Refreshing Honesty On Why Zappos Sold To Amazon

from the our-board-sucked dept

Back when Amazon bought Zappos for a little over a billion dollars, it left a lot of people scratching their heads. Zappos had been growing like gangbusters, gettings tons of positive attention, in part due to its obsessive commitment to over delivering on customer service, as well as its unique and creative management practices. Given all of that, any acquisition was a bit of a surprise, let alone one at a price that wasn't much more than 1x revenue (even in a low margin business). At the time, the announcement from Zappos CEO Tony Hsieh definitely stunk of PR-spin, as well, which was unfortunate, coming from a guy who's usually such a straight shooter.

So it's very cool to see (via Liz Gannes) that Tony has since written up a very honest explanation for why he sold Zappos. It really comes off as a lesson in how your investors can force you into moves you really don't want to make. First he details some of the realities of operating an e-commerce business: how they had a revolving line of credit for $100 million that could be pulled pretty easily, as well as some other inventory issues that could lead to cash flow problems, even as the business itself was thriving (if you've never run a business, it's important to understand the differences between revenue and cash flow). Those cash flow problems were apparently creating tension on the board of directors, made up of some venture capitalists that Zappos had brought on late in the game (it had been financed by Tony for a while):
These issues had nothing to do with the underlying performance of our business, but they increased tensions on our board of directors. Some board members had always viewed our company culture as a pet project -- "Tony's social experiments," they called it. I disagreed. I believe that getting the culture right is the most important thing a company can do. But the board took the conventional view -- namely, that a business should focus on profitability first and then use the profits to do nice things for its employees. 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.

On some level, I was sympathetic to the board's position. The truth was that if we pulled back on the culture stuff, the immediate effect on our financials would probably have been positive. It would have reduced our expenses in the short term, and I don't think our sales would have suffered much at first. But I was pretty sure that in the long term, it would have ruined everything we had created.

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.
From there, Tony and Alfred decided the best way to get out from under the threat of board revolt was to buy out the board, and that led them to go looking for a partner to help make that possible. That eventually resulted in knocking on Amazon's door, which turned into a discussion about a full acquisition -- which Tony agreed to once he felt clear that Bezos and Amazon understood the culture aspect that he felt was so important, and agreed to let Zappos operate independently and continue that tradition.

Now, times may change, and situations may change. Tony may end up leaving. Amazon may not like how things are going at Zappos at some point. Or Amazon may come under more financial pressure from its own shareholders (though, to be fair, for many years Bezos did an amazing job resisting calls from Wall Street to focus on short term profits over long term results -- if no one has done a case study on this, someone should...). However, to some extent, this really is a story that touches on our recent discussion on motivation and monetary rewards. Hsieh and Lin certainly made out very nicely in the Amazon acquisition. If I remember correctly they each ended up with hundreds of millions of dollars. But at the rate the company was growing, many thought they could have done much, much better by hanging on and waiting for an IPO. However, there are motivators other than "more money" -- especially when you already have plenty of it. And, in this case, that seemed to work out for Zappos.

Either way, the clear honesty of what was happening behind the scenes that resulted in the sale is nice to see. You usually don't hear that at all (other than random rumors). Lots of things happen behind the scenes in various business deals, much of which never gets talked about. It's always nice to get a peek into the details of some of those situations.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    John Doe, Jun 7th, 2010 @ 4:35pm

    The myth of shareholder value...

    I am glad to see that there is a company out there that understands you cannot manage shareholder value at the expense of employee value. Most companies only focus on profits to the total neglect of the employees. They mistakenly think that employees are worthless and replaceable. What they don't realize is that employess can make or break a company.

    There are three aspects to managing a company, employees, customers and shareholders. Unfortunately, most companies only focus on the shareholders.

    Consider Zappos; they are a glorified online shoe company. Well, they do clothing now too, but you get my point. There are hundreds of online shoe and clothing companies, the vast majority you have never heard of and never will. But Zappos focused on happy employees to create happy customers which resulted in happy profits.

    It would be amazing to think what a company can do in short order when they address all three aspects of a company rather than only one.

     

    reply to this | link to this | view in thread ]

  2.  
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    out_of_the_blue, Jun 7th, 2010 @ 4:44pm

    Yes, greed should be kept in rein by progressive tax rates.

    Greed clearly works against public interest, as does the notion that shareholders are the only ones who should have a say in how a company is run. Workers are mere economic units, then. Statutes requiring a focus on shareholders exist precisely because it's an unnatural view, and guess who exerted influence on politicians to get such passed? Surprise, was again the grasping Rich.

    Everywhere you look, society is structured by the rich and for the rich. It's becoming more obvious as they reach further.

    (Two notes:
    1) YOU are not rich, and wouldn't be affected by high tax rates.

