Amazon's purchase of online shoe retailer Zappos was surprising and interesting news all by itself, but now comes a twist: reports that this marriage made in e-commerce heaven may have been a shotgun wedding forced by Zappos' itchy-fingered venture-capitalist parents.
The informed, albeit anonymous, speculation from sources close to the company is that Zappos CEO Tony Hsieh favored remaining independent and moving towards an IPO. But his investors, particularly No. 1 sugar daddy, legendary VC Michael Moritz of Sequoia Capital, was anxious about achieving a more immediate windfall--and forced the deal on Hsieh and Zappos.
PEHub.com, which broke the story, says that Moritz had valued Zappos pretty highly and associated a high liquidation multiple with the deal. As a result, the Amazon sale will net the VC significant value right now, versus an uncertain return over a longer term after an IPO.
That's actually not a surprise. As we've noted, the VC business is really in the doldrums at the moment. Investment rates recently hit an 11-year low thanks to the uncertainty in the market spilling over to VCs being unsure that their capital outlays are going to net any sort of return. There was just one VC-backed IPO in the first quarter of 2009. That all adds up to serious pressure on Sequoia and its bretheren.
But consider one consumer-oriented dot-com that went public two months ago: OpenTable. The restaurant-reservations service went public in late May, pricing its shares at $20 when pre-deal estimates were more around $12 and the stock had a 1999-style first day of trading, finishing up 59%. It's currently trading at just over $30 a share. This for a company that generated just shy of $56 million in 2008 revenues and lost money.
Compare that with Zappos, which has been doing very well indeed, generating more than $1 billion in 2008 revenue and was reportedly profitable. Its IPO would have been an event like, well, Amazon's back in 1997. Zappos may have been strong enough to ride out the IPO lull--or even jumpstart a new IPO market.
Which makes one wonder why the Amazon deal happened at all. One suggestion is that Amazon could've gone all out to defeat it in the marketplace after IPO, which may have sunk the nascent public company. But remember that this pairing is a classic case of if you can't beat 'em, join 'em, because Amazon's own in-house attempt at enter the shoe trade, Endless.com, didn't do very well and is now likely to, um, end.
End of the day, the shotgun of blame points to the VCs. And they may have fired their buckshot a bit prematurely.
Update: Zappos read this piece, and got in touch with us with the following statement:
Regarding the rumors Sequoia forced the sale, Tony Hsieh states, “The articles and rumors of Sequoia forcing us to sell are simply not accurate. Nobody was forced to sell to Amazon. The Zappos board was united in believing that joining forces with Amazon would be in the best long term interests of our employees, customers, shareholders, and other stakeholders. The Amazon deal got us the best of all worlds: we can continue to run independently and grow the Zappos brand and culture, our small and larger investors are getting rewarded for all their contributions to Zappos over the last decade, and we don't have to deal with the headache and overhead of running a public company.”
Interesting, stuff, especially since legally Zappos can't reveal much more detail on the deal for a while. If you're interested in reading more from Hsieh on the matter, you can visit here.