Refreshing Honesty On Why Zappos Sold To Amazon

Say That Again

from the our-board-sucked dept

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

So it’s very cool to see (via Liz Gannes) that Tony has since written up a very honest explanation for why he sold Zappos. It really comes off as a lesson in how your investors can force you into moves you really don’t want to make. First he details some of the realities of operating an e-commerce business: how they had a revolving line of credit for $100 million that could be pulled pretty easily, as well as some other inventory issues that could lead to cash flow problems, even as the business itself was thriving (if you’ve never run a business, it’s important to understand the differences between revenue and cash flow). Those cash flow problems were apparently creating tension on the board of directors, made up of some venture capitalists that Zappos had brought on late in the game (it had been financed by Tony for a while):

These issues had nothing to do with the underlying performance of our business, but they increased tensions on our board of directors. Some board members had always viewed our company culture as a pet project — “Tony’s social experiments,” they called it. I disagreed. I believe that getting the culture right is the most important thing a company can do. But the board took the conventional view — namely, that a business should focus on profitability first and then use the profits to do nice things for its employees. The board’s attitude was that my “social experiments” might make for good PR but that they didn’t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.

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

By early 2009, we were at a stalemate. Because of a complicated legal structure, I effectively controlled the majority of the common shares, so that the board couldn’t force a sale of the company. But on the five-person board, only two of us — Alfred Lin, our CFO and COO, and myself — were completely committed to Zappos’s culture. This made it likely that if the economy didn’t improve, the board would fire me and hire a new CEO who was concerned only with maximizing profits. The threat was never made overtly, but I could tell that was the direction things were going.

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

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

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

Filed Under: tony hsieh
Companies: amazon, zappos