Tony Hsieh on Companies, Cities, and Community

Zappos CEO Tony Hsieh discusses the importance of looking beyond your own business to the community around you.
Read the full transcript below. (Transcript by Realtime Transcriptions.)
Kirkpatrick: Next we're going to hear from Tony Hsieh, who's somebody who I think many of you are eager to hear from. He's the CEO of Zappos, needless to say. In 1999, when he was 24, he sold LinkExchange to Microsoft for $265 million. Then he joined Zappos as an advisor and investor; became CEO.
In 2009, Zappos was acquired by Amazon for $1.2 billion. He also wrote a huge best seller, "Delivering Happiness." Please help me welcome Tony Hsieh.
[APPLAUSE]
Hsieh: Thank you. So real quick, how many of you have actually purchased from Zappos before? Very cool. So for those of you who may not be familiar with Zappos, quick Cliff Notes summary: We're about 14 years old now. And really, the way we think of our brand is actually about customer service. And hopefully, 10 years from now, people won't even realize we started selling shoes online. And in fact, today we sell a lot more than shoes. We also sell clothing, handbags, and other product categories, and we talked about how one day Zappos could possibly open up a hotel or airline and really build our brand to be about the very best customer service and customer experience.
And our whole strategy for doing so is actually by making something else the number one priority of the company, and that something else is company culture. Our whole belief is if we get the culture right, most of the other stuff, like delivering great customer service or building a long-term, enduring brand or business will just be a by-product of that.
And so we've grown from no sales in '99 to—now we're doing roughly about $3 billion a year in gross merchandise sales. And the Number 1 driver of all that growth has been through repeat customers and word of mouth.
And so let me advance. I'm doing a team building thing. I don't normally have a mustache. This is my first time having a mustache, and so this is actually what—when my book came out about three years ago, called "Delivering Happiness," the way we thought of our brand at Zappos is in terms of the three Cs: clothing, customer service, and company culture.
And one of my favorite quotes is from—I think an executive from one of the major ad agencies—is a great brand is a story that never stops unfolding. And after my book came out, people asked, “Okay, ‘Delivering Happiness,’ clothing, customer service, company culture, what's next?” And actually for the longest time, did not have a great answer for that.
And this is what our headquarters in Henderson, which is a suburb of Las Vegas looked like, that we were actually at 1,500 employees, spread amongst three different buildings. And this is the building that I was in. And we actually just last month announced that we moved or we finished moving into the former Las Vegas City Hall in downtown Vegas. And pretty happy to get everyone under one roof, because being spread in three different buildings actually had a big negative impact on our culture; but we have been looking for a place to call home, to call our permanent headquarters for at least the past seven or eight years. And it was surprisingly hard to find anywhere in Vegas a place where we could house everyone under one roof and have enough land to expand upon.
And so pretty happy with our ribbon cutting and grand opening. And then, when the City Hall opportunity became available and we found out about two or three years ago, we were super-excited and asked our employees for ideas for what to have in our dream campus.
And I actually toured campuses like Nike, Google, and Apple—amazing campuses. And I remember at Nike, there was one building that had a running track around it, and another building that had an on-site pub on the ground floor. And we thought to ourselves, we definitely need one of those.
So several of our employees—asked, “What features do you want?” And they came back with on-site pub, on-site gym, and so on, but the Number 1 request we got from employees was doggy daycare. More than human daycare. And so as we started getting all these requests, we realized a couple of things: One was that we couldn't possibly fit these hundreds of requests into a physical building, but the other thing we realized was all those other campuses—Apple, Nike, Google—were great for their employees, but were actually insular and didn't really integrate or contribute to the community around them.
So we thought to ourselves, “What if instead of just focusing on ourselves, we turned the entire concept inside out? What if we took an approach that's more analogous to NYU, where the campus kind of blends in with the city and you don't really know where one begins and other ends?” And so coincidently, right around this same time—this was about three years ago—bunch of Zappos employees, myself included, discovered this area in downtown Vegas that most tourists don't know about, called Fremont East.
