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

Episode Date: January 23, 2018

Former Zappos Chairman & COO (and current Partner at Sequoia Capital) Alfred Lin joins our heroes to kick off Season 2 with a classic: Amazon’s 2009 acquisition of the internet’s quirkiest online retailer for $1.2B in stock. How did three Harvard undergrads go from delivering pizza to their dorm to delivering happiness to the world — and become in the process one of the few companies ever to compete successfully head-to-head against Amazon in commerce? Tune in to find out! Note: Unfortunately the quality of David and Alfred’s audio tracks in this episode were significantly impacted by a processor issue on David’s computer, which we didn’t discover until after recording. We’ve worked hard to fix in post-production, but it’s still far from perfect. Still, the content from Alfred is so good, we felt we had to put this episode out there even though the audio quality isn’t up to par. We hope you’ll give it a listen regardless, and we’re working on getting a transcript made ASAP as well. -Ben & DavidSponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Carve Outs:Ben:  Andrew Mason on Recode Decode David: Justin O’Beirne on Google Maps’ MoatAlfred: Walter Isaacson’s biographies of  Albert Einstein and  Benjamin Franklin

Hey, Acquired listeners. 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. We had a problem that we didn't catch until afterwards that makes it sound like a conference call with a poor connection. This stuff is important to us, and we even talked about not even releasing the episode. However, the interview content is just awesome, so we thought it'd be a shame not to share it with all of you. We apologize, and we hope you enjoy the interview. Okay, and is video good for you? Is this a good angle? Is this a good angle? You look great.

Is this a good angle? Are you getting my good side? Always, David. Welcome to Season 2, Episode 1 of Acquired, the show about technology, acquisitions, and IPOs. I'm Ben Gilbert. I'm David Rosenbaum. And we are your hosts. And I'm Alfred Leonard. Hey, welcome, Alfred. We're very, very excited.

You spoiled the surprise. I know, I know. Too bad our titles really do those in. Thank you for having me on the show. Yeah, we're super pumped to have you. Listeners, this episode is going to be about Zappos. 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. In December, I mentioned that we're switching to season so we

can do themes and mini series across several episodes. And for our first episode, we wanted to do a really classic acquired format reviewing an M&A transaction. And this is one of the ones that has been at the top of our list for a very long time. So David, do you want to introduce who is Alfred Lin? Our mystery guest, not so mystery guest. 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, Houzz, DoorDash, Zipline, and many others. But today we're going to talk about his time before Sequoia

when he was the chairman and COO of Zappos, which was prior to Whole Foods, Amazon's largest acquisition ever. 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 Hsieh, 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. So welcome, Alfred, and thanks for coming on. Well, thank you for having me. I'm no longer the human trash compactor of pizza. I try not to eat as much, too much. I was going to say. Given that I'm a lot older,

I don't have the same metabolism as I used to. It looks like a few things have changed since those days. Okay, listeners. Now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI platform for business transformation. And they have some new news to share.

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So when most people think of Zappos, they probably imagine it was started by a guy named Tony Hsieh 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? Impressive, David. Every word of that sentence was wrong. Yeah, Ben's right. That's not quite accurate. I really should have done my research here.

The founder of Zappos was Nick Swimmer. He had started the company because he was looking for a 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 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 he could buy his shoes. And so this was 1999. He thought it was a good idea, and he was a webmaster. He thought it was a good idea to just quit his job and create a website and start Zappos.

And here we are. Fortunately, he called you guys. Alfred, I missed the term webmaster. We've got to bring that back. Well, I guess nobody really is a webmaster anymore because we've moved on from websites to mobile apps. No, there's one webmaster. His name is Jeff Bezos. He is the webmaster. He is the webmaster. So let's start way back, even before then.

We go back to your undergrad days at Harvard in the early 90s when you were still the human trash compactor. And so you were an undergrad and you had two friends, Tony Hsieh and Sanjay Madan. And you guys decided you would develop a business together. And Tony and Sanjay were CS majors and you were a math major, right? And so naturally, you guys were going to do something very technical, very smart. but the business actually turned into a pizza business. And so the story as it is told in lore is that Tony and Sanjay 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. 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. Yeah, that's mostly true. But I think the

interesting part about that story is, yes, Tony and Sanjay and I were friends. We had other friends. We didn't really hang out all that much together. What brought us together is the grill. And that is an interesting place. It was a place where lots of undergrads hung out late at night trying to get something to eat while they were working on their prom sets or write their term papers. Tony and Sandra were actually very entrepreneurial even back then. Usually what happens is the graduating seniors would sell the grill, the rights of the grill, to the upcoming seniors. So the graduating juniors will be seniors. So they would hold the rights of the grill, to the upcoming seniors, so the graduating juniors who will be seniors. So they would hold the rights of the grill for one year. And because they can

only operate the grill for one year, they mostly did very simple stuff like hamburgers and fries and milkshakes, which sounds great, but it actually doesn't have great margins. 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. And pizza has great margin if you can overcome the cost of the oven. And so he decided that he was going to bid for the rights for two years. And his bid was highest bid plus $1. I mean, that was a pretty courageous thing for him to do. And so that's what he did. I happened to have a pretty large grooming blocking group in Quincy. And I did come downstairs, negotiate with

Tony and say, Hey, I'll just buy them by the pie instead of the slice. And then I did bring it upstairs. I didn't really sell it by the slice. I just wanted my money back. That's the part that is, you know, it sounded predatory, but what I was trying to do was just get my money back. And the slices were $2 a slice downstairs. I got a discount, so it was maybe $1.50, $1.25 when you buy it as a pie. And the thing that is most interesting

about that story is I always got two dollars even though I asked for $1.25 over $1.50 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 today you probably had you know pay without with a card or a phone but But that was important. 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. I just thought that was an interesting arbitrage opportunity story. That's awesome. You guys were delivering happiness even back at Harvard.

