Zappos CEO Wanted To Stay Independent, Sequoia Wanted Liquidity

What's striking to me is that the CEO letter mentions Moritz directly. I'm sure this isn't the last we'll hear of this story.

  > We asked our board members what they thought of the opportunity. Michael
  > Moritz, who represents Sequoia Capital (one of our investors and board
  > members), wrote the following: "You now have the opportunity to accelerate
  > Zappos' progress and to make the name and the brand and everything associated
  > with it an enduring, permanent part of peoples' lives... You are now free to
  > let your imagination roam - and to contemplate initiatives and undertakings
  > that today, in our more constrained setting, we could not take on."

http://blogs.zappos.com/ceoletter

  > At least two sources who do not hold board seats, but are directly involved
  > with Zappos, indicated that Moritz and Zappos CEO Tony Hsieh came into
  > conflict about the company’s future. Moritz, the sources say, wanted Zappos to
  > sell while Hsieh wanted to remain independent.

http://www.pehub.com/45388/zappos-ceo-wanted-to-stay-indepen...

What surprises me most is not just that this is Sequoia, but that it's Mike Moritz, one of the most respected VCs in the biz, and not just Amazon but Jeff Bezos, probably the greatest tech CEO today.

This seems terribly shortsighted from Moritz for 2 reasons:

1- Zappos could definitely have exited through an IPO later, which would probably have delivered a better return for Sequoia (a 3.5X return on one investment is good but not great in the context of a VC fund; 5X is a MINIMUM if you want to return the fund). We're talking about a company with negative working capital and a tremendous brand, perfectly positioned to take advantage of the economic upturn if/when it happens.

2- Moritz should have known that his forcing the sale would have come out, and he should have known that this would have tarnished his brand, and Sequoia's. VCs are nothing if the best entrepreneurs won't take their money. This can have far-reaching repercussions. Just one example: Peter Thiel had a falling out with Sequoia when he was CEO of PayPal so after he invested in Facebook he steered Zuckerberg away from taking their money. Wasn't that enough of a lesson?

The only thing I see is that LPs are putting a ton of pressure on Sequoia to perform and that they needed a big liquidity event yesterday, but if that's the case it's bad for all parties involved.

And it's also terribly shortsighted of Bezos:

- They're both etailers but Amazon and Zappos actually have very different value propositions. Amazon is about buying consumer goods for cheap on the internet. Zappos is all about great service/customer experience. So there aren't that many synergies there because they're actually in very different businesses. Amazon succeeds by being ruthlessly efficient at building infrastructure, slashing costs and converting visits into sales. Zappos succeeds by being ruthlessly efficient at customer service and "soft" marketing (word of mouth, etc.).

- Integrating the two would mean a culture clash which would destroy a big part of what makes Zappos so valuable, ESPECIALLY when the sale was forced against Zappos' highly visible and very beloved CEO's will, which means that Zappos' employees won't have much loyalty, which means a crumbling corporate culture, which means a dilution of the Zappos value proposition, which means FAIL.

Unless Bezos has a plan to be fanatically dedicated to preserving Zappos' culture (as dedicated, if not more, than Hsieh is) and/or some secret master plan I don't know of, this seems like the classic "empire building CEO" M&A mistake that someone like Bezos should be immune from.

I really don't get it.

But if Amazon is ruthlessly efficient at its infrastructure (running warehouses/shipping efficiently) then won't the result be that Zappos can continue to excel at personalized customer service, but cut costs and distractions by taking advantage of Amazon's shipping infrastructure?

Because their EBITDA is only 40 MM on Revenue of 1 Billion.