Acquired - Zappos (with Alfred Lin)

0:00Hey 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.

0:28Is this a good angle? You look great. This is a good angle. Are you getting my good set? Always, David. Welcome to season two, episode one 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 Len. Hey, welcome, Alfred. We're very excited. You're very excited. I know. I know. Too bad our titles really, really do those in.

1:07Thank you for having me on the show. Yeah, we're super pumped to have you listeners this episode is gonna be about 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? We in December I mentioned that we're switching to season so we can do themes and mini series across across several episodes and for our first episode we wanted to do it 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, you want to introduce who is Alfred Lynn? Our mystery guest, not so mystery guest. So today, Alfred is a VC at Sequoia Capital, where he's the co-head of their US venture business and represents Sequoia on boards of many great companies, such as Airbnb, House, DoorDash, Zipline, and many others.

2:03But 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 Shea, he was known as the, and I'm quoting directly from Tony here, he was known as the human trash compactor of pizza.

2:31which also what turns out is pretty relevant to the Zepa 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'm 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. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora.

3:00the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

3:29They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you...

3:41drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:01And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time LaGora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months truly insane numbers and that is the real test.

4:53Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. So David, now without further ado, uh, So when most people think of Zappos, they probably imagined it was started by a guy named Tony Shay, 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.

5:40Ben's red. That's not quite accurate. I really should have done my research here. The founder of Zachos was Nick Swimmer. He had started the company because he was looking for a particular pair of shoes and he went to one store and couldn't find the right size. One store couldn't find the right color. One 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 can buy his shoes. And so this was 1999. He thought it was a good idea. And 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-

6:23I 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. 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 you were an undergrad and you had two friends Tony Shay 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 very technical very smart but the business actually turned into a pizza business

7:16And 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, you would buy pizzas from them, and then take them upstairs and resell them by the slice at a profit. Yeah, that's...

7:39mostly true but I think the the interesting part about that story is yes Tony in Sanjay and I were friends we had other friends we didn't really hang out all that much together what brought us together is is real 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 write their term papers Tony 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 of the grill for one year. And because they can only operate the grill for one year, they mostly did very simple stuff like

8:27hamburgers and fries and milkshakes which you know sounds great but it actually doesn't have great margins and Tony had this great idea of like if I could just buy the the rights of the girl 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 gonna bid for the rights for two years and his bid was highest bid plus one dollar I mean, that was a pretty courageous thing for him to do. And so that's what he did. I happened 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, instead of the slice. And then I did bring it upstairs.

9:16I didn't really sell it by the slice. I just wanted my money back. That's the part that is, you know, it's 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, $1.25 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 $1.24 every $1.50. And the reason...

9:43is like, today maybe not as obvious, but back then, you needed quarters for washing machines, dry machines, vending machines, arcade games. Today you probably, you know, pay for 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.

10:09That's awesome. You guys were delivering happiness, even back at Harvard. You get your slice of pizza and your quarter full laundry. Yeah. Yeah. And it started out with lots of conversations on how to make the grilled better. Tony started recording movies and playing 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.

10:36How 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 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, you actually make more per hour than I do. Like, come on, I like order, I call down order, come downstairs, pick it up and take it upstairs. Yes, all right, fine, I make more per hour, but you still make more in aggregate because you spent more time on grill.

11:06There was a type of geeky things that we talked about when we were in college. The legend is, of course, that's why you became CFO of your first company together, which was Link Exchange. After you guys all graduated, you all moved out west. Tony and Sanjay started working at Oracle as developers, and you started a PhD program in statistics at Stanford.

11:30supposedly, 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 subways franchise on campus. Ah, cool. Or pizza business on campus. And I told him, well, plenty of pizza stores and there is a subways 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. There's rules have changed on Stanford's campus, but there's always a little bit ahead. The thing that was interesting is like, well,

12:23The internet was happening so it was like why don't we like think about some internet business and like exchange came about as a Fluke because when they started Tony and Sandra 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 to a day or an afternoon and then they work on their side business which was building websites for companies that would pay them and this is back once HTML seemed like something really hard to learn. It turns out it 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 for the HTML for others. And they were paid a very handsome fee for creating these sites. And the sad part for them was these sites would just stand along and they would be there 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.

