Camping with an eCommerce Venture Capitalist

I was recently introduced to a venture capitalist coming to town and wanted to show him a good time.

I considered a night with a fancy dinner, the opera, cigars and high-end bourbon.¬† But it didn’t seem quite right.

So I decided to take him camping instead.

That’s just how we roll in Montana.¬† ūüôā

It helped that Zach Ware isn’t your ordinary VC.¬† Apart from loving the outdoors (which helps with the whole camping thing) he’s made dozens of eCommerce investments and worked in high-level roles at eCommerce companies like Zappos.

Our discussion recorded while camping covers his time working with Zappos founder Tony Hsieh, travel, and (of course) lessons learned from making numerous investments in the eCommerce space.

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(With your host Andrew Youderian of eCommerceFuel.com and Zach Ware of VTF Capital)


Andrew: Welcome to The eCommrenceFuel podcast, the show dedicated to helping high six and seven figure entrepreneurs build amazing online companies and incredible lives. I’m your host and fellow ecommerce entrepreneur, Andrew Youderian.

Hey guys, it’s Andrew here and welcome to the eCommerceFuel podcast. Thanks so much for tuning into the show today, and have a really interesting one for you. I’m joined today by Zach Ware who’s the managing partner at VTF Capital, which is a venture capital firm focusing on the ecommerce space. And that’s kind of what Zach’s focused on primarily right now, but in the past, he has been the head of product at Zappos.

He’s been one of the guys leading the charge on the Downtown Project with Tony Hsieh in Las Vegas. Then a lot of really interesting things, and has a very unique perspective on the ecommerce space in general.

And so, yeah. So he…we got to know each other through a common friend who was coming through Bozeman and I figured what better way to have a, you know, first meeting with a venture capitalist than to head out on an overnight camping trip. So that’s what we did. Loaded up the van, headed out, did some fishing, got a fire going, and sat down to talk about a bunch of stuff including, of course, what he sees as some of the commonalities in businesses that he invests in, what his investing thesis is, you know. He talks about his time with Tony Hsieh, and what it’s like to work with him. We cover a lot of ground, ecommerce and otherwise, in this episode. So hope you enjoy it.

So, Zach, where are we right now? Describe where we’re at.

Camping in the Middle of Nowhere

Zach: We’ll have to leave the location to you because I have absolutely no idea. We are in a campsite near the Boulder River, and it’s in the middle of absolutely nowhere Montana. Somewhere near Bozeman but I’m not quite sure where.

Andrew: And so we’ve never met before, talked on the phone, what made you think it was a good idea to come out with some total random stranger and do an overnight camp trip?

Zach: I never said it was a good idea. I had a reasonable suspicion that it was not a bad idea. The jury was still out until about 10:00 last night.

Andrew: We’ve got the axe, so we’ve got like half of the axe murder equation here.

Zach: Yeah. There were other people around though. Right now there’s literally no one else in this campsite so if we’d gotten here yesterday I would have been a little fearful.

Andrew: Yeah. Probably safe to say this is probably the first podcast interview ever done in this campsite.

Zach: I think that’s probably pretty accurate, particularly sitting next to a pretty badass Volkswagen van.

Working for Zappos

Andrew: It’s been fun, man. So we’ll start with Zappos. You worked for Zappos for how many years?

Zach: I was there for just over three, it was pretty short. Previous to that, I’d come from a company called The Republic of Tea where I ran distribution, and then later, consumer. So all of our web and retail business.

Andrew: And what did do you do for Zappos?

Zach: I ran product at Zappos. So for those who don’t know that in most technology organizations, there’s basically two sides, there’s engineering and product. And product are the people that are kind of…that are charged with being kind of the mixers of engineering and technology, or engineering and business.

So they try to figure out the priorities of the organization, they are the ones that will design the flows of sites and apps, and so forth. So my team ran Zappos.com, VIP, 6PM, the mobile apps we developed and architected, pretty much all the properties in the Zappos family.

Andrew: And you do wanna talk about, a little bit later, some of your other…involving ecommerce, VTF capital investing, things like that, but what… Obviously, I’m sure you learned a ton there, but what did you really take away from that experience that has impacted the way you run ecommerce companies or invest in them today?

Takeaways from Corporate eCommerce

Zach: Well, I mean, I think Zappos was a pretty unique company. I was fortunate to come from the privately held small family business, it was large but held very closely. And, you know, we always looked at business as a…we made decisions for the long term but we were obviously fairly small.

And so what I really appreciated about Zappos was the opportunity to operate at an extraordinary scale. Like, we could have an idea, deploy it and have mounds of data, in an A/B or a multivariate or whatever we were doing, by lunchtime. It was a unique experience to be running a business that was, at the time, well over $1 billion in gross merchandise volume.

The other thing that was interesting, you know, is when you’re dealing with an organization…most of what I had learned at Zappos was really about organizational development and understanding the different priorities you have to manage when you get to that size, decisions that when you make a mistake, they can be multimillion dollar mistakes, you obviously have a little bit of a buffer.

