How does a serial entrepreneur turn into the owner of one of the largest shoe companies in the minimalist category? One shoe at a time…

Dave Young:

Welcome to the Empire Builders podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Simple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.

[Waukee Feet Ad]

Dave Young:

Welcome back to the Empire Builders podcast…

Stephen Semple:

Do I have you stumped this time?

Dave Young:

Well, I don’t know. I’m thinking, I’m thinking, I’m thinking. I’m stalling… I was talking about the podcast. This is the Empire Builders podcast. Stephen Semple just interrupted me, got me off my train of thought because he just, just before I started yammering, you whispered the topic and it is…

Stephen Semple:

That’s correct.

Dave Young:

Xero Shoes, but zero with an X. Zero with an X. There’s something tickling my memory that says, maybe I know it, maybe I don’t.

Stephen Semple:

Well, they are a private company. The best I could find as it’s estimated that they probably do around $50 million a year in sales. They have 61,000 reviews on their site, and they were launched on November 23rd, 2009 by Steven Sashen and Lena Phoenix out of Boulder, Colorado. They’re in a small space in the shoe market ’cause they are a minimalist shoe, and minimalist shoes are basically 1% of the shoe business, but is a growing part of the shoe area.

Dave Young:

Mm-hmm.

Stephen Semple:

And this shoe was, it was actually kind of a bit of an accidental business for them, and it was not their first business. They did a lot of different things, and Steven was, when he was in school, did a lot of running and things like that. And when he turned 45, he decided to get back into sprinting and he’d been reading the book Born to Run, and in the book Born to Run, the author of the book talks about this whole idea of minimalist shoes and really allowing the natural body to govern itself in terms of running and that you’d have fewer injuries and things along that line. So he decided to make his own sandals. But again, as I was saying, he did a lot of different things.

Dave Young:

Okay.

Stephen Semple:

Like he was an athlete in high school. He did magic shows to make money. He went to Duke University and he did stand-up comedy when he was at Duke. And when he graduated, he went on the road for 10 months doing comedy, and he moved to New York and did stand-up comedy there. And when he was doing his comedy, he created a software for helping write screenwriting because back in the day, auto-pagination was really, really hard to do. So he wrote the software that did that. Then he moved to Boulder, Colorado and he started another business there. So he did a whole pile of different things. In ’92, ’93, he got into internet marketing and he was doing this internet marketing-

Dave Young:

Okay.

Stephen Semple:

… and then he was doing this mortgage brokerage stuff on the side, and they were doing real estate investments, and he got back into running. When he got back into the running, he was getting a bunch of injuries. He read the book and started to run barefoot, let the body do what it does naturally. And he loved the experience of feeling his feet on the ground. And when you run wrong when you’re barefoot, it hurts. When you run right, it feels good. And minimalist shoes at the time did not fit the shape of his feet and his wife, she did not like him doing the whole barefoot thing around the house because basically she was like, Lena was like, “You know, you come home after barefoot running and you walk around the house bare feet and you’re making a mess of everything. So you got to stop doing this barefoot stuff.” He’s looking around to try to find some sort of minimalist shoe, and he decides that what he’s going to do is make his own sandals.

So he’s looking around for materials to make his own sandals, and he found that basically Vibram would make these replacement soles. He went to a shoe store, a shoe repair store, bought some Vibram soles, went to Home Depot, got some cord, basically cut the soles, used the cord, made his own sandals. Now the challenge was Vibram would only sell soles to shoe repair shops, so he had to buy pretty large quantities of the soles, and basically the cord was really just to hold the sandal in place, just to keep it on your foot. But the other barefoot runners that he was running with, they were like, “Hey, we want something like that.” So he would get them to stand on the rubber, he would trace their feet, he would cut it out with tin snips, punch holes in it, lace it up, and it became this kind of goofy little hobby.

So it was a buddy of his, Michael Sandler, who gets this contract to write a book about barefoot running called Barefoot Running. And he said, “Hey, if you have a website, I could feature it in the book.” Well, so I mentioned to you, one of the businesses that Stephen had was internet marketing and building websites. So he thought, well, I’ve built hundreds of sites, I should spin one up. So he rushes home and he pitches this idea to Lena and he says, “Hey, we should build this website.” She’s like, “Dude, you get really easily distracted. We’re not doing another business. Let’s focus on this SEO business we’re trying to get off the ground.” He agrees. She goes to bed, he builds a website and they name it, invisibleshoe.com. She gets up in the morning, it’s November, 2009, she gets up in the morning, she’s annoyed ’cause he went and he built the website. But he pitches it to her and says, “Well, what we can do is we can use this as a case study.” Because Google at the time bought YouTube right? And they’re starting to rank videos higher.

And he says, “Well, why don’t we do this? I can create a whole pile of videos showing how you can make these shoes, where to get the materials. We can give all this away and we can use this as a case study for SEO.” So off he goes and does that. If you want the materials, here’s where you get it, all this other stuff. And of course, there’s no competition at the time for videos for how to make your own minimalist shoes and sandals. So it ranks pretty quickly. They get traffic pretty quickly.

