I just read “Delivering Happiness” by Tony Hsieh. It’s a story about the founding of Zappos, and Tony Hsieh’s life up to that point. It’s a fun book and a fun story, and Tony Hsieh tells it well.
Tony Hsieh’s first major company was called LinkExchange. It was an advertising startup, and he sold it in 1998 for $265 million. He made between $30 and $40 million out of the sale. He started doing some angel investing, and Zappos was an early investment he made in 1999. Pretty quickly Zappos needed more money, and Hsieh decided to continue funding it, and come in as co-CEO.
It was a different time in venture capital, after the crash. By 2003 Zappos was doing $32 million in sales, and it still couldn’t raise venture capital. It wasn’t profitable yet, and Tony Hsieh ended up putting all his assets into Zappos, apart from his own apartment. In 2004, Sequoia invested. 5 years later, in 2009, Zappos’ shareholders wanted liquidity, and Tony Hsieh sold the company to Amazon in 2009 for $1.2 billion.
Hsieh grew up in Marin and he went to Harvard. After Harvard he joined Oracle where he says he was ‘bored and unfulfilled’. He figured out that he could turn up at 10am, leave at 4pm, and take a 2 and a half hour break in the middle of the day, and no-one would notice or mind.
He had the idea for LinkExchange in March 1996 with a friend. The idea was that you would advertise other sites on your website, in exchange for you being able to advertise on their sites. A system of credits regulated the exchange of ad slots. By the end of 1996, LinkExchange had grown to 25 employees, and Yahoo offered to buy them for $20 million.
Money and Happiness
With regard to the $20 million Yahoo offer, Tony Hsieh writes “The next few days were filled with a lot of angst…. If we took the $20 million, I wouldn’t have to work again for the rest of my life. As a thought experiment, I made a list of all the things I would do with the money if I had it:
- I would buy a condo or loft in San Francisco so I’d have a place to live that I could call my own, instead of renting a place and living with a roommate.
- I would buy a big-screen TV and build a home theater.
- I would want to be able to go on mini-vacations (long weekends) whenever I wanted to, to places like Las Vegas, New York, Miami, and LA.
- I would buy a new computer.
- I would start another company, because I really enjoyed the idea of building and growing something.
I was already helping run a company that I was excited about. It seemed kind of silly to sell a company that I was excited about in order to start another company to be excited about. With the exception of actually owning my own place instead of renting, I realized that I already had the means to buy everything I wanted to buy.”
So, he didn’t accept Yahoo’s $20 million offer. They raised money from Sequoia, and by 1998 had over a hundred employees. Hsieh writes “One day, I woke up after hitting the snooze button on my alarm clock six times. I was about to hit it a seventh time when I suddenly realized something. The last time I had snoozed this many times was when I was dreading going to work at Oracle. It was happening again, except this time, I was dreading going to work at LinkExchange.
“This was a really weird realization for me. I was the co-founder of LinkExchange, and yet the company was no longer a place I wanted to be at. It wasn’t always like this….How did things change so quickly? What happened? How did we go from an “all-for-one, one-for-all” team environment to one that was now all about politics, positioning, and rumors.“
Later in 1998, Microsoft offered to buy LinkExchange for $265 million. Tony Hsieh had a one year vest. At Microsoft, Hsieh writes “Most of my free time was spent just on being introspective and thinking. I didn’t need more money, so what was it good for? I wasn’t spending the money I already had. So why was I staying at Microsoft, vesting in peace, trying to get more of it?
“I made a list of the happiest periods in my life, and I realized that none of them involved money. I realized that building stuff and being creative and inventive made me happy. Connecting with a friend and talking through the entire night until the sun rose made me happy. Trick-or-treating in middle school with a group of my closest friends made me happy. Eating a baked potato after a swim made me happy. Pickles made me happy.
“I thought about how I enjoyed creating, building, and doing stuff that I was passionate about. And there was so much opportunity to create and build stuff, especially with the Internet still exploding, and not enough time to pursue every idea out there. And yet here I was, wasting my life, so that I could make more money even though I had all the money I ever needed for the rest of my life.