Other things that really stood with me, and an example I use a lot, not really divulging too much here, but they’re… Every day there’s this thing that Zappos sort of used to be, it was kind of a hack together thing called the Zappos Bookkeeper Email. And the Zappos Bookkeeper Email was this gargantuan thing you never wanted to open on your phone because it took forever to load. And it basically had every piece of data about the day’s transactions you could possibly imagine. You can get an hourly one too, but your email will get overloaded.

In fact, once my… I had a blackberry for a period of time and it was off for a long weekend. And I got a call from our IT team the next… I got this hourly report. I got call from IT team on Monday saying that my email account had crashed the BlackBerry server because that hourly email was too big and I had too many of them. But we got this email and we had this…it would have topline revenue, category revenue, brand revenue, individual sales revenue, and so forth. It was a fun thing to peruse.

And I remember thinking… Zappos had a culture and a reputation for doing anything for customer service. So you would call and say, “I bought these shoes two years ago. I hate them. I know you don’t take them back.” Zappos would wow you and send you a new pair. You could order a pizza from Zappos. Zappos culture…customer service culture is the brand.

But you think about that when you’re small and you think that’s expensive. It must cost so much money to be that flexible. And I remember getting this email this one day and we had done $8 million in revenue that day, that day. And we had this line item on the bookkeeper report that tracked all, let’s just call them customers or risk concessions. So anything that wasn’t a full price item at overnight…overnight when we didn’t have to do an overnight, a free coupon, replacement pair of shoes. On that $8 million day, those write downs cost us $300,000. And that’s it, that’s the cost of it.

And what Zappos does to achieve that is give every customer service person 100% latitude to make every decision possible. So you talk to someone on the phone at Zappos, and that person could, without any oversight, put $1,000 on your credit card right there. There’s no checks in the system to stop them from doing that. That culture creates problem solvers, and those problem solvers want the company to be successful, they will not put the company at risk. But the impact of what they do is less than 1/10 of 1%. It’s a huge deal.

So everything that I’ve done since then, with the companies in our portfolio and the companies I’m involved in, that’s one of the things that’s really stuck with me, is if you really orient your service around taking care of the customer in a significant way… You’re gonna have some edge cases that are gonna take advantage of you. You can just deal with those. You want your systems to be about letting humans help humans. And that doesn’t actually cost you that much money in the long run. And look what it did for Zappos. There was a differentiator between $10 million company and a multibillion dollar powerhouse.

Working With Tony Hsieh

Andrew: And you’ve worked a lot with Tony Hsieh at Zappos. You’ve been involved with the Downtown Project really, you know, leading that and building that out at the ground level. What’s he like? We were talking about…does he really live in an Airstream trailer?

Zach: He does.

Andrew: He does?

Zach: Tony is one of my closest friends and we met… After I joined Zappos, actually was brought to Zappos via Alfred who was sort of the COO of Zappos, COO, CFO, and had been with Tony really since the early days. They knew each other in college. Alfred’s now at Sequoia. And Tony and I…by the virtual that my job basically touched… My world touched everything called consumer, Tony cares a lot about that, so we work together a lot and that…it turned into a really deep friendship.

And then we started Downtown Project together. And somewhat accidentally it was never really intentional. We worked on redeveloping the campus. We’re currently partners in a venture firm that’s now focusing on retail and retail tech. And we’ve been close friends for a long time, yet, he lives in the trailer and he has a mohawk.

But, you know, I think what you find about people… And this one of the things that’s been really great about his evolution is, you know, he’s always been proud of being a little bit different. But he…I think before he had the opportunity to…when we first… To understand why he lives in a trailer, you got to understand what preceded that.

A bunch of us moved downtown before we started working on the Zappos redevelopment of the campus, which was my project, and then later, we launched Downtown Project. We all moved downtown. And the two of us first moved into these apartments on the opposite sides of a floor in a building that had gone belly-up during the real estate crisis. And we got wildly luxurious apartments for like nothing. It was crazy, it was awesome, we had to rent them.

And over time, over the next few months, a lot of our friends moved onto that floor. It was a super casual, not intentional. And we ended up having this floor where we all just kind of hang out with each other. So the neighborhood did have a lot of people in it, so we had friends now.

And so Tony really likes that environment, that culture, that sort of collegial feel, of being able just to like knock on a friend’s door and be like, “Hey, what are you doing?” And you don’t get that in suburban environment. And that’s pretty much what we were doing with the city, trying to create an environment where you had the opportunity to collide with people and see people a lot. It’s just like a small tightly knit neighborhood.

One thing led to another, and he ended up buying a bunch of Airstreams, it’s his own story, and decided… One of the properties we acquired in the process of building Downtown Project was an RV park. So he put them all in a big circle in the RV park and… That was three years ago. And over time, it’s evolved into an incredible place. I mean there’s… Oddly, there are two Alpacas there, one of them is really mean.

