Season 2, Episode 1: Zappos (with Alfred Lin)

Former Zappos Chairman & COO (and current Partner at Sequoia Capital) Alfred Lin joins our heroes to kick off Season 2 with a classic: Amazon’s 2009 acquisition of the internet’s quirkiest online retailer for $1.2B in stock. How did three Harvard undergrads go from delivering pizza to their dorm to delivering happiness to the world — and become in the process one of the few companies ever to compete successfully head-to-head against Amazon in commerce? Tune in to find out! 

Note: Unfortunately the quality of David and Alfred’s audio tracks in this episode were significantly impacted by a processor issue on David’s computer, which we didn’t discover until after recording. We’ve worked hard to fix in post-production, but it’s still far from perfect. Still, the content from Alfred is so good, we felt we had to put this episode out there even though the audio quality isn’t up to par. We hope you’ll give it a listen regardless, and we’re working on getting a transcript made ASAP as well. 

-Ben & David

Carve Outs:


  • Thanks to Perkins Coie, Counsel to Great Companies, for sponsoring this podcast. You can get in touch with Jason Day, who you heard at the beginning of this podcast, here.

Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Hey Acquired listeners, before this episode starts, David and I wanted to give you a heads-up that the audio quality is pretty rough in the second half. We had a problem that we didn’t catch until afterwards that makes it sound like a conference call with a poor connection. This stuff is important to us and we even talked about not even releasing the episode. However, the interview content is just awesome so we thought it’d be a shame not to share it with all of you. We apologize and we hope you enjoy the interview.

David: Okay. Is video good for you? Is this your angle?

Ben: This is a good angle. You look great.

David: This is a good angle. Are you getting my good side?

Ben: Always, David. [music] Welcome to Season 2, Episode 1 of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: And we are your hosts.

Alfred: And I'm Alfred Lin.

Ben: Hey! Welcome, Alfred. We’re very, very excited.

David: You spoiled the surprise.

Ben: I know, I know. Too bad our title really do those in.

Alfred: Thank you for having me on the show.

Ben: Yeah, we’re super pumped to have you. Listeners, this episode is going to be about Zappos, and Alfred is one of the few people in the world who can actually do this episode justice and come on to do the show with us. In December, I mentioned that we’re switching to Season so we can do themes and miniseries across the several episodes. For our first episode, we wanted to do a really classic Acquired format – reviewing an MA transaction. And this is one of the ones that has been at the top of our list for a very long time. So David, you want to introduce who is Alfred Lin?

David: Our mystery guest. Or not so mystery guest. So today, Alfred is a VC at Sequoia Capital where is the co-head of their US venture business and represents Sequoia on boards of many great companies such as Airbnb, Houzz, DoorDash, Zipline and many others. But today we’re going to talk about his time before Sequoia when he was the chairman and COO of Zappos and which was prior to Whole Foods, Amazon’s largest acquisition ever. But my favorite part of Alfred’s background which we’ll get into was that long before Zappos, when he was an undergrad at Harvard with Tony Hsieh, he was known as the – and I'm quoting directly from Tony here – he was known as the “human trash compactor of pizza”, which also it turns out is pretty relevant to the Zappos story. So, welcome Alfred and thanks for coming on.

Alfred: Thank you for having me. I'm no longer the human trash compactor of pizza. Given that I'm a lot older, I don’t have the same metabolism as I used to.

David: It looks like a few things have changed since those days.

Ben: Real quick before we dive in, I want to thank our sponsors for all of Season 2, Perkins Coie. So they were a fantastic sponsor, providing top-notch content and advice for the last several episodes and they’re back to do it again. So our first question is for Jason Day about IPOs.

Jason, we frequently hear about the roadshow process where executives from a company raise money from investors to participate in the IPO. What’s counsel’s role in that process?

Jason: “Counsel’s role in the roadshow is generally to take a look at the materials, make sure that they comply with what’s been disclosed publicly and aren’t misleading, are a fair picture of the company. Make sure there’s no promises that are not otherwise in the documents filed in the SEC etc. Then they do some training and work with the company, the company’s management bit to help them understand how investor questions will come across and how to answer within the confines of the legal IPO process.”

Great. Thanks, Jason. If you want to reach out to Perkins Coie or Jason directly, you can click the link in the show notes or in the Slack. So David, now without further ado.

David: So when most people think of Zappos, they probably imagine it was started by a guy named Tony Hsieh who lived in Las Vegas, loved shoes and he probably named it Zappos because he had some lifelong obsession with weird and quirky company culture. Right?

Ben: Impressive, David. Every word of that sentence was wrong.

Alfred: Ben’s right. That's not quite accurate.

David: I really should have done my research here.

Alfred: The founder of Zappos was Nick Swinmurn. He had started the company because he was looking for a particular pair shoes and he went to one store and couldn’t find the right size; went to another store, couldn’t find the right color; went to another store, couldn’t find the right style. And went home empty-handed and decided to go Google on the internet and he couldn’t find a place where he could buy his shoes. So this was 1999. He thought it was a good idea and he was a web master, he thought it was a good idea to just quit his job and create a website and start Zappos.

David: And here we are. Fortunately, he called you guys.

Ben: Alfred, I missed the term “web master.” We got to bring that back.

Alfred: Well, I guess nobody really is a web master anymore because we’ve moved on from websites to mobile apps.

David: No, there’s one web master. His name is Jeff Bezos.

Alfred: He is a web master.

David: He is the web master. So, let’s start way back even before then We go back to your undergrad days at Harvard in the early ‘90s when you were still the human trash compactor. So you were an undergrad and you had two friends, Tony Hsieh and Sanjay Madan, and you guys decided you would develop a business together. Tony and Sanjay were CS majors and you were a math major, right? So naturally, you guys were going to do something very technical, very smart. But the business actually turned into a pizza business and so the story, as it is told in lore, is that Tony and Sanjay lived in Quincy House at Harvard and they managed the Grille in the basement which was sort of a late-night dive bar/study spot and you lived upstairs and you would come down, you would buy pizzas from them and then take them upstairs and resell them by the slice at a profit.

Alfred: Yeah. That's mostly true but I think the interesting part about that story is, yes, Tony and Sanjay and I were friends. We had other friends. We didn’t really hang out all that much together. What brought us together is the Grille and that is an interesting place. It was a place where lots of undergrads hung out late at night trying to get something to eat while they’re working on their problem sets or their term papers. Tony and Sanjay were actually very entrepreneurial even back then. Usually what happens is the graduating seniors would sell the rights to the Grille to the upcoming seniors, so the graduating juniors will be seniors. So they would hold the rights to the Grille for one year. Because they can only operate the Grille for one year, they mostly did very simple stuff like hamburgers and fries and milkshakes which sounds great but it actually doesn’t have great margins. And Tony had this great idea of like if I could just buy the rights to the Grille for two years, I could amortize the cost of having a pizza oven in there. And pizza has great margin if you could overcome the cost of the oven. So he decided that he was going to bid for the rights for two years and his bid was highest bid plus $1. That was a pretty courageous thing for him to do and so it’s what he did.