”….And then I stopped thinking to myself and started talking to myself ‘There will never be another 1999. What are you going to do about it?’. I already knew the answer. In that moment, I had chosen to be true to myself and walk away from all the money that was keeping me at Microsoft.“
Tony Hsieh started doing some angel investing with some friends, and Nick Swinmurn pitched his idea for selling shoes online. Hsieh’s first response was “In my mind, it seemed like there was no way people would be willing to buy shoes online without trying them on first….Nick threw out a few statistics: Footwear was a $40 billion a year industry, and 5% of that was already being done by paper mail-order catalogs… I did some quick math and realized that 5% was equal to $2 billion. It didn’t matter whether I would be willing to buy shoes without trying them on first. What mattered was that consumers were already doing it, and it seemed pretty reasonable to assume that Web sales would one day be at least as big as catalog sales.”
Hsieh and some of his friends put $2 million into Zappos in 1999. Later that year he introduced Zappos to Sequoia. Hsieh writes “Alfred Lin and I had talked up Zappos to Sequoia in our email introductions to them. We assured the Zappos folks that the meeting was more of a formality than a pitch. With their LinkExchange investment, Sequoia had turned a $3 million investment into over $50 million – basically multiplying their money by seventeen in seventeen months. Alfred and I had credibility, and in our minds, it seemed like a relatively small thing to ask Sequoia for a few million dollars to put into Zappos.
“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 out what had happened or if anything had gone wrong. We were told that the accomplishments of the 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.”
Hsieh had raised a small angel fund of $27 million from LinkExchange colleagues in 1999. In 2000, after the crash, he tried to raise a second fund of $100 million, part of which could continue funding the companies from the first fund, many of which needed capital. Hsieh writes “We sent out an email to our previous investors to get an idea of how many would be interested in participating, and then waited anxiously for their response. As it turned out, not a single person was interested. We ended up raising exactly $0.”
Joining Zappos as CEO
Hsieh writes “I started to have feelings of self-doubt. I wondered whether I had just gotten lucky with LinkExchange. Was I just a dot-com lottery winner who happened to be at the right place at the right time? Alfred and I had continued to keep in touch with Michael Moritz at Sequoia about Zappos, and despite the progress that Zappos was making, Sequoia was still not interested in investing. I believed with all my heart that Zappos had a great shot at succeeding. I felt that I needed to prove to myself and to Sequoia that the financial success of LinkExchange was not a fluke, that it wasn’t just dumb luck. I wanted to prove to the world that I could do it again.”
Hsieh decided to join Zappos as CEO. Hsieh describes the years 1999-2001 as stressful. The tech economy had crashed. He said that they “continued to reach out to Sequoia, but they still weren’t interested in investing.” One presumes that Hsieh pitched to other VC firms too.
They did a round of layoffs in late 2000, but they still weren’t profitable. Hsieh continued to fund the business personally, saying “I ended up selling every property I had bought except for the one I lived in and the party loft.”
Inventory vs drop ship
The problem was that sales weren’t growing fast enough. The concept of Zappos was initially something called ‘drop ship’. In this model Zappos holds no inventory. When they get an order, they pass it onto the manufacturer sends the shoes directly to the customer. This was nice from the perspective of minimizing inventory risk.
One of Zappos’s employees said to Hsieh “The problem is that a lot of the brands that we want to carry can’t drop ship. Their systems and warehouses aren’t set up to send orders from their warehouse directly to our customers. And even for the brands that can drop ship, usually they’re sold out of their best stuff, so we wouldn’t be able to offer those styles to our customers.” He told Hsieh that Zappos would triple sales if they had all the inventory and brands.
Buying inventory wasn’t easy. Most of the brands would only sell inventory to bricks and mortar stores. So they sought to buy a small store that they could use as their bricks and mortar front, and buy inventory through that. Hsieh writes “Fred found a small mom-and-pop shoe store in a tiny town called Willows about two hours north of our offices. The owner was looking to retire, and we ended up buying the business for a small amount of cash. Suddenly, we had access to a lot more brands whose products we could inventory, and our sales started to skyrocket…. our sales did much more than triple. In 2000, we did about $1.6 million in gross merchandise sales. In 2001, we ended up doing $8.6 million in gross merchandise sales.
