7 ms·

How Fred Smith Saved Fedex at the Blackjack Table

80 points by vincentchan 13y ago

bryanlarsen 13y ago
As presented, that sounds like an extremely good bet. Look at the stakes. If he didn't gamble, they had a 100% chance of going bankrupt immediately. If he did, they had a ~50% chance of going bankrupt immediately.
- DennisP 13y ago
  It's a little more complicated but still an excellent bet. In poker terms, he had good pot odds. Say I'm an investor and get $10K if he goes bankrupt. If bets and wins, I have, say, a 52% chance of getting nothing, and a 48% chance of getting a million, for an expected value of $480K. The rational decision, in the best interest of investors, is to make the bet. Even more so if he was counting cards, improving his odds slightly over 50%. Counting cards isn't all that difficult, the hard part is just doing it over time without being detected, which in this situation wasn't necessary. It's interesting that he chose blackjack, a game that punishes you badly if you're not skilled, instead of roulette.
zbruhnke 13y ago
This is a story I've always loved and it's good to hear it with a little more background. I had no idea they had raised so much money already. The smarter thing to do would have probably been to go to one of his investors for a small bridge loan knowing the new round was in the works. I put myself in some pretty tight personal financial spots for the success of my first company and just seeing my employees happy and at work was enough for me to never regret it. After selling the company they all got an even more stable foundation for their lives and I got the "reward" that comes to those too dumb to give up. Here's to guys like Fred for giving me the inspiration to do whatever it took for my company!
- arthurrr 13y ago
  This is a story that I've always hated because I think it is very very unlikely to be true. If he actually did play blackjack, I'm curious to know how many hands he played, how much he was betting per hand, what casino he was playing at, etc. If he bet it all on one hand, what if he was dealt A-A and didn't have the money to split? I think somebody who is reckless enough to gamble the remaining funds of the company, is not disciplined enough to walk away from the blackjack table after having won just enough for the fuel payment. If he actually did play blackjack, it would be more likely that he started out winning, won enough to pay for the fuel, but then continued gambling and gave it all back.
kintamanimatt 13y ago
This is the flip side to the Cooper Union story [1] that's gracing the front page right now—a reckless strategy that is only lauded because it paid off in this one high-profile instance. I'm not sure where the line between reckless gamble and calculated risk is, but this feels like it's over the line. Yes, the company would have likely folded either way had the founder not gambled and won, but this strategy together with the "never give up on a particular business" cockroach mentality feels akin to winning a lottery and subsequently advising people that lottery tickets are a viable way to prepare for retirement. Also, I'm quite sure that the founder would have found himself in a lot of personal trouble for gambling company funds on a blackjack table had he lost. [1] https://news.ycombinator.com/item?id=5599385 https://news.ycombinator.com/item?id=5599385
- moogleii 13y ago
  I agree it would have been over the line, if it hadn't been so desperate. It sounds like it was do or die - in that sense, it shouldn't be interpreted as a strategy, reckless or not. Everyone involved admits it was a gamble. I get the feeling the Cooper Union situation was, although bad, not as bad as what Fedex was in. Cooper Union made a gamble, failed, and was still able to continue to run (2 years of debate, plus funds to run until the 2014 school year when the fees actually kick in). That tells me it wasn't a do or die situation; they still had rope left. Even now, I'm not convinced they exhausted all available, smarter avenues. I'm also kinda surprised their books aren't open if they've been debating for 2 years.
graycat 13y ago
The way I heard the story, and I was at FedEx in Memphis at the time, Fred went to Vegas to see Howard Hughes and pitch for an investment and won the $27 K while waiting to see Hughes. That week the company asked employees to delay cashing their paychecks if they could. At the time, I was doing operations research working on fleet scheduling, etc. Likely there was a lot of money to be saved with better scheduling of the fleet. I'd written the first software for scheduling the fleet, and one evening Roger Frock (mentioned in the article) and I used my software to do a schedule for all planned 33 airplanes and all planned 90 cities. Our two representatives from Board Member General Dynamics checked the 'feasibility' of the schedule and announced "It's a little tight in a few places but it's flyable". Some members of the board had been concerned or even convinced that a schedule would not be possible. So, the schedule Roger and I did alleviated the concerns and, as I was told, enabled $55 million in funding, i.e., loans, on the airplanes. At a senior staff meeting, Fred's remark on the schedule was "An amazing document. Solved the most important problem facing the start of Federal Express.". Yup, it had been six weeks in my living room in Maryland connected to a time sharing computer for 80 hours a week writing PL/I code while finishing teaching two computer science courses at Georgetown U. That FedEx was close to going under didn't bother me much, but the stock I'd been promised "within two weeks" with my offer to join still was not there 18 months later and bothered me a lot. If I couldn't get the promised stock when the company was close to folding, then staying around and helping to save the company would get me what? With no stock, I was going to graduate school to have a better career in operations research. Then Fred called me to his office and said: "You know, if you stay, then you are in line for $500,000 in Federal Express stock." But he wasn't giving me that statement on paper with a signature. My manager, Mike Basch, SVP Planning, was there with me with Fred. My office was next to Fred's with Mike's across the hall. No, given that the promised stock was already 18 months late, the company was close to going under, and Fred was not putting his statement in writing, I didn't know I was in line for any stock at all. Apparently none of Fred's talk about stock meant anything: With the original copy of the offer letter, all the promises, all my records from then, when I contacted Fred with all the information, he and his FedEx lawyer refused to pay me anything, and a lawyer told me that legally FedEx owed me nothing. The work I was doing would likely have saved FedEx a LOT of money soon. E.g., a good first shot would have been to modify the scheduling software to include some accurate costing and then just use it to develop schedules with the least cost by just intuitive methods. For a second cut, generate and cost out many possible individual airplane trips from Memphis to the cities and back. Then use that data for integer linear programming (ILP) set covering with one column for each possible trip and one row for each city to be served, say, a few dozen cities growing to the planned 90. Then use some column generation (Gilmore and Gomory) and some branch and bound. Easily should have saved millions a year in fuel and other operational costs quickly. I had world expert in integer linear programming George Nemhauser lined up as a consultant, and I was writing software in PL/I on an IBM CP67/CMS system. Actually, well into the start of FedEx, Fred had planned to do the first schedules himself. When he tried, for just a few cities, just by hand, from his office, when FedEx was still in Little Rock, at the end of the afternoon he came out of his office saying "We need a computer". A guy I had known in college heard that and gave me a call. Yes, ILP set covering is in NP-complete. So, no one has a guaranteed polynomial algorithm for worst case examples. But that doesn't mean that can't save a lot of money fairly easily in cases of interest. Sure, might have trouble guaranteeing to save the last 10 cents, but if save $5 million a month over the best solution otherwise, then just saved, let me see here, right, $5 million a month. I didn't get the stock, and Fred didn't get the savings. Fred has been very successful, but he didn't do it alone, and some promises about stock were not kept. One lesson is, from what my wife told me as I joined FedEx, "Get it in writing". Well, my offer letter said I'd be in the stock plan, but apparently that was meaningless legally. Better still, get a lawyer. Better still, start and own your own company. Back to it.
Bulkington 13y ago
I'd always heard the blackjack story was cover for a new silent partner--the kind you don't break your promises to. And those deals aren't in writing either.
rrrrtttt 13y ago
An entrepreneur's character is truly tested only when his company is failing. You can take one of two options: 1) pay your employees and suppliers everything you owe, return any money that's left to investors and close up shop, or 2) take all the cash from the till and go to Vegas (or some other equivalent of betting the farm). If this story is true I wouldn't want to have anything to do with Mr. Smith.
niggler 13y ago
Discussion from a month ago (hit the front page): https://news.ycombinator.com/item?id=5405371 https://news.ycombinator.com/item?id=5405371
leejoramo 13y ago
I heard this store more than 20 years ago. I had always assumed "won the money in Vegas at Blackjack" was a euphemism for getting a loan from the Mob.