I happen to have a pretty large rooming/blocking group in Quincy and I did come downstairs and negotiate with Tony and say, “Hey, I’ll just buy them by the pie instead of the slice” and then I did bring it upstairs. I didn’t really sell it by the slice, I just wanted my money back. That's the part that it sounded predatory but what I was trying to do is just get my money back and the slices were $2 a slice downstairs, I got a discount so it was maybe $1.50 right $1.25 when you buy them as a pie. The thing that’s most interesting about that story was I always got $2 even though I asked for $1.25 or $1.25. The reason is like, today maybe not as obvious, but back then you needed quarters for washing machines, drying machines, vending machines, arcade games. Today, you probably with a card or a phone. But that was important. It was a really interesting business lesson which is sometimes even something like a commodity like a quarter, a quarter is sometimes worth more than 25 cents. I just thought that was an interesting arbitrage opportunity-like story.

David: That's awesome. You guys were delivering happiness even back at Harvard. You get your slice of pizza and your quarter for laundry.

Alfred: Yeah. It started out with lots of conversations on how to make the Grille better. Tony started recording movies and playing them downstairs so they would get people to hang out more to make the experience better. We’re talking about customer experience and not just like serving people food which, yes, made them happy. But how do you get people to congregate downstairs and hang out? So there was a lot of conversations about that one day. The reason Tony tells the story is because one day we’re calculating how much we made and he made the calculations and said, “Alfred, you actually make more per hour than I do.” I'm like, “Come on. I order, I call down, order, come downstairs, pick it up, and take it upstairs. All right, fine, I make more money but you still make more in aggregate because you spent more time on the Grille.” But those are the type of like geeky things that we talked about when we were in college.

David: And the lesson is of course that’s why you became CFO of your first company together which was LinkExchange. So after you guys all graduated, you all moved out west, and Tony and Sanjay started working at Oracle as developers and you started a PhD program in statistics at Stanford.

Alfred: Yeah.

David: And then supposedly or I’d have to ask you about this, you tried to convince them to come and run the same pizza game at Stanford, right?

Alfred: Actually, Tony was looking into starting a similar business that he was trying to get a Subway franchise on campus or a pizza business on campus and I told him, “Well, there are plenty of pizza stores and there is a Subway on university out new, so it may be a little difficult to make the economics work. But he’s always a little bit ahead of everybody else because he said, “Well, that's too far away. Why not on campus?” And at the time, campus didn’t allow third-party operators either. Of course that’s changed. The rules have changed on Stanford’s campus. But it was always a little bit ahead. The thing that was interesting is, well, like the internet was happening. So it's like, why don’t we think about some internet business? LinkExchange came about as a fluke because when they started, Tony and Sanjay were bored at Oracle. They would go to their weekly meetings, they would be told what to do and they would figure out how to do that work within half a day, through a day or in the afternoon. Then they work on their side business which was building websites for companies that would pay them and this was back when HTML seemed like something really hard to learn. It turns out not to be that hard to learn but people didn’t want to learn it. So there were more than happy to code up sites in HTML for others and they were paid a very handsome fee for creating these sites. The sad part for them was these sites were just standalone and there would be no traffic, nobody would go to them. So then they sort of figured out how to link all these sites together and try to drive traffic to each other, and that was the creation of Link Exchange.

David: I mean basically in a lot of ways invented the display advertising network business that eventually becomes DoubleClick and aQuantive, become massive acquisitions from Google and Microsoft. But you guys were first in a lot of ways.

Alfred: We’re early. There were a bunch of copycats along the way. Some were like HyperBanner and other banner exchanges and then obviously DoubleClick and aQuantive, we sold a little too early before that. Then there was the next wave of these companies on the mobile. So history does repeat itself and so Sequoia not only invested in LinkExchange, they had made 17x in 17 months but they also invested in AdMob and AdMob’s acquisition by Apple was much bigger than LinkExchange’s acquisition.

David: Well, if you adjust for inflation, you know.

Ben: Alfred, it feels like you said that 17x in 17 months before. It rolled right off the tongue.

Alfred: I thought that was the first time I was like, I said to Michael Moritz who was on the board, it seemed “Wow, this is a great business. Does this happen all the time?” And he’s like, “That doesn’t always happen.” But what I got to do is I learned a lot from Michael. He was a great mentor for me. I developed a great relationship with Sequoia and the Sequoia partners. I know how they operate. There’s a lot of work that goes into venture capital that I did not appreciate at the time because it seemed like it was easy money. But going back, if you had to rewind, Michael was interim CEO for a period of time when we’re looking for a CEO. He spent a day a week at the company and so today when I'm sitting at this seat at Sequoia, I just remember back the success of Sequoia has a lot to do with partnering with the founders and the management teams of the companies and picking up and doing whatever to help the company succeed. That's why this is for me a very rewarding job.

David: That's really cool. I didn’t realize that Michael had actually stepped in as temporary CEO. But as you say, so you sold the company after 17 months to Microsoft and you and Tony decided maybe as you said you thought the venture business was easy. It’s not. We’ve talked about that a bunch on the show. You leave and you decide to raise a fund on your own. This is essentially like today, this would be a pre-seed venture fund.

Alfred: Yeah. Back then we raised 27 million dollars from friends and family of LinkExchange after the liquidity event. But 27 million back then was a fairly sizable fund for seed and pre-seed. Today it’s not that... it’s like average, I would say. The idea was not to write $100,000 or $200,000 checks but to have like a million in on average for a concentrated portfolio. We had decided that we were going to figure out how to invest in 27-ish or really 30 companies over 3 years. We ended up making 27 investments but it was over 1 year.

David: Wow. And you didn’t reserve anything for pro rata.

Alfred: We didn’t reserve anything for pro rata. So that was a big learning experience of time diversification is actually important in the venture business because 1999 was not a great time to be an investor.

Ben: How do you even have the deal flow to be doing two deals a month and with that small of a fund and that few of a number of GPs, like how does that work?

Alfred: I think we had a good network. We knew lots of people on the internet space and so we were primarily investing in just the internet. So it wasn’t hard to find companies to invest in and keep in mind the level of sophistication people have today thinking about companies was not the same back then. Like any company that had a product that was working and had eyeballs people were funding. So we did some of that too. We also made some good investments and we’re pretty product of our track record at Venture Frogs and ended up being a 7.5x to 8x fund after fees. For a 1999 fund, I'm pretty sure that’s in the top, if not the top percentile –

David: I mean, the only top-top venture funds these days are 700x to 800x after fees. Period. But to do that in 1999? It was the result of a lot of work that you ended up doing, the portfolio.

Ben: It was the result of in 2000 or 2001 we looked at the portfolio and there were basically three sets of companies. There are companies that regardless of whether we help or not, they were going to go under. Then there are companies like regardless whether we help or not, they were going to do just fine.

David: So you guys invested in Open Table, right?