13:22And that was the creation of Link Exchange. Yeah. And I mean, it basically, in a lot of ways, invented the display advertising network business that eventually becomes double click and a quantity of 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 copycats along the way.

13:48We're like hyperbanner and other banner exchanges and then obviously double-click and Aquana if we saw the 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 link exchange and made 17 X and 17 months, but they also invested in ad mob and ad mob acquisition by Apple was much bigger than than link exchanges acquisition Well, if you adjust for inflation, you know, Alfred, it feels like you've said that 17 X and 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. It's just happened all the time. And he's like, yeah, that doesn't always happen.

14:39But 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.

15:02you know, 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. And 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. And so that's why this is for me a very rewarding job.

15:30That's really cool. I didn't realize that Michael had actually stepped in as temporary CEO. But as you say, you sold the company after 17 months to Microsoft and you and Tony decided...

15:43Maybe 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 from friends and family of Link Exchange after the liquidity event. But $27 million back then was a fairly sizable fund for seed and pre-seed. Today, it's like...

16:10Not that. It's like average, I would say. Yeah. And the idea was not to write 100,000 or 200,000 on tracks, 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 to really 30 companies over three years. We ended up making 27 investments, but it was over one year.

16:39Wow. And you didn't reserve anything for a program. 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 it was a 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 were just You know, we had a good network. We 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

17:32eyeballs, people were funding. So we did some of that too. We also made some good investments. We're pretty proud of our track record adventure vlogs. It ended up being a seven and a half to 8x fund after fees. For a 1999 fund, I'm pretty sure that's in the top. That's why I've not the top. I mean, it's very early, the top, top, you know.

17:59venture funds these days are seven or eight X 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. It was a result of, in 2001, we looked at the portfolio and there were basically three sets of companies. There are companies that we, regardless of whether we help or not, they were going to go under. And then their company is like, regardless, whether we help or not, they were going to do just fine.

18:28So that was, you guys invested in an open date, right? We invested in an open table. 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 my pages for WAP phones. Imagine like, can't even imagine looking at these small screens. You would put a MyPage on that. But anyway, they were...

18:52They're building that. That gets told to phone.com which got merged with software.com to create open wave systems. So that defined. There are a bunch of companies that define regardless 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 whether we helped them or not. And then there were two companies we felt like if we helped, we could make a lot.

19:14of impacting those companies and those two companies were telling me not works and Zappos. So did you and Tony sit down and say like, okay, let's draw straws? 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 set a 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. This might be an interesting problem.

19:57Well, at Sequoia, we've over the years created these buckets. Sometimes you have a future. It's not a product or you have a product, but it's not a company. I didn't have those lists or frameworks back then, but it was pretty clear. I was like, yeah, this is a nice tool. People will use it, but you can't really build any meaningful business or user based on top of it. Then you're like, okay, well, maybe they'll pivot to something different, but we're not.

20:24in the business of helping them think about pivoting to another business that they're not passionate about. You know, 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. And they're a set of like, I think founders who are resistant to change. And so they really want our advice that's difficult to sort of influence.

20:50And 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 assume. And so those are the conclusions. And then, 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.

21:20for 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. It's interesting. Zappos kind of fit into that bucket, right? Like the business was good, it was growing. So you guys invested in 99, and they can founded the business, just had a business plan. It was initially called shoestate.com, right? 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 nuclear winter. They've been pets.com and eat toys. Nobody wanted to fund it, right? But the business was growing. The business was growing. And it was actually one thing that was different, Brad Zappos, even back then, was it was break even. Most e-commerce companies would not break even even today. We accept they won't be breaking even for the first few years back then.

22:18to a lot of companies like Pets.com didn't or breaking even. And I think the whole e-commerce category was just dead to all investors in 2000, 2001, 2002. And so even for support investing, support invested in 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. And 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 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.

23:16Yeah. Pretty good at that moment. The company only raised $10 million per primary capital. And yes, it raised more money from Sequoia for secondaries and yes, it had debt and yes, it had, it sort of leveraged relationships to get vendor credit. All of those things that are written in Tony's books, those were all true. But primary capital was about $10 million. And I don't think you can imagine today a e-commerce company raising $10 million and becoming a billion dollar company over time.

