The story of Zappos, as it’s told nowadays centres on the company’s wacky culture, and Tony Hsieh’s stewardship.But, before it gained that reputation, and before it was gobbled up by Amazon, it had many lean years of just barely scrapping by.
We spoke with founder Nick Swinmurn about the process of building the company. What follows is a lightly edited transcript of our conversation.
The highlights of our conversation:
- He was rejected by just about every VC. No one thought people would buy shoes online, even though Swinmurn had a stat that said 5% of people bought their shoes from mail order catalogues.
- Tony Hsieh, who ended up backing Zappos, was selling off apartments to keep the company in business. Hsieh made a lot of money selling his first company to Microsoft. He spent a lot of it on apartments. He ended up selling those apartments to keep Zappos running.
- Zappos lost a $250,000 convertible note. It had a $250,000 convertible note from Draper Richards, but when the note was set to convert they changed their mind and pulled the note. Hsieh had to pay them back out of his pocket.
- Jeff Bezos offered to buy Zappos twice. The first time he said, “I’m going to make you an offer that’s going to be unbelievable,” but Zappos never heard what the offer was.
- Zappos decided to sell when it started to realise that an IPO wasn’t going to be viable. The company had big sales, but relatively small profits. It had a goofy culture. The VCs worried that the stock would be clobbered, thus making an IPO worse than selling to Amazon.
For anyone with a passing interest in how hard it is to build a startup, this is a good read:
Business Insider: When you started Zappos, you had no experience in this field right?
Nick Swinmurn: I was fresh out of college. I got out of college, worked for the San Diego Padres for a year. There I realised it was taking forever to advance, and was kind of slow paced, so I moved back to the Bay Area, entered a job at an actual Newspaper, for Autoweb, and that was my introduction to the internet. I didn’t use email in college, this was 1996. I think I went to the library and signed up for ucsb.edu email address but I couldn’t quite figure out how to use it, you’d go to the terminal and use it and all that.
I got a job at Autoweb and it was the opposite of the Padres. Everybody was so excited and young and you had a chance, whatever you could accomplish you could rise through the ranks. I got real excited and decided if these guys can do it, there must be something I can do.
When I left, that was kind of it, I had nine months experience at Autoweb and a season at the Padres. I think it was more indicative of the times I could get those level meetings, top tier VC’s, because they were looking at everything, the sky was the limit and every category was ripe for being brought online.
BI: You came up with the idea for Zappos while you were at Autoweb. At that point, was it just yourself, just you and your idea?
NS: Yeah, it was just me. I left Autoweb to work on a couple of things. My Dad told me, you know I think the one you should focus on is the shoe thing. That’s a real business that makes sense. So I said OK, focused on the shoe thing, went to a couple of stores, took some pictures of the shoes, made a website, put them up and told the shoe store, if I sell anything, I’ll come here and pay full price. They said OK, knock yourself out. So I did that, made a couple of sales.
I had statistics from 1998 that 5% of all shoes sold in the US had been sold from mail order catalogues. I thought, it’s a $40 billion business and $2 billion was done through mail order catalogues last year, which surprised me because I had never bought through a catalogue. That one statistic was the key in getting in a lot of doors and getting people who’s first reaction was “I don’t know, shoes?”, was like, “Well it’s worth taking a look at, it sounds like there’s a good mail order business already”.
BI: When you went around presenting the idea you were met with a heavy dose of scepticism, right? Nobody really believed in that statistic?
NS: We would have that conversation over and over again about, alright, no one is going to buy shoes without trying them on. I would say, “No, last year 5% of shoes sold in the U.S. were sold through mail order catalogues,” and they’d say, “Yeah but nobody is going to buy shoes without trying them on.” And it was like, did I just say that out loud or inside my head, but let me repeat it, “last year, 1 out of every 20 pairs of shoes sold was sold through a mail order catalogue.” “That may or may not be, but no one is going to buy shoes.”