Alfred: We invested in Open Table, they were going to do just fine. MongoMusic got sold to Microsoft, they were going to do just fine. We didn’t have to do much work for it. There was a company that was in the WAP space, it was called Miable (?), they were trying to create My Pages (?) for WAP phones. Can’t even imagine looking at these small screens and why you would put a My Page on that. But anyway, that got sold to which got merged with to create open wave systems. There are a bunch of companies that did fine regardless of whether we helped them or not. Then like I said, the first class was like most of these companies were just going to go under regardless of whether we helped them or not. Then there were two companies we felt like if we helped, we could make a lot of impact in those companies and those companies were Tellme Networks and Zappos.

David: So did you and Tony sit down and say like “Okay, let’s draw straws”?

Ben: And also on this, how do you determine if a company is at a place where if you apply high leverage, it makes an impact or not? Are there certain types of business models or certain places where you have domain expertise where you’re like “Yup, if we apply here, it can go the distance”? Or how do you figure that out?

Alfred: I think when you sort of step back, you kind of think about whether the investment thesis was right or wrong and then you kind of know that you got this wrong, it’s not going to work, here are the reasons why it’s not going to work. At Sequoia, we’ve over the years created these buckets. Sometimes, you have a feature, it’s not a product. Or you have a product but it’s not a company. And I didn’t have those sorts of frameworks back then but it was pretty clear like yeah, this is a nice tool and people use it. But you can’t really build any meaningful business or user base on top of it. So then you’re like, okay, well, maybe they’ll pivot to something different but we’re not in the business of helping them think about pivoting to another business that they’re not passionate about. That's one that I was like, well, we can’t really help companies where they’re not really a company or a product; they’re really a feature.

Then there’s I think founders who are resistant to change and so if they don’t really want our advice, that's difficult to sort of influence. Then there are just certain things you just got wrong about the business or the business model and the underlying assumptions has proven to be the opposite of what you assumed. So those are the conclusions.

And unfortunately, there’s also a class of things where maybe the product is great and the underlying assumptions are right and the founders will listen and work hard but it can’t raise money for whatever reason. Whether the story is not good, you can work on the story, but for whatever reason it can’t get the capital that it needs.

David: It’s interesting. Zappos kind of fit into that bucket, right? The business was good, it was growing. So you guys invested in ’99 and Nick had founded the business, just had a business plan, it was initially called which still redirects to Zappos if you go there. And so you guys invest and then it grows pretty nicely. I think year 2000 (first full year) it does about 1.6 million in revenue. In 2001, you do over 8 million in revenue but everybody was... it was winter, there had been and eToys. Nobody wanted to fund it, right? But the business was growing.

Alfred: The business was growing and actually one thing that was different about Zappos even back then was it was breakeven. Most e-commerce companies would not break even. Even today we accept they won’t be breakeven for the first few years. Back then too a lot of companies like weren’t breaking even. I think the whole e-commerce category was just dead to all investors in 2000, 2001, 2002. So even for Sequoia investing, Sequoia invested I think in 2005 and so it took some time for a very toxic space to turn around even when you have a good business. So I attribute some of Zappos’ success, there’s a lot of like feel-good stuff in Tony’s book but there are two things that I think I attribute to that is not told about very much in the founder lore because it’s not a happy story. But the lack of money is actually one of the things that sort of made Zappos successful. Very early on it had to figure out how to acquire customers in a way that is unit positive on the first order.

David: And you guys were unit positive on the first order, I mean, that's not an easy thing to do ever particularly at that moment.

Alfred: The company only raised 10 million dollars of primary capital. And yes, it raised more money from Sequoia for secondaries and yes it had debt and yes it had sort of leveraged relationships to get vendor credit. All of those things are written in Tony’s books. Those are all true. But primary capital was about 10 million dollars. I don’t think you can imagine today an e-commerce company raising 10 million dollars and becoming a billion-dollar company over time. You probably think it’s in the hundreds of millions of dollars, maybe 100 million or 200 million. And Zappos did earn $100 million of free cash flow. It was just smart about how it did. It did it from vendor relationships, extending the terms from net 30 to net 90 over time and we didn’t do it immediately. We got a line of credit that we didn’t need to use for a short period of time to get inventory before we sold it. So we had to understand our cash conversion cycle very, very well.

Ben: Was it easier to acquire and scale those days? When you think about today, it’s in many ways expensive to acquire from Facebook and Google. But then you were educating people about the whole category of e-commerce particularly in these new niches they had never seen before. So I mean, can you talk about acquisition costs then versus acquisition costs now?

Alfred: I think that's a great question about acquisition. Everybody seems to say, “Well yeah, you had it easy because Google was a lot cheaper back then.” Well, it wasn’t obvious that Google was a place to actually acquire.

David: Yeah, right. It probably doesn’t send you that much traffic.

Alfred: No. Back then there’s a lot of acquisition channels that just didn’t work. And we tried all of them. There was Yahoo, banner ads, there was MSN banner ads. Like there’s a whole banner advertising category. Then there was like trying to buy placement at HomePlay (?) and PacBell. We got all of, like, three customers in that.

David: Did you guys do an AOL sponsored channels?

Alfred: We probably did an AOL sponsored channel for a short period of time. I don’t particularly remember but yes, we spent money on AOL. So when you say “Oh yeah, you had it easy because you had Google and it was cheap and it was converting well.” Yeah, that was true but we discovered that. Then as soon as we discovered it, it wasn’t like there was no competition out there. As soon as we discovered it, “Oh yeah, it's really cool. You can bid on shoes and it actually sends us traffic and it converts pretty well,” other people started bidding on shoes. So we had to keep going further and further and further and further down the longtail of keywords. This is all things that you now think about and that like we had to do that, we had to do SEO. We had to figure out SEO optimization. Those were not things that there was a book about, you know, you were AB testing this stuff all the time. I would say back then Google was not obvious, we did that. There was print ads and prints ads were actually pretty good. We did print ads that were cobranded with Stuart Weitzman or with Clarks depending on the shoes that you’re selling and they actually were pretty effective. Then we figured out a way for Stuart Weitzman to pay for that because it was cobranded. It’s like, well, you put up Stuart Weitzman ads and they don’t know where to buy it, so why don’t you put at the bottom for your ads? So a bit of negotiation. So those are clever things that you had to sort of do. As soon as we started doing that, competitors started doing that. They were called co-op dollars or the money that was available.

David: You’ve talked a lot about this. All this stuff was really hard and if you had slid a business plan across the table at Sequoia Capital that you were going to do this, they’d probably be like you’re going to do print ads. But because you had to do it, you had this muscle that nobody else had and then when Amazon came and tried to compete with you, they didn’t know how to do this stuff, right?

Alfred: Yeah. I think nothing in the consumer business is completely proprietary. You try to create these moats along the way. But consumer business and moats are like little by little. You make things a little bit more user-friendly. You make it a little bit cheaper for you to acquire customers. These are all like getting up every single day and figuring out how to do something 1 percent better than the day before and you try to make that out of it and if you really do try to make those 1 percent come out, and that's the way you sort of get ahead. There were other competitors before Amazon but I would say one of the other things back to the one sort of thing that people don’t talk about is not having too much money was actually a good thing for Zappos. Not having too many competitors at the beginning was also a good thing for Zappos.

David: Yeah. You have this calling of the herd, right?

