
Why I Sold Zappos - dwynings
http://www.inc.com/magazine/20100601/why-i-sold-zappos.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+inc%2Fheadlines+%28Inc.com+Headlines%29
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jrockway
This article explains a lot of Corporate America. Banks and investors make
money by doing nothing; they write a check, they get a check back for more
than the original. Therefore, they don't care if the employees or customers
are happy, they only care about maximizing the chance that they get their
check tomorrow.

This is obviously shortsighted in the case of Zappos. You can buy shoes online
from anywhere. The user selects the shoes he wants, you put them in a box, you
ship the box. Take away the "expensive" features of Zappos, like good customer
service and free shipping, and your customers will just go somewhere else,
leaving you with nothing.

Amazon has a clue about dealing with customers, so I think Zappos will be OK.
But if the banks and VCs took over, Zappos would have become another data
point in the portfolio of "being nice fucks you over". (But really, it's the
banks that are fucking you over. Or perhaps, the people that default on their
loans are fucking everyone else over.)

~~~
cynicalkane
_Banks and investors make money by doing nothing_

Marx thought the same thing, and decided that to remedy the situation the
lower class should steal the capital from the upper class. Marx was wrong, and
so are you.

Cynicism about capitalism is popular in this recession, but that speaks less
about the failures of capitalism and more about the fickleness of public
opinion. Allocation and management of capital is a bit harder than throwing
money at things and expecting it to stick, as millions of American investors
have discovered over the past two years. Anyway, it seems ironic to have this
pseudo-communist whining on a board run by a venture capitalist.

~~~
pyre
> _Anyway, it seems ironic to have this pseudo-communist whining on a board
> run by a venture capitalist._

Huh? Why are you trying to call people 'communists' now? Please don't try to
turn this into some sort of political mud-slinging contest.

The bottom-line in this discussion is that Zappos's culture and customer
service was the thing that set it apart from other retailers. It was the
reason that people wanted to shop there. To try and marginalize the effect
this has on Zappos' bottom-line because it can't be easily quantified in terms
of dollars and cents on a quarterly earnings reports by calling it a 'social
experiment' or 'insignificant' is short-sighted at best.

> _Allocation and management of capital is a bit harder than throwing money at
> things and expecting it to stick, as millions of American investors have
> discovered over the past two years._

That may be true, but investing money in a business does _not_ make you an
expert in that business's core competency.

~~~
cynicalkane
Correction: I called the GP post a 'pseudo-communist rant' I'm not saying
jrockway is necessarily an actual communist, or even a pseudo- one... rather
that he has, whether on purpose or not, stated a classically Communist belief
about capitalist political economy.

That is, I wanted to point out that the claim being made--that capital owners,
in capitalism, add nothing to the capital they own--is fundamental to a
philosophy we now understand to be old, bad and dangerous.

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smanek
This was interesting:

 _When employees log in to their computers, we ask them to look at a picture
of a random employee and then ask them how well they know that person -- the
options include "say hi in the halls," "hang out outside of work," and "we're
going to be longtime friends." We're starting to keep track of the number and
strength of cross-departmental relationships -- and we're planning a class on
the topic._

~~~
tcdent
I can understand encouraging casual relationships with your coworkers, but
tracking and giving seminars on improving them goes too far. I'll take my
$2000 now, please.

~~~
regularfry
I thought he meant it was more meta than that, in that rather than sitting
everyone down and explaining how to be friends, he'd get the managers in and
help them create an environment in which it happens naturally.

~~~
vog
That might justify the seminars, but tracking personal relationships still
goes too far.

It's one thing when people do that voluntarily on various "social" websites,
but being asked to do that at work is a whole different story.

~~~
fgf
In a small company (a startup for example) the boss will know who knows who.
To make that kind of information available to the CEO in a big company seems
pretty harmless.

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edw519
Wow, I really enjoyed that. For a totally unexpected reason...

There's lots of discussion here at hn about MBAs and I often comment about how
little use I got out of mine. I remember little from marketing, finance, and
operations classes. But I remember the case studies. The comprised almost half
of the curriculum. And I hadn't thought much about them for years. Until
reading this post.

This reads like a Harvard Business Review case study. It's got everything that
makes for good business reading: compelling ideas, profit and loss, tradeoffs
between profit and growth, economic considerations, competing interests, and
most of all, characters. For a minute there, I thought I was reading Lee
Iacocca. This could even make a great Hollywood script.

Great post. Thank you dwynings. I gotta get this book!

