mobile device, and if that patent had been granted, it would have killed Lula as a business. Because Getaround was a heavily funded company, potential investors in Lula were scared of the potential patent being a huge roadblock. The Getaround patent was rejected because it was too general, which opened up investment doors for Lula.
Lula encountered pushback by college campus administrators who wanted Lula to operate on college campuses only after getting official permission from the university. Matthew believes that this was because of their previous interactions with companies like Zipcar that needed to rent a parking spot at the college. Matt explained, “Lula, unlike Zipcar, was a peer-to-peer model that allowed anybody to download and rent the car. When the college administrators asked us how they got parking spots on campus, we explained that the students that already had a parking space were renting their cars out. We also explained that the Lula service was similar to Uber or Lyft and they didn’t need permission to operate on campus.”
Matthew learned that raising money isn’t as easy and glamorous as it seems on shows like Shark Tank. “Only 3–5% of startups ever get funding. There are hundreds of companies trying to get funding, and getting funding on an average takes around 6 months. What is not portrayed in movies (or on Shark Tank) is how it is a full-time job in itself and how much time it takes away from running the business.” The journey so far has also taken a toll on Matthew’s personal life. His parents hate that he and his brother are barely home, and he has lost a bunch of friends because of not having the time to spend with them. However, Matthew is excited about where Lula can go as a company.
Matthew’s advice to aspiring entrepreneurs is that “When you’re starting a company, listen to who your customer is going to be. When we started, we thought investors such as venture capitalists knew all this stuff, but at the end of the day they don’t know nearly as much as you think they do. We had parents, professors, and investors telling us that there wasn’t a need for this or that this wasn’t a very good idea. So many people, who we thought were credible, gave us what we can call, in hindsight, bad advice. But every time we spoke to our target demographic, college students, they told us, ‘Yes, there is a need for this!’ So, my advice is don’t launch a business unless you have random people across the target demographic telling you they need this.”