Alfred: Yeah. So like in 1999 there were competitors but in 2000-2001 most of the competitors died down and some of the competitors that did exist were pretty weak. The competitor that got a lot of money was They got 20 million, Zappos got funded with 2 million. They soon didn’t go anywhere because they had too much money. Five years in, that's when the competition started heating up. But I do think that it is important for founders to know that nothing destroys value faster than irrational competitors. So if we had irrational competitors very, very early on for a long sustained period of time, I'm not sure Zappos would have been around. But being able to learn a lot of these lessons over some period of time and there’s room to make mistakes and to experiment and to figure out the security bin and putting the ads in the security bin was actually pretty effective and actually pretty cheap because it was never done before. We did take risks.

David: Brad Stone writes about this in The Everything Store in that you guys put ads and when you’re going through security detection at the airport, you put Zappos ads where you had to point your shoes which is just brilliant and apparently –

Ben: Which is now like an ad unit, like that's a thing now.

Alfred: Yeah, and now it’s very competitive. So when you say like “Oh yeah, you could acquire users for cheap”, sure, but you have to go discover these things. This company had developed this business plan and in 1999 they were all ready to go and then September 11 happened. They were still working with TSA for a long period of time to get it done. By the time they were ready and they were capable of doing this, they were soon going to be out of money. So they were willing to sell those very, very cheap.

David: You guys were the only buyer, yeah. So it actually was a third party who did those ad units. Interesting.

Ben: Let’s rewind a little bit here. So we talked about Venture Frogs. So at some point, Alfred, you went to tell me and Tony went, it sounds like not as CEO but has sort of joined the leadership team at Zappos. Can you take us from there a little bit on how Tony became CEO and how you found your way to Zappos?

Alfred: Sure. So I think we were both trying to just help the company that we thought we could help. Tony thought that he could helped Zappos and he always wanted to incubate the company in the Venture Frogs Incubator and then I had a longstanding relationship with Hadi Partovi and Ali Partovi. So Hadi was one of the founders of Tellme and he was telling me how much they were spending. I'm like, “Wait, you raised 265 million dollars and you’re burning 60 million dollars a year? That sounds crazy for a zero revenue company.”

David: And yet here we are today.

Alfred: Meanwhile, Zappos did not raise any money. It was like night and day, I'm like, “Well, Zappos, whatever. Tony, just grow the business. Don’t spend any money just like it is today. Just grow it and break even, you’re fine, you can’t raise any money anyway.” This other company raises 265 million dollars and losing 60 million dollars a year. I’m like, “Holy s***.” I was pretty sure with a 60 million loss you can narrow that to something lower than that. And Tony really liked the notion of trying to figure out to take a commodity business and layer on service. He had this whole thesis that most commodity businesses are commodity businesses because they don’t layer on service. So he went to Zappos first. For Tellme, I just thought my financial skills were going to valued. Tellme turned out to be one of the first SaaS computing, cloud computing companies. We had to build that on cloud. We turned that company from not having any revenue, having too many people, having going through 2.5 rounds of layoffs. The notion of the consumer business was that you can sell advertising as well. Advertising units on Google or 90 percent gross margin on this because the infrastructure was going to be at best 50 percent gross margin. So that made it very hard to work. So we pivoted our enterprise business, had to sort of change the mindset of the company. Mike McCue did a great job sort of shifting that and we built an enterprise business through a lot of pivoting.

David: So Mike’s the founder and CEO of Flipboard, right?

Alfred: Flipboard, yes.

David: Wow, I didn’t realize he was at Tellme.

Alfred: So after Tellme was in good shape, I joined Zappos.

David: So in 2005 you came over to Zappos. You just raised the round from Sequoia. And shortly after you joined, Tony gets an email from Jeff Bezos saying that Jeff is going to be in Las Vegas and wants to meet you guys.

Alfred: Yup.

David: What were you guys thinking when you got that?

Alfred: I don’t know. I just thought it was like we probably should take the meeting. It would be cool to see if there’s some partnership that we could do together. We weren’t thinking that he was coming down to buy the company at all.

David: So back to pizza, you brought two pizzas to the meeting, right?

Alfred: Well, he’s famously known for his two pizza team so we thought we’d bring two pizzas. Funnily enough, I don’t think anybody ate the pizza.

David: It wasn’t that kind of –

Alfred: It wasn’t, yeah, an eat-the-pizza thing.

Ben: Was Amazon in the shoe market at this point? Were they a competitor?

Alfred: I think they were in the market not in a big degree but in a small one.

David: The suppliers, the shoe manufacturers were pretty scared of Amazon because they were worried that Amazon would discount their merchandise below MSRP.

Alfred: Let’s go back. Like back then, they were scared of anybody in the internet. Not scared in the way that you’re thinking about like these people are going to take our business. They were scared because they thought all internet businesses were fly-by-night businesses and that consumers were never going to –

David: They were going to take your money, not your business.

Alfred: Yeah. They’re like, consumers would never buy shoes on the internet. We need a shoe salesman. Shoe salesmen that come and talk to the customer, measure her feet or his feet and bring out like three pairs and try to upsell them another pair that they don’t really want. I'm like, “Okay, whatever.” So as you know, originally the idea for Zappos was to be completely dropship and over time, just to get even some of these brands to sell to us, we had to get inventory, we had to buy the inventory.

David: I was going to ask about that. So when you started with dropship, so the manufacturers would send the shoes directly to the customers, you wouldn't have to take inventory. You convert to a retailer model. Part of that, I imagine, was to provide better customer service.

Alfred: Yeah. Because I think the brands were not set up to be direct-to-consumer businesses. They don’t take the time to think about what direct-to-consumer business needs and so the packaging wasn’t perfect. They were sending packaging slips like they would send to a store as opposed to a consumer. The boxes were not branded. They didn’t have exact inventory because that's not actually as important to when you’re sort of distributing to a store. So they were providing a subpar experience and we took over the experience because we felt like wanted to provide 99.9 percent accuracy on inventory, as an example. And we want to provide a nice and happy and joyful packing slip as opposed to a grid with numbers.

David: But part of it, it sounds like also is just getting there. You had to buy the inventory or else they weren’t going to trust you to sell it.

Alfred: Yeah. That's where most of the use of capital went, which is buying inventory.

Ben: So when you go into this meeting with Amazon, what’s the result of that? Do you guys walk away feeling like, “Well, they’re about to come after us”?

Alfred: I think it was a very happy meeting, from what I remember. It was a long time ago so maybe I'm not remembering correctly. But I think it was hinted at maybe we should join forces and we hinted back we’re not quite ready to sell and the meeting kind of wrapped up pretty quickly. We suggested we do a partnership and I think the response back was rightful which is like partnerships don’t tend to work when you have hugely disparate sizes of companies. So we went on our way and I don’t think we were thinking that they would – we always thought they were going to come after us and I wasn’t thinking that they would immediately in a few years launch

David: Yeah, I think it was so in the next year they launched which is basically a clone of Zappos. They spent 30 million dollars developing it. When they launched, it has free overnight shipping, which is super clear. I mean, I'm sure it was obvious too that they were losing money on every order. And you guys had worked so hard to be profitable and they’re just, as you say, it’s like lot of capital coming into the space and your economics. How did you react to that?

