Delivering Reality: To Succeed, Tony Hsieh's Downtown Project Can't Please Everybody

By Sarah Lacy , written on September 18, 2012

From The News Desk

When it comes to Tony Hsieh's Downtown Project, I am not merely an outside observer. Given that we spend half of our time there, it's a project that my family has bet on personally. There are few (read: no) other CEO interviews I do where I'm also living half-time inside their companies. You could argue that gives me too much visibility into the Project, making anything I write inherently unfair.

Then again, either I publish the truth as I see it unfolding there, or I can't ever write about any of it. And this is too fascinating of a story for me to live inside of it and never write about it.

So here's the truth: The lofty vision of the Downtown Project is starting to collide with reality. But that's by no means a bad thing, for Hsieh or anyone else.

When I first visited Hsieh's three-unit compound on the 23rd floor of the Ogden apartments in Downtown Las Vegas I marveled at two things. The first is outside the windows: Sweeping views of the strip off in the distance, and then closer to the building, the empty parking lots and check cashing store fronts and comparative low-frills Fremont Street Experience of Downtown Vegas. The sights closer in don't look like much. Unless you are Hsieh, and you have $350 million to spend. Then you see the next big thing outside your massive sun-drenched windows every morning.

Turn around and face the wall of Hsieh's living room, and you could see his early blueprints for what this view would look like in five year's time. Today there are all sorts of schematics on the wall for construction projects in progress. But back when I first visited, about a year ago, it was mostly vision and ideas in the form of post-its. Not all were immediate priorities but they included everything from schools to gay bars to yoga studios to grocery stores. On a big white column that people wrote on with dry erase markers, there were sketched out plans for an ambitious music festival with asking prices for bands listed at random.

Vision on the wall. Outside the window: Reality.

In interviews, Hsieh was always very clear to say this would be a community effort, not a command and control operation. But nearly a year ago, as we wandered Downtown, you heard everyone loosely connected with the project constantly throwing out ideas of an urban utopia. We met people potentially working on a documentary, people working on a fashion coworking space and hung out with Zubin Damania -- a Stanford internal medicine doctor who does online videos under the name ZDoggMD. He was visiting too, and Hsieh had asked him to come to Vegas for the meager mission of changing healthcare in America. Not an offer anyone working in such a frustrating system can resist.

The ideas ranged from lofty -- like Damania's -- to frivolous. "Sarah, you know what a blow out bar is right? Tell Tony we need one downtown," someone from the project asked me as I was grabbing coffee in The Beat on that first visit. "Um, maybe phase two?" I said to Hsieh, not wanting to tell a guy with a quarter-inch of hair he needed to prioritize a blow out bar.

You could put our visit in the lofty category. My husband was enamored by the idea of building a nationally significant photography community and residency program. An absolute dream job for a photographer that no one simply hands you. Except, maybe someone with as grand a city vision as Hsieh.

Of course there was a big category in between lofty and frivolous-- things that were just plain essential if this was to be a high-density community with everything in walking distance. Things like a park for kids or a grocery store.

It was the mention of a grocery store that caught our attention that weekend. We were wrapping up a meeting when one of the Downtown Project employees said, "Oh, we're just headed to Tony's to talk about grocery stores, do you want to come?" My husband's eyes widened. This had gone from a dream job for a photographer to a dream job for anyone who'd ever wanted to remake the neighborhood around him.

In San Francisco, we live in the hip but ever-gritty Mission District, where there's frustration aplenty. There are Michellin starred restaurants within walking distance of my house. But I dodge more human feces strolling my baby a few blocks to the park than I've seen in any emerging country I've visited. Weekends are littered with hookers on our corners, because San Francisco is one of the only cities in the Bay Area that won't prosecute sex workers. We clean up used condoms from our sidewalk the next day, and dread having to explain to our child what they are.

Most vexing: There isn't a single decent grocery store in walking distance because of the neighborhoods overly-aggressive anti-chain rules.

Since we bought our house in 2008, my husband had done what he could to make the neighborhood better. Joining the neighborhood watch, planting trees, cleaning up vacant lots. But what Hsieh was building in Vegas seemed so much beyond that. They were creating a new city within a city from the ground up. To listen to the people around us that weekend, it sounded like a microcosm of hope for everything that frustrated everyone about where they lived.

I recount this story to explain why we-- and so many people-- fell in love with the vision after visiting Downtown Vegas, particularly in those early dreamy days. It was essentially Barack Obama's first presidential campaign on a municipal scale. "Change cities and you change the world," Hsieh said in early interviews. It was a tangible way to be part of changing the world. And vague enough that people could write whatever details in they wanted.

Several months later, I still look forward to hopping on Virgin Flight VX918 every month to go to our home in the desert. Walking around Fremont East reminds me of growing up in my also hot and gritty hometown of Memphis, Tennessee. People make eye contact. They're excited to see you. You know the people who own the bars and coffee shops. (Note: Not hard, it's pretty much the same couple.) No one is overly trying to be cool.

But on each trip to Vegas while I notice pop up fashion stores, a Heart Attack Grill, a drag queen bowling alley and yet another pizza place all filling in the holes in the downtown landscape, I find we're still missing those essentials, while the lofty is still mostly in progress.

