Monthly Archives

July 2009

Timeline to exit – Zappos case study

By | Exits | 9 Comments


As you probably saw Amazon acquired shoe e-tailer Zappos last week in a mostly stock deal worth around $900m.  It was a very interesting deal for a number of reasons – the big ticket price, the cash to founders and employees, Zappos’ unique culture, and Amazon’s stated intention to keep the business as a separate stand alone unit – on which there has been more than adequate commentary elsewhere.  I’m instead going to focus on the characteristics of the exit process as revealed in the S4 Zappos filed with the SEC a couple of days ago.

First some time periods:

  • Time from company start to deal closed: 10 years
  • Time from first Sequoia investment to deal closed: 4 years 9 months
  • Time from first Amazon contact to deal closed: 3 years 11 months
  • Time from when talks started to heat up to signing of termsheet: 4 months
  • Time from signing of termsheet to announcement of the deal (and I assume signature of a sale and purchase agreement): 1 month

The main takeaway here is that Amazon and Zappos have known each other for a long time.  In the majority, and probably vast majority, of big deals this is the case.  When evaluating the exit possibilities for startups it is always tempting to dream about the possibility of a white knight coming in with a knock out offer, and those deals do happen, but the reality is that the acquirer is overwhelmingly likely to be someone you already know well.

There is a good reason for that too – making acquisitions is a risky business, and many, if not most, turn out to be failures, and acquiring a business that you have known for sometime reduces that risk.  Moreover for most startups it takes a while to really get to understand them and appreciate their charms.

Building relationships with potential acquirers over time therefore makes sense, even if it doesn’t drive revenue in the short term.  Typically there are two aspects to that – building the brand in the financial community and old fashioned business development.

Also of interest is that:

  • Zappos formally appointed Morgan Stanley as advisors in April, two months after talks had started to heat up in February
  • Terms were in discussion for around 10 days before a formal offer was made
  • The exclusivity letter was signed eight days after the termsheet was delivered

There is (much) more detail on the timeline on PEHub.

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Zuckerberg on the merit of cash out deals

By | Startup general interest, Venture Capital | 8 Comments
Image representing Mark Zuckerberg as depicted...

Image via CrunchBase

At DFJ Esprit some of our biggest successes have come from cash out deals where the founders have taken some money off the table at the same time as we have invested to fund growth.  It worked very well for us at BuyAt and more recently at WAYN I believe it has had a positive impact on the dynamics around the board table and the prospects for the business. 

Not all VCs think cash out deals are a good idea though, with many believing that if entrepreneurs take money out of the business they might lose motivation, and that it is much wiser ‘hold their feet to the fire’.

At the weekend I came across the following quote from an interview with Zuckerberg explaining why he is allowing employees to sell some of their shares to one of Facebook’s investors.  It sums up the argument nicely:

One of your investors is buying shares from employees—letting them cash out early. I’ve heard you were not crazy about this. Is that true?
No, I’m really happy that people have a chance to do this. Back in the early days I had the chance during one of our funding rounds to get a bit of liquidity. It meant that in making decisions about Facebook I didn’t have to worry about the short term. I could just work on making Facebook as good as possible, and optimize it for 10 to 20 years out. To the extent that other people have the chance to do that now, it would be a healthy thing.

Perhaps this isn’t surprising because as I wrote last year the guys at Founders Fund, one of the early investors in Facebook have a similar opinion.

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Apple’s rejection of Google Voice on the iPhone doesn’t bode well for them

By | Apple, Mobile | 5 Comments


On the way in this morning I was thinking about Apple’s rejection of the Google Voice iPhone application, whether they will approve Spotify’s app (I really hope so), what it all means for the ecosystem and whether I should write a blog post on the topic.  Then I saw the following on Techdirt which sums up my thoughts perfectly:

As we wait to hear if Spotify’s mobile app gets approved (I heard a rumor that it was, but have seen no proof yet), we hear of another questionable Apple iPhone rejection: the Google Voice iPhone app has been forbidden from the iPhone, though the reasons aren’t entirely clear. Still, it does show that Apple doesn’t care who you are, or how big a name. If it doesn’t like your app, too bad. Once again, this seems like an argument for why more open solutions will win out in the end. Not only do users not have to worry about arbitrary rejections like this, but innovation will happen much faster on open platforms where each innovation doesn’t need to be approved by a mercurial secret cabal.

In the long run Apple will not win out if it continues to put its partners and own interests ahead of its customers interests.

