
  Guess Who Lost Big on the Zappos Deal?  - jasonlbaptiste
http://www.techcrunch.com/2009/07/22/guess-who-lost-big-on-the-zappos-deal/
======
brk
This article is lame.

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.

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jacquesm
This is the same kind of 'loss' that the RIAA claims every time somebody
downloads an mp3, money that you didn't earn is not a 'loss', it's a missed
opportunity.

~~~
pg
The title isn't claiming they suffered a loss, more that they lost out. Those
are different senses of the word.

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.

~~~
jacquesm
The title says 'lost big', not 'lost out'.

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.

~~~
req2
If you use 'winning' and 'losing', the usage 'lost big' works well for the
situation.

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crux
I know there are a lot of founders, and therefore businesspeople, on this
site—but I still find it a little weird that this kind of fratty business talk
has so thoroughly permeated hacker culture. This article has absolutely 0
technical content; it's entirely about a business deal, and it could be about
_any_ business deal.

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.

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noelchurchill
But what did Draper Richards end up using that cash for? What other company
was it invested in? Perhaps this loss isn't really as bad as it seems.

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mgenzel
I think I speak for everyone when I say: "hindsight is 20/20"

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joez
Unless Draper Richards was under huge liquidity crunch, probably any
investment at the bottom of a bubble would have paid out. Just a case of poor
timing and judgment. And Techcrunch being smug.

~~~
grellas
When the dot-bust occurred, the going rule with VCs was to rein in their
investments, getting cash where they could and deploying their liquidation
preferences to cash out where possible.

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.

~~~
netsp
True. At the end of the day, Zappos is/was really just an online shop. Amazon
at least were the first/biggest online shop in a field where infinite shelf
space means a lot. Shoe stores on the other hand, could easily have been
bigger if bigger meant better. What strong reason was there at the time to
believe that Zappos would grow so much more then the many other online
retailers with similar numbers.

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.

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alanthonyc
This is a terrible article: it is completely without substance and a great
example of why I try not to click on tc links when they come up on here. Pure
linkbait.

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.

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alaskamiller
Hey, I would rather have cash in hand than a lottery ticket. Especially if I'm
not in the business of big dreaming.

~~~
neilc
I think that preference is exactly why you're not a venture capital firm.