80 points by vincentchan 13y ago

As presented, that sounds like an extremely good bet. Look at the stakes. If he didn't gamble, they had a 100% chance of going bankrupt immediately. If he did, they had a ~50% chance of going bankrupt immediately.

DennisP 13y ago
It's a little more complicated but still an excellent bet. In poker terms, he had good pot odds. Say I'm an investor and get $10K if he goes bankrupt. If bets and wins, I have, say, a 52% chance of getting nothing, and a 48% chance of getting a million, for an expected value of $480K. The rational decision, in the best interest of investors, is to make the bet. Even more so if he was counting cards, improving his odds slightly over 50%. Counting cards isn't all that difficult, the hard part is just doing it over time without being detected, which in this situation wasn't necessary. It's interesting that he chose blackjack, a game that punishes you badly if you're not skilled, instead of roulette.

zbruhnke 13y ago

This is a story I've always loved and it's good to hear it with a little more background. I had no idea they had raised so much money already. The smarter thing to do would have probably been to go to one of his investors for a small bridge loan knowing the new round was in the works. I put myself in some pretty tight personal financial spots for the success of my first company and just seeing my employees happy and at work was enough for me to never regret it. After selling the company they all got an even more stable foundation for their lives and I got the "reward" that comes to those too dumb to give up. Here's to guys like Fred for giving me the inspiration to do whatever it took for my company!

arthurrr 13y ago
This is a story that I've always hated because I think it is very very unlikely to be true. If he actually did play blackjack, I'm curious to know how many hands he played, how much he was betting per hand, what casino he was playing at, etc. If he bet it all on one hand, what if he was dealt A-A and didn't have the money to split? I think somebody who is reckless enough to gamble the remaining funds of the company, is not disciplined enough to walk away from the blackjack table after having won just enough for the fuel payment. If he actually did play blackjack, it would be more likely that he started out winning, won enough to pay for the fuel, but then continued gambling and gave it all back.

kintamanimatt 13y ago

This is the flip side to the Cooper Union story [1] that's gracing the front page right now—a reckless strategy that is only lauded because it paid off in this one high-profile instance. I'm not sure where the line between reckless gamble and calculated risk is, but this feels like it's over the line. Yes, the company would have likely folded either way had the founder not gambled and won, but this strategy together with the "never give up on a particular business" cockroach mentality feels akin to winning a lottery and subsequently advising people that lottery tickets are a viable way to prepare for retirement. Also, I'm quite sure that the founder would have found himself in a lot of personal trouble for gambling company funds on a blackjack table had he lost. [1] https://news.ycombinator.com/item?id=5599385 https://news.ycombinator.com/item?id=5599385

moogleii 13y ago
I agree it would have been over the line, if it hadn't been so desperate. It sounds like it was do or die - in that sense, it shouldn't be interpreted as a strategy, reckless or not. Everyone involved admits it was a gamble. I get the feeling the Cooper Union situation was, although bad, not as bad as what Fedex was in. Cooper Union made a gamble, failed, and was still able to continue to run (2 years of debate, plus funds to run until the 2014 school year when the fees actually kick in). That tells me it wasn't a do or die situation; they still had rope left. Even now, I'm not convinced they exhausted all available, smarter avenues. I'm also kinda surprised their books aren't open if they've been debating for 2 years.