There were sceptics at different levels. Sequoia was pretty receptive to the idea, I think they had just invested in a watch company that was making good traction in watches. I had no connection with them other than a guy, I had a temp job at Silicon Graphics, a guy I had worked with, had introduced me to a guy there and we got all the way through to the partner meeting at Sequoia, which was the farthest we got with anyone. Everyone else was kind of one meeting and done, but Sequoia we got all the way through to the partner meeting, but then they decided to pass.
BI: What year was this?
NS: That was 1999. At that point, I had kind of exhausted all options as far as any connections to VC’s, and gotten a bunch of “no’s”. Our attorney from Wilson Sonsini, who was my brothers father in law, he was like, look, I’ve seen some deals come across the table from these guys, I’ve never worked with them but from what I understand they’re investing in anything, so you should go meet with these guys.
The website just said vfrogs.com, and there was a phone number on the website. So I called a left a message, cut a meeting with Tony, and by that point figured, screw it, forget the presentation, forget this that and other, forget trying to get dressed up and pretend you’re someone you’re not. Just got in there and talk about it.
I talked with him, he was young, just sold his company, he was excited about things, seemed a lot more optimistic then a lot of people I’d met with. I left there hopeful, thinking, if he doesn’t get it, no one is going to get it. I heard back a couple of days later from Alfred, who was a partner at Venture Frogs, and they said, “Tony said you’re really passionate about the idea so we’re going to go ahead and send you a term sheet.” That was kind of what got us going.
[Editor’s note: Tony is Tony Hsieh, who ultimately became the public face of Zappos.]
BI: That’s 1999 still?
NS: Yes, August 1999. I’ve had the little website up, I’ve sold a couple of shoes. So I went and raised a friends round, friends and family I always call it but there was no family involved so I guess I just call it friends. Anywhere from $2,500 to $10,000, people ranging from my buddy from high school, to my chiropractor. I put together $150,000, and so that was the Series A, now I guess it would be the seed round. We started that, hired a couple of people, friends, jack of all trade positions and that led to Venture Frog.
BI: I bet those people are really good friends now.
NS: It’s funny, one of them had put money into the $150,000 and then he came on to start working and after about a month, he’s like, this is pretty cool and all, right before we closed Venture Frogs round, he’s like, this is fun but this is my last chance to drive around the country and go crazy. So I’m going with a buddy from college, and we’re going to drive around the country in a van for a month. If I got a job when I get back awesome, but give me a bunch of Zappos thirst and stickers and I’ll pass them out. So he would just go around the country, having fun, and would go through a drive thru and slap some Zappos stickers on it. When he came back he never came back to work for us but he did really well from the friends and family round.
BI: Then you went through a lean period, right? It took a while, it wasn’t like Zappos was an overnight success. How did it work out from there?
NS: 1999 we did a couple of hundred thousand bucks, maybe even less.
BI: Are you still going to the local shoe store and buying them or had you been able to establish connections with Adidas and all these other companies?
NS: We had combo. In August ’99 we hired Fred from Nordstrom, he was at the San Francisco Nordstrom. He came on and he had some connections. We went to our first shoe show in August of 1999 and we signed on I think 12 brands, and they were all mens brown comfort shoe brands. Those brands we had drop ship relationship but that’s one small category so we still had footwear etc, and I can’t remember the other shoe stores on board so we appeared to have a wider selection.
Pretty much August 1999 was when we began transition into trying to work with brands direct. We worked with Shoe Pavilion for a long time, we worked with shopsports.com, which was Coughlin’s oniline division for a long time. We worked with a shoe store out of Atlanta called Friedman Shoes, which is all exotic skins…it’s like where all the athletes go when they’re in Atlanta. So we had mens comfort shoes, general shoes, then we had a ton of green crocodile, size 22, double E, shoes. We had a weird selection but slowly but surely started adding brands.
