Zappos (with Alfred Lin)

00:00Hey, 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. Okay, and is video good for you? Is this a good angle? Is this a good angle? You look great. Is this a good angle? Are you getting my good side? Always, David. Welcome to Season 2, Episode 1 of Acquired, the show about technology, acquisitions, and IPOs. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. And I'm Alfred Lennon. Hey! Hey, welcome, Alfred. We're very, very excited.

01:00I know, I know. Too bad our titles really do those in. Thank you for having me on the show. 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 seasons, so we can do themes and miniseries across several episodes. And for our first episode, we wanted to do a really classic acquired format, reviewing an M&A transaction. And this is one of the ones that has been at the top of our list for a very long time. So, David, do you want to introduce who is Alfred Lin? Our mystery guest, not so mystery guest. So today, Alfred is a VC at Sequoia Capital, where he's the co-head of their U.S. venture business and represents Sequoia on boards of many great companies, such as Airbnb,

01:59Houzz, 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, 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. Well, thank you for having me. I'm no longer the human trash compactor of pizza. I try not to eat too much. I was going to say, given that I'm a lot older, I don't have the same metabolism as I used to. It looks like a few things have changed since those days.

02:51All right, listeners, now is a great time to tell you about longtime friend of the show, Vanta. So, David, I want to paint a picture that many founders listening will recognize. You're about to close your biggest customer yet. The product team has hit a bunch of milestones. The sales team built this fantastic relationship. Everyone at the potential customer is fired up. Your legal team has the contract done. But then an email comes in from the security team. Ah, yes. It's usually a very polite email asking something like, before proceeding, could you share your SOC 2 report? Or do you mind sharing your ISO 27001? If you don't have one, that deal just went from closing this month to closing next quarter, maybe. Now you have to go find an auditor, go through every system, write the policies, and then prove that you follow them.

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04:24And the results are super impressive. A recent industry report says that Vanta's customers see a 526% return over three years and that it pays for itself within the first three months. If you've ever had one of these security emails stall a deal, you know exactly how that math works. More than 16,000 companies now run on Vanta. 16,000! Listeners, there were 2,000 when David and I started working with Vanta. It's incredible what they've accomplished. And these are companies from large enterprises like Atlassian and Snowflake to the NewGuard, like Ramp and Cursor. We've been fans of Vanta for years and hundreds, like literally hundreds, maybe even at this point, thousands of acquired listeners have become Vanta customers over that time. If you want $1,000 off, check out Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired. And just tell them that Ben and David sent you.

05:18so david now without further ado uh so when most people think of zappos uh they probably imagine it was started by a guy named tony shea 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 impressive david every word of that sentence was wrong yeah ben's right that's not quite accurate man i really should have done my research here um the founder of zappos was nick swimmer he had started the company because he went to he was looking for a particular pair of shoes and he went to one store 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 you could buy his shoes. And so this was 1999. He thought it was a good idea to,

06:15and he was a webmaster. He thought it was a good idea to just quit his job and create a website and start Zappos. And here we are. Fortunately, he called you guys. Alfred, I missed the term webmaster. We got to bring that back. Well, I guess nobody really is a webmaster anymore because we've moved on from websites to mobile apps. No, there's one webmaster. His name is Jeff Bezos. He is the webmaster. He is the webmaster. 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. And 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. And Tony and Sanjay were CS majors, and you were a math major, right? And so naturally, you guys were going to do something

07:13very 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 grill in the basement, which was sort of a late night dive bar study spot. And you lived upstairs and you would come down and you would buy pizzas from them and then take them upstairs and resell them by the slice at a profit. 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 grill. 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 were working on their prom sets or write their term papers.

08:08Tony and Sandra were actually very entrepreneurial even back then. Usually what happens is the graduating seniors would sell the grill, the rights of the grill, to the upcoming seniors. So the graduating juniors who will be seniors. So they would hold the rights to the grill for one year. And because they can only operate the grill 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 grill for two years, I can amortize the cost of having a pizza oven in there. and pizza has great margin if you can overcome the cost of the oven and so he decided that he was going to bid for the rights for two years and his bid was highest bid plus one dollar

09:00i mean that was a pretty courageous thing for him to do and so that's what he did i happen to have a pretty large rooming blocking group in quincy and i did come downstairs 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. Um, that's the part that is, you know, it's, 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 a dollar 50, a dollar 25, uh, when you buy it as a pie. And the thing that is most interesting about that story is I always got $2, even though I asked for $1.25, I would $1.50. And the reason is like today, maybe not as obvious, but back then you needed quarters for washing machines, drying machines,

09:52vending machines, arcade games. Today, you probably pay with that 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. That's awesome. You guys were delivering happiness. Even back at Harvard, you get your slice of pizza and your quarter for laundry. Yeah. Yeah. And it was, it started out with lots of conversations on how to make the grill 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

10:41downstairs and hang out? So there was a lot of conversations about that one day. The reason Tony tells this story is because he was one day we're calculating how much we made. And he was like, he made the calculation and said, Alfred, you actually make more per hour than I do. I'm like, come on. I like order. I call down order, come downstairs, pick it up and take it upstairs. Yeah, sorry, fine. I make more per hour, but you still make more in aggregate because you spent more time on the grill. But those are the type of like geeky things that we talked about when we were in college. And the legend is, of course, that's why you became CFO of your first company together, which was Link Exchange. 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

11:31statistics at Stanford. And then supposedly, right, I have to ask you about this. You tried to convince them to come and run the same pizza game at Stanford, right? No, actually, Tony was looking into starting a similar business that he was trying to get a Subway's franchise on campus. Ah, cool. Or a pizza business on campus. And I told him, well, They have plenty of pizza stores, and there is a Subway's on University Avenue, 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 to be there. Of course, that's changed. Those rules have changed on Stanford's campus. But he's always a little bit ahead. And the thing that was interesting is like the internet was happening.

