How I Built This with Guy Raz - Remembering Tony Hsieh of Zappos

Episode Date: November 30, 2020

The former CEO of Zappos, Tony Hsieh has died. He was 46 years old. We are grateful that Tony shared his story with us in 2017 and we are republishing it as a tribute to his life and career. Tony was a computer scientist whose first company made millions off the dot-com boom. But he didn't make his mark until he built Zappos—a customer service company that "happens to sell shoes." Tony stepped down as CEO of Zappos in August 2020; the company is worth over a billion dollars and is known for its unorthodox management style. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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walking distance from so much of the city, made it feel less like a visit and more like we were actually living there. Plus, taking a trip is the perfect time to host your space on Airbnb. Your place with all of its personal touches and its amazing location could make someone else's vacation even better. Your home might be worth more than you think. Find out how much at Airbnb.ca.com slash host. Hey, everyone. So, as some of you may know, over the break, we heard the sad news about the death of Tony Shea, the co-founder and longtime head of Zappos. When I interviewed Tony three years ago on the show, I have to admit it was one of the hardest interviews I'd done at that point. And not because Tony was difficult or belligerent or evasive. To the contrary, he was kind and polite and genuinely sweet.

The problem was that Tony had such a hard time talking about his achievements and his incredible vision for how to run a business. He was so modest and so humble, I literally had to beg him to brag a little. But in the end, we were able to pull out an incredible story from Tony. And as so many of you know, Tony Shea wasn't a shoe salesman, even though that's what Zappos is known for. Tony was a customer service salesman. He rewrote the playbook on how to treat customers and employees. and he inspired legions of founders and CEOs to come visit Zappos to learn how to replicate his model.

Tony Shea was just 46 when he passed away this week, and we wanted to honor him by re-airing this episode that first ran back in January of 2017. As Zappos was growing, it was also losing more money, and we also need more money for inventory. And so all of this was happening at a bad time in terms of the dot-com crash back in 2000,

so it was pretty much impossible to raise money from anyone. You could not get outside investment? No, and also even if someone wanted to invest in an internet company, the last thing they wanted to do was invest in an online shoe company because no one would ever buy shoes online. From NPR, it's how I built this, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

I'm Guy Raz, and, And on today's show, how old school mail order catalogs inspired Tony Shea to build one of the world's biggest online shoe retailers. You know it as Zappos, and it's worth billions. I read that you only have four pairs of shoes. Is that right? Yeah, roughly. Maybe fewer now. Wow.

What kind of shoes you're wearing now? Right now I'm wearing black A6, and then I have a pair of flip-lops that I wear. Yeah. Those are the only two pairs. Right. I'm actually not passionate about shoes at all. I'm passionate about customer service and company culture, so I can talk forever about those two things,

but I can't say anything about shoes. Okay, so as you just heard, one of the most successful shoe salesmen in the world doesn't care about shoes. And also, he's really quiet. He's an introvert. Right, definitely. So how do you cope with it?

I mean, you have a huge company, like, when you've got to talk to lots of people and inspire them, And how do you find the energy to do that? I'm probably different from a lot of typical CEOs where I like to use the analogy of imagine a greenhouse where maybe at a typical company, the CEO might be the strongest and tallest, most charismatic plant that all the other plants strive to one day become, maybe. Yeah. And for me, I really think of my role as more about being the architectures.

of the greenhouse, and then all the plants inside will flourish and thrive on their own. And so from a, I guess, company perspective, I try to surround myself with people that are just naturally more extroverted. Yeah, and probably, I guess, a little bit weird, too, because I heard that when you apply to Zappos, you actually, you're asked how weird you are. I believe so. Yeah, I think our application form evolves, but as far as I know, that question is still there. Oh, so on a scale of 1 to 10, how weird are you? I would say maybe an eight. Okay, there you have it.

Tony Shea, the guy who built this huge company with more than a thousand employees, doesn't really like shoes. He's an eight on the weird scale and an introvert. And yet people who study companies and company culture come from all over the world to Zappos, to its headquarters in Las Vegas, to see how it operates. Because, as many of you know, at Zappos, Zappos, there are no typical bosses. Employees have a lot of autonomy to make decisions. But at the same time, there's an obsessiveness about customer service.

In fact, as you will hear, Zappos doesn't even think of itself as a shoe company, but basically, as a company that sells good customer service. And the story of how Tony got there begins, as these stories often do, in childhood. My parents were your typical Asian-American parents. They were always making sure that I was practicing piano and violin and other instruments. And during the summers, for example, practiced one hour of piano, one hour of violin. And this is, you know, as a kid, summer vacation. And so I would actually get up super early and I would actually just play back a recording of myself playing the piano or violin.