23:45He'd probably think it's in the hundreds of millions of dollars, maybe 100 million or 200 million. And Zappos did burn 100 million dollars of free cash flow. It was just smart about how he did it. He 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 did 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.

24:13Was it easier to acquire at 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'd never seen before. So can you talk about acquisition costs then versus acquisition costs now? Yeah, 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.

24:41It wasn't obvious that Google was a place to actually probably wasn't sending you that much traffic Well, no, but to like back then There was a lot of acquisition channels that just didn't work. It's not like and we tried all of them there was There was Yahoo banner ads. Here's MSM banner ads. There's like so there's a whole banner advertisement category then there was like trying to buy placement at home play at Pack Bell. We got all of like three customers. Did you guys do an AOL sponsor channel? Probably did an AOL sponsor 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.

25:34As soon as we discover, oh, yeah, it's really cool. You can pin 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 like 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 were ab testing this stuff all the time.

26:00I would say that then Google was not obvious with that. There 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 it by. So why don't you put www.dappless.com at the bottom for your ads. And so a bit of negotiation. So there were 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 money that were available. And this is something, for granted, you've talked a lot about this. All this stuff was really hard. And you get like, nobody, if you had slid a business plan across the table, it was a quiet capital that you were going to do this, they'd probably be like, you're going to do...

26:54print heads, right? 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? Yeah, I think that nothing in the consumer business is completely proprietary. You could try to create these modes along the way, but...

27:13Consumer businesses 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 one percent better than the day before. And you try to make that additive.

27:32If you're really going to try to make those 1% compound, and that's the way you sort of get ahead. And 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 the thing for Southwest. Not having too many competitors at the beginning was also the thing for Southwest. Yeah, it's calling up the herd, right? Yeah, so like in 1999 there were competitors by 2001 most of the competitors like died down and some of the competitors that did exist were pretty weak. And, you know, the competitor, they got a lot of money. What's Nordstrom Shoes.com? I got 20 million. Zapples got funded with two million. They soon, you know, didn't go anywhere because they had too much money. And five years end. That's when the competition started heating up. But I do think that it is

28:22Important for founders to know that nothing destroys value faster than irrational competitors Yeah, and so if we had irrational competitors very very early on for long sustained period of time. I'm not sure that was 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 we've never done before.

28:53This is Bradson writes about this and everything stored that you guys put ads on and when you go through security to check in at the airport, you put Zappos ads where you had to put your shoes, which is brilliant, apparently. Which is now like an ad unit. That's a thing now. 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 in 1999 and they were all ready to go and then September 11th happened and for they were still like working with the TSA for a long period of time to get it done. Yeah. 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. You guys are the only very cheap. Yeah. So it actually was a third party who did those ad units. Interesting. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta.

29:50AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF that everyone would not and you're done. But in an AI first world, that doesn't hold up anymore. Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit.

30:16Vanta's own research found that around 70% of companies have this, quote unquote, shadow AI running with no security review at all. Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap and the way that they close that gap is Vanta agent.

30:35Think of it as a GRC engineer that's governance risk and compliance except that it's software and it doesn't sleep. It finds the issues drafts the fixes and cuts the time that you'd spend on vendor assessments in half. In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like ramp, cursor and snowflake all stay audit ready and catch the risks that crop up between audits across every vendor.

31:02Every AI tool, the whole environment. And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you.

31:32Well, 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 it's just 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? Sure. So I think we were both trying to help the companies that we thought we could help.

31:55back to, you know, Tony thought that he could help Zappos, and he was willing to incubate the company and, you know, in the loft and venture frogs incubator. And then I had long standing relationship with Hadi Partovie and Ali Partovie. And so Hadi was one of the founders of Tell Me, and he was telling me how much he was, they were spending. And I'm like, Wait, you raised $265 million and you're burning $60 million a year. That sounds crazy for a zero revenue company. Meanwhile, the apples can't raise any money. It was like night and day, and like, well, is that supposed to count?

32:29And whatever. Tony, just grow the business. Don't spend it. Don't spend any money. Just like it is today. Just grow it at break even. 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'm actually pretty sure with a $60 million loss, you can narrow that to something lower than that. You can add value that way. And Tony, and Tony really like the notion of trying to figure out to take a business from commodity business 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 tell me, I just thought my financial skills were going to be valued. Tell me it turned out to be one of the first SaaS computing cloud computing companies. It just wasn't. We had to build an ARM cloud. And we turned that company from

33:25Not having any revenue, having too many people, having going through two, 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. That may get very hard to work. So pivoted to the enterprise business, had to sort of change the mindset of the company. Mike McHugh did a great job sort of.