12:28So it was like, why don't we think about some internet business? And 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'd be told what to do. And they would figure out how to do that work within half a day to a day or an afternoon. And then they would work on their side business, which was building websites for companies that would pay them. And this is 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 they were more than happy to code up sites in HTML for others, and they would be paid a very handsome fee for creating these sites. And the sad part for them was these sites would just stand alone and there would be no traffic. Nobody would go to them.

13:20So 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. Yeah. And I mean, it basically, in a lot of ways, invented, you know, the display advertising network business that eventually becomes, you know, DoubleClick and Aquanive. These become massive acquisitions from Google and Microsoft. But you guys were first in a lot of ways. we're early there were a bunch of copy cats along the way uh some were like hyper banner and other banner exchanges and then obviously double click and a quantitative we sold a little too early before that and then there was a next wave of these companies on the mobile so history does repeat itself and so sequoia not only invested in lake exchange but made 17x in 17 months but They also invested in AdMob, and AdMob's acquisition by Apple was much bigger than

14:15LinkExchange's acquisition. Well, if you adjust for inflation, you know, you're probably about to say. Yeah. Alfred, it feels like you've said that 17x in 17 months before. I don't know, rolled right off the tongue. Yeah, I thought, you know, 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, yeah, 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 were looking for a CEO. He spent a day a week at the company.

15:14And so today when I'm sitting in 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 their companies and picking up and doing whatever to help the company succeed. Yeah. And so that's why this is, for me, a very rewarding job. 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, you know, maybe as you said, you thought the venture business was easy. It's not. We've talked about that a bunch on this show. You leave and you decide to raise a fund on your own and this is essentially like today this would be a pre-seed venture fund yeah back then we raised 27 million dollars from friends and family of link exchange after the liquidity event

16:07but 27 million back then was a fairly sizable fund for seed and pre-seed today it's like not that it's like average i would say yeah and the idea was not to write a hundred thousand 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 three years. We ended up making 27 investments, but it was over one year. Wow. And you didn't reserve anything for ProRata. We didn't reserve anything for Prorata. 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. How do you even have the deal flow to be doing two deals a month with that small of a fund and that few of a number of GPs? How does that work? I think we had a good network.

17:13We knew lots of people in the internet space. And so we were primarily investing in just the internet. And so it wasn't hard to find companies to invest in. And keep in mind, you know, deal flow, the level of sophistication people have today thinking about companies was not the same back then, right? Like the company, 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. We're pretty proud of our track record at Venture Frogs. It ended up being a 7.5 to 8x fund after fees. Wow. For a 1999 fund, I'm pretty sure that's in the top decile, if not the top. I mean, it's very hard. Only the top, top venture funds these days are 7 or 8x after fees, period. But to do that in 99, but it was the result of a lot of work that you ended up doing in the portfolio.

18:10It was a 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. And then there are companies like, regardless of whether we help or not, they were going to do just fine. So you guys invested in OpenTable, right? We invested in OpenTable, they were going to do just fine. Mago Music 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 Myable. They were trying to create MyPages for WAP phones. Imagine, like, you can't even imagine looking at these small screens and why you would put a MyPage on that. But anyway, they were building that. That got sold to phone.com, which got merged with software.com to create open-wave systems. So that defined.

19:03There are a bunch of companies that defined regardless of whether we helped them or not. And 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. And then there were two companies we felt like if we helped, we could make a lot of impact in those companies. And those two companies were Tony Networks and Zappos. So did you and Tony sit down and say like, okay, let's just draw us. 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, yep, if we apply here, it can go the distance? Or how do you figure that out? I think when you step back, you kind of think about whether the investment thesis was right or wrong.

19:52And 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. This might be an interesting problem. At Sequoia, we've over the years created these buckets. Like sometimes you have a feature, it's not a product or you have a product, but it's not a, it's not a company. And I didn't have those laced or frameworks back then, but it was pretty clear like, yeah, this is a nice tool and people will use it, but you can't really build any meaningful business or user base on top of it. And 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 set of like, well, we can't really help companies where they're not really a company or a product, they're really a feature.

20:41And there are a set of, 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. And then there are just a set of 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. And so those are the conclusions. And then, unfortunately, there is 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. And what's interesting, Zappos kind of fit into that bucket, right? The business was good. It was growing. So you guys invested in 99. Nick had founded the business, just had a business plan.