And there’s a music stage, there’s a cool campfire area. The campfire’s ginormous now. There’s a fire every morning and evening, people just kind of throw events, it’s a very community-oriented place so people do… People might have a…one person might just throw barbecue on a Sunday. There’s lots of kids hanging out there. Off and on, there’s usually kids living there. There’s about 20 people who live there full time and they’re all wildly close friends.

So he, today… I’ve told him this multiple times, I’ve never seen him happier since I’ve known him. He’s more in touch with who he is. He’s comfortable in his own skin in a way that I think all of us struggle to achieve at a real level. Yeah, he’s just a really interesting, authentic human being.

Andrew: You’ve mentioned A/B testing earlier. And one thing like I’d say, you know, if you look at the average like members of the eCommerceFuel community probably a couple million in revenue, and you can do A/B tests. But it takes a while to do them even if you’ve got decent traffic. And you guys had the luxury of being able to iterate on A/B tests really quickly, get a lot of data on a lot of different tests. So when you…So I guess my question is, how often were they really meaningfully beneficial, where you came out with an outcome you made a change on?

The Luxury of A/B Tests

Zach: So first of all, we weren’t terribly good at it. There’s a few of us who remember that the history of how we…we were not actually that good at it, we got better over time. But the thing that I’ve… So leadership is about making decisions and owning them, and then creating an environment where you can test your own assumptions. And so, whether you’re operating at scale or you’re small, people tend to look at testing or look for projections, or look for some study or something that tells them their idea’s right or wrong.

This happens a lot in growing companies. One in particular I’m thinking of, in our portfolios, you know, just near 10 million in revenue. And had a conversation with CEO a couple months ago where he had an idea, that was based upon an experience they had with a…basically giving away a very odd, but related product to their core business. It was a weird thing to get for someone to give you, you always remembered it. And it had a conversion rate that was in the ballpark of 30% to 40%. It was absurd, absurd what they were able to do when they targeted the right kind of people.

And he comes to me and says, “I wanna spend $10,000 and I wanna buy 20,000 units of this thing and I wanna give them out to people at a significant scale, but I can’t make a case for it and my marketing team thinks I’m crazy.” And I just basically said, “Look, you have to… Sometimes as a CEO, you just have to say, this is my idea, I don’t know if it’s a good idea. I need you to back me here, but I want you to be in the business of proving me wrong. So let’s go find the data and see what we can do to prove ourselves right or wrong, to learn something from this. But we’re gonna do this, we’re gonna make this decision.”

And that’s a lot of what we did at Zappos, you know, where we… Zappos is a very individualistic culture. It allows for the free exchange of ideas. It’s not very top down. Particularly today, I left before it moved into its extraordinary self-management phase, though I worked with Tony and that team in a separate company, learning about it before they deployed it at Zappos. And that’s a different type of environment.

But one of the weaknesses in that environment and one of the weaknesses in companies that rely too much on data, or consultants, or other things, is you lose sight of the fact that someone just has to make a decision, you know. So what we did at Zappos was, we would have an idea, we would flush it out as best we could, we knew it probably wasn’t a great idea, we knew we’d learn a lot, and we’d just go with it.

And most of the time, what we were really looking for, we knew where we wanted the company to go and all of our ideas were in line with what we wanted the company to go. We were really looking for reasons that we were wrong. So we would A/B test, not necessarily to see if we were right but rather, did we have a negative impact on the business? Because everything we would push to the site, and everything we’ve…

This is what we do in all of our other businesses is they’re…we’re almost always doing it in a while before we want the company to go over time, where we believe the company should go. So we wanna make sure, particularly when we’re smaller than some of our other companies.

Andrew: So you were approaching A/B testing in a very different way than most. A lot of people come and say, “Hey, I wanna try to optimize the copy on this page where I want the…with the end goal of being maximizing conversion.” But you guys would look at it a lot more from the perspective of saying, “Here’s where we wanna go based on some other factors. Let’s make sure that doing this isn’t gonna be…isn’t gonna materially hurt the core business.

Why You Can’t Immediately React to Data

Zach: Listen, when you’re selling to people, you have to deal with emotions, right? And so you have to try different things. And the data is not always immediately going to show you that you’re right or wrong. What you’re really shooting for is, if your business is operating at an extraordinary scale or even small, if your conversion rate is in the 1, 2, 3, 4, 5% or whatever, if this feels like it’s the right thing for your business, the media thing you wanna make out…make sure you’re not doing is tanking your conversion rate, right?

And if you do decide to tank your conversion rate, you’re doing it…it’s kind of like when Zappos dropped drop shipping early in its history, they lost 25% of their business. They did that consciously. There were times when we would do that in ecommerce, we would make decisions that we knew were gonna be negative on the business for a short period of time.

Andrew: Did you do that just because you guys couldn’t control the whole customer experience. Was that why?