Alfred: Well, the only way you can react to that is like figure out what you want to match that and how you differentiated that stuff. So those are the two conversations. We had fortunately figured out. We had been upgrading shipping along the way so over the years we had sort of gotten people from on average a 5-day delivery. We’d always say 5 to 7 days and deliver in 5 days, and then 4, and then 3, even 2. We hadn’t gone to overnight yet. So it wasn’t that big of a leap to go from 2 to 1. For that time it was a big dollar difference shift. We’d from profitable to just break even again. So it was a big decision to do that and we were still focused on making sure we had the right selection, we had the best vendor relationships and things like that that we thought were still differentiated against Endless. So we went to the free shipping both ways, we went to free overnight shipping. Then went from free overnight shipping. Because discounting on the shoes and season is not thought of as positive by the industry and they didn’t want to hurt their own sort of ability to get inventory.

Ben: And by not thought of as positive, you mean like the brands would stop retailing through them if they were selling below MSRP, right?

Alfred: Yeah. They can’t ask you to change the price but they can stop selling to you. If you’re going to discount before the season ends, we’re going to not let you access to more inventory. So Amazon is very clever. I thought this was very clever. It’s like, as they’re discounting their shoes, they said $5 back for overnight shipping.

David: It's like we’ll pay you to send it you overnight.

Alfred: We’ll pay you to send it to you overnight. I'm like, wow, that's really clever.

David: Coming to Prime subscriptions next year. Wow. So despite all this, I'm wondering, you guys continued to grow. In 2007 you did 840 million in revenue. Was there an element of like I'm thinking when Facebook cloned Snapchat and released and oh, it was like the best thing that ever happened to Snapchat. Did Amazon do category development in front of you? I'm sure they were spending a lot of marketing. Did you see any glean over of that into Zappos?

Alfred: I think one of the advantages of being in a growing market where the consumer trends are in your advantage is that for a period of time it’s a win-win situation for the consumer and those involved. Meaning, we’re growing, Amazon was definitely growing and we didn’t really see like mass competition. We didn’t feel like we were losing our loyal customers to Zappos. We didn’t need to acquire Amazon shoe customers to make our business work. There were enough customers out there. You get to large enough size, that will at some point not be true. And so if you end up being in gray situation where you’re one of the only kind of company in your category class and you have a natural monopoly, that's great. But if you don’t and you’re able to sort of still have a large business and that you’re one of many, you can still be a valuable business.

David: So that happens, you guys are both growing through ’05 to ’08, then the financial crash after that.

Ben: Yeah. Zappos endures one financial crisis, so they may as well stick around for the next one.

Alfred: Well, if you want to build a long enduring company, you’re going to endure a lot more than just one or two financial crisis. So yeah, the financial crisis was interesting because I think we saw glimpses of the slowdown happening the year before the financial crisis. And looking back, it's easier to say that. Back then obviously we didn’t realize it.

Ben: Do you mean in raising capital or in people buying shoes and getting somehow more expensive to get people to do that?

Alfred: Consumer spend was more tepid. We would see consumer confidence coming down faster than the Fed or whatever can see it, I think. Anyway, so the financial crisis was interesting because our business is still growing. I think we had 100 million dollar line of credit of which we’re only using 30 or 40 million of it. It wasn’t like overextended.

David: So you didn’t bust your covenants on the credit line.

Alfred: No. But the banks couldn’t host the money. Those contract, it was like, well, we’ve been told to like, we have a liquidity crunch. We need to put all back some of the liquidity and that's a little disappointing.

David: Huh. Wow.

Ben: Yeah. I mean that's not how lines of credit work.

Alfred: Well, you should read all the terms and conditions.

David: Right. And when it’s not your money, it’s not money.

Alfred: Yeah. We had some technical issues where we had verbal agreements that we would extend from shoes to all, it would extend again to shoes to handbags to apparel and it had been agreed upon verbally but the extension went from shoes to handbags but not all the way to apparel and they started saying, well, we’re not going to lend apparel. There are ways for them to sort of get out of the contract. What was more painful was conversations with employees. Some of them had lost their home.

David: The biggest was particularly a hard hit by the housing crisis.

Alfred: The biggest, housing crisis, fell 50 percent or more. Some estimates. So some people lost their homes. They said, “Well, the only thing that's of value in my portfolio is my stock options.” It's like, whoa, I thought I had a big weight running a business. The conversations were obviously like we love running the company and we thought we could continue to keep running the company and there was no reason to sell except for the fact the company had existed for almost 10 years and people needed liquidity. I had a senior member of the team needing to sell his Zappos stock at a fairly large discount during that time just to be able to post his mortgage payments. That was like, “What do you mean? I thought you were renting.” He was like, “Well, I am renting but the landlord is going to lose his house so I don’t want to move, I don’t want to move my family. I had to come up with the money to buy the house. And it’s going to be at a discount. So yes, I'm selling my stock at a discount but I'm buying the house at a discount too.” So he felt a little good about that but I was like, “You know you’re selling this at 25% of the value that you would get. If you just wait this out.” He’s like, “Well, I need the cash now.”

So those types of conversations are much harder and so we were thinking about what’s the right thing for all our shareholders. And look, I mean, you could always think of that like if Zappos had gone public because it could build a big enough business, what would be the value today and it’s probably... When I left, the business was doing 1.6 billion in gross sales. I don’t know what the numbers are today. I'm sure it’s well more than that and when I left it was profitable. So I'm sure it could be a public company but Tony wouldn’t be working on the Downtown Project and doing what he loves to do. And I wouldn’t be here doing what I love to do. 

David: So when the deal happens, it’s announced summer of 2009. Amazon is going to acquire Zappos for 1.2 billion dollars in stock. How did the conversation go about stock? That was the best thing that you guys probably ever did financially, right?

Alfred: Yeah. So what’s the line, success has many fathers. Many people claim to have been the person who negotiated –

David: But you were negotiating the deal, right?

Alfred: Negotiated the stock buy. Like Tony says he pushed for stocks. Michael Moritz says he pushed for stock. You know what, actually everybody pushed for stock because we knew that coming out of a financial crisis, everybody’s stock is undervalued.

David: I think it was trading at like 50 or 60 bucks a share at this point.

Alfred: The day it closed, it was trading at 118. So the stock price today is more than 10 times.

Ben: But who could remember, you know.

David: Who could remember exactly what it was.

Alfred: I think it was 118.23, something to that effect.

David: Oh my goodness.

Alfred: So it started out with all cash because Amazon had not done many transactions with stock and we said we’re happy to reprice, we just won’t do this deal unless it’s on stock.

Ben: In corporate finance it shouldn’t matter.

Alfred: Because the acquirer can decide to give stock and buy back the stock, so it shouldn’t matter to the acquirer. It does matter to the company because all stock transactions are tax deferred because you don’t pay taxes until you sell the stock. Whereas if you get cash, all cash, you need to pay the taxes as soon as you get the cash. I think there are some people with different views about Amazon’ stock and some people sold, some people held, some people did a half and half. So in my view, in mergers, I think the acquirer should be more lenient about doing stock transactions because it shouldn’t be any different for them.