And increasingly I hear the rumblings of whether all those promises will ever come true. Part of this critique isn't fair. An ambitious container park with an area for kids is coming-- that will be huge for relocated families who have no outdoor place for their kids to play. The newsstand and venue for TED-like talks is also in progress and similarly addresses Hsieh's lofty goal of continuous learning. And I know from direct knowledge, his support of art projects hasn't wavered.

As Hsieh said on stage at last week, the most frustrating part of this has been how comparatively slow it is to build things in the real world, versus the ease of throwing up a Web page. There's that rule that people overestimate what technology will do in a year, and overestimate what it'll do in ten years. The expectation to reality gap is wider when you are talking about physical spaces.

But part of the critique is fair, and it'll likely get louder as the dream starts to morph into reality. It's natural for every startup to dream big during the white boarding "zero gravity" phase, but that changes when you start to build. Tough choices have to be made, and everyone will not be happy. As the Downtown Project has moved from idea to reality, it's hitting snags-- just like any startup. When you hit snags, you iterate.

But iterating when you are building a city-- one that people have quit jobs to move to-- is different than iterating in a regular company in Silicon Valley. People feel promised things, and when they don't work out, they feel burned. It's clear that some people had unrealistic expectations-- a danger with a vision this big and a personal financial pledge so Santa Claus-huge. People started to see Hsieh and his checkbook as a cure-all. But even $350 million can only do so much.

It turns out, as a small example, that the Downtown Project isn't going to open a grocery store. They can't find anyone who wants to, and they know they don't have the expertise to run it. So residents are going without, and that means for now anyone living downtown needs a car-- a glitch since one of the goals was everything being in walking distance. Likewise, some of the planned coworking spaces have hit snags-- another goal was becoming the coworking capital of the world. And a grand idea to bring Teach for America to Downtown Vegas was scuttled when out of more than 100 invited teachers, zero decided to accept.

The Downtown Project is in an unenviable catch-22. Every startup iterates as it goes; to expect a project this grand, this unprecedented wouldn't have snags like these is unreasonable. But on the other hand, this isn't just a company. It's a city. When people have decided to live inside your entrepreneurial venture-- or are unwittingly doing so as existing residents-- things aren't so business-as-usual.

At the event, I asked Hsieh some tough questions about the internal conflicts that seem to be cropping up. Between his professed love of the neighborhood that's already there with a promise that it'll be totally different in five years. Between the existing Vegas community downtown that inspired him to want to invest his fortune there and the thousands of people he's essentially importing to live there. Between his carefully crafted and protected Zappos culture and a wild, unknown culture of Downtown Vegas that he won't be able to control.

On the whole, I didn't come out of it feeling like there was much resolution in those conflicts. Part of that is just Hsieh. He's a man who can rationalize things in his head that don't seem to go together to the rest of us. Like in 2000, when the world has turned its back on ecommerce, the idea that it's a good idea to liquidate all your assets and double down on it. Or the idea you can build a profitable ecommerce company and while you destroy the margins through free returns and pricey customer service. Guess what? Irrationality aside, both worked for Hsieh.

But he did talk about three important iterations that gives the clearest idea I've heard of how the Downtown Project is changing and adapting as it goes. And it gave me more confidence in how things are going. These don't sound outrageously different than what Hsieh has said in media interviews before. But it's very different than the conversations I've heard on the ground. I feel if people had heard these when they visited, expectations would have been better aligned and there'd be less griping now.

The first was around the idea of what a "resident" is. When I first talked to Hsieh about the project, there was a huge emphasis on people uprooting their lives and moving there full time. But now, Hsieh is thinking creatively about what a resident is, and what value a resident provides. After all, he travels all the time. What matters isn't whether you live in Vegas full-time, it's how many hours a month you are actually mixing in the community. Increasingly, he's trying to find ways that someone can regularly spend time in Vegas, not live there.

It may sound like a cop-out-- like he couldn't find enough people to live there. But I think it's more forward thinking than that. Part of what has made Silicon Valley such a rich ecosystem is the constant churn of people coming in and people leaving. (My son is one of the only San Francisco natives I know.)

The second was around the idea of what the Downtown Project-- the organization--actually is. It's more a boutique finance and real estate company than anything else. Most of the magic that defines this community in five years will happen outside its walls.

Most startups add staff and get bigger as they grow. But Hsieh is trying to keep the actual operating organization building this as lean as possible-- permanently. They don't want to hire someone who is into music, they want to fund that person to build something. What's cool about this is it means a relatively small amount of the $350 million is going to organizational overhead. It's all getting out there in experiments, for good or ill.

That also means, it can take frustratingly long to get emails returned, as a handful of people are trying to do something massive. But on the whole, it seems a lot smarter than the alternative.

The third was something that Hsieh said at the end of his talk, and this may be the thing that struck me as the most different from the rhetoric I heard on my first visit to Vegas. He compared the Downtown Project to what Apple has done with the iPhone-- they'll create a platform and an ecosystem, but they aren't going to build all the apps. It's up to everyone else to come in and do that.

This may have been the vision all along. If so, it wasn't well communicated locally. And it's crucial that people understand it, because really, it's the key to this thing working. $350 million-- while a lot of money-- is a finite amount. Hsieh's checkbook alone can't solve the city's many problems, and no one would be happy if downtown Vegas simply became "Zappos town." Least of all Hsieh.