Jul 3, 2015 ยท 40 minutes

“Where’s the man with the megaphone?”

The fair boy shook his head.

“This is an island. At least I think it’s an island. That’s a reef out in the sea. Perhaps there aren’t any grownups anywhere.”

- Lord of the Flies

“I can’t get fired. I can just wait her out.”

May 2015 and in a downtown Vegas restaurant called Eat, a man wearing a Zappos badge is loudly explaining his plan to force a co-worker to quit. I’m at the adjacent table, but the man is being so vocal I could have heard him from across the room.

“She’s made the work environment miserable. Why doesn’t she stay at home?”

His companion doesn’t respond, which the man takes as encouragement to continue: “Before I get fired she’ll be long gone.”

The man may be an asshole but, unfortunately for his intended victim, he isn’t wrong. Up until recently Zappos was considered one of the best places to work in the world: A company offering benefits so in-demand that, to guard against carpetbaggers, it famously offers new hires up to one month’s salary to quit. According to Zappos’ own numbers, less than two percent of recruits take the offer.

When I first visited Zappos in 2011, for the Huffington Post, I joked to CEO Tony Hsieh that, frustratingly for a reporter, I couldn’t persuade any of his employees to say anything bad about their boss, or his company.

Four years later, Hsieh has solved that particular problem. In the weeks leading up to my most recent trip to Vegas, 210 Zappos employees had resigned. Many of those who remained were — people close to the company would tell me — a combination of scared, confused, and angry. The sources themselves asked me not to use their names in any subsequent reporting, citing an already strained work environment.

[Disclosure: Both Hsieh and his Vegas Tech Fund are investors in Pando]

Zappos is in the midst of the biggest shake up in its fifteen year history, bigger even than when it was sold to Amazon in 2009. At risk is not just the soul of the company, but the careers of the 1200 or so employees who still rely on Zappos for their livelihood and who still, in many cases, trust that Tony Hsieh will continue to -- in the words of his famous book -- Deliver Happiness. Never have those careers seemed so uncertain, and never has that trust been so stretched.

The culprit? A new and unproven management theory called “Holacracy.”

* * * *

In late 2013, Hsieh announced that Zappos would soon abandon its existing management structure and move instead to Holacracy, a made-up word -- and trademark -- roughly translating to “management by everyone.”

In a Holacratic company, there are no managers. Instead it is employees who make the rules by forming decision making “circles” at which the thousands, or maybe millions, of individual decisions required to run a company are farmed out to whichever workers the group decides should handle them. A central database called “Glass Frog,” accessible to all staff, keeps track of those individual responsibilities.

The principles of Holacracy are laid out in a book of the same name, written by Brian J. Robertson, the founder of HolacracyOne LLC. According to the book, Robertson met Hsieh at “a business conference” in 2013 and the two men quickly agreed that Zappos should become the first company with over 1000 employees to implement Robertson’s new management theory. Robertson likens Holacracy to an “operating system” for modern businesses. The Financial Times’ review of Robertson’s book offered a less generous comparison:

Reading this short book feels like the first time you unbox Monopoly or Risk and someone tells you how to play: “The ‘Lead Link’ is appointed by the super-circle to represent its needs in the sub-circle. A lead link holds the perspective and functions needed to align the sub-circle . . .” and so on. If this is revolutionary, it may be the most tedious revolution yet.

For all its rules, the Holacracy “operating system” has some glaring omissions: For one thing, it has no pre-installed system for replacing the four most important roles traditionally performed by managers: staff mentorship, setting compensation, hiring, and firing. Companies are left to figure these out for themselves. And while they do, people like the guy I overheard at Eat are able to exploit the system to their own ends.

Even after Zappos figures out its various responsibilities and circles, another challenge is explaining them to employees, particularly new hires who are still coming to terms with the company’s existing HR quirks. Bloomberg quoted Jake McCrea, a Zappos employee responsible for training or “indoctrinating” new hires:

"There are some people who are very confused, but they’re excited and they’re optimistic about it," McCrea says "There are some people who aren't so optimistic and they’re skeptics."

Confused and excited or confused and skeptical. He offers no third option. 

Warning Lights and Free Puppies

“Your responsibility is not to support the people but to protect the process.” - Brian Robertson, Holacracy

The more you understand Zappos, and Holacracy, the less sense the combination makes. Holacracy has almost no success stories, but those companies yet to uninstall the Robertson’s “operating system” tend to have certain traits in common. Holacracy seems most successful if it is baked into an organization from the start, rather than replacing an existing structure. Similarly, it seems best suited to small companies with highly skilled workers needing little management hand-holding. Evan Williams’ blog platform, Medium, incorporated aspects of Holacracy from the start — as did the Las Vegas-based transportation startup SHIFT, another Tony Hsieh investment.