They initially made a mistake outsourcing their warehouse operations to a firm called eLogistics. Outsourcing warehouse management sounded very attractive, because it was one less thing to think about. eLogistics had a warehouse right next to the UPS Worldport hub in Kentucky.
There was a crisis moment in managing the eLogistics relationship at one point, and Fred Mossler called another Zappos employee, Keith Glynn, to see if he could sort out the problem.
Hsieh writes ”’Keith, we have a problem in Kentucky with eLogistics,’ Fred said. ‘It’s a mess down there, we need someone from Zappos to help get all our inventory checked in.’
‘What do you need me to do?’ Keith asked.
‘How far are you from the Sacramento airport?’
‘About an hour.’
‘There’s a flight that leaves in two hours. We need you to head to the airport right now to catch the next flight to Kentucky.’ Fred said.
‘Are you serious?’
‘Um, can I go home and pack and leave tomorrow morning?’ Keith asked.
‘We can’t afford to lose a single day. We’re losing tens of thousands of dollars every day that passes. When you get to Kentucky, buy some underwear and whatever else you need.’
‘Um. All right. How long do I need to be out there?’
‘Until we get this figured out,’ Fred said. ‘Probably a week, maybe two. We should stop talking so you don’t miss your flight. “
After two months in Kentucky, Keith realized he’d be staying in Kentucky for a while, so he flew back to California to pick up some things, and returned to Kentucky.
Hsieh writes “Keith ended up living out of a hotel room in Kentucky for another two years before moving back to our headquarters. Zappos decided to take over warehouse operations themselves. Hsieh wrote “It was a valuable lesson. We learned that we should never outsource our core competency. As an e-commerce company, we should have considered warehousing to be our core competency from the beginning. Outsourcing that to a third party and trusting that they would care about our customers as much as we would was one of our biggest mistakes. If we hadn’t reacted quickly, it would have eventually destroyed Zappos.”
In 2002, Zappos did $32 million in sales, and still couldn’t raise VC. Hsieh sold off his spare apartment to continue funding Zappos. He had put his entire $30-40 million fortune into Zappos, except the apartment he lived in. Hsieh wrote “In 2002, about 75% of our sales were coming from inventoried product. If it wasn’t for our decision to start carrying inventory, our gross merchandise sales in 2002 would have been $8 million instead of $32 million.”
Wells Fargo came through with a $6 million line of credit in 2003, and their sales grew to $70 million.
Customer service as a core competence
In late 2003, Zappos started looking around for a new place to expand their customer service call center. It was in San Francisco at the time, and they were finding that people regarded their customer service jobs as temporary. Hsieh writes “We initially considered outsourcing our call center overseas to India or the Philippines, but we remembered our hard lesson from working with eLogistics: **Never outsource your core competency**. If we were trying to build our brand to be about the very best customer service, we knew that we shouldn’t be outsourcing that department.”
Hsieh writes “Our original plan was simply to open up a satellite call center, but as we thought more about it, we realized that if we did that, our actions wouldn’t really be matching our words. To build the Zappos brand into being about the very best customer service, we needed to make sure customer service was the entire company, not just a department….In the end, we decided that Las Vegas would be the best move for the company.
”… Two days later, we held a company meeting and announced that we were relocating our headquarters to Las Vegas…. We had about ninety employees in San Francisco at the time, and I had though that maybe half of them would decide to uproot their lives and move with the company. A week later, I was pleasantly surprised to learn that seventy employees were willing to give Vegas a shot and see what would happen. In their minds, it was all about being adventurous and open-minded.“
Hsieh valued customer service so much that he was willing to lose half the headcount of the company in order to have customer service be part of the company’s headquarters. Hsieh writes “Everyone that is hired into our headquarters goes through the same training that our Customer Loyalty Team (call center) reps go through, regardless of department or title. You might be an accountant, or lawyer, or software developer – you go through the exact same training program. It’s a 4-week training program, in which we go over our company history, the importance of customer service, the long-term vision of the company, our philosophy about company culture – and then you’re actually on the phone for 2 weeks, taking calls from customers.”
Hsieh writes “Too many companies think of their call centers as an expense to minimize. We believe that it’s a huge untapped opportunity for most companies, not only because it can result in word of mouth marketing, but because of its potential to increase the life-time value of the customer.