Zach: No. Oh, no, no. So Zappos did that…yes, because they couldn’t control the customer experience. You remember… I don’t wanna make this about…there’s probably someone listening to this who’s gonna roll their eyes and say dropship is actually a great business today, and it is, it’s better. In 2003, getting anyone to ship anything was a foreign concept. And so you would drop an order into… The networks didn’t exist.

So literally, a system would fax or a person would fax in order to a manufacturer…particularly in a payroll they’re really bad at shipping quickly. You couldn’t handle returns, you had no sense of tracking, you couldn’t offer any guarantee to your customers. So that just didn’t make sense for a company that was gonna be all about service, that made a distinct decision to be about service.

But ultimately, when you make decisions that are in line with the values of your business and where you want your business to be, sometimes you have to be comfortable just making sure the data tells you that you’re not totally screwing up. And as long as you see that, you can then allow these tests to elongate over time, particularly if you don’t have as much traffic as we were lucky to have.

Running a Venture Firm

Andrew: So maybe we can move into VTF for a bit. VTF is a venture firm you run with a number of people including Tony Hsieh, he’s one of the general partners there. What’s your focus in investment strategy? Maybe asked differently, what makes you guys different from other VC firms?

Zach: Yes. So we… You know, coming from… We are a very long-term oriented group of people, and that’s important to note when you’re dealing with a firm. A lot of people say they’re founder-friendly, a lot of people say they’re long-term investors and so forth. We, generally…that’s so cliche that we just don’t talk about it a lot, we just talk about ourselves, you know. We’re very long-term thinkers.

If you ask one of my partners, Fred, basically been at Zappos as long as Tony, he was just… He came from Nordstrom, ran the merchandising organization, one of the most interesting people you’ll ever meet. You know, he basically said, you know, when we started working at Zappos, we thought this was gonna be the rest of our lives. Like, we really saw this as a company we were gonna be running for the rest of our lives. And that’s how we invest.

And so we never invest thinking we’re hitting at some sort of lottery. We assume that this is gonna be a long term relationship, and we treat our companies that way. We do not swing our egos in the room. I can say these things because I’ve been through situations where you’re tested and where we… Where you just separate the founder-friendly people from the non founder-friendly people is when things get hard. And I’ve unfortunately been in that position a couple of times a year for the past few years with a company I’ve been very close to. And it’s disconcerting, sometimes, to see what happens in the investment industry when things get difficult.

I think it’s… I think Paul Graham or… I think Paul Graham said once it’s like he’s constantly amazed at how hard investors fight over scraps when a company is collapsing. And that’s very true for…that’s very true, period. You get lot of loss aversion, you get a lot of people swinging egos, and fighting battles for things that are immaterial. You’re fighting between 1% of something and 2% of something that’s probably gonna be worth zero. And we just don’t play that game, you know, we just take a super rational view of the future of retail.

We understand retail economics. We do not get lost in the hype of brands and what, you know, the venture scalability of brands. We understand how you build one, we understand the math of how you build one. Probably everybody listening to this podcast knows the math of how you build a brand, build a product company. And that’s how we invest. And we tell people that… And we believe this, that we are buying the job. You know, we’re interviewing you for various reasons and we encourage you to interview us. I sound like I’m pitching my firm right now, I don’t mean to be. But that’s purely how we see the world.

The Demise of Retail

Andrew: You had… When they were talking about earlier this weekend, their week, I guess, you’re saying that retail, the demise of retail, has been…maybe I’m putting words in your mouth, correct me if I’m wrong, but overstated, you know, people say retail’s dying, it’s shrinking, Amazon’s eating so much of it. And you had mentioned that, well, that’s not really the full picture because there’s a couple of big guys that are really suffering, that’s tainting the overall picture. Can you describe your thoughts on that?

Zach: Yeah. So there are a number of sources of stats that you can look up. In the last year, the general retail industry’s grown 7.3%, ecommerce is up 1.1. Ecommerce is big. Amazon is huge, but the market is a lot bigger. What we’re seeing is a shift away from valuing, for example, the proximity of goods around a consumer. So companies that just…who are solely in the business of just having stuff on hand, that’s no longer valuable to consumers. If you think about how Netflix built their business, they saw themselves as a delivery vessel between content and the consumer.

The delivery vessel is now a UPS truck, and it’s more efficient than…and better priced. More efficient, not only for the consumer but also for the retailer, to have it coming from a warehouse on a UPS truck than it is to have it distributed across 200 stores in the country. So we’re seeing those companies die. And it’s because most of them don’t provide a unique value to the consumer. The time they grew, consumers needed access.

The only way to buy a certain type of product was to buy at a Macy’s that was…there were three in your town and you went to one of them. That’s no longer how you people buy stuff. So we’re seeing that fall apart, and that’s good. I mean that’s just the natural evolution of the economy.