    2) I've never heard of Zappos, but I'm going to bet that it doesn't manufacture widgets in the US, but only re-sells something. Retailers don't make for very good examples of everyday success, they rely on someone else's efforts...
    )

     

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  3.  
    identicon
    John Doe, Jun 7th, 2010 @ 4:47pm

    Re: Yes, greed should be kept in rein by progressive tax rates.

    Say wha? What does this have to do with the article at hand? If $1 billion is not success because they are a retailer than I would love to be a miserable failure.

    And since when are retailers not a legit business? Someone has to sell the goods being produced. The mfgs could do it but don't so they rely on the retailers.

    But I am guessing logic is lost on you.

     

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  4.  
    identicon
    Greg G, Jun 7th, 2010 @ 8:54pm

    Re: Yes, greed should be kept in rein by progressive tax rates.

    hmmm.. you're comments are from out of the blue. Serious fail from a moron in a hurry.

    If you have a job, guess you probably is paying you to do that job? Yep, it's "the grasping rich," as you call them.

    So STFU.

     

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  5.  
    icon
    Kitchenator (profile), Jun 8th, 2010 @ 1:35am

    Re: Yes, greed should be kept in rein by progressive tax rates.

    You are a Communist, right?

    > Statutes requiring a focus on shareholders
    Clearly you don't understand the concept of a public company. Shareholders are the owners of a company. Every Board has a fiduciary duty to its shareholders to make money for them. If they don't, they get booted out.

    The rich got that way because they worked hard. I'm guessing you don't, and are resentful that you don't get more handouts.

     

    reply to this | link to this | view in thread ]

  6.  
    identicon
    Anonymous Coward, Jun 8th, 2010 @ 8:33am

    Re: Re: Yes, greed should be kept in rein by progressive tax rates.

    If I understand the linked story correctly, Zappos was pre-IPO, which suggests that financial pressure was being exerted by the investor groups of VCs (perhaps the second round and subsequent investment groups who typically have to pony up more $$ than first round investors).

    If this is the case, it would serve as an example of what can happen when investor groups place their primary focus on the IPO if the company is to be taken public.

     

    reply to this | link to this | view in thread ]

  7.  
    identicon
    out_of_the_blue, Jun 8th, 2010 @ 8:56am

    @ #3, 4, 5

    No, I'm a Populist, the truly American view of distrusting big gov't, big corporations, and Inherited Riches. All should be whittled down to size continually, or they get out of control.

    You guys predictably defend the notion that shareholders are the *sole* concern of a company, which IS the main point of the trouble Zappos had. Evidently you're willing to exploit labor until their bodies wear out then let them die, so long as shareholders profit. Move to China then. -- That may be where Zappos gets their products, eh?

    "The rich got that way because they worked hard." -- MYTH. True in the past to large degree (there's a useful distinction between *getting* rich and *being* rich), but The Rich are now five and six generations away from anything resembling labor, and constantly increasing their burden on labor with every generation of inherited parasites who get literally feudal entitlements from birth to live at the very highest levels. In no way do you exchange labor with The Rich, they get more in a year without the least effort than you will in a lifetime of hard work. That's not merely unfair, it's impossible to maintain civil society with this trend.

    You three haven't got anything to engage me with, so you just try to silence me: "logic is lost on you", "STFU", "Communist". -- WOW, I'm crushed.

     

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  8.  
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    DannyDeranged, Jun 18th, 2010 @ 2:27pm

    Re: @ #3, 4, 5

    Do you actually know what a populist is? I didn't even bother to read the rest of your reply after you managed to get that one wrong on soooo many different levels.

    At first I was excited that someone was explaining something concisely and with clarity, but you quickly made it clear that, while you can state facts and opinions well, you lack an understanding of many relevant issues.

     

    reply to this | link to this | view in thread ]

  9.  
    identicon
    Daniel Yerelian, Mar 11th, 2012 @ 6:04pm

    Resist Humane Nature.

    Thanks for putting down these thoughts. It has become so common place for business men/women to look for the quickest profits in the least amount of time. Instead of taking pride in building some lasting company the interest has swung to taking pride to how quickly money can be made, then moving on to the next project.

     

    reply to this | link to this | view in thread ]

  10.  
    identicon
    Philip Clock, Dec 26th, 2012 @ 5:07pm

    Re: Yes, greed should be kept in rein by progressive tax rates.

    Oh, really, who's the Ayatollah beheading the "greedy", that you, pal?

    You're EXACTLY why the founding fathers fought a revolution, keep both you and King George out of bedrooms, so WE THE PEOPLE can make our OWN decisions, away from your sanctimonious morality, keep it at YOUR dinner table, and away from mine, thank you very much.

    Or maybe you want ME in your face, every day, penalizing you every time you're "greedy", as I see it. No instant replay, sorry.

     

    reply to this | link to this | view in thread ]


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