Hsieh writes “We have all of our employees walk through a central reception area to get in and out of the building even though there are more convenient doors located closer to the parking lot. The previous tenants had used all the doors in our building for exiting, but we decided to mark all of them for use as emergency exits only. We made this decision when we moved into our building as part of our goal to build more of a community by increasing the chances of serendipitous employee interactions.
“In most companies, logging into the computer systems requires a login and password. At Zappos, an additional step is required: a photo of a randomly selected employee is displayed, and the user is given a multiple-choice test to name that employee. Afterward, the profile and bio of that employee are shown, so that everyone can learn more about each other. Although there is no penalty for giving the wrong answer, we do keep a record of everyone’s score. Internally we refer to this as “The Face Game.”
Hsieh encourages each person at Zappos to describe the Zappos culture in a book published each year. “There was a group of about ten of us hanging out one night talking about how we could make sure that we continued to hire only people who would fit into the Zappos culture. There was a new hire in the group, so I asked each person to talk about the Zappos culture. We each gave our own interpretation. When everyone was done, I felt that the new hire had gotten a pretty good idea of our culture.
”’I wish we had recorded our past twenty minutes of conversation so that we could show it to all new hires’ I said.
‘Yeah’, someone else said. ‘That would have been pretty cool.’
‘Or we could have transcribed it and given it as a handout to prospective employees’, someone else chimed in.
‘You know what?’ I said. ‘We should just ask all of our employees to write a few paragraphs about what the Zappos culture means to them, and compile it all into a book.’ And just like that, the idea for the Zappos culture book was born, and it’s been a part of Zappos ever since. Every year, a new edition of the Zappos Culture Book is produced, which we give out to prospective employees, vendors, and even customers.“
Hsieh gives some interview questions that are used at Zappos.
“Give me an example from your previous jobs where you had to think and act outside the box?”
“What’s the best mistake you made on the job? Why was it the best?”
“Tell me about a time you recognized a problem/area to improve that was outside of your job duties and solved without being asked to. What was it, how did you do it?”
“Would you say you are more or less creative than the average person? Can you give me an example?”
“If it was your first day on the job at Zappos and your task was to make the interview/recruiting process more fun, what would you do for those eight hours?”
“What’s an example of a risk you took in a previous job? What was the outcome?
“When was the last time you broke the rules/policy to get the job done?”
Transparency for vendors
Fred Mossler, one of the first employees at Zappos, writes in the book “Early on in Zappos, because of the size of our business, we realized we were going to need help running it. There was just no way we could afford to staff all the buyers needed to manager the number of styles and sizes in our selection. I’ll never forget the afternoon I turned my chair around and asked Tony what he thought about giving vendors access to the same information as our buyers. Traditionally in retail, information in hoarded, kept secret, and used as leverage against the vendors to get more out of them. Retailers wouldn’t want a vendor to know how well they’re doing so they can demand more. But if we created true transparency in our business, not would they help us, they’d benefit as well.
“Not too long after I proposed the idea to Tony, he spun back around and said “Were you thinking about something like this?” He created the beginning of what we now refer to as “the extranet”. It does exactly what we had discussed. It allows the vendors complete visibility into our business. They’re able to see inventory levels, sales and profitability. They can write suggested orders for our buyers to approve. They can communicate with our creative team and make changes to their brand boutiques on the site. In effect, they’re given the keys to the shop.
“Why do we do this? The average buyer at Zappos has a portfolio of fifty brands, but because of transparency, there’s an additional fifty pairs of eyes helping run the business too. Not only that, vendors are the experts at what they do. No one buyer knows a brand better than the brand’s own representative. So why not leverage that knowledge to help us run a better business?”
Hsieh writes “our sales continued to grow, driven primarily by repeat customers and word of mouth. Eventually, Sequoia ended up investing in Zappos. Alfred moved to Vegas and joined the company full time as CFO, we built out the board of directors, and Wells Fargo in conjunction with two other banks increased our credit line over time to $100 million.” In 2008 Zappos hit $1 billion in gross merchandise sales.
