Season 2, Episode 1: Zappos (with Alfred Lin)

[0] Hey, Acquired listeners.

[1] Before this episode starts, David and I wanted to give you a heads up that the audio quality is pretty rough in the second half.

[2] We had a problem that we didn't catch until afterwards that makes it sound like a conference call with a poor connection.

[3] This stuff is important to us and we even talked about not even releasing the episode.

[4] However, the interview content is just awesome.

[5] So we thought it'd be a shame not to share it with all of you.

[6] We apologize and we hope you enjoy the interview.

[7] Okay.

[8] And is video good for you?

[9] Is this a good angle?

[10] Is this a good angle?

[11] You look great.

[12] This is a good handgun.

[13] Are you getting my good side?

[14] Always, David.

[15] Welcome to Season 2, Episode 1 of Acquired, the show about technology, acquisitions, and IPOs.

[16] I'm Ben Gilbert.

[17] I'm David Rosenpaw.

[18] And we are your hosts.

[19] And I'm Alfred Len.

[20] Hey, welcome, Alfred.

[21] We're very, very excited.

[22] I know, I know.

[23] Too bad our titles really do those in.

[24] Thank you for having me on the show.

[25] Yeah, we're super pumped to have you.

[26] Listeners, this episode is going to be about Zappos.

[27] And Alfred is one of the few people in the world who can actually do this episode justice and come on to do the show with us.

[28] In December, I mentioned that we're switching to seasons so we can do themes and miniseries across several episodes.

[29] And for our first episode, we wanted to do a really classic acquired format reviewing an M &A transaction.

[30] action.

[31] And this is one of the ones that has been at the top of our list for a very long time.

[32] So David, do you want to introduce who is Alfred Lynn?

[33] Our mystery guest, not so mystery guest.

[34] So today, Alfred is a VC at Sequoia Capital, where he's the co -head of their U .S. venture business and represents Sequoia on boards of many great companies, such as Airbnb, house, DoorDash, Zipline, and many others.

[35] But today, we're going to talk about his time before Sequoia when he was the chairman and COO of Zappos, and which was prior to Hull Foods, Amazon's largest acquisition ever.

[36] But my favorite part of Alfred's background, which we'll get into, was that long before Zappos, when he was an undergrad at Harvard with Tony Shea, he was known as the, and I'm quoting directly from Tony here, he was known as the human trash compactor of pizza, which also it turns out is pretty relevant to the Zappos story.

[37] So welcome, Alfred, and thanks for coming on.

[38] Well, thank you for having me. I'm no longer the human trash compactor of pizza.

[39] I try not to eat as much.

[40] Too much.

[41] I was going to say.

[42] Given that I'm a lot older, I don't have the same metabolism as I used to.

[43] It looks like a few things have changed since those days.

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[61] Thanks, ServiceNow.

[62] So David, now without further ado.

[63] So when most people think of Zappos, they probably imagine It was started by a guy named Tony Shea, who lived in Las Vegas, loved shoes, and he probably named it Zappos because he had some lifelong obsession with weird and quirky company culture, right?

[64] Impressive, David.

[65] Every word of that sentence was wrong.

[66] Yeah, Ben's right.

[67] That's not quite accurate.

[68] I really should have done my research here.

[69] The founder of Zappos was Nick Swimmer.

[70] He had started the company because he was looking for particular pair of shoes and he went to one store, couldn't find the right size, went to another store, couldn't find the right color, went to another store, couldn't find the right style, and went home empty -handed and decided to go Google on the internet, and he couldn't find a place where you can buy his shoes.

[71] And so this was 1999.

[72] He thought it was a good idea, and he was a webmaster.

[73] He thought he was a good idea to just quit his job and create a website and start Zappos.

[74] And here we are.

[75] Fortunately, he called you guys.

[76] Alfred, I miss the term webmaster.

[77] We got to bring that back.

[78] Well, I guess nobody really is a webmaster anymore because we've moved on from websites to mobile, mobile apps.

[79] No, there's one webmaster.

[80] His name is Jeff Bezos.

[81] He is the webmaster.

[82] He is the webmaster.

[83] So let's start way back, even before then.

[84] We go back to your undergrad days at Harvard in the early 90s when you were still the human trash compactor.

[85] And so you were, you were an undergrad and you had two friends, Tony Shea and Sanjay Madan.

[86] And you guys decided you would develop a business together.

[87] And Tony and Sanjay were CS majors.

[88] And you were a math major, right?

[89] And so naturally, you guys were going to do something very technical, very smart.

[90] But the business actually turned into a pizza business.

[91] And so the story, as it is told in lore, is that Tony and Sanjay, They lived in Quincy House at Harvard, and they managed the grill in the basement, which was sort of a late -night dive bar study spot.

[92] And you lived upstairs, and you would come down and you would buy pizzas from them and then take them upstairs and resell them by the slice at a profit.

[93] Yeah, that's mostly true.

[94] But I think the interesting part about that story is, yes, Tony and Sanjay and I were friends.

[95] We had other friends.

[96] We didn't really hang out all that much together.

[97] What brought us together is the grill, and that is an interesting place.

[98] It was a place where lots of undergrads hung out late at night, trying to get something to eat while they're working on their promsets or write their term papers.

[99] Tony and Sondry were actually very entrepreneurial even back then.

[100] Usually what happens is the graduating seniors would sell the grill, the rights of the grill, to the upcoming seniors, so the graduating juniors who will be senior.

[101] So they would hold the rights of the grill for one year.

[102] And because they can only operate the grill for one year, they mostly did very simple stuff like hamburgers and fries and milkshakes, which, you know, sounds great, but it actually doesn't have great margins.

[103] And Tony had this great idea of like, if I could just buy the rights of the grill for two years, I can amortize the cost of having a pizza oven in there.

[104] And pizza has great margin if you can overcome the cost of the oven.

[105] And so he decided that he was going to bid for the rights for two years.

[106] And his bid was highest bid plus $1.

[107] I mean, that was a pretty courageous thing for him to do.

[108] And so that's what he did.

[109] I happened to have a pretty large grooming blocking group in Quincy.

[110] And I did come downstairs, negotiate with Tony and say, hey, I'll just buy them by the pie instead of the slice.

[111] And then I did bring it upstairs.

[112] is I didn't really sell it by the slice.

[113] I just wanted my money back.

[114] That's the part that is, you know, it sounded predatory, but what I was trying to do is just get my money back.

[115] And the slices were $2 a slice downstairs.

[116] I got a discount, so it was maybe $1 .50, $1 .25 when you buy it as a pie.

[117] And the thing that is most interesting about that story is I always got $2, even though I asked for $1 .25, I have $1 .50.

[118] And the reason is like today maybe not as obvious, but back then you needed quarters for washing machines, drying machines, vending machines, arcade games.

[119] Today you probably have, you know, pay with that with a card or a phone.

[120] But that was important to, it was a really interesting business lesson, which is sometimes even something like a commodity, like a quarter, a quarter is sometimes worth more than 25 cents.

[121] I just thought that was an interesting arbitrage opportunity like story.

[122] That's awesome.

[123] of you guys were delivering happiness, even back at Harvard.

[124] You get your slice of pizza and your quarter for laundry.

[125] Yeah, yeah.

[126] And it started out with lots of conversations on how to make the grill better.

[127] Tony started recording movies and playing them downstairs.

[128] So they would get people to hang out more to make the experience better or talking about customer experience and not just like serving people food, which, yes, made them happy.

[129] But how do you get people to congregate downstairs and hang out?

[130] So there was a lot of conversations about that one day.

[131] The reason Tony tells this story is because he was one day we're calculating how much we made.

[132] And he was like, he made the calculation and said, Alfred, you actually make more per hour than I do.

[133] I'm like, come on.

[134] I like order.

[135] I call down, order, come downstairs, pick it up and take it upstairs.

[136] Yeah, sorry, fine.

[137] I make more per hour.

[138] But you make, you still make more in aggregate because you spent more time on the grill.

[139] But those are the type of like geeky things that we talked about.

[140] when we're in college.