33:52shifting 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 football. I didn't realize he was a tell me. Yeah. 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.

34:18Shortly after you joined Ray, 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 thought it was like probably should take the meeting or be cool to see if there's some partnership that we could do together. We weren't thinking that he was coming down to...

34:41by the company at all. So you brought back to pizza, you brought two pizzas to the meeting, right? Well, he's famously known for his two pizza teams, so we thought we'd bring two pizzas. Funny enough, nobody, I don't think anybody ate the pizza. It wasn't that kind of you. It wasn't, yeah, it wasn't a 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 one.

35:11The suppliers, the shoe manufacturers, were pretty scared of Amazon, right? Because they were worried that Amazon would discount their merchandise below MSRVD. They just go back, like, back then, they were scared of anybody in the internet. They're not scared in the way that you're thinking about, like, these people are going to be dominant. They're going to take our business. They were scared because they thought all internet businesses were fly-by-night businesses. And consumers were never going to get your business. Yeah. They're like, consumers would never buy shoes on the internet. We need a shoe salesman. It's like the Silk Road. Yeah. He has shoes salesmen to 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.

35:50They don't really want, I'm like, okay, whatever. So, as you know, originally the idea for Zappos was to be completely dropshed. And over time, just to get even some of these brands to sell to us, we had to get more, get inventory. We had to buy the inventory. So part of, I was gonna ask about that. See, when you started it with dropships, so the manufacturers would send the shoes directly to the customers. You wouldn't have to take inventory. You convert to a retailer model.

36:16Part 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 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 consumer. The boxes were not branded. They didn't have exact inventory because that's not actually as important to when you're selling your sort of distributing to a store.

36:44So 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 it was just...

37:07getting there truly 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 I was just buying events for. 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? I 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 that we hit it 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 is rightful, which is like partnerships don't tend to work when you have just like hugely disparate sizes of companies. And so we went on our way. And I don't think we were thinking that they would

38:01We always thought they were going to come after us. I wasn't thinking that they would immediately, well, in a few years, launch endless outcome. Yeah, I think so. It was the next year they launched NS.com, which is basically a clone of Tappos. They've been $30 million developing it.

38:18And when they launch, it has free overnight shipping, 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 to the space and killing your economics. How did you react to that? Well, the only way you can react is like figure out what you want to match that and how you differentiate against that. So those are the two conversations.

38:45We had fortunately figured out we had been operating shipping along the way. So over the years, we had sort of gotten people from on average five day delivery would 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, you know, for that time, it was a big dollar difference shift where go from profitable to just break even again. And so it was a big like decision to do that. And we were still focused on making sure we had the largest selection. We had the best tender 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 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

39:40They said and by just not thought up 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 Like okay, well, if you're gonna discount before the season ends we're gonna not let you access to more right so So Amazon is very clever. I thought this was very clever. It's like, instead of discounting the shoe, they said minus $5 for or $5 back for overnight shipping. We'll pay you to send it to you overnight. I'm like, that's really clever. Coming to prime some scripts in the next year. Wow. So despite all this, I'm wondering, you guys continued to grow in 2007. You did 840 million revenue.

40:27Wasn't there an element of like, I'm thinking of, you know, when Facebook, Clone Snapchat and Released Poke and it was like the best thing that ever happened to Snapchat? Like, did Amazon do category development for you? Like, did you see, I'm sure they were spending a lot of marketing. Did you see any bleed over of that into Sappos? I think when you're in a grow, 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 mass competition, we weren't losing, we didn't feel like we were losing our loyal customers to Zappos, but 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 the 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

41:21You'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 they're you're one of many you can still be a valuable business So that happens you guys are both growing through kind of O5 DOE then financial crisis. 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.

41:57glimpses of the slowdown happening the year before the financial crisis. And looking back, it's easier to say that back then obviously wouldn'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, you know, could see it, I think. Anyway, so.