SHIFT experimented with Holacracy because its engineers were becoming frustrated at not being able to solve problems fast enough. As founder Zach Ware told me: “We had a fight in the office once because an engineer had a problem but lacked the authority to fix it. Our solution was to give everyone the authority to make any decision not explicitly assigned to someone else.” Ware acknowledges this is not a strict implementation of Holacracy, which would normally require that a meeting be held to allocate the responsibility. Even with that flexibility, Ware ultimately abandoned Holacracy because, amongst other issues, “there were too many meetings.” SHIFT, remember, was a brand new company with only a handful of employees.

"It’s hard to walk the length of a street with Hsieh without being stopped by a succession of acolytes hoping to touch the hem of his ubiquitous Zappos branded t-shirt."

Medium, still with less than 100 employees, is sticking with Holacracy for now. But people familiar with its implementation say that even their workforce of techies has struggled to navigate the system’s lack of “apps” to handle compensation and mentorship.

The dearth of success stories is not surprising. The idea of self-management isn’t new and had been largely discredited decades before the word Holacracy was coined. Jan Klein from MIT’s school of management explained to Business Insider that, in the 1970s, companies like Shell Oil and Cummins tried a form of Holacracy only to abandon it when it turned out most employees wanted strong managers.

I asked Robertson whether, apart from Zappos, any company with more than 1000 employees had even tried to adopt Holacracy. He confirmed not, but added, “I suspect others will follow in Zappos’ footsteps before too long.”

* * * *

And so to Zappos: In almost every way the antithesis of an organization that should thrive under Holacracy.  Hsieh took over as CEO of Zappos in 2000 (he is not the company’s founder, as many believe) and you only have to spend two minutes — I spent two years — living around Zappos employees to realize that many see him as an almost messianic figure. It’s hard to walk the length of a street with Hsieh without being stopped by a succession of acolytes hoping to touch the hem of his ubiquitous Zappos branded t-shirt.

And forget getting within fifty feet of him at one of Zappos’ regular All Hands meetings, where Hsieh is mobbed by fan-ployees as they line-up to eat mealworms or cover themselves in tarantulas in the hope of winning a $250 gift card, redeemable at… where else?

In a skit during the meeting, Hsieh and an employee were performing a Taylor Swift song when another staffer interrupted them with “Imma let you finish…”—West’s famous MTV V.M.A. outburst—and Hsieh threw a fake punch at the Kanye impersonator. The crowd went wild.

A former senior Zappos exec explains the dirty secret of Hsieh’s success thus: While other tech CEOs only hire freakishly smart people — “A students,” as he put it — and allow them maximum freedom, Hsieh specializes in recruiting the “B minus to C students” and creating a highly structured environment in which working hard becomes fun and the company gets not just an employee but a disciple.

As Zappos’ recruitment website boasts:

We love our employees so we take good care of them! We have a nap room complete with nap pod, an employee library, mandatory weekly team fun, $50 monthly co-worker bonuses and even free puppies!

This was the brilliance of what Hsieh and his longtime partner Alfred Lin created, and it’s what Amazon bought for $1 billion -- still one of the headiest ecommerce acquisitions since the dot-com bust. Since the acquisition, Amazon has adopted many of Zappos’ crowd-pleasing quirks, including the “pay to quit” offer.  

Still, it’s hard to imagine an employee at, say, Google embracing “mandatory weekly team fun” or being willing to spend ten hours on a single customer service phone call as one Zappos employee once did. Then again, there aren’t many companies who will fire you “on the spot” if you’re ever late for one of their 7am training meetings.

Given Hsieh’s cult of personality inside Zappos, you’d have to be out of your mind to suggest that staff would perform better without his guiding hand. And yet according to Robertson’s book “the very first step is for the CEO to formally adopt the Holacracy constitution and cede his or her power into its rule system.”

Don’t worry, it gets even creepier…

“By heroically releasing authority into the system’s embrace, the leader paves the way for an authentic distribution of power through every level of the organization.”

And so, in November 2013, Hsieh released his authority into the embrace of Zappos' 1200 or so employees. Even the kids in Lord of the Flies took half a dozen chapters before they started jabbing each other with spears. At Zappos the problems started almost immediately.  

In theory, the ability for anyone to form a circle to set office policy is a great way to cut out red tape. But sources inside Zappos tell me it quickly became a very effective way for junior employees to try to force through terrible ideas, including ones that had already been rejected.

