Entrepreneurial Sole

Alfred Lin of Zappos.com thrives in the VC world, whether the product is shoes or services or something yet to come.
Entrepreneurial Sole

Alfred Lin is fascinated by the potential of online commerce. Although he’s currently COO of Zappos.com, an Internet-only emporium of shoes and accessories, he’s dedicated his whole career to e-businesses. And so far he’s made what have been pretty accurate guesses about the models most likely to succeed in the online world.

The figures don’t lie: Before joining Zappos, Lin held top finance positions at Tellme Networks, which offers voice-based services for computers and mobile devices, and LinkExchange, an Internet ad banner network. Each company eventually was sold to Microsoft—for $800 million and $265 million, respectively. Not only that, last year Zappos was acquired by online retailing giant Amazon.com for close to $1 billion.

It’s easy to pinpoint the characteristics that made Zappos worth the price—a strong, quirky corporate culture; superb customer service; and growing sales that had hit $1 billion by 2008. But none of these were in evidence in the company’s early days. When Zappos was founded in the late 1990s, customers placed orders online, and manufacturers drop shipped items to buyers. The dot-com crash, 9/11, and the first recession of the 2000s put the company on shaky financial ground, and the management team decided to refine its business model. Rather than outsource its fulfillment operations, Zappos would buy and warehouse its own inventory. It would also differentiate itself from other online shoe stores by focusing on customer service.

Now the company manages a warehouse in Kentucky while running most of the operations out of headquarters in Henderson, Nevada, near Las Vegas. Among the employees in Henderson are those taking calls from customers who find the 800-number prominently displayed on the Zappos Web site. The commitment to customer service means there are no limits on calls, resulting in some phone interactions that last four and five hours; it also means the buying process is as simple and convenient as possible.

“We think of ourselves as bringing the store to your home,” says Lin. “Look through our store online. Pick out the items that you think you would like, and we’ll ship them to you. Try them on in the comfort of your home. Keep the ones that you love, and ship back the rest.” Moreover, shipping in both directions is free, and loyal customers are often upgraded to free overnight shipping as well.

Lin joined Zappos in 2005, but he already knew a lot about the business. He’d been friends with CEO Tony Hsieh since their college days at Harvard University, and the two of them were early investors in Zappos through their investment company Venture Frogs. Together with head merchandiser Fred Mossler, they have built an online shoe store into an Internet juggernaut.

That means, for Lin, it’s time to move on. He recently announced that he’ll be leaving Zappos for Sequoia Capital by early next year. The venture capital firm—which has already invested in Google, PayPal, and Oracle—specializes in startups related to the Internet, mobile, and tech sectors. In other words, the kinds of companies that are close to Lin’s heart. In an e-mail to Zappos.com employees, Lin explains the move by saying he is following his calling of helping “interpret the visions and dreams of entrepreneurs about how the world should be.” As he might tell business students, the more you venture, the more you stand to gain.

You first became involved in Zappos when you and Tony Hsieh invested in it while running Venture Frogs. What made you believe the company could be successful, particularly with a commodity item like shoes?

There was a certain amount of naiveté involved. We would like to say that we could foresee everything that would happen, but if we had, we probably wouldn’t have invested.

All kidding aside, we almost missed investing in Zappos.Nick Swinmurn, the company founder, left a voicemail saying that he wanted to sell shoes on the Internet. Either Tony or I had a finger on the delete button. Then Nick went on to say that the U.S. market for shoes was about $40 billion. The clincher was when he said 5 percent of the market, or $2 billion, already was being sold on the Internet. It wasn’t rocket science to dream that the Internet would be bigger than mail order.

The fact that everyone thought it was a crazy idea also made the investment interesting. In the early days, people didn’t think we could sell shoes on the Internet. Then, they didn’t think an Internet company could provide great customer service. Then, they didn’t think that a company could create a brand around great customer service or that an online company could create a personal, emotional connection with the customer.

We realized that if no one else thought it could be done, then there would be very few companies trying to compete with us. If we could figure it out, it would allow us to build a valuable company.

Why do you consider customer service such an integral part of Zappos.com’s business model?
Customer service is one of the most undervalued methods of creating a substantial company in the long run, whether it is online or offline—but the key is in the long run. Most customer service departments are considered expenses, and it is easy to cut expenses in the short run without damaging things in the short run.

Try turning the problem on its head. See if making a greater investment in customer service will pay off over time. In theory, if customers are treated well, they will be more loyal and more likely to promote the company. In theory, that should allow you to spend less on marketing. That is how it played out for Zappos. On any given day, three quarters of our sales are from customers who have shopped with us before.

Out-of-the-box thinking doesn’t just happen. It comes from passionate dedication to making progress each and every day in an area that you just love.

I’m not sure all business school students understand just how much impact customer service can have on the bottom line. What would you tell graduates about how to build and maintain a loyal customer base?

Know what your differentiated value proposition is to your customers. What makes your company different from your competitors and special to customers? That’s not a course taught in school, but it is probably the most important question you could answer before starting your own business.