Most tourists think of the big casinos on the strip, which turns out those aren't even technically in the city of Las Vegas; or if they know anything about downtown, it's the old casinos, the overhead light show and so on, on the West side of Las Vegas Boulevard, but on the East side of Las Vegas Boulevard, if you go into any of the bars or cafes or restaurants, you would have no idea you were in Vegas. In fact, it's almost the complete opposite of the strip. There's no gaming, and it's the most community-focused place I have ever lived.
I grew up in San Francisco, but I have never lived a place where the bar owners actually hang out in each other's bars to support each other and support the community. So it's one of those magical coincidences that was just too good to be true, that this Fremont East area, which I hadn't heard about until a few years ago, just was coincidentally five blocks away from the former City Hall.
And so we had our answer from the Zappos perspective in terms of what we wanted to do with our brand, how do we expand our brand by basically adding a fourth C, and that fourth C being community.
And so now, in everything that we do, we try to incorporate all four of these Cs. For example, we held a skating event where there was a skate ramp and professional skateboarders, open to the community, and then it was also a fun bonding activity for our employees, help build company culture. And then we captured that on video and in photographs and Livestreamed that out and also sent it out to customers of ours that are interested in skate shoes. So that way, we can kind of, over time, weave in the entire story of Zappos beyond just shoes, beyond just clothing, beyond just customer service, and now including company culture and community.
So that's the Zappos side of it. Separate from Zappos, formed a separate company called Downtown Project, which is just—no outside investors. It's just myself and a couple other friends that are funding the company. And you can see roughly that there's a $350 million budget.
There's a few different goals. And this was originally formed to complement the Zappos move to downtown. One is to have everything you need to live, work, play within walking distance; in other words, to help make downtown Vegas the most community-focused large city in the world, and probably the place people least expected.
Third is to make it the co-learning and co-working capital of the world; and not just for tech start-ups, but also in fashion, in culinary, and photography. And you can imagine actually trading co-working spaces around anything that you can actually build a community around.
What makes us different from other real estate developers or other urban revitalization projects is rather than maximizing the short-term ROI or cash flow needs that most real estate developers have, we have this concept of maximizing the long-term ROC in all of our investments, return on community.
And it's analogous to how we hire at Zappos. When we hire people at Zappos, we do two sets of interviews. There's the normal set that the hiring manager and his or her team does, but then our HR department does a separate set of interviews purely for culture fit. And they have to pass both, in order to be hired.
So on the investment side for Downtown Project, whether we're investing in a tech company or in small business or another type of business, we, in addition to it making sense as an investment in its own right, the entrepreneurs and the company needs to care more about just themselves. And they need to care about the community and help out other entrepreneurs in the community.
Then the other thing that we focused on is institutionalizing this acronym I stole from Joan Collins' book, "Great By Choice," ROL, return on luck, which actually sounds like a really strange or even almost impossible thing to actually try to manage. How do you accelerate serendipity? But we have very real metrics behind this, and I'll share how we're going about trying to accelerate luck and serendipity later on.
So our big bet is, for Downtown Project, we have the three Cs of collisions. And by collisions, we mean people in the community running into each other, entrepreneurs running into each other. And the reason that's important is because the research has shown most innovation actually comes from something outside your industry being applied to your own.
So by accelerating the collisions, community, and co-learning, not only will that lead to a happier and luckier community, but innovation and productivity increases. And so here's a quick breakdown of the budget. We're investing $50 million into small businesses to help build a sense of neighborhood and community. And so call it one to 200 small businesses.
And this is actually my wall in my apartment, there's a Post-it Note wall. And we have tours come through. And when the tours come through, we just ask them, “What do you want in your dream neighborhood?” We're very anti-top-down master programming. Instead, we just want this to be organic and community-driven. And if it's not already on the wall, we encourage people to just write it down on a Post-it and add their own idea to the wall.