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Enterprise 2.0 and the economics of abundance

By | Enterprise2.0 | 2 Comments

I haven’t written much about Enterprise 2.0 recently, perhaps because the slow rate of adoption has stemmed the flow of interesting startups in this area, but I remain convinced that it’s time will come.  That conviction was strengthened this morning when reading the chapter on the economics of abundance in Anderson’s Free.

Early in the chapter he describes how he and his colleagues used to receive regular emails from their IT department asking them to delete unnecessary files from shared drives, and how that changed with the realisation that storage is now cheap and abundant and it therefore no longer makes sense to ask people to spend their (scarce) time deleting files.  Critically, this realisation took a long time to dawn on them because the IT department was in the happy world of managing measurable storage costs and stepping outside that to thinking about people’s time was a move into the unknown.

So it is with enterprise 2.0.  Historically the scarce resource has been server space and the resources of the IT team who had to deploy and support enterprise apps.  In the world of enterprise 2.0 both those scarcities disappear.  The apps are hosted outside the enterprise, the employee takes care of deployment (in her browser) and support is handled directly by the app provider.

A significant part of the raison d’etre for IT departments is therefore under threat and it is little surprise that they resist the trend towards enterprise 2.0.

The chart below is copied from Anderson’s book and describes five changes in the optimal organisational model brought about by the shift from scarce to abundant computing.  Four of five apply directly to enterprise IT, and all are an anathema to most CIOs.

  Scarcity Abundance
Rules "Everything is forbidden unless it is permitted" "Everything is permitted unless it is forbidden"
Social model Peternalism ("we know what’s best") Egalitarianism ("you know what’s best")
Profit plan Business model We’ll figure it out
Decision process Top-down Bottom-up
Management style Command and control Out of control

Any cultural change is slow happen, and on this scale particularly so, which explains the slow roll-out of enterprise 2.0.  This also suggests that maybe the way forward in the short term is to target companies too small to have strong IT departments – a strategy employed by Basecamp, one of the most successful companies in this space.

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Making heavy users pay – the optimum freemium model for news?

By | Business models, Content, free | 9 Comments


Having an attractive free offering and building a large non-paying user base as first steps to building a large paying user base is a theme that has been running through a number of Fred Wilson’s posts recently – and so it was again at the weekend when he wrote Monetize The Audience, Not The Content.

I’m going to pick out two quick quotes.

First – on the absurdity of putting only some of the content behind a paywall:

The worst examples of subscription services are those that break the content up into free and paid. It’s as if some content is worth more than other content.

And second, on the merit of making the whole site open and asking only heavy users to pay (a model the FT has had for a while):

[The FT] model recognizes a few fundamental facts about the internet. First, you need to make your content available for search engines and social media linking. That drives as much as half or more of the visits these days. And if you have an ad model at all, and most newspapers do, then you need those visits and that audience.

Its also true that the ‘drive by’ visits will bring new audiences, some of whom will become loyal and ultimately paid audience members.

Most newspapers are struggling with profitability online and thinking about introducing charging, with many proprietors musing publicly about the question.  One of the obstacles is the fear that the first news site to crack and begin charging will haemorrhage traffic to those that don’t  – adopting the FT’s model doesn’t carry that risk.


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Twitter Weekly Updates for 2009-07-26

By | Weekly Twitter digest | One Comment

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Information abundance creates attention scarcity

By | Content, Venture Capital | 6 Comments


Reading Chris Anderson’s Free today I came across the following quote from social scientist Herbert Simon:

In an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes.  What information consumes is rather obvious: it consumes the attention of its recipients.  Hence a wealth of information creates a poverty of attention.

Which reminded me of a conversation I had recently with Jof Arnold, founder of GymFu, on Facebook the other day (can’t find it though, anyone know how to do that?) where we discussed the information overload problem and how none of the tools beloved of much of the tech early adopter crowd haven’t made it to the mainstream (e.g. RSS readers).  I’m not including Google because it helps you find information rather than process information that comes at you.

Jof made the good point that the mainstream consumer doesn’t perceive herself as having an information overload problem, and since then I have been wondering whether my instinct that information management tools will be a fruitful area going forward is sound.

The quote above (which was more than a little prescient when written in 1971) got me thinking again, and on reflection it is kind of obvious that everyone will be dealing with the information overload problem before too much longer, and the reason it isn’t mainstream yet is because the ubiquitous web is still in it’s infancy. 