42:25Financial crisis was interesting because our business is still growing. I think we had a hundred million online credit of which we're only using 30 or 40 million of it. It wasn't like we're overextended. So you didn't bust your cover notes on the credit line? No, but the banks couldn't post the interesting money. They're like we have this contract is like well, we're going to we've been told to like we have a liquidity crunch. We need to like We're all black, some of the liquidity, and that's a little disappointing. Wow. Yeah, I mean, that's not how lines of credit work. Well, you should read all the terms. Yeah, right. One, it's not your money. 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 they had, it had been agreed upon verbally, but

43:20the extension went from shoes to handbags, but not all the way to the parallels. They started saying, well, we're not going to lend against the parallel. There are ways for them to sort of get out of the contract. It was also what was more painful was conversation with employees. Some of them had lost their home and Vegas was particularly hard hit by housing crisis. Housing crisis fell 50% or more.

43:49some SMS events. But 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. And I thought I had a big weight running a business. So I mean, the conversations were obviously like, we love.

44:10running 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 ten years. Some people needed liquidity. I had a senior member of the team needing to sell his Zappostock at a fairly large discount during that time just to be able to post his mortgage payment.

44:38And I was like, what do you mean? I thought you were renting. Well, I am renting, but the landlord is going to lose this house. So I don't want to move. I don't just want my family 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 probably 25% of the value that you would get.

45:07If you just wait this out, he's like, well, I mean, the cash now. And so those kind of types of conversations are much harder. And so we were thinking about what's the right thing for all shareholders. And look, I mean, we can always like think about like, if that person then public, you know, gone public because it can build a big enough business, what it would be value today and it's not.

45:31Now, when I left the businesses for $1.6 billion in gross sales, I don't know what the numbers are today. I'm sure it's well north of that. When I left it was profitable. 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. I wouldn't be here doing what I love to do. When deal happens, it's announced summer of 2009.

45:58Amazon's gonna 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, so that was one success as many fathers. Yeah. Many people claim to have been the person who knew like, but you were negotiating the deal, right? I negotiated the stock boy. Like Tony, Tony was like pushed, says he pushed for stock. Like more, says he pushed for stock. You know what? Actually, everybody pushed for stock because we knew that coming out of a financial crisis, Everybody stuck was depreciation undervalued, right? I think Amazon was trading like 50 or 60 bucks a share at this point. It was trading at, now you're, the day close, it was trading at 118. Okay. So the stock price today is more than 10 times what. But who could remember, you know? Who could remember exactly what it was trading? I was 118 at 23 cents. I think something to that effect. Oh my goodness. And so it started with all cash because Amazon had not done many

46:55transactions with stock and we said we won't do this. We're happy with the price. We just won't do this deal on since stock. It should like in corporate finance, it shouldn't matter, right? Because you can the acquirer can decide to give stock and buy back the stock, the acquirer, you know, so it shouldn't matter to the acquirer. It doesn't quite. It does matter to the company because all stock transactions are tax deferred because you don't pay taxes until you sell the stock.

47:25whereas 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 didn't, half and half. So in my view, in mergers, I think a choir should be more lenient about doing stop transactions because it shouldn't be any different for them unless you have a view of the value of your own stock, quit sappers from the market. But you can always buy back, sell it. That's true. That's true.

48:03One thing that we'll move on to acquisition category, but but I'm really curious I mean, you did this and it was announced from day one. There's this amazing video. Well, it's so incredible. It is the best. This is so incredible. Vezus records a video to all Dappos 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.

48:26It's 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 over simplifying everything being like salt of the earth like I'm just Jeff and my jeans and You know what not even a wayport like you know the paper easels that you flip and he writes in marker the four main lessons he learned at Amazon Anyway, but the bonus the when it's announced from day one Zappas is gonna remain fully independent be a holy on subsidiary That was pretty novel for the time I mean, now, like, this is the playbook that Facebook runs and others with acquisitions. How did those discussions go? Yeah, I think Amazon has always been pressing it on this front. It wasn't the first acquisition that they'd done that was like this. I think Alexa was less dependent. So it would be an audible. And so we weren't the first acquisition that there are obviously situations when you acquired.

49:21the company, and you want it integrated, I think it makes sense when it's an aqua hire, makes sense when it's a feature as part of a overall product somewhere. When you have a whole business, I think it really does make sense when it independently, unless you can find a good reason why you should integrate. Centralization has its costs. I think decentralization has its costs too, but you're more likely to...

