Zappos Deal Shows VCs Hate Entrepreneurs

http://www.manyniches.com/entrepreneurs/zappos-deal-shows-vcs-hate-entrepreneurs/

by BrandonWatson • 17 years ago

36 27 17 years ago

pclark3• 17 years ago

there has to be another side to this story.

There certainly may be, and I would love more info. My experience as an investor and entrepreneur, however, has been that the interests of investor and management can have a tough time aligning when money is on the table.

pclark3• 17 years ago

Quite. seems rather unusual that the founders want to grow larger and the investor wants to take the money offered though ...

ajju2• 17 years ago

Hate is just the wrong word to use. Do you think Sequoia had a personal dislike for Tony? Or do you think they just wanted to cash out earlier? Even the latter is speculation based on un-named sources, but assuming it's true - where does hate figure into any of this?

BrandonWatson8• 17 years ago

Perhaps "hate" is too strong a word, but the more I think about this, I find it hard to understand why Sequoia would force a sale here. Tony is a very successful guy, who has built something quite amazing and unique. The public market would most likely be very receptive to the Zappos story. Their unique blend of customer focused service has erected quite a defensible market position, and I suspect that once they acquire a customer, the customer lifetime value is quite high.

With all that in mind, why would Sequoia force a sale? They wanted to report a liquidity event. They put a short term profit motive above the desires for building an even more successful business, which, according to all accounts, Zappos stood a very good chance of doing.

ajju2• 17 years ago

Assuming, again, that the speculation that this was a forced sale is true, there could be any number of reasons for it - ranging from the simple (Sequoia needs a good exit in this bleak environment for their limited partners and don't have any better alternatives) to the complex (Sequoia's analysis of the macro-economic conditions and their understanding of Zappos' business disagree with your own).

donaldc• 17 years ago

Their interests may differ, but VCs don't hate Tony Hsieh. Indeed, if he ever starts another company, I bet they'll be falling all over themselves wanting to fund him.

Also, while the founder/CEO of Zappos may not have wanted to sell, were I an early employee with a lot of vested stock, I might be happy that my stock was finally liquid. Zappos has been in existence for 10 years, and I just might be interested in cashing out enough stock to buy a nice house.

Tony already had enough money, and made a big enough salary, that the independence of Zappos was worth more than having Zappos stock liquid, but I doubt this was true for all of the early employees.

gleb• 17 years ago

Good point. In general, in the VC backed business, the interests of employees tend to be aligned with interests of VCs not with interests of founders. Both VCs and employees need an exit and both make too little money to matter on a small exit.

mrduncan• 17 years ago

I agree with ajju, hate is totally the wrong word to use. Both parties simply have different interests. In this case, Sequoia wanted liquidity on their investment (the economy is in a downturn after all), while from what I understand Tony wanted to stay independent so that he could continue to run his company. I don't think that this in any way shows that Sequoia hates Tony though.

If the articles are true, it definitely casts a bit of a shadow on Sequoia. Having a reputation for wanting to cash out at any moment certainly isn't good when trying to court entrepreneurs.

BrandonWatson8• 17 years ago

Yes, both parties have different interests. One commenter pointed out that the employees could have really wanted this, as they likely don't have the financial security Tony has. I am sure there are more than one Twitter employee wondering when they can cash out some shares.

jasonlbaptiste• 17 years ago

Yes, Sequioa capital hates entrepreneurs. Somehow they hate them soooooo much they were able to attract founders who made successes such as Apple, PayPal, EA, Google, Yahoo, Youtube, and over 10% of the Nasdaq.

Please leave linkbait and uninformed articles like this to other places. Maybe they didn't want to sell, but it was not a homerun exit, and there are rules of engagement when taking on VC.

mattmaroon3• 17 years ago

This is actually pretty stupid. There's a literal 0% chance that Tony Hsieh got a bad deal here. The guy's a successful repeat entrepreneur who had been through the whole thing before and was dealing with a top-notch VC firm. He knew the game way too well to be getting burned by participating preferred or some absurd liquidation preference. Hell, I knew the game well enough to have avoided that before I even got in it, just from Googling around. (Thanks PG!)

