Entrepreneur Profile: Founder of - Elite Daily

by Ryan Babikian

Internet Entrepreneur Tony Hsieh is everything the Elite aspire to be: he made his fist couple hundred million before the age of 24 and is the co-founder of one of the largest online retailers in the world: Hsieh's story is an inspirational one and is sure to cultivate ambition within your own entrepreneurial pursuit. 

Before getting into the details, allow me to set the scene for the founding of Hsieh's multi-billion dollar company: In 1998, 24-year-old Tony Hsieh sold his company, Internet advertiser LinkExchange, to Microsoft for $265 million. A year later, he met an even younger entrepreneur, Nick Swinmurn, who had an idea no investor would touch: selling shoes on the Internet.

But Hsieh was intrigued and invested $500,000 in (they soon changed the name to Zappos, after zapatos, which is Spanish for "shoes"). Within six months, he and Swinmurn were running the show together. Early this year, Swinmurn moved on, leaving Hsieh at the helm of a company that had a revenue of $1 billion in 2009.

On the beginning of the startup:

I almost deleted the voice mail. Nick left a message saying he wanted to start a company that sold shoes online. I didn't think consumers would buy shoes sight unseen, and Nick didn't have a footwear background. It sounded like the poster child of bad Internet ideas.

On the market:

But right before I hit Delete, Nick mentioned the size of the retail shoe market – $40 billion. And the more interesting thing was that 5 percent was already being done through mail order catalogs. That intrigued me. Initially, I was just an adviser. But I got sucked in.

On the brand:

We all sat around one day talking about what we wanted the Zappos brand to represent. We decided to be about providing the best service; we said, 'We're a service company that just happens to sell shoes.' But in order for that to happen, we had to control the entire customer experience.
We expanded the warehouse to 77,000 square feet and stopped having manufacturers ship directly to customers. It was a scary time – drop shipping was 25 percent of revenue, and we gave it up all at once.

On financing the business:

We thought about going under every day – until we got a $6 million credit line from Wells Fargo. It's now $60 million. I'd rather spend money on things that improve the customer experience than on marketing. We run the warehouse 24-7 – it's not very cheap or efficient, but it allows us to get the shoes out more quickly. We have a 365-day return policy with free shipping both ways.

On hiring:

We have to untrain employees' bad habits from previous call centers – where they're trying to be more efficient by minimizing the time they talk to the customer. If someone is looking for a specific shoe and we happen to be out of stock, we have employees direct those people to competitors' sites.

On moving to Las Vegas:

In January 2004, we decided to move to Las Vegas. It was one of those things we started talking about at the beginning of lunch, and by the end of lunch, we'd decided. We were having a hard time finding good customer service people in San Francisco. Las Vegas has a lot of call centers and lots of people who want to do customer service as a career. We announced it later that week and people were moving by March.

On Zappos' core:

We interview people for culture fit. We want people who are passionate about what Zappos is about: service. I don't care if they're passionate about shoes.

On distinguishing from the competition:

Zappos sells shoes and apparel online, but what distinguished us from our competitors was that we'd put our company culture above all else.
We'd bet that by being good to our employees – for instance, by paying for 100 percent of health care premiums, spending heavily on personal development, and giving customer service reps more freedom than at a typical call center – we would be able to offer better service than our competitors.
Better service would translate into lots of repeat customers, which would mean low marketing expenses, long-term profits, and fast growth. Amazingly, it all seemed to be working. By 2005, gross merchandise sales were $370 million, and we made the Inc. 500. We weren't profitable yet, but we were close to breaking even, and our revenue was growing quickly.

On what was planned:

At the time, we made almost all our money selling shoes, but our hope was that we'd eventually go into all sorts of other businesses. We saw Zappos as a global brand like Virgin – except whereas Virgin was about being hip and cool, Zappos would be about offering the best service. The plan was to grow sales to $1 billion by 2010 and eventually go public.

On the first offer to sell:

These ideas about the power of our company culture had yet to be proved. As I talked to Amazon founder and CEO Jeff Bezos, who visited our headquarters in 2005, I realized that to Amazon, we were just a leading shoe company. If we sold, we'd probably be folded into their operations, and our brand and culture would be at risk of disappearing. That was why we told Jeff that we weren't interested in selling at any price. I felt like we were just getting started.

On Amazon's second attempt to buy:

Four years later, Amazon came calling again – and again my impulse was to say no. Our sales had grown steadily since 2005; by 2008 we were doing more than $1 billion in gross merchandise sales annually – two years ahead of our original plan. We were now profitable, and our culture was even stronger. As before, our plan was to stay independent and eventually go public.

On company tension arising:

These issues had nothing to do with the underlying performance of our business, but they increased tensions on our board of directors. Some board members had always viewed our company culture as a pet project – 'Tony's social experiments,' they called it.
I disagreed. I believe that getting the culture right is the most important thing a company can do. But the board took the conventional view – namely, that a business should focus on profitability first and then use the profits to do nice things for its employees.
The board's attitude was that my 'social experiments' might make for good PR but that they didn't move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.

On beating the board:

We began brainstorming ways that we could get out from under the board. We certainly didn't want to sell the company and move on to something else. To us, Zappos wasn't just a job – it was a calling. So we came up with a plan: we would buy out our board of directors. We figured to do so would cost about $200 million.
Eventually, Hsieh decides that Amazon would be a better partner than the current board of directors. Amazon, under the leadership of Jeff Bezos, would at least allow Zappos to run as an independent entity. Also, at that point, Amazon's offer was too high to just outright ignore. After the initial meeting, both Hsieh and Bezos began to feel as though Zappos and Amazon were a perfect fit.

On Amazon:

I left Seattle pretty sure that Amazon would be a better partner for Zappos than our current board of directors or any other outside investor. Our board wanted an immediate exit; we wanted to build an enduring company that would spread happiness. With Amazon, it seemed that Zappos could continue to build its culture, brand, and business. We would be free to be ourselves.

On the negotiations:

Negotiations with Amazon began shortly afterward. Amazon initially offered to buy Zappos in cash, but that didn' t sit well with us. In our minds, a cash deal felt too much like we were selling the company outright, so we proposed an all-stock transaction. Zappos shareholders would simply trade their stock for Amazon stock. We saw the deal less as an acquisition than as a marriage. An all-stock deal would be analogous to a married couple opening a joint bank account.

On the final sale:

The acquisition closed on November 1, at a valuation of $1.2 billion (based on Amazon's stock price on the day of closing). Our investors at Sequoia made $248 million. Our board was replaced by a management committee that includes me, Jeff, two Amazon executives and two Zappos executives.
As CEO, I report to the committee every quarter, and Zappos is responsible for hitting revenue and profitability numbers. But unlike our former board of directors, our new management committee seems to understand the importance of our culture – the 'social experiments' – to our long-term success.
In fact, one Amazon distribution center recently began experimenting with its own version of Zappos's policy of paying new employees $2,000 to quit if they're unhappy with their jobs.

On the deal being a win-win

Otherwise, Zappos continues to operate independently. Our relationship is governed by a document that formally recognizes the uniqueness of Zappos's culture and Amazon's duty to protect it. We think of Amazon as a giant consulting company that we can hire if we want – for instance, if we need help redesigning our warehouse systems. In the first quarter of 2010, net sales at Zappos were up almost 50 percent, and we've added several hundred new employees. The growth has made Amazon very happy, but it's also creating new challenges. I've noticed that at company happy hours, you don't see as many employees from different departments hanging out with one another.