The other cool thing that happens is every once in a while, we get someone whose lifelong dream is to, say, retire 10 years from now and start a cupcake bakery. And we basically tell them, “Well, rather than wait 10 years, why don't we invest in you now, and you can start living your dream and it will also help build the sense of neighborhood and community?”
And so we have a few different criteria. Owner-operated is really important to us. Unique, first, or best is important. Story-worthy and, ultimately, probably the most important is that it needs to help build community.
So this is Natalie. I serendipitously ran into her little over a year ago, maybe a year and a half ago, at the local coffee shop. And she was working as a chef at one of the casinos, for 10 years, and had just quit her job. She was sick of working in a casino environment.
And as I talked to her, turns out she was about packing up her bags, about to leave town, because she didn't want to be in the casino business anymore. And as we started talking, learned her lifelong dream was to open up her own breakfast and lunch place.
And so she's one of the first small businesses we invested in. And I'll show you this under construction—and I'm not normally a PowerPoint person, but I'm very proud of this transition. So if we can go back one slide, please. Then we'll look at that one more time. Thank you.
[LAUGHTER]
Thank you. You can see this under construction. She just had her one-year anniversary. She's been doing triple her initial projections. So not only is she living her dream and doing well financially, but she's also now ready to mentor the next generation of first-time entrepreneurs that want to open up a restaurant.
This is a check cashing place last year. This is what it looked like on the inside. Sarah, turns out her lifelong dream was to open up her own clothing store. And she describes it as a hangout place that just happens to sell clothing.
In two weeks, less than two weeks, we're opening up—I think it's the world's largest container park. This is someone named Ernie, used to be a Zappos employee, left a few years ago to pursue his passion of making barbecue sauce and barbecue food and happened to be walking by as they were lowering—that's his barbecue restaurant in a container being lowered behind him. And he was super-happy that day.
And that's—at night, there's a 40-foot praying mantis from Burning Man that shoots out 20-foot flames. You can see some of the renderings here. And then it's kind of hard to see; but at the top, there's outdoor live music and 40 retail shops, five food and beverage. And the focus is the in the middle, where it's a children's paradise, where there's going to be a 25-foot tall Swiss Family Robinson type of tree house, the giant Lego blocks and so on. The idea is kids are having fun, parents can enjoy their wine and cheese with their adult friends, watch the live band and so on.
One of our goals is to get people to get rid of their cars. So we are investing in bike sharing. We announced a few months ago we placed the largest order in the United States for Teslas. We ordered 100 Teslas, and that will be part of our car-sharing program, in addition to other electric car-sharing programs as well.
We've set aside $50 million to invest in tech companies. In the past year, we have relocated about 60 tech companies from other states, or even other countries. We had a 20-personal company from China move to downtown Vegas that was originally underway to Silicon Valley.
And we ask all these different companies, “Why downtown Vegas versus Silicon Valley or another city?” And they give us two reasons: One is really this sense of community that you can really feel, even just by visiting for a day or two, but the other reason they give us is really just this whole idea of thinking of the city as a startup, and how many opportunities do you have in a lifetime to help shape the future of a major city.
I partnered with Venture With America, for college graduates that wanted to become entrepreneurs; relocating Teach for America's Vegas offices to downtown to bring about that additional energy. We opened up an early childhood center that will eventually include K through 12, teaching kids entrepreneurship and creativity, using the latest neuroscience research; took over a monthly festival called First Friday that draws 25,000 to 30,000 people. It's arts and music.
And also, we're bringing large-scale art. This is 45-feet tall, and I think you can crawl up in there and get a DJ on top and bring in large-scale art to downtown Vegas as well. So the idea is every block or so have some sort of something interesting. It could be large-scale art, it could be—we're building the world's largest functioning fire hydrant next to the dog park, building all sorts of things. And the idea is to get people to walk one more block, get them to walk another block, because Vegas has been a very car-focused town.
