Timeline to exit – Zappos case study

By July 31, 2009Exits

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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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