The unique thing that’s happening right now is the internet allows…that’s…how old do I sound. Ecommerce allows… The world wide web allows us to move products to really…globally at the drop of a hat. And what that’s creating is fierce competition for commodity-type products. So products that aren’t really differentiated themselves you can get from four or five different places.

And the behemoths are competing on who can do that more efficiently, more cheaply. So you’re starting to see a lot of those companies die. You’re starting to see a lot of companies die that went…that got really big when big was the only thing they could do to survive. So you’re seeing companies like Gap and J.Crew have problems. Those are just companies that I’m familiar with.

A Growing Industry Overall

Andrew: So who is… You mentioned like retail, in general, is growing seven plus percent, ecommerce is 1.1%, which is totally different from the numbers that I’ve heard. It just surprised… I’m not saying it’s wrong, it’s just…

Zach: No. I think there’s always going to be some issues with who counts what as ecommerce and retail. But the industry is overall growing.

Andrew: Where’s that growth coming from?

Where The Growth Is Coming From

Zach: So the growth is coming… When the economy…you know, when GDP continues to grow between 2 and 3%, that’s generally gonna be an indicator that people are buying more things, so that’s retail. I think that what we’re seeing is just a shift in how people buy things and what they buy. So the commodities are moving to commodity-type movers like Amazon, which is more of a platform than it is a retailer.

And the companies that are really starting to die are the companies that don’t provide a unique value like the ones that I just described or companies like Gap and J.Crew that got really big because they had to in order to get the efficiencies necessary in the ’90s to be well-priced for their consumer. And to get that big, you have to get kind of generic.

And today, it’s just as easy for me to a buy generic J.Crew shirt as it is easy for me to buy a shirt from…there’s a brand I love in Telluride called Western Rise, right? And those guys, I can buy… It’s just as easy for me to buy from Western Rise as it is to buy from the Gap. That’s a big deal, and that’s where retail dollars are starting to shift is to…because it’s just as easy for me to buy things that are made, that reflect what I want or reflect a different level of quality.

And consequently, it’s also just as easy for those companies to make those products at the same price point that Gap was making them at today. That’s a big, big shift. So that’s where the dollars are going.

What Zach Looks for in Investments

Andrew: So maybe a question that kind of brings us those two together, in terms of what works and where retail is growing today, as well as what you guys look for in investments. Like, there’s crossover there because I’m guessing you wanna invest in things that are gonna continue to have a future, that grow well. So what kind of ecommerce company makes you just absolutely drool when it comes across your desk, if you have an opportunity to invest in them?

Zach: So I’m a little… So my general view of the world is that the future opportunity in retail is in companies…is for companies that make and sell their own things. And primarily, they’ll do that direct to consumer or via the channel that makes the most sense for their category. My view about the defensibility then of that business is, it has to start with the product and the supply chain.

And the best way to do that is to be a craft, but I call it craftsman. And so, you know, you can kind of run a spectrum of craftsmen, from the guy who made your axe, the handmade sort of limited scale-type companies. There’s one in Clarksville, Tennessee that makes…I think the BootHill Blades, I bought a knife from those guys and they’re outstanding, it’s a husband-and-wife team. His wife makes kitchen stuff, and they’re amazing. And then you get all the way up to Saddleback bags, you know, which is operating a relatively large scale.

The fanatical nature of the people behind those companies and the people that make those things is extraordinary. When you speak to those people, you get emotionally connected to them. That happens when you’re a consumer. That happens when you go to a shop if they have a store and you’re speaking to someone who just is over the moon about the product.

And those are the people I flip out about. I spent a bunch of time, a couple of months ago, with a company called Sid Mashburn. They’re Atlanta-based. I actually knew them years ago. They’re in the menswear space. I randomly knew them.

Andrew: You said Sid Mashburn?

Zach: Sid Mashburn. And they’re basically like a modern menswear tailor shop. They make the majority of their clothes. The founder of the company Sid, and then there’s a store called Ann Mashburn, his wife, Ann. Sid was the first menswear designer at J.Crew. And they’ve built this incredibly high-touch retail experience with incredibly just… When you talk to Sid about his product and where he sources his fabrics, and how they handle their customer, it is just…it almost makes you cry, you know. And you meet people like that, and those are the people who can defend their product.

And the channel distribution? Who cares. Well, that might be today, we might block that, we might not sell on Amazon. Ten years from now, I don’t think any of us will care. Amazon will be the equivalent of Shipwire, it will just be really efficient. There’ll be basically 3PL, and we don’t care where it goes through Amazon.

Today people are still a little defensive of that. But bottom line is, if you’re making a great product that can’t be duplicated, you can really just kind of ride whatever channel is working at that period of time. But if you’re not making great products, you’re gonna…there’s a lot of competition, there’s a lot of capital that’s gonna be gunning for you and coming after your business.

How To Get Zach’s Attention

Andrew: You know, if there’s someone listening who’s got a business right now, where you could intersect with them and help them, either in terms of just advisory or an investment, what kind of ways can you really help retailers where someone’s listening it might make sense for them to reach out to you and talk to you?

