Zappos: Tony Hsieh

Computer scientist Tony Hsieh 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." Now Zappos is worth over a billion dollars and known for its completely 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.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03Speaker 00

  As Zappos was growing, it was also losing more money, and we also needed 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.

• 0:19Guy Raz?

  You could not get outside investment?

• 0:22Speaker 00

  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.

• 0:40Guy Raz?

  From NPR, it's How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

• 0:52Guy Raz?

  I'm Guy Raz, and on today's show, how old-school mail-order catalogs inspired Tony Hsieh to build one of the world's biggest online shoe retailers. You know it as Zappos, and it's worth billions.

• 1:10Guy Raz?

  I read that you only have four pairs of shoes. Is that right?

• 1:14Speaker 00

  Yeah, roughly, maybe fewer now.

• 1:16Guy Raz?

  Wow. What kind of shoes are you wearing now?

• 1:19Speaker 00

  Right now, I'm wearing black Asics. And then I have a pair of flip-flops that I wear.

• 1:24Guy Raz?

  Yeah.

• 1:25Speaker 00

  Those are the only two pairs.

• 1:27Guy Raz?

  Right.

• 1:28Speaker 00

  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.

• 1:37Guy Raz?

  OK, 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.

• 1:49Speaker 00

  Right, definitely.

• 1:50Guy Raz?

  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, like, how do you find the energy to do that?

• 1:59Speaker 00

  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.

• 2:19Guy Raz?

  Yeah.

• 2:20Speaker 00

  And for me, I really think of my role as more about being the architect of the greenhouse and then the, 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.

• 2:38Guy Raz?

  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.

• 2:46Speaker 00

  I believe so, yeah. I think our application form evolves, but as far as I know, that question is still there.

• 2:53Guy Raz?

  Oh, so on a scale of 1 to 10, how weird are you?

• 2:56Speaker 00

  I would say maybe an 8.

• 3:00Guy Raz?

  Okay, there you have it. Tony Hsieh, the guy who built this huge company with more than 1,000 employees, doesn't really like shoes. He's an 8 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, 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.

• 3:44Guy Raz?

  And the story of how Tony got there begins, as these stories often do, in childhood.

• 3:50Speaker 00

  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, practice one hour piano, one hour violin, and... 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.

• 4:18Guy Raz?

  Wait, you would play a recording of you practicing the violin to give your parents the impression that you were actually practicing the violin?

• 4:25Speaker 00

  Right, so because they were sleeping, but they could hear. So that was my way around that.

• 4:32Guy Raz?

  That's like a Ferris Bueller move.

• 4:34Speaker 00

  And strangely, every week when I went to piano lessons or violin lessons, I never improved. And so the teachers did not understand why.

• 4:45Guy Raz?

  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 programmer.

• 4:57Speaker 00

  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.

• 5:40Guy Raz?

  So you guys were like doing a side hustle?

• 5:41Speaker 00

  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 an advertisement on it, it was actually kind of a badge of honor, because only the really big websites, like Yahoo, would have advertising customers.

• 6:05Guy Raz?

  Okay, so wait, so you guys were trying to build like a web-based ad sales company?

• 6:09Speaker 00

  Well, originally, we didn't really actually intend to start it as businesses. More of one of those things we were bored and we're thinking, okay, well, let's try this and see what happens. And so we literally just contacted 100 random websites that we thought were interesting.

• 6:24Guy Raz?

  Like, how would you even contact them?

• 6:26Speaker 00

  We would just email them because back then, people would put their email addresses.

• 6:31Guy Raz?

  Oh, on the website?

• 6:32Speaker 00

  Say something like, yeah, on the website, it'd be like [email protected].

• 6:36Guy Raz?

  What was your pitch when you would email them?

• 6:38Speaker 00

  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 more just, we're doing this experiment. Do you want to participate?

• 7:00Guy Raz?

  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?

• 7:09Speaker 00

  Yep.

• 7:09Guy Raz?

  And then you were like the middleman, right? You sold those spaces on websites to companies that wanted to advertise?

• 7:15Speaker 00

  Yeah.

• 7:16Guy Raz?

  Wow. So this was like incredibly good timing.

• 7:18Speaker 00

  Yeah, over two and a half years, we ended up growing the company, which was called Link Exchange, to about 100 or so people. And then ultimately ended up selling the company to Microsoft in 1998 for 265 million.

• 7:33Guy Raz?

  Okay, first of all, Tony, this is not how this narrative is supposed to go. I mean, you were so young. And this is just three years after you graduated from college. So, I mean, was that totally overwhelming that that happened so quickly?

• 7:46Speaker 00

  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 10 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, 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

• 8:29Speaker 00

  so had to do, 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.

• 8:46Guy Raz?

  So wait, what? You just like cashed out and moved on?

• 8:50Speaker 00

  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.

• 9:21Guy Raz?

  So just to be clear, you could have made much more money if you had stayed for like just another year and a half, but you walked away because you were miserable?

• 9:30Speaker 00

  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 are time. So I didn't want to be wasting time.