[141] And the legend is, of course, that's why you became CFO of your first company together, which was Link Exchange.

[142] So after you guys all graduated, you all moved out west.

[143] And Tony and Sanjay started working at Oracle as developers.

[144] And you started a PhD program in statistics at Stanford.

[145] And then supposedly, right, I have to ask you about this, you tried to convince them to come and run the same pizza game at Stanford, right?

[146] No, actually, Tony was looking into starting a similar business that he was trying to get a Subways franchise on campus or a pizza business on campus.

[147] And I told him, well, there are plenty of pizza stores and there is a Subways on University Avenue.

[148] So it may be a little difficult to make the economics work.

[149] But he, you know, he's always a little bit ahead of everybody else because he said, well, that's too far away.

[150] on campus.

[151] And at the time, campus didn't allow third -party operators to, like, be there.

[152] Of course, that's changed.

[153] Those rules have changed on Stanford's campus.

[154] But it was always a little bit ahead.

[155] The thing that was interesting is, like, the internet was happening.

[156] So it was like, why don't we, like, think about some internet business?

[157] And Lake Exchange came about as a fluke, because when they started, Tony and Sanjay were bored at Oracle, they would go to their weekly meetings, they'd be told what to do, and they would figure out how to do that work within half a day to a day or an afternoon.

[158] And then they would work on their side business, which was building websites for companies that would pay them.

[159] And this is back once HTML seemed like something really hard to learn.

[160] It turns out not to be that hard to learn, but people didn't want to learn it.

[161] So they were more than happy to code up sites in HTML for others, and they would be paid a very handsome fee for creating these sites.

[162] And the sad part for them was these sites would just stand alone and there would be no traffic.

[163] Nobody would go to them.

[164] So then they sort of figured out how to link all these sites together and try to drive traffic to each other.

[165] And that was the creation of link exchange.

[166] Yeah.

[167] And I mean, it basically in a lot of ways invented, you know, the display advertising network business that eventually becomes, you know, double -click and a quantitative.

[168] These become massive acquisitions from Google and Microsoft.

[169] But you guys were first in a lot of ways.

[170] We're early.

[171] There were a bunch of copycats along the way.

[172] Some were like Hyperbanner and other banner exchanges.

[173] And then obviously Double -Click and Equantive.

[174] We sold a little too early before that.

[175] And then there was a next wave of these companies on the mobile.

[176] So history does repeat itself.

[177] and so Sequoia not only invested in Lake Exchange and made 17 X in 17 months, but they also invested in ad mob, and ad mob's acquisition by Apple was much bigger than than Lake Exchange's acquisition.

[178] Well, if you adjust for inflation, you know, he'll probably both say.

[179] Yeah.

[180] Alfred, it feels like you've said that 17X and 17 months before.

[181] I don't know, rolled right off the tongue.

[182] Yeah, I thought, you know, that was the first time I was like, I said to Michael Moritz, who was on the board, It seemed, wow, this is a great business.

[183] Does this happen all the time?

[184] And he's like, yeah, that doesn't always happen.

[185] But what I got to do is I learned a lot from Michael.

[186] He was a great mentor for me. I developed a great relationship with Sequoia and the Skoria partners.

[187] I know how they operate.

[188] There's a lot of work that goes into venture capital that I did not appreciate at the time because it seemed like it was easy money.

[189] Yeah.

[190] But going back, if you had to rewind, you know, Michael was interim CEO for a period of time when we're looking for a CEO.

[191] Oh, wow.

[192] He spent a day a week at the company.

[193] And so today when I'm sitting in this seat at Sequoia, I just remember back the success of Sequoia has a lot to do with partnering with the founders and the management teams of their companies and picking up and doing whatever to help the company succeed.

[194] Yeah.

[195] And so that's why this is, for me, a very rewarding job.

[196] That's really cool.

[197] I didn't realize that Michael had actually stepped in as temporary CEO.

[198] But as you say, so you sold the company after 17 months to Microsoft, and you and Tony decided, maybe as you said, you thought the venture business was easy.

[199] It's not.

[200] We've talked about that a bunch on this show.

[201] You leave and you decide to raise a fund on your own.

[202] And this is essentially, like today, this would be a pre -seed venture fund.

[203] Yeah, back then, we raised $27 million from friends and family of link exchange after the liquidity event, but 27 million back then was a fairly sizable fund for seed and pre -seed.

[204] Today, it's like not that.

[205] It's like average, I would say.

[206] Yeah.

[207] And the idea was not to write $100 ,000 or $200 ,000 checks, but to have like a million in on average for a concentrated portfolio.

[208] We had decided that we were going to figure out how to invest in 27 -ish, or really 30 companies over three years, we ended up making 27 investments, but it was over one year.

[209] Wow.

[210] And you didn't reserve anything for prorata.

[211] And we didn't reserve anything for prorata.

[212] So that was a big learning experience of like time diversification is actually important in the venture business because it was a 1999 was not a great time to be an investor.

[213] how do you even have the deal flow to be doing two deals a month I mean with that small of a fund and that few of a number of GPs like how does that work I think we were just you know we we had a good network we knew lots of people in the internet space and so we were primarily investing in just the internet and so it wasn't hard to find companies to invest in and keep in mind you know deal flow the level of sophistication people have today thinking about companies was not the same back then, right?

[214] Like the company, any company that had a product that was working and had eyeballs, people were funding.

[215] So we did some of that too.

[216] We also made some good investments.

[217] We're pretty proud of our track worker at VentureFrogs.

[218] It ended up being a 7 .5 to 8X fund after fees.

[219] Wow.

[220] For a 1999 fund, I'm pretty sure that's in a top decile, if not the top.

[221] I mean, it's very hard.

[222] Only the top, top, you know, venture funds these days are seven or eight X after fees, period.

[223] But to do that in 99, but it was the result of a lot of work that you ended up doing in the portfolio.

[224] It was a result of, we, in 2000 or 2001, we did, we looked at the portfolio.

[225] And there were basically three sets of companies.

[226] There are like companies that we, you know, regardless of whether we help or not, they were going to go under.

[227] And then, And their companies, like, regardless, whether we help or not, they were going to do just fine.

[228] So that was, you guys invested in an open table, right?

[229] We invested in an open table.

[230] They were going to do just fine.

[231] Mago music got sold to Microsoft.

[232] They were going to do just fine.

[233] We didn't have to do much work for it.

[234] There was a company that was in the web space.

[235] It was called Miable.

[236] They were trying to create my pages for, for Wap phones.

[237] Imagine, like, can't even imagine looking at these small screens.

[238] Why you would put a my page on that.

[239] But anyway, they were building that.

[240] that got told to phone .com, which got merged with software .com to create open wave systems.

[241] So that defined, there are a bunch of companies that define regardless whether we helped them or not.

[242] And then, like I said, the first class was like most of these companies were just going to go under regardless of whether we help them or not.

[243] And then there were two companies we felt like if we helped, we could make a lot of impact in those companies.

[244] And those two companies were tommy networks and Zappos.

[245] So did you and Tony sit down and say like, okay, let's draw Strauss, who's, who's, And also on this, how do you determine if a company is at a place where if you apply high leverage, it makes an impact or not?

[246] Like, how do they, are there certain types of business models or certain places where you have domain expertise where you're like, yep, if we apply here, it can go the distance?

[247] Or how do you figure that out?

[248] I think when you, like, you sort of step back, you kind of think about whether the investment thesis was right or wrong.

[249] And then you kind of know that, you got this wrong.

[250] it's not going to work.

[251] Here are the reasons why it's not going to work.

[252] This might be an interesting problem.

[253] At Sequoia, we've over the years created these buckets.

[254] Sometimes you have a feature, it's not a product, or you have a product, but it's not a company.

[255] And I didn't have those Lister frameworks back then, but it was pretty clear, like, yeah, this is a nice tool, and people will use it, but you can't really build any meaningful business or user base on top of it.

[256] And so then you're like, okay, well, maybe they'll pivot to, something different, but we're not in the business of helping them think about pivoting to another business that they're not passionate about.