~~~
davidmurphy
This makes me want to read some case studies! Does anyone know of a good
source for (ideally free) case studies, or does one always have to pay? I did
a search for HBS case studies and found them for sale....

~~~
danielnicollet
The HBR case studies are always sold but fairly cheap ($6.95) given the
quality of insights - see
<http://hbr.org/search//4294958507/?Ns=is_HBD_bestseller|0>

Otherwise, go to a business school library if you have access to one and you
should find copies to read...

On the other hand, all the free business case studies you can find on the web
([http://www.google.com/search?aq=f&sourceid=chrome&ie...](http://www.google.com/search?aq=f&sourceid=chrome&ie=UTF-8&q=free+business+case+studies))
are rarely worth the effort reading though them in my opinion...

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tansey
I had no idea Zappos was so big (1800 employees, over $1.5B in revenue), but
with a founder like that, I can see why. He clearly cares a lot about his
employees and his company's vision. What an enthralling story too!

Easily the best article I've read today.

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staunch
He's still in the honeymoon period. Everyone is optimistic at this stage. My
guess is that within a year or two he will leave, disgusted by the subtle
erosion of the Zappos vision.

~~~
byoung2
Some more of the Zappos vision might actually bleed over into Amazon (the
article mentioned the Amazon distribution center that followed the "$2000 to
quit" Zappos approach).

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rantfoil
Subtle jab at Sequoia -- on the one hand, yes, macro trends went against
Zappos heavily. On the other hand, the board didn't have faith in Tony's
groundbreaking worldview.

You can tell through the heavily filtered language that Tony went through hell
and back on this one.

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dabeeeenster
I find it incredible that a company that on the face of it seems so robust
was/still is completely at the mercy of the banks that are funding its
cashflow.

1 bn in sales, yet the moment it misses a growth target it could easily get
caught in a cashflow credit crunch and go belly up?

Utter madness.

~~~
roel_v
Eh? Most big retail businesses finance inventory this way. Ahold (big
supermarket holding company) with a market cap of 15 billion and a revenue of
a little under 40 billion almost went bust a few years ago because of a
similar reason. It's too expensive for a company of that size and in that
market to use its own capital for financing inventory - margins are like 3
percent, 5 percent if they're selling premium products. There's no (financial)
room to keep 10% of their revenues laying around in warehouses.

Besides, those that don't have credit lines from banks have them from their
suppliers - with the same risks and conditions.

~~~
dabeeeenster
If they make 3% profit per annum, and they have no growth, it would only take
3.33 years of profits for them to be able to finance 10% of stock...?

Surely this would be a better use of capital than the enormous risk of relying
on commercial paper/short term credit lines?

~~~
roel_v
What, and let shareholders wait for three years for any profits? These
businesses operate on the edge - in the margin as an economist would say. They
need every single bit of competitive advantage to survive. Storing capital
that can be put to productive use in a warehouse is a liability, to be
remedied asap. Every business has risks, credit risk is just one of the many.
When managed well, there is no problem with relying on outside credit to
finance short-term debts. Running a big company (or a country, for that
matter) is _not_ the same as balancing a household budget. Risk is an
essential part of doing business, and managing risk is one of the aspects that
can give a company a competitive advantage.

A few days ago there was a link here on HN about marginal advantages in game
design, how the best Starcraft players thrive in environments where they are
just a smidgen ahead of their opponent, and maneuver themselves in such a
position, in contrast with the amateurs who want to 'win big' - have a big
lead and crush their opponent in an overwhelming fashion. It's an eye-opening
read, putting in words a property of winners that I never quite managed to
capture myself. The theory applies to businesses equally - in a mature market,
you can never be hunkered down, playing an all-defense game while you build up
resources and then crush the opposition. By that time, that competition will
have eaten your lunch and driven you out of business.

~~~
Retric
A) Cash on hand has value.

B) Banks do charge them interest on that money. So their opportunity cost =
(Money * (Potential return - bank interest rate), but risk also has a cost.

C) As a public company Edit:(Ahold) could sell stock and gain capital without
making their numbers look bad.

IMO, if there was a 5% risk of going bankrupt it's a now brainer. If it’s less
than 5% they can mitigate it by keeping more cash on hand.

~~~
roel_v
Of course cash on hand has value. Question is how much of it is needed to
optimize profit. And of course credit lines cost money. That's where the 'risk
management' part comes into play. My point is that there are hundreds of
people running models and doing calculations on what the optimal way to
finance operations in a company of that size is. Contrary to popular opinion
these people aren't stupid. It's unreasonable to, a priori, rule out financing
inventories with credit, just because there is risk involved. It's about
balancing pros and cons, and whoever balances it the best, wins (i.e., makes
most profit, or can lower prices to gain customers and grab more market share,
or buy competitors, or...)

(about Ahold, without knowing the details, the liquidity problem was at the
time when details of shady accounting in a US subsidiary came to light. You
can't issue more stock in a few days to cover immediate liquidity problems.
plus investors aren't going to be too happy when you're diluting their stock
just to cover an operating loss. It's a different thing when you're doing it
to raise money to expand the business.)