Dave Young:

Right.

Stephen Semple:

And he starts selling kits and the instructions for these sandals. So in the first year, they make like $114,000, sell about 6,000 of the kits, and they’re putting these together in a corner of the spare bedroom, and then they eventually buy a table, and then they have people working out of the house. And also what happens is there’s the recession going on at the time, and this is inexpensive but empowering and people would also tire of getting into the do-it-yourself movement. Then they see this lift when the book sale happens.

Dave Young:

Yeah.

Stephen Semple:

And here’s one of the things, they start doing this guerrilla marketing anywhere that they drive around and find places that have got that book, they go to the bookstore and they insert their business card into the book. Barefoot running is now starting to take off. They start developing this niche in this space, and in 2010, they really are starting to feel like this is going and they incorporate the business. In the second year, they’re doing 247,000 in sales. In the third year, they’re doing a half a million in sales. What they suddenly realize is they need to actually start making some of these sandals themselves.

Dave Young:

And they realize they’re in the shoe business.

Stephen Semple:

So they reach out and they find a Korean supplier. It almost kills them because the first batch that they get was really inconsistent and they had spent like $100,000 in molds and materials, and it starts shipping, and there’s a problem with how the material is being made. There’s this side flap with this pre-punched hole that’s ripping. It’s just not working. And at that point, they’re like, “We’re ruined.” They really thought they were ruined. They had to open up every box and see how much they could salvage. And here’s the other problem is when you’re this small player in this big shoe market, no one really cares about them. They ended up complaining to the manufacturer in Korea and complaining so much, not only did that Korean manufacturer fire them, they got basically kicked out of Korea. They would call any other manufacturer in Korea and they’d go, “Yeah, we don’t want to talk to you.”

Dave Young:

Wow.

Stephen Semple:

Yeah. Now they lucked out. There was a footwear magazine and there was an article on how to get manufacturing agents in New York, and so they managed to find a manufacturing agent in New York who decided to work with them, who connected them with a Chinese manufacturer, but also it worked out better because they now had this person in the middle who could help guide them.

Dave Young:

Hey, Stephen, I want to interrupt ourselves. That’s not proper grammar, but I did it anyway.

Stephen Semple:

There you go.

Dave Young:

In lieu of our commercial this time I thought maybe you and I could just chat for a minute.

Stephen Semple:

Absolutely. Sounds great.

Dave Young:

Our goal with the Empire Builders podcast is to talk about business building strategies that have worked for people that started out small and became empires. We want to help you. If you’re a business owner and you’re listening to the Empire Builders podcast because you want to build your own empire, we’ve got a pretty sweet offer for you, and that is to just spend 90 minutes chatting with us. It’s not a sales call on our part. It’s a 90-minute session where beforehand you do a little bit of homework and give us some basic background information about your business, and then we get on a Zoom call and we learn a little bit more about you, and we give you the very best advice we can give in a 90-minute session.

Stephen Semple:

And I’m going to say it is miles away from it. I hate these dog and pony sales calls where I’m great, I’m amazing. Here’s samples of our work. You should hire us. Which is part of the reason that makes us different is the fact that there is the scorecard and questionnaire that goes out, that the owner sends back to us because it allows us to take a couple of days, do some research, put some thought, and come with some solid recommendations ’cause it’s my belief that if we can provide some good insights that somebody may be more interested in hiring us, and certainly that’s a way better experience than meeting with some sales guy who runs you through a dog and pony. It’s lots of fun. It’s great value. People get a recording of it. I highly recommend people take us up on the offer.

Dave Young:

Easy to find us. You’re listening to our podcast, so find a way to request your 90-minute session with us. Looking forward to talking to you. Let’s get back to the story.

Stephen Semple:

Back to the story. And in 2011, they got a loan from a private family office for $200,000. One of the first things that this private family office did is they looked at them and said, “You need to get somebody on the marketing side.” So they managed to hire this guy who had done marketing with some of the shoe companies, and the first thing he said is, “You need to change the name from Invisible Shoes.” And he goes, “Well, but it’s almost like you can’t see them.” He says, “But I can see them. They’re not invisible.”

So they were referred to an agency. They came up with a bunch of names and they fell on the name Xero Shoes, which they really liked. And in 2012, they applied to go onto Shark Tank, big PR opportunity. And Shark Tank has like 36,000 applications a show, it’s crazy. And when you send the application, the application actually has to be handwritten and his handwriting is terrible. So he typed it and he hired somebody to hand write it. One of the reviewers’ husband was a barefoot runner and knew them, so they managed to get onto the show. And of course, when the TV show happened, the internet traffic just blew up, which then became calls, which then became orders.

Dave Young:

Sure.

Stephen Semple:

It was just huge.

