How a Night of Gambling in Vegas Saved This 40 Billion Dollar Company from Failure
Blackjack was not a part of the business plan
With his last $5000 left, Frederick Smith stepped off the plane, ready to gamble it all away on the Las Vegas Strip.
Smith, the founder of Federal Express, had started his company just a few years prior. After being denied a vital business loan and having a $24,000 bill due next Monday, Smith knew his only chance at keeping the business afloat was to take it to the casino and gamble it all.
How Did FedEx Get Here?
The concept of FedEx originated from a term paper that Smith wrote at the last minute back in 1965 when he was an undergraduate at Yale. When inquired about his paper’s grade, he admitted, “I don’t know what grade, probably made my usual C.” Yet despite his underwhelming academic performance, Smith had created the whitepaper from overnight shipping.
After graduating college and serving two tours in Vietnam, Smith made his way into the business world, founding Federal Express (now FedEx) in 1971 with $4 million in inheritance and $80 million in loans and equity investments. Federal Express began operations in 1973, starting with eight planes covering 35 cities, and plans to add more each month.
Due to the First Oil Crisis of 1973, fuel costs were abnormally high, and the company found itself in millions of dollars of debt. Smith had gone to extremes, such as having pilots use their personal credit cards to purchase plane fuel.
After Smith’s pitch failed to convince the General Dynamics board to provide Federal Express a loan, the company was within days of bankruptcy.
The Night in Vegas
Smith had $5000 on hand — his fuel bill was $24,000.
Smith knew that his money was worthless if he couldn’t pay that bill, so he decided to try turning it into a profit the quickest way he knew how — blackjack.
Smith had become a skilled blackjack player while serving in Vietnam, and he knew he could use this to his advantage. While playing, he increased his money by sevenfold, from $5000 to $35,000. After a few bad rounds, he dropped to $27,000 before calling it a night.
Executive Robert Frock describes the exchange he had with Smith shortly after his night in Vegas in his book Changing How the World Does Business: Fedex’s Incredible Journey to Success — The Inside Story:
“I asked Fred where the funds had come from, and he responded, ‘The meeting with the General Dynamics board was a bust and I knew we needed money for Monday, so I took a plane to Las Vegas and won $27,000.’ I said, ‘You mean you took our last $5,000 — how could you do that?’ He shrugged his shoulders and said, ‘What difference does it make? Without the funds for the fuel companies, we couldn’t have flown anyway.’”
The money Smith made that night was not nearly enough to solve their crippling debt, but it allowed them to survive for another week.
What Happened to Federal Express After?
Shortly after, Smith secured a loan for $11 million dollars which allowed the company to continue for even longer. Smith used this as an opportunity to launch an aggressive advertising campaign.
The result was a major hit that allowed Federal Express to finally net its first year of profit in 1976 after five years of operation.
Federal Express went public in 1978 and survived the Second Oil Crisis of 1979 (the first crisis occurred in 1973). Federal Express rebranded to its prevalent nickname, FedEx, in 1994. Well into the 21st century, FedEx is one the world’s leading shipping providers, with a current market capitalization of $40 billion dollars (though this number was as high as nearly $80 billion dollars prior to the current recession).
What Can You Take From This Story
When Frederick Smith created his business, gambling the company funds on blackjack was probably not in the business plan. Nevertheless, when faced with adversity, Smith figured his way out of the situation.
This ability to think outside the box was one of the most significant differences between Federal Express becoming one of the many failed businesses and becoming a global leader in shipping.
Not only that, but after spending years falling further into debt and coming within days of bankruptcy, Smith kept hope in the future of his company.
Many would have given up long before he did, but his persistence and endless hope were also one of the critical differences between failure and monumental success.
Smith may have found a better route to keeping Federal Express alive, but nevertheless, he kept his company alive.
And nearly 50 years later, it appears to have paid off.
Wishing you the best — Simon
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