~~~
Retric
_Question is how much of it is needed to optimize profit._

No, optimizing for profit ignores your risk to capital. The US banking history
has a long history of Martingale style investments where a high probability
for modest return risks huge amounts of capital.
<http://en.wikipedia.org/wiki/Martingale_(betting_system)> The important
difference is banks risk far more capital than they have so a Martingale style
bet works in their favor.

Alhold however, was risking 15 billion in capital to make a modest return.
IMO, if you’re going to risk 15 billion then go whole hog and run a financial
institution to better balance your risks. Why risk zero when you can go all
the way to negative 15 billion etc.

PS: I know that's not what you meant by optimizing for profit, but they were
still making a 15 billion dollar bet for a few millions of dollars in annual
return.

~~~
roel_v
Yes, I meant 'optimize for profit/risk ratio' I think - Ahold is a 'safe'
company so low profits are tolerated by investors in return for a 'certain'
return, as compared to investments in high tech where a higher yield is
demanded because the risk is higher.

I think we're on the same page but I don't understand your last line - are you
saying that companies with 'low' (single digit) returns are suboptimal choices
for investors?

~~~
Retric
What I meant by _they were still making a 15 billion dollar bet for a few
millions of dollars in annual return._ was the company risked its market cap
for whatever return they received from their approach to managing money.
Credit crunches are not uncommon and often kill large companies when something
bad happens in the middle of one.

As to safe return, as you say their stock holders where paying a premium for
safety and unless the R/W was awe inspiring I suspect most of them would
rather gone to safer route.

~~~
roel_v
Oh, I guess we're not on the same page then after all. They're only "risking"
15B in the sense you're implying in a black/white world. They were/are taking
a calculated risk, well within 'normal' bounds, and certainly within well
accepted bounds for most investors (as in, investors with the most money on
the line). Credit crunches 'often' killing large companies is hyperbole. Small
companies yes, but for large companies it's relatively rare as far as I know.
Then again what do I know, I'm open to number that prove me wrong.

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mikebo
Way more frank than I was expecting. Great article

~~~
mawhidby
Agreed. This article was adapted from Tony's book, Delivering Happiness, and
it just so happens that today is the official release:
<http://www.deliveringhappinessbook.com/> I was planning on getting the book,
but after reading this article, I went ahead and orered it. Can't wait to read
it.

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blizkreeg
Such an inspiring story. What amazes me about great companies is there is
always _one_ (just one) underlying trait that strings through the company as
its DNA. And it is never money.

~~~
clemesha
Is this actually true? Or is it more that we "hear" (listen and remember)
about this type of "great" companies?

(This is definitely more of an honest question than some sort of inadvertently
negative response.)

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rama_vadakattu
Reminding "VC money is a time bomb" --DHH
<http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2351>

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mchafkin
If anyone is interested, we'll be hosting a live chat with Tony at 1pm EST.
<http://www.inc.com/live>

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iworkforthem
Take-a-away... VCs funding is not a good idea. They just want to grow their
investments and not grow the business. To build a great company, you need to
have some form of identity... To think Zappos is a Billion $$$ company that
sell shoes, etc. Crazy..

~~~
hop
Unless you need 48M in working capital like Zappos did, there are few
investors other than venture capitalists.

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petercooper
_except whereas Virgin was about being hip and cool, Zappos would be about
offering the best service._

According to Branson's autobiography, that was Virgin's initial brand ethos
too.

~~~
justinchen
Are his books any good?

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petercooper
The original "Losing My Virginity" autobiography is excellent. Some of the
smaller "guide" type books he did afterwards tend to just rehash things from
the autobiography..

~~~
justinchen
Cool, thx. I'll check it out.

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tjmaxal
If you liked this article you might like a similar one at Fast company:

[http://www.fastcompany.com/1657030/the-happiness-culture-
zap...](http://www.fastcompany.com/1657030/the-happiness-culture-zappos-isn-t-
a-company-it-s-a-mission)?

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eande
Tony Hsieh website on delivering happiness
<http://www.deliveringhappinessbook.com/> with lots of more information around
the subject he is very devoted to.

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perlpimp
What a great read. It seems that you have so many options, as long as you
don't rush it.

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bennysaurus
It looks like they are hanging onto a little of their culture at least even
externally - just take a look at the link in the about section at the bottom
of the page labelled 'Don't ever click here'

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alain94040
Indeed well worth the read. There are many parallel story lines that you could
extract, depending on which point you are trying to make, but the best thing
to do is read it and decide for yourself.

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coryl
Awesome, Tony Hsieh is a true business leader.

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hartror
Fantastic story but I think it avoids the obvious, if Zappos didn't have what
customers wanted being really really nice wouldn't have done them any good.

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_pius
Remarkable article, well worth a read.