21:43And it was initially called shoesite.com, right? Yep. 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, you know, it was Nuclear Winter. There have been pets.com and eToys. Nobody wanted to fund it, right? But the business was growing. The business was growing. And it was actually one thing that was different about Zappos even back then was it was breakeven. Most e-commerce companies were not breakeven. Even today, we accept they won't be breakeven for the first few years. Back then, too, a lot of companies like Pets.com weren't breakeven. And I think the whole e-commerce category was just dead to all investors in 2000, 2001, 2002. And so even for Sequoia Investing, Sequoia invested, I think, in 2005. And so it

22:41took some time for a very toxic space to turn around, even when you have a good business. And so I attribute some of Zappos' success. There's a lot of feel-good stuff in Tony's book, but there are two things that I think I attribute 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. Yeah. 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. The company only raised $10 million for primary capital. Yes, it raised more money for Sequoia for secondaries. And yes, it had debt. And yes, it leveraged relationships to get vendor credit.

23:34All of those things that are written in Tony's books, those are all true. But primary capital was about $10 million. And I don't think you can imagine today an e-commerce company raising $10 million and becoming a billion-dollar company over time. You'd probably think it's in the hundreds of millions of dollars, maybe $100 million or $200 million. And Zappos did burn $100 million of free cash flow. It was just smart about how it did it. It did it from vendor relationships, extending the terms from net 30 to net 90 over time. 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. Was it easier to acquire at scale those days? When you think about today, it's in many ways

24:22expensive 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'd never seen before. So I mean, can you talk about acquisition costs then versus acquisition costs now? Yeah, I think that's a great question about acquisition. Everybody seems to think, 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. It probably wasn't sending you that much traffic. Well, no, but back then, there was 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. So there's a whole banner advertising category. Then there was trying to buy placement at Home Plate at Pac Bell. We got all of three customers from that. Did you guys do an AOL sponsored channel?

25:16We 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. And then as soon as we discovered it, it wasn't like there was no competition out there. As soon as we discovered, 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 long tail of keywords. This is all things that you now think about. But 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 are A-B testing this stuff all the time.

26:04I would say back then, Google was not obvious. We did that. It was doing print ads, and print ads were actually pretty good. And when you did print ads that were co-branded with Stuart Weitzman or with Clarks, depending on the shoes that you're selling, it actually were pretty effective. And then we figured out a way for Stuart Weitzman to pay for that because it was co-branded. It's like, well, you put up Stuart Weitzman ads, and they don't know what to buy. So why don't you put www.dappos.com at the bottom for your ads? And so a bit of negotiation. So those are clever things that you have to sort of do as soon as we start doing that, competitors start doing that. They were called co-op dollars or money that were available. And this is something, preparing for this, you've talked a lot about this. All this stuff was really hard. And if you had slid a business plan across the table

26:54at Sequoia Capital that you were going to do this, they'd probably be like, you're going to do print ads, right? But like, 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? Yeah, I think nothing in the consumer business is completely proprietary. You could try to create these modes along the way, but consumer business modes are like little by little. You know, you make things a little bit more, you know, 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% better than the day before. And you try to make that additive. And if you're really good, you try to make those 1% compound. And that's the way you sort of get ahead.

27:41And when Amazon tried it, 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. Yeah, that's calling of the herd, right? Yeah, so in 1999, there were competitors. By 2000, 2001, most of the competitors died down. And some of the competitors that did exist were pretty weak. And the competitor that got a lot of money was NordstromShoes.com. I got $20 million. Zappos got funded with $2 million. They soon didn't go anywhere because they had too much money. And 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.

28:31And 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. This is, Brett Stone writes about this in the Everything Store that you guys put ads on and when you're going through security to check in at the airport, you put Zappos ads where you had to put your shoes, which is just brilliant. Which is now like an ad unit. That's a thing now. 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

29:22in 1999 they were all ready to go and then September 11th happened and they were still working with the TSA for a long period of time to get it done so 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 ad units for very very cheap so it actually was a third party who did those ad units interesting. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. So David, here's a question that I do not think most enterprise CIOs or CEOs could actually answer today if they were asked. How many agents actually run inside your business? Yes. I don't think anybody really knows. And of course, then there's the harder questions like, what can they access? And who gave them that access? And is any of this paying for itself?

30:20ServiceNow has an answer to all those questions. The super intelligence control tower. As friend of the show, CEO Bill McDermott says, it's the one place to see, secure, measure, and help govern your agents, models, and workflows across your entire business, no matter who built it. Yep. So for example, it finds the agent that someone in procurement spun up on their own, and then tracks what it's doing and its ongoing cost. When the CFO inevitably asks whether any of this is working and if there's ROI, you'll be ready with the number. And importantly, if something goes wrong, it can detect and revoke access immediately. There's even a kill switch built into the product. And ServiceNow is uniquely positioned for this because they've spent the last 20 years building the operating backbone of the enterprise from IT to HR, sales, service, and cybersecurity. They know how work gets done,