When candidates interview for top positions at Zappos, one question you ask is, “What would you say is the biggest misperception that people have of you?” What’s the biggest misperception people have of the company?
We’re trying to change three main perceptions, which we call the Three C’s. Most people have not shopped with us and even if they have, they think of us as a shoe company. So first we want customers to think of us as a clothing company. After customers have had a great experience, we want them to think of us as a customer service company. After customers have had a few great customer service experiences, we want them to know that our great service comes from our dedication to our culture.

Your corporate culture is so offbeat that it’s frequently been described in business books and case studies. A few years ago, employees worked together to distill that culture into a list of ten tenets, such as “create fun and a little weirdness” and “be humble.” How do you ensure you hire people who will truly embrace those tenets when they come to work at your company?
The commitment to core values begins with the hiring process and continues throughout the employees’ tenure. We call our core values “committable core values” because we are willing to hire and fire based on them. We interview, train, and evaluate performance based on both a technical ability to do the job and the ability to live, breathe, and inspire the culture.

When business students interview for jobs, how can they gauge whether a company has the kind of culture where they’ll feel comfortable?
We encourage everyone to join a company that has their same values. They can watch the everyday decisions a company makes and ask themselves if they would handle situations the same way. If a company with their values doesn’t exist, they should start their own!

When Zappos was sold to Amazon.com, there was obviously some fear that the culture wouldn’t remain the same. Now, not quite a year after the sale, what changes have you seen?
Nothing has really changed. We swapped out our former board of directors with a management committee composed of three members from Zappos.com and three from Amazon.com. Zappos.com is not trying to be Amazon.com or vice versa. Each company operates independently, and we are building our respective businesses, brands, and cultures. The biggest benefit is that now Zappos has access to a wealth of resources at Amazon.

Merging with another company is one way businesses continue to grow. Another way is by adding product lines, and Zappos has started to sell apparel, jewelry, and accessories. What other innovations do you think the company might implement in the future?
We are constantly trying new things, and we encourage our employees to drive that innovation and change. When Tony, Fred, and I speak at orientations for our new hires, we say that if we are the ones who come up with the ideas, that’s only three ideas for the day, month, or year. If we leverage all of our employees, we can get 1,800 ideas in the same timeframe. Given our size, if there’s one person who’s passionate about an idea, there are probably 20 or 30 who are also passionate about it. We encourage them to find those people, get the group together, and run with the idea.

Innovation is a big buzzword among business schools today. How can people be encouraged to think innovatively, either in the classroom or in the corporation?
In general, we are not a fan of buzzwords. In our experience, out-of-the-box thinking doesn’t just happen. It comes from passionate dedication to making progress each and every day in an area that you just love. After a while, you become an expert in that area because you have thought about it more than anyone else. Once you start thinking more quickly than everyone else in that area, you do things differently, and people start calling you an innovator.

If you want to innovate, work on something you are really passionate about. Learn as much as you can about it, and just get started.

Investors don’t buy shares of a founder, a management team, a feature, a product, or even a revenue model. They buy shares in companies.

Although you’ve been COO of Zappos.com for the past five years, your real passion is for investing in startup companies. Not only were you a founder of Venture Frogs, but by early next year, you’ll be joining the VC firm Sequoia Capital. When you’re considering startup firms to invest in, what do you look for? What makes you think a specific company has the potential to succeed?
The answer you’ll hear time and time again is that investors are looking for companies that have exceptional founding and management teams, as well as revolutionary products or services that fulfill a real need in a large and growing market.

We all want to invest in special companies. In my opinion, special companies do three things. One, they change the way the world does something. Two, they create a great environment for employees to work. And three, they make money. Some companies do one of these things, some do two, but very few do all three things consistently.

If you were visiting a business school and talking to budding entrepreneurs about how to secure funding for their startups, what would you tell them about getting a new business off the ground?
First, as I noted before, start by working on something you are really passionate about. Learn as much as you can about the space, and become uniquely good at something in that space.

Second, think of a very large vision that you and others would care about for a very long time. Chase that vision.

Three, build a team with similar vision, passions, and values. There is an African proverb that says, “If you want to go quickly go alone, but if want to go far, go together.”

Next, start small and stay focused. As Jim Collins would say, focus on the intersection of what you are uniquely good at, what you are passionate about, and what can drive your economic engine.

Finally, build a great company. Investors don’t buy shares of a founder, a management team, a feature, a product, or even a revenue model. They buy shares in companies. And they want to buy as many shares as they can of great companies. In a great company, the whole is bigger than the sum of its parts, so think about how to constantly scale and leverage the company’s assets to be even greater.

If you were talking to those business students 40 years from now, as you were retiring from a long and successful business life, what would you hope to tell them about the career you’ve had?
Ah, the epitaph question is so interesting. When one of my high school teachers asked this question, I thought it was very novel and really got to the core of how people want to be remembered. But I’ve come to the realization that it just doesn’t matter what others think of you, as long as you work on what you find meaningful and try to leave the world a better place than when you found it.

I think the character Dicky Fox from the movie “Jerry McGuire” sums it up best: “Hey, I don’t have all the answers. In life, to be honest, I have failed as much as I have succeeded. But I love my wife. I love my life. And I wish you my kind of success.”