An Amer­i­can Suc­cess Story

Financial Mirror (Cyprus) - - FRONT PAGE -

In late July 2009, In­ter­net trader Ama­ an­nounced the takeover of Zap­, an on­line shop for shoes and clothes. The vol­ume of the deal was val­ued at $1.2 bln. Just 35 years old at the time, the com­pany’s CEO, Tony Hsieh (pro­nounced “Shay”), made at least $214 mln from this deal alone, not count­ing the money that his for­mer in­vest­ment firm Ven­ture Frogs made through the deal. Born in 1973 to a fam­ily of Tai­wanese im­mi­grants, Hsieh de­scribes in his au­to­bi­og­ra­phy how he came to be so suc­cess­ful.

Af­ter grad­u­at­ing from Har­vard with a de­gree in com­puter science, Hsieh went to work for the soft­ware com­pany Or­a­cle in 1995. He was well paid, but felt bored all day be­cause he had noth­ing truly chal­leng­ing to do. One week­end, he and a friend had an idea that they turned into the com­pany LinkEx­change shortly af­ter. “If you ran a Web site, then you could sign up for our ser­vice for free. Upon sign­ing up, you would in­sert some spe­cial code into your Web pages, which could cause ban­ner ads to start show­ing up on your Web au­to­mat­i­cally. Ev­ery time a vis­i­tor came to your Web site and saw one of the ban­ner ads, you would earn half a credit.”

So, if 1,000 peo­ple vis­ited your web­site you would get 500 cred­its. Th­ese 500 cred­its meant that your own web­site would be ad­ver­tised 500 times for free through the LinkEx­change net­work. “The ex­tra 500 ad­ver­tis­ing im­pres­sions left over would be for us to keep. The idea was that we would grow the LinkEx­change net­work over time and even­tu­ally have enough ad­ver­tis­ing in­ven­tory to hope­fully sell to large cor­po­ra­tions.”

They mailed the idea to 50 web­sites and were sur­prised when half of them re­sponded pos­i­tively within 24 hours. It soon turned out that they had dis­cov­ered a gold mine with their idea. Within months af­ter start­ing LinkEx­change, a per­son called Lenny called from New York and stated he was look­ing into a pos­si­ble ac­qui­si­tion of the com­pany. They met with Lenny, and much to their amaze­ment he of­fered to pay them a mil­lion dol­lars for a com­pany just months old that had yet to turn a profit. Hsieh de­clined, but the of­fer showed him that he was on the right track. In De­cem­ber of that year, he re­ceived an­other call, this time by Ya­hoo! co-founder Jerry Yang. Yang had col­lected a bil­lion dol­lars through the IPO of Ya­hoo! that year, and was of­fer­ing Hsieh to buy his com­pany for $20 mln. “The first thought that came to my mind was Wow. The sec­ond thought that came to my mind was: I’m so glad we didn’t sell the com­pany to Lenny five months ago.” To Hsieh, the sit­u­a­tion felt like a déjà vu, ex­cept the sum of­fered was much higher – a lot higher. Hsieh again turned the of­fer down, though.

He pre­pared to take the com­pany to the stock mar­ket, when the Rus­sian Rou­ble cri­sis and the col­lapse of the Long Term Cap­i­tal Fund struck – caus­ing the IPO plans to be shelved. Yet since the com­pany had high ex­penses and next to no rev­enues, it ur­gently needed fresh cash. They asked Netscape and Mi­crosoft whether they were in­ter­ested in in­vest­ing, and both said they were not, but wanted to buy the com­pany out­right. Mi­crosoft of­fered $265 mln – and Hsieh sold the com­pany.

Hsieh and his friends de­cided to set up an in­vest­ment fund that would in­vest in other promis­ing In­ter­net com­pa­nies. He col­lected $27 mln among for­mer LinkEx­change em­ploy­ees. One of those who ap­plied for fi­nanc­ing through the fund was a young man named Nick Swin­mum who had started a web­site for sell­ing footwear – shoe­

Ini­tially, Hsieh thought the idea ab­surd – as did most peo­ple. Who would want to buy shoes with­out try­ing them on first? He quickly learned, though, that the US shoe mar­ket had an an­nual turnover of $40 bln, and that no less than 5% of it rep­re­sented mail or­der sales. More­over, mail or­der sales were the fastest grow­ing seg­ment in the shoe busi­ness.

