Bijan Sabet

Did Sequoia force Zappos to sell?

There is a rumor swirling around that Sequoia forced Zappos to sell to Amazon.

I’ve received a bunch of emails on the subject from entrepreneurs. Can a VC force a sale?

Here’s my thoughts on this rumor and the idea of whether a VC can force a company sale.

Few scenarios to consider (I’m talking about forcing a sale, not blocking a sale):

1. Company raises a relatively small amount of capital and is making some modest or exceptional progress. In this case the VC doesn’t have a the ability to sell the company. They don’t control the board. Also, in a small company like this the founders are the franchise and the acquiring company isn’t going to want to buy a company if the founders aren’t happy.

2 Company raises a relatively small amount of capital and is making zero/negative progress. I dunno about this one either. I haven’t seen this one personally. But I can’t imagine the VCs and founders not agreeing. In any event, small amount of capital = founder control over the board and shares so its’ moot

3. Company raises a significant amount of capital and making little/zero/negative progress. Okay here’s is where it gets tricky. In this case the company is going to need more money. The VCs may be tapped out and there might be little/no interest in the market to funding the company. In this case there could be a way for the VCs to force a sale since a lot of money combined with little/zero progress means giving up control. But this isn’t the Zappos scenario. Zappos is growing fast and making/growing real profits ($40M/year in profits).

4. Company raises significant amount of capital and financially successfull. Okay, we’ve finally arrived. This is the Zappos scenario. Can a VC force a sale? I don’t know the board make up at Zappos so that’s not worth speculating upon.

Conceptually, Sequoia could have had a redemption right that they wanted to trigger — perhaps if this was from a 1999 fund and they needed liquidity (10 year fund life cycle). But first, I don’t know which fund this came from. Second, they probably could have gotten a waiver from their LPs if that was true and third, they could have gotten a buyout from a private equity firm. Again, I’m not sure this was even an issue but given all of those I don’t think a redemption right caused this.

But here’s the real clencher in my mind: watch the Bezos video about Zappos. He is sincerely and completely head over heels for the management team and with good reason. If they didn’t want to sell they would have made that clear to Bezos and the deal would have soured.

Zappos is successful financially and they didn’t need additional capital. The brand is amazing, the service is fantastic and the founders & management are critical to the business.

Obviously I’m not a Zappos insider and there could have been other things on. But I really can’t see how the VCs could forced a Zappos sale at this time.

And I agree with Howard’s tweet