David: Unless you have a view of the value of your own stock which differs from the market.

Alfred: But you can always buy back, sell it.

David: That's true. One thing and then we’ll move on to acquisition category, but I'm really curious. You did this and it was announced from day 1 that there’s this amazing video, we’ll link to in the show notes.

Ben: Oh my God, it is the best.

David: This is incredible. Bezos records a video to all Zappos employees. It's about a 10-minute video. It’s on YouTube. It’s about everything that he’s learned, knowledge that he wants to impart to Zappos. It’s just wonderful.

Ben: It’s in this classic... for listeners who haven’t seen it, you got to go watch this video. It’s in the classic Jeff Bezos style of like way oversimplifying everything, being like salt of the earth. Like I'm just Jeff in my jeans.

David: He has not even a whiteboard. Like the paper easels that he flipped and he writes in market the four main lessons that he’s learned at Amazon. Anyway though, the point is when it's announced from day one, Zappos is going to remain fully independent, be a wholly owned subsidiary. That was pretty novel for the time. I mean, now, this is the playbook that Facebook runs and others with acquisitions. How did those discussions go?

Alfred: I think Amazon has always been pressing on the front. It wasn’t the first acquisition that they’ve done that was like this. I think Alexa was independent, so was Audible. So we weren’t the first acquisition. There are obviously situations when you acquire the company and you want to integrate it. I think it makes sense when it’s an acquihire. It makes sense when it’s a feature as part of an overall product somewhere. When you have a whole business, I think it really does make sense to run it independently unless you can find a good reason why you shouldn’t integrate. Centralization has its cost and so I think decentralization has its cost too but in my opinion, decentralized organizations are more innovative because they don’t have to bubble everything up. There’s no central decision maker. So decentralized ecosystems are more innovative and if you want a comparison it would be like a large company versus a startup ecosystem. That's why we have a job here at Sequoia like we believe in the decentralized ecosystem and the innovation of entrepreneurs when they don’t have to. And I think the companies that are larger have a harder time innovating because they’re centralized. And so the conversations were pretty natural. The questions were about what’s the management structure and so the management structure was basically our board at Zappos will be replaced by a board that was now full –

David: An Amazon board.

Alfred: Yeah, an Amazon board. I think it still exists that way today.

Ben: I'm curious. When they approached you about buying the company, what were sort of the main cited reasons? Like was it “We just think you have a good business and we want to poor additional capital into it for this business line to grow”? Was it “We want to learn from this and figure out how to spread the Zappos DNA around Amazon?” And why did they do it?

Alfred: I think you should ask them but there’s a line in the video that you were referencing where Jeff Bezos said “I get knee weak when I see customer obsessed companies” and he really understood that Zappos was really customer obsessed. I do think that for all the sort of bizarre differences between Amazon and Zappos, that is one thing that both companies share a lot in common and maybe we do customer obsession differently. We have a different style of doing customer obsession at Zappos versus Amazon. Both companies I think learned a lot from each other even during the due diligence process of how we think about things. And so we’re surprised that we said we don’t measure, for example, call times. It’s not that we don’t measure call times for an individual agent. You can’t hold an individual agent to a particular call because you don’t know what that call situation is like. But you can look at the efficiency of the team and when you talk about the efficiency of the team, it’s not you stayed on the phone 2 seconds longer than you should have. It’s more of collaborative, like, our team is not efficient compared to all these other teams. And that's how we did it. We weren’t measuring every single. And so they were like, “Okay, well you’re not actually like...” You say these things like you don’t measure that stuff but you measure it in just slightly in a different way. And the way we were trying to measure it was to try to get collective intelligence of the team and trying to make better decisions.

David: So the next thing we do on the show is acquisition category and we assign a category to the acquisition. To me it’s pretty obvious this is a business line that Amazon acquired, keeping it as a separate company. It's not just a product that's being integrated into Amazon. But I think this is really interesting. Like this was what I wanted to make and the cultures, even though as Brad Stone said and you quoted it, like Zappos was a bizarre world version of Amazon. But the core values were basically the same: Be frugal, be customer obsessed, decentralized decision making. It’s such a good fit when it comes to culture even though it seems on the surface that it wouldn’t be.

Alfred: Yeah. I think that's why the acquisition was considered a success and I don’t think it was an easy acquisition at the time because it was the largest acquisition at the time. It pales in comparison today to Whole Foods, but hey, it’s 10 years later. Yeah, just for inflation, well, acquisitions and numbers only get larger, right? So yeah, it was a business line that they acquired. I think they also were very interested to learn about some of the things that we built related to merchandising – how did we get so good at getting the right product in the right quantities at the right times with less than stellar technology. We weren’t using AI.

David: Were you guys using Kiva?

Alfred: We’re also using Kiva.

David: Okay, and that time Kiva got on the radar screen of Amazon, right?

Alfred: It's funny so I’ll tie this all the way back to Sequoia. Roelof Botha sent me a business plan of Kiva, asked me for my opinion.

David: And Kiva came from Webvan which Michael Moritz was on the board of.

Alfred: Michael Moritz was on the board of Webvan. Webvan did not work out well. If you wanted to go all the way back, they had been using a carousel system, I won’t name the vendor. We ended up using that carousel system and the same exact vendor. It was my first board meeting and I got ripped into shreds because we’re saying that this was going to work, etc.

David: By Michael?

Alfred: By Michael and then also by Michael Moritz who was obviously founder and CEO of Flextronics and so he knew a little bit about operations. I was like, “Okay, all right. Well, we need something different.” Anyway, so that happened. So Mick who was at Webvan noticed how inefficient most of the systems were so he went on to create Kiva Systems. I didn’t know that connection so thanks for reminding me at the time. So I got the business plan for Kiva from Roelof asking me what I thought about it. It was like, “Oh,” interesting idea but probably too hard to rip out a whole setup distribution center. Maybe for a new distribution center we might use but not for a setup where you rip out the racking, etc. etc. So as a startup you kind of move pretty quickly to your next distribution center. So we did try Kiva and it worked well and then eventually it took over all of our distribution centers. When Amazon was doing due diligence on us, they really thought that they were going to rip out Kiva from our distribution centers because they thought it was not going to work. They said, “Well, your spike in December or our spike in December is an order of magnitude higher than the rest of the year.” So you’re paying for idle robots who are going to sit around for most of the year, so that can’t be efficient. It turned out it’s still efficient because you can get into much larger distribution centers, you can zip things around. Have people work on one end and have machines move certain things around and in another. So a few years later after they had served us, they bought –

Alfred: Acquired Kiva, yeah. And now, I don’t think it’s all in Amazon warehouses yet but certainly all new ones and I think they’ve been retrofitting old ones. I think there was some public statement they had maybe on the order of 200,000 or 300,000 Kiva robots.

David: Wow. That’s awesome. All thanks to Zappos.