Nick did ad­mit, how­ever, that he knew noth­ing about the shoe busi­ness, so Hsieh made it a pri­mary con­di­tion for in­vest­ing that Nick find some­one who did. Once Nick had met this con­di­tion, a new busi­ness idea was born. The In­ter­net por­tal, now re­named Zap­, would part­ner with hun­dreds of shoe brands and for­ward in­com­ing pur­chase or­ders di­rectly to the shoe com­pa­nies, which would de­liver the shoes in their own right. First talks to footwear man­u­fac­tur­ers, how­ever, were less than en­cour­ag­ing, most of them had mis­giv­ings. Hsieh’s fund did not have a lot of money left for new com­mit­ments be­cause it had al­ready in­vested in an­other 27 promis­ing In­ter­net com­pa­nies.

Over the next two years, Zap­pos strug­gled to stay alive, re­peat­edly on the brink of bank­ruptcy. Ev­ery few months, Hsieh would con­trib­ute cash from his pri­vate ac­count. He re­mained con­vinced that the idea un­der­ly­ing Zap­pos was sound, but he was not sure whether he would man­age to keep the com­pany alive long enough, given the high monthly losses. Jobs were cut, and the salaries of the re­main­ing staff were cut, too. Yet he re­alised that cuts alone will not suf­fice to turn a com­pany around.

Hsieh and his staff tried to think of ways to do things dif­fer­ently than be­fore in or­der to make the com­pany a suc­cess­ful busi­ness. The prob­lem with Zap­pos was above all that the com­pany was un­able to col­lab­o­rate with many popular shoe brands be­cause th­ese could not de­liver shoes di­rectly to the end cus­tomer. Hsieh there­fore de­cided to build up his own in­ven­tory of shoes, do­ing which would re­quire an­other $2 mln in in­vest­ments. He was pre­pared to stake ev­ery­thing on one card. “This was a ‘bet the com­pany’ plan… Con­tin­u­ing with the drop-ship-only route that we had been on and dy­ing a slow death didn’t sound like very much fun. It would just be de­lay­ing the in­evitable.”

Since most footwear man­u­fac­tur­ers would not de­liver to on­line shops but to “proper” tra­di­tional shoe stores only, they im­pro­vised a shoe store in their own of­fice rooms and in ad­di­tion ac­quired a small shoe store in a small town. Sales did go up, from $1.6 mln in 2000 to $8.6 mln in 2001, yet the com­pany kept los­ing money month af­ter month. More than once, it nearly folded.

In this sit­u­a­tion, Hsieh de­cided to sell all his en­tire prop­erty in or­der to keep the com­pany alive – along with a party loft he had be­come par­tic­u­larly fond of. How­ever, no­body wanted to buy the prop­erty at its cost price, and so he fi­nally had to set­tle for a “fire sale” that net­ted but 60% of the cost price.

Sales con­tin­ued to rise, to­talling $32 mln in 2002. It ap­peared the com­pany was headed in the right di­rec­tion. It was in this sit­u­a­tion that Hsieh de­fined a much big­ger goal for the com­pany, a sim­ply un­be­liev­able goal for most em­ploy­ees. He wanted sales to top one bil­lion dol­lars by 2010 at the lat­est. It was surely an im­por­tant de­ci­sion, and the right one to make, be­cause dif­fi­cult sit­u­a­tions call for lofty goals in or­der to pro­vide mo­ti­va­tion and the en­ergy to keep go­ing. If your goals are too mod­est, they will not give you the power you need.

The next set­back oc­curred in 2008, when the fi­nan­cial cri­sis got all US com­pa­nies in trou­ble. As a pre­cau­tion­ary mea­sure, Zap­pos let 8% of its work­force go. Yet the com­pany’s strat­egy kept pay­ing off, and in July 2009 it was taken over by Ama­zon, known mostly as an on­line book seller. Ama­zon paid the own­ers of Zap­pos $1.2 bln worth of Ama­zon stock, and made Zap­pos a wholly-owned sub­sidiary.

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