[257] That's one set of like, well, we can't really help companies where they're not really a company or a product, they're really a feature.

[258] And there's a set of, like, I think founders who are resistant to change.

[259] And so if they don't really want our advice, that's difficult to sort of influence.

[260] And then there are just a a set of things you just got wrong about the business or the business model and the underlying assumptions has proven to be the opposite of what you assumed.

[261] And so those are the conclusions.

[262] And then unfortunately, there's also class of things where maybe the product is great and the underlying assumptions are right and the founders will listen and work hard, but it can't raise money for whatever reason.

[263] the story is not good.

[264] You can work on the story.

[265] But for whatever reason, it can't get the capital that it needs.

[266] And what's interesting, Zappos kind of fit into that bucket, right?

[267] Like, the business was good.

[268] It was growing.

[269] So you guys invested in 99.

[270] Nick had founded the business, just had a business plan.

[271] It was initially called Shusite .com, right?

[272] Which still redirects to Zappos, if you go there.

[273] And so you guys invest.

[274] And then it grows pretty nicely, I think, year 2000, first full year, It does about 1 .6 million in revenue.

[275] In 2001, you do over 8 million in revenue.

[276] But everybody was nuclear winter.

[277] There have been Pets .com and E -toys.

[278] Nobody wanted to fund it, right?

[279] But the business was growing.

[280] The business was growing, and it was actually one thing that was different about Zappos, even back then, was it was break -even.

[281] Most e -commerce companies were not break -even.

[282] Even today, we accept that they won't be break -even for the first few years.

[283] Back then, two, a lot of companies like Pets .com didn't.

[284] weren't breaking even.

[285] And I think the whole e -commerce category was just dead to all investors in 2000, 2001, 2002.

[286] And, you know, so even for Sequoia investing, Sequoia invested in, I think, in 2005.

[287] Yep.

[288] And so it took some time for a very toxic space to turn around, even when you have a good business.

[289] And so I attribute some of Zappos's success.

[290] There's a lot of, like, feel good stuff in Tony's book but there are two things that I think I attribute to, that is not told about very much in the founder lore because it's not a happy story but the lack of money is actually one of the things that sort of made Zappa successful.

[291] Very early on, it had to figure out how to acquire customers in a way that is unit positive on the first order.

[292] Yeah, and you guys were unit positive on the first order.

[293] I mean, that's not an easy thing to do ever, particularly at that moment.

[294] The company only raised 10 million dollars for primary capital.

[295] Yes, it raised more money from Sequoia for secondaries, and yes, it had debt, and yes, it had, it sort of leveraged relationships to get vendor credit.

[296] All of those things that are written in Tony's books, those were all true, but primary capital was about $10 million.

[297] And I don't think you can imagine today a e -commerce company raising $10 million and becoming a billion -dollar company over time.

[298] You'd probably think it's in the hundreds of millions of dollars, maybe 100 million or 200 million.

[299] And Zappos did burn $100 million to free cash flow.

[300] It was just smart about how it did it.

[301] It did it from vendor relationships, extending the terms from net 30 to net 90 over time.

[302] We didn't do it immediately.

[303] We got a line of credit that we did need to use for a short period of time to get inventory before we sold it.

[304] So we had to understand our cash conversion cycle very, very well.

[305] Was it easier to acquire at scale those days?

[306] Like when you think about today, it's in many ways expensive to acquire from Facebook and Google, but then you were educating people about the whole category of e -commerce, particularly in these new niches they had never seen before.

[307] So, I mean, can you talk about acquisition costs then versus acquisition costs now?

[308] Yeah, I think that's a great question about acquisition.

[309] You know, everybody seems to think, well, yeah, you had it easy because Google was a lot cheaper back then.

[310] Well, it wasn't obvious that Google was a place to actually acquire.

[311] It probably wasn't sending you that much traffic.

[312] Well, no, but so like back then, there was a lot of acquisition channels that just didn't work.

[313] And we tried all of them.

[314] There was there was Yahoo banner ads.

[315] There was MSM banner ads.

[316] So there's a whole banner advertising category.

[317] Then there was like trying to buy placement at home plate at Pack Bell.

[318] We got all of like three customers from that.

[319] Did you guys do an AOL -sponsored channel?

[320] We probably did an AOL -sponsored channel for a short period of time.

[321] I don't particularly remember, but yes, we spent money on AOL.

[322] So, you know, when you say, oh, yeah, you know, you had it easy because you had Google and it was cheap and it was converting, well, yeah, that was true, but we discover that.

[323] And then when we, as soon as we discovered it, it wasn't like there was no competition out there.

[324] As soon as we discover, oh, yeah, it's really cool.

[325] You can bend on shoes and it actually sends us traffic and it converts.

[326] pretty well.

[327] Other people started bidding on shoes.

[328] So we had to keep going further and further and further and further down the long tail of keywords.

[329] This is all like things that you now think about.

[330] But like we had to do that.

[331] We had to do SEO.

[332] We had to figure out SEO optimization.

[333] Those were not things that there was a book about, you know, you were AB testing this stuff all the time.

[334] I would say back then Google was not obvious.

[335] We did that.

[336] It was doing print ads And print ads were actually pretty good.

[337] And when you did print ads that were co -branded with Stuart Whitesman or with Clarks, depending on the shoes that you're selling, it actually were pretty effective.

[338] And then we figured out a way for Stuart Whitesman to pay for that because it was co -branded.

[339] It's like, well, you put up Stuart Whitesman ads and they don't know what it buys.

[340] So why don't you put www .d .com at the bottom for your ads.

[341] And so a bit of negotiation.

[342] So those are clever things that you had to sort of do.

[343] do as soon as we start doing that, competitors start doing that.

[344] They were called co -op dollars or money that were available.

[345] And this is something for preparing this.

[346] You've talked a lot about this.

[347] All this stuff was really hard.

[348] And if you had slid a business plan across the table of Sequoia Capital that you were going to do this, they'd probably be like you're going to do print ads, right?

[349] But like because you had to do it, you had this muscle that nobody else had.

[350] And then when Amazon came and tried to compete with you, they didn't know how to do this stuff, right?

[351] Yeah, I think nothing in the consumer business is completely proprietary.

[352] You try to create these modes along the way, but consumer business modes are like little by little.

[353] You know, you make things a little bit more user -friendly.

[354] You make it a little bit cheaper for you to acquire customers.

[355] These are all like getting up every single day and figuring out how to do something 1 % better than the day before, and you try to make that additive.

[356] and if you're really good, you try to make those 1 % compound.

[357] And that's the way you sort of get ahead.

[358] And when Amazon tried it, there were other competitors before Amazon, but I would say one of the other things, back to the one sort of thing that people don't talk about is not having too much money was actually the thing for Zappas.

[359] Not having too many competitors at the beginning was also a great thing for Zappas.

[360] Yeah, that's calling at the herd, right?

[361] Yeah, so like in 1999 there were competitors by 2000, 2001.

[362] most of the competitors like died down and some of the competitors that did exist were pretty weak and you know the competitor they got a lot of money was northstrom shoes at con i got 20 million zappos got funded with 2 million they soon you know didn't go anywhere because they had too much money and five years end that's when the competition started heating up yeah but i i do think that it is important for founders to know that nothing destroys value faster than irrational competitors And so if we had irrational competitors very, very early on for long, sustained period of time, I'm not sure Zappos would have been around.

[363] But being able to learn a lot of these lessons over some period of time, and there's room to make mistakes and to experiment and to figure out the security bin and putting the ads in the security bin was actually pretty effective and actually pretty cheap because it was never done before.

[364] This is, Brett Stone writes about this and everything story, that you guys put ads on, and when you're going through security to check in at the airport, you put Zappos ads where you had to put your shoes, which is just brilliant, apparently.

[365] Which is now like an ad unit.

[366] Like that's a thing now.

[367] Yeah, and now it's very competitive.

[368] So when you say like, oh, yeah, you could acquire users for cheap, sure, but you have to go discover these things.

[369] This company had developed this business plan in 1999.

[370] They were all ready to go.

[371] And then September 11th happened.

