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Last night we had the pleasure of hosting a number of friends from Groceryshop at an Airstream Park in downtown Las Vegas. The park is home to Tony Hsieh (pronounced ‘Shay’), one of Exact Media’s investors and CEO of the online shoe and clothing company Zappos.

In honour of last night’s festivities, we thought we’d share Daniel’s podcast interview with Tony.

It doesn’t matter what your (company) values are. The point is you don’t have to adopt values, you should have them and commit to them.

Tony Hsieh is an American internet entrepreneur and venture capitalist. Prior to joining Zappos, Hsieh co-founded the internet advertising network LinkExchange, which he sold to Microsoft in 1998 for $265 million.

Tony then joined Zappos as an advisor and investor, eventually becoming CEO. In November 2009, Zappos.com was acquired by Amazon in a deal valued at $1.2 billion on the day of closing.

Through a post on Medium, a tweet, and a little serendipity, we were fortunate to connect with Will Young at Tony’s Fund, VTF Capital, and have been fortunate to draw on their expertise and network to grow Exact Connections.

In this interview, we cover how to balance investing resources into testing new ideas vs focusing on your core business, how Tony is building his company to mimic the structure of a city, avoiding the ‘default state of death’ that normally inflicts most companies and more.

Daniel: I thought it’d be interesting to start with a bit of a thought experiment with you. Culture has been incredibly important to the success of Zappos, but imagine if you could capture everything that makes it successful – the people, the values, the weirdness – and go back in time to transplant it to LinkExchange in 1996: What do you think that business would have become, if you got the culture right the first time?

Tony: It’s hard to predict exactly what we’d be doing at LinkExchange but at the time we sold it, we were mainly known for being an ad-exchange network that we pioneered back in ‘96. We had about a million websites in our network, just displaying banner ads, which was a relatively new thing back then.

If you combine the reach of all those websites at the time, we had higher reach than many well-known sites like Yahoo. That was our main business, though we had several side businesses that were also growing. This and the fact that 1/3 of our sites were small businesses was why Microsoft became interested in us.

Zappos is a similar story, where we are mainly known for one thing – selling shoes online – even though we sell clothing and other product categories as well. We’ve consistently been asking ourselves how to grow the business beyond the core we’re known for? The closest analogy I can share is Virgin: they started in the music business but now are in so many different businesses – airlines, telecom, etc. We’re trying to do the same thing at Zappos – any business where customer service can be a differentiator, we want to leverage the Zappos brand.

Daniel: One of our challenges in building Exact Connections is the balance when resources were constrained. How did you balance resources for testing new ideas and growing new businesses, versus deploying resources back into your core business?

Tony: We adopt the ratio that I believe Google employs – roughly 70/20/10 or 80/20, where 10 to 20 percent of your revenue is devoted to innovation. Whatever ratio you decide, you need to devote some percentage to experimentation and don’t get so focused on just your core business.

At some point, your business model works great until it doesn’t. We’ve seen examples of it everywhere, like in the music industry for example. The Fortune 500 list first debuted in 1955 and today, 88% of those companies are no longer on it. It’s important not to get too complacent, even if your core business is doing well.

The default future for companies that aren’t constantly experimenting, innovating and adapting to a changing world is death.

Daniel: What were some of the other businesses you had launched back at LinkExchange?

Tony: We had a pretty cool service that helped build up mailing lists. Early on, in order for your website to be found on a search engine, you literally had to submit the URL and a description of your page to them. You had to do that for every search engine and there were about 20-30 of them, in various sizes, with different submission criteria, so it was a pain to have to manually do this.

We ran a service called ‘Submit’ where you’d fill in all your information and it would submit it on your behalf to all the search engines. It’s a perfect example of a super valuable service many years ago, but today is totally irrelevant.

Daniel: In my research and conversations prior to our talk, I’ve heard the term “Market-Based Dynamics” (MBD) a number of times, which effectively sounds like you’re trying to build Zappos like a city – to be organic and allow for self-organization and creation. I’d love to hear more about this vision and what implications you see it having on Zappos in the future.

Tony: The broadest term is MBD, but the simplest explanation is what you said – how do we re-structure Zappos to be more like a city and less like a typical top-down, hierarchal corporation. The average lifetime of a public company is about 15 years (or so). The only human-created organization that has really stood the test of time are cities, so that’s part of the reason we’re going down that path.

Cities (and nature) are a great example of self-organization. There is no CEO of a rainforest. The Mayor of a city doesn’t actually tell its residents what to do or where to live. Every time the size of a city doubles, innovation and productivity per resident increases by 15%, so as cities get bigger, they become more innovative, more productive and more efficient. The opposite is true of companies where the bigger the company gets, productivity typically goes down.