Zach: Well, I think the help from me is overrated. First of all, I would say… Look, I think that the challenge you run into in our world is, you know, I’m an investor. I’m an operator who is reluctantly an investor. There’s some profiles on the internet that say…the way I refer to myself as a reluctant VC.

And so I tend…I obviously carry the moniker of investor, the incentives are built for me to…are such that, you know, my advice…anytime you get advice from someone who would be…who has incentives to gain something potentially from your relationship, you must tread intelligently, I guess is the way to put it. I try to be a person who can transcend that, and I… Typically, my relationship with a lot of bootstrap investors is more of them that we haven’t had an opportunity to invest in for various reasons, then there are people that we’ve invested in.

Most of the time, I spend time, particularly with bootstrap founders, one, because I’m fascinated and wildly interested in what they’re doing. I wanna learn from them. But two, I can…there’s a lot that I can share about what you look for if you’re looking for capital. A big area that we started to focus on, and we spend a lot of time on with both our companies and people that we just know, we meet from your community and elsewhere, is focus on inventory capital, making sure that you nail that. When you’re about $5 million in revenue, I think it’s a lot easier.

But optimizing that sub $10 million in revenue is really, really important. It’ll save you from meeting a lot of equity capital. It will help you sleep at night. And we spent a long time over the last couple years trying to build a structure and relationships and kind of an easy way to open up that capital, and we make that available too… We help people… If it’s a high-quality business, even if it’s not something we would invest in because it might be too small or they don’t wanna raise capital or whatever, we want more people to use those sources because it helps the entire ecosystem.

The Biggest Scaling Problem

Andrew: Would you say that… I mean, you guys invest a lot of times at companies that are, you know, $5 million in revenue and above, would you say that’s the biggest scaling problem you see for most companies, is being able to finance inventory when they’re growing? Is that the number one issue you run into?

Zach: No. It’s the absolutely number one issue. The number one issue is either figuring out how to financing it or what happens when you finance it incorrectly. So what happens in our world, in the ecommerce space, it’s a hot…a little less so today than it was a couple years ago, it was a hot venture capital category.

And we always thought that was crazy because if you think about the math… If you’ve been doing this a while and I said, “Okay, so how did you get from zero to 200 million revenue and in four years and you’re debt-free. Tell me about your equity positions. Tell me about your cap table. Tell me about who owns the business. If you were gonna meet $300 million dollars next year, would you have enough money to fund your inventory?” And the answers are usually no. Most of these companies are extremely fragile.

One little slight oscillation in the availability of venture capital to scale, and they’re kaputs. I mean, look at Nasty Gal, look at… I mean there are…and there are several that have recently had exits that were on the cusp of falling apart.

When you rate…When you grow these businesses the wrong way and you grow dependent upon outside capital to survive, it doesn’t usually end well. Either, you know, implode upon yourself when there’s just a like a tiniest little blip in the radar, or you can’t get to the exit point fast enough. And you put yourself in a position then to really have to sell the company because eventually, the $100 million plus you’ve raised wants their money back. So it’s a really terrible way to run your business, and it’s a really easy…there’s a really easy way not to do it that way.

And I think part of the problem is simply that the companies that do it, and do it well, have been doing at billion-dollar levels for the big retailers for decades, and they didn’t know how to underwrite smaller companies They didn’t know how to find them, they’re just… I like to kind of joke that they’re kind of these old-school banker folks that do this like one thing really, really well and they’re like really hard to find on the internet. You know, they’re not loan sharks in any way, they just don’t…they don’t know how to speak to this emerging business, and they want to terribly.

And so we’ve tried to make that a little easier but it’s important that you do that correctly. That’s the number one question we ask, that’s the number one… We don’t ask that question. We know how to solve it. If we invest in a company, we know we’re gonna be able to help them do it. We ask that question to test for rationality, like, you know, how are you gonna grow from 2 million to 20 million if it’s like we’re just gonna keep raising capital. That’s a little bit of a…either sign of just they don’t know or that’s a little bit of an irrational view. It rarely ends well when you do it that way.

The Lightning Round

Andrew: So I wanna ask you some questions. I ask these of everyone who, or most people that come on the show. And feel free to be just real brief, as the name implies. But first one is, how much money is enough, in terms of money you would have in the bank where if you didn’t want to, you would never feel like you had to work again, you could, of course, because if you wanted to and I’m guessing most of us love to at some level. But how much money would you feel really comfortable with in the bank as being enough?

Zach: So we’ve had a conversation about the robotic nature of some things, like how we can sound like robots. There actually is the mathematics…There’s a mathematical answer to this question, and you can learn more about that answer by going to Mr. Money Mustache.

But, I mean, that answer…the technical answer is 25 times what it costs you to live every year. I’ve actually had this conversation with my best friend, and I think that number, you know, that it is…when you think about all the amount of money you would ever need to spend and live an incredible life, you know, somewhere in the 5 to 10 million range is a pretty good number. I think that if you really… I think that’s generous. But I think for Mr. Money Mustache it’s two and a half million. It’s a great number.

