Tony Hsieh’s new $350 million startup

January 23, 2012, 1:47 PM UTC

By Leigh Gallagher, assistant managing editor

Tony Hsieh

FORTUNE — Tony Hsieh is well known for building Zappos into a billion-plus company, and perhaps even better known for building an unusually strong culture that encourages employees to have fun, embrace quirks and “create fun with a little weirdness.” He’s become a workplace evangelist of sorts: his 2010 book Delivering Happiness, which details the Zappos philosophy, has sold more than 300,000 copies; in addition to selling shoes (and now clothes and more), Zappos also has a consulting arm that trains companies like Google and Eli Lilly on building happy workplaces. But as Hsieh floats toward guru status, he’s also quietly been up to something totally, completely different. And if his next act goes as planned, Zappos and delivering happiness may just be his first chapter.

What’s he up to? In short, he’s trading shoes for urban planning — and spending $350 million to rebuild downtown Las Vegas.

A little over a year ago, Hsieh, 38, made headlines in Las Vegas when he announced his company would be moving from its suburban Henderson, Nevada headquarters, where it’s been based since 2005, to Las Vegas’ City Hall building in Vegas’ overlooked downtown neighborhood. Under the terms of the deal, Zappos would lease the building from its new owner, Resort Gaming Group, start on some $60 million in renovations this coming April, and move Zappos’ 1,200 or more employees into the new headquarters in October 2013. The city cheered, Las Vegas mayor Oscar Goodman hailed the move as a new beginning for the city’s long-forgotten downtown, and soon the mainstream press moved on.

But the move, and the new Zappos building is just one small piece of Hsieh’s plan.

Hsieh and a few partners — the vast majority of the investment is Hsieh’s — plan to spend $350 million to develop and build a small city in the roughly 1.5-square mile downtown area around the Fremont East and Arts District areas (for CES-trekkers and other Vegas aficionados, it’s a few miles north of the Strip). Hsieh’s goal: To turn the overlooked area into a neighborhood not just for his workers’ coffee breaks, but a new live/work/play destination for Las Vegas’ emerging creative class.

This is the plan (modest it’s not): $100 million will go to the purchase of land (not including the new Zappos headquarters) and building acquisition. An additional $100 million will go to residential development including the building of high-rise apartments. Fifty million dollars will go to tech startups Hsieh plans to recruit to the area with seed investments of $100,000 or so apiece. Another $50 million will go toward drawing local small businesses like bakeries, yoga studios, restaurants, coffee shops and other requisite creative-class amenities. And because Hsieh wants people to move here and that requires having decent education for their children, another $50 million will go toward education and the building of — what else? — a school system.

Dream much? It’s Steve Wynn meets Walt Disney meets Jane Jacobs meets — Tony Hsieh, really. “This isn’t so different from what we built at Zappos,” he says in his soft-spoken, low-key manner. “We’re just scaling it.”

Reinventing the office park

Indeed, the motivation for Hsieh’s big bet comes from his long-held philosophy that serendipitous interactions, or what he likes to call spontaneous “collisions” between people, are what spark ideas and what facilitate relationships that lead to stronger ties — and stronger ties lead to more ideas. It’s why he’s poured such effort into building Zappos’ into a place where “culture magicians” work their magic and where streamers, balloons and toy figurines seem to spill out of every cubicle.

But for all its zaniness, Zappos is still located in a sprawling suburban office park; the nearest bar where employees can collide after work is almost a half-mile away, next to a big highway. When it came time to think about a new home for the company, Hsieh decided the best way to create those interactions is to drop his employees in the middle of a vibrant downtown and let the surroundings facilitate the interaction. “When you’re in a city, the bar or the restaurant becomes an extended conference room,” he says. Since downtown Vegas didn’t really have that yet, Hsieh says, “The idea went from ‘let’s build a campus’ to ‘let’s build a city.’”

It’s a stark rejection of the prevailing Silicon Valley approach: build a massive, all-encompassing office campus and fill it with perks so your employees won’t leave. But Hsieh has never aligned himself much with the prevailing wisdom, and doesn’t see himself as a tech CEO (“we don’t see ourselves as a tech company; we’re a customer service company,” he is known to clarify).

