SPP: Your parents were pretty strict in regards to how they raised you. They stressed academic excellence, musical abilities, and things like that. This style of parenting I know is fairly normal amongst many eastern cultures, but it’s different for many American parents idea of how to raise a child. What do you think is the best approach and do you wish you had more leniency as a child, or are you glad you were pushed?
Tony Hsieh: I don’t know if there’s any one right answer to that. I think there’s benefits to combining those approaches. But I would also say really a lot of it comes down to the individual personality of the kid and the parents and their interest. So for example, I have two younger brothers and my response to my parents being strict, because my parents wanted me to go to college and become a doctor, you can eventually get a PhD and so on. So for me going the path of being an entrepreneur was kind of my way of rebelling against my parents.
So for me personally I think if they were not strict and were more encouraging of going down the entrepreneur path I think that would have been better for me, but not necessarily for my brothers or for someone that has a different personality. There’s some people that really benefit from that exposure and parents being stricter and so on. I think like any family my parents actually became less strict with each child. So I was definitely the one that they were the most strict with.
SPP: You also mentioned in your book something that I believe has crossed everyone’s mind at some point. You said that early on you thought you’d worked hard when you were young so that later in life you could do what you wanted. However, oftentimes people say that you shouldn’t put your dreams on hold because you may never get back around to them, which by the way is one of the reasons I admire Fred in your book. I think that’s exactly what he did. He had a lot of responsibilities but he followed his dream and it ended up working out really great for him. Do you think that people should be willing to sacrifice following their dream or their passions early on to guarantee a paycheck and stability, and things like that, because obviously there is a lot to be said for making a good living and providing for your family.
￼Tony Hsieh: Well a) I would say there are no guarantees so a lot of times what you think is a guarantee could be a false sense of security. Then I would say the flipside though is that we lived in an age in society where the worst case scenario is actually not that bad. I think there’s a lot of assumptions that people have in terms of like oh if whatever doesn’t work out then there’s no alternative solution. The worst case scenario for probably anyone listening to this podcast is maybe you suck up your pride and crash the friend for awhile versus the 20,000 years ago the worst case scenario was you would starve to death or be eaten by a saber tooth tiger, like you would actually die, because the worst case scenario for most people listening to this is not you will die.
SPP: Good point. I never really looked at the extremes like that. One thing that I think that you and I have in common is that you talk about doing minimal work and getting maximum return. This goes back to the days when you trick your parents into thinking you’re practicing the piano and then in college you tended to pick classes based on having an easier workload. Even later when you worked at Oracle you tended to enjoy the lax schedule for a good pay. Where do you think this idea originates from and how do you feel about that? Because oftentimes I feel like people may misinterpret it as being lazy or unmotivated but personally I think it’s just working smarter and not harder.
Tony Hsieh: Well for me for the examples you came up with actually I think it was for me being lazy and unmotivated. Probably that’s the biggest thing is just feeling unmotivated. If you’re doing something that you’re actually passionate about then it doesn’t seem like work and time just flies. That’s one of the lessons that I learned is just follow your passion.
I think as a society we kind of been accustomed to the way things like back in the factory days when you just had to do however many hours of unrewarding work just to feed your family. Today there’s so many opportunities that didn’t exist even 10 years ago that definitely I think there’s opportunity for people to be able to align what they actually do during the day with what they’re actually passionate about.
SPP: I wanted to talk to you a little bit about when you started Link Exchange. I was fascinated by the fact that you did quit that job at Oracle, not really having a plan in mind, but just knowing that that wasn’t what you wanted to do. What was your mindset when you had quit Oracle, and then when you eventually did start Link Exchange and you sold it to Microsoft for $265 million dollars, how did that affect you at such a young age?
Tony Hsieh: I guess for me it kind of goes back to creating an article and just realizing the worst case scenario is not that bad. So many people put their lives on hold or never figure out what they actually want to do or what they’re passionate about because they’ve been stuck in an unrewarding job for 10, 20 years. So you’re never going to get to wherever you’re going to end up if you aren’t moving along and being true to yourself. I would say that’s probably maybe the best guiding principle in general for life or in business is just to be true to yourself. Anytime you realize you’re not being true to yourself you have the power to change that.
In terms of being in, like you said selling to Microsoft this was back in 1998 so we got lucky with the timing it was during the .com boom, so definitely was in the position of not having to work again for the rest of my life. So I actually ended up spending about a year or so investing in different companies and Zappos just happened to be one of them. During that year I realized that for me investing was actually kind of boring. I felt like I was sitting on the sidelines and I really missed being part of building something.