This is a Mexican restaurant that we partnered in and opened up a few months ago. And then we also, just two weekends ago, through the Life is Beautiful Festival, which was an arts festival, music festival, there were 65 bands, a culinary festival—and that drew about 60,000 people, where we fenced off 15 city blocks, which has never been done before in any city. And so it was kind of like South By Southwest meets Coachella.
And this is a book I would recommend people to read, even if you are not involved in city revitalization stuff. It's called "Triumph of the City," written by a Harvard economics professor that studied cities from all different time periods—Rome, New York, Detroit, and looked at why some thrived and some didn't. A lot of findings are really counter-intuitive, but we're using it as our playbook for ways we're approaching things.
And Geoffrey West was up here earlier, and one of the key findings is that—of city research is that every time the size of a city doubles, innovation or productivity per resident increases by 15 percent; but when companies get bigger, as Geoffrey West was mentioning, productivity per employee goes down.
So from the Zappos perspective, part of our goal in being involved with this is to try to avoid that fate. How do we organize Zappos more like a city and less like a corporation that is destined to eventually die, if you follow the history of other companies that are hierarchically organized?
So the ingredients you need for that to happen are a residential density of 100 residences per acre, combined with street-level activity, so all those Post-it Notes for the residents to collide. And the third ingredient is probably the hardest, but also the cheapest and the one that gives you the most leverage—culture of openness, collaboration, and sharing, because if people are twice as likely to talk to each other, maybe you only need half the residential density.
And so a lot of the stuff we do, both from the Zappos perspective in terms of employees within the office and the city level is really thinking about how do you get people to collide more often. We prioritized collisions over convenience. We think about things like office density and city density, because turns out that when—average office density in the U.S. is about 200 or 300 square feet per employee. At Zappos, in our previous offices, we were at 120 square feet per employee. At our new offices, we are under 100 square feet per employee.
The reason why we think that's important is because the research has shown if you sit twice as far away from someone in an office environment, you don't see them half as often; you see them half as often squared. So a quarter as often.
And so we do weird things, like there's a parking garage on the left, and the city employees usually park there, go across the sky bridge and into the building. We shut down that sky bridge, which forces employees out onto the street to have more collision opportunities with each other as well as with people in the community.
So the big bet is get all these groups—this is a partial list—that are creative and entrepreneurial and have a bias to collaborate and talk to each other, get them in a relatively small space together. And statistically, the magic will just kind of happen on its own. And that 15 percent increase in productivity is kind of the accidental historical average. So I think if we're actually thoughtful about how we approach things and purposeful about how we approach things, we can get gains much greater than that.
And one of the things we realized is culture is to company as community is to city. It's the same concept, just at a different scale. This is actually the building I live in, and there's about 500 bedrooms in there. And our group is collectively leasing about half of them, and 100 of those bedrooms we have set up as furnished apartments, free hotel rooms. And basically we just tell people, “Hey, next time you are in Vegas, stay in one of our furnished apartments, free hotel room.”
And what happens is the people we invite essentially end up getting tricked into going to the local coffee shop, the local bars, and so on, and they discover a whole other side of Vegas; but we're hosting about 100 people a week now.
And the other cool thing that happens is that those people end up meeting each other. And so a conference like this or like TED or South By Southwest, there's two reasons to go: One is for the content and then the other half is for you're going to run into people serendipitously and have these serendipitous interactions.
And so that's kind of what downtown Vegas is starting to become, is every day it's almost like we're throwing a mini-TED conference every single week now, because when visitors come, we ask them, “Hey, as long as you're in town, do you want to the give a talk to the community?” It's free to the community. And 95 percent of people we ask if they want to do that say yes.