[372] and they were still like working with the TSA for long period time to get it done.

[373] And so by the time they were ready and they were capable of doing this, they were soon going to be out of money.

[374] So they were willing to sell those ad units for very cheap.

[375] Yeah.

[376] So it actually was a third party who did those ad units.

[377] Well, let's rewind a little bit here.

[378] So we talked about venture frogs.

[379] So at some point, Alfred, you went to tell me and Tony went.

[380] And it sounds like not as CEO, but it's just sort of join the leadership team at Zappos.

[381] Can you take us from there a little bit on how Tony became CEO and how you found your way to Zappos?

[382] Sure.

[383] So I think we were both trying to us to help the companies that we thought we could help.

[384] And back to, you know, Tony thought that he could help Zappos.

[385] And he was willing to incubate the company in the loft and Venture Frogs Incubator.

[386] And then I had longstanding relationship with Hadi Partovia and Ali Partovee.

[387] and so Hattie was one of the founders to tell me, and he was telling me how much they were spending.

[388] And I'm like, wait, you raised $265 million and you're burning $60 million a year.

[389] That sounds crazy for a zero revenue company.

[390] Meanwhile, like, and you can't raise any money.

[391] It was like night and day.

[392] I'm like, well, Zappos can't, you know, whatever.

[393] Tony, just grow the business.

[394] Don't spend it.

[395] Don't spend any money just like it is today.

[396] Just grow it at break even.

[397] You're fine.

[398] You can't raise any money anyway.

[399] Here, this other company.

[400] raises $265 million and is losing $60 million a year.

[401] I'm like, I was pretty sure with a $60 million loss, you can narrow that to something lower than that.

[402] You could add value that way.

[403] And Tony really like the notion of trying to figure out to take a business from commodity business and layer on service.

[404] He had this whole thesis that most commodity businesses are commodity businesses because they don't layer on service.

[405] Yep.

[406] And so he wants his appos first.

[407] And for Tommy, I just thought my financial skills were going to be valued.

[408] It told me it turned out to be one of the first SaaS computing cloud, cloud company.

[409] It just wasn't.

[410] We had to build our own cloud.

[411] And, you know, we turned that company from not having any revenue, having too many people, having going through two and a half rounds of layoffs.

[412] The notion of the consumer business was that you can sell advertising.

[413] It's well, advertising units on Google are 90 % risk margin on this because of the infrastructure was going to be at best 50 % risk margin.

[414] That made it very hard to work.

[415] So we pivoted to their enterprise business, had to sort of change the mindset of the company.

[416] Mike McHugh did a great job, sort of shifting that.

[417] And we built an enterprise business through a lot of pivoting.

[418] I didn't realize Mike, so Mike's the founder and CEO of Flipboard there, right?

[419] Wow.

[420] I didn't realize he was a tell me. And so after Tell Me was in Gochay, but I joined Zappos.

[421] So in 2005, you came over to Zappos.

[422] You just raised the round from Sequoia.

[423] And shortly after you joined, Ray, Tony gets an email from Jeff Bezos, saying that Jeff is going to be in Las Vegas and wants to meet you guys.

[424] What were you guys thinking when you got that?

[425] I don't know.

[426] I just thought it was like probably should take the meeting.

[427] It would be cool to see if there's some partnership that we could do together.

[428] We weren't thinking that he was coming down to buy the company at all.

[429] So you brought back to pizza.

[430] You brought two pizzas to the meeting, right?

[431] Well, he's famously known for his two pizza team.

[432] So we thought we'd bring two pizzas.

[433] Funny enough, nobody, I don't think anybody ate the pizza.

[434] It wasn't that kind of view.

[435] It wasn't a, yeah, it wasn't a eat the pizza.

[436] Was Amazon in the shoe market at this point?

[437] Like, were they a competitor?

[438] I don't, I think they were like in the market to something, not in a big degree, but in a small way.

[439] And the suppliers, the shoe manufacturers, were pretty scared of Amazon, right?

[440] Because they were worried that Amazon would discount their merchandise below MSRP.

[441] The, the, they just go back.

[442] Like, back then, they were scared of anybody in the internet.

[443] They're not scared in the way that you're thinking about, like, these people are going to be dominant, to take our business.

[444] They were scared because they thought all internet businesses were fly -by -night businesses.

[445] And that consumers were never...

[446] Yeah, they were like, consumers would never buy shoes on the internet.

[447] You got, we need a shoe salesman.

[448] It's like the Silk Road.

[449] You can't.

[450] He needs a shoe salesman to come and talk to the customer, measure her feet or his feed and bring out like three pairs and try to upsell them another pair that they don't really want.

[451] I'm like, okay, whatever.

[452] So, so as you know, like originally the idea for Zappos was to be completely dropshed.

[453] And over time, just to get even some of these brands that sell to us, we had to like get more, get inventory.

[454] We had to buy the inventory.

[455] So part of, I was going to ask about that.

[456] So when you started it was drop ship.

[457] So the manufacturers would send the shoes directly to the customers.

[458] You wouldn't have to take inventory.

[459] You convert to a retailer model.

[460] Part of that I imagine was to provide better customer service.

[461] Yeah, because I think the brands are not set up to be direct to consumer businesses.

[462] So they don't take the time to think about what direct to consumer business needs.

[463] And so the packaging wasn't perfect.

[464] They were sending packaging slips like they would send to a store as opposed to a consumer.

[465] The boxes were not branded.

[466] They didn't have exact inventory because that's not actually as important to when you're sort of distributing to a store.

[467] So they were providing a subpar experience and we took over the experience because we felt like we wanted to provide 99 .9 % accuracy on inventory as an example.

[468] And we wanted to provide a nice and happy.

[469] joyful packing slip as opposed to a grid with members.

[470] But part of it, it sounds like, also was just getting their, like, you had to buy the inventory or else they weren't going to trust you to sell it.

[471] Yeah, and that's where most of the use of capital went, which is buying inventory.

[472] So when you go into this meeting with Amazon, what's the result of that?

[473] Do you guys walk away feeling like, well, they're about to come after us?

[474] I mean, I think it was a very happy meeting From what I remember it It was a long time ago So maybe I'm not remembering correctly But I think we didn't really It was hinted at Maybe we should join forces And we hinted back We're not quite ready to sell And the meeting kind of wrapped up pretty quickly We suggest that we do a partnership And I think the response back It was rightful which is like partnerships Don't tend to work When you have disparate like hugely disparate sizes of companies.

[475] And so we went on our way.

[476] And I don't think we were thinking that they would, we always thought they were going to come after us.

[477] Well, I wasn't thinking that they would immediately, well, in a few years, launch endless .com.

[478] Yeah.

[479] I think so it was the next year.

[480] They launched Ends .com, which is basically a clone of Tapos.

[481] They spent $30 million developing it.

[482] And when they launch, it has free overnight shipping, which is super clear.

[483] I mean, I'm sure it was obvious to you guys.

[484] They were losing money on every order.

[485] You guys worked so hard to be profitable.

[486] And they're just, as you say, you know, it's like lots of capital coming into the space and killing your economics.

[487] How did you react to that?

[488] Well, the only way you can react is like figure out how what you want to match that and how you differentiate against that way.

[489] So those are the two conversations.

[490] We had fortunately figured out how we had been upgrading shipping along the way.

[491] So over the years, we had sort of gotten people from on average.

[492] five -day delivery would always say five to seven days and delivered in five days and then four and then three then two we hadn't gone over not yet and so it wasn't that big of a leap to go from two to one it was a big you know for that time it was a big dollar difference shift would go from profitable to just break even again and so it was a big like decision to do that and we were still focused on making sure we had the largest selection we had the best vendor relationships and things like that that we thought were still differentiated against endless.

[493] So we went to free shipping both ways.

[494] We went to free overnight shipping.

[495] They went from free overnight shipping to because discounting on the shoes and season is not thought of as positive by the industry and they didn't want to hurt their own sort of ability to get in the way.

[496] And by not thought up as positive, you mean like the brands would stop retailing through them if they were selling below MSRP, right?

[497] Yeah, they can't ask you to change the price, but they can stop selling to you.