31:12helping support over 100 billion workflows a year across more than 90% of the Fortune 500. The world's most complicated businesses, like many that we've covered here on Acquired, already run on ServiceNow, and now they're running their AI there too. If you're trying to turn AI ambition into real outcomes, just go to servicenow.com slash acquired and just tell them that Ben and David sent you. Well, let's rewind a little bit here. So we talked about VentureFrogs. So at some point, Alfred, you went to tell me and Tony went, it sounds like not as CEO, but it's his sort of join 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? Sure. So I think we were both trying to just help the companies that we thought we could help. And back to, you know, Tony thought that he could help Zappos and he was willing to incubate the

32:07company and you know in in the loft and venture frogs incubator and then i had a long-standing relationship with hadi partovi and ali partovi and so hadi was one of the founders to tell me and he was telling me how much he was they were spending and 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 meanwhile like can't raise any money it was like night and day i'm like well zappos can't whatever. Tony, just grow the business. Don't spend any money just like it is today. Just grow it at breakeven. You're fine. You can't raise any money anyway. Here, this other company raises $265 million and is losing $60 million a year. I'm like, I was pretty sure with a $60 million loss, you can narrow that to something lower than that. You can add value that way. and so Tony and Tony really liked the notion

33:03of trying to figure out to take a business from 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 and so he went to Zappos first and for Tommy I just thought my financial skills were going to be valued Tommy turned out to be one of the first SaaS computing, cloud computing companies, it just wasn't, we had to build our own cloud and we turned that company from not having any revenue having too many people going through two and a half rounds of layoffs the notion of the consumer business was that you can sell advertising as well advertising units on Google are 90% risk margin on this because the infrastructure was going to be at best 50% risk margin so that may get very hard to work so we pivoted to the enterprise business had to sort of change the mindset of the company

33:57Mike McHugh did a great job sort of shifting that. And we built an enterprise business through a lot of pivoting. I didn't realize Mike, so Mike's the founder and CEO of Flipboard now, right? Flipboard, yes. Wow, I didn't realize he was a tell me. And so after tell me was in good shape, I joined Zappos. So 2005, you came over to Zappos. You just raised around 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 what were you guys thinking when you got that? I don't know, I just thought it was probably should take the meeting, it would be cool to see if there was some partnership that we could do together, we weren't thinking that he was coming down to buy the company at all So you brought two pizzas to the meeting, right? Well, he's famously known for his two pizza team, so we thought we'd bring two pizzas.

34:58Funny enough, I don't think anybody ate the pizza. It wasn't that kind of you. It wasn't a, yeah, it wasn't a eat the pizza. Was Amazon in the shoe market at this point? Like, were they a competitor? I don't, I think they were like in the market to something, not in a big degree, but in a small way. And the suppliers, the shoe manufacturers were pretty scared of Amazon, right? Because they were worried that Amazon would discount their merchandise below MSRP. Just go back. 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 be dominant and going to take our business. They were scared because they thought all internet businesses were fly-by-night businesses. And that consumers would never buy shoes on the internet. We need a shoe salesman. It's like the Silk Road. We need a shoe salesman to come and talk to the customer.

35:52measure 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, so as you know, like 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 like get more, get inventory. We had to buy the inventory. So part of, I was going to ask about that. So when you started, it was 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. Yeah, because I think the brands are not set up to be direct-to-consumer businesses. So they don't take the time to think about what a direct-to-consumer business needs. And so the packaging wasn't perfect.

36:36They 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 distributing to a store. So they were providing a subpar experience, and we took over the experience because we felt like we wanted to provide 99.9% accuracy on inventory, as an example. And we wanted to provide a nice and happy and joyful packing slip as opposed to a grid with numbers. But part of it, it sounds like, also was just getting their trouble. You had to buy the inventory or else they weren't going to trust you to sell it. Yeah, and that's where most of the use of capital went, which is buying inventory. 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?

37:32I mean, 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 we didn't really – it was hinted at maybe we should join forces. And we hinted back we were 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. And 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. We wasn't thinking that they would immediately, well, in a few years, launch Endless.com. Yeah, I think so it was the next year. they launch ends.com which is basically a clone of tapos uh they spend 30 million dollars

38:23developing it and when they launch it has free overnight shipping uh which is super clear i mean i'm sure it was obvious to you guys they were losing money on every order you guys worked so hard to be profitable and they're just as you say you know it's like lots of capital coming into the space and killing your economics how did you react to that well um the only way you can react is figure out what you want to match that and how you differentiate against that. 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, five-day delivery. We'd always say five to seven days and deliver it in five days and then four and then three and then two. We hadn't gone to overnight yet. And so it wasn't that big of a leap to go from two to one. It was a big,

39:12For that time, it was a big dollar difference shift where we go from profitable to just break even again. So it was a big decision to do that. We were still focused on making sure we had the largest selection. We had the best vendor relationships and things like that that we thought were still differentiated against endless. So we went to free shipping both ways. We went to free overnight shipping. they went from free overnight shipping to because discounting um 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 they said and by not thought of as positive you mean like the brands would stop retailing through them if they were selling below msrp right yeah they can't shake they can't ask you to change the price but they can stop selling to you um like okay well if you're going to discount

40:02before the season ends, we're going to not let you access to more inventory. They want them to cheapen the inventory. So Amazon's very clever. I thought this was very clever. It's like, instead of discounting their shoes, they said minus $5 or $5 back for overnight shipping. We'll pay you to send it to you overnight. We'll pay you to send it to you overnight. I'm like, wow, that's really clever. 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 um was there an element of like i'm thinking of you know when when facebook cloned snapchat and released poke and it was like the best thing that ever happened to snapchat like did amazon do category development from you like did you see i'm sure they were spending a lot of marketing did you see any bleed over of that into zappos i think when

40:49you're in a 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 were growing, Amazon was definitely growing, and we didn't really see 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 to go acquire. You get to large enough size, that will at some point not be true. And so if you end up being in a great 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 you're one of many, you can still be a valuable business. So that happens.

