Zappos' silent founder

  @FortuneMagazine September 5, 2012: 6:51 AM ET
nick swinmurn

Behind the scenes, Nick Swinmurn quietly built a retail giant named Zappos.

(Fortune)

Many people probably think it was Zappos CEO Tony Hsieh who founded one of the largest footwear retailers in the United States. It wasn't. The guy who came up with the idea and persuaded Hsieh to invest is Nick Swinmurn, a quiet entrepreneur. His willingness to put success before ego was amply rewarded when Amazon acquired Zappos for $1.2 billion. His story:

I was born in England, and we moved to the United States when I was 7. My father was an engineer for the same company for 30 years, and my mom was a teacher. We laugh because we weren't sure where my interest in business came from. But my parents encouraged me to do entrepreneurial things. When I was in college, they were willing to co-sign a lease so I could open a salad bar, but the building owner expected me to take over $35,000 in equipment debt that he had, so I said no to the deal.

I majored in film studies at U.C. Santa Barbara and graduated in 1995, but didn't know what I wanted to do. So I took a job with the San Bernardino Stampede, a minor-league baseball team, for $12,000 a year, working in ticket sales, then moved to the San Diego Padres. After a year I decided there was nowhere for me to advance to, so I moved back to the Bay Area.

I tried to start a recreational sports league, then I answered an ad for Autoweb, a car-buying service online where the founder and CEO were only a year older than me. In 1997 everyone was so excited about the Internet. I volunteered to help with all the stuff people didn't want to do with the goal of learning how to start something myself.

After 11 months, I left and started 4Students.com, a student portal where you could e-mail other students and get deals on shopping. Studentadvantage.com wanted to hire me and rebrand the site under theirs, but I decided the student thing wasn't for me, so I just shut it down.

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One day I was at the mall and couldn't find a pair of the Airwalk desert boots I wanted. So I thought, Why not do an online shoe store? I went to Footwear Etc. in Sunnyvale [Calif.] and said, "I'll take some pictures, put your shoes online, and if people buy them, I'll buy them from you at full price." The store said okay, and I got a few orders. Then I went to a shoe show and thought, I need to put this giant collection online.

I took a job as a contractor for Silicon Graphics to make money to live on and started raising funds for the company, which I called Shoesite.com. I got money from friends, co-workers at Silicon Graphics, even my chiropractor. When I raised $150,000, I quit Silicon Graphics and hired a couple of buddies to help me.

It was 1999, and we had the same business model of going into stores, taking pictures, and selling the shoes online. That fall some competitors started to pop up, and we thought Shoesite wasn't distinctive as a brand. Zapatos is Spanish for shoes, so we added another p to it, and made it Zappos. We wanted to create something that would be fun and different.

I took meetings with about 10 VC firms. Everybody was looking for the next big Internet thing, but I got nowhere. They said nobody's going to buy shoes without trying them on first. Also that we needed someone with experience in the shoe business who could persuade brands to work with us. So one day I called the Nordstrom (JWN, Fortune 500) in San Francisco and asked to talk to the men's shoes buyer. Fred Mossler agreed to meet with me. He felt there was an opportunity to do something online but wouldn't commit until I got more money.

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I was getting nothing but noes from people, and then my attorney, Art Schneiderman, said he knew some guys called Venture Frogs and they would invest in anything. I met with Tony Hsieh, who'd just sold his company [LinkExchange, which Microsoft (MSFT, Fortune 500) bought for $295 million in 1998], and he was really enthusiastic. I told him the U.S. footwear market was $40 billion in 1998, and at that time, 5% of all the shoes sold were sold through mail-order catalogues. So one out of 20 shoes were already sold through the mail before the Internet. A couple of days later Tony and his partner Alfred Lin wrote up a term sheet, Fred joined us, and we were in business. They gave us $500,000 initially.

I was probably paying myself $30,000 a year in the beginning. At first I was making all the decisions. When Tony came onboard, he helped a lot with the tech things. In 2001 we became co-CEOs. We integrated the Venture Frog staff into Zappos, and Tony ended up putting $15 million of his own money into the company. He owned 11 apartments in San Francisco and kept selling them to keep Zappos open.

It was an uphill slog. We always had the feeling it could fall apart. In 2002, Draper Richards invested $250,000 as a convertible note. After a year they wanted their money back, and Tony had to sell an apartment to do it.

We were close to breaking even in 2003 and were growing fast. Our sales were $70 million in 2003, $184 million in 2004, $370 million in 2005. But we were still borrowing money to buy inventory.

We had huge inventory problems because our approach was to buy everything. A lot of times our buyers would have the brand reps place the order in our system, thinking the brand reps would know best what would sell. But then we'd be left with a ton of leftover inventory.

The company became well known, but if the bank lowered our line of credit, or if vendors wanted us to pay them faster, we'd have gone out of business. In 2006 we were doing $597 million in sales but were still making the same 1% or 2% profit. Everything was in equity.

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When we went for another round of venture capital in 2004, I'd talk as the CEO/founder and Tony was making the financial decisions. I told him, "The CEO needs to be the financial decision-maker, so why don't you be the CEO, and I'll be the chairman/founder, so investors will know you're the one to deal with." There was never a question of egos.

We moved the company near Vegas [to Henderson, Nev.] in 2004 because we were running out of room in our call center, and it was hard to find people in San Francisco who'd work customer service because of the cost of living there.

By 2006, I was getting bored. I wanted to be in the trenches with a small company again, so I decided to leave. I left with all my stock and still retain ownership in the company. There was no buyout.

I started Stagr, which was an online custom T-shirt designer. We signed a deal with Madonna right away, taking her album artwork and letting people print out the designs on T-shirts. It was very successful, so we signed Fergie, Ozzy Osbourne, and others, but their stuff didn't sell as well. I guess Madonna's fans were just underserved. So after a year I shut the company down.

That failure threw me for a loop. It took me a year to stop feeling like I sucked. But with the Amazon (AMZN, Fortune 500) acquisition of Zappos [for $1.2 billion in 2009], I realized that some things work and some things won't.

After Stagr, I ended up meeting a guy who managed mixed martial arts fighters, so I decided to start Dethrone, a clothing line catering to fans of UFC [Ultimate Fighting Championship]. Dethrone isn't going to be the biggest brand in the world. It's a passion project that I'm working on with my brother Dan. Sales are about $1.3 million a year, and it's getting close to profitable.

The fun part is coming up with ideas and trying to turn them into reality. Now that I'm not taking myself too seriously, I'm not afraid to fail.

My advice

Respond to the customer's needs. If a customer called and wanted to buy a certain shoe and we didn't have it, we'd search the web and send him a link to a place where he could get it. We created free shipping as an incentive -- both outbound and return --in response to the question "What if it doesn't fit?"

Don't let other people put a ceiling on what you do. When I worked for the San Bernardino Stampede, they told me it'd take years to work my way up through the minor leagues before getting hired for the majors. I ignored them, applied anyway, and immediately got hired with the San Diego Padres.

Don't have a big ego. At Zappos everyone saw themselves as equal, all working for the same goals. I called myself CEO only because I gave myself the title. You've got to relate to everyone because it's a team effort. To top of page

This story is from the September 3, 2012 issue of Fortune.


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