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Why Startups Fear Amazon: The Price Cut Behind The Acquisition of Quidsi

elephant 2 Why Startups Fear Amazon: The Price Cut Behind The Acquisition of Quidsi

The Amazon in the room

Here’s a little interesting history  for a slow news day. We were chatting with a well respected VC about the explosion of e-commerce companies in New York. On the list of IPO hopefuls at the recent Goldman Sachs conference in Las Vegas were a number of relatively young Silicon Alley companies: Birchbox, Warby Parker and One Kings Lane. A investor we spoke with recently was kicking himself for passing on Fab.com, which has hit more than 1.5 million users and a $50 million annual revenue run rate in the span of just six months.

The social infrastructure in place on the web today means e-commerce companies can scale up very quickly. One of the big success stories that people point to is Quidsi, the parent company of diapers.com, which was acquired by Amazon for in November of last year for $545 million. But while that purchase was heralded as a big win, it’s actually a cautionary tale.

“Amazon tried to buy Quidsi and got turned down,” the VC told us. Quidsi’s shopping network and algorithmic approach to infrastructure had them on pace to double their revenue. The founders didn’t feel the need to sell their creation, they believed it could be huge on its own.

“So Amazon turned around and drastically undercut them on their big product, diapers.” Amazon could afford to take a loss in certain areas of its business. It wasn’t price fixing because they were not colluding with any competitors. “When Quidsi saw their sales go flat, they realized they had to sell, and that gave Amazon the upper hand in negotiating the price.”

While the price tag on the Quidsi deal may seem grand, the company was actually acquired for less than two times their expected revenue, a great price for Amazon given the company’s strong growth up to that point.

Hitting $10 million in revenue is still an accomplishment, but its no longer enough to guarantee exit velocity for a venture backed startup. Getting real size, like Diapers.com, is enough to lock in a buyer. But with an elephant like Amazon in the room, it’s especially challenging for founders and their investors to take things much farther than that.

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