Season 2, Episode 1: Zappos (with Alfred Lin‪)‬

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest Alfred Lin of Sequoia Capital, delve into the story of Zappos, an e-commerce company renowned for its exceptional customer service. Lin, former COO and Chairman of Zappos, shares insights from his time at the company, highlighting the strategic decisions that led to its success, including a focus on customer obsession and the innovative use of technology like Kiva robots in their fulfillment centers. The discussion also touches on Zappos' acquisition by Amazon for $1.2 billion, a move that allowed Zappos to maintain its unique culture and independence while benefiting from Amazon's resources. Lin's perspective sheds light on the importance of marrying a visionary founder with a large market opportunity and the value of doing "hard things" to create a competitive moat.

• Podcast hosts A (Ben Gilbert) and B (David Rosenthal) introduce the show and provide a disclaimer about audio quality issues in the second half of the episode.
• They apologize for the audio quality but emphasize the value of the interview content.

"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." "However, the interview content is just awesome, so we thought it'd be a shame not to share it with all of you."

• The hosts acknowledge the importance of audio quality and considered not releasing the episode.
• They ultimately decided to share the episode due to the excellent content of the interview.

• Hosts A and B introduce themselves and the show, Acquired, which covers technology, acquisitions, and IPOs.
• Guest C (Alfred Lennon) is introduced as a special participant in the episode.

"Welcome to season two, episode one of Acquired, the show about technology, acquisitions, and IPOs." "And I'm Alfred Lennon."

• The hosts and guest exchange greetings and express excitement about the episode's content.
• The episode focuses on Zappos, and Alfred Lennon is identified as someone who can provide detailed insights into the company.

• Alfred Lin is a VC at Sequoia Capital and was the chairman and COO of Zappos prior to its acquisition by Amazon.
• The hosts discuss Alfred's college days with Tony Hsieh, including a humorous anecdote about being the "human trash compactor of pizza."

"Alfred is a VC at Sequoia Capital, where he is the co-head of their US venture business and represents Sequoia on the boards of many great companies such as Airbnb, Houzz, Doordash, Zipline, and many others." "But today we're going to talk about his time before Sequoia, when he was the chairman and COO of Zappos."

• Alfred's role at Zappos and his relationship with Tony Hsieh are highlighted as significant to the episode's theme.
• The discussion sets the stage for exploring Alfred's experiences and the history of Zappos.

• The founder of Zappos was not Tony Hsieh but Nick Swinmurn, who started the company after a frustrating experience trying to find a specific pair of shoes.
• In 1999, Swinmurn left his job as a webmaster to create Zappos, an online shoe retailer.

"The founder of Zappos was Nick Swinmurn. He had started the company because he was looking for a particular pair of shoes." "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."

• Nick Swinmurn's personal shopping experience led to the creation of Zappos.
• The story of Zappos' founding emphasizes the impact of individual experiences on entrepreneurial ventures.

• Hosts discuss Statsig, a company specializing in data-driven product decisions and experimentation, as a sponsor.
• Statsig's growth, capabilities, and customer base are highlighted, including processing 130 billion events per day.

"Statsig now processes about 130 billion events per day." "They then take all the data from them, run huge statistical jobs across the whole corpus to compute the experiment results that their customers are running."

• The hosts provide a detailed overview of Statsig's services and success.
• The advertisement showcases the company's scale and the breadth of its operations.

• Hosts discuss common misconceptions about Zappos and Tony Hsieh, including the origin of the company and Hsieh's involvement.

"When most people think of Zappos, they probably imagine it was started by a guy named Tony Hsieh 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." "Yeah, that's right. That's not quite accurate."

• The dialogue corrects misconceptions and provides accurate information about Zappos' beginnings.
• The exchange emphasizes the importance of understanding the true history behind well-known companies.

• The hosts and Alfred Lin discuss the early business ventures at Harvard, including the pizza business that brought Alfred, Tony Hsieh, and Sanjay Madan together.
• The conversation transitions to the creation of Link Exchange, an early Internet company founded by Tony Hsieh and Sanjay Madan.

"So you were an undergrad, and you had two friends, Tony Hsieh and Sanjay Madan. And you guys decided you would develop a business together." "Link Exchange came about as a fluke because when they started, Tony and Sanjay were bored at Oracle."

• The story of the pizza business and Link Exchange provides context for the entrepreneurial spirit of Alfred and his colleagues.
• Link Exchange's origin story is tied to the early days of the Internet and the founders' desire to create interconnected websites.

• After selling Link Exchange to Microsoft, Alfred Lin and Tony Hsieh started Venture Frogs, an investment fund.
• The fund focused on concentrated investments in Internet companies, with 27 investments made over one year.