Wait, you would play a recording of you practicing the violin to give your parents the impression that you were actually practicing the violin? Right, because they were sleeping, but they could hear. So that was my way around that. That's like a Ferris Bueller move. And strangely, every week when I went to piano lessons or violin lessons, I never improved. And so the teachers do not understand why. So anyway, Tony eventually goes off to college. He graduates in the mid-1990s.

And it's not like he goes right into starting Zappos. At first, he goes to work for Oracle as a low-level. level programmer. Yep. I wasn't there for very long. I think I was there for five months and it's just straight out of college and the actual work I was assigned to do was pretty boring and this was right about when the internet or the World Wide Web started because I remember it didn't even really exist. I don't think the summer before or at least two summers before. And at the time these web design and hosting agencies were popping up left and right and so Sanjay, My college roommate and I decided to do that on the side while we were both.

Our day jobs were at Oracle, but during lunch breaks and at night would go start selling and designing websites for different local small businesses. So you guys were like doing a side hustle. Yeah. And then we had this idea for at the time advertising online was very, very rare. And right, you know, today if you go to any website, you'll see ads all over the place. But back in the day, if you went to a website and it had to. advertising on it. It was actually kind of a badge of honor because only the really big websites like Yahoo would have advertising customers. Okay, so wait, so you guys were trying to build

like a web-based ad sales company? Well, originally we didn't really actually intend to start it as business as more of one of those things where we're bored and we're thinking, okay, well, let's try this and see what happens. And so we literally just contacted a hundred random websites that we thought were interesting. Like how would you even contact them? We would just email them because back then people would put their email addresses. Oh, on the website. Say something like, yeah, on the website. It would be like webmaster.

Oh, right. What was your pitch when you would email them? Basically that we're trying this thing out. And if you just put this little piece of code into your website, banners will start showing up. And in exchange, you send us your banner and we'll make sure that it's showing up on other websites doing the same thing. And that was it. We weren't really trying to pitch.

I guess we were doing this experiment. Do you want to participate? Okay, so just so I understand, you basically got like a lot of small websites to join a kind of a network and then agree to run ads on their sites. And then you were like the middleman, right? You sold those spaces on websites

to companies that wanted to advertise? Yeah. Wow. So this was like incredibly good timing. Yeah, over two and a half years, we ended up growing into the company, which was called Link Exchange, to about a hundred or so people.

and then ultimately ended up selling the company to Microsoft in 1998 for $265 million. Okay, first of all, Tony, this is not how this narrative is supposed to go. I mean, you were so young. And this was just three years after you graduated from college. So, I mean, was that totally overwhelming that that happened so quickly? Well, the whole thing definitely seemed very surreal. But at the same time, what a lot of people don't know is the real reason why we ended up selling the company. And the real reason was because the company culture had gone completely downhill.

And I, myself, dreaded getting out of bed in the morning to go to my own company, which is kind of a weird feeling. Because when it was just five or ten of us, and we were all friends, it was a lot of fun. We were kind of your typical dot-com startup back then. We were sleeping under our desks. I had no idea what day of the week it was, working around the clock. But it was really exciting. And it was fun growing. And as we started hiring more and more people, we eventually ran out of either friends or friends of friends.

And so I had to figure out how to do interviews and so on. And not everyone we hired was good for our culture. And by the time we got to 100 people, it wasn't any one specific hire. It was just death by 1,000 or in this case 100 paper cuts. And that's really what led to the sale. So wait, what? You just like cashed out and moved on? Well, in Silicon Valley, usually there's a four-year, what's known as a four-year vesting for your stock,

and I'd only been there for two and a half years. So really had to stay for another year and a half after Microsoft acquired us in order to get the full amount of what the deal was structured for. But I ended up actually just walking away from that where I guess I could have easily just sat around for a year and a half, but I was ready to move on to the next thing. So just to just be clear, you could have made much more money if you had stayed for just another year and a half, but you walked away because you were miserable? Yeah, I think I just started going down the path

of just trying to make sure that I'm being true to myself and doing things because it's what I want to do versus what is maybe a status symbol or what society expects me to do. I mean, the one resource that we all ultimately have the same constraints on our time. So I didn't want to be wasting time. Okay, so fair enough. You part ways with link exchange.

And then I read that you opened an incubator, like were you invested in other companies? Yeah. It was called Venture Frogs. And we raised about $27 million. I'd say roughly half of that was my money. And then the other half was from other early link exchange employees. that had money from the acquisition. And for me, when I first got started in that,

my thinking was, oh, this will be lots of fun. We'll get exposure to lots of different founders and different internet companies. But what I realized was that for me, I actually found that investing was pretty boring, and I felt like I was sitting on the sidelines all the time, and I really miss being part of building something. So how did you, like, how did Zappos even get on your radar?