You get your slice of pizza and your quarter full laundry. Yeah, yeah. And it started out with lots of conversations on how to make the grill better. Tony started recording movies and playing them downstairs 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. But how do you get people to congregate downstairs and hang out so there was a lot of conversations about that one day the reason tony tells this story is because he was one day we're

calculating how much we made and he was like he made the calculate calculation and said alfred you actually make more per hour than i do like I'm like, come on. I like order. I call down, order, come downstairs, pick it up and take it upstairs. Yeah, sorry. Fine. I make more per hour. But you still make more in aggregate because you spent more time on the grill. But those are the type of like geeky things that we talked about when we were in college. And the legend is, of course, that's why you became CFO of your first company together,

which was LinkExchange. So after you guys all graduated, you all moved out west. And Tony and Sanjay started working at Oracle as developers. And you started a PhD program in statistics at Stanford. 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? No, actually, Tony was looking into starting a similar business that he was trying to get a Subway's franchise on campus. Ah, cool. told him, well, there are plenty of pizza stores and there is a Subway's on University Avenue. So

it may be a little difficult to make the economics work. But he's always a little bit ahead of everybody else because he said, well, that's too far away. Why not on campus? And at the time, campus didn't allow third party operators to be there. Of Of course that's changed. Those rules have changed on on Stanford's campus but there's always a little bit ahead. The thing that was interesting is like the internet was happening so it was like why don't we like think about some internet business and Link 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. And then they work on their side business, which was building websites for companies that would pay them. And this is back when HTML seemed like something really hard to learn. It turns out not to be that hard to learn, but people didn't want to learn it. So they were more than happy to code up sites in HTML for others. And they were paid a very handsome fee for creating these sites. And the sad part for them was these sites would just stand alone and there would be no traffic. Nobody would go no traffic. Nobody would go to them. So then they sort of figured out how to link all these sites together and try to drive

traffic to each other. And that was the creation of LinkExchange. Yeah. And I mean, it basically, in a lot of ways, invented the display advertising network business that eventually becomes DoubleClick and Equantive. These become massive acquisitions from Google and Microsoft. But you guys were first in a lot of ways. We're early. There were a bunch of copycats along the way. Some were like HyperBanner and other banner exchanges.

And then obviously DoubleClick and Equantive, we sold a little too early before that. And then there was a next wave of these companies on the mobile. So history does repeat itself. And so Sequoia not only invested in Lake Exchange and made 17x in 17 months, but they also invested in AdMob, and AdMob's acquisition by Apple was much bigger than Lake Exchange's acquisition. Well, if you adjust for inflation, you know, you're probably about the same. Yeah. Alfred, it feels like you've said

that 17x in 17 months before. I don't know, it rolled right off the tongue. Yeah, I thought, you know, that was the first time I was like, I said to Michael Moritz, who was on the board, wow, this is a great business. Does this happen all the time? And he's like yeah the that that

doesn't always happen but what i got to do is i learned a lot from michael he was a great mentor for me i developed a great relationship with sequoia and the sequoia partners i know how they operate 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 yeah but going back if you had to rewind um you know michael was interim ceo for a period of time when we were looking for a ceo he spent a day a week at the company 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. Yeah. And so that's why this is, for me, a very rewarding job.

That's really cool. I didn't realize that Michael had actually stepped in as temporary CEO. But as you say, so you sold the company after 17 months to Microsoft and you and Tony decided, you know, maybe as you said, you thought the venture business was easy. It's not. We've talked about that a bunch on this show. You leave and you decide to raise a fund on your own. This is essentially like today, this would be a pre-seed venture fund. Yeah, back then we raised $27 million

from friends and family of LinkExchange after the liquidity event. But 27 million back then was a fairly sizable fund for seed and pre-seed. Today it's like not that, it's like average, I would say. And the idea was not to write a hundred thousand or $200,000 checks, but to have like a million in on average for a concentrated portfolio. 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. Wow. And you didn't reserve anything for Prorata. We didn't reserve anything for Prorata. So that was a big learning experience of time diversification is actually important in the venture business because 1999 was not a great time to be an investor.

How do you even have the deal flow to be doing two deals a month with that small of a fund and that few of a number of GPs? How does that work? I think 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 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? Like the company, any company that had a product that was working and had eyeballs, people were funding. So we did some of that too we also made some good investments um we're pretty proud of our track record at venture frogs it ended up being a seven and a half to eight x fund after after fees wow uh for a 1999 fund i'm pretty sure that's in the top decile if not the top i mean it's it's uh it's very hard only the top top you know venture funds these days are seven or eight x after fees period but to do that in 99 but it was the result of a lot of work that you ended up doing in the portfolio

it was a result of we we in 2000 or 2001 we did we looked at the portfolio and there were basically three sets of companies they're like companies that we you know regardless of whether we help or not they were going to go under and then their company is like regardless whether we help or not they were going to do just fine so that was you guys invested in an open table right we invested in an open table they were going to do just fine mago music got sold to Microsoft. They were going to do just fine. We didn't have to do much work for it. There was a company that was in the web space. It was called Myable.

They were trying to create my pages for web phones. I can't even imagine looking at these small screens and why you would put a my page on that. But anyway, they were building that. That got sold to Phone.com, which got merged with software.com to create open wave systems. So that defined. There are a bunch of companies that define regardless of whether we help them or not. 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.

And then there were two companies we felt like if we helped, we could make a lot of impact in those companies. And those two companies were Tomi Networks and Zappos. So did you and Tony sit down and say like, okay, let's just draw us? Yeah. 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? 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, it can go the

distance or how do you figure that out? I think when you, like you sort of step back, you kind of think about whether the investment thesis was right or wrong. And then you, you kind of know that, you know, you got this wrong. It's not going to work. Here are the reasons why it's not going to work. There's, this might be an interesting problem. At Sequoia, we've over the years created these buckets.