[498] They're like, okay, well, if you're going to discount before the season ends, we're going to not let you access to more.

[499] Right.

[500] They want them to cheap.

[501] So Amazon's very clever.

[502] I thought this was very clever.

[503] It's like, instead of discounting their shoes, they said, minus $5 for, or $5 back for overnight shipping.

[504] We'll pay you to send it to you overnight.

[505] I'm like, wow, that's really clever.

[506] Coming to prime subscriptions next year.

[507] Wow.

[508] So despite all this, I'm wondering, you guys continued to grow.

[509] In 2007, you did 840 million in revenue.

[510] Was there an element of, like, I'm thinking of, you know, when Facebook cloned Snapchat and released Polk and it was like the best thing that ever happened to Snapchat?

[511] Like, did Amazon do category development from you?

[512] Like, did you see, I'm sure they were spending a lot of marketing.

[513] Did you see any bleedover of that into Zappos?

[514] I think one of the advantages of being in a growing market where the consumer trends are in your advantage is that for a period of time, it's a win -win situation for the consumer and those involved, meaning we were growing, Amazon was definitely growing, and we didn't really see mass competition, like, we weren't losing.

[515] We didn't feel like we were losing our loyal customers to Zappos.

[516] We didn't need to acquire Amazon shoe customers to make our business work.

[517] There were enough customers out there to go acquire.

[518] You get the large enough size that will at some point not be true.

[519] And so if you end up being in a great situation where you're one of the only kind of company in your category class and you have a natural monopoly, that's great.

[520] But if you don't and you're able to sort of still have a large business and you're one of many, you can still be a valuable business.

[521] So that happens.

[522] You guys are both growing through kind of 05 to OE, then financial crash out.

[523] Yeah, Zappos endures one financial crisis, so may as well stick around for the next one.

[524] Well, if you want to build a long enduring company, you're going to endure a lot more than just one or two financial crisis.

[525] So, yeah, the financial crisis was interesting because I think we saw glimpses of the slowdown happening the year before the financial crisis.

[526] And looking back, it's easier to say that.

[527] Back then, obviously we didn't realize it.

[528] Do you mean in raising capital or in people buying shoes and, you know, getting some how more expensive to get people to do that?

[529] Consumer spend was more tepid.

[530] And we would see consumer confidence coming down faster than the Fed or whatever, you know, could see it, I think.

[531] Anyway, so financial crisis was interesting because our business is still growing.

[532] I think we had a $100 million line of credit, of which we were only using $30 or $40 million.

[533] It wasn't like we were over -extended.

[534] So it wasn't, you didn't bust your covenants on the credit line.

[535] No, but the banks couldn't post the money.

[536] They're like, we have this contract.

[537] It was like, well, we're going to, we've been told to like, we have a liquidity crunch.

[538] We need to like, we're all black, some of the liquidity.

[539] And that was a little disappointing.

[540] Wow.

[541] Yeah, I mean, that's not how lines of credit work.

[542] Well, you should read all the terms of conditions.

[543] Yeah, right.

[544] When it's not your money, it's, it's not your money.

[545] Yeah, we had some technical issues where they, we had verbal agreements that we would extend from shoes to all, they would lend against shoes to handbags to apparel and they had, it had been agreed upon verbally, but the extension went from shoes to handbags, but not all the way to apparel.

[546] So they started saying, well, we're not going to lend against apparel.

[547] There are ways for them to sort of get out of the contract.

[548] It was also what was more painful was conversations with employees.

[549] Some of them had, you know, lost their home and Vegas was particularly hard hit by Vegas housing prices.

[550] Housing prices fell 50 % or more, some estimates.

[551] So some people lost their homes.

[552] They said, well, the only thing that's of value in my portfolio is my stock options.

[553] It was like, whoa.

[554] I thought it had a big weight running a business.

[555] So, I mean, the conversations were obviously like we love running the company and we thought we could continue to keep running the company and there was no reason to sell except for the fact the company had existed for almost 10 years.

[556] Some people needed liquidity.

[557] I had a senior member of the team needing to sell his Zappos stock at a fairly large discount during that time just to be able to post his mortgage payment.

[558] And I was like, what do you mean?

[559] Like, I didn't, I thought you were renting.

[560] I was like, well, I am renting, but the land, the sort of landlord is going to lose his house.

[561] So I don't want to move.

[562] I don't want to just want my family.

[563] So I'm going to come up with the money to like buy the house.

[564] And it's going to be at a discount.

[565] So yes, I'm selling my stock at a discount, but I'm buying the house at a discount too.

[566] So he felt a little good about that.

[567] But I was like, you know, you're selling this at like probably, you know, 25 % of the value that you would get.

[568] if you just wait this out and he's like well I need the cash now and so those kind of those types of conversations are much harder and so we were thinking about what's the right thing for all shareholders and look I mean we can always like think about like if that person in public you know gone public because it can build a big enough business would it be value today and it's probably not when I left the business is doing 1 .6 billion in gross sales I don't know what the numbers are today, I'm sure it's well north of that.

[569] Yeah.

[570] And when I left, it was profitable.

[571] And so I'm sure it could be a public company, but Tony couldn't, wouldn't be working on the downtown project and doing what he loves to do.

[572] Deloring happiness.

[573] And I wouldn't be here doing what I love to do.

[574] Yeah.

[575] Well, now, so when the deal happens, it's announced summer of 2009, Amazon's going to acquire Zappos for $1 .2 billion in stock.

[576] How did the conversation go about stock?

[577] And, I mean, that was the best thing that you guys probably ever did financially, right?

[578] Yeah, so that was the line success has many fathers.

[579] Yeah.

[580] Many people claim to have been the person who negotiated the deal, right?

[581] But you were negotiating the deal, right?

[582] I negotiated at this stock point.

[583] Like Tony, Tony says he pushed for stock.

[584] Mike Moritz says he pushed for stock.

[585] You know, actually, everybody pushed for stock because we knew that coming out of a financial crisis, everybody's stock was undervalued, right?

[586] I think it was trading with like 50 or 60 bucks a share at this point.

[587] It was trading at, now you're, the day closed, it was trading at 118.

[588] Okay.

[589] So the stock price today is born 10 times.

[590] But who could remember, you know?

[591] Who could remember exactly what it was trading?

[592] No, I didn't.

[593] It was 118 and 23 cents, I think, so something to that effect.

[594] Oh, my goodness.

[595] And so it started out with all cash because Amazon had not done many transactions with stock.

[596] And we said we won't do this.

[597] We're happy with price.

[598] We just won't do this deal on us to send stock.

[599] it should like in corporate finance it shouldn't matter right right because you can the acquirer can decide to give stock and buy back the stock the acquire you know so it shouldn't matter to the acquire it does acquire it does matter to the company because all stock transactions are tax deferred because you don't pay taxes until you sell the stock whereas if you get cash all cash you need to pay the taxes as soon as you get the cash and I think there are some people with different views about Amazon stock and some people sold, some people held, some people did half and half.

[600] So in my view, in mergers, I think Acquire should be more lenient about doing stock transactions because it shouldn't be any different for them.

[601] Unless you have a view of the value of your own stock, which differs from the market.

[602] But you can always buy back, you can always sell it.

[603] That's true.

[604] that's true what one thing and then we'll move on to acquisition category but but I'm really curious when you did this and it was announced from day one there's this amazing video we'll link to the show it is the best this is so incredible Bezos records a video to all Zappos employees it's about a 10 minute video it's on YouTube about everything that he's learned knowledge that he wants to impart to Zappos it's just wonderful it's it's in this like classic for listeners who haven't seen it you got to go watch this video it's in the classic Jeff Bezos style of like way oversimplifying everything, being like salt of the earth, like, I'm just Jeff in my jeans.

[605] And, you know, he has a, what, not even a whiteboard.

[606] Like, you know, the paper easels that you flip and he writes in marker, the four main lessons he learned at Amazon.

[607] Anyway, though, but the point is the, the, when it's announced from day one, Zappos is going to remain fully independent, be a wholly un -subsidiary.