49:47In my opinion, decentralized organizations are more innovative because they don't have to like bubble everything while there's not a central decision maker. So decentralized ecosystems are more innovative. And you see, if you want to have comparison, it'd be like a lot of company versus the startup ecosystem.

50:03That'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. Yeah. And so the conversations are pretty natural. The questions were about what kind of what's the management structure and so there was a manufacturer structure was basically our board at Zappos. We replaced by a board that was now full. And Amazon board. Yeah. And Amazon board. Cool.

50:31and I think it still exists that way today. I'm curious, you know, 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 a 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 Zappos DNA around Amazon and why they do it?

51:00You know, you should ask them, but in the line, there's a line in the video that you were referencing where Jeff Bezos said, I get, I get tingly, me, me week, when I see customer obsessed companies, and he really understood that, like, Zappos was really customer obsessed. And 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 that's apples versus Amazon, but both companies, I think, learned a lot from each other, even during the due diligence process of how we think about things. And so there's a surprise that we didn't, 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

51:50call situation is like but you could look at the efficiency of the team and when you talk about the efficiency of the team it's not you like stay 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're 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 collective intelligence of the team and trying to make better decisions. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

52:37Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real. Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

53:01Yup, AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible, and secure in one place. And service now can do this.

53:21because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. Service now already runs more than 100 billion.

53:39workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

54:01So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So the next thing we do on the show is that it's in category and we assign category to the acquisition. And to me, it's pretty obvious. This is a business line that Amazon acquired. Keep 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 the when I wanted to make them. The cultures, even though it's, you know, as Brad Stone said, and you quoted it like it's 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 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 a conserved success.

54:56I don't think it was an easy acquisition at the time because it was the largest acquisition at the time now. It's 10 years later, just for inflation. Numbers only, acquisitions and numbers only get larger, right? 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, but how did we get so good at getting the right product and the right quantities at the right times?

55:25with less than stellar technology. We were using AI, right? Yeah, were you guys using Kiva or? We were also using Kiva. Okay. And then with how Kiva got on the radar screen in Amazon, right? Kiva was, it was funny. So I'll tie this all the way back to Sequoia. We're a lock boy to set me in a business plan of Kiva. Asked me for my opinion. And Kiva came from Web-N, which my comrades was on the board. My comrades was on the board of Web-N, Web-N did not work well.

55:54working out well. They had been using, they had been using, oh, if you wanted to go all the way back, they had been using a carousel system wanting 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. And then also by Michael Marks, who obviously found her and CEO of FlexTronics. And so he means a little bit about operations.

56:24And I was like, OK, all right, well, we need some different. Anyway, so that happened. And so Mick, who was at WebVend, noticed how inefficient most of the systems were. So he went on to create Kiva systems. I had, I didn't know that connection. So thanks for reminding me, but at the time. So I got the business plan from Kiva, from Brula, asking me what I thought about it. It was like, oh, interesting idea. But probably too hard to rip out a whole set up.

56:51distribution center, maybe for a new distribution center, we might use it, but not for one already set up when I rip out a racking, et cetera, et cetera. 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 diligence 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, 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 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 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.

57:48a few years later after they've served us, they bought the car. 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. They have like hundreds, maybe on the order of 200,000 or 300,000 Kiva robots. Wow. That's awesome. All thanks to Zephyz.

58:10Well, that's just that. I mean, tempers also use them. And so they acquired diapers.com. So it was it was it was it was more and more evidence that this was going to work. So there was technology that there was technology that they 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. Like Amazon's in house shoe businesses is according to all these external research reports, you know, really crushing it. So why not Poor all the investment that they're putting into their own in-house thing in the Zappos and and you know were they for a time and have have 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 site or on Zappos site has been growing really well for both and so it's not an either or I think if if you sort of used

59:01Our way of like are 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 Your biggest competitor at the same time if you can pull that off and they did I'm curious kind of on that front Did anybody else ever seriously to buy the company beside Amazon? Would you guys have sold to anyone else? I don't think anybody was anything anybody else was serious I don't think we would assault anyone else. And it's hard to imagine anyone else would have 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 yeah, 2008-2009. I think today, there are plenty of competitors. So, like, you know, could apples have remained independent, gone public, and then bought by someone else, it's all possible.