"We raised $27 million from friends and family of Link Exchange after the liquidity event." "We ended up making 27 investments, but it was over one year."

• The investment strategy of Venture Frogs is discussed, including the pace and focus of their investments.
• The conversation sheds light on the early days of venture capital for Internet startups.

• Alfred Lin reflects on his experiences with Sequoia Capital and Michael Moritz, who mentored him and served as interim CEO of Link Exchange.
• The discussion highlights Sequoia's approach to partnering with founders and the hands-on involvement in portfolio companies.

"I developed a great relationship with Sequoia and Sequoia partners. I know how they operate." "The success of Sequoia has a lot to do with partnering with the founders and the management teams of their companies."

• Alfred's reflections provide insight into the venture capital industry and the role of mentorship.
• The narrative underscores the importance of investor-founder relationships in the success of startups.

• Alfred Lin and Tony Hsieh evaluated their Venture Frogs portfolio, identifying companies that could benefit from their involvement, including Zappos.
• They decided to focus their efforts on Zappos and Tellme Networks, believing they could make a significant impact.

"We looked at the portfolio and there were basically three sets of companies." "There were two companies we felt like if we helped, we could make a lot of impact in those companies. And those two companies were Tellme Networks and Zappos."

• The strategy for managing the Venture Frogs portfolio is discussed, with an emphasis on impactful involvement.
• The decision to focus on Zappos is a key moment in the company's history and Alfred's career.

• Discusses the criteria for assessing whether a business is investable.
• Features, products, and companies are distinct categories for potential investment.
• A feature may be useful but does not constitute a standalone business.
• A business must be more than a feature to attract meaningful investment and user base.
• Companies that are resistant to change or advice are difficult to influence and invest in.
• Incorrect assumptions about the business or business model can lead to investment failures.
• Some businesses may have a great product and team but struggle to raise capital.

"Sometimes you have a feature, it's not a product, or you have a product, but it's not a company."

• This quote highlights the different levels of business development and the importance of distinguishing between a feature, a product, and a company when considering investment.

"And there are a set of, like, I think, founders who are resistant to change, and so they don't really want our advice."

• Indicates the challenge of investing in startups whose founders are not open to guidance or adapting their business model.

"And then unfortunately, there is 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."

• Describes a scenario where a startup has all the right elements but still struggles to secure funding, which is crucial for growth.

• Zappos' growth trajectory and funding history are examined.
• The company experienced significant revenue growth despite the "nuclear winter" for e-commerce funding.
• Zappos was unique in being breakeven early on, unlike many e-commerce companies.
• The lack of funding forced Zappos to be innovative in customer acquisition and operations.
• Zappos raised only $10 million in primary capital but became a billion-dollar company.
• The company was strategic in managing cash flow and vendor relationships.

"But the business was growing. And it was actually one thing that was different about Zappos even back then was it was breakeven."

• Emphasizes Zappos' unique financial position compared to other e-commerce companies that were not profitable.

"Only raised $10 million of primary capital. 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."

• Explains how Zappos managed to grow with limited primary capital by utilizing secondary funding, debt, and vendor credit.

• Explores the different customer acquisition channels Zappos used.
• Zappos had to discover and optimize various marketing channels, including Google Ads and SEO.
• The company utilized co-branded print ads and negotiated with brands to share advertising costs.
• Competitors replicated Zappos' marketing strategies, leading to continuous innovation.
• Zappos' lack of competitors in the early 2000s allowed them to experiment and grow without intense pressure.

"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."

• Highlights the misconception that early online marketing was easy and underscores Zappos' role in pioneering effective use of Google Ads.

"We had to do SEO. We had to figure out SEO optimization. Those were not things that there was a book about."

• Reflects on the innovative approaches Zappos took to marketing, including SEO, at a time when such practices were not well-documented or understood.

• Discusses the importance of incremental improvements and sustainability in business.
• Emphasizes the role of not having too much money, which forced Zappos to be more resourceful.
• The lack of irrational competitors allowed Zappos to learn and grow without destructive price wars.
• Zappos' unique marketing tactics, such as ads in airport security bins, provided a competitive edge.

"And you try to make that additive. And if you really do try to make those 1% compound, and that's the way you sort of get ahead."

• Suggests that small, consistent improvements over time can lead to significant advantages in business.

"Nothing destroys value faster than irrational competitors."

• Warns of the dangers posed by competitors who engage in unsustainable business practices, such as excessive spending without regard for profitability.

• Explores Zappos' transition from a drop-ship model to holding inventory for better customer service.
• The move was necessary due to the subpar experience provided by brands' direct-to-consumer shipping.
• Zappos aimed to improve accuracy, branding, and the overall customer experience by managing inventory.

