Timeline to exit – Zappos case study

By July 31, 2009Exits


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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  • David Jouarisse

    Same good old recipe… A lot of what you are saying reminds me of Kelkoo's Exit which is still in the top 3 of the biggest Exits in Europe in the media-internet area: previous relationships if not “flirts” with Yahoo, MSN and Google, selecting a good corporate finance company… Catching this ball at the second bounce:), I'd like to share further insights..

    Beyond the usual suspects (between which good initial “stock picking” (cf. previous post of mine on your website), a “dream team” and Great market segment..), at least three conditions should be re-united to hit such successful exits, which also define the optimal “time-to-sell”:
    1- Strong historical growth
    2- Minimum critical size both in revenues – and bottom line
    3- Still strong growth perspectives: the g factor… before the wooah exit ;-))

    This is why in my opinion VC financings in the range of less than 2m€ do not make sense in the way that they do not allow to reach those 3 conditions for historical or future shareholders, and in the end for LPs asking 3-4 times the money over a 4 years average time frame. Below such level of performance (~33% p.a. on average), VCs cannot fulfill their goal to belong to the “tiers one VC” category, and beyond that level of performance lies the “HomeRun” /1st quartile VC category;-)

    European VC under-performs US VC in particular for that “cultural” reason (more or less shared) of micro-financings if not “powdering financing”… The only case it may make sense deals with seed stage financing, in companies starting within a small domestic market, with low talent-labor cost?… Other case is “micro-financing” in developing countries or “social VC” in developed countries, but this is a whole other matter than the one dealing with big Exits, targeting low economic performance along with social benefits..

    I have seen in Northen Europe a lot of companies getting a few mSEK/DKK/NOK while the same companies in the same business get the same figure but rather in m£, m€ or m$ in the UK, France, and you can even ad up a 0 behind that figure for US financings… How can such companies compete then, or reach “tiers one” / “homerun” Exit levels ?… Comparing exits from Sarenza to Zappos is the same story than to compare Glowria (to not quote any one else:)) to Netflix, and soon Dailymotion to Youtube ?…

    So a 4th criteria might be to bear in mind that “size does matter”, goes along with speed; even from the initial financing, the bigger the financing, the stronger growth kick, the faster you reach that minimum critical size, preempt your market over laggard big corps &other me-toos, and keep the business running on that nicely bent steady growth curve…

    To finish, on the other extreme, I have also too much financing lowering ingenuity, hard work and drive, and generate lower efficiency and profitability… so there's a right balance to find to preserve every one's interest well aligned on that road of successful exits…

    Also to be noted, while speaking of well aligned interest, that certain shareholder agreements badly set up favor to go for smallER exit levels when privileged investors earn more on a smallER exits than on a large one!…..

  • Thanks for the insightful comment David

  • Thanks for the insightful comment David

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