Zappos CEO Tony Hsieh On Building A Virtuous Business In The City Of Sin

Hsieh made you buy shoes you didn't really want. Now he will make you love Las Vegas (and not just the craps table).

Zappos CEO Tony Hsieh believes hard in the value of community. That might sound a little... namby-pamby. Except that it really isn't. Consider the evidence: Hsieh engineered Zappos to be synonymous with excellent customer service, engendering cult-like loyalty among customers. Then last November, Zappos sold the business to Amazon for $1.2 billion, a transaction that earned Hsieh a cool $400 million. Moral of the story? Community=kaching.

Which helps explain Hsieh's latest, seemingly crazy move: He has staked $350 million on revitalizing downtown Vegas—the seedy, largely abandoned areas of Fremont East and Arts Districts north of the Strip—and he has done so by infusing it with the fired-up fraternal spirit that made Zappos a success. Some call Hsieh’s plan visionary; others wonder aloud if it’s an ego-trip by a restlessly ambitious CEO. It might even be understood as a lavish bid to keep Zappos employees happy, at work or not.

Whatever the story, one thing is clear: Entrepreneurs could learn a lot from Hsieh's big gamble on community. We talked to Hsieh along with Kim Schaefer of the Downtown Project and Dylan Bathurst, CEO of Rumgr, a company funded by Hsieh, to find out more.

Slash your marketing budget and pour it all into customer service.

Zappos was founded in 1999 and quickly built its reputation for outstanding service. As Hsieh likes to say, Zappos is a customer service company that happens to sell shoes (and now quite a few other things).

“At Zappos, we've made company culture our No. 1 priority and have formed our entire company strategy around that,” Hsieh explains in an email. “Culture drives brand, customer service and [ultimately] growth.” In other words, if your startup has any customer-service component at all, that’s core to your product—it’s no frill to be skimped on.

In his book Delivering Happiness, Hsieh writes a mantra (originally by Maya Angelou) that you should scrawl on the walls surrounding your customer-service team: “People may not remember exactly what you did or what you said, but they will always remember how you made them feel.” Word-of-mouth is infinitely cheaper than traditional advertising costs, but it’s a mistake to call it free. Instead think of word-of-mouth as the culmination of well-tended investments in every customer touch-point. Invest in the right things, according to Hsieh’s thinking, and you don’t have to outpace your competitors’ monster-marketing budget.

So how can this mission apply to an entire city, in this case downtown Vegas? “Culture is to a company as community is to a city, just at a different scale,” Hsieh says. “You need to bring together people with shared values and a desire to be part of something bigger than themselves.”

Aim for the densest part of any crowd.

Zappos announced their move into the former City Hall back in December 2010. In January 2012 Hsieh upped the ante in supporting downtown Vegas by helping to launch the Downtown Project.

“We've been primarily relying on Edward Glaeser's work in his book Triumph of the City," Hsieh says, referring to the acclaimed Harvard economist. “Specifically, we are focused on residential density (100 residents/acre) combined with street level activity for residents to collide in (bars, cafes, restaurants, etc.) and most importantly a culture of openness, sharing, collaboration, and optimism.” This emphasis on urban density as a multiplier of human potential is all the rage among urban-planning wonks, but the hard data around cities confirms this theory.

That means startups should aim for the densest, most culturally rich spot for their office location, and build such nodes of density into their office floorplan.

Downtown Vegas has a serious density problem: it’s urbanized, with sidewalks and so forth, but it's almost a tabula rasa. “For a number of reasons during Las Vegas’ evolution, development of large-scale casino projects migrated from Downtown to the Strip, which is in unincorporated Clark County, not the City of Las Vegas,” says Kim Schaefer, the Downtown Project’s chief spokesperson. “We’re unlike most other urban redevelopment efforts because our downtown isn’t full of dilapidated buildings; it’s full of vacant lots.”