"We took over the experience because we felt like we wanted to provide 99.9% accuracy on inventory, as an example."

• Explains Zappos' decision to manage inventory directly to ensure high standards of customer service and experience.

• Details the interaction between Zappos and Amazon, including a meeting initiated by Jeff Bezos.
• The meeting hinted at a potential acquisition, but Zappos was not ready to sell.
• Amazon's subsequent launch of Endless.com was a direct challenge to Zappos.
• Zappos responded by matching Endless.com's shipping offers and focusing on differentiation.

"We weren't thinking that he was coming down to buy the company at all."

• Reflects the initial perception of Bezos' visit, which was not seen as a precursor to an acquisition offer.

"It was hinted at maybe we should join forces. And we hinted back we're not quite ready to sell."

• Describes the subtle communication between Zappos and Amazon regarding a potential merger or acquisition.

• Describes Alfred's involvement with Tell Me Networks and his financial expertise.
• Discusses the pivot from consumer-focused to enterprise business at Tell Me.
• Tony Hsieh's and Alfred's roles evolved at Zappos, with Tony becoming CEO.
• The discussion covers the strategic decisions and leadership changes that contributed to the companies' successes.

"And so Tony, and Tony really liked the notion of trying to figure out to take a business from commodity business and layer on service."

• Highlights Tony Hsieh's interest in transforming commodity businesses by adding service layers, which he applied at Zappos.

"And so after tell me was in good shape, I joined Zappos."

• Indicates Alfred's transition to Zappos after ensuring Tell Me was on a stable path, marking a shift in his career focus.

• The market's growth and consumer trends were in favor of Zappos, leading to a period of win-win for consumers and the company.
• Zappos and Amazon were growing without significant competition or customer loss between them.
• The importance of acquiring new customers in a growing market is emphasized.
• A large business can still be valuable without a monopoly, provided it maintains substantial market size.

"I think when you're 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."

• This quote highlights the advantageous position of Zappos during a time of market growth and favorable consumer trends, leading to mutual benefits for the company and its customers.

• Enduring multiple financial crises is part of building a long-lasting company.
• Zappos noticed a slowdown in consumer spending before the 2008 financial crisis.
• During the financial crisis, Zappos had a substantial line of credit and was not overextended.
• Banks faced liquidity crunches and retracted some of their credit lines, affecting Zappos' operations.

"Well, if you want to build a long, enduring company, you're going to endure a lot more than just one or two financial crises."

• This quote suggests that enduring financial crises is an expected and necessary part of sustaining a long-term business.

• The housing crisis affected employees, with some losing their homes and relying on stock options for value.
• A senior team member sold Zappos stock at a discount to meet mortgage payments.
• The leadership considered the right course of action for all shareholders during the crisis.

"Some people needed liquidity. I had a senior member of the team needing to sell his Zappos stock at a fairly large discount during that time. Just be able to post his mortgage, his mortgage payments."

• This quote illustrates the personal financial struggles faced by Zappos employees during the housing crisis and the decisions they had to make regarding their stock options.

• The discussion of Amazon acquiring Zappos for $1.2 billion in stock.
• The negotiation for stock was unanimous because all stock was undervalued post-financial crisis.
• The acquisition was initially proposed as all cash, but Zappos insisted on stock due to tax benefits.
• Opinions on Amazon's stock varied among people involved; some sold immediately, while others held on.

"We said, we won't do this. We're happy with the price. We just won't do the deal unless it's in stock."

• This quote reveals Zappos' stance during the acquisition negotiations, emphasizing their preference for a stock-based deal over an all-cash offer for tax deferment reasons.

• Amazon's strategy was to keep Zappos as an independent subsidiary.
• Decentralized organizations are believed to be more innovative due to less centralized decision-making.
• Zappos' management structure changed, with its board replaced by an Amazon board.
• The acquisition's success is attributed to shared core values between Amazon and Zappos, such as customer obsession and frugality.

"Decentralized ecosystems are more innovative because they don't have to like bubble everything up. There's not a central decision maker."

• This quote explains the belief that decentralized structures foster innovation by allowing decisions to be made without needing approval from a central authority.

• Amazon and Zappos shared common values in customer obsession, despite different styles.
• Both companies learned from each other during the due diligence process.
• Zappos did not measure individual call times but focused on team efficiency.
• Amazon's acquisition of Kiva Systems was influenced by its successful implementation at Zappos.

"Both companies, I think, learned a lot from each other, even during the due diligence process of how we think about things."

• This quote emphasizes the mutual learning and exchange of ideas between Amazon and Zappos during the acquisition process.