Sometimes you have a feature, it's not a product. Or you have a product, but it's not a company. And I didn't have those laced or 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. 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. You know, 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. And there are a set of like, I think founders who are resistant to change. And so if they don't really want our advice, that's difficult to sort of influence. And then there are just 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. And so those are the conclusions. And then, unfortunately, there's also a 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 whether the story is not good you can work on the story but for whatever reason it can't get the capital that it needs to get and what's interesting

zappos kind of fit into that bucket right like the business was good it was growing so you guys invested in 99 uh nick had founded the business just had the business was good. It was growing. So you guys invested in 99, uh, Nick had founded the business, just had a business plan. It was, it was initially called shoe site.com, right? Which still redirects to Zappos if you go there. Um, and, uh, and so you guys invest and, and then it grows pretty nicely. I think year 2000, first full year, it does about 1.6 million in revenue. Uh, in 2001, you do over 8 million in revenue, but everybody year, it does about $1.6 million in revenue. In 2001, you do over $8 million in revenue. But everybody was, you know, it was nuclear winter. There'd been pets.com and eToys.

Nobody wanted to fund it, right? But the business was growing. The business was growing. And it was actually one thing that was different about Zappos even back then was it was break-even. Most e-commerce companies were not break-even. Even today, we accept that they won't be breakeven for the first few years. Back then, too, a lot of companies like pets.com weren't breakeven. I think the whole e-commerce category was just dead to all investors in 2000, 2001,

2002. Even for Sequoia Investing, investing sakura invested i think in 2005 yep and so it took some time for a very toxic space to turn around uh even when you have a good business and so i attribute some of zappos's success there's a lot of like cool 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. Very early on, it had to figure out how to acquire customers in a way that is unit positive

on the first order. Yeah. And you guys were unit positive on the first order. I mean, that's not an easy thing to do ever, particularly at that moment. The company only raised $10 million of primary capital. Yes, it raised more money for Sequoia for secondaries, and yes, it had debt, and yes, it leveraged relationships to get vendor credit. All of those things that are written in Tony's books, those are all true, but primary capital

was about $10 million. And I don't think you can imagine today a e-commerce company raising $10 million and becoming a billion dollar company over time. You'd probably think it's in the hundreds of millions of dollars, maybe a hundred million or 200 million. And Zappos did earn a hundred million dollars of free cashflow. It was just smart about how it did it. It did it from vendor relationships, extending the terms from net 30 to net 90 over time. We didn't do it immediately. 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. So we had to understand our cash conversion cycle very, very well. Was it easier to acquire at scale those days? 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'd never seen before. So I mean, can you talk about acquisition costs then versus acquisition costs now? Yeah, I think that's a great question about acquisition. Everybody seems to think, well, yeah, you had it easy because Google was a lot cheaper back then.

Well, it wasn't obvious that Google was the place to actually acquire. It probably wasn't sending you that much traffic. Well, no. But back then, there was a lot of acquisition channels that just didn't work. And we tried all of them. There was Yahoo banner ads. There was MS lot of acquisition channels that just didn't work. And we tried all of them. There was Yahoo banner ads. There was MSM banner ads. So there was a whole banner advertising category.

Then there was trying to buy placement at HomePlate at PacBell. We got all of three customers from that. Did you guys do an AOL-sponsored channel? We probably did an AOL-sponsored channel for a short period of time. I don't particularly remember. But yes, we spent money on AOL sponsored channel. We probably did an AOL sponsored channel for a short period of time. I don't particularly remember but yes, we spent money on AOL. So when you say oh yeah, you had it easy because

you had Google and it was cheap and it was converting well. Yeah, that was true but we discovered that. And then as soon as we discovered it, it wasn't like there was no competition out there. As soon as we discovered, oh yeah, it's really cool, you can bid on shoes and it actually sends us traffic and it converts pretty well, other people started bidding on shoes.

So we had to keep going further and further and further and further down the long tail of keywords. This is all like things that you now think about. But we had to do that, we had to do SEO, we had to figure out SEO optimization. Those were not things that there was a book about. You were A-B testing this stuff all the time. I would say back then, Google was not obvious. We did that.

It was doing print ads, and print ads were actually pretty good. And when you did print ads that were co-branded with Stuart Weitzman or with Clark's, depending on the shoes that you're selling, it actually were pretty effective. And then we figured out a way for Stuart Weitzman to pay for that because it was co-branded. It's like, well, you put up Stuart Weitzman ads and they don't know where to buy it,

so why don't you put www.dacos.com at the bottom for your ads? And so a bit of negotiation. So those are clever things that you you have to sort of do as soon as we start doing that competitors start doing that um they were called co-op dollars or money that were available and this is something preparing for this you've talked a lot about this all this stuff was really hard and you get like nobody if you had slid a business plan across the table as sequoia capital that you were going to do this they'd probably be like you're going to do print ads right but like because you had to do, you had this muscle that nobody else had.

And then when Amazon came and tried to compete with you, they didn't know how to do this stuff, right? Yeah, I think they, nothing, nothing in the consumer business is completely proprietary. You could try to create these modes along the way, but consumer business modes are like little by little. You know, you add, you make things a little bit more, you know, user-friendly. You make it a little bit cheaper for you to acquire customers. 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. And if you're really good, you try to make those 1% compound. And that's the way you sort of get ahead um and when amazon tried it there were other competitors before amazon but i i would say one of the other things back to you know the one sort of thing that people don't talk about is not having too much money was actually the thing for zap was not

having too many competitors at the beginning was also a thing for zap yeah that's calling it the herd right yeah so like 1999, there were competitors. By 2000, 2001, most of the competitors died down, and some of the competitors that did exist were pretty weak. And the competitor that got a lot of money was NordstromShoes.com. They got $20 million. Zappos got funded with $2 million. They soon didn't go anywhere because they had too much money.

And five years in, that's when the competition started heating up. But 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 a long, sustained period of time, I'm not sure Zappos would have been around. 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.

