Photo credit: naturebe
Fred Smith is not the type of man you’d expect to be known for a lucky streak at a Vegas casino. He does not compete in the World Series of Poker, nor was he part of the MIT Blackjack Team that profited from card counting. Smith is a Vietnam veteran and accomplished CEO who used to fly planes with John Kerry and nearly became Secretary of Defense under George W. Bush. Yet if Fred Smith did not have a lucky streak at a blackjack table in the 1970s, FedEx might not exist today.
As an undergraduate at Yale in 1965, Smith was a charter pilot at a New Haven airport. He learned from pilots who flew for companies like IBM and Xerox -- and spent much of their time flying around spare computer parts for broken computers -- that the logistics of transporting computer parts and electronics were extremely challenging. At the time, the nation’s highly regulated airlines focused on transporting people around the country. As Smith would write in a paper, for airfreight to be economical, it needed its own system, distinct from passenger airlines. He envisioned a service that could quickly deliver time-sensitive cargo by taking care of every part of the shipping and delivery process.
Smith would get the opportunity to refine his idea. After Yale, he flew planes in Vietnam and saw the military’s logistics operation in action, then managed Arkansas Aviation Sales. In 1971, Smith raised money and launched Federal Express.
The goal of creating a nationwide clearinghouse for cargo was an ambitious one, and Federal Express burned cash quickly. Several years into operation, with Federal Express delivering 1,000 pieces of cargo a day and expanding to cities like Buffalo, Denver, and Hartford, the company war chest dwindled to $5,000.
Every Monday, fuel companies demanded the week’s payment in advance, which at that point ran $24,000. As the week ended, Federal Express looked unable to pay its bills, leaving a company predicated on fast delivery with a grounded fleet. “I really did not know what was going to transpire on my return,” COO Roger Frock writes in Changing How The World Does Business about leaving for home that weekend.
On Monday, however, he discovered the company’s checking account held $32,000. When Frock asked Smith about the source of the money, Smith replied, “I knew we needed money for Monday, so I took a plane to Las Vegas and won $27,000.” The leaders of Federal Express had been hoping for a group of investors to raise additional funding -- something they’d expected for some time. Smith had met with the board of General Dynamics, a large defense contractor, and when they declined to offer money, he flew to Vegas instead of going home. Frock relates:
I said, "You mean you took our last $5,000 -- how could you do that?" He shrugged his shoulders and said, "What difference did it make? Without the funds for the fuel companies, we couldn't have flown anyway."
Despite the nonchalance expressed by Smith (at least in Frock’s recollections), his actions were not callous. When Smith traded company money for casino chips, he placed his own money on the line along with his career. Smith “had poured a good part of his net worth” into Federal Express, recollects an investor who later became director of the company. “Fred was about as entrepreneurial as they come.”
Decades later, Smith's gamble has achieved legendary status. No one but Smith knows the full details of his trip. In the early 1970s, FedEx was just a small, struggling company and startups and venture capital did not enjoy the attention it does today -- no journalists raced to confirm the details of his story. But Smith related the blackjack story to his executive team and has since repeated it to the media in venues like an hour long interview on the Charlie Rose show. As Bloomberg writes, Smith's bet and its place in the founding of Federal Express has become "part of Corporate Americana."
Smith’s blackjack winnings kept FedEx afloat for another week. Between some favorable reports from potential investors that made it easier to borrow money and employees agreeing to hold off cashing their payroll checks, that allowed Federal Express to keep going for several more months until it inked $24.5 million in additional funding and a $27.5 million loan. FedEx is now worth nearly $45 billion.
Business reporters often like to say that executives are betting the future of the company on a new product or strategy -- whether it’s Steve Jobs with the iPhone or Google with “moonshots” like self-driving cars. Fred Smith simply gambled on the future of the company quite literally.
To get occasional notifications when we write blog posts, sign up for our email list.
July 22, 2014 · 12,473 views
Family with kids used to be able to board flights early. Now many airlines have done away with that.
April 16, 2014 · 28,420 views
Stanford researchers say that attractive people are more likely to endorse hierarchies -- and believe that they belong at the top of them.