• Amazon's in-house shoe business and Zappos both experienced growth.
• The acquisition allowed Amazon to grow its own business and own its biggest competitor.
• Zappos focused on the "power of and" rather than trade-offs, a philosophy shared by Amazon.

"Why not grow your own business and own your biggest competitor at the same time? You can pull that off, and they did."

• The quote reflects the strategic advantage Amazon gained by acquiring Zappos, allowing them to expand their market presence and control competition.

• There were no serious attempts from other companies to buy Zappos.
• The company's willingness to sell was limited and selective.

"I don't think anybody was anything, anybody else was serious. I don't think we would have sold to anyone else."

• This quote indicates that Zappos did not seriously consider acquisition offers from companies other than Amazon, suggesting a selective approach to potential mergers.

• Discussion on the acquisition of Zappos and its potential to remain independent or be bought by another company.
• Speculation on the possibilities of Zappos' direction had they not been acquired by Amazon.
• Mention of Walmart as a potential company that could have allowed Zappos to remain independent.

"Well, I think Walmart has shown that they'd be willing to and keep them independent."

• This quote highlights that companies like Walmart might have been willing to acquire Zappos while allowing them to maintain some level of independence.

"You don't get to a b test your life. So get to move on."

• The quote emphasizes the finality of life choices and the inability to experiment with different life paths as one would with A/B testing in business.

• Discussion on the importance of market size in investment decisions.
• Emphasis on the combination of founders and markets being critical to the success of a company.
• Highlighting the importance of company teams, problems being solved, and the market being targeted.

"It was part of the sort of story in venture frogs. And there's this great tidbit about the initial phone call from Nick to Tony, sort of pitching about shoesight.com."

• This quote introduces a story about a pitch that led to the creation of Zappos, indicating the significance of seizing opportunities and the power of market size.

"We invest in companies, not ideas. We invest in companies and not products. We invest in companies, not features."

• This quote from the transcript underscores the philosophy of investing in the whole company, including the team and the market, rather than just the initial idea or product.

• Discussion on the elements required for a company to succeed, such as market knowledge and team expertise.
• The importance of having a vision for the company's future and assembling the right team.

"You need to have imagination, and you also need to make sure that you can dream."

• This quote highlights the necessity of imagination and vision in the early stages of a company's development.

"The company coming together has a lot to do with making sure you have all those right pieces."

• This quote emphasizes the importance of assembling the right team and components to build a successful company.

• Discussion on the balance between being mission-driven and having a business mindset in entrepreneurship.
• Emphasis on the importance of solving problems in unique ways and building a company with longevity.

"I think best founders are kind of both."

• This quote suggests that the most successful founders are those who are both mission-focused and business-oriented.

"You gotta be a hustler to get this done right."

• This quote implies that successful founders need to be proactive and determined to solve problems and differentiate their companies.

• Discussion on the importance of doing difficult tasks to create protection and competitive advantages for a business.
• The hard work and strategic decisions that go into building a sustainable enterprise.

"One of the themes that you have to do hard things that yield some protection, some moats."

• This quote underscores the necessity of undertaking challenging tasks to build a strong and defensible business.

"Some of the hardest things to replicate are the hard things that people do to build a real moat around the business."

• This quote emphasizes that the most effective competitive advantages often come from the most challenging aspects of building a business.

• Discussion on the process of evaluating acquisitions and determining their success.
• The criteria for assessing whether an acquisition was a good use of the acquirer's capital.

"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 this."

• This quote explains the goal of analyzing successful acquisitions to understand how to replicate their success in new ventures.

"It's hard to see this not being a good use of capital for Amazon."

• This quote reflects the belief that the acquisition of Zappos was likely a sound financial decision for Amazon, considering the strategic benefits.

• Discussion on the value of being curious and exploring various interests to enhance one's primary work.
• Mention of reading books about historical figures like Ben Franklin and Albert Einstein as a way to learn from their diverse interests and contributions.

"Both people demonstrate that having a fertile curiosity about many different areas actually allows you to do whatever you believe your day job to be better."

• This quote highlights the idea that a broad range of interests can enrich one's primary professional pursuits.

• Discussion on the refreshing honesty of entrepreneurs like Andrew Mason.
• Recommendations for content that provides insight into the development of products and the building of competitive advantages.

"It is always refreshing to hear that guy on any form of media, especially in an interview format, so straightforward, so honest."

• This quote praises the candidness of entrepreneur Andrew Mason during interviews, which is seen as rare in the industry.

"The Google Maps mote. And he's a, I think, designer in maps space."

• This quote refers to a recommended article that analyzes Google Maps' competitive advantage, demonstrating the importance of hard work and innovation in creating a market-leading product.