For Tony Hsieh, Zappos’ Success Has Been All About Culture and Control

By Michael Carney , written on September 13, 2012

From The News Desk

(Disclosure: Hsieh is an investor in PandoDaily.)

When Tony Hsieh first invested in Zappos, it wasn’t a business he was overly excited about. It was one of 27 porftolio companies within his VentureFrogs fund. Worse, the company was being built in the wake of the fiasco, when Amazon was still not looking good. As Hsieh described it during tonight’s PandoMonthly fireside chat, “It was a dark time for ecommerce.”

So what convinced him that Zappos was worth his time? Hsieh points to the lessons he learned in building his first company, Link Exchange. For him, it all boiled down to culture. When Link Exchange was small, he hired his friends and things were great. As it grew faster, and they ran out of friends, the cultural identity of the company dissolved and Hsieh dreaded going to work every day.

What most attracted him to Zappos then were the people. By luck or by chance, Zappos was full of people he wanted to spend time with, whether at work or at a bar. As Hsieh started spending more and more time there, this ideology became more and more ingrained in the way Zappos hired.

For a long time, Tony personally interviewed every employee. Today, that’s the purview of HR, but the hiring managers still conduct two interviews: one for “the normal stuff,” and one for cultural fit. Hsieh says that Zappos has passed on a number of smart and talented people, who could have made an immediate impact on the company, due to poor fit.

Because Zappos was built during a time when Silicon Valley didn’t believe in ecommerce, Hsieh was able to maintain more control of his company than many entrepreneurs. His company took a $250,000 seed investment that was structured as a convertible note. When the note matured, his investors had so little faith in the business, rather than finding a workout as is typical in situations like this, he demanded the money back.

Tony scraped the cash together, and in the process regained control of Zappos. This would become a bigger advantage than even he realized at the time. One of the most visible examples of this was when it became time to talk acquisition.

Zappos ended up raising additional money later on, more than $62.8 million dollars before all was said and done. When Amazon started floating acquisition offers, investors were not looking to sell. Hsieh initially resisted as well, out of fear that the acquisition by such a large company would ruin his all important, painstakingly created culture.

As a result, Amazon created as a direct Zappos competitor. Eventually, once it was clear that Endless was going nowhere, the Amazon deal came back on the table and this time CEO Jeff Bezos committed to keeping Zappos independent post-acquisition and allowing Tony to build it as he saw fit. This time, Hsieh took the deal, despite his investors' desires. It was his dominant ownership position that made this possible.

The only thing that changed was something that worked in Hsieh’s favor. He was able to replace his early Board of Directors with that of Amazon. The best thing about this is that Amazon is decidedly a long-term thinker and obviously “gets” ecommerce. Two to three years post-acquisition, the acquire has stayed true to their word, and all is rosy for Hsieh.

Despite his unsure beginnings, it’s been Tony Hsieh’s unrelenting commitment to creating the Zappos that he envisioned in his mind that has led to its ultimate success. By focusing on corporate culture, and through the good fortune of keeping more control than most, he has largely been able to realize this vision.

Now Hsieh’s applying a similar visionary daredevil ethos to rebuilding downtown Las Vegas. It's yet to be seen whether he'll be able to wrestle the same degree of control this time around. Given the scale of the project and the number of things that can go wrong, we may find out the answer to this sooner rather than later.