Yep. This is, Brett stone writes about this the everything store that you guys put ads on and when you're going through security uh to check in at the at the airport you put zappos ads where you had to put your shoes which is just brilliant and apparently which is now like an ad unit like that's a thing now yeah and now it's very competitive so when you say like oh yeah you could acquire users for cheap sure but you have to go discover these things this company had developed this business plan in 1999 they were all ready to go and then september 11th happened and for

they were still like working with the tsa for a long period of time to get it done and so by the time they were ready and they were capable of doing this, they were soon going to be out of money. So they were willing to sell those ad units for very, very cheap. You guys are the only buyers. Yeah. So it actually was a third party who did those ad units. Interesting. Well, let's rewind a little bit here. So we talked about venture frogs. So at some point, Alfred, you went to Tell Me and Tony went, it sounds like not as CEO, but it's his sort of joined the leadership team at Zappos. Can you take us from there a little bit on how Tony became CEO and how you found your way to Zappos? Sure. So I think we were both trying to just help the companies that we thought we could help. And back to, you know, Tony thought that he could help Zappos and he was willing to incubate the company in the loft in VentureFrog's incubator.

And then I had a longstanding relationship with Hadi Partovi and Ali Partovi. And so Hadi was one of the founders of TellMe, and he was telling me how much they were spending. And I'm like, wait, you raised $265 million, and you're burning $60 million a year? That sounds crazy for a zero-revenue company. Meanwhile, Zappos can't raise any money.

It's like night and day. I'm like, well, Zappos can't, whatever. Tony, just grow the business. Don't spend any money just like it is today. Just grow it at break even. You're fine. You can't raise any money anyway. Here, this other company raises $265 million and is losing $60 million a year.

I'm like, holy shit. I was pretty sure with a $60 million loss, you can narrow that to something lower than that. You can add value that way. And so Tony really liked the notion of trying to figure out to take a business from commodity business and layer on service he had this whole thesis that most commodity businesses are commodity businesses because they don't layer on service yep and and so he wants his app was first uh and for tell me i just thought my financial skills were were going to be valued it tell me it turned out to be one one of the first sas computing cloud computing companies just wasn't we had to build our own cloud. And we turned that company

from not having any revenue, having too many people, going through two and a half rounds of layoffs. The notion of the consumer business was that you can sell advertising as well. Advertising units on Google are 90% risk margin. On this,

because of the infrastructure, was going to be at best 50% risk margin. That may get very hard to work. We pivoted to the enterprise business, had to change the mindset of the company. Mike McHugh did a great job shifting that. We built an enterprise

business through a lot of pivoting. Mike's the founder and CEO of Flipboard. I didn't realize he, so Mike's the founder and CEO of Flipboard, right? Flipboard, yes. Wow. I didn't realize he was at TellMe. Yeah. And so after TellMe was in Gachet, I joined Zappos. So 2005, you came over to Zappos.

You just raised the round from Sequoia. And shortly after you joined, Tony gets an email from Jeff Bezos saying that Jeff is going to be in Las Vegas and wants to meet you guys. What were you guys thinking when you got that? I don't know. I just thought it was like probably should take the meeting. It'd be cool to see if there's some partnership that we could do together. We weren't thinking that he was coming down to buy the company at all. you brought back to pizza you brought two pizzas to the meeting right well he's famously known for his two pizza team so we thought we'd bring two pizzas uh funny enough nobody i

don't think anybody ate the pizza it wasn't that kind of you it wasn't it wasn't uh yeah it wasn't a eat the pizza was amazon in the shoe market at this point like were they a competitor i don't i think they were like in the market to something not in a big degree but in a small way and the suppliers the the shoe manufacturers were pretty scared of amazon right because they were worried that amazon would discount their merchandise below msrp the the just go back like back then they were scared of anybody in the internet. Not scared in the way that you're thinking about these people

are going to be dominant and take our business. They were scared because they thought all internet businesses were fly-by-night businesses. They were going to take your money, not your business. Consumers would never buy shoes on the internet. We need a shoe salesman. It's like the Silk Road. We need a shoe salesman to come and talk to the customer,

measure her feed or his feed, and bring out three pairs and try to upsell them another pair that they don't really want. I'm like, okay, whatever. So as you know, originally the idea for Zappos was to be completely drop-shut. And over time, just to get even some of these brands to sell to us, we had to get inventory. We had to buy the inventory. So part of these brands to sell to us we had to like get more get inventory we had to buy the inventory so part of i was going to ask about that see when you

started it was dropship so the manufacturers would send the shoes directly to the customers you wouldn't have to take inventory you convert to a retailer model part of that i imagine was to provide better customer service uh yeah because i think the brands are not set up to be direct to consumer businesses. So they don't take the time to think about what a direct to consumer business needs. And so the packaging wasn't perfect. They were sending packaging slips like they would send to a store as opposed to a consumer. The boxes were not branded. They didn't have exact inventory because that's not actually as important to when you're distributing

to a store. 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. And we wanted to provide a nice and happy and joyful packing slip as opposed to a grid yeah with members but part of it it sounds like also was just getting their trouble like you had to buy the inventory or else they weren't going to trust you to sell it yeah and that's where most of the use of capital went which is buying inventory

so when you go into this meeting with with amazon what's the result of that do you guys walk away feeling like well they're they're about to come after us? I mean, I think it was a very happy meeting. From what I remember, 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 suggested we do a partnership and I think the response back was rightful, which is like partnerships don't tend to work

when you have disparate, like hugely disparate sizes of companies. And so we went on our way and I don't think we were thinking that they would we always thought they were going to come after us. We wasn't thinking that they would immediately, well, in a few years, launch Endless.com.

Yeah, I think so. It was the next year they launched Endless.com, which is basically a clone of Tapos. They spent $30 million developing it. And when they launch, it has free overnight shipping, which is super clear. I mean, I'm sure it was obvious to you guys. They were losing money on every order.