Andrew: Is his two and a half?

Zach: I think it’s two and a half.

Andrew: Oh, I thought it’s less than that because he spends…he’s got like what 30k in annual spending, something like that?

Zach: I feel like his number was 2.5, but I might be screwing the 25s up and turning that into 25 times your annual spend. I might be doing the math wrong. But I also am a big believer in the power of compounding interest. And the majority of, you know, of what I preach is sort of safe investing. And I think you can generate a lot on 8% a year if you keep it in the S&P and have a base amount of money. You need a lot less to live than you think. So I think that five to ten’s a number that I’ve thrown around a lot.

Andrew: Nice. If there is one thing that was gonna bring upon the fall of civilization in the next 25 years, what would it be?

Zach: I think it’s probably going to be a global pandemic. I think the antibioticization of the world compounded with the ease of travel, compounded with the increased density in cities is just a calculus, it’s gonna lead to…it’s probably going to lead to things we can’t predict.

Andrew: If you had to leave your current position, you’ve gotta leave VTF capital, you can’t run a business on your own, you have to work for a company, but you can work for any company in the world, in any role that you want, what company do you work for?

Zach: That’s a great question. I’m pretty sure I’ve thought about this. I would probably be head of operations for an airline.

Andrew: Really?

Zach: Yeah. I think it’d be a blast. I’ve wanted to run an airline my entire life.

Andrew: Why?

Zach: Since I was a kid, I like…this always sounds… I always answer this wrong. People ask me why a lot. I like the ordering of systems and the ordering of chaos. And airlines have so many moving pieces. So if like systems are dots on a map or whatever, they’re just a lot of dots. Airlines have more dots than just about any other system in the world. And they move more quickly and with more dependencies on weather and so forth than anything else.

I mean, you’ve got tickets, bags, security, you’ve got aircraft, employees, food, I mean all these input… The next time you get on an airplane, just look around at all the people whose sole job it is to get that thing to push back. Then once you push back, you’ve got people in dispatch watching over you, you’ve got air traffic control. You’ve got all kinds of things happening. It is such an amazing wonderful, beautiful ballet, that I think it would just be… I’ve always wanted to run an airline.

Andrew: Have you ever been up in a… This is something I’ve always wanted to do. If anyone knows anyone in the air traffic control industry who can get either one of us into an air traffic control tower, please let me know.

Zach: I’ve never tried. I feel like it probably isn’t easy, but probably isn’t all that difficult.

Andrew: Yeah.

Zach: It would be amazing.

Andrew: I think it would be fascinating.

Zach: So fun little facts about me. When I really need to concentrate, I listen to air traffic control.

Andrew: It’s crazy.

Zach: No, I really do. Since broadcast.com, Mark Cuban’s company back when the internet was dial-up and today live in LiveATC launched. I have listened to air traffic control as a thing as long as I can… I have the LiveATC app on my phone, like I can listen to it any time. It’s amazing. I was into it when I…I’m not supposed to do this because I don’t…

Sorry, but I don’t turn my electronic devices off until we take off or to airplane mode, because when I… If you see me on a plane, when we’re on the ground and I have headphones then I’m listening to air traffic control control. I’m listening to ground control while we’re on the plane. I will hear our clearance to take off, and then I’ll go into airplane mode.

Andrew: That’s cool.

Zach: I find it fascinating.

Andrew: I’m gonna have to do that next time, that’s really interesting. What do you spend most your discretionary money on? Like not investment money, not expenses, but money that you just…discretionary.

Gear Heads Unite!

Zach: Probably outdoor gear, to be perfectly honest. I travel significantly. And so a lot of what I do is about experiences. I would say… I have a pretty good tracking of my spending, and I think that I’m an oddball. I track my personal spending in QuickBooks, which is really bizarre, and I consider… I run my life on a P&L and so I can tell you, actually categorically, where I spend most of my money.

Andrew: That’s awesome.

Zach: But the short answer is, you know, is like experiences. And then I justify gear spend as things that I need for more experiences, which I think is pretty much the most irrational thing you can do. But I do travel… When I travel… So I travel a lot for work, significantly enough for work, internationally, in the U.S. and about 40 to 50% of the time. It would be about 25% if I didn’t buffer a lot of my work.

So if I have to go to Boston… I’m a director at a company called Ministry of Supply in Boston. I’m out there quite a bit. I never go for one day, I always go for three or four days. And I just mean…this big principle of mine is leaving slack in the system for like good things to happen, and I do that a lot. My calendar… And so I fly out to Boston for two or three days, and the company will cover some of that, but then I have to cover some of it.

Or I’m in London for work, and European airlines are suicidally cheap, and so you can go to Spain for a dollar sometimes, so I had to pay for the Airbnb. So I spend a lot of money on travel because I think it’s just one of the most important things you can do. I’m a better person because of it.