“The technology department at Zappos hated it,” a senior employee told me. “They were already the recipient of every bad idea in the company.” Under Holacracy, they suddenly no longer have the authority to veto all those bad ideas and instead have to appeal to higher up circles, or form their own, in order to achieve what a simple “no” could have done previously.

“Now you have to listen to idiots,” one source told me.

The Holacracy system pays special attention to “tensions” and “grievances.” In his book, Robertson explains that major problems are just as likely to be spotted first by junior employees who should act as “warning lights” for the rest of the organization.

Crowd-pleasing stuff, but Robertson doesn’t cite any concrete examples of companies avoiding disaster thanks to Holacracy. A Wall Street Journal article entitled “Banishing the Bosses Brings Confusion“ quotes an employee who says Holacracy gives her “more time for a workplace diversity committee and to perform on the Zappos dance team.” A Zappos shuttle bus driver says “the turn-taking in meetings has allowed him to speak up about things that bothered him for years, like employees leaving trash in Zappos vans.”

"Even the kids in Lord of the Flies took half a dozen chapters before they started jabbing each other with spears. At Zappos the problems started almost immediately."

According to Zach Ware, who was a senior manager at Zappos before founding SHIFT, confusion over responsibilities, and even some abuses of power, are to be expected in the early days of Holacracy. But he insists that, in time, most companies are able to fix them. He describes the ability for anyone to air grievances as “a good and bad part of the process.” I ask if sometimes employees might see themselves as “warning lights” when in fact they just don’t understand why things are done a certain way. “Yeah,” he says, “that happens.”

As for Zappos specifically, Ware says the company “has so many processes that it’s going to take a long time to codify them, but once it’s done it should make things better.”

But Hsieh wasn’t willing to wait a long time for Holacracy to start working at Zappos. In April of this year he wrote a 4,700 word all-staff memo in which he blamed the problems with Holacracy on the fact that the company was trying to implement it in parallel with existing structures.

Having one foot in one world while having the other foot in the other world has slowed down our transformation towards self-management and self-organization.

Rather than retreating, he planned a "rip the band-aid" approach in which, in a little over a month, the company would become 100 percent Holacratic. Expanding on his “we’ll pay you to quit” training offer, Hsieh said that anyone who didn’t feel they could work under Holacracy could quit with at least three months severance and three months COBRA reimbursement for benefits.

There was one additional catch to the offer: Anyone who wanted to quit had to read yet another management self-help book called Reinventing Organizations by Frederic Laloux — a requirement that management consultant Bud Cadell referred to both reasonably and amusingly as “management by book report.”

Hsieh gave employees until the end of April to decide whether to stay or go.

Bad Culture Fit

“I view my role more as trying to set up an environment where the personalities, creativity, and individuality… come out and can shine.” - Tony Hsieh

"Suicides happen anywhere. Look at the stats." - Tony Hsieh

April 30th, 2015. Deadline day. I landed at McCarran airport and pointed my rental car north along I-15 towards Downtown Las Vegas. The rumor in town was that as many as 200 Zappos employees — well over 10% — had handed in their notice. By the end of the day the number would be confirmed at 210, or 13%.

That number suggests that Hsieh’s “rip the band-aid” solution hasn’t entirely reassured Zappos employees that their once-beloved boss hasn’t lost his mind. But to really comprehend what’s happening at Zappos, and why Hsieh is so determined that Holacracy will work, you have to first understand the company’s place in an even bigger, far more chaotic, experiment. An experiment which put Zappos at the heart of Tony Hsieh’s plan to rebuild downtown Las Vegas as the most livable city in the world.

And so, while many of those 210 workers were making plans to leave Las Vegas, I’d made the opposite journey, at least for a few days.

* * * *

For the benefit of new readers, let me make a few things very clear. Nothing above or below is dispassionate journalism. Not even close. As I’ve written before, Tony Hsieh was the first investor in my company, NSFWCORP — ultimately investing close to half a million dollars on the condition that I and my team set up shop in Las Vegas.

This was in 2011, not long after Hsieh first announced his ambitious plan to reinvent downtown Las Vegas — or at least a few city blocks of it, just east of the famous “Glitter Gulch” of Fremont Street. Hsieh was funding his “Downtown Project” using $350m of his own money, made from the sale of Zappos to Amazon in 2009.

As he explained to me when he gave me a tour of East Fremont in 2011, Hsieh planned to seed his new community by moving Zappos’ then-1200 or so employees from their old offices in Henderson to a new downtown HQ in the former Las Vegas city hall. The real success of the project, however, depended on Hsieh attracting a flood of entrepreneurs to relocate from San Francisco, LA, New York, and all points between. Money, Hsieh explained, was no object.