You guys worked so hard to be profitable. And they're just, as you say, you know, it's like lots of capital coming into the space and killing your economics. How did you react to that? Well, the only way you can react is like figure out what you want to match that and how you differentiate against that. So those are the two conversations. is figure out what you want to match that and how you differentiate against that. So those are the two conversations.

We had fortunately figured out how... We had been upgrading shipping along the way, so over the years we had gotten people from, on average, five day delivery. We'd always say five to seven days and deliver it in five days, and then four, and then three, then two. We hadn't gone to overnight 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.

We would go from profitable to just break even again. And so it was a big decision to do that. And we were still focused on making sure we had the largest selection, and we had the best vendor relationships and things like that that we thought were still differentiated against endless. So we went to free shipping both ways we went to free overnight shipping they went from free overnight shipping to because discounting um

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 inventory. And by not thought up as positive, you mean like the brands would stop retailing through them if they were selling below MSRP, right? Yeah, they can't ask you to change the price, but they can stop selling to you. 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 inventory. They want them to cheapen the price. So Amazon's very clever. I thought this was very clever. It's like, instead of discounting their shoes, they said minus $5 for, or $5 back for overnight shipping. We'll pay you to send it to you overnight.

I'm like, wow, that's really clever. Coming to Prime subscriptions next year. Wow. So despite all this, I'm wondering, you guys continued to grow. In 2007 you did $840 million in revenue. Was there an element of like, I'm thinking of when Facebook cloned Snapchat and released Poke and it was the best thing that ever happened to Snapchat. Did Amazon do category development from you? I'm sure they were spending a lot of marketing. Did you see any bleed over of that into Zappos? I think when you're in a growing, 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. We didn't feel like we were losing our loyal customers to Zappos.

We didn't need to acquire Amazon shoe customers to make our business work. There were enough customers out there to go acquire. You get the large enough size, that will at some point not be true. 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. 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. So that happens.

You guys are both growing through kind of 05 to 08. Then financial crash happens. Yeah. Zappos endures one financial crisis, so may as well stick around for the next one. Well, if you want to build a long-enduring company, you're going to endure a lot more than just one or two financial crises. So yeah, the financial crisis was interesting

because I think we saw glimpses of the slowdown happening the year before the financial crisis. And looking back, it's easier to say that. Back then, obviously, we didn't realize it. Do you mean in raising capital or in people buying shoes and getting somehow more expensive to get people to do that? Consumer spend was more tepid. And we would see consumer confidence coming down faster than the Fed

or whatever could see it, I think. Anyway, so the financial crisis was interesting because our business is still growing. I think we had a $100 million line of credit of which we're only using $30 or $40 million of. It wasn't like we were overextended. So you didn't bust your covenants on the credit line? No, but the banks couldn't post the money. They were like, wait, we have this contract. It was like, well, we've been told to like, we have a liquidity crunch. We need to like draw black some of the liquidity.

And that was a little disappointing. Huh. Wow. Yeah. I mean, that's not how lines of credit work. Well, you should read all the terms and conditions. Yeah, right. When it's not your mean, that's not how lines of credit work. Well, you should read all the terms and conditions. Yeah, right. When it's not your money, it's not the money.

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

So they started saying, well, we're not going to lend against apparel. There are ways for them to sort of get out of the contract. It was also what was more painful was conversations with employees. Some of them had lost their home and- Right. Vegas was particularly hard hit by the housing crisis. Vegas housing prices fell 50% or more, some estimates. Some people lost their homes. They said, well, the only thing that's of value in my portfolio is my stock options. I was like, whoa.

I thought I had a big weight running a business. 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. Some people needed liquidity. 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 payments.

And I was like, what do you mean? I thought you were renting. He's like, well, I am renting, but the landlord is going to lose his house. So I don't want to move. I don't want to destroy my family. So I'm going to come up with the money to buy the house. And it's going to be at a discount. So yes, I'm selling my stock at a discount, but I'm buying the house at a discount too.

So he felt a little good about that. But I was like, you know, you're selling this at probably 25% of the value that you would get if you just wait this out. He's like, well, I need the cash now. Those types of conversations are much harder. And so we're thinking about what's the right thing for all shareholders. And look, I mean, we can always think about if Zappos had been public, gone public because it could build a big enough business, would it be valued today? And it's probably not.

When I left, the business was 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. And when I left, it was profitable. And so I'm sure it could be a public company, but Tony wouldn't be working on the downtown project and doing what he loves to do. Delivering happiness. And I wouldn't be here doing what I love to do.

So when the deal happens, it's announced summer of 2009, Amazon's going to acquire Zappos for $1.2 billion in stock. How did the conversation go about stock? I mean, that was the best thing that you guys probably ever did financially, right? Yeah, so that was the line, success has many fathers. Many people claim to have been the person who

negotiated the stock point. Tony says he pushed for stock. Mike Martin says he pushed for stock. Actually, everybody pushed for stock because Mike Martin says he pushed for stock. You know what? Actually, everybody pushed for stock because we knew that coming out of a financial crisis, everybody's stock was undervalued. I think Amazon was trading at like 50 or 60 bucks a share at this point.

It was trading at... The day it closed, it was trading at 118. So the stock price today is more than 10 times what... But who could remember? Who could 10 times what it was. But who could remember? Who could remember exactly what it was? It was 118.23 cents, I think, something to that effect. Oh my goodness. And so it started out with all cash because Amazon had not done many transactions with

stock and we said we're happy with the price, we just won't do the steel losses in stock. In corporate finance, it shouldn't matter. Right. Because the acquirer can decide to give stock and buy back the stock. So it shouldn't matter to the acquirer. 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 yeah So in my view, in mergers, I think acquirers should be more lenient about doing stock transactions because it shouldn't be any different for them. Unless you have a view of the value of your own stock, which differs from the market. Right, but you can always buy back, you can always sell it. Yeah, that's true what one thing and then we'll move on to acquisition category but but i'm really curious i mean you did this and

it was announced from day one there's this amazing video oh my god 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 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 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 over simplifying everything being like salt of the earth. Like I'm just Jeff and my jeans and you know, he has a, not even a whiteboard like you know the paper easels that you flip and he writes in marker the four main lessons he learned at amazon anyway though but the point is

the when it's announced from day one zappos is going to remain fully independent be a wholly owned subsidiary that was pretty novel for the time i mean now like this is the playbook that facebook runs and others with acquisitions. How did those discussions go? Yeah, I think Amazon has always been prescient on this front. It wasn't the first acquisition that they've done that was like this. I think Alexa was left independent. So was IMDB and Audible.

