How Sequoia forced Tony Hsieh to sell Zappos

By Felix Salmon
June 7, 2010
Why I Sold Zappos". It makes for very sad reading. Hsieh starts by explaining that he never wanted to sell to Amazon:

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I just found Tony Hsieh’s astonishing book excerpt in Inc, entitled “Why I Sold Zappos“. It makes for very sad reading. Hsieh starts by explaining that he never wanted to sell to Amazon:

Our hope was that we’d eventually go into all sorts of other businesses. We saw Zappos as a global brand like Virgin — except whereas Virgin was about being hip and cool, Zappos would be about offering the best service. The plan was to grow sales to $1 billion by 2010 and eventually go public.

But then Amazon came calling again:

As before, our plan was to stay independent and eventually go public.

But our board of directors had other ideas. 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…

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…

I left Seattle pretty sure that Amazon would be a better partner for Zappos than our current board of directors.

Essentially, Hsieh never wanted to sell, but Amazon was a less-bad option than sticking with the bean-counters at Sequoia, who never really signed on to Hsieh’s philosophy:

Some board members had always viewed our company culture as a pet project — “Tony’s social experiments,” they called it… The board’s attitude was that my “social experiments” might make for good PR but that they didn’t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.

The tensions between Hsieh and his board (for which read Sequoia GP Mike Moritz) were reported by PE Hub at the time, and then dismissed by the NYT; it seems PE Hub was right. This is a lesson for anybody who takes VC gold: VCs always have an eye on their exit, and they usually want it more quickly than the founders do.

Still the tensions can’t have been all that bad. After Zappos was sold to Amazon for $1.2 billion in Amazon stock, the team which had fought to keep it independent — Tony Hsieh and Alfred Lin — stayed on at the company. Until, in April, Lin announced that he was leaving. To go to Sequoia Capital. I wonder how closely he’ll be working with Moritz?

(Via)

5 comments

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“To address that, we’ve begun tracking employee relationships.”

That’s even more unsettling than most of the details that were in The New Yorker’s profile.

Posted by absinthe | Report as abusive

Such a shame… the ideal purchaser for Zappos would have been Berkshire Hathaway.

Posted by ScottAllison | Report as abusive

Having read the full article (but not the book) I agree there are a number of sweet/sour contrasts in this.

It is a shame the investor board were so out of sync with the core reasons why their investment was a success in the first place.

However Tony Hsieh kept his focus on the core principles which were important to him and used that focus to guide his decision to sell.

On the tracking of employee relationships reference very few of us have had the experience of managing “happiness” in a 1,800 ee operation so I would reserve judgment on that.

keith

Posted by keithbohanna | Report as abusive

That’s more overpriced footwear than a whole season of Sex And The City. With approximately the same amount of sex involved, i.e. zero.

Posted by HBC | Report as abusive

A startup company where the goals of the VCs did not coincide with the founders? And this is worthy of a book?

Even though VCs will talk about how they deserve preferential tax treatment because of all the jobs they create, their #1 priority, and the only reason they are in that business, is making money. For themselves. Any entrepreneur should know this before they ever speak to a VC.

Zappos was sold for $1.2B at a time when they didn’t even have $1B in sales, which is a remarkable achievement for a retailer with no inherent advantage over anybody else. Hsieh should be very happy with that accomplishment, and use the proceeds to find a way to change the world that doesn’t require selling shoes.

Posted by OnTheTimes | Report as abusive