So basically within a year I ended up joining Zappos full time and part of that process was also realizing once you don’t have to worry about paying rent or basic necessities like food money doesn’t necessarily buy incremental happiness, which I think most of society assumes is true. There’s actually been plenty of studies that show once you’re above, for example $75K roughly in annual income that the additional income actually doesn’t buy more happiness.
SPP: I wanted to talk to you about what you mentioned in terms of how you were investing in companies before you came across Zappos. You were probably asked for funding by a lot of people when you were doing this, can you tell us what you looked for in an investment and what do you think most venture capitalist look for. Is it a strong business plan, a great idea? I know passion is big with you. What do you think kind of sold you?
Tony Hsieh: At the time it was myself and Alfred and we’d never really done any investing before, so it was not like we really knew what we were doing. We made about 20 or so different investment. At the time we were looking for what seemed like a good market opportunity, a team that worked well together, and a chance to be Number 1 in whatever the company was in. All that being said we made I think the exact number was 237 investments and ultimately the vast, vast majority of our returns came from Zappos. So really I guess specifically for Zappos it was we really liked the people there and enjoyed working with them.
I would also say that in general the value that VCs or investors in general were able to add when Zappos started back in ’99 compared to today is very different, or even back in the Link Exchange stage to keep our servers up running and being able to handle all the volume, we looked into the class and that was something like $50,000 dollars a month for the equivalent bandwidth and service that you can get today for $50 dollars a month. So a lot of people go in with the assumption that they need to raise money and I think it’s a very different role today versus 10 or 15 years ago.
SPP: I know that in thinking about starting something I oftentimes worry about where the money is going to come from. I was going to ask you for someone with an idea what do you think is the best way to go about raising money these days? Basically, how do you start from the beginning? For example, it seem like Nick just called you out of the blue fairly unprepared with just an idea that was Zappos. I don’t think many people would recommend this strategy so I was kind of wondering what you would recommend.
Tony Hsieh: Well I would actually recommend first figuring out if you actually need the money or not because I think a lot of times people assume they do and I would actually say you don’t. One of my favorite quotes is, I think it was from Jim Collins, was that it’s a never a question of not having enough resources it’s a question of not having resourcefulness. It’s actually when you don’t have a lot of money or any money that you’re forced to be creative and really figure out how to take your business to the next level and instead of relying on money.
There’s lots of things you can do. There’s other ways to have the equivalent affect of raising money. For example, my brother is actually doing a startup right now and he was talking about how he needs money to pay his employees for payroll. So you can either in that scenario you can either raise money and then use the money to pay your employees, or you can go direct to your employees and just say if you’re willing to work for reduced salary or no salary you’ll get some of the equity in the company that would have otherwise gone to that initial investor.
Other examples are for Zappos in our early days initially we thought we needed money in order to grow our inventory, but rather than try to get a bigger loan or raise more money to grow that inventory we found that actually some of that funding could affectively come from our vendors. Instead of paying them in 30 days we partner with them and paid some of them in 60 days or 90 days, which helped the cash flow of the situation and meant that we didn’t need to raise more money or borrow more money.
SPP: I wanted to go a little bit into the big thing behind Zappos is the culture and the customer service. You made a statement of saying that the culture drives the brand. Can you explain that just a little bit?
Tony Hsieh: Sure. I mean our belief is that a company’s culture and a company’s brand are really just two sides of the same coin and the brand is really just a lagging indicator culture. For example, if you ask a random person off the street what they think of the airline industry as a whole not any specific airline, you’ll probably get back the response about bad customer service, apathetic employees and so on. Like it or not, that is the industry, even though no airline set out for that to be their brand.
I think with social networking based on Twitter blogs and so on that actually that lag is becoming less and less because everyone’s happy connected in information travel so quickly. So our Number 1 priority as a company is our culture and our belief is that if we get the culture right then most of the other stuff like delivering great customer service or building a long term brand or business will just happen as a natural byproduct of that.
SPP: Part of your training you show your potential employees what the culture of Zappos is and you guys have an interesting training program where you actually offer your new hire employees money to leave after going through training or any time during training. Do you still offer that and what successes did you guys see out of that interesting take on a training program?
Tony Hsieh: Yeah we’ve been doing it for several years now and basically at the end of the first week of training, which is when they just start their job, we make an offer to the entire class. It start out at $100 dollars actually now at $4000 dollars where basically we say we’ll pay you for the time you spent training, plus a bonus of $4000 dollars to quit and leave the company right now. That’s a standing offer until the end of our four week training program and then we extend it a few weeks beyond that afterwards.