59:58I try not to think about like all the possibilities because you only have one life to live. You get to rewind. You're a little busy on other stuff these days. You get to maybe test your life, so get to move on. That's okay. We'll speculate widely about it on this show instead. Tech memes, 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 this is great tidbit about the initial phone call from Nick Tatoni sort of pitching about um shoesite.com and Tony almost deleted it but decided not to Even though it's sort of thought is a bad idea, 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 really powerful to big companies get created in big markets.

1:01:05It 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. The 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 around Argentina. The people around the company.

1:01:32it 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. No, on day one, do you have all those things? No, you don't. But you have to envision all of this, and why will this be an interesting company in five, 10, 15 years? And if 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 thing that I was going to put out there, that I thought we were going to cover a long way, but I actually don't think we did, is,

1:02:21Well, Ben, you mentioned a little bit, but just how much this story reminds me of the StitchFix story as well. And even down to, you guys hired, it was the first hire in Zappos, Fred, Mosler, and it reminds me of, you know, one of the first hires at StitchFix was Mike Smith from Walmart. You're bringing that DNA from the industry into understanding, you know, to this new paradigm of the industry, but from the old world, to it was, you can bridge that gap. But one of the things we talked about on the StitchFix episode was this idea and 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 voice now, right? Because who's going to buy shoes online? Like, it seems like a dumb idea. Just like, Stitchfix, you know, 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, like, how much you guys thought about that along the way. Yeah, so Katrina has done an extraordinary job at Stitchfix, so I think Kudos to her.

1:03:17going back to the comment you made about, right, MB, 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 waste mail. And at the same time, the reason he almost deleted, didn't delete it was Alfred, we had a conversation. It sounds like a dumb idea. But nobody else is going to do this if they get money in the account. So once we're going to be the only ones doing this dumb idea, 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, he knew that Nick could build a website. He was a webmaster. He designed websites. OK, check. We knew that there was a problem here.

1:04:16We didn't know about the market. He listed the market size, 40 billion, 5% or 2 billion, or 8000 on mail order. So what is the conclusion from those facts? Well, it's not that hard to extend that conclusion to be the internet should be bigger than that order. At least it's big. Yeah. At least it's big or bigger or many of orders and magnitude bigger. So if you believe that, then back to like you need to build a company, we have a founder with an innovative idea.

1:04:43you're missing a few pieces. So as you said, we went out and hired Nick Swimmer because we're missing shoe experience. Tony or I could knew how to sort of, because of link exchange, drive traffic to a site. Got that check. We have a bunch of things to check, but we didn't have the shoe experience. Originally, the original idea, we didn't need customer service experience or occupation because we're dropshipping that 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.

1:05:12I think that's what's so 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 Judging as if the pieces were together because if the pieces were together It would either be a public company or like you know, it's never gonna work. Yeah, you need to you need to not well You also you just need to have imagination. Yeah, you need to have imagination and you also need to make sure that's You can dream what the entrepreneur like we often sort of talk about like okay, can you see a world like this? This should the future be this way the founders we like backing like You know a D at house or Brian Chaskey 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 personal standpoint and they just feel like the world has solved that problem incorrectly. They just gotten that wrong and they're on mission to go change that

1:06:04And it 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 Sappos and the story, like actually another one I had in here was mission, you know, focus founded 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 the space was so focused on customer service that could really deliver, you know, well, happiness, the Tony Buzzet, you know, to customers. Yeah, I think that the before getting on to mission versus arsenary founders, I think the one thing that was like clear was that e-commerce was going to have was going to compete on price and was going to compete on selection. And those two things are hard for a startup to

1:07:00just compete on those two things because you don't have the bank role to compete on price. And on day one, you're not going to have the widest election. And so we needed another pillar. You could 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 Tony and I were pretty passionate about customer service. Well, I mentioned standpoint. You know, people asked us all the time, whether we back, you know, mission focused or mercenary.

1:07:30founders, I think best founders are kind of both. You know, they're not doing this 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 like, I mean, back to your days with pizza at Harvard, you know, Quincy House.

1:07:51There's an element of you got to be a hustler to get this done, right? Yeah, 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 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. And then I do think one of the themes that you have to do hard things that yield some protection, some modes.