41:43You guys are both growing through kind of 05 to OE. Then financial crash happens. Yeah. Zappos endures one financial crisis, so may as well stick around for the next one. 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. Do you mean in raising capital or in people buying shoes and getting somehow more expensive to get people to do that? Consumer spend was more tepid. And we would see consumer confidence coming down faster than the Fed or whatever could see it, I think. Anyway, so the financial crisis was interesting because our business is still growing.

42:36I think we had $100 million line of credit, of which we were only using $30 or $40 million of it. It wasn't like we were overextended. So you didn't bust your covenants on the credit line? No, but the banks couldn't post the money. They were like, wait, we have this contract. It was like, well, we've been told we have a liquidity crunch. We need to pull all black some of the liquidity. And that was a little disappointing. Huh. Wow. Yeah, I mean, that's not how lines of credit work. Well, you should read all the terms and conditions. Yeah, right. When it's not your money. Yeah, we had some technical issues where we had verbal agreements that we would extend from shoes to all. They would lend against 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.

43:30So they started saying, well, we're not going to lend against apparel. There are ways for them to sort of get out of the contract. It was also what was more painful was conversations with employees. Some of them had lost their home. Vegas was particularly hard hit by the housing crisis. Vegas housing prices fell 50% 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. I was like, whoa. I thought I had a big weight running a business. So, I mean, 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.

44:28I 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 payment. And I was like, what do you mean? I thought you were renting. I 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 just want my family. I'm going to come up with the money to buy the house. It's going to be at a discount. Yes, I'm selling my stock at a discount, but I'm buying the house at a discount too. He felt a little good about that, but I was like, you know you're selling this at probably 25% of the value that you would get if you just wait this out. He's like, well, I need the cash now. Wow. Those types of conversations are much harder. and so we're thinking about what's the right thing for all shareholders and look I mean we can always like think about like

45:30if Zappos have been public you know gone public because it can build a big enough business would it be valued today and it's probably not 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 north of that and when I left it was profitable and 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. Delivering happiness. And I wouldn't be here doing what I love to do. Yeah. Well, now, so when the deal happens, it's announced summer of 2009. Amazon's going to acquire Zappos for $1.2 billion in stock. How did the conversation go about stock? And I mean, that was the best thing that you guys probably ever did financially, right? Yeah. So that, what's the line? Success has many fathers. Yeah. Many people claim to have been the person who negotiated the stock market.

46:24Tony says he pushed for stock. Mike Moore says he pushed for stock. Actually, everybody pushed for stock because we knew that coming out of a financial crisis, everybody's stock was undervalued. I think it was almost trading at $50 or $60 a share at this point. The day it closed, it was trading at $118. So the stock price today is more than 10 times what we're at. But who could remember, you know? Who could remember exactly what it was changing? It was $118.23, I think, something to that effect. Oh, my goodness. And so it started out with all cash because Amazon had not done many transactions with stock. And we said we won't do this. We're happy with price. We just won't do this deal unless it's in stock. It shouldn't. Like, in corporate finance, it shouldn't matter. Right, right. Because you can, the acquirer can decide to give stock and buy back the stock.

47:18the acquirer you know so it shouldn't matter to the acquirer it does 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 and i think there are some people with different views about amazon stock and some people sold some people held, some people did half and half. So in my view, in mergers, I think acquirers should be more lenient about doing stock transactions because it shouldn't be any different for them. Unless you have a view of the value of your own stock, which differs from the market. Right, but you can always buy back, you can always sell it. That's true. One thing, and then we'll move on to acquisition category, but I'm really curious. I mean, you did this and it was announced from day one.

48:15There's this amazing video we'll link to in the show. Oh my God, it is the best. This is so incredible. Bezos records a video to all Zappos employees. It's about a 10 minute video. It's on YouTube about everything that he's learned, knowledge that he wants to impart to Zappos. It's just wonderful. It's in this like classic, for listeners who haven't seen it, you gotta 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. And, you know. He has a, not even a whiteboard, like, you know, the paper easels that you flip. And he writes in marker the four main lessons he learned at Amazon. Anyway, though, but 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, like, this is the playbook

49:06that Facebook runs and others with acquisitions. How did those discussions go? Yeah, I think Amazon has always been pressing on this front. It wasn't the first acquisition that they'd done that was like this. I think Alexa was left independent, so it was IMDB and Audible. And so we weren't the first acquisition. There are obviously situations where you acquire the company and you want it integrated. I think it makes sense when it's an acqui-hire. 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 costs. And so I think decentralization has its costs too, but you're more likely to, in my opinion, decentralized organizations are more innovative because they don't have to bubble everything up.