[608] That was pretty novel for the time.

[609] I mean, now, like, this is the playbook that Facebook.

[610] runs and others with acquisitions, how did those discussions go?

[611] Yeah, I think Amazon has always been pressing on this front.

[612] It wasn't the first acquisition that they've done that was like this.

[613] I think Alexa was left independent.

[614] It was IMPD and Audible.

[615] And so we weren't the first acquisition.

[616] There are obviously situations when you acquired the company and you want it integrated.

[617] I think it makes sense when it's an aqua hire.

[618] It makes sense when it's a feature as part of a overall product somewhere.

[619] When you have a whole business, I think it really does make sense to run it independently unless you can find a good reason why you should integrate.

[620] Centralization has its costs.

[621] And so I think decentralization has its cost too, but you're more likely to, in my opinion, decentralized organizations are more innovative because they don't have to bubble everything up.

[622] There's not a central decision maker.

[623] So decentralized ecosystems are more innovative.

[624] And you see, if you want to have a comparison, it'd be like a large company versus the startup ecosystem.

[625] That's why we have a job here at Sequoia.

[626] Like, we believe the decentralized ecosystem and the innovation of entrepreneurs when they don't have to.

[627] And I think the companies that are larger have a harder time innovating because they're centralized.

[628] And so the conversations were pretty natural.

[629] The questions were about what kind of, what's the management structure?

[630] And so there was, the management structure was basically our board at Zappos would be replaced by a board that was now full.

[631] An Amazon board.

[632] Yeah, an Amazon board.

[633] Cool.

[634] And I think it still exists that way today.

[635] I'm curious, you know, when they approached you about buying the company, what were sort of the main cited reasons?

[636] Like, was it, we just think you have a good business and we want to pour additional capital into it for this business line to grow?

[637] Was it, we want to learn from this and figure out how to spread the Amazon DNA or the Zappos DNA around Amazon?

[638] I mean, why'd they do it?

[639] I think the, you know, you should ask them, but in the line, there's a line in the video that you were referencing where Jeff Bezos said, I get tingly, knee -weeked when I see customer -obsessed companies, and he really understood that, like, Zappos was really customer -obsessed.

[640] And I do think that for all those sort of bizarre differences between Amazon and Zappos, that is one thing that both companies share a lot in common.

[641] And maybe we do customer obsession differently.

[642] we have a different style of doing customer session at Zappos versus Amazon but both companies I think learned a lot from each other even during the due diligence process of how we think about things and so we were surprised that we didn't we like we said we don't measure for example call times well it's not that we don't measure call times for an individual agent you can't hold an individual agent to a particular call because you don't know what that call situation is like but you can look at the efficiency of the team and when you talk about the efficiency of the team it's not you like stayed on the phone two seconds longer than you should have it's more of a let's collaborate like our team is not efficient compared to all these other teams yeah and that's how we did it we weren't measuring every single and and so they're like okay well you're not actually like you say these things like you don't measure the stuff you measure it just slightly in a different way and the way we were trying to measure it was to try to get the collective intelligence of the team and trying to make better decisions all right listeners our sponsor is one of our favorite companies, Vanta, and we have something very new from them to share.

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[661] So the next thing that we do on the show is acquisition category and we assign a category to the acquisition.

[662] And to me, it's pretty obvious.

[663] This is a business line that Amazon acquired.

[664] Keep it as a separate company.

[665] It's not just a product of being integrated into Amazon.

[666] But I think this is really interesting.

[667] This was the point I wanted to make.

[668] And the cultures, even though it's, you know, as Bradstone said, and you quoted it, like, Zappos was a bizarro world version of Amazon.

[669] But the core values were basically the same.

[670] Be frugal, be customer obsessed, decentralized decision -making.

[671] It's like such a good fit when it comes to culture, even though it seems on the surface that it wouldn't be.

[672] Yeah, I think That's why the acquisition was considered a success.

[673] And I don't think it was an easy acquisition at the time because it was the largest acquisition at the time.

[674] Now, I was in comparison today, it's a whole food.

[675] Hey, it's 10 years later, just for inflation.

[676] Numbers only acquisitions and numbers only get larger, right?

[677] So it was a business line that they acquired.

[678] I think they also were very interested to learn about some of the things that we built related to merchandising.

[679] But how did we get so good at getting the right product and the right quantities at the right times with less than stellar technology?

[680] We weren't using AI.

[681] Yeah, were you guys using Kiva?

[682] We were also using Kiva.

[683] Okay.

[684] And that was how Kiva got on the radar screen of Amazon, right?

[685] Kiva was, it was funny.

[686] So I'll tie this all the way back to Sequoia.

[687] Rlock Boyd has sent me the business plan of Kiva.

[688] Asked me for my opinion.

[689] And Kiva came from WebIn, which Michael Moritz was on the port.

[690] Michael Morris was on the board of Webvan.

[691] Webvan did not work well, work out well.

[692] They had been using, if you wanted to go all the way back, they had been using a carousel system, I will name the vendor.

[693] We ended up using that carousel system and the same exact vendor.

[694] It was my first board meeting, and I got ripped into shreds because we were saying that this was going to work, et cetera.

[695] By Michael.

[696] By Michael.

[697] And then also by Michael Marks, who, you know, obviously found her in CEO of Electronics.

[698] And so he leaned a little bit about operations.

[699] I was like, okay, all right, well, we need something different.

[700] Anyway, so that happened.

[701] And so Mick, who was at a webband, noticed how inefficient most of the systems were.

[702] So he went on to create Kiva systems.

[703] I had, I didn't know that connection.

[704] So thanks for reminding me, but at the time.

[705] So I got the business plan for Kiva from Rulov asking me what I thought about it.

[706] It's like, oh, interesting idea, but probably too hard to rip out a whole, whole set -up distribution center.

[707] Maybe for a new distribution center, we might use it, but not for one already set up.

[708] We're going to rip out a racking, et cetera, et cetera.

[709] So as a startup, you kind of move pretty quickly to your next distribution center.

[710] So we did try Kiva, and it worked well, and then eventually it took over all of our distribution centers.

[711] Wow.

[712] When Amazon was doing diligence on us, they really thought they were going to rip out Kiva from our distribution centers because they thought it was not going to work.

[713] And I said, why?

[714] I said, well, your spike in December or our spike in December is an order of magnitude higher than the rest of the year.

[715] So you're paying for idle robots that are going to sit around for most of the year, so that can't be efficient.

[716] It turned out it's still efficient because you can get into a much larger distribution centers, you can zip things around, have people work on one end and have machines move certain things around in another.

[717] So a few years later after they observed this, they bought the...

[718] Acquired Kiva, yeah.

[719] And now, I don't think it's in all Amazon warehouses yet, but certainly all new ones, and I think they've been retrofitting old months.

[720] I think there was some public statement that they had like 100 ,000, maybe on the order of 200 ,000 or 300 ,000 Kiva robots.

[721] Wow.

[722] That's awesome.

[723] All thanks to Zafos.

[724] Well, that's just that happens.

[725] I mean, Denters also used them, and so they acquired diapers .com.

[726] So it was, because it was more and more evidence that this was going to work.

[727] So there was technology that they bought as well.

[728] So we've decided it's a business line.

[729] Amazon's got a competing business line that's doing really well.

[730] Like Amazon's in -house shoe businesses, according to all these external research reports, you know, really crushing it.

[731] So why not pour all the investment that they're putting into their own in -house thing into Zappos?

[732] and were they for a time and have, does it feel like they've shifted away to you?

[733] No, I think the shoe business as a whole, whether it's on Amazon's site or on Zappo site, has been growing really well for both.

[734] And so it's not an either -or.

[735] I think if you sort of used our way of like, we talk about the power of and, not about trade -offs, and I think Amazon also likes Anne versus war.

[736] And so why not grow your own business and own your biggest competitor?

[737] at the same time if you can pull that off and they did.

[738] I'm curious on that front, did anybody else ever seriously attempt to buy the company besides Amazon?

[739] Would you guys have sold to anyone else?

[740] I don't think anybody was, anything, anybody else was serious.