BI: How did the next phase go? You said Tony Hsieh had to put in a lot of his money to keep the thing going, right?NS: We got to the end of 1999 and knew we were going to run out of money pretty soon, so Venture Frogs agreed to put another $500,000 in and we moved over to the incubator. At that point our biggest challenge was, we couldn’t get the majority of brands to sell us any shoes. It was a chicken and the egg thing. We could only drive a certain amount of traffic to the site because we only had a limited selection that was only going to appeal to a certain amount of people. It was pretty rough.
We did $1.8 million in 2000, our costs were high, we had a pretty good staff of people trying to sign up shoe brands, and developers, and we were losing money and counting on the fact that one day these brands are going to work with us. When we moved into incubator, Tony had a penthouse and 10 other apartments and by the time we raised the Sequoia round, he had 1 apartment, so he was kind of like, “OK we need more money, let me go sell another apartment, I’ll put some more money in”.
He had sold his startup Link Exchange for $265 million, and he’d kind of tied up most of the money in the Venture Frogs fund, or opening a restaurant, investing in documentaries, and buying a ton of apartments. Fortunately for us he was 100% in, liked the people, liked the company and it kind of became the same thing, people were telling him “you’re crazy” and “what are you doing, this thing is never going to work” and he took it personally and kind of went all in.
We were having conversations like how much do you literally need to live? We weren’t really getting paid, it was more like, how much is your rent, what’s the bare minimum you need for food, do you have a car payment? I’m like, I’ll take care of your rent because you’re going to live in this apartment until I sell it. We had a couple times where we told the whole company, anyone volunteer and work for stock? And obviously, the people that did, it paid off like crazy in the long run. We were constantly doing stuff like that, we had lay offs quite a bit, asking people “how low can you go?”
Fortunately barely any of us had kids, no one was really married, no one really had any responsibilities and someone said “Hey, you have to go sleep on this couch for a month”, it was like, “I can do it”.
BI: When did the Sequoia round come in?
NS: 2004. The first round, yeah.
BI: That’s four or five years…
NS: Tony put in somewhere between $12 and $15 million over the course of that time. It’s clear, we had gone all the way through, Tony invested, then Tony came on board, started worked on it full time, and we kept going back to Sequoia, and they said, “Lets keep our relationship up but it’s not something we’re looking at right now”. And then finally got to the point where they were like, “Hey, you guys have gotten this to the point where we’re interested in investing”.
BI: They were the only ones you were approaching right? In that four to five year span, did you guys talk about going somewhere else, or did Tony say, let me keep funding it this way and eventually we’ll figure out another system?
NS: We were talking to other people. Draper Richards had invested in Link Exchange and had done pretty well. Tony, after he got involved, convinced them to put a $250,000 convertible note in, but it was a 12 month note, and at the end of the 12 months, we were expecting them to say “let’s convert it”. We hadn’t done a big round, so we figured they’d extend it or convert it, but they actually asked for it back.
I think that’s a good example of where we were at and where the state of e-commerce was. We had to pay them back. I think Tony sold an apartment to pay them back $250,000. We always had that feeling, if we messed something up today, we could be out of business by tomorrow. So when employees would start to get a little cocky, because you’re reading all the time about, you’re on Fucked Company, reading about this company sucks, this company went out of business, and we’d be like, “Dude, there’s way better ideas then Zappos”.
They were better ideas and they got a lot of money, and so they were forced to spend it and grow too fast and they got themselves in a position where maybe they were marketing a product that wasn’t ready yet. From an equity, and all that perspective, they couldn’t really figure out, they had to go down rounds.
For us the best thing was everyone said “no”, and we were forced to go in slow increments with Tony, and stay relatively lean and mean and keep growing. Later on, when it got to the point where Sequoia was about ready to invest, we had some meetings. I remember we met with Benchmark, and some others, and a lot of times it got to the point where people knew. They said, “Realistically, what am I doing here? You’ve worked to Sequoia in the past, Tony you have a good relationship with them. Am I wasting my time now because what you really want to do is go with Sequoia?”