Alfred: Well, it’s not just Zappos. I mean, Diapers also use them and so they acquired It was more and more evidence that this was going to work. So, there was technology that they bought as well.

Ben: So, we’ve decided it’s a business line. Amazon’s got a competing business line that’s doing really well. Like Amazon’s inhouse shoe businesses is according to all these external research reports really crushing it. So why not pour all the investment that they’re putting into their own inhouse thing into Zappos and were they for a time and does it feel like they’ve shifted away to you.

Alfred: I think the shoe business as a whole whether it’s on Amazon’s site or on Zappos’ site has been growing really well for both. So it’s not an either or. I think if you sort of used our way, like we talk about the power of and, not about tradeoffs, and I think Amazon also likes and versus or. And so why not grow your own business and own your biggest competitor at the same time if you can pull that off.

David: I'm curious to know on that front, did anybody else ever seriously attempt to buy the company besides Amazon? Would you guys have sold to anyone else?

Alfred: I don’t think anybody else was serious. I don’t think we would have sold to anyone else.

David: And it’s hard to imagine anyone else would have let you guys keep doing this stuff.

Alfred: Well, I think Walmart has shown that they’d be willing to buy companies.

David: Well, now. But 2008-2009.

Alfred: Back then it probably would have been harder to sort of conceive. But I think today, there are plenty of competitors. So could Zappos have remained independent, gone public and then bought by someone else? It’s all possible. I try not to think about like all the possibilities because you only have one life to live, you don’t get to rewind.

David: You’re a little busy on other stuff these days.

Alfred: You don’t get to A/B test your life. So, you get to move on.

Ben: It's okay. We’ll speculate wildly about it on this show instead. Tech themes, yeah. So we’ve talked about a bunch of them. There’s one that we didn’t. It was part of the sort of story in Venture Frogs and there’s this great tidbit about the initial phone call from Nick to Tony sort of pitching about and Tony almost deleted it but decided not to even though he sort of thought it was a bad idea like who was going to try on, who’s going to order shoes before they can’t try them on. But Nick had this tidbit in there that it’s a $40 billion market and 5 percent of that is already being sold by paper mail order catalogues. And it reminded so much of a Sequoia investment thesis that we invest in markets, not ideas and we invest in markets over founders in many ways. I think that there’s something really powerful to big companies get created in big markets and it doesn’t matter how incredible of a widget you make in a small market. It’s just not going to become a behemoth.

Alfred: I think you’re right that large markets are very, very important. I would just say that we have learned over time that founders and markets go hand in hand. It’s not like you can’t invest in a big market and have the wrong founder in place. The people around the company has to all work. So in some ways I would say we invest in companies and ideas, we invest in companies and not products. We invest in companies, not features. And the company consists of the team and the problem you’re solving, the innovation you’re bringing, and also the market that you’re attacking and also the go-to market and all those things. And no, on day one do you have all those things? No, you don’t but you have to sort of envision all of this and why will this be an interesting company in 5, 10, 15 years. You can’t envision that or you don’t feel like the pieces come together or you don’t know where the other pieces that you need can come from. It makes it very, very hard to build a company.

David: Yeah. My theme that I was going to put out there that I thought we were going to cover along the way but I actually don’t think we did is... well, Ben, you mentioned a little bit which is how much this story reminds me of the Citrix story as well. Even down to you guys hired... was the first hire at Zappos Fred Mossler and it reminds me of one of the first hires at Citrix was Mike Smith from Walmart. You’re bringing that DNA from the industry into understanding to this new paradigm of the industry but from the old world too and so when you can bridge that gap. But one of the things we talked about on the Citrix episode was this idea in founding a company or investing that it’s not enough to be right about something. You need to be right and have it be non-consensus and that like Tony almost deleted the voicemail because who’s going to buy shoes online? It seems like a dumb idea. Just like Citrix on the surface back in the day probably seemed like a dumb idea but when you dig into the market, it actually didn’t. I'm curious how much you guys thought about that along the way.

Alfred: So Katrina has done an extraordinary job at Citrix, so kudos to her. I think going back to the comment you made about right and being non-consensus, I think that's part of what we’re talking about where if it’s non-consensus you will not attract a ton of attention and you will not attract a ton of competitors and it allows you time to get things right. And yes, Tony almost deleted the voicemail and at the same time the reason he almost didn’t delete it was, we had a conversation, “This sounds like a dumb idea but nobody else is going to do this if they get money,” and so it works.

David: We’re the only ones doing this dumb idea.

Alfred: Yeah. We’re going to be the only ones doing this dumb idea. Then you ask is it that dumb. So the facts were that he knew that Nick can build a website, he was a webmaster. He designs websites. Okay, check. We knew that there was a problem here. We didn’t know about the market. He listed the market size. 40 billion, 5 percent or 2 billion already down that mail order. So what is the conclusion from those facts? Well, it’s not that hard to extend that conclusion to the internet should be bigger than mail order.

David: At least it’s big.

Alfred: Yeah. At least it’s big, we’re bigger. Many orders are a magnitude bigger. So we believed that and back to like you need to build a company, we have a founder with an innovative idea, you’re missing a few pieces. So as you said, we went out and hired Nick Swimmer because we were missing shoe experience. Tony and I, we had to sort of because of Link Exchange, drive traffic to a site. Okay, get that checked. Like, we have a bunch of things checked but we didn’t have the shoe experience. And originally, the original idea is we didn’t need customer service experience or distribution we’re drop shipping. The evolved so we needed more pieces to be filled in. But the company coming together has a lot to do with making sure you have all those right pieces.

David: I think that's what’s so, for me at least, super fun about early stage investing is you can’t look at it and say or judge it as if the pieces were together because if the pieces were together, it would either be a public company or like it’s never going to work.

Alfred: You just need to have imagination. You need to have imagination and you also need to make sure that you can dream with the entrepreneur. We often sort of talk about like okay, can you see a world like this? Should the future be this way? The founders we like backing like Adi at Houzz or Brian Chesky at Airbnb or Drew at Dropbox. They see the world slightly differently now and if you have a problem, they feel that problem from a personal standpoint and they just feel like the world saw that problem incorrectly. They’ve just gotten that wrong and they’re on a mission to go change that. It was on the mission change that Tony was interested in changing.

David: Yeah. I think this is what’s also super cool about Zappos in the story. Actually, another one I had here was mission focused founders versus mercenary founders, even though Tony and I don’t know, I'm guessing you probably weren’t that passionate about shoes but you were passionate about seeing this way that the market wasn’t working and could work and that nobody else in this space was so focused on customer service that could really deliver, well, happiness, as Tony puts it, to customers.

Alfred: Yeah. I think before getting on to mission versus mercenary founders, I think the one thing that was clear was that ecommerce was going to compete on price and was going to compete on selection. Those two things are hard for a startup to just compete on those two things because you don’t have a bankroll to compete on price and on day you’re not going to have the widest selection. So we needed another pillar. You compete on those two things later. But that's why we’re so focused on sort of putting on another layer and it was customer obsession and customer service, and both Tony and I were pretty passionate about customer service on our mission statement. People ask us all the time whether we’re mission focused on mercenary founders. I think the best founders are kind of both. They’re not doing this as a charity because otherwise they would start non-profit. So they are in the entrepreneur space because they want to build a company and build a business.

