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After the Web · Era 4 · Dot-coms and the crash

1999–2009acquired by Amazon for stock · 2009

Zappos

An online shoe store launched in San Francisco in 1999. It is known for free shipping and returns, and for its own warehouse and service instead of advertising. In 2009 Amazon bought it for its own stock: ~$807 million at signing, $1.134 billion in the accounts at closing.

Founders Nick Swinmurn · Tony Hsieh · Alfred Lin
Domains zappos.com
marketplaceecommercereturns

In brief

Zappos is an online shoe store that Nick Swinmurn launched in San Francisco in 1999 and Tony Hsieh made famous: free shipping and returns, its own warehouse, and round-the-clock support instead of advertising. Over eight years gross sales grew from $1.6 million (2000) to, according to Hsieh, more than $1 billion (2008) estimate, and in July 2009 Amazon announced that it was buying the company entirely for its own stock. The story is worth telling because at Zappos returns and service were not a cost but a way to keep the customer, and this calculation can be checked against documents. But "culture saved the company" is a simplification: alongside it stood Hsieh's money, bank credit lines, and a venture round.

How it started (the founders)

By 1999 Swinmurn was doing contract work at Silicon Graphics; his earlier jobs and his education are not confirmed by the sources estimate. He explains the idea simply: in stores the selection is limited to what the buyer ordered, while online you can show everything. The first version of the model was to go to stores, photograph the shoes, put them on the site, and buy the pair from the store at full price if someone ordered it. To get started he raised about $150,000 and left his contract at Silicon Graphics.

Investors did not work out: by his account, he went around about ten venture funds, and a lawyer put him in touch with Venture Frogs, the small fund of Tony Hsieh and Alfred Lin (according to Swinmurn, they put in the first $500,000). Before that, Hsieh and Lin had sold their company LinkExchange to Microsoft, in 1998 according to retellings estimate. In 2003 Entrepreneur put the size of the market at $40 billion of shoes a year, about $2 billion of it through catalogs; what exactly convinced Hsieh is not in the sources. The site opened in June 1999 as ShoeSite.com; in July it was renamed Zappos, from the Spanish zapatos (with an extra p, and to stand out more against the competitors that were appearing). Hsieh came into operational management later: only Wikipedia gives 2001, and the exact date is not confirmed estimate.

Year-by-year timeline

Lesser-known but significant facts

  1. The first version of the model was a middleman store with no warehouse and no contract with manufacturers: photograph shoes in stores and buy the pair at full price after an order.
  2. For its first five years Zappos did without venture funds, apart from Venture Frogs, Hsieh and Lin's own fund: until Sequoia in 2004, growth ran on that money, bank credit lines, and profit.
  3. Dropshipping was switched off because the "in stock" promise was not being kept: before the switch, 80–90% of the products shown were in stock, and 10–20% of customers found out a couple of days later that the item was unavailable; giving it up cost ~25% of revenue.
  4. At first the warehouse was run by a contractor, not by Zappos itself: according to a retelling of Hsieh's book, outsourcing the warehouse near a UPS hub in Kentucky is called a mistake, and the warehouse a core competency that the company should have handled from the very beginning estimate.
  5. Sequoia partner Michael Moritz recalls that the fund had doubts because of returns and inventory: in his words, a high rate of returns and the huge cost of holding inventory.

Legend vs. the record

  1. "Amazon bought Zappos for $1.2 billion." That is how the investor's page puts it, and that is how the deal is retold. The record: the 8-K of 2009-07-22 shows the price paid in stock, with cash only for fractional shares; ~10 million shares worth $807 million at an average price of $81.09, plus $40 million for retention in cash and RSUs; 10% of the shares went into escrow. Per Amazon's 10-K, at closing on 2009-11-01: $1,079 million in stock plus $55 million in options = $1,134 million. Verdict: inaccurate; "$1.2 billion" is $1.134 billion on the closing date rounded up, at signing it was about $847 million ($807 million in stock and $40 million for retention), and holders were paid in stock, not cash.
  2. "Zappos survived thanks to its culture." The legend: good people and service pulled the company through on their own. The record: Hsieh called spending on service a retention investment in place of advertising, and by 2006 about 2/3 of sales came from repeat customers. But alongside that stood the founders' money, credit lines ($6 million in 2003, $60 million + $20 million in 2006), and Sequoia in 2004. Verdict: partly true; culture explains retention, not survival, which was paid for by money and warehouse discipline.
  3. "From day one Zappos gave 365 days for returns and free shipping." Documents from the era: free expedited shipping and free returns were there from the start, but the return window in early descriptions is 60 days; later retellings place the 365 days at a later time, and the year of the change was not found. Verdict: half true; free returns came early, 365 days later, date unverified.
  4. "Zappos always kept its own warehouse" and "was always a dropshipper." In 1999 Swinmurn bought the pair from a store after an order; then came 100+ brands shipped by the manufacturers; a warehouse run by a contractor, then its own; dropshipping stopped estimate. By the fall of 2003 the press was already writing about its own warehouse. Verdict: both claims are wrong; the model changed in three stages.

The first growth lever

The lever was not advertising but returns as a product: free shipping both ways, no fee for accepting a return, and returns through UPS with a ready-made label. For shoes, where fit is unpredictable, this removed the main fear of buying online. It came at a high price: according to a retelling, in 2008 37% of purchases, worth $379 million, were returned estimate, and there is no primary source. The company counted this as marketing: $6 of sales for every $1 of marketing, with a marketing team of 9 people out of 1,200 employees in 2007, and about 2/3 of sales from repeat customers in 2006. According to Lin (secondhand), the most profitable customers were the ones who returned the most and bought the most rumor. The second part of the lever was the warehouse: giving up dropshipping in favor of keeping goods in stock cost 25% of revenue, but removed the main way the promise failed.

The paired story

The pair is Boo.com, a London fashion store. Both sold clothing and shoes online from 1999: Zappos launched in June, Boo.com on November 3, in 18 countries at once. The bets were opposite: Zappos started with $150,000 and photos from other people's stores, and raised spending as demand grew; Boo.com planned £20 million, had spent four times as much by launch, and in all took more than £80 million from investors. In 2000 Zappos made $1.6 million in gross sales, while Boo.com took £200,000 in revenue over its last two months; the liquidators from KPMG were called in on May 17, 2000. The commonly cited figure of $135 million over 18 months has no primary source estimate. The documents collected show no shared people or deals between the companies.

Parallels today (projects from the catalog)

What a builder can take from this in 2026

Discrepancies and what we could not verify

Sources (primary first)

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