Like, how did that happen? It almost actually didn't get on our radar. because I remember getting a voicemail from the founder's app was Nick Swinmer, and he said he had this idea for selling shoes online, and we were getting random pitches every day. And so to me, it seemed like the poster child of bad internet ideas who's going to actually try on shoes without seeing them in person. Yeah.

And right before hitting the delete button on the phone, he threw out a couple of facts that made us change our mind. And one was that footwear at the time was a $40 billion a year industry in the U.S. Yeah. And I'm not into shoes at all, so that was news to me. And then the other interesting fact was that at the time, mail order catalogs, those paper catalogs, that was actually the fastest growing segment of the footwear industry in the U.S. And that represented 5%.

So $2 billion a year and growing. And there's clear proof that people are willing to remotely try on shoes. And so in our minds, we thought, okay, the worldwide web, the internet is going to be much bigger than just paper order catalogs. And so that's what made us ultimately decide to invest. Okay. So when the founder of Zappos, Nick Swinburne, came to meet you guys for the first time, what was your impression of him? He just seemed like a pretty casual guy. But we basically just said, since you, Nick, don't have any footwear background, we'll invest if you can find a shoe guy.

It turns out that there was a shoe guy named Fred Mosler who was working at Nordstrom at the time, and he told Nick, I'll join if you find an investor. And so we all met, and ultimately Fred ended up joining the company and been working with Fred ever since. Wow. So at what point did you realize that you want to be more than just a passive investor that you wanted to be involved in the company? there wasn't really any one moment in time it was more we were also running an incubator at the time and sapos ended up moving in and all in the same building and so we just started being able to help them more and it just slowly just evolved but it was a gradual thing it wasn't like one day wasn't really helping the next day it was full time and this was like a time when people were still kind of freaked out about using credit cards online right so in in the first year of that company, were you actually selling shoes? Yeah. I mean, so in order to test out the whole concept for real, Nick would actually just go down to the local shoe store, take pictures of all the shoes that were on the wall, and then put it on the website, and if someone bought something, then go down to the local shoe store, buy the shoe, and then ship it. And obviously, not making money

from each of those, but it was really a really cheap and easy way to test the actual demand. So that's how you would get, you would sort of gauge what people were interested in. Or more importantly, just whether they'd buy shoes online at all. Yeah, and then over time we learned what brands they were interested in, and then eventually got to the point where we wanted to make money. But just, I mean, you must have been, like, burning through cash at this point. So how are you funding the company? Yeah, I mean, so after the link exchange sale, I set some money aside for investing

and also bought a bunch of apartments or lofts that were in that same building. In San Francisco? Yeah, this was right in San Francisco. And basically, as Zappos was growing, it was also losing more money, and we also need more money for inventory. And so I ended up one by one selling off the apartments. It's kind of like in Monopoly, when you buy a hotel or houses, and then you have to sell them, but you lose money on the sale.

So that's basically what happened. How many apartments did you have to sell? All of them eventually. Wow. I mean, you must have really believed this thing was going to work. Yeah, well, so all of this was happening at a bad time in terms of the dot-com crash back in 2000. So it was pretty much impossible to raise money from anyone. And there was also 9-11 and a war.

Basically, it was just a bad economic environment. and especially in Silicon Valley. You could not get outside investment? No. And also there were huge companies like Pets.com that were e-commerce that were kind of imploding at the time. And so even if someone wanted to invest in an internet company, the last thing they wanted to do was invest in an online shoe company because no one would ever buy shoes online.

When we come back in a moment, the secret sauce that helped Zappos blow up. And a hint, it had nothing to do with shoes. I'm Guy Raz, and you're listening to How I Built This from NPR. And one more thing, the New York Times best-selling book, How I Built This, is now available. It's a great read and a great gift for anyone looking for ideas, inspiration, wisdom, and encouragement to have the courage to put out an idea into the world. It's filled with tons of stories you haven't heard about how some of the greatest entrepreneurs, You Know and Respect started out at the very bottom.

Check out How I Built This, The Book, available wherever you buy your books. It's How I Built This from NPR. I'm Guy Raz. So it's the early 2000s, and Zappos is struggling. The economy isn't doing well, and basically, at this time, Tony Shea is funding the company with his own money, and he's doing that by selling off a bunch of apartments that he owns. So, fair to say, this was not a good time for the company. I mean, every week or two, we had to make the choice between do we make payroll or do we pay half of our vendors or do we sell another apartment? But you can't just sell an apartment overnight either.