And eventually I think it became clear that that’s what we had a good experience with Sequoia at Link Exchange, and it seemed like the visions were aligned if we could convince them it’s worth investing in. Near the end it became, we want Sequoia. If we don’t get Sequoia, we’ll meet with someone else, but why are we meeting with everyone when all we really want is Sequoia?
BI: Is there a point in the story for you, for Zappos, where you feel like suddenly things flipped? You went from being, “We’re grinding it out, we’re mean and lean, we’re trying to get by, we’re trying to get by, the company is building,” to all of a sudden, “Holy crap, we’re a big deal!”
NS: I don’t remember what year it was, but we brought Doc Martins on board. They agreed to sell to us, that was sort of a milestone, because, while they weren’t the biggest brand, they were kind of seen as they took their reputation very seriously, and so when they agreed to sell to us, a lot of other brands looked at it like, hey Doc Martins is selling to them, and there was a market for them online because people couldn’t find them everywhere.
There were little milestones like that where we would get a brand we were trying to get and we were like, cool, we’re making progress. We never made a bunch of money, I guess when we got to break even was a big milestone, but we were never really profitable. It was break even profitable .
It was still a culture of like, hey it’s all in your equity. We never had a point where people were rolling up in BMW’s and Mercedes, and everyone ‘s getting new cars and moving into nice houses. That didn’t happen, it was more like hey we’re doing $370 million but our salaries were pretty similar to when we were doing $1 million. There’s just more of us. We saw that we were growing, and we were doing fun stuff. Throwing big parties at the shoe shows, and you could tell in the shoe world we were becoming a big deal.
It was such a capital intensive business, we always needed our line of credit to keep going up and we had such huge amounts of inventory that we weren’t selling, so there was never a “we did it, this works”. It was always like, “OK we got by that obstacle, but now is the inventory going to kill us, or is the bank going to freeze our line of credit or lower the line of credit, which would basically put us out of business. What are we going to do?” It was hard for people to get passed that, we might go out of business tomorrow feeling. We would be doing $500 million-$700 million and people would be like, still, the people who were there from the beginning, it was still like that this could end tomorrow.
BI: I know that feeling. You’re at the beginning of something, you hold on to that early fear and then new people come in and say, why would you have anything to be worried about?
NS: Also, people think each employee on a personal level is doing so well, but really everyone’s like, “I’m really excited about my company but it hasn’t made a cent of difference to me personally over the last 5-6 years”. There was that kind of stress from people. When we did the Sequoia round, we used part of the money for employee liquidity, so that kind of helped ease the burden off of people.
Then we moved the company to Vegas. When we were all in San Francisco, there was no way we were all going to be able to afford houses. When we moved to Vegas, all of a sudden everyone could buy houses. Unfortunately that was one of the main selling points and then 3 years later, that market crashed and we have people that are left now completely upside down on their houses.
BI: Why did you guys move to Vegas?
NS: We were running out of room in our call centre area and really needed to ramp up customer service. And in San Francisco, everyone we hired for customer service, on day two, they’d be walk in and be like, “How do I get into marketing?” We just hired you for customer service, and have a pretty intensive training program. We can’t put all these people through these training programs and have everyone see it as a stepping stone. We wanted to move somewhere where customer service wasn’t seen as a get my foot in the door type of position, where there was more people interested in that kind of job, and where office space was cheaper.
BI: When was the first conversation with Amazon?NS: First conversation with Amazon was 2004, 2005, right when we got to Vegas. Jeff Bezos sat us down and basically told us, “I’m going to make you guys a great offer”. We weren’t really looking to sell the company. It was kind of a weird thing where the board said, what are you doing? Why is Jeff Bezos coming out here to ask you a bunch of questions about the company when you don’t want to sell?