Dave Young:

Yeah.

Stephen Semple:

Just huge. And it was also through this that they met Dennis Driscoll, who was the former head of global distribution for Crocs. They got involved with him and he helped them really develop the idea and find a factory that they could work with in China and things along that lines. But here’s the interesting thing to happen. So patents are really interesting thing in China. So when they went to the first factory in China, they didn’t have money to do a patent, so they took the product to China and the Chinese factory put a patent on the design. So when they went to change factories, they actually had to get their patent back.

You know we also talk about unleveraged assets? One of the unleveraged assets that they had when they went to make some of their first shoe designs was remember how they were doing their shoes at first, and I might not have talked about this as much. What they did at first, in the early days was they would have these instructions of how to trace your feet. So people would trace their feet themselves and send the tracing in, and then they handmade the sandals and sent it back. That was how they did it in the early days. So they had 5,000 foot tracings. So when they went to do their first shoe designs, they could go, “Well, here’s what we know. We know, here’s the 5,000 foot tracings.”

Dave Young:

Wow.

Stephen Semple:

And so they were able, yeah, so they were able to leverage that for their early shoe designs.

Dave Young:

That’s amazing.

Stephen Semple:

In 2013, they’re doing about three million in sales. They develop this really great, really great word of mouth, and they have this, they develop what’s called this inner circle list. So what they know is there’s this list of people who are these really big fans at any time. They reached out to them, would further communicate things around the world. So they really worked hard to keep in touch with the consumer ’cause they did all this stuff direct to consumer. They always wanted to have direct conversation with consumers. What they did know is at a certain point that they needed to add retail to the mix. They found it really, really hard to develop retailers ’cause at one point they went into a couple of retail stores and their stuff outsold like the minimalist shoe from Nike or whatever, and then Nike would kick them out. They eventually realized that, nope, what they needed to do was really be this direct to consumer brand. So they’ve done everything on the direct to consumer.

Dave Young:

Yeah.

Stephen Semple:

By 2015, they become profitable, and then they have this huge problem in 2019, and that was the trade war with China. So when the US started the trade war with China, they kept raising these tariffs, but the problem was the tariffs kept going up, and so they didn’t know what their cost of product was going to be. So they had to raise a bunch of money.

Dave Young:

Right.

Stephen Semple:

To pre-order things, to get things in and get stuff in before the tariffs hit. So they had a bunch of challenges along the way in terms of growing the business. And to put in an idea, they had placed this one huge order, which had this $500,000 unexpected tariff, and so can you speed up orders before the next tariff? That led to them building up a lot of debt because they were trying to build this inventory, and that’s 2019, right? And then guess what ended up happening? 2020 hits. Their next challenge was factories are starting to shut down and they have to get inventory in. They have felt a lot of challenges through this growth period. Here’s the thing, they knew it was working because every time they brought stuff in, it sold out, but they were uncomfortable with the debt that they had, and they were now reaching like 50 million in sales and they kept selling out.

So what they ended up doing is they ended up bringing in some outside investors, and really the whole idea of these outside investors was to put the business into a scenario where it didn’t have this debt ’cause they were really uncomfortable with that, and then also brought in some outside management that really helped them manage the supply chain way better, ’cause they were saying they had no idea what they were doing. They were like, “Oh my god, we need more. Oh my god, we need more.” They had no financial modeling and all of that other stuff, so that really helped them build a much more professional business. They’re close to becoming the dominant player in this market because of this evangelical following that they have built with their fans.

Dave Young:

Wow.

Stephen Semple:

Yeah.

Dave Young:

That’s really cool.

Stephen Semple:

It’s this really kind of interesting business that just grew out of, he was barefoot running. He did his own thing. The only way he could get enough soles was he had to buy a whole bunch, so he did it for his friends, and then somebody’s writing a book, he builds a website for it. That blows up. They’re doing these tracings.

Dave Young:

Yeah.

Stephen Semple:

It was never really intended to be this business, but because it was this interesting little niche, it really grew.

Dave Young:

Yeah. Sometimes the forces all just work together to make it inevitable.

Stephen Semple:

They became a big player in a small niche, and I think we sometimes overlook the power of being a big player in a small niche.

Dave Young:

Very cool story. I’m happy they’ve been able to weather those storms.

Stephen Semple:

They have weathered a bunch of storms and that space is growing, so as that space grows, they’re going to grow with it.

Dave Young:

Yeah, absolutely. Well, thank you for sharing the Xero story. It’s not just a Xero-sum game.

Stephen Semple:

And they’re invisible shoes you can see.

Dave Young:

See what I did there? Yeah. Invisible shoes, you can see. I wonder if they’ve used that line before.

Stephen Semple:

Probably not. Or they’re sick and tired of hearing it.

Dave Young:

Thank you, Stephen.

Stephen Semple:

All right, thanks David.

Dave Young: Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big fat juicy five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions@theempirebuilderspodcast.com.