50:00There's not a central decision maker. So decentralized ecosystems are more innovative. And if you want to have a comparison, it'd be like a large company versus a startup ecosystem. that's why we have a job here at Sequoia like we believe 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 kind of what's the management structure and so there was the management structure was basically our board at Zappos would be replaced by a board that was now full an Amazon board yeah an Amazon board cool Um, and, and I think it still exists that way today. I'm curious, you know, when, when they approached you about, about buying the company, what were sort of the, the main cited reasons?

50:49Like, was it, we just think you have a good business and we want to pour 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 Amazon DNA or the, the, um, Zappos DNA around Amazon and why'd they do it? 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-weaked 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 bizarro differences between Amazon and Zappos, that is one thing that both companies share a lot in common. 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.

51:43And so we were surprised that we said we don't measure, for example, call times. Well, 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 like stayed on the phone two seconds longer than you should have it's more of a let's collaborate like our team is not efficient compared to all these other teams yeah and that's how we did it we weren't measuring every single and and so they were like okay well you're not actually like you say these things like you don't measure the stuff you measure it just slightly in different ways and the way we were trying to measure it was to try to get the collective intelligence of the team and trying to make

52:29better decisions. All right, listeners, now is a great time to talk about one of our favorite companies, Lagora, the agentic operating system for legal work. Yes, most of you have dropped a contract into a chatbot by now. But as a lawyer, how far can that really take you? It's never seen your firm's precedents. It doesn't respect confidentiality, and you can't check where its answer came from. So Lagora's founders approached this the way that great founders do. Early on, the team moved into the office of a big law firm in Stockholm and learned, for months, how the work actually gets done. A couple of thousands of enterprise customers and 100,000 users later, they still work that way. They employ 100 legal engineers on staff. These are lawyers sitting inside of firms and legal departments to deploy Lagora onto live situations like the deal closing this week or the policy review due Friday.

53:22The product has gotten very powerful in a short period of time. A year ago, the goal was a good answer from a chatbot. With the Legora agent, you hand it the work and it comes back with a plan. Tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day like Microsoft Word and against your own precedents and playbooks. Every finding is sourced, the lawyer directs the work, and signs off before the system executes any steps. Every legal team can get access to the same AI models, so the models themselves do not give you an edge. What you can do with your own data, people, playbooks, that's the whole game. Today, over 100,000 legal professionals at more than 1,800 law firms and in-house legal teams in over 50 markets use Lagora. And when Legora goes head to head with its top competitor in a pilot, it wins 70% of the time.

54:19A demo is one thing, but what matters most is an associate who reaches for it at two in the morning during a closing or whether a general counsel trusts what it says before the board meeting. So if your legal team wants to check it out, whether you're at a firm or in-house, go to Legora.com slash acquired and be sure to tell them that Ben and David sent you. so the next segment we do on the show is acquisition category and we assign category to the acquisition and to me it's pretty obvious this is a business line that amazon acquired uh keep it as a separate company um you know it's not just a product that's being integrated into amazon but i think this is really interesting like the this was the point i wanted to make and the cultures even though it's you know as bradstone said and you quoted like it's zappos was a bizarro world version of Amazon. But the core values were basically the same.

55:09Be frugal, be customer obsessed, decentralized decision making. It's like such a good fit when it comes to culture, even though it seems on the surface that it wouldn't be. 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's in comparison today to Whole Foods, but hey, it's 10 years later, just for inflation. numbers only acquisitions and numbers only get larger, right? So 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. Yeah, were you guys using Kiva? We were also using Kiva. Okay.

56:00And that was how Kiva got on the radar screen of Amazon, right? Kiva was, it was funny, I'll tie this all the way back to Sequoia. Ruloc Boy just sent me the business plan of Kiva. Ask me for my opinion. And Kiva came from WebIn, which Michael Moritz was on the board of. Michael Moritz was on the board of WebIn. WebIn did not work well, work out well. They had been using, if you wanted to go all the way back, they had been using a carousel system. We'll 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 were saying that this was going to work, et cetera. By Michael. By Michael, and also by Michael Marks, who, you know, obviously founder and CEO of Flextronics, and so he mean a little bit about operations. I was like, okay, all right, well, we need something different. Anyway, so that happened.

56:56And so Mick, who was at WebMend, noticed how inefficient most of the systems were so he went on to create kiva systems um i had i didn't know that connection so thanks for reminding me but um at the time so i got the business plan from for kiva from ruloff asking me what i thought about it it's like oh interesting idea but probably too hard to rip out a whole set up uh distribution center maybe for a new distribution center we might use it but not for one already set up when i rip out a 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 when amazon was doing diligence on on us they really thought they were going to rip out kiva from our distribution centers because they thought it was not going to work and i said why and they said well you know

57:50your spike in december or our spike in december is order is an order of magnitude higher than the rest of the year so you're paying for idle robots that are going to sit around for most of the year so that can't be efficient it turned out it's still efficient because uh 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 in another so a few years later after they observed this they bought the acquired jiva yeah and now i don't think it's in all amazon warehouses yet but certainly all new ones and I think they've been retrofitting old ones. I think there was some public statement that they have like hundreds, maybe on the order of 200,000 or 300,000 Kiva robots. Wow. That's awesome. All thanks to Zappos. Well, that's just Zappos. I mean, diapers also use them and so they acquired diapers.com.