David: Back to your days with pizza at Harvard at Quincy House, you’ve got to be a hustler to get this done, right?

Alfred: Hustler. You want to solve the problem, you want to do it in a different way, you have to differentiate. Most of the founders are successful and want to build an enterprise that exists much longer than themselves and that requires making sure that the company has longevity which means it has to have a sustainable business. Then I do think one of the themes that you have to do hard things that yield some protection, some moats and things that are hard that just people don’t want to do. And kudos to Amazon for building a network warehouse nobody wanted to do that. “Oh, let’s do that.”

David: Or circuit farms.

Alfred: If you asked in 1999 whether you put 10,000 dollars of your life savings at eBay or Amazon, I bet you most people in 1999 would ___ because it was elegant, no capital, like capital lite, no distribution centers, no inventory model. It was just connecting two people and the marketplace would take care of itself.

David: They acquired Skype and people can chat with each other.

Alfred: And I'm not making fun of eBay. They have lots of issues that they need with trusted safety. They have to solve that, they have to solve payment, micropayments. These are small payments, that's what they had to go sort of develop on their own, they tried developing their own. They acquired Billpoint and PayPal. It was not an easy thing but from an investor standpoint, investors seemed to like these high margin, really like easy to explain business models and at the same time some of them, the hardest things to replicate or the hard things that people do to build a real moat around the business, and Amazon build three moats.

Ben: That's a great, great way to close out the regular section of the show. We’re on to grading. Alfred, first, I want to ask, do you want to participate in this?

David: You don’t have to.

Alfred: What is this grading thing?

Ben: All right. So when we started the show, the whole notion that we had in mind was we want to figure out what have been the most successful acquisitions in history and try and take them apart and reverse engineer and figure out how to start companies like that. So we thought well there’s got to be some access on which we evaluate whether it was actually a good deal for the acquirer or not and so we basically go through this whole process of trying to figure out was that the best use of the acquirer’s capital. Our A+ scenarios are like Apple spending money on NeXT and basically having a reverse acquisition happen where the company is reborn because of it. Or Instagram is another great example.

David: Our A+ is Instagram.

Ben: Right. Then there’s other ones where we’re like actually that was a terrible use of capital and it kind of gives us a way to understand basically given all the options on the table, should they have done this. Usually they land in the B to C range. So that's the process. Well, I'm going to take a first stab. I think that on its own, Zappos was a great business. So it’s not like they were buying something that they’d have to integrate and have really high cost of creating those synergies. That's not what it was about. It was about acquiring a very unique business and one of the few large customer-centric businesses that were not Amazon on the internet and continuing to grow that. In some ways a takeout because Zappos was a very real thread expanding category by category the same way that Amazon had. We didn’t talk on the show at all about how big it could have gotten from a categories perspective but if I'm Amazon, that's one of the main fears is that someone becomes the Everything Store before I do. I think it's been a good business inside of Amazon. From what I can tell which is extremely difficult because Amazon never breaks anything out, it seems to be growing a little bit more slowly than Amazon’s own shoe business and definitely not as quickly as AWS or even the Amazon marketplace with third-party sellers. So I think it's good, I’d go with B+. But it’s a tough bar to get an A on the show.

David: Tough bar to get an A from Ben.

Ben: David?

David: Well, it’s hard to see this not being a good use of capital for Amazon both for the reasons you were saying. But also, preparing for the show I think a bunch of people have made analogies to this almost being like a Berkshire Hathaway type acquisition of allowing Zappos to keep doing what it was doing, free of all the financial constraints that hampered you guys along the way. And for Amazon, this was obviously a hugely important category to the company and to Jeff Bezos to be able to enter that, stop losing. The estimates are Amazon lost $150 million on Stopped the bleeding there and be able to cross pollinate the knowledge to grow their own category. Sorry, Alfred, I don’t think this is as transformative as Instagram but this is A- in my book. No comment from Alfred.

Alfred: I think I know too much information.

David: We can move on. How about Carve Outs? What you got, Ben?

Ben: Last week, I listened to Andrew Mason as a guest on Recode Decode with Kara Swisher. It is always refreshing to hear that guy on any form of media especially in an interview format. So straightforward, so honest. For listeners who don’t know, Andrew Mason is the founder of Groupon and has since started a couple of other companies and he was on talking about his new company which is in the audio editing space so it obviously was interesting to us here at Acquired. But there is so much revision as history in our industry and legend and lore that get started, and you just never hear that sort of things out of Andrew’s mouth. It's mostly like “no, we didn’t know what we were doing”, “yes, we figured it out”, “yes, it was really hard”, “no, maybe I should have been the person to do it”, “yes, that's why I was fired.” I mean, it's just a refreshing take. So, really enjoyed it and really enjoyed hearing about some of the new stuff he’s up to.

David: Nice. Mine is, actually I didn’t think there was any way it was going to be related to the episode but as so often happens, carve outs, we find some way to relate them. Justin O’Beirne published this great long piece on his blog called The Google Maps’ Moat. He’s I think a designer in Maps basically. He worked for Apple Maps for a while. And it’s just a piece of like all of the culmination of all of the hard things that Google has done in Maps for the last 10 years and the lead that they have because of it over Apple and Nokia and everyone else in the space and it really detailed break outs like product changes month by month over years across all the products in this space. Really just a brilliant analysis and very worth reading on what makes a moat in the consumer business.

Ben: I’ll second that. That piece was incredible. And it’s got these great side by side comparisons and animated gifs where you can see like he’s been taking the same screenshot year after year for 7 years or something and you can see the complexity on each of these maps grow over time and he annotates what they did to do. It's so cool even to just scroll through.

Alfred: I agree as well. That was a great piece. For me, I'm trying to do some hard things and read on fit books, so I'm reading through two books by Walter Isaacson. One is about Ben Franklin, the other about Albert Einstein. I just think both of those men were fascinating people and they have contributed lots to our society and they were prolific in the work that they did. They’re also interested in many, many different things. I kind of think about Albert Einstein as a physics genius but he also loved playing music and the violin. And Franklin was a publisher, he obviously was one of the founding fathers and published a lot of papers but he was also into music and other things. I think both people demonstrate that having a fertile curiosity about many different areas actually allows you to do whatever you believe your day job to be better. Another fascinating person, I hope Walter writes a book about Madam Curie because I think she’s also a fascinating character.

David: Definitely. He’s a great writer. Well, thank you Alfred for joining us.

Alfred: Thank you.

David: Putting up with us, reliving your trash compactor days.

Ben: Alfred, where can our guests find you on the internet?

Alfred: My email is You can find me on the Sequoia website, So it’s where I hang out.

Ben: Awesome. Well thanks so much for coming on. Listeners, thank you for listening as always. Thanks to Perkins Coie for being our sponsor this season. If you are new to the show, you can subscribe from your favorite podcast client. We’re now in Soundcloud and Spotify as well. And at you can come join us and 1100 other people in the Acquired Slack. So have a great day, everyone.