1:08:20Things that are hard that are just people don't want to do and you know kudos to Amazon for building a network of warehouses. Nobody wants to build that wants to do that or network of server farms. If you were if you if you asked in 1999 whether you put $10,000 of your life savings in eBay or Amazon I bet you most people in 1999 would say eBay. There's this elegant no capital like capital light no distribution center is no inventory model. It was just connecting to you know, two people in the marketplace would take care of itself. Of course, people can chat with each other. And I'm not making fun of you, but they have lots of, they have lots of issues that they need with trust and safety. They have to solve that. They have to solve payments, micro payments, right? Like these are small payments. That's why they had to go about, you know, sort of develop their own. They tried developing their own. They acquired a bill point and PayPal. It was not an easy thing. But from an investor standpoint, investors seem to like these like high margin, like really like

1:09:18Easy to explain business models and at the same time some of them the hardest things to replicate are the hard things that people do to build a real mode around the business and Amazon builds real modes. Yep Well, that's a great great way to close out close out the regular section of the show. We're on degrading Alfred first. I want to do you want to participate in this? Yeah 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 it was 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

1:10:16you know, spending money on next and basically getting, you know, having a reverse acquisition happen where the company is reborn because of it. Or Instagram's another great example. Right. And then there's other ones where we're like, actually, that was a terrible use of capital. And then they're, it kind of gives us a way to understand basically, you know, given all the options on the table should they have done this.

1:10:44usually they land in the B to C range. So that's the process. Well, I'm going to take it first step. So 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 costs of 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 threat, expanding category by category the same way that Amazon had. We didn't talk on the show at all about how

1:11:33big it could have gotten from a category's perspective. But, you know, if I'm Amazon, that's one of the main fears is that someone becomes the everything store before I do.

1:11:44I 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. I think it's good. I'd go with B+. It's a tough bar to get an A on the show.

1:12:13It's hard to see this and not being a good use of capital for Amazon, like both for the reasons you were saying, but also like, you know, preparing for the show as a bunch of people have made analogies to it's almost being like a virtually athletic acquisition of, you know, allowing Dappos to keep doing what it was doing, free of all the financial constraints that had hampered you guys a long way. And very Amazon. This was obviously a hugely important category to the company and to Jeff Bezos to be able to enter that stop losing, estimates are Amazon lost to $150 million on Endless.com. Stop the believing 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 minus in my book.

1:13:10You'll come up from Alfred. I think I know too much information. We can move on. What do you have, Ben? Last week, I listened to Andrew Mason as a guest on recode decode with Kara Swisher, and it is always refreshing to hear that guy.

1:13:30on any form of media, especially in an interview format. So straight forward, so honest for listeners who don't know Andrew Mason is the founder of Groupon and 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 required. But there's so much revisionist history in our industry and Legend and lore they get started and you just never hear that sort of thing at Andrew's mouth It's mostly like no, we didn't know 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 a very it's just a refreshing take so I really enjoyed it and really enjoyed hearing about some of the new stuff he's up to

1:14:18Nice. 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, Carbouts end up, we find some way to relate them. Justin Obran published this great long piece on his blog called Google Maps, the Google Maps Mot. And he's a, I think, designer in the map space. I believe he worked for Apple Maps for a while. And it's just a piece of like all of the the culmination of all of the hard things that Google has done in Maps for the last 10 years. And I'll leave 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 the mode in a consumer business. I'll second that. That piece was incredible.

1:15:13That was and it's got these like great side by side comparisons and animated gifts where you can see like he's been taking the same screenshot year after year for like 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. It's just it's so cool. Even to just scroll through. I agree as well. That was a great piece. For me, I'm trying to.

1:15:37I'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 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. Kind of think about Albert Einstein as a physics genius, but he also loved playing in...

1:16:06playing music in the violin. And Franklin was, you know, his 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 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 like writes a book about Madam Curry, 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 a reliving year of trash compactor days. Yeah, Alfred, where can our guests find you on the internet? Oh, they can find me. I'm just my email is Lynn. It's a core cap.com. You can find me on the Sequoia website. It's a core cap.com. So it's where I hang out. Awesome. All right, listeners.

1:17:02Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to Statsig.com slash acquired to get started.

1:18:01Listeners, 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.