And so we weren't the first acquisition. There are obviously situations when you acquired the company and you want it integrated. I think it makes sense when it's an acqui-hire. It makes sense when it's a feature as part of an overall product somewhere. 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. Centralization has its costs. And so I think decentralization has its costs too, but you're more likely to, in my opinion,

decentralized organizations are more innovative because they don't have to bubble everything up. There's not a central decision maker. So decentralized ecosystems are more innovative. And if you want to have a comparison, it'd be like a large company versus a startup ecosystem. That's why we have a job here at Sequoia. Like we believe the decentralized ecosystem and the innovation of entrepreneurs when they don't have to.

And I think the companies that are larger have a harder time innovating because they're centralized. And so the conversations are pretty natural. The questions were about what kind of, what's the management structure? And so there was the management structure was basically our board at Zappos would be replaced by a board that was now full. An Amazon board. Yeah, an Amazon board. Cool. And I think it still exists that way today. I'm curious, you know, when they approached you about buying the company, what were sort of the main cited reasons? 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?

Was it, we want to learn from this and figure out how to spread the Amazon DNA or the Zappos DNA around Amazon? I mean, why'd they do it? I think the, you know, you should ask them, but there's a line in the video that you were referencing where Jeff Bezos said, I get knee-weaked when I see customer-obsessed companies. And he really understood that Zappos was really customer-obsessed. And I do think that for all the sort of bizarre differences between Amazon and Zappos, that is one thing that both companies share a lot

in common. And maybe we do customer obsession differently. We have a different style of doing customer obsession 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 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 stand 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 were 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 different ways 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 next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses and provides enterprise grade security with the technology services and expertise

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the industry leader in endpoint detection and response for the eighth consecutive season, and the industry leader in managed detection and response again this summer. Yep. So if you want cutting-edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. So the next segment we do on the show is acquisition category, and we assign a category to the acquisition. And and to me it's pretty obvious this is a business line that amazon acquired uh keep it as a separate company um you know it's not just a product that's being integrated into amazon but i think this is

really interesting like the this was the point i wanted to make and the cultures even though it's you know as brad stone said and you quoted like it's Zappos was bizarro world version of Amazon, but the core values were basically the same. Be frugal, be customer obsessed, decentralized decision-making. It's like such a good fit when it comes to culture, even though it seems on the surface that it wouldn't be. Yeah. I think that's why the acquisition was considered a success. And I don't think it was an easy acquisition at the time because it was the largest acquisition at the time. Now, it's in comparison today to Whole Foods, but hey, it's 10 years later, just for inflation.

Numbers only, acquisitions and numbers only get larger, right? So it was a business line that they acquired. I think they also were very interested to learn about some of the things that we built related to merchandising. How did we get so good at getting the right product in the right quantities at the right times with less than stellar technology? We weren't using AI. Yeah, were you guys using Kiva? We were also using Kiva.

Okay. And that was how Kiva got on the radar screen of Amazon, right? Kiva was... It was funny. I'll tie this all the way back to Sequoia. A lot of boys have sent me the business plan of Kiva. Asked me for my opinion. And Kiva came from Webvan, which Michael Moritz was on the board of. Michael Moritz was on the board of

Webvan. Webvan did not work well. Work out well. They had been using... If you wanted to go They had been using, they had been using, if you wanted to go all the way back, they had been using a carousel system. I won't name the vendor. We ended up using that carousel system and the same exact vendor.

It was my first board meeting and I got ripped into shreds because we were saying that this was going to work, et cetera. By Michael. By Michael. And then also by Michael Marks, who obviously found her and CEO of Flexronics,

and so he knew a little bit about operations. I was like, okay, all right, well, we need something different. Anyway, so that happened. And so Mick, who was at Webvan, noticed how inefficient most of the systems were, so he went on to create Kiva Systems. I didn't know that connection, so for reminding me but at the time. So I got the business plan for Kiva from Rulof asking me what I thought about it. It's like oh interesting idea but probably too hard to rip out a whole set up distribution

center. Maybe for a new distribution center we might use it but not for one already set up. We're gonna rip out a a racking, et cetera, et cetera. So as a startup, you kind of move pretty quickly to your next distribution center. So we did try Kiva, and it worked well. And then eventually, it took over all of our distribution centers. 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. And I said, why? And they said, well, you know, your spike in December or our spike in December is an order of magnitude higher than the rest of the year. So you're paying for idle robots that are going to sit around for most of the year. So that can't

be efficient. It turned out it's still efficient because you can get into much larger distribution centers, you can zip things around, have people work on one end and have machines move certain things around in another. So a few years later after they observed this, they bought the car. Acquired Kiva, yeah. 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 ones. I think there was some public statement that they have like 100, maybe on the order of 200,000 or 300,000 Kiva robots. Wow. That's awesome.

All thanks to Zappos. Well, that's just Zappos. I mean, Zappos also used them. And so they acquired diapers.com. So it was more and more evidence that this was going to work. So there was technology that they bought as well. So we've decided it's a business line. Amazon's got a competing business line that's doing really well.