The web has only been truly usable for less than a decade and before the mainstream starts adopting tools that help manage information overload it needs to collectively go through a quite deep seated behavioural change of both embracing the services available so that the information overload becomes acute and then admitting to a problem.  Right now it seems to me that a lot of people are in a denial phase – denying that tools like Facebook and Twitter are useful precisely because they are afraid of the information overload problem using them might create.  E.g. they avoid Facebook because they don’t want all their old friends contacting them, or avoiding Twitter because there is too much drivel.

I think the mainstream will end up developing an information overload problem as the twin forces of digital natives growing up and internet devices getting literally everywhere (from smartphones in the pocket to netbooks all around the house) drive nearly everyone towards much greater use of the web.

All of which leaves me thinking that ‘tools that help us get the most out of our attention’ will be an interesting invest theme over the next few years, although possibly more in the medium term than short term.

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Pitch me like I’m your best friend

By | Uncategorized | 6 Comments

Yesterday Brad Feld quoted Jeffrey Kalmikoff of Threadless saying the following on Techstars:

give me your pitch, but give it to me as if you are giving it to your best friend

and I liked it so much I had to repeat it here.

I like it both because that’s how I like to be pitched by entrepreneurs and because it is sound advice for people who are pitching.  To break it down a little, if you pitching your best friend you would:

  • Give it her straight
  • Keep it interesting
  • Deliver it like a conversation rather than like a firehose
  • Try to inject some humour
  • Do as much listening as talking
  • Focus on the areas that your friend wants to hear about
  • Adjust the length of the pitch to the level of interest

Open versus closed and the iPhone app store

By | Business models, iPhone | 8 Comments

I am a big believer that in the long run open always wins out over closed, and that is an argument which at the theoretical level that rarely gets much pushback these days.  At the practical level it is often different though, and Mike Masnick has a good post up on Techdirt that goes a long way to explaining why, focusing on the case of Apple’s iPhone app store:

I’ve been getting into some interesting discussions with people lately concerning open vs. closed platforms — especially in light of the supposed “success” of Apple’s iPhone app store, which is a very closed platform. And the point that I’ve tried to make is that you have to understand the trajectories of these things over time. At any given time, it’s never difficult to find a closed platform that is successful. In fact, I’d argue that if you are reshaping a market, often it helps to have a closed platform initially to drive that market in a useful direction — though, this can really only be accomplished by someone visionary (Steve Jobs certainly counts). The question is how does this play out long term. And the answer is that you can’t stay closed too long, or open solutions will catch up and surpass you. We’ve seen this pattern multiples times (closed AOL –> open internet?).

Mike goes on to point out that open solutions are often substandard to closed ones, at least in their initial stages, and also that the point when momentum shifts is often a subtle one that participants in the closed solution ecosystem can be slow to recognise.

Focusing more squarely on the iPhone and app store – it is a relatively closed solution (all content has to be approved by Apple) but one that is a massive leap forward from anything available previously, but it is not a perfect solution, particularly not from the perspective of developers.  I’ve written about this before, giving some anecdotal data on the frustrations that Apple’s developer partners feel and wondering whether Apple’s culture is an inhibitor to them being fully open and working well with third parties, and now this post on gives more colour to the topic, the whole piece is well worth a read, but here are two highlights:

iTunes Connect, the interface through which developers submit and manage apps, is extremely buggy and frequently mishandles important operations. On multiple occasions, it has posted screenshots and description text from an in-review update submission to the live app page, revealing upcoming features to competitors, blowing press exclusives, and causing my customers to email me angrily asking where the features are and accusing me of bait-and-switch.


Trying to communicate with Apple is like talking to a brick wall. The ADC phone reps can’t do anything, emails are rarely answered, and nearly every response that actually gets through just tells you to keep filing duplicate bug reports (that rarely get answered) until the problem goes away, which may never happen.

The simple problem is that in a closed ecosystem there isn’t enough incentive for Apple to fix these problems, or as the post on has it “Apple thinks this is good enough”.  I’m a strong believer that at some point an alternative will emerge that is good enough on one narrow dimension to take a corner of the market and then it will expand from there, and others will arrive, and that will force the market to become open.

At this point though the Apple solution is still far superior to anything else out there, and I don’t think we have yet reached the point of momentum shift, which makes it difficult to see past the iPhone and the app store.  As with all areas of business, there is no certainty, but given all of the above if I was running a startup in this space I would avoid coupling myself too tightly to the success of the iPhone and app store.