We were all in different spots. I was thinking, let’s see what he offers. I was ready to do something else. I was thinking, maybe a little bit selfishly at the time, for me personally this might be good. And then, I think Tony was curious, and he said afterwards, he liked Jeff, he didn’t know what to expect, but he liked him. The board was saying, “Please, there’s no need to have these conversations if we’re not trying to sell the company.” We never found out the exact offer.
He said, “I’m going to make you an offer that’s going to be unbelievable,” but we never found out what the offer was. I wanted to find out what it was. Tony said, I’d probably consider it if I knew he would let it remain at Zappos but if he wouldn’t let it remain at Zappos, I wouldn’t consider it. So we ended up saying, sorry we’re not interested.
BI: Is it intimidating meeting Bezos? Is he down to earth, does he scare you? What kind of feelings do you have going in there, and what’s it like talking to him?
NS: I can only speak for myself. I think the board was nervous, like, why are we doing this? Mike Moritz flew out and he’s saying, “I still don’t understand why we’re having this meeting and why you guys told me about it after you set it up.” I had no idea what Tony was thinking.
I was more excited, curious what he’d be like. I was thinking, does he want to buy us, what’s he going to offer us? He was really nice. Really nice, really personable. I remember his laugh, he had a really unique laugh, he kept laughing, and I was like, “This guys cool”. I don’t think it was intimidating. We didn’t want the rest of the company to know so we met at, I think it was a Double Tree or whatever the name of the hotel was that was just across from the office. So we met in the conference room there. It was kind of this secret meeting. He was really nice, seemed like a nice guy.
BI: It was his team, and you guys had your team?
NS: Yeah, there was a couple of them. I can’t remember the connection, but I think there was someone in their business development department that had either reached out to Tony or Alfred, or even worked with him at some point in the past, maybe Link Exchange, that was like in Amazon’s biz dev department and that was how the connection was made.
I think the fact that he flew down meant it was serious conversation. At the point, I think that was the year we did $180 million, might have been 3. It was cool, he was really nice. It was kind of surreal, we just met with Jeff Bezos.
BI: Then later on, obviously they do go through with it. What changed between the first meeting and the second meeting?
NS: I think the biggest thing that changed, we saw ourselves, in the early stages, we still had a ton of growth to go by the first meeting, and I think by that point everyone thought this is going to be a public company one day. Or at least it’s going to be a lot more valuable then it is today but I think everyone’s goal was this is going to be a free standing public company.
Over the next 3 or 4 years, I think I started to question it. We could go public but are we set up to operate as a public company? Do we have the personality or the culture to follow the rules that will make us a successful public company as far as projections, and information. A lot of times it was like, we’re thinking, we’re here, and at any point we can pull these levers and get more profitable, and we can do this and that, and when it got to the point we were doing $1 billion in sales, but we’re having 40% returns and barely making money, I think people started to question, is this going to be a great company or is this just a big company that’s doing well?
You know if you compare us to Amazon, we didn’t compare favourably to them in anything. Even at that stage, we’re smaller, we should be growing faster, certain things we should be doing better, but we weren’t. At their scale, they were outperforming us in almost every metric, and so we started to question, “We’re going to go up against Amazon, but we’re not as good as Amazon.”
We don’t really have any technology plays, we haven’t done anything new or evolutionary, ever. We basically are what we are. Tony’s goal was to keep it private forever, that’s what Tony wanted. What the board really wanted, they have a liquidation preference. They could probably achieve it on day one of an IPO, but 6 months later when our lockup is over, but they don’t believe, well not that they don’t believe, but they’re not 100% confident that the company will have been accepted by the markets in a way that, when they can sell, they still would achieve their liquidation preference.
I think they said, it might be time to reconnect with Amazon, and see if there’s a deal we can make.