And so what ends up happening is there's this ongoing free content for the community that also brings the community together. And so we acquired this building that is going to be opening up—it's on Fremont/Las Vegas Boulevard, prominent intersection. Rather than turn into a bar or a McDonald's or something else, we are building a speakers theater called The Inspired Theater.
So the vision is imagine if Wednesday afternoon through Sunday afternoon, anyone can walk in, and there's an interesting TED-like talk about something. There's also Vegas's largest magazine rack and co-working spaces, collaboration spaces, and so on.
So I'm going to fast forward through some of these, but we're theming some of the different weeks now, and here's some photos of our fashion incubator that we opened. And just want to show some really quick math. The value of a resident like me, I'm out and about in a collisional way three or four hours a day, seven days a week. I travel a lot, so 40 weeks a year. So works out to about 1,000 collisionable hours a year for in terms of the value of a resident like me, from a collisions perspective.
This guy Jake, we were trying to convince—he raised over $1 million on Kickstarter, and he can't move to Vegas, but he said he could come on the third week of every month, which is our Fashion Focus Week, and give talks and help other fashion entrepreneurs. And he's given talks about raising money on Kickstarter and so on.
So started actually doing the math on a purposeful visitor like Jake, who purposefully contributes to community when he's in town. And he's in town, he's out and about in a collisionable way 12 hours a day, seven days a week, 12 times a year. It works out to about 1,000 collisionable hours a year.
So originally we were just focused on residents, but now we have this new concept of subscribing to downtown Vegas, where people can be part of the community and can help accelerate all the collisions, all the serendipity, and the co-learning going on.
So we took that formula of 100 residents per acre and changed it to 100,000 collisionable community hours per acre per year, which worked out to 2.3 collisionable hours per square foot per year, which gives a completely different way looking at our small business investments and our real estate investments. So if investing in a restaurant, you can look at the square footage, do estimates on number of customers, how long the customers will be there, and see if it's yielding at least 2.3 collisionable hours per square foot per year.
So our big bet is by focusing on the three Cs, collisions, community, and co-learning, we want people to say, whether they are just visiting or subscribing or living there, is that downtown Vegas will make you smarter, which is probably the last thing a lot of people would associate with Vegas or downtown. So people are very surprised when they come and stay with us. And I would invite any of you to stay with us. I'll give my contact information at the end.
So through Zappos and Delivering Happiness, which is a separate company that was spun off of the book and Downtown Project, there's this common theme of inspiration we try to weave throughout them. And it was mentioned earlier that just in the past few years, we passed a threshold, where for the first time in human history, 50 percent of humans now live in cities. And within our lifetime, it's going to be 75 percent.
And so we view this as much more than just about downtown Vegas or even the Vegas area in general. A lot of city revitalization projects depend on having an expensive stadium or sports team or a Harvard or Stanford. We chose the three Cs of collisions, community, and co-learning, because we wanted something that could be replicated to other communities and cities.
And to us, this whole project, downtown project is a lot like the story of the four-minute mile, where for the longest time, people thought it was impossible to run a mile in less than four minutes, or, they thought even if you did, you could—as soon as you crossed the finish line, you would probably die. And then turns out that wasn't true.
In 1954, a guy named Roger Bannister broke the four-minute mile; but what I found interesting was that in less than a year, other people broke the four-minute mile. So if we can make downtown Vegas, probably the place voted least likely to succeed, a place of inspiration, entrepreneurial energy, creativity, innovation, upward mobility, discovery, and so on—if we can do that in downtown Vegas, then hopefully we can help inspire other communities and cities and we can serve as the four-minute mile for the world.
So copy of this presentation, [email protected]. Just want to end on this quote: A great brand is a story that never stops unfolding. I think the same is true for a company, same is true for a city, and same thing is true for a community. And that's why I'm so excited to be part of this Downtown Project in downtown Vegas, because I can't wait to see what unfolds next. Thank you very much.
[APPLAUSE]