Hsieh concurs. When asked for downtown Vegas’ most pressing need, Hsieh immediately responds, “Not enough buildings. There are a lot of empty lots in downtown Vegas and we're working on different ways to activate them as quickly as possible.” $200 million of the initial $350 million goes towards real estate acquisition and residential development, with another $50 million devoted to the kinds of street-level small businesses that boost a city’s walking score: coffee shops, yoga studios, bodegas, bars, and so on. (Another $50 million each goes to education and to funding tech startups via VegasTechFund.) Two hundred mill may or may not prove a sufficient cash infusion to jump-start density downtown; right now there aren’t enough downtown residents to justify a grocery store, according to Schaefer.

The Downtown Project aims to close the real estate gap with—wait for it—jerry-rigged shipping containers. Glamorous it’s not, but the plans call for a steep discount on Vegas’ already-depressed rates for commercial square footage. “The purpose of the shipping containers is more about lowering the obstacles to entry for some businesses, giving them an opportunity to prove their concept,” says Dylan Bathurst, CEO of Rumgr, a mobile location-based marketplace, funded partly by Hsieh, and based downtown. Bathurst is involved in numerous downtown-revitalization efforts, including organizing the “Jelly,” a weekly networking event for Vegas tech startups.

For those who want more ambiance, a coworking space is nearing completion, while a more modestly scaled space called CoBiz opened in late May. Residential housing is sparser: it consists primarily of the Ogden, the only luxury high-rise in the
area, although additional buildings are under construction.

Put your teams in a real room together—an awesome room.

Zappos offices have become famous for their perk-bedecked offices (take a virtual tour here). Your startup’s budget may not stretch to complimentary dry-cleaning or a constant supply of free food and drink, but there are other cost-effective ways to give your employees license to infuse their working space with personality. Zappos offices are entirely open-plan; the cubicles are positively littered with personal touches. The conference rooms are similar encrusted with the teams’ enthusiasms: skateboard shells plastered to the walls, a mountain bike hanging from the ceiling. It ain’t going to impress a VC who values formality – but if it keeps the troops happily at home when they work super-late, that’s another story.

Keep learning, especially outside your discipline.

Much of Hsieh’s project rests on a belief in the creative power of accidental collisions between different-thinking folks. Those friendly collisions happen daily within Zappos unstructured offices, as they do every time a random Zappos customer gets offered the perk-filled VIP program, and they’ve fueled the company’s success. Now it’s Hsieh’s turn to apply that logic to his chosen hometown.

Partly the Downtown Project Vegas enthusiasts seem drawn to the plan because it’s well outside their professional comfort zone, a crazy locus around which many likewise dreamers are now revolving. “I’ve been living in Las Vegas since the mid-90s,” says Schaefer. “I’ve been witness to the boom and the bust, the incredible growth, and the despair of the downturn….[This is] our second chance to decide what we want to be when we ‘grow up’, what kind of city we want to be.” It’s a very Vegas storyline, in fact: a glorious crapshoot by amateurs, an attempt to found a cultural oasis in the middle of a desert. Whether it’ll work, or simply evaporate Hsieh’s time and money, is an open question.

Hsieh likes dissenters who are curious enough to head downtown and see what his plans are actually about. “The doubters are generally people who don't have a full understanding of what we're doing and what's already happening,” he states. “The Downtown Project team gives tours of what we're up to almost every day. It takes about an hour, and I'd encourage everyone to come take a tour before forming an opinion.”

video: How Tony Hsieh Pivoted Zappos Into A $1.2 Billion Amazon Acquisition



[Image: Flickr user Thomas Hawk]

Corrections: An earlier version of this article stated that Rumgr was funded by Zappos, it was funded by Hsieh; it also erroneously said that Zappos was founded in Nevada in 2005, it was founded in California in 1999.

Add New Comment

1 Comments

  • Ryan Sommer

    I'm really excited about this project and I can't believe I haven't seen more about it in the press. Nicely done Fast Co.!