As the company passed $1 billion in sales, Hsieh writes “At the board level, we were at a stalemate. The board wanted a financial exit, but internally at Zappos we didn’t want to exit. We wanted to continue to build, and we were in this for the long haul. Luckily I controlled enough voting rights so that the board couldn’t force us to sell the company, but they controlled enough board seats so that in theory they could fire me and hire a new CEO who didn’t care about company culture and was only concerned about maximizing profits from our e-commerce business.”
Hsieh looked into options for raising money to buy out the board of directors. At this point, Amazon contacted Zappos, and Hsieh came round to the view that a sale to Amazon would be the best outcome for Zappos’ shareholders and employees.
Hsieh pushed for an all-stock transaction rather than all-cash, writing “in our minds this was much more in the spirit of the marriage that we were envisioning, analogous to when married couples get a joint bank account.” Zappos remained a subsidiary based in Vegas, with its own culture and independence.
In July 2009, Zappos sold to Amazon for $1.2 billion. According to CNN, Zappos hit $2.1 billion in sales by 2011. I couldn’t find what the 2013 sales figures were.
It’s a good and fun book about an interesting journey through turbulent times. It’s well-written. There are also some good quotes from others that appear in the book.
“I failed my way to success” – Thomas Edison
“You can’t stop the waves, but you can learn to surf” – Jon Kabat-Zinn.
Appendix: Electronic Music and Rave Culture
There are some interesting non-business parts of the book. Hsieh describes his conversion to electronic music and rave culture “I didn’t really know what a rave was. All I knew was they played a lot of techno and house music. I had gone to nightclubs before where they played the same type of music that they played at raves, and I remember finding that music really annoying and not understanding why the biggest rooms in all the clubs always seemed to play that type of music. There were no words to the music, and it seemed like it was just the same repetitive beat playing over and over again incessantly. I just didn’t understand the appeal of electronic music.
”… We all drove to a gigantic empty warehouse that seemed like it was in the middle of nowhere. There were hundreds of cars parked outside the warehouse, and we could hear the repetitive thumping of the electronic techno music as we waited outside in line. I secretly wondered how long we would be staying there, as I would have really preferred a venue with music that I recognized and had heard on the radio. After waiting in line for twenty minutes, we finally turned the corner and walked into the warehouse. What I experienced next changed my perspective forever.
….There was no feeling of judgement, and as I glanced around the warehouse, I saw each person as an individual to be appreciated for just being himself or herself, dancing to the music.
“As I tried to analyze what was going on in more detail, I realized that the dancing here was different from the dancing I usually witnessed in nightclubs. Here, there was no sense of self-consciousness or feeling that anyone was dancing to be seen dancing, where in nightclubs, there was usually the feeling of being on display somehow. In nightclubs, people usually dance with each other. Here, it seemed that almost everyone was facing the same direction. Everyone was facing the DJ, who was elevated up on stage, as if he was channeling his energy to the crowd. It almost felt as if everyone was worshipping the DJ.
“The entire room felt like one massive, united tribe of thousands of people, and the DJ was the tribal leader of the group. People weren’t dancing to the music so much as the music seemed like it was simply moving through everyone. The steady wordless electronic beats were the unifying heartbeats that synchronized the crowd. It was as if the existence of individual consciousness had disappeared and had been replaced by a single unifying group consciousness, the same way a flock of birds might seem like a single entity instead of a collection of individual birds. Everyone in the room had a shared purpose. We were all contributors to the collective rave experience.
“I didn’t know it at the time, but ten years later I would learn that research from the field of the science of happiness would confirm that the combination of physical synchrony with other humans and being part of something bigger than oneself (and thus momentarily losing a sense of self) leads to a greater sense of happiness, and that the rave scene was simply the modern-day version of similar experiences that humans have been having for tens of thousands of years.
“In the moment though, I felt a sense of experiential epiphany. It swept through my entire being. In that instant, I suddenly understood the appeal of the techno music. I couldn’t simply listen to it the way I listened to music on the radio. I had to let it flow through me in the context of a mind-set that I hadn’t really experienced until just now. It was like someone bestowed on me the Rosetta Stone of techno music, and no amount of verbal explanation would have helped me understand it. I had to experience it for myself.
“And in that instant, I did. I had awakened. I had been transformed. Finally, after all these years, I understood what the music was all about.”