But now, he has to build the neighborhood. Much of the plans are already in the works. Plans are being finalized for 21,000 square feet of “co-working” space along the lines of General Assembly in New York. The small business development team is exploring building a back-office technology platform that the mom and pop shops can share to handle accounting, inventory, payroll and the like. Hsieh has made a $1.5 million deal with Teach for America to bring 1,000 core members and alumni to live and teach in the area. He is talking to the creators of the Burning Man festival about supplying art to the neighborhood. Party buses? He and his team are in the process of acquiring and revamping a dozen. Oh, and Hsieh is also part of a group trying to buy the Las Vegas 51s, the farm team; cue the new stadium plans.

Corner office, corner apartment

Hsieh wants as many Zappos employees to move downtown as possible, so one of the first uses of all that money was to take over the leases for 50 apartments in the Ogden, one of the neighborhood’s only luxury high-rise condo buildings (built during the real estate boom, it was acquired in 2009 in an FDIC auction by an investment group led by Starwood Capital Group). They offer apartments to visitors as crash pads, and to Zappos employees at subsidized rents. Hsieh and the Downtown Project team, as well as a dozen or so Zappos employees, have moved in, taking over the top floor as a kind of live/work/play dormitory that resembles the Zappos offices (there are white boards outside everyone’s room with messages scrawled in marker and a Christmas tree in the hallway). Hsieh has the corner unit.

Hsieh’s main lieutenants are Zach Ware, 30, who joined Zappos a year ago to redesign the website and now finds himself managing the $100 million residential real estate fund, and Don Welch, 33, who worked in equity derivatives at Citigroup (C) and moved from New York with his fiancé, Connie Yeh — Hsieh’s cousin — to handle the small business side. (Yeh, 29, also a Citigroup refugee, a former derivatives trader, is in charge of the $50 million education fund.) It’s at the Ogden and at the nearby Downtown Cocktail Room where the group usually gathers and meets with the dozens of others in their extended orbit (there are a number of other Downtown Project people, and many Zappos (AMZN) employees are involved too). Shots of Fernet, the Italian digestif, have become a ritual.

None of the group has real estate or urban planning experience. They use the recent Edward Glaeser book Triumph of the City as a bible and have consulted with Richard Florida’s Creative Class Group, but they do most of the brainstorming themselves: a big beige wall in Hsieh’s apartment has a collection of colored post-it notes listing the ingredients that they think go into the perfect neighborhood (“jazz fest,” “beer garden,” “wine bar/wine and cheese store”, “dog park,” “hybrid e-school (eg Khan Academy),” “Yoga!” are some.) Hsieh, Ware and Welch often mark decisions with pinky swears.

Ask them if they’ve heard of New Urbanism or urban infilling, the wonkier, established versions of what they’re trying to do, and they shrug. Hsieh says there’s a benefit to their outsider perspective. “We don’t have some top-down idea of how this should be done,” he says. Ware adds that there’s a benefit to coming into something with no preexisting knowledge. “We ask the dumb questions.”

And they work startup hours. The Monday night before Christmas included dinner with Michael Downs, VP of operations for the Bellagio; a meeting afterwards at the Downtown Cocktail Room with an improv coach Hsieh had flown in from Washington, DC to discuss setting up a comedy scene; a late-night pitch session in an upstairs room of the Beat, the area coffeehouse, from three entrepreneurs seeking some of Hsieh’s funding for their food and beverage service-industry app. (They’d conceived it at a Startup Weekend competition Hsieh hosted to spark ideas.) At around 10:30 Ware peeled off for an 11pm Skype call with a Danish architect in China.

A plan is beginning to take shape. Five tech startups have already relocated to downtown Vegas, joining roughly a dozen local ones. Sal Khan has informally advised on education. Triumph of the City author Glaeser is coming to speak at Zappos’ All Hands Meeting next month. And construction will soon begin on some 50,000 square feet of retail space and 21,000 square feet of coworking space. “Those numbers will quickly rise,” Ware writes me in an email.

And so, Hsieh hopes, will a new community.

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