Zappos' Cautionary Tale: Even Geniuses Can Take Too Much VC
The skyrocketing rise of $1 billion online shoe-seller Zappos has been the stuff 21st Century entrepreneurs' dreams are made of. Its customer-service ethic is legendary. But in a new book, founder Tony Hsieh describes the fatal mistake that caused him to need to sell the company to Amazon (AMZN) last summer: He took too much venture-capital money from VCs who didn't buy into his vision.
Hsieh's plan was to take Zappos public this year, when sales topped that $1 billion mark. The company actually made it to that revenue figure by 2008. But when Amazon came courting that year, Hsieh writes he was under pressure to sell from Sequoia Capital, which had put $48 million into Zappos. The downturn put Zappos in a precarious financial position despite its success, as its credit line was asset-backed. As the value of its assets -- mostly inventory -- declined due to lower sales, the company risked having its credit pulled. An even bigger problem: The Sequoia-backed board members didn't support Hsieh's emphasis on building a superior customer-service culture, referring to it as "Tony's social experiments" instead of viewing it as a core company value. Pressure was building to scale back on the service aspect to maximize profits, which rankled Hsieh.
After meeting with Amazon's Jeff Bezos, Hsieh came away with the feeling that being part of Amazon would provide a more supportive environment for growing Zappos the way he wanted than he could get sticking with his VC-packed board. And of course, the VCs got their happy ending -- Sequoia made $248 million in the all-stock, $928 million acquisition deal.
Many startup founders dream of scoring a big VC round and having the money to grow fast. But Zappos' story shows how VC money can often send a company hurtling down a path to a compulsory "exit" just to get the VCs off their back. Better to keep looking until a founder finds a venture firm that really gets the company culture and likes it, rather than grabbing the first brass ring on the funding merry-go-round. Or better to pass on VC funding altogether.
Zappos could have elected to grow more slowly, accepted less venture funding, and maybe kept control of its destiny. It might have grown to be the next great stand-alone retailer; instead, now it's part of an ecommerce giant that made its name on low price rather than outstanding service.
It remains to be seen whether that marriage will work out in the end, given the culture clash. Hsieh talks a good game about the merger now, but we'll see how long he sticks around. However it shakes out, it's clear Hsieh will always wonder if he could have managed the company's growth better and stayed in control of its destiny.
Photo via Flickr user theritters.Hat tip to Felix Salmon for this item.