Sunday, February 5, 2012

Las Vegas: Startup City

Zappos CEO Tony Hsieh is spending $350 million of his own to make Sin City a startup hub

By Brad Stone

The history of Las Vegas is full of determined men with outsize egos and grand plans. There was Bugsy Siegel in the 1940s, envisioning a gambling mecca in the desert, away from the reach of law enforcement. A half century later, developers like Steve Wynn and Sheldon Adelson added pomp, glitz, and more than a touch of excess to the area that has become known as the Strip.

Now there’s another resolute businessman who wants to bend Sin City to his vision. Tony Hsieh, the soft-spoken chief executive officer of shoe and apparel site (a division of (AMZN)) wants to turn the often overlooked and economically depressed downtown area into a dense urban neighborhood teeming with artists, entrepreneurs, and Internet workers. It’s one of the most unconventional redevelopment efforts in any American city, ever. Instead of soliciting public funds, Hsieh is spending $350 million of his own money to buy empty lots, seed new businesses, and subsidize schools. Next year he’ll move his company’s 1,400 local employees from suburban offices into the 11-story former City Hall (complete with jail cells on the second floor that may become meeting rooms). “What started out as a campus relocation project has evolved into a project to revitalize downtown Vegas,” Hsieh says.

Hsieh and the 10 Zappos employees he’s tapped to help have their work cut out for them. Downtown Las Vegas has resisted rehabilitation attempts for decades. The area was developed at the start of the 20th century as a railroad stop between Salt Lake City and San Diego. Almost immediately the focal point of the region shifted six miles to the southwest, to the area that’s now the Strip, when casino operators started building on unincorporated land to avoid paying city taxes. While historic districts like Baltimore’s Inner Harbor have been successfully redeveloped, plans to put a domed stadium in Las Vegas’s downtown and build row houses along its tightly gridded streets have gone nowhere. A small colony of artists, restaurants, and bars have moved in, but the neighborhood is still seedy. The empty lots, abandoned buildings, dollar stores, and pawnshops are punctuated by retro signs, including a 30-foot-tall neon blue martini glass.

Now it’s Hsieh’s turn. As anyone who read his bestselling 2010 memoir, Delivering Happiness, knows, the Zappos CEO is willing to make big personal bets. Bucking investor skepticism and economic turmoil after the first dot-com bust, he invested his fortune from the sale of a previous Internet company and built a successful online shoe retailer. In 2009 he sold Zappos to Amazon for $850 million. Last year, Hsieh started thinking about where to move his company, which is straining the capacity of the three nondescript office buildings it occupies in nearby Henderson, Nev. (Hsieh moved Zappos from San Francisco in 2004, in part to take advantage of the relatively inexpensive labor market for call-center employees.) At first he considered building an enclosed corporate campus like Apple’s digs in Cupertino, Calif., or the Googleplex in Mountain View, Calif.—“our own little paradise,” he says.

Then he started to spend time downtown with the residents and local business owners who had rejected Las Vegas’s addiction to McMansions and ritzy shopping destinations. Hsieh started to think about Zappos’s geographical decision differently. According to Triumph of the City, a 2011 book by Harvard professor Edward Glaeser, when cities grow, productivity increases because of the serendipitous connections between people. When companies grow, they tend to become stodgy and bureaucratic. “We decided on an approach that was more like NYU [New York University], where the campus blends into the city and you don’t know where one begins and the other ends,” Hsieh says.

Hsieh tells this story from his apartment on the 23rd floor of the Ogden, once a 275-unit condo building painted nausea-inducing pink. It opened right into the teeth of the housing bust and was subsequently repainted white and rented out as apartments. Last year, Hsieh abandoned his Vegas mansion and moved into one of the downtown building’s top floors, turning part of it into a command center for his revitalization efforts. A wall of yellow Post-its specifies the kinds of businesses his team wants to draw to their new mecca, including a doggie day care and a barbecue joint.

Zappos expects to move next year into the refurbished city hall, where there will be less space per employee than with the current setup. That’s by design. Hsieh envisions that instead of holing up in conference rooms, employees will stream outside, into coffee shops and restaurants, to interact with their environment. On top of the undisclosed amount that Zappos is spending for a 15-year lease on its new digs, Hsieh is personally spending $100 million to buy land, $100 million to develop high-density apartment buildings, and $50 million backing tech startups that open in the area. Over the next few years an additional $100 million will be parceled out, in chunks of around $200,000, to schools and small businesses that lay down roots in the neighborhood. City officials are thrilled, though Hsieh adds that he didn’t solicit government funds because he doesn’t want to deal with the bureaucracy.

Hsieh and his novice city planners cheerfully concede they have no experience doing what they’re doing. They’re simply mapping what they do know—how to build technology companies—onto urban development. Hsieh’s motives are not selfless: His for-profit company, The Downtown Project, will take a large piece of equity in each business it funds, but he says entrepreneurs have no obligation to pay him back until they turn a profit. “We are not doing it to make money,” he says. “We want owner-operators who care about this community.” Although the initiative could swallow a large chunk of his wealth, he isn’t worried. “No matter what happens, I don’t see my lifestyle changing,” says Hsieh, inviting an interviewer to look at his rather modest collection of possessions. “In some ways, you could argue I’m not actually risking anything.”

Veteran Vegas watchers have seen many ambitious plans for downtown come and go, but Hsieh seems to have won them over. Robert E. Lang, an urban sociologist at the University of Nevada at Las Vegas, says Zappos could be a big enough anchor to spark a revival, and that if the area can craft a unique identity as a hip hangout, it could be a huge draw. “If you create a successful space in Las Vegas, you don’t just work off the 2 million residents in the region. You can count on 40 million visitors who come to Las Vegas every year,” he says. Stephen Brown, director of the UNLV Center for Business & Economic Research, says Hsieh’s approach is unconventional but notes that in Las Vegas, iconoclasm is completely normal. “Nevada is still a place where individual audacity can be really successful.”

The bottom line: To revitalize the area around Zappos’s new headquarters, Hsieh is funding restaurants, schools, and startups that open nearby.

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