Zappos: the poster child for why start-up VCs suck

A while back I remember having a conversation with a friend about the state of web business and how it seems that no one wants to build a business that they ever intend to make into a long lasting proposition. It is all about building to be bought rather than building a business intended to last beyond the first serious offer from a larger company.

YouTube is probably the most famous of these buy-out that made waves when Google bought the video service. However they are not alone as the web is littered with absorbed companies of which Zappos was the newest member.

When Amazon bought Zappos for $1.6 billion of Amazon stock many wondered what would happen to the company. While predictions may have varied it seems that at this point in time all is well with the Amazon-Zappos marriage and with Zappos becoming the poster child of successful big company – small company buy-outs.

So it was interesting to read the excerpt of Tony Hsieh’s, founder and CEO of Zappos, book Delivering Happiness on the Inc.com site and hear how; and why, the sale to Amazon came about. As it turns out there were actually two offers from Amazon with the first being made when Zappos was still just getting its feet wet in the start-up world but ended up turning down.

In the intervening years Zappos grew into being a successful business with profit just around the corner and changing the whole landscape of what customer service meant. The problem was that the venture capitalists backing the company didn’t see the company ethos the same way as the people running, and working for, the company. There was a conflict brewing and one that could have changed the company.

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.

The main thing to remember here is that Hsieh didn’t want to sell the company but instead of taking Zappos public and remaining independent he realized that the only way to keep the company unique was to find a buyer.

It was a stressful time for me and Alfred. But we’d gotten through much tougher times before, and this seemed like just another challenge we needed to figure out. We began brainstorming ways that we could get out from under the board. We certainly didn’t want to sell the company and move on to something else. To us, Zappos wasn’t just a job — it was a calling. So we came up with a plan: We would buy out our board of directors.

We figured to do so would cost about $200 million. As we were talking to potential investors, Amazon approached Alfred about buying Zappos outright. Although that still didn’t seem like the best option to me, Alfred sensed that Amazon would be more open than last time to the idea of letting Zappos continue to operate as an independent entity. And we felt that the price Amazon was talking about was too large for us to ignore without potentially violating our fiduciary duty to our shareholders.

Therein lies the big problem of venture capital – they aren’t in for the long haul, especially in complicated financial times. They want to see a return on their investments as quickly as they can and don’t get me wrong, there is nothing wrong with this but it provides little incentive for long term business strategy.

Where Zappos wanted to remain independent and wholly owned by the people who had founded it they were put in a position where they had to sell. It was either that or potentially lose their business.

While venture capital might be the greatest thing to happen to people with a dream it the same doesn’t always apply to people who want to create a business for the long term. Sure it is great to see all the innovation that these start-ups are bringing to our world but at the same time there is way too many me-too ideas getting funded by VCs. It is because of this crap shoot in funding that venture capitalists find themselves thinking in the short term which means take the best and soonest buy-out offer that comes along.

It leaves one wonder just how many of these absorbed companies could have gone on to continue to innovate instead of becoming a nameless entity that once showed promise.

image courtesy of Jake Chessum/Inc.com

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