Andrew: We’ve spent a lot of time this last day or two talking about locations, interesting places to live. I know you’re thinking about, you know, what that looks like for you, but gonna throw you kind of a subset of that question. Community, obviously, is super important and plays a major role in that calculation. But let’s assume that all the people that were close to you in the world said, “Hey, Zach, we’re willing to uproot ourselves to wherever you want us to go, so you could solely focus on geography as, you know, as the issue, place as the issue.

Cost wasn’t an issue, that was something that somebody took care of. Purely based on geography and just the environment, where would you live, if all your friends were there and you had an expense card that paid for all of your, you know, the cost of living expenses?

Zach: Wow, that’s a really phenomenal question. I don’t know. I think of all the places that I’ve been, the places that speak to me the most, Majorca in Spain is probably one of my favorite places in the world. Not because of Palma and the parties, but because of what is outside of that. It’s one of the most beautiful environments I’ve ever been in. It’s mountainous, it’s arid, it’s agricultural, it’s beachy.

Andrew: What’s the name of the place again?

Zach: Majorca.

Andrew: Oh, Majorca.

Zach: Yeah. It’s in the Mediterranean or it’s not really the Balearic sea, but it’s that area of the world where they all…it’s all in the Mediterranean to me. Probably another would be a Mediterranean place. Probably Kalymnos in Greece, you know, I’ve talked about that. It’s a huge rock climbing area, but it’s an amazing place.

But I don’t know, I’m not sure that that’s the right answer. I’m not sure if I have the right answer. It would probably be…I honestly think it would be some place international if all things were free, not because I wanna escape the U.S. but I think that there are some really beautiful places that we under appreciate.

Andrew: Last question. What’s the best book you’ve read in the last year? It doesn’t have to be the definitive one because that’s…sometimes it’s hard to remember what you’ve read, and sounds like you have a terrible memory for books like I do. But one of the most impactful. It’d be in the top three, let’s say, of the books you’ve read in the last year.

Zach: Well, so I’m cheating a little bit here because I reread this book every year. Is that okay?

Andrew: Oh, yeah.

Read This Book

Zach: So the most meaningful book in my life, that I encourage everybody to read, is a book called “Fooled by Randomness” by Nassim Taleb. He’s the author of what… the more popular of the three books is “The Black Swan.” I think that “Fooled by Randomness” is one of the better books I’ve ever read. But I’d cheat so I’ll give you a second answer that I read in the last year. I think one of the best books I’ve read is “The Outsiders.” I don’t read a lot of business books, I read mostly history, biography, science.

Aside from “Ego Is The Enemy” which I recommend everybody…the business book that I think is one of the most meaningful, and for your audience too, will probably be really incredible, it’s about, basically, the eight best nonconformist, nontraditional capital allocators of all time. So Warren Buffett, the CEO of Ralston Purina, whose name I can’t remember, Tom Singleton, a few other, just greats.

And it just reminds you how important it is to have your own view of things and having to do things your own way. And that the race will, you know, the scoreboard, the long-term scoreboard always goes in the favor of those who make good decisions and forget what happens in the short run.

If you combine “The Outsiders” to “Fooled by Randomness,” you’ll never care about PR ever again. Like, you’ll never care about blog posts or Twitter followers ever again because it, you know… That’s not super true but meaning, the short-term stuff is a lot less important than what you build over the long term. And “Fooled by Randomness” convinces you that that’s important, and then “The Outsiders” shows you empirically that it actually can work at significant scale.

Andrew: So if you’re interested, you can check out… I highly recommend it, zgware.com, that’s Zach’s blog. He talks about travel, life…

Zach: It’s actually not updated. There’s a lot of half-written stuff in Google Drive.

Andrew: It’s still…it’s great. Check out zgware.com, as well as VTF capital. What’s the website for VTF?

Zach: Vtfcapital.com

Andrew: Dotcom. Okay, great. If you’re interested in what he’s doing there, make sure to check him out. Zach, it’s been a fun night…

Zach: This is awesome.

Andrew: …fun camping, fishing and hanging out talking shop. I appreciate you coming and hanging out in Bozeman. And thanks for being on the show.

Zach: Sure, man. Thanks so much.

Andrew: Yeah. Want to connect with and learn from other proven ecommerce entrepreneurs? Join us in the eCommerceFuel private community. It’s our tight-knit vetted group for store owners with at least a quarter million dollars in annual sales. You can learn more and apply for membership at eCommerceFuel.com. Thanks so much for listening. And I’m looking forward to seeing you again next time.

 

What Was Mentioned

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Post tagged in: Entrepreneur Profiles, Podcast

1 Comment

  1. Great episode! I’d actually love to hear Tony expand on this… “Probably everybody listening to this podcast knows the math of how you build a brand”

    I think a lot of us are trying to figure out that math every day. I’d love to hear Tony further explain that math from his perspective.

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