58:42So it was more and more evidence that this was going to work. So there was technology that they bought as well. So we've decided it's a business line. Amazon's got a competing business line that's doing really well. Amazon's in-house shoe business 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 in-house thing into Zappos? And were they for a time? Does it feel like they've shifted away to you no i think the the shoe business as a whole whether it's on amazon's site or on zappos site has been growing really well um for both and so it's not an either or i think if if you sort of used our way of like our we we talk about the power of and not not about trade-offs and i think amazon also likes and versus war and so why not have why not grow your own business and own uh your

59:40your biggest competitor at the same time if you can pull that off and they did I'm curious on that front did anybody else ever seriously attempt to buy the company besides Amazon would you guys have sold to anyone else I don't think anybody was anybody else was serious I don't think we would have sold to anyone else and it's hard to imagine anyone else would have like let you guys keep doing this stuff well I think Walmart has shown that they'd be willing to buy companies and keep them independent well now but now yeah 2008 2009 harder to sort of conceive but i think i think today there are plenty of competitors so like you know could zapos have remained independent come 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 you're a little busy on other stuff

60:34you don't get to test your life so you have to move on that's okay we'll we'll speculate wildly about it on this show instead um tech teams yeah so we've talked about a bunch of them there's one that we didn't um 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 um shoesite.com and tony almost deleted it but decided not to even though he sort of thought it was a bad idea like you know who's 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% of that is already being sold by paper mail order catalogs. And it reminded me so much of a Sequoia investment thesis that we invest in markets, not ideas. And we invest in markets over founders in many ways. And I think that there's something

61:29really 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. Yeah, I think you're right that markets are, 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 or the wrong management team. The people around the company, it has to all work. And so in some ways, I would say we invest in companies and not 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. I know on day one, do you have all those things?

62:21No, 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? And 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. Yeah, 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, but just how much this story reminds me of the Stitch Fix story as well. And even down to you guys hired, was the first hire at Zappos, Fred? Yes. and reminds me of um you know one of the first hires at stitch fix was mike smith from walmart you're bringing that dna from the industry uh into understanding you know to this new paradigm

63:10of the industry but from the old world too and somebody who can bridge that gap but one of the things we talked about on the stitch fix episode was this idea in founding a company or investing that like it's not enough to be right about something you need to be right and have it be non-consensus that you're right and like you know tony almost deleted the voicemail right because who's going to buy shoes online? It seems like a dumb idea. Just like Stitch Fix on the surface back in the day probably seemed like a dumb idea. But when you dig into the market, it actually isn't. I'm curious how much you guys thought about that along the way. Yeah, so Katrina has done an extraordinary job at Stitch Fix. So I think kudos to her. I think going back to the comment you made about write and be non-consensus, I think that's part of what we were talking about where if it's non-consensus,

63:56you 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 deleted it but didn't delete it was, Alfred, we had a conversation. This sounds like a dumb idea, but nobody else is going to do this if they get money and they go off the ground. So if it works... At least we're going to be the only ones doing this dumb idea. Yeah. We're going to be the only ones doing this dumb idea. And then you ask, is it that dumb? So the facts were that he had no – we knew that Nick could build a website. He was a webmaster. He designed 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% or $2 billion, or he done a mail order. So what is the conclusion from those facts?

64:53okay well it's not that hard to extend that conclusion to be the internet should be bigger than their order at least it's big yeah at least it's big or bigger or many of orders of magnitude bigger so you believe that then back to like you need to build a company we have a founder with an innovative idea you need you you're missing a few pieces so as you said we went out and hired nick swimmer because we're missing shoe experience like i tony and i could like you had a sort of because of link exchange, drive traffic, suicide. Right. Okay, got that checked. Like, we have a bunch of things checked, but we didn't have the shoe experience. And originally, the original idea, we didn't need customer service experience or distribution because we were dropshipping. That evolved, so we needed more pieces to be filled in. But the company coming together has a lot to do

65:37with, like, making sure you have all those right pieces. I think that's what's so, you know, for me at least, super fun about early stage investing is, like, you can't think about, you can't look at it and say, like, judge it as if the pieces were together because if the pieces were together, it would either be a public company or it's never going to work. Yeah, you need to, well, you also, you just need to have imagination. Yeah. You need to have imagination and you also need to make sure that you can dream with the entrepreneur. Like, 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, you know, Adia at Houzz or Brian Chesky at Airbnb or Dropbox. They also just like, they see the world slightly differently than everyone else. And they view a problem, they feel that problem from a personal standpoint,

66:25and they just feel like the world has solved that problem incorrectly. They've just gotten that wrong. And they're on a mission to go change that. And Nick was on a mission to change that. Tony was on a mission to change that. Yeah. Even though, and I think this is what's also super cool about Zappos and the story, like actually another one I had in 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 choose, but you were passionate about seeing this way that the market wasn't working and could work and that nobody else in the space was so focused on customer service that could really deliver, you know, well, happiness, as Tony puts it, you know, to customers.