[741] I don't think it would have sold to anyone else.

[742] And it's hard to imagine anyone else would have like let you guys keep doing this stuff.

[743] Well, I think Walmart has shown that they'd be willing to buy companies and keep them independent.

[744] Well, now, but now, yeah, 2008, 2009.

[745] I probably wouldn't be harder to sort of conceive, but I think, I think today there are plenty of competitors.

[746] So, like, you know, could Zappos have remained independent gone public and been bought by someone else?

[747] It's all possible.

[748] I try not to think about, like, all the possibilities because you only have one life to live, you don't get to rewind.

[749] You're a little busy on other stuff these days, too.

[750] You don't get to maybe test your life, so you get to move on.

[751] That's okay.

[752] We'll speculate wildly about it on this show instead.

[753] Tech teams, yeah.

[754] So we've talked about a bunch of them.

[755] There's one that we didn't, it was part of the sort of story in venture frogs.

[756] And it's this great tidbit about the initial phone call from Nick to Tony sort of pitching about shoe site .com.

[757] And Tony almost deleted it but decided not to, even though he sort of thought it was a bad idea like, you know, who's going to try on, who's going to order shoes before they can't try them on.

[758] But, you know, Nick had this tidbit in there that it's a $40 billion market.

[759] And, 5 % of that is already being sold by paper mail order catalogs.

[760] And it reminded me so much of a Sequoia investment thesis that, you know, we invest in markets, not ideas, and we invest in, you know, markets over founders in many ways.

[761] And I think that there's something really powerful to big companies get created in big markets.

[762] And it doesn't matter how incredible of a widget you make in a small market.

[763] It's just not going to become a behemoth.

[764] Yeah, I would, I think you're right that markets are.

[765] the large markets are very, very important.

[766] I would just say that we have learned over time that founders and markets go hand at hand.

[767] It's not like you can't invest in a big market and have the wrong founder in place or the wrong management team.

[768] The people around the company has to all work.

[769] And so in some ways, I would say we invest in companies and not ideas.

[770] We invest in companies and not products.

[771] We invest in companies, not features.

[772] And the company consists of the team and the problem you're solving, the innovation you're bringing, and also the market that you're attacking, and also the go -to -market and all those things.

[773] I know on day one, do you have all those things?

[774] No, you don't.

[775] But you have to sort of envision all of this, and why will this be an interesting company in 5, 10, 15 years?

[776] And you can't envision that, or you don't feel like the pieces come together where you don't know where the other pieces that you need can come from.

[777] It makes it very, very hard to build a company, Yeah.

[778] Yeah.

[779] My theme that I was going to put out there that I thought we were going to cover along the way, but I actually don't think we did is, well, Ben, you mentioned a little bit, but just how much this story reminds me of the Stitchfix story as well.

[780] And, you know, even down to you guys hired, was the first hire at Zappos Fred Mosler and reminds me of, you know, one of the first hires at Stitchfix was Mike Smith from Walmart.

[781] You're bringing that DNA from the industry into understanding, you know, to this new paradigm of the industry, but from the old world, too.

[782] but you can bridge that gap.

[783] But one of the things we talked about on the Stitch Fix episode was this idea in founding a company or investing that it's not enough to be right about something.

[784] You need to be right and have it be non -consensus that you're right.

[785] And like, you know, Tony almost deleted the voicemail, right?

[786] Because who's going to buy shoes online?

[787] Like, it seems like a dumb idea.

[788] Just like Stitchfix, you know, on the surface back in the day probably seemed like a dumb idea.

[789] But when you dig into the market, it actually isn't.

[790] I'm curious, like, how much you you guys thought about that along the way.

[791] Yeah, so Katrina has done an extraordinary job at Stichick, so I think kudos to her.

[792] I think going back to the comment you made about Wright M .B. Non -consensus, I think that's part of what we were talking about, where if it's non -consensus, you will not attract a ton of attention, and you will not attract a ton of competitors, and it allows you time to get things right.

[793] And yes, Tony almost deleted the voicemail.

[794] And at the same time, the reason he almost deleted it, but didn't delete it was, Alfred, this does something.

[795] Like, we had a conversation.

[796] It sounds like a dumb idea.

[797] But nobody else is going to do this if they get money and they get off the time.

[798] So if it works.

[799] We're going to be the only ones doing this dumb idea.

[800] Yeah.

[801] We're going to be the only one one's doing this dumb idea.

[802] And then, you know, then you ask like, is it that dumb?

[803] Right.

[804] So the facts were that, you know, He had no, we knew that Nick could build a website.

[805] He was a webmaster.

[806] He designed websites.

[807] Okay, check.

[808] We knew that there was a problem here.

[809] We didn't know about the market.

[810] He listed the market size, $40 billion, 5 % or $2 billion, or he done on a mail order.

[811] So what is that, what is the conclusion from those facts?

[812] Okay, well, it's not that hard to extend that conclusion to be, the Internet should be bigger than mail order.

[813] At least as big.

[814] Yeah, at least this big or bigger, or many of orders are magnitude bigger.

[815] So you believe that, then back to, like, you need to build a company.

[816] We have a founder with an innovative idea.

[817] You're missing a few pieces.

[818] So, as you said, we went out and hired a swimmer because we're missing shoe experience.

[819] Like, Tony and I knew how to sort of, because of link exchange, drive traffic to a site.

[820] Right.

[821] Okay, got that check.

[822] Like, we have a bunch of things checked, but we didn't have the shoe experience.

[823] And originally, the original idea, we didn't need customer service experience or distribution because we were drop shipping.

[824] That evolved.

[825] So we needed more pieces to be filled in.

[826] But the company coming together has a lot to do with making sure you have all those right pieces.

[827] I think that's what's so, for me at least, super fun about early stage investing is like you can't think about, you can't look at it and say like, judge it as if the pieces were together.

[828] Because if the pieces were together, it would either be a public company or like, you know, it's never going to work.

[829] Yeah, you need to, you need to, you know, well, you just need to have imagination.

[830] Yeah.

[831] You need to have imagination and you also need to make sure that, you know, You can dream with the entrepreneur.

[832] We often sort of talk about, like, okay, can you see a world like this?

[833] Should the future be this way?

[834] The founders, we like backing, you know, Adia at Hals or Brian Chesky at Airbnb or Dropbox.

[835] They also just like they see the world slightly differently than everyone else.

[836] And they view a problem, they feel that problem from a personal standpoint, and they just feel like the world has solved that problem incorrectly.

[837] They just gotten that wrong.

[838] And they're on a mission to go change that.

[839] and Nick was on the mission to change and Tony was on the mission to change.

[840] Yeah.

[841] Even though, and I think this is what's also super cool about Sappos in the story.

[842] Like, actually another one I had in here was mission, you know, focused founded versus mercenary founders.

[843] Even though Tony and, I don't know, I'm guessing you probably weren't that passionate about shoes, but you were passionate about seeing this way that the market wasn't working and could work and that nobody else in the space was so focused on customer service that could really deliver, you know, well, happiness, Tonypuss it, you know, to customers.

[844] Yeah, I think that before getting on to Mission versus Marsemanary founders, I think the one thing that was like clear was that e -commerce was going to have, was going to compete on price and was going to compete on selection.

[845] And those two things are hard for a startup to just compete on those two things because you You don't have the bank roll to compete on price.

[846] And on day one, you're not going to have the widest selection.

[847] And so we needed another pillar.

[848] You could compete on those two things later.

[849] But that's why we're so focused on putting on another layer, and it was customer obsession and customer service.

[850] And both Tony and I were pretty passionate about customer service from a mission standpoint.

[851] People ask this all the time, whether we back mission focus or mercenary founders, I think the best founders are kind of both.

[852] You know, it's like, they're not, they're not doing this as a charity because otherwise they were started a nonprofit.

[853] So they are in the, they are in the, in the entrepreneur space because they want to build a company.

[854] They want to build a business.

[855] There's also like, I mean, back to your days with pizza at Harvard, you know, Quincy House, like, there's a element of you got to be a hustler to get this done, right?

[856] You have to be a hustler.

