Guess Who Lost Big on the Zappos Deal?
techcrunch.com
techcrunch.com
So, had Draper Richards converted their $250,000 loan to shares, they would have made out big on this deal.
OR, the whole outcome could have been totally different. If they would have been a major shareholder, it stands to reason they would have also had major influence, both on this deal and everything leading up to it.
It's quite possible that this deal would have never even existed had they not demanded loan repayment instead of shares.
The investors faced a dilemma, they had to make a decision. They made a poor choice (perhaps only in retrospect), and missed out on a bunch of money because of it.
The RIAA doesn't decide whether people pay or download. The people face the dilemma: download and possibly face consequences, or pay. Since the RIAA doesn't have a decision to make, there is no missed opportunity either.
Or take a poker analogy. Suppose you have the best possible hand at show down. If you then muck your cards regardless, you forfeit the pot. This is a missed opportunity, and definitely also a loss.
The RIAA makes a similar argument, they count every mp3 downloaded as a lost sale, whereas it remains to be seen if a sale would have been made.
In both cases the word 'loss' is used in ways that suggest that in some alternative universe the 'loser' would have been better off, but that is one of those things that you'll never get to check, you can only live in one universe at the time...
Poor choices in retrospect are fantasy, you make your choices in real time to the best of your ability and you hope that you make them well. If you're going to second guess yourself (or be second guessed by third parties such as techchrunch) after the fact then you are engaging in deception. For all you know the whole thing could have gone south and then everybody would have have been saying 'wow, look at how much money they saved'.
Hindsight...
They should probably revisit the deal and the information that they had at the time. It's possible that there was some information they viewed as 'worthless' which would have changed their mind had they given it more weight. This could possibly help them out in similar situations in the future.
Saying "we can't go second-guessing ourselves" is a sure way to keep repeating the same mistakes over and over again. _Especially_ if they are subtle mistakes with large consequences. That said, they shouldn't devote millions and millions of man-hours pouring over what they could have done different either.
If there is a clear reason why they wanted their cash back - and nobody seems to have a clue why they did that - then all this is is speculation.
Money in the bank in the short term is sometimes more important than a great payoff at some distant point in the future (if it happens).
And they did lose out, if they had convertible debt and asked for the money back instead of converting it. That is an exceptionally rare outcome. No VC does a convertible debt deal expecting it to actually be a loan.
Everyone seems to hate this article, but I found it useful. It is an interesting data point that a fairly highly regarded VC thought so little of Zappos that they opted not to convert a convertible round. It's up there with Battery turning down Facebook.
It is my understanding of the use of convertible debt that the industry uses this as a means of recouping part or all of the money in case an investment doesn't fly but doesn't tank either.
If it flies convert otherwise demand your cash back and treat the investment as a regular loan.
Wait too long with converting the debt and you'll find out that the knife cuts both ways.
What I really don't get in all this is why after such a spectacular exit this founder would go and pick up such a small investment on a convertible loan basis.
I am not of course suggesting that this should be of less concern to hackers, or to the population of this website (or of the Web 2.0 penumbrua in general), so please don't view this as another 'Uh, should this really be on Hacker News?' post. I just am sometimes struck by the tone and focus of much of the chatter on the 'technical' web---by how thoroughly, apparently, so many of its denizens have been totally consumed by concern with how well any given fund made out on a business deal, and bodies of shares; and by the obnoxious Wall Street tone that can be taken, more or less indistinguishable from the smug chatter of the talking heads on cable TV or any of the obnoxious businessmen that I know.
Investing in startups is not like buying public stocks, where if you buy at the bottom of the market you're almost guaranteed a positive return. It's exactly the opposite, in fact. The returns depend almost entirely on which startups you pick, and hardly at all on market conditions when you invest.
It was not panic so much as it was an exercise of common sense by the VCs at the time. A lot of startups had been riding on fluff and, when the fluff went away, it was time to cut investment losses.
A crude, but key, indicator is that the liquidation preference in the relatively few fundings that did occur went from a former standard of 1x out to a new one of 3x to 5x. Few deals were done, and those that were done were on terms perceived by founders to be onerous.
In such a climate, it likely would have been deemed reckless conduct by the VC's managing partners not to cash in on the convertible note and to opt instead for an alternative outcome that was highly speculative at best. We can't really know without being privy to inside details, which we are not. In any case, that decision shouldn't be second-guessed by outsiders today.
Growth: http://i.zdnet.com/blogs/zappos-revenue.png
YC's 'How to Apply' recommends against saying you will win because your app will be well-designed and easy to use because presumably that is what everyone tries to achieve. Zappos eventually succeeded because they made the online shop equivalent: efficient back-end, excellent customer service, lots of products that people want to buy, low prices.
Burned again.
Summary: somebody lent Zappos some money a while ago and demanded repayment instead of stock. So they got repaid.
How this translates into "losing big" befuddles me.