So did you actually have to lay people off in those early days? Yeah, within the first couple of years, just the reality of, you know, we really are out of cash and we're out of options. and so how to do a layoff just to keep the company going. So how did you guys even begin to turn it around? I mean, how did you get to a place where you were able to make it sustainable? I think for us, a big turning point was really deciding we wanted to build our brand to be about the very best customer service and customer experience. That wasn't baked into the model from the beginning that came later?

Yeah, so in the beginning, we always wanted to offer good service, but it wasn't until we decided we wanted to build our, that's what we actually wanted our brand to be about. That's the most important thing. It led us to do a lot of things that would not have made any sense if that wasn't our North Star. And so examples would be offering free shipping both ways because that's obviously very expensive to do.

And if we were just around trying to say maximize the profit margin, then we never would have gone down that path. And yes, we would have made more money in the short term during those days, but then we wouldn't have built our brand and reputation and so on. And so I think, you know, when you actually want your brand to stand for something or to have some sort of purpose. And in our case, it's about to be about the very best customer service and customer experience, you do things that are kind of nonsensical in some ways

that your competition would never do. Yeah, so, I mean, there was a point where you really just defined yourself like, this is, you know, this is what sets our company apart. Yeah, and there's actually a phrase that I think one of the employees in our call center actually came up with started describing us as we're a service company that just happens to sell shoes. And so for us, that's, we're hoping 10, 20 years from now. People won't even realize we started selling shoes online. And I can imagine one day there could be a Zappos Airlines or Zappos Hotel that is really just about the very best customer service and customer experience. Do you do Zappos cable TV? That'd be great.

I need that. We are open to anything where service can be a differentiator. Okay, so Zappos becomes a huge deal. And then, like, at your peak, I guess in 2009, you sell to Amazon. Why? Yeah, so Amazon had actually approached us several years. Before 2009, they just wanted to acquire us, and then basically the company being acquired ends up joining the mothership and kind of loses its original identity.

And so we said no very quickly. And then they actually, in the years in between then in 2009, they launched a competitor called Endless, and it was basically launched from our perspective to compete with us, and ultimately if they weren't going to be able to acquire us, then they wanted to essentially compete and win. And so they tried that for a while, but we continue to grow. And so I think after several years of them, I'm assuming, I don't know the details of losing lots of money trying to gain market share through endless, they approached us again and said, okay, we will let you guys be your own separate subsidiary with your own separate culture. own separate way of doing business and happy to report seven years later, they've remained totally true to their word.

And we've been able to continue doing our own thing and our culture is very different and distinct from Amazon's. And so from our point of view, it was really just as if we swapped out our prior board of directors with a new one. Why do you think that, I mean, if at times Zappos was like a week away from going under. and there was just a lifeline that came through every time, whether you sold an apartment or some money came in. Why do you think it made it? Do you think it was luck, or do you think you guys were just really good at what you were doing?

I'd say it was probably mostly luck. What's interesting is that Jim Collins is, I'm trying to remember the name of his latest book, Great by Choice, I think. And he actually has this acronym ROL, return on luck. And he looked at whether companies, how much of a role did luck play in companies that did well and companies that didn't do well. And in his research and analysis, he actually found that good companies and bad companies, they all have lucky and unlucky events that happened to

them, except when it happened to good companies, they would double down on whatever that event was and get the most out of that. And then when bad things happen to good companies, the good companies were prepared to deal with, or more prepared than the not-so-good companies to deal with that bad luck. But the same amount of good luck or bad luck happens to all companies and all people.

Do you remember when we were kids that show lifestyles of the rich and famous? Yeah. And like you became a very rich and famous person, right? So did it change the way you live your life? I mean, right now I live in an airstream, which... Like a trailer, like 150 square feet type of thing? Yeah.

We've got dogs running around, kids running around. We actually have two alpacas running around, so... And I just love it because there's just so many random, amazing things that happen around the campfire. And I just go outside, and I actually think of it as the world's largest living room. and I guess for me I've always I'm willing to pay for experiences but not really for things and just because experiences

I think I realized a while ago are what made me happy and it's funny because I was literally this morning having coffee with a friend of mine in the airstream and we were talking about I think it was a quiz or something where the question was if you if your house was on fire

and you could only save one thing from your house, what would it be, and how that would be a really good way of getting to know someone? And I was just looking around my airstream, and it was like, I don't know, my phone, maybe. And sometimes people ask me what my definition of successes. And I would say, for me, it's getting to a point where you're truly okay with losing everything you have. That's Tony Shea, the co-founder and longtime head of Zappar. He died this past week at age 46. By the way, Tony had an interesting way of dealing with his introversion.

He forced himself to do one uncomfortable thing every single day. And on the day I interviewed him, three years ago, he dyed his hair bright red and spiked it up into a mohawk just because it made him uncomfortable.