• 9:56Guy Raz?

  OK, so fair enough. You part ways with Link Exchange. And then I read that you like opened an incubator, like where you invested in other companies?

• 10:04Speaker 00

  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.

• 10:40Guy Raz?

  So how did you, like, how did Zappos even get on your radar? Like, how did that happen?

• 10:44Speaker 00

  It almost actually didn't get on our radar because I remember getting a voicemail from the founders app was Nick Swinburne. 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.

• 11:06Guy Raz?

  Yeah.

• 11:06Speaker 00

  And right before hitting the delete button on the phone, he threw out a couple of facts that made us change our mind. One was that footwear at the time was a $40 billion a year industry in the US.

• 11:19Guy Raz?

  Yeah.

• 11:20Speaker 00

  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 US. 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, OK, the world wide 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.

• 11:59Guy Raz?

  OK, so when the founder of Zappos, Nick Swinburne, came to meet you guys for the first time, what was your impression of him?

• 12:07Speaker 00

  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. 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.

• 12:34Guy Raz?

  Wow. So at what point did you realize that you wanted to be more than just a passive investor? That you wanted to be involved in the company?

• 12:42Speaker 00

  There wasn't really any one moment in time. It was more, we were also running an incubator at the time, and Zappos 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, and the next day it was full time.

• 13:03Guy Raz?

  And this was like a time when people were still kind of freaked out about using credit cards online, right? So in the first year of that company, were you actually selling shoes?

• 13:14Speaker 00

  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.

• 13:39Guy Raz?

  So that's how you would get, you sort of gauge what people were interested in?

• 13:43Speaker 00

  Or more importantly, just whether they'd buy shoes online at all.

• 13:50Speaker 00

  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.

• 13:57Guy Raz?

  Wait, but just, I mean, you must have been burning through cash at this point. So how were you funding the company?

• 14:04Speaker 00

  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.

• 14:16Guy Raz?

  In San Francisco?

• 14:18Speaker 00

  Yeah, this was right in San Francisco. And basically, as Zappos was growing, it was also losing more money, and we also needed more money for inventory. And so I ended up, one by one, selling off the apartments.

• 14:34Guy Raz?

  Huh.

• 14:34Speaker 00

  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.

• 14:40Guy Raz?

  Yeah.

• 14:41Speaker 00

  That's basically what would happen, so.

• 14:43Guy Raz?

  How many apartments did you have to sell?

• 14:45Speaker 00

  All of them, eventually.

• 14:47Guy Raz?

  Wow, I mean, you must have really believed this thing was going to work.

• 14:50Speaker 00

  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 war. And basically, it was just a bad economic environment, and especially in Silicon Valley.

• 15:11Guy Raz?

  Right, you could not get outside investment?

• 15:14Speaker 00

  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.

• 15:34Guy Raz?

  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.

• 16:07Guy Raz?

  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 Hsieh 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.

• 16:32Speaker 00

  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.

• 16:44Guy Raz?

  So did you actually have to lay people off in those early days?

• 16:47Speaker 00

  Yeah, within the first couple of years, just the reality of we really are out of cash, and we're out of options. And so had to do a layoff just to keep the company going.

• 17:02Guy Raz?

  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?

• 17:08Speaker 00

  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.

• 17:16Guy Raz?

  That wasn't baked into the model from the beginning, that came later?

• 17:20Speaker 00

  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 margins, 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.

• 18:05Speaker 00

  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 and that your competition would never do.

• 18:22Guy Raz?

  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.

• 18:29Speaker 00

  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.

• 18:58Guy Raz?

  Do you do Zappos cable TV? That'd be great. I'd need that.

• 19:02Speaker 00

  We are open to anything where service can be a differentiator.

• 19:06Guy Raz?

  Okay, so Zappos becomes this huge deal, and then like, at your peak, I guess in 2009, you sell to Amazon. Why?

• 19:19Speaker 00

  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 and 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.

• 19:58Guy Raz?

  Right.

• 19:59Speaker 00

  And so they tried that for a while, but we continued 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- We'll let you guys be your own separate subsidiary with your own separate culture and 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.

• 20:48Guy Raz?

  You are so young. I mean, you're still in your early 40s and you've done so much. So where do you see yourself in like 20 or 30 years from now? I mean, are you still running Zappos? Are you doing something else?

• 21:02Speaker 00

  I don't know, because if you asked me 20 years ago, I mean, Zappos wasn't even around, but I would be imagining it certainly wouldn't be this. So I don't know. I mean, I generally don't try to think that far ahead. I guess for me, it's just making sure that I'm doing what makes me happy. And so many people are unhappy at their jobs.

• 21:28Guy Raz?

  Yeah.

• 21:28Speaker 00

  For various reasons. It could be the work itself, the culture, the lack of autonomy. All those things are things that we want to hopefully show that there's a different and better way of not just work, but I just think of it as life. And I know, and it helps spread that, I guess.

• 21:50Guy Raz?

  Do you remember when we were kids, that show Lifestyles of the Rich and Famous?