Every year we found that on average about 2% or 3% of the people end up taking the offer and so that’s actually why we keep upping the offer because we feel like not enough people are taking it. The reason we initially made that offer was because we didn’t want employees that were here just for a paycheck. For a call center rep the starting pay is $11 dollars an hour. There’s plenty of other call centers in Las Vegas and we’re really just looking for employees that believe in our long term vision and really feel like this is the right environment and culture for them.
SPP: I know that when Zappos first started Nick was just taking pictures of shoes and putting them on a Web site. Obviously this won’t work unless people somehow visit the Web site. So I was wondering what methods did Zappos used to advertise, but early on when no one knew about them, and also later. Even up to now you guys are a nationally recognized company how your marketing ideas and mediums changed?
Tony Hsieh: Yeah I think we advertise on keywords on Google and so I’m sure we experiment with some of that during the early days, but for the most part our whole philosophy is let’s take most of the money that we would have spent on paid advertising or paid marketing. Rather spend it on that investing in the customer service and the customer experience and then let our customers do the marketing for us through word-of-mouth. On any given day about 75% of our orders are repeat customers. Basically the Number 1 driver of our growth over the years from basically zero in 1999 to 2008 was when we first hit a $1 billion dollars in gross merchandise sells. The Number 1 driver of that growth has been through repeat customers and word-of-mouth.
SPP: People are going to look at your story, hear your financial wherewithal and think you had it made. You sold a company early on in life and you could have taken it easy after that. I don’t think until diving into your book you realized that you did put it all on the line pretty much, which is scary but it’s awesome in my mind. Do you ever look back and think you could have just hung out after you sold Link Exchange and probably avoided a lot of stress along the way or would you have done the exact same thing?
Tony Hsieh: Probably would have done the exact same thing. I mean it just goes back to just being true to yourself and I think if I was just hanging out and not doing anything I’d probably be pretty bored with life. The other thing is like if for whatever reason Zappos hadn’t worked out then it’s not really the end of everything. I guess in my mind it’s just worst case scenario just try to start another company.
SPP: Because of how the economy is now and what’s going on in big corporation and industries it seems like a lot of people are trying to start their own startups or get into small businesses so that they can kind of control day-to-day work/life. For these entrepreneurs that are out there, what would be your Number 1 piece of advice?
Tony Hsieh: I would say start with blank slate and start out imaging that if money weren’t an issue what would you ideally like to do? Or if you won the lottery or didn’t have to work what type of lifestyle would you want to design for yourself and the people in the opposite end and kind of work backwards from there. You’ll have to make some adjustments to adjust to reality, but I think what a lot of people find through that exercise is there’s a lot of assumptions that you don’t have to assume.
So for example, for us on Zappos in the early days of Zappos when I actually interviewed everyone, Fred interviewed everyone and our thought was well who would we choose to be around if we weren’t forced to be in the office together with them every day? And that was an additional criteria that we added to the interview process, which kind of evolved to today our HR Department interviews everyone purely for culture fit. In addition to the standard set of interviews that they do with the hiring manager and his or her team they have to ask both in order to be hired. Whereas some people would assume well sometimes you have to hire people because they have the right skill sets and experiences, even if you don’t get along personality wise with them even if they’re bad for the culture you have to hire them. For us we just went with the assumption that you actually don’t, challenging that assumption that you can’t add additional criteria and for us it’s culture.
SPP: All right Tony we know your time is valuable and we’re going to end it there, but we really appreciate you being on the show. Again we both loved your book “Delivering Happiness”. We’ll be sure to put a link on our site and recommend it to everyone. So thank you so, so much for being on.
Tony Hsieh: Thank you for having me. One last comment I would make is I think this was just before you were recording, but you were giving me background of how you guys started with the show. I think you guys basically, my understanding is, started this just because it was something you were passionate about. If you had to go in with saying “Okay if we’re only going to do this from the get go we’re going to get 20,000 listeners a day and make a business out of it”, like you would have never gone down that path. But you went in it just because you were passionate about it and then now it is what is today. It happened through something you couldn’t have controlled or predicted.
SPP: That’s such a good point and one that Jon and I both kind of thought about after reading your book. You’re such a proponent of following your passion, working hard towards what makes you happy, and then seeing your success story gives us and hopefully others the will to go for it and see what happens without always having to think about the what ifs and what could go wrong. So we really appreciate it and again thank you.
Tony Hsieh: Well thanks for having me and enjoy the rest of your day.