Amazon's in-house shoe business is, according to all these external research reports, really crushing it. So why not pour all the investment that they're putting into their own in-house thing into Zappos? And were they for a time? And does it feel like they've shifted away to you? No, I think the shoe business as a whole, whether it's on Amazon's site or on Zappos' site, has been growing really well for both. And so it's not an either or. 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 and versus or. And so why not grow your own business and own your biggest competitor at the same time if you can pull that off, and they did. I'm curious on that front. Did anybody else ever seriously attempt to buy the company besides Amazon? Would you guys have sold to anyone else? I don't think anybody else was serious.

I don't think we would have sold to anyone else. And it's hard to imagine anyone else would have let you guys keep doing this stuff. Well, I think Walmart has shown that they'd be willing to buy companies and keep them independent. Well, now. Now, yeah. Back then, it probably would have been harder to conceive.

But I think today there are plenty of competitors. So, like, could Zappos have remained independent, gone public, and been bought by someone else? It's all possible. I try not to think about all the possibilities because you only have one life to live.

You don't get to rewind. You're a little busy on other stuff these days, too. You don't get to A-B test your life, so you have to move on. That's okay. We'll speculate wildly about it on this show instead. Tech themes, yeah. So we've talked about a bunch of them.

There's one that we didn't, it was part of the sort of story in Venture Frogs and it's this great tidbit about the initial phone call from Nick to Tony sort of pitching about shoesite.com 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. But, you know, Nick had this tidbit in there that it's a $40 billion market. And 5% of that

is already being sold by paper mail order catalogs. And it reminded me so much of a Sequoia investment thesis that, you know, we invest in markets, not ideas. And we invest in markets over founders in many ways. And I think that there's something really powerful to big companies get created in big markets. And it doesn't matter how incredible of a widget you make in a small market, it's just not going to become a behemoth. Yeah, I think you're right that large markets are very, very important. I would just say that we have learned over time that founders and markets go hand in hand. It's not like you can't invest in a big market and have the wrong founder in place or the wrong management team. The people around the company, it has to all work.

And so in some ways, I would say we invest in companies and not ideas. We invest in companies and not products. We invest in companies, not features. 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. I know on day one, do you have all those things? No, you don't.

But you have to sort of envision all of this. And why will this be an interesting company in 5, 10, 15 years? And you can't envision that or you don't feel like the pieces come together or you don't know where the other pieces that you need can come from. It makes it very, very hard to build a company. Yeah. Yeah. My thing 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, um, well, Ben, you mentioned a little

bit, but just how much this story reminds me of the Stitch Fix story as well. And, you know, even down to you guys hired, it was the first hire at Zappos, Fred, uh, Mosler, and reminds me of, um, you know, one of the first hires at Stitch Fix was Mike Smith from Walmart. You're bringing that DNA from the industry, uh, into understanding, you know,

to this new paradigm of the industry, but from the old world too. And so you can bridge that gap. But one of the things we talked about on the Stitch Fix episode was this idea in founding a company or investing that like, it's not enough to be right about something you need to be right. And have it be non-consensus that you're right. And like, you know, Tony almost deleted the voicemail, right? Because who's going to buy shoes online? It

seems like a dumb idea. Just like Stitch Fix on the surface back in the day probably seemed like a dumb idea. But when you dig into the market, it actually isn't. I'm curious how much you guys thought about that along the way. Yeah. So Katrina has done an extraordinary job at Stitch Fix, so kudos to her. I think going back to the comment you made about right MB 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. And yes, Tony almost deleted the voicemail and at the same time the reason he almost deleted it, didn't delete it was, Alfred, we had a conversation, this sounds like a dumb idea, but nobody else is going to do this if they get money and they go off the

ground. At least we're going to be the only ones doing this dumb idea. If it works, yeah. we're going to be the only ones doing this dumb idea. Yeah, we're going to be the only ones doing this dumb idea. And then you ask, is it that dumb? The facts were that he had no...

We knew that Nick could build a website. He was a webmaster. He designed websites. Okay, check. We knew that there was a problem here. We didn't know about the market. He listed the market size. $40 billion, 5% or $2 billion already done on mail order. So what is that? What is the conclusion from those facts?

Okay, well, it's not that hard to extend that conclusion to be the internet should be bigger than mail order. At least as big. Yeah, at least as big or bigger or many of orders are magnitude bigger. So if you believe that, then back to you need to build a company. We have a founder with an innovative idea.

You're missing a few pieces. So as you said, we went out and hired Nick Swimmer because we're missing shoe experience. Tony and I knew how to sort of, because of Link Exchange, drive traffic to a site. Okay, got that checked.

We have a bunch of things checked, but we didn't have the shoe experience and originally the original idea we didn't need customer service experience or distribution because we were drop shipping that evolved so we needed more pieces to be filled in but the company coming together has a lot to do with like making sure you have all those right pieces i think that's what's so you know for me at least super fun about about early stage investing is you can't look at it and judge it as if the pieces were together, because if the pieces were together it would either be a public company or it's never going to work. Yeah, you need to have imagination. You need to have imagination and you also need to make sure that you can dream with

the entrepreneur. We often sort of talk about, okay, can you see a world like this? Should the future be this way? The founders we like backing, like Adia at Houzz or Brian Chesky at Airbnb or Dropbox, they also just see the world slightly differently than everyone else 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. They've just gotten that wrong. And they're on a mission to go change that. And Nick was on a mission to change that. Tony was on a mission to change that. Yeah.

Even though, and I think this is what's also super cool about Zappos and the story. Actually, another one I had in here was mission-focused founders versus mercenary founders. 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 happiness, as Tony puts it, you know, to customers.

Yeah, I think that before getting on to mission versus mercenary 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. And those two things are hard for a startup to just compete on those two things because you don't have the bank roll to compete on price. And on day one, you're not going to have the widest selection.