He may have been forced to sell perhaps, but he gave up that right when he took the money and he knew it was a very real possibility. He also knew that if it happened, he'd be making a bundle off of it. If he feels screwed right now, which seems highly unlikely, it's his own fault.

VCs don't hate entrepreneurs, most of them love them. They just have a business to run and look out for themselves. The good ones, like Sequoia, do it by aligning their interests with the founders as much as possible.

BrandonWatson8• 17 years ago

Matt, yours is an opinion that I hold in high regard, and am a frequent reader of your blog. I am not in any way insinuating that the cash out deal for Tony is bad. What I am suggesting is that perhaps this wasn't the deal he wanted. It sounded like he wanted to stay the course and try to go public, which would have yielded a far higher pay day (presumably) and would have allowed him more autonomy than a sale to Amazon.

True he gave up the right to block a sale (I say this without any knowledge of the definitive documents) when he took the money, but I don't think it's too far afield to suggest that Tony thought he was getting a partner that would allow him to see this through.

The VC in this case was most likely acting in economic self interest, but not in the interest of the entrepreneur (or so it would appear).

ryanwaggoner2• 17 years ago

The VC in this case was most likely acting in economic self interest, but not in the interest of the entrepreneur (or so it would appear).

This is a far cry from your headline that VCs "hate" entrepreneurs. VCs have a fiduciary responsibility to act in the best interest of their LPs. The best VCs work to align the interests of all parties involved, but when they conflict, the VCs have a duty to act in the best interest of their investors, just as entrepreneurs have a duty to act in the best interest of theirs. Using phrases like "VCs hate entrepreneurs" is beyond sensational and distorts the relationships and responsibilities of all parties.

For the record, I'm not a huge fan of the VC model, but for entirely different reasons.

mattmaroon3• 17 years ago

Well, what was all that junk about liquidation preferences? That seemed to be insinuating the cash out deal could have been bad.

But the bigger point is that stuff isn't VCs hating entrepreneurs. If that rumor is true, it's just them doing exactly what Tony expected them to (or at least realized they would strongly consider) when he took the money.

You could similarly say Tony hates VCs because he didn't want to sell and give Sequoia a huge 5-10x, but that would be equally untrue.

tvon• 17 years ago

Isn't it the role of a VC to give a company funding so they can get a big return on their investment later one when the company sells, or something along those lines? I mean, isn't that something everyone expects when they get involved with a VC? Isn't that what they're for? Am I misunderstanding something here?

dan_the_welder• 17 years ago

Venture Capitalists are capitalists. They believe that all wealth flows from capital.

Entrepreneurs believe in free enterprise, that wealth flows from one's efforts.

There will always be tension between the two camps.

BRadmin• 17 years ago

"...but that liquidation preference (3 or 3.5X!!) is meant to ensure that no matter what, Sequoia actually gets a guaranteed return."

Since when does liquidation preference confer a guaranteed return?

BrandonWatson8• 17 years ago

The guaranteed return is in the interest rate that their security undoubtedly had...prob around 12% to 15%. In the event of a sale, the liquidation preference creates a scenario where the equity is being treated like debt - their money comes out first, and does so with an increased return. If they invested $100 with a 12% paid in kind interest, after 1 year, that's $112, and with a 3x liquidation preference, that's a $336 return for a $100 investment. If the sale of the company was under $336, the VC gets a guaranteed return, and all of the capital. It gets even worse over time. With a seven year horizon and the same return and liq pref, the sale price would have to be greater than $663 for the preferences to not come into the decision tree.

People cry foul over the payday loan places, but no one is crying foul over a 3x liq pref. 1x is palatable, but 3x (or even 3.5x) is crazy.

quoderat• 17 years ago

If they don't put DRM in the shoes, then break into my house and steal them back in the middle of the night, I might consider buying something from Zappos again.

Zappos Deal Shows VCs Hate Entrepreneurs

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