graycat 13y ago

The way I heard the story, and I was at FedEx in Memphis at the time, Fred went to Vegas to see Howard Hughes and pitch for an investment and won the $27 K while waiting to see Hughes. That week the company asked employees to delay cashing their paychecks if they could. At the time, I was doing operations research working on fleet scheduling, etc. Likely there was a lot of money to be saved with better scheduling of the fleet. I'd written the first software for scheduling the fleet, and one evening Roger Frock (mentioned in the article) and I used my software to do a schedule for all planned 33 airplanes and all planned 90 cities. Our two representatives from Board Member General Dynamics checked the 'feasibility' of the schedule and announced "It's a little tight in a few places but it's flyable". Some members of the board had been concerned or even convinced that a schedule would not be possible. So, the schedule Roger and I did alleviated the concerns and, as I was told, enabled $55 million in funding, i.e., loans, on the airplanes. At a senior staff meeting, Fred's remark on the schedule was "An amazing document. Solved the most important problem facing the start of Federal Express.". Yup, it had been six weeks in my living room in Maryland connected to a time sharing computer for 80 hours a week writing PL/I code while finishing teaching two computer science courses at Georgetown U. That FedEx was close to going under didn't bother me much, but the stock I'd been promised "within two weeks" with my offer to join still was not there 18 months later and bothered me a lot. If I couldn't get the promised stock when the company was close to folding, then staying around and helping to save the company would get me what? With no stock, I was going to graduate school to have a better career in operations research. Then Fred called me to his office and said: "You know, if you stay, then you are in line for $500,000 in Federal Express stock." But he wasn't giving me that statement on paper with a signature. My manager, Mike Basch, SVP Planning, was there with me with Fred. My office was next to Fred's with Mike's across the hall. No, given that the promised stock was already 18 months late, the company was close to going under, and Fred was not putting his statement in writing, I didn't know I was in line for any stock at all. Apparently none of Fred's talk about stock meant anything: With the original copy of the offer letter, all the promises, all my records from then, when I contacted Fred with all the information, he and his FedEx lawyer refused to pay me anything, and a lawyer told me that legally FedEx owed me nothing. The work I was doing would likely have saved FedEx a LOT of money soon. E.g., a good first shot would have been to modify the scheduling software to include some accurate costing and then just use it to develop schedules with the least cost by just intuitive methods. For a second cut, generate and cost out many possible individual airplane trips from Memphis to the cities and back. Then use that data for integer linear programming (ILP) set covering with one column for each possible trip and one row for each city to be served, say, a few dozen cities growing to the planned 90. Then use some column generation (Gilmore and Gomory) and some branch and bound. Easily should have saved millions a year in fuel and other operational costs quickly. I had world expert in integer linear programming George Nemhauser lined up as a consultant, and I was writing software in PL/I on an IBM CP67/CMS system. Actually, well into the start of FedEx, Fred had planned to do the first schedules himself. When he tried, for just a few cities, just by hand, from his office, when FedEx was still in Little Rock, at the end of the afternoon he came out of his office saying "We need a computer". A guy I had known in college heard that and gave me a call. Yes, ILP set covering is in NP-complete. So, no one has a guaranteed polynomial algorithm for worst case examples. But that doesn't mean that can't save a lot of money fairly easily in cases of interest. Sure, might have trouble guaranteeing to save the last 10 cents, but if save $5 million a month over the best solution otherwise, then just saved, let me see here, right, $5 million a month. I didn't get the stock, and Fred didn't get the savings. Fred has been very successful, but he didn't do it alone, and some promises about stock were not kept. One lesson is, from what my wife told me as I joined FedEx, "Get it in writing". Well, my offer letter said I'd be in the stock plan, but apparently that was meaningless legally. Better still, get a lawyer. Better still, start and own your own company. Back to it.

Bulkington 13y ago

I'd always heard the blackjack story was cover for a new silent partner--the kind you don't break your promises to. And those deals aren't in writing either.

rrrrtttt 13y ago

An entrepreneur's character is truly tested only when his company is failing. You can take one of two options: 1) pay your employees and suppliers everything you owe, return any money that's left to investors and close up shop, or 2) take all the cash from the till and go to Vegas (or some other equivalent of betting the farm). If this story is true I wouldn't want to have anything to do with Mr. Smith.

niggler 13y ago

Discussion from a month ago (hit the front page): https://news.ycombinator.com/item?id=5405371 https://news.ycombinator.com/item?id=5405371

leejoramo 13y ago

I heard this store more than 20 years ago. I had always assumed "won the money in Vegas at Blackjack" was a euphemism for getting a loan from the Mob.