[857] You want to solve the problem.

[858] You want to do it in a different way.

[859] You have to differentiate.

[860] And most of the founders are successful, they want to.

[861] They want to build an enterprise that exists much longer than themselves.

[862] And that requires making sure that the company has longevity, which means it has to have a sustainable business model.

[863] And then I do think one of the themes that you have to do hard things that yield some protection, some modes, and things that are hard that are just people don't want to do.

[864] And, you know, kudos to Amazon for building a network of warehouses.

[865] Nobody wanted to build that.

[866] Like, oh, let's do that.

[867] Or network of server farms.

[868] If you asked in 1999 whether you put $10 ,000 or your life savings in eBay or Amazon, I think most people in 1999 would say eBay.

[869] It was this elegant, no capital, like capital of light, no distribution centers, no inventory model.

[870] It was just connecting to, you know, two people in the marketplace would take care of itself.

[871] They acquired Skype, people can chat with each other.

[872] And I'm not making fun of eBay.

[873] They had lots of, they have lots of issues that they need with trust and safety.

[874] They had to solve that.

[875] They had to sell payments, micropayments, right?

[876] Like, these are small payments.

[877] That's why they had to go about, you know, sort of develop their own.

[878] They tried developing their own.

[879] They acquired Billpoint and PayPal.

[880] Yeah.

[881] It was not an easy thing.

[882] But from an investor standpoint, investors seemed to like these like high margin, like really like easy to explain business models.

[883] And at the same time, some of them, the hardest things to replicate or the hard things that people do to build a real mode around the business.

[884] And Amazon built to real modes.

[885] Well, that's a great, great way to close out the regular section of the show.

[886] We're on to grading.

[887] Alfred, first, I want to ask, do you want to participate in this?

[888] You don't have to.

[889] What is this grading thing?

[890] All right, so we basically, you know, when we started the show, the whole notion that we had in mind was we want to figure out what are, have been the most successful acquisitions in history and try and take them apart and reverse engineer and figure out how to start companies.

[891] like that.

[892] And so we thought, well, it's got to be some access on which we evaluate whether it was actually a good deal for the acquirer or not.

[893] And so we basically, you know, go through this whole process to try and figure out was that the best use of the acquirer's capital?

[894] And our, you know, A plus scenarios are like Apple, you know, spending money on Next and basically getting, you know, having a reverse acquisition happen where the company is reborn because of it.

[895] Or Instagram's another great example.

[896] Our other A plus is Instagram.

[897] Right.

[898] Right.

[899] And then there's other ones where we're like, actually, that was a terrible use of capital.

[900] And then they're, it kind of gives us a way to understand basically, you know, given all the options on the table, should they have done this.

[901] And usually they land in the B to C range.

[902] So that's the process.

[903] Well, I'm going to take a first stab.

[904] So I think that on its own, Zappos was a great business.

[905] So it's not like they were, you know, buying.

[906] something that they'd have to integrate and have really high costs of creating those synergies.

[907] That's not what it was about.

[908] It was about acquiring a very unique business and one of the few large customer -centric businesses that were not Amazon on the internet and continuing to grow that in some ways a takeout because Zappos was a very real threat, you know, expanding category by category the same way that Amazon had.

[909] And we didn't talk on the show at all about how big it could have gotten from a category's perspective.

[910] But if I'm Amazon, that's one of the main fears is that someone becomes the everything store before I do.

[911] I think it's been a good business inside of Amazon.

[912] From what I can tell, which is extremely difficult because Amazon never breaks anything out, it seems to be growing a little bit more slowly than Amazon's own shoe business and definitely not as quickly as AWS or even the Amazon Marketplace with third -party sellers.

[913] So, you know, I think it's good.

[914] I'd go with B -plus.

[915] But, you know, it's a tough bar to get a get an A on the show.

[916] Tough part you get an A from Ben.

[917] David?

[918] Well, it's hard to see this not being a good use of capital for Amazon.

[919] like both for the reasons you were saying, but also like, you know, I'm preparing for the show.

[920] I think a bunch of people have made analogies to this almost being like a Berkshire Hathaway type acquisition of, you know, allowing Depos to keep doing what it was doing, free of all the financial constraints that had hampered you guys a long way.

[921] And for Amazon, this was obviously a hugely important category to the company and to Jeff Bezos to be able to enter that.

[922] stop losing, the estimates are Amazon lost $150 million on endless .com, stop the bleeding there, and be able to cross -pollinate the knowledge to grow their own category.

[923] So, you know, sorry, Alfred, I don't think this is as transformative as Instagram, but this is a minus in my book.

[924] No comment from Alfred.

[925] I think I know too much information.

[926] We can move on.

[927] How about Carvouts?

[928] What did you get, Ben?

[929] Last week, I listened to Andrew Mason as a guest on Recode Decode with Carousisher.

[930] And it is always refreshing to hear that guy on any form of media, especially in an interview format, so straightforward, so honest for listeners who don't know, Andrew Mason is the founder of Groupon and since started a couple of other companies and he was on talking about his new company, which is in the audio editing space.

[931] So it obviously was interesting to us here acquired.

[932] But there's so much revisionist history in our industry and legend and lore that get started.

[933] And you just never hear that sort of thing at Andrew's mouth.

[934] It's mostly like, no, we didn't know what we were doing.

[935] Yes, we figured it out.

[936] Yes, it was really hard.

[937] No, maybe I shouldn't have been the person to do it.

[938] Yes, that's why I was fired.

[939] I mean, there's just a very, it's just a refreshing take.

[940] So really enjoyed it and really enjoyed hearing about some of the new stuff he's up to.

[941] Nice.

[942] Mine is, actually, I didn't think there was any way it was going to be related to the episode, but as so often happens, carve -outs end up, we find some way to relate them.

[943] Justin O 'Bern published this great long piece on his blog called Google Maps Moat, the Google Maps Moat.

[944] And he's a, I think, designer in MapSpace.

[945] I believe you worked for Apple Maps for a while.

[946] And it's just a piece of like all of the culmination of all of the hard things that Google has done in Maps for the last 10 years.

[947] And the lead that they have because of it over Apple and Nokia and everyone else in the space.

[948] And it really detailed breaks out like product changes month by month over years across all the products in the space.

[949] Really just a brilliant analysis and very worth reading on what makes a mode in a consumer business.

[950] I'll second that.

[951] That piece was incredible.

[952] And it's got these great side -by -side comparisons and animated gifts where you can see he's been taking the same screenshot year after year for like seven years or something and you can see the complexity on each of these maps grow over time and he annotates what they did to do.

[953] It's so cool, even to just scroll through.

[954] I agree as well.

[955] That was a great piece.

[956] For me, I'm trying to do some hard things and read thick books.

[957] So I'm reading through two books by Walter Isaacson.

[958] One is about Ben Franklin, the other about Albert Einstein.

[959] I just think both of those men were fascinating people and have contributed lots to our society.

[960] And they were prolific in the work that they did.

[961] They were also interested in many, many different things.

[962] Kind of think about Albert Einstein as a physics genius, but he also loved playing music and the violin.

[963] And Franklin was a publisher, obviously was one of the founding fathers and published a lot of papers, but he was also into music and other things.

[964] And I think both people sort of demonstrate that having a fertile curiosity about many different areas actually allows you to do whatever you believe your day job to be better.

[965] Another fascinating person, I hope Walter writes a book about Madam Curry, because I think she's also a fascinating character.

[966] Definitely.

[967] He's a great writer.

[968] Well, thank you, Alfred, for joining us, putting up with us, reliving your Tracking Factory days.

[969] Yeah, Alfred, where can our guests find you on the internet?

[970] Oh, they can find me. I'm just, my email is Lynn at Sequoiccaf .com.

[971] You can find me on the Sequoia website, Sequoicotac .com.

[972] So it's where I hang out.

[973] Awesome.

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[1003] Listeners, thank you for listening.

[1004] As always, if you are new to the show, you can subscribe from your favorite podcast client.

[1005] We're now in SoundCloud and Spotify as well.

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[1007] So have a great day, everyone.