Tony Hsieh is the driving force behind online shoe and clothing retailer Zappos. Now he’s turning a rundown area of Las Vegas into a start-up hotbed. Here he explains how his successes have been founded on a measured approach to risk-taking.
He is no stranger to gambling his own money on visions he believes in, so it is perhaps fitting that Tony Hsieh – chief executive of online shoe and clothing company Zappos – has chosen Las Vegas, the high-risk, high-stakes capital of the world, to base his business.
Yet the man who first attracted global fame for his role in Zappos’ $1.2bn (£730m) stock and cash acquisition by Amazon in 2009 doesn’t really consider himself to be a risk-taker. His masterstroke in what was Amazon’s biggest acquisition at that time, was the pre-condition that he would remain boss, with almost unprecedented freedom to continue running the business and preserving the customer-focused culture on which it had been built.
Within a decade of its launch Hsieh had steered the company towards a $1bn plus annual turnover – today it is over $2bn. Eighteen months ago he relocated Zappos from its Henderson, Nevada, HQ to the old City Hall building in Downtown Vegas, a move that sparked his current venture, the Downtown Project, transforming a rundown, semi-derelict part of the city into a community-focused business hub that is already a hotbed of start-up activity.
A high-risk venture? Not according to Hsieh, who argues that the risk is mitigated by the fragmented nature of the scheme. “Downtown Project is actually 200 projects going on simultaneously, so there is no one individual project that is a big risk. Some will work out, and some probably won’t, but the risk is spread out,” he says.
The science of risk
A seasoned poker player, he does draw an analogy between gaming risk and business risk. He says: “Like poker, business risk is part science, part art. The science will vary according to the specific business. With restaurants, for example, if your labour costs are 50 per cent, then history has shown that it will be very hard to keep the business sustainable with labour costs that high.”
He has had his share of high-stakes business deals. In 2000, during the dotcom era, one of his first business creations as an entrepreneur was LinkExchange, a pioneer of the internet banner advertising phenomenon. As the company flourished, Yahoo approached him with an offer of $20m to buy the business. He turned it down, confident it would be worth a lot more. A year later he sold LinkExchange to Microsoft for $265m.
From there he moved into investment, setting up his own venture capital fund Venture Frogs, which invested in several start-ups, including a fledgling Zappos. The numbers convinced him to commit cash. He says: “In 1999, footwear in the US was a $40bn a year industry, and five per cent was already being done by paper mail-order catalogues. So it didn’t seem like that big a stretch that the potential size of the internet market would be at least $2bn.”
Venture Frogs invested, and within a year Hsieh had decided to become involved as an executive. “Originally, Zappos was just one of 27 different investments we had made, so there wasn’t anything particularly special about it as an investment in the beginning. Over time, what got me more excited about Zappos was the opportunity to build a brand around customer service, which is something I am passionate about.”
On a pivotal point in the Zappos timeline, Hsieh does concede to making a high-risk decision; possibly the biggest risk he has ever taken. It was 2003, when economics dictated that Zappos maintained the drop-ship – drop-shipping involves transferring customer orders and shipment to a third-party supplier, which ships the goods directly to the customer. Hsieh’s instinct told him to let it go because it was creating customer service issues. Given that the entire brand was built around customer service, his position was understandable. His decision paid off, but how many other business leaders would have done the same? “It was a gut decision and it felt like it was the right thing to do,” says Hsieh.
With the Downtown Project he is an investor again. With his $350m, he is buying property, investing in education – 9th Bridge is Downtown’s first school – arts and culture, and tech and non-tech start-ups. A fund of $50m has been set aside to help small businesses, which are selected for originality, potential for growth and, crucially, for what they can bring to the local community.
One of the first to benefit was Eat, a small breakfast and lunch restaurant run by Natalie Young. A chance encounter with Hsieh in a Downtown coffee house changed everything for the chef, who had grown tired of corporate kitchen life. She says: “A mutual friend introduced us, and the first thing Tony said to me was ‘How big a restaurant do you want?’ I couldn’t believe what I was hearing.”
Young received a $225,000 interest-free loan to set up Eat, which is profitable and has repaid its debts. So far, the Downtown Project has funded more than 90 small businesses, including 60 tech start-ups and Hsieh’s vision of a city as a community is taking shape.
He says: “I guess I don’t consider anything I’ve done to be super risky… the worst-case scenario is not that bad. I’m lucky to be living in a time and a society where I don’t need
to worry about being able to eat or having a friend’s couch I can crash on if things don’t work out from a business perspective.”
Business risk: the rules
How do entrepreneurs decide where to draw the line between seeing risk as a business opportunity or a recipe for disaster? Tony Hsieh’s ability to simply “not see things as being that risky” could be a reflection of the high-rolling culture of his Las Vegas base. Indeed, the US’s more positive attitude to business failure could influence how risk is perceived by entrepreneurs there. Do British entrepreneurs view it any differently?
“Screw it, let’s do it” may be his business mantra, but even a renowned risk-taker such as Sir Richard Branson admits there are limits, and says that protecting the downside was among the best advice he had ever been given. “As an entrepreneur you should be willing to take risks and trust your judgement when you do, but you always have to think about the worst-case scenario,” he says.
In 2009, Linda Cheung left her chief operating officer role at Morgan Stanley to co-found social CRM business CubeSocial. Cheung, who served as a committee member at the IoD Young Directors Forum, says: “I knew I could forego earning an income for a period of time, and the focus during start-up was on seeing connections, and identifying the opportunities more than the risk. My inner business sense tells me that risk is not a negative thing. Nor is it necessarily a positive thing, but more a challenge. It is about seeing the glass as half-full.”