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Sequoia Capital, the venture capital firm that grew to prominence with early investments in Internet wonders Google Inc. and Yahoo Inc., can mark down another successful dot-com deal with the sale of Zappos.com Inc. to Amazon.com Inc.
But the $885 million blockbuster deal, which is one of the largest acquisitions of a venture-backed company this year, will likely net Sequoia modest returns compared to its other big Internet victories, which include YouTube.com Inc. and PayPal Inc.
Online apparel and footwear retailer Zappos had raised about $45 million since 2000, including about $10 million in the early history of the company from small investors. Zappos then raised two rounds from Sequoia Capital: a $20 million Series E in November 2004 and a $15 million Series F in July 2005.
As of the 2005 Series F, Sequoia held about a 10% stake in Zappos, according to a previous VentureWire story. It's not immediately clear if Sequoia purchased more shares other than what has been publicly disclosed, but if does still hold a roughly 10% stake, its gross return from the acquisition was roughly $88 million on top of that $35 million investment, before any liquidation preferences.
That of course is on paper since Amazon is paying for Zappos mostly in stock. Sequoia's return could be worth a lot more if the firm holds onto the shares and Amazon's stock rises. Still, the returns won't come anywhere near the extraordinary profits Sequoia enjoyed with the aforementioned Internet investments, or match what it might have made had Zappos remained independent and eventually gone public. Zappos has been profitable for many years and did more than $1 billion in 2008 gross merchandise sales, according to interviews given by Chief Executive Tony Hsieh.
PEHub.com, citing anonymous sources close to Zappos, suggests that Hsieh and Sequoia Capital came into conflict about the company's future. Sequoia, PEHub says, wanted Zappos to sell to generate some liquidity while Hsieh hoped to remain independent.
Zappos had been eyed as a potential IPO candidate and its executives had in the past told VentureWire that an IPO was a likely eventual exit route.
That wasn't always considered likely. The company started selling shoes online in 1999 but early on had trouble raising venture funding. Unlike many other e-commerce retailers that went public and flamed out during the dot-com bubble, Zappos quietly built its business out of the spotlight.
The company brought on Hsieh as chief executive in 2000. Hsieh had invested in Zappos through his firm Venture Frogs and had Sequoia ties through his company LinkExchange Inc., an ad network that returned 20 times Sequoia's $3 million investment in the company when it sold to Microsoft Corp in 1998.
Hsieh, in a letter to Zappos employees, said he decided to accept Amazon's offer because of its assurance to keep Zappos as an independent, though wholly owned, entity. That would allow the company to maintain its culture and style, including its well-regarded customer service. The Amazon deal will also allow Zappos to grow faster, Hsieh said.
"We plan to continue to run Zappos the way we have always run Zappos - continuing to do what we believe is best for our brand, our culture, and our business," Hsieh wrote.
Representatives from Sequoia Capital couldn't be reached for comment. Michael Moritz, the famed Sequoia partner that made the investments in Google, PayPal, Yahoo and YouTube, also sits on the board of Zappos. Another Moritz investment, Pure Digital Technologies Inc., maker of the Flip video camera, sold to Cisco Systems Inc. earlier this year for $590 million in stock.
-With reporting by Scott Austin and Tomio Geron
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