And so we needed another pillar. You could compete on those two things later, but that's why we're so focused on sort of putting on another layer, and it was customer obsession and customer service and both tony and i were pretty passionate about customer service from a mission standpoint you know people ask this all the time whether we back you know mission focus or mercenary founders i think best founders are kind of both you know it's like they're not they're not doing this as a charity because otherwise they would

start a non-profit um so they are in the they are in the in the entrepreneur space because they want to build a company they want to build a business there's also like i mean back to your days with pizza at harvard you know quincy house like there's an element of you gotta be a hustler to get this done right a hustler you want to solve the problem you want to do it in a different way you have to differentiate and most of the founders want to solve the problem. You want to do it in a different way. You have to differentiate. And most of the founders that are successful, they want to build an enterprise that exists much longer than themselves.

And that requires making sure that the company has longevity, which means it has to have a sustainable business model. And then I do think one of the themes that you have to do hard things that yield some protection, some moats, and things that are hard that are just people don't want to do. And kudos to Amazon for building a network of warehouses. Nobody wanted to build that.

Like, oh, let's do that. Or a network of server farms. If you ask in 1999 whether you put $10,000 of your life savings in eBay or Amazon, I bet you most people in 1999 would say eBay. It was this elegant, no capital, like capital light, no distribution centers, no inventory model. It was just connecting two people and the marketplace would take care of itself. They acquired Skype.

People could chat with each other. And I'm not making fun of eBay. They have lots of issues that they need with trust and safety. They have to solve that. They have to solve payments, micropayments, right? These are small payments. That's why they had to sort of develop their own. They tried developing their own.

They acquired Billpoint and PayPal. It was not an easy thing. But from an investor standpoint, investors seem to like these high margin, really easy to explain business models. At the same time, some of them, the hardest things to replicate are the hard things that people do to build a real mode around the business.

Amazon builds real modes. That's a great, great way to close out the regular section of the show. We're on to grading. Alfred, first, I want to ask, do you want to participate in this? You don't have to. What is this grading thing?

All right, so we basically, when we started the show, the whole notion that we had in mind was we want to figure out what have been the most successful acquisitions in history and try and take them apart and reverse engineer and figure out how have been the most successful acquisitions in history and try and take them apart and reverse engineer and figure out how to start companies like that. And so we thought, well, there's got to be some access on which we evaluate whether it was actually a good

deal for the acquirer or not. And so we basically go through this whole process to try and figure out, was that the best use of the acquirer's capital? And our A 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 um or instagram's another great example our other a pluses right right um and then there's other ones where we're like actually that was a that was a terrible use of capital um and then they're they're uh it kind of gives us a way to understand, basically, given all the options on the table, should they have done this? And usually they land in the B2C range.

So that's the process. Well, I'm going to take a first stab. So I think that on its own, Zappos was a great business. So it's not like they were buying something that they'd have to integrate and have really high costs of creating those synergies. That's not what it was about. 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, expanding category by category the same way that Amazon had. And we didn't talk on the show at all about how big it could have

gotten from a category's perspective. But if I'm Amazon, that's one of the main fears is that someone becomes the everything store before I do. I think it's been a good business inside of Amazon. 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. So I think it's good. I'd go with B+. But it's a tough bar to get an A on the show. Tough bar you get an A from Ben.

David? Well. on the show. Tough party day today for Ben. David? Well, it's hard to see this not being a good use of capital for Amazon, both for the reasons you were saying, but also in preparing for the show, I think a bunch of people have made analogies to this almost being like a Berkshire Hathaway type acquisition of allowing Zappos to keep doing what it was doing free of all the financial constraints that had hampered you guys along the way. And for Amazon, this was obviously a hugely important category to the company and to Jeff Bezos to be able to enter that, 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. So, you know, sorry, Alfred, I don't think this is as transformative as Instagram, but this is a minus in my book. No comment from Alfred. I think I know too much information. We can move on. How about Carb about carabouts what you got ben uh last week uh i listened to andrew mason as a guest on recode decode with with kara swisher um and it is always refreshing to hear that guy um on any form of media especially in an interview format so uh so straightforward so honest uh for listeners who don't know, Andrew Mason is the

founder of Groupon and has since started a couple of other companies. And he was on talking about his new company, which is in the audio editing space. So it obviously was interesting to us here at Acquired. But there's so much revisionist history in our industry and, and legend and lore that gets started. And you just never hear that sort of thing out of Andrew's mouth. It's mostly like, no, we didn't know what we were doing. Yes.

We figured it out. Yes. It was really hard. No, maybe I shouldn't have been the person to do it. Yes. That's why I was fired. I mean,

there's just a very, it's just a refreshing take. So really enjoyed it and really enjoyed hearing about some of the new stuff he's up to. Nice. 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. Justin O'Byrne published this great long piece on his blog called Google Maps Moat, the Google Maps Moat.

And he's a, I think, designer in the map space. I believe he worked for Apple Maps for a while. 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 and the lead that they have because of it over Apple and Nokia and everyone else in the space. And it really detailed breaks out like product changes month by month over years across all the products in the space. Really just a brilliant analysis and very worth reading on what makes a moat in the consumer business. I'll second that. That piece was incredible. And it's got these like great side-by-side comparisons and animated GIFs where you can see like he's been taking the same screenshot year after year for like

seven years or something and you can see the the complexity on each of these maps grow over time and he annotates what they did to do it just it's so cool even to just scroll through yeah i i agree as well that was a great piece for me i For me, I'm trying to do some hard things and read thick books. So I'm reading through two books by Walter Isaacson. One is about Ben Franklin, the work that they did. They were also interested in many, many different things. Kind of think about Albert Einstein as a physics genius, but he also loved playing music and the violin. And Franklin was a publisher. He obviously was one of the founding fathers

and published a lot of papers, but he was also into music and other things. 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. Another fascinating person, I hope Walter writes a book about Madame Currie because I think she's also a fascinating character definitely he's a great writer well thank you alfred for joining us putting up with us uh reliving your trash compactor days yeah alfred uh where can our guests find you on the internet oh they can find me i'm just my my email is lynn at sequoiacap.com

you can find me on the uh sequo website, sequoiacap.com. So that's where I hang out. Awesome. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring,

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