One of the most interesting facts I’ve heard is Manhattan has (something like) three days of food supply for everyone in Manhattan – yet they never run out of food and there’s no central food manager. It’s a resilient, effective system that’s made up of individuals and businesses, consuming food, creating opportunities for suppliers at different scales. There could be a natural disaster or bridge could go out, yet Manhattan doesn’t run out of food. Just another example of self-organization and MBD at work.

Daniel: Tactically as you craft this within Zappos, what does the company framework look like to mimic a city?

Tony: The way we’re structured right now is we have 500 internal circles or teams and 1500 employees in Vegas so each employee could belong to multiple circles or teams. Instead of being arranged in a hierarchy by people or by department, we’ve organized ourselves in hierarchies of purpose. Each circle is in service of the larger goals of the circles above it. It’s still a top-down organization and budgeting is done in a semi-traditional way, but we’ve been transitioning ourselves to be purpose-driven over the last few years.

Traditionally, the budget comes from one manager, which creates one potential point of failure if that person doesn’t give you the resources you need. All it takes is one person to prevent you from making the best contribution to the company. Whereas if you think about it in a city environment, if someone has the funding and wants to start a bakery, they can do so – there’s no one to block them. If they don’t get enough customers? They close down. But it’s not some evil manager’s fault, they just couldn’t provide enough value for the customer.

So our transition is a multi-year process changing each of the 500 teams into units that act like their own startup, with their own customers (even internal customers.) Ideally each circle has its own P&L and multiple customers, so there’s not one person who can say no and rather than being given a budget in terms of headcount or dollars, we want our teams to hire whoever they want and do whatever they want. The only criteria being, make sure you’re balancing the books. Make sure what you’re doing is in line with the Zapops brand and culture.

Daniel:  In your time learning how to manage and lead people, is there any bad advice that you continue to hear repeated? For example, it’s said that Steve Jobs ran his company with an iron fist and was very short-tempered, so people began to feel that was the way a corporate culture should be.

Tony: Research has shown that all things being equal, companies with strong values and culture outperform co that don’t have it. There’s not necessarily one formula for the right values and culture. In the book Good To Great, author Jim Collins highlights it doesn’t matter what your (company) values are. The point is you don’t have to adopt values, you should have them and commit to them.

Daniel: On the personal side, what does your typical morning look like? What do you do in the first 60 minutes of your day?

Tony: Hit the snooze button a few times – and I still don’t understand why the iPhone only allows a 9 minute snooze. A 20 minute snooze would be perfect. I generally try to keep my mornings free to catch up on email and reading, then have my meetings in the afternoons and evenings.

Daniel: I know you spend a lot of time on email. Have you ever thought about what kind of communication would replace email down the line as you build out the company like a city?

Tony: I think the problem is that email is good enough. Until some other tech comes along of large magnitude, it’s going to be hard to get people to adopt something en masse.

Daniel: Other than Good To Great and your own book, Delivering Happiness, are there any other books that come to mind that you’ve gifted most to other people?

Tony: It really depends on the individual and what they’re looking for. Right now I’m reading a book called Scale by Geoffrey West and that’s where I first learned that statistic about cities and residents increasing their innovation by 15%. He gives a great TED Talk as well.

Daniel: What’s left on your bucket list personally – what do you still want to do or see in life?

Tony:  I haven’t met Anna Kendrick yet!

Daniel: Only ever at your parties have I had Fernet – a bitter herbal liquor that you introduced me to and now enjoy, (though my friends don’t like it as much). How did you discover it and how did it become your drink of choice?

Tony: Before moving to Las Vegas in 2004, I was introduced to it in San Francisco and, at the time, it was almost this secret handshake amongst bartenders – if you ordered it, then they knew you were either a bartender or had a friend in the industry.

It’s a pretty polarizing drink, with about 50/50 of people loving or hating it, but it becomes a kind of bond. Have you ever seen Pretty Woman? There’s this scene where Richard Gere takes Julia Roberts to the San Francisco Opera and it’s her first time. He says people’s first reactions to Opera are very visceral – people either love it or hate it and if they love it, they love it forever, but if they hate it, they can learn to appreciate it, but it’ll never become a part of their soul. The same is true for Fernet.

Daniel: Last question on the topic of those that may hate Fernet, from what I read you do discomfort challenges regularly. Of all the ones you’ve done, what is the best discomfort challenge you’ve done that has had the most long-lasting and positive effect in your life?

Tony: Right now I’m wearing a mohawk that I started last year. I still get random comments from strangers or weird looks from kids pointing at me. It’s kind of an ongoing discomfort, but I also get strangers complimenting me or asking for product recommendations.

 

The Connections Leadership Series Podcast interviews the leaders and legends of the marketing industry. From CMOs of the world’s largest brands to CEOs of agencies and fastest growing, billion-dollar organizations, our goal is to help you understand their stories and leave you with lessons and tactics to help you in your career.