• 21:54Speaker 00

  Yeah.

• 21:54Guy Raz?

  And like, you became a very rich and famous person, right? So did it change the way you live your life?

• 22:01Speaker 00

  I mean, right now, I live in an airstream, which...

• 22:04Guy Raz?

  Like a trailer, like 150 square feet type of thing?

• 22:08Speaker 00

  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 you just go outside. And I actually think of it as the world's largest living room. And I guess for me, I've always, like, I'm willing to pay for experiences, but not really for things.

• 22:36Guy Raz?

  Yeah.

• 22:37Speaker 00

  And just because experiences, I think I realized a while ago, are what make 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, my phone, maybe? And sometimes people ask me what my definition of successes. And I would say, for me, it's

• 23:20Speaker 00

  getting to the point where you're truly OK with losing everything you have.

• 23:29Guy Raz?

  Tony Hsieh still runs Zappos. He says one of the ways he fights his introversion is by forcing himself to do something uncomfortable every single day. And the day we spoke with him, he decided to dye his hair red and spike it up into a mohawk.

• 23:58Guy Raz?

  And please don't turn us off just yet. In a moment, we're going to hear from you about the things you guys are building.

• 24:06Guy Raz?

  So we have finally arrived to the very end of the show. Time now to hear another story about something you're building. And this week, we've got a story from Dave Weiner, who lives in New York City.

• 24:18Speaker 02

  When you tell people that you're leaving your successful software career to start a bike company, you get two types of reactions. You get, wow, that's amazing. Let me hear more. And then you get the, oh, OK, good luck.

• 24:31Guy Raz?

  But about three years ago, Dave was willing to take that leap because he loves bicycles. He basically grew up fixing them, building them. But a lot of times, when he wanted to go out for a ride with friends, he'd run into this.

• 24:45Speaker 02

  They'd always say, my bike has flat tires and needs a tune-up. And then, of course, me, as the ex-mechanic, I'd either have to go over early and tune up their bike, or we wouldn't go for a ride.

• 24:57Guy Raz?

  So Dave decided to design the kind of bike where that type of thing would not happen.

• 25:02Speaker 02

  We really reinvented the bicycle, going through every little nut, bolt, piece, component on the bike with the focus of low maintenance.

• 25:12Guy Raz?

  And so, in a basement workshop in Manhattan, Dave designed his first bike, made of aluminum and stainless steel with internal gears and disc brakes. But he says what really set his bike apart is that, instead of a greasy chain, it's got a belt drive made from carbon fiber that feels more like rubber.

• 25:33Speaker 02

  So there's no grease, there's nothing to rust, there's no way to suck in your pants and leave you on the side of the road. And it lasts three times longer than a traditional chain.

• 25:42Guy Raz?

  Now, you might think a bike like this would cost like thousands of dollars, but Dave figured out a way to do it for a lot cheaper, more like $400. And his concept was so popular that he raised half a million bucks on Kickstarter and then found two factories in Asia to make the bikes. But about two years ago, when it was time to deliver the first 1,000 bikes, He got into a jam.

• 26:06Speaker 02

  We had our bikes produced and they were on the water on their way over from Taiwan when customs took our containers and held them for an undetermined amount of time while they inspected them.

• 26:17Guy Raz?

  And even worse, this was in December.

• 26:21Speaker 02

  And we started to get emails from our customers saying, you're going to ruin Christmas. I bought this for my spouse, for my son, for my daughter, for Christmas. It needs to be under the tree.

• 26:31Guy Raz?

  And all this almost offended the whole company. But about a week before Christmas, customs finally let the bikes through.

• 26:39Speaker 02

  I was lucky. We made it on the very last day we could have.

• 26:43Guy Raz?

  That's Dave Weiner of Priority Bicycles, which now offers six different kinds of bikes. In this spring, they'll be opening their first retail showroom in New York City. Hey, we love hearing stories about the things you're building. If you want to tell us yours, go to build.npr.org. That's build with a D, dot NPR, dot org. And thanks. Thanks for listening to the show this week. If you want to find out more or listen to previous episodes, you can go to howibuiltthis.npr.org. Please also consider subscribing to our show on iTunes. And do us a favor, write us a review while you're there. You

• 27:22Guy Raz?

  can also write directly to us at [email protected]. And if you want to send a tweet, it's at how I built this. Our show was produced this week by Ramtin Arablouei, who also composed the music. Thanks also to Niva Grant, Sanaz Meshkhanpour, Maria Paz Gutierrez, and Jeff Rogers. Our intern is Claire Breen. I'm Guy Raz, and you've been listening to How I Built This from NPR.

• 27:52Guy Raz?

  And just one last thing. 1A is NPR's new daily show inspired by the First Amendment. 1A is the news show with those who make the news. Great guests and topical debates, all framed in ways to make you think and engage. Each day, 1A will champion your right to speak freely. Check out 1A with Joshua Johnson from WAMU and NPR. You can find it on the NPR One app or visit npr.org/podcasts.