Delivering Happiness

What Happened Next by Fred
It wasn’t pleasant. It was December 10 and we knew we had until the
fifteenth to raise more money. All we had was five days to find
funding or Zappos would be out of business.
I was in New York, attending every single shoe show to sell
Zappos as a company and sign on more footwear brands. We were
doing all that we could, basically hustling, expecting that phone call
from Nick to see if Zappos was going to survive.
I was having dinner at a restaurant when he broke the news.
Sequoia decided not to invest. I had stepped outside to receive the
call and when I sat back down at the table, the waiter accidentally
spilled a glass of water in my lap. I had to laugh. When it rained, it
literally poured.
After returning to California, Nick and I tried calling more
venture capitalists to raise more money, but no one was willing to
invest. On the afternoon of the fifteenth, all twelve of us in the
company got together and did what most would naturally do—head
down to Chevy’s for a margarita.
We knew we had given it our best shot and recognized it was a
good run. For us, it just didn’t happen to work out. After a few
rounds, we headed back to the office around four o’clock and started
cleaning out our desks.
Alfred and I were both a bit surprised when we learned that Sequoia
wasn’t interested in investing in Zappos. We reached out to Sequoia to find

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out what had happened or if anything had gone wrong. We were told that
the accomplishments of the team were impressive given how small the team
was and that the company had only been around for a few months, but
Sequoia wasn’t confident that this would ever end up being more than a
niche business. They wanted to see more growth and progress in the
company, and they suggested that we touch base again in a few months.
Our original plan with Venture Frogs was to make a single small angel
investment in each company and then pass them on to the bigger venture
capital companies like Sequoia a few months afterward, so we were in a bit
of a quandary with Zappos. Either we had to make another investment in
Zappos with money from the Venture Frogs fund, or we had to let Zappos
go out of business.
Letting Zappos go out of business would have fit in better with our
original investment strategy and philosophy: Invest in a lot of different
Internet companies with the expectation that a third would make money, a
third would break even, and a third would go out of business. Zappos would
simply fall into that last category.
“What do you want to do about Zappos?” Alfred asked. “We have to
make a decision today. They only have a couple of days of cash left, and
Sequoia isn’t interested in putting money in them for at least a few months.
They want to see more progress.”
“If that happens, then they’ll definitely fund them?” I asked.
“Not definitely,” Alfred replied. “But I think more likely than not. It’s
definitely a risk. We can give Zappos a few months more of cash to tide
them over to their next meeting with Sequoia and hope that Sequoia will
invest at that time. But if Sequoia doesn’t, then we’re going to wind up in
the same situation we’re in right now, except there probably won’t be much
money left in our fund by then.”
This was a tough call. If we decided to invest more money into Zappos,
then that meant that we wouldn’t be able to make an investment into
another company.
“It’s definitely higher risk. Sort of like putting more eggs into a basket,”
I said. “But I like the guys there. They’re passionate and determined, and
they don’t seem like they’re doing this just to get rich quick. They’re
actually interested in trying to build something for the long term.”

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“Well, if you think we should put more money into Zappos, then we
really should be spending more time with them in order to protect our
investment,” Alfred said. “We should get them to move into the incubator.”
As part of the investment strategy for our fund, Alfred and I had decided
to start the Venture Frogs Incubator, where we would provide office space
and services for Internet companies. It would also allow us to work more
closely with whichever companies were in the incubator.
We had talked to the landlord of the building we lived in because there
was still a lot of commercial space available for lease. Alfred and I decided
to take over all of the remaining space. Our plan was to convert part of it
into office space for the incubator and part of it into a restaurant. This way,
there would be no reason for us and the companies we would incubate to
leave the building. We would all be able to work longer and harder.
The problem was that the incubator space was still under construction.
“Yeah, I think that’s a good idea, but the incubator isn’t going to be
ready for at least a few months,” I said. “The next few months are going to
be critical. They’re going to make or break the company.”
“So what do you want to do?” Alfred asked.
I thought about all the possible options.
“I have my birthday party this weekend, and a New Year’s party in two
weeks. Let’s have them move into my loft right after New Year’s. We’ll
convert it into an office until the incubator offices are ready downstairs.”
“Sounds good.”