67:06Yeah, I think that before getting on to mission versus mercenary founders, I think the one thing that was clear was that e-commerce was going to compete on price and was going to compete on selection. And those two things are hard for a startup to just compete on those two things because you don't have the bankroll to compete on price. And on day one, you're not going to have the widest selection. and so we needed another pillar you could compete on those two 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 from a mission standpoint you know people ask this all the time whether we back you know mission focus or mercenary founders i think best founders are kind of both you know it's like they're not they're not doing

68:03this as a charity because otherwise they would start a non-profit. So they are in the entrepreneur space because they want to build a company. They want to build a business. There's also, back to your days with pizza at Harvard at Quincy House, there's an element of you've got to be a hustler to get this done. You've got to be a hustler. You want to solve the problem. You want to do it in a different way. You have to differentiate. And most of the founders that are successful, they 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 model. 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 are just people don't want to do. Kudos to Amazon for building a network of warehouses. Nobody wanted to build that.

68:55Let's do that. If you asked in 1999 whether you put $10,000 or your life savings in eBay or Amazon. I bet you most people in 1999 would say eBay. It was this elegant, no capital, like capital light, no distribution centers, no inventory model. It was just connecting two people and the marketplace would take care of itself. They acquire Skype. People can chat with each other. And I'm not making fun of eBay. They have lots of issues that they need with trust and safety. They have to solve that. They have to solve payments, micropayments, right? These are small payments. That's why they had to develop their own. They tried developing their own. They acquired Billpoint and PayPal. It was not an easy thing. But from an investor standpoint, investors seem to like these high margin, really easy to explain business models. And at the same time, some of the hardest things to replicate are the hard things that people do

69:54to build a real mode around the business. And Amazon builds real modes. Yep. Well, 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? You don't have to. What is this grading thing? All right, so we basically, 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. And 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 to try and figure out, was that the best use of the acquirer's capital? And our A-plus scenarios are like Apple spending money on Next and basically

70:47having a reverse acquisition happen where the company is reborn because of it. Or Instagram's another great example. Our other A-plus is Instagram. Right. And then there's other ones where we're like, actually, that was a terrible use of capital. And then it kind of gives us a way to understand basically, you know, given all the options on the table, should they have done this? And usually they land in the B2C range. So that's the process. Well, I'm going to take a first stab. So I think that on its own, Zappos was a great business. So it's not like they were, you know, buying something that they'd have to integrate and, you know, have really high costs 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.

71:49In some ways, a takeout, because Zappos was a very real threat. expanding category by category the same way that Amazon had. And 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. Tough bar to get an A from Ben. David? It's hard to see this not being a good use of capital for Amazon. like both for the reasons you were saying, but also like, you know,

72:56preparing for the show, I think a bunch of people have made analogies to this almost being like a Berkshire Hathaway type acquisition of, you know, allowing Zappos to keep doing what it was doing free of all the financial constraints that had 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 endless.com. Stop the bleeding there and be able to cross-pollinate the knowledge to grow their own category. So, you know, sorry, Alfred, I don't think this is as transformative as Instagram, but this is A- in my book. No comment from Alfred. I think I know too much information. We can move on. How about Carvats? What do you got, Ben? uh last week uh i listened to andrew mason as a guest on recode decode with with kara swisher

73:52um and it is always refreshing to hear that guy um on any form of media especially in an interview format so uh so straightforward so honest uh for listeners who don't know andrew mason is the um founder of groupon and uh 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's so much revisionist history in our industry and legend and lore that gets started. And you just never hear that sort of thing 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 shouldn't have been the person to do it. Yes, that's why I was fired. I mean, there's just very, it's just a refreshing take. So really enjoyed it and really

74:44enjoyed hearing about some of the new stuff he's up to. 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 end up, we find some way to relate them. Justin O'Byrne published this great long piece on his blog called Google Maps Moat, the Google Maps Moat. And he's a, I think, designer in MapSpace, I believe 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 breaks out like product changes month by month over years across all the products in the space. Really just a brilliant analysis and very worth reading on what makes a moat in the consumer business.

75:38I'll second that. That piece was incredible. And it's got these great side-by-side comparisons and animated GIFs where you can see he's been taking the same screenshot year after year for seven 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 that. It's so cool, even to just scroll through. I agree as well. That was a great piece. For me, I'm trying to do some hard things and read thick 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 have contributed lots to our society. And they were prolific in the work that they did. They were also interested in many, many different things. Kind of think about Albert Einstein as a physics genius, but he also loved playing music and the violin.

76:35And 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. And I think both people sort of 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 Madame Currie because I think she's also a fascinating character. Definitely. He's a great writer. Well, thank you, Alfred, for joining us, putting up with us, reliving your Trash Compactor days. Yeah, Alfred, where can our guests find you on the internet? Oh, they can find me. My email is lynn at sequoiacap.com. You can find me on the Sequoia website, sequoiacap.com. So that's where I hang out. Awesome. All right, listeners, now is a great time to talk about one of our favorite companies,

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78:28started. Listeners, thank you for listening. As always, 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 acquired.fm, you can come join us and 1100 other people in the acquired Slack. So have a great day, everyone.