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This happens all the time, but usually on a much smaller scale, so this story gets into headlines and serves as a reminder to all entrepreneurs. I read Why I Sold Zappos on Inc. Magazine’s website just two days after I posted Choose an Investor Like You Would a Spouse on this blog. And the Zappos story is a great example: if investors and entrepreneurs have conflicting goals, there’s going to be trouble.
This story ends well, with Zappos sold to Amazon.com and the company character preserved; or, at least, that’s what the story says.
Tony Hsieh, well-known founder of Zappos and driving-force entrepreneurial success story, wrote his own story for Inc. And it turns out that the decision to sell Zappos to Amazon last year was forced by investors. He says:
Our sales had grown steadily since 2005; by 2008 we were doing more than $1 billion in gross merchandise sales annually — two years ahead of our original plan. We were now profitable, and our culture was even stronger. As before, our plan was to stay independent and eventually go public.
But our board of directors had other ideas.
The board of directors represented both entrepreneurs and investors. He says:
Although I’d financed much of Zappos myself during its early days, we’d eventually raised tens of millions of dollars from outside investors, including $48 million from Sequoia Capital, a Silicon Valley venture capital firm. As with all VCs, Sequoia expected a substantial return on its investment — most likely through an IPO. It might have been happy to wait a few more years if the economy had been thriving, but the recession and the credit crisis had put Zappos — and our investors — in a very precarious position.
This was in 2009. Credit was tight, and Zappos depended on commercial financing of inventory. Cash flow was very tight. Lenders stuck to loan agreements holding Zappos to tough sales and profitability targets, and, when the economy tanked, pulled back. And the board of directors, meanwhile, got nervous:
These issues had nothing to do with the underlying performance of our business, but they increased tensions on our board of directors.
By early 2009, we were at a stalemate. Because of a complicated legal structure, I effectively controlled the majority of the common shares, so that the board couldn’t force a sale of the company. But on the five-person board, only two of us — Alfred Lin, our CFO and COO, and myself — were completely committed to Zappos’s culture. This made it likely that if the economy didn’t improve, the board would fire me and hire a new CEO who was concerned only with maximizing profits. The threat was never made overtly, but I could tell that was the direction things were going.
Hsieh said he tried to gather funds to buy the investors out, but failed; and turned to Jeff Bezos and Amazon.com instead. He ended up with a good deal, happy employees, and a happy ending. And lots and lots of money.
Zappos continues to operate independently. Our relationship is governed by a document that formally recognizes the uniqueness of Zappos’s culture and Amazon’s duty to protect it. We think of Amazon as a giant consulting company that we can hire if we want — for instance, if we need help redesigning our warehouse systems.
So it’s not a bad outcome; but still, worth noting – he didn’t want to sell, he wanted to stay and fight. Investors forced the sale.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