BI: And so now, you’re doing a new startup, RNKD. How does being rejected for Zappos and also seeing how the VC’s affected the ultimate decision of where the company went, effect you as a second time entrepreneur?
NS: Initially I thought, we have to prove X. When I was pitching Zappos, I had this idea, and what I took from all the meetings was, “That’s an idea, we invest in companies, so when it’s working as a company, come back and talk to us and we might be interested”.
That was a long time ago and obviously things have changed but that was kind of ingrained in my head. Whether it’s talking to investor or talking to brands, I’ve kind of taken that approach. Instead of selling them on the idea that, “this and this and this is going to happen,” why don’t we just make step one happen, and everything from there becomes a little more logical.
We don’t need any money, we don’t need anyone elses money to get to step one. If we got a bunch of money right now, we wouldn’t really do anything differently. Well, we might do something differently, but it might be because we feel like we have to spend more money, which is kind of what I learned from Zappos, was like, that was a blessing in disguise, was not having that pressure to spend a ton of money.
So if we wouldn’t do anything differently with someone elses money, and also the value of the company is hopefully at it’s lowest possible point right now, unless it doesn’t work, at which point we wouldn’t have wanted to raise money anyway. Then what’s the point of spending time in meetings, trying to raise money. From a brand perspective, I learned, there’s a ton of brands, so you could spend all day meeting with them, and the same thing, telling them this and this and this is going to happen but it would just be a lot easier to get to step two and go and talk to them.
At the same time, the only reason…well there’s a lot of “only reasons” Zappos made it but Sequoia, without Sequoia, Zappos doesn’t make it. Well unless someone steps in in their place, Zappos goes out of business. Money was always a crucial thing along the way for Zappos. If Tony hadn’t kept funding it, it would have gone out of business. If Sequoia hadn’t funded it, it would have gone out of business. And so, I personally had a great experience with Sequoia.
I think some of the guys, near the end, they felt a little differently but I feel like everything happened perfectly and everything happened because of everyone involved. I think we were incredibly lucky to have Sequoia on board. I have a good opinion of VCs, in the long run of a companies evolutions but I just feel like in the beginning, unless you need the money, there doesn’t’ seem to be any logical reason to go out and spend time in meetings when you could be working on the company.
BI: What do you make of startups out there that will raise $41 million before they’ve even put out the first step of a product?NS: I think there’s multiple ways, right. Different people prefer different ways. There’s different ways to get to the same end. For me personally, on a super personal level, I think that raising money before you needed it, would just make things more difficult. You always have to consult someone when you’re changing directions. In a worst case scenario, you could end up with a job. If you wanted a job, here’s a lot less stressful situations then raising a bunch of someone’s money, and kind of, end up a year later working on something that you’re not passionate about, but feel like, “Shit I’ve already got this money and I have to keep twisting it until I find a path that might work.”
For me personally, I would be terrible in that situation. I wouldn’t be the guy an investor would go to and go, here’s a bunch of money, we believe you can build a company. I would have to be attached to an idea, and so, I feel like I need an idea and someone has to believe in that idea as much as I do. Otherwise, there’s a lot better guys. I’m not a turn around specialist or someone you can just throw into anything and they’ll be great at it. I have to be attached to an idea. But I think, I can see the other side of the coin. If you can raise a bunch of money, then, it’s someone else money, then go do it.
I was reading about the guy from colour, and he’s like, I just love raising tons of money and I don’t feel bad if I lose it and I’m just going to keep raising money as long as people will give it to me and I was taught early, raise as much money as possible. There’s probably something to be said for that, it’s just not for me.
BI: Any other Zappos war stories you wanted to share?
NS: It was a lot of fun. Everyone was young and flexible, so we could do whatever and obviously we had a ton of fun. We always had a great culture. Always had low turnover. Socialized a lot inside and outside the office and obviously later on, that became the big PR angle for the company. I feel like we got really lucky, and we had the stars aligned, so I can’t complain.
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