Guess Who Lost Big on the Zappos Deal?

http://www.techcrunch.com/2009/07/22/guess-who-lost-big-on-the-zappos-deal/

by jasonlbaptiste • 17 years ago

34 20 17 years ago

brk• 17 years ago

This article is lame.

So, had Draper Richards converted their $250,000 loan to shares, they would have made out big on this deal.

OR, the whole outcome could have been totally different. If they would have been a major shareholder, it stands to reason they would have also had major influence, both on this deal and everything leading up to it.

It's quite possible that this deal would have never even existed had they not demanded loan repayment instead of shares.

joez• 17 years ago

Unless Draper Richards was under huge liquidity crunch, probably any investment at the bottom of a bubble would have paid out. Just a case of poor timing and judgment. And Techcrunch being smug.

pg2• 17 years ago

Boy is that not true. A lot of startup investments at that time spectacularly failed to pay.

Investing in startups is not like buying public stocks, where if you buy at the bottom of the market you're almost guaranteed a positive return. It's exactly the opposite, in fact. The returns depend almost entirely on which startups you pick, and hardly at all on market conditions when you invest.

grellas• 17 years ago

When the dot-bust occurred, the going rule with VCs was to rein in their investments, getting cash where they could and deploying their liquidation preferences to cash out where possible.

It was not panic so much as it was an exercise of common sense by the VCs at the time. A lot of startups had been riding on fluff and, when the fluff went away, it was time to cut investment losses.

A crude, but key, indicator is that the liquidation preference in the relatively few fundings that did occur went from a former standard of 1x out to a new one of 3x to 5x. Few deals were done, and those that were done were on terms perceived by founders to be onerous.

In such a climate, it likely would have been deemed reckless conduct by the VC's managing partners not to cash in on the convertible note and to opt instead for an alternative outcome that was highly speculative at best. We can't really know without being privy to inside details, which we are not. In any case, that decision shouldn't be second-guessed by outsiders today.

netsp• 17 years ago

True. At the end of the day, Zappos is/was really just an online shop. Amazon at least were the first/biggest online shop in a field where infinite shelf space means a lot. Shoe stores on the other hand, could easily have been bigger if bigger meant better. What strong reason was there at the time to believe that Zappos would grow so much more then the many other online retailers with similar numbers.

Growth: http://i.zdnet.com/blogs/zappos-revenue.png

YC's 'How to Apply' recommends against saying you will win because your app will be well-designed and easy to use because presumably that is what everyone tries to achieve. Zappos eventually succeeded because they made the online shop equivalent: efficient back-end, excellent customer service, lots of products that people want to buy, low prices.

jacquesm4• 17 years ago

This is the same kind of 'loss' that the RIAA claims every time somebody downloads an mp3, money that you didn't earn is not a 'loss', it's a missed opportunity.

gizmo• 17 years ago

The situations are very different.

The investors faced a dilemma, they had to make a decision. They made a poor choice (perhaps only in retrospect), and missed out on a bunch of money because of it.

The RIAA doesn't decide whether people pay or download. The people face the dilemma: download and possibly face consequences, or pay. Since the RIAA doesn't have a decision to make, there is no missed opportunity either.

Or take a poker analogy. Suppose you have the best possible hand at show down. If you then muck your cards regardless, you forfeit the pot. This is a missed opportunity, and definitely also a loss.

jacquesm4• 17 years ago

A 'loss' would have been if they had to write off that money instead of recoup their loan. That it would have earned them more in the long term is not a loss, that is stretching the definition of the word loss beyond the breaking point.

The RIAA makes a similar argument, they count every mp3 downloaded as a lost sale, whereas it remains to be seen if a sale would have been made.

In both cases the word 'loss' is used in ways that suggest that in some alternative universe the 'loser' would have been better off, but that is one of those things that you'll never get to check, you can only live in one universe at the time...

Poor choices in retrospect are fantasy, you make your choices in real time to the best of your ability and you hope that you make them well. If you're going to second guess yourself (or be second guessed by third parties such as techchrunch) after the fact then you are engaging in deception. For all you know the whole thing could have gone south and then everybody would have have been saying 'wow, look at how much money they saved'.

Hindsight...

pg2• 17 years ago

The title isn't claiming they suffered a loss, more that they lost out. Those are different senses of the word.

And they did lose out, if they had convertible debt and asked for the money back instead of converting it. That is an exceptionally rare outcome. No VC does a convertible debt deal expecting it to actually be a loan.

Everyone seems to hate this article, but I found it useful. It is an interesting data point that a fairly highly regarded VC thought so little of Zappos that they opted not to convert a convertible round. It's up there with Battery turning down Facebook.

jacquesm4• 17 years ago

The title says 'lost big', not 'lost out'.

It is my understanding of the use of convertible debt that the industry uses this as a means of recouping part or all of the money in case an investment doesn't fly but doesn't tank either.

If it flies convert otherwise demand your cash back and treat the investment as a regular loan.

Wait too long with converting the debt and you'll find out that the knife cuts both ways.

What I really don't get in all this is why after such a spectacular exit this founder would go and pick up such a small investment on a convertible loan basis.

ErrantX• 17 years ago

It depends how you read the title - in fairness to jacquesm it does read like they have actually lost something. Which isnt technically true - they missed a great opportunity sure, but there is no loss, purely a failure to gain (IMO that's a huge distinction).

alaskamiller• 17 years ago

Hey, I would rather have cash in hand than a lottery ticket. Especially if I'm not in the business of big dreaming.

neilc• 17 years ago

I think that preference is exactly why you're not a venture capital firm.

noelchurchill• 17 years ago

But what did Draper Richards end up using that cash for? What other company was it invested in? Perhaps this loss isn't really as bad as it seems.

mgenzel• 17 years ago

I think I speak for everyone when I say: "hindsight is 20/20"

crux• 17 years ago

I know there are a lot of founders, and therefore businesspeople, on this site—but I still find it a little weird that this kind of fratty business talk has so thoroughly permeated hacker culture. This article has absolutely 0 technical content; it's entirely about a business deal, and it could be about any business deal.

I am not of course suggesting that this should be of less concern to hackers, or to the population of this website (or of the Web 2.0 penumbrua in general), so please don't view this as another 'Uh, should this really be on Hacker News?' post. I just am sometimes struck by the tone and focus of much of the chatter on the 'technical' web---by how thoroughly, apparently, so many of its denizens have been totally consumed by concern with how well any given fund made out on a business deal, and bodies of shares; and by the obnoxious Wall Street tone that can be taken, more or less indistinguishable from the smug chatter of the talking heads on cable TV or any of the obnoxious businessmen that I know.

alanthonyc• 17 years ago

This is a terrible article: it is completely without substance and a great example of why I try not to click on tc links when they come up on here. Pure linkbait.

Burned again.

Summary: somebody lent Zappos some money a while ago and demanded repayment instead of stock. So they got repaid.

How this translates into "losing big" befuddles me.

Guess Who Lost Big on the Zappos Deal?

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