Not long after our first meeting, Hsieh asked, almost in passing, if I’d consider taking a “six figure” advance from him to write a book about the Downtown Project. I said I wouldn't. Not long afterwards he encouraged me to start NSFWCORP and offered to be our first backer. When I told Hsieh I wasn’t sure I wanted to take any investment at all in NSFWCORP, he offered to give us $100k for no equity at all — just the rights to republish our articles in his downtown magazine (the magazine never launched). There was only one other catch: I had to agree to stay in Vegas.

My two years running NSFWCORP inside the Downtown Project allowed me not only to witness the rise and fall of Hsieh’s experiment, as a writer and reporter, but also to live it as an entrepreneur who was first feted and then cast out by Hsieh as a “bad culture fit.” Hsieh was our biggest investor but he stopped returning my calls after we began reporting on the Downtown Project and its misbehaving employees.  

I’ll say more about the breakup in a moment but for now the important thing to know is that, while my experiences mean I likely know more than any other writer about the downsides of working with Tony Hsieh, I’m also uncommonly skeptical about the upsides. Keep that in mind as we take a tour around downtown Vegas…  

* * * *

East Fremont and Maryland Parkway. If you’re going to spend any meaningful time in Las Vegas as a working journalist, it pays to make friends with a criminal defense attorney. If, as is the case with Dayvid Figler, that attorney also happens to be a professional writer and an incorrigible gossip, so much the better. Dayvid never considered himself part of Tony Hsieh’s Downtown Project — “this too will pass” — but he knows where the bodies are buried.

Last I’d heard, Hsieh had moved out of his ten-room, penthouse apartment in the Ogden condo building at 6th and Ogden and into an Airstream trailer down the street. Hsieh later confirmed he’d been living in a trailer for “seven to eight months.” The Airstream trailer park is the first — and perhaps only — fully-realized phase of Hsieh’s plan to revolutionize how people will live in the City of the Future.

Many of his other grand ideas have either flamed out, been heavily reduced in scale, or quietly abandoned. Of the founders who received investment from Hsieh’s Vegas Tech Fund, most of the smart — or lucky — ones have fled to San Francisco while the less smart — or unlucky — ones have been driven out of business or forced to sell (hello!). In the space of two years, two founders committed suicide, as reportedly did a student brought to the Downtown Project through a partnership with Venture for America. Some of those entrepreneurs who remain have gone native, taking jobs at Zappos or within the Downtown Project itself.

“If there’s a fence around it, it’s one of Tony’s buildings.”

Bars, restaurants, and entertainment venues are struggling too — in large part due to Hsieh’s lack of experience in the hospitality industry, in a town where amateurs are eaten alive. A few weeks before my trip, it was announced that most of Hsieh’s food and drink portfolio had been sold off, for zero dollars, to Wendoh Media, the local media group behind listings magazines like Vegas Seven and Vegas Rated.

“You should look this up,” Dayvid tells me as we stop for scones and tea at Public.Us, a popular new coffee shop not owned by the Downtown Project. “One of Wendoh’s guys is being investigated for importing human skulls from Thailand.” I did look it up, and it’s true: According to local Vegas press, Ryan McPherson, founder of Wendoh subsidiary Shoot To Kill, is being investigated by the FBI after customs officials found a baby skull, a human foot, and a human heart in a package he’d arranged to have delivered to Wendoh’s offices. McPherson, by the way, was previously the creator of the “Bum Fights” video series in which homeless people were paid cash to beat each other up. These are the professionals Hsieh is bringing in to save his bars.

As Dayvid and I walked west along Fremont Street towards Las Vegas Boulevard North, the scale of the Downtown Project’s failure was plain. Hsieh had promised that these half dozen blocks would be transformed by his project: Old hotels like the Peter Pan and the Western would be demolished, replaced by yoga studios, “collaborative workspaces,” art galleries, and high-density housing, all connected up by an integrated transport system comprising electric cars, bicycles and even “party buses.” Those buses, Hsieh explained to me when trying to convince me to set up NSFWCORP in Las Vegas, would be available for free to anyone who volunteered in the community. Today most of the buses remain in storage, and the 100 Teslas ordered with great fanfare were never delivered. Zach Ware’s SHIFT, the company founded to manage the transport system, recently closed.

The hotels are still abandoned — though they’re now surrounded by chain-link fencing to keep out the area’s burgeoning homeless population.

“If there’s a fence around it, it’s one of Tony’s buildings,” Dayvid tells me as we trudge along in 90 degree heat.

The emptiness of the streets is eerie and telling. At the very least they should be filled with Zappos employees by now, spending their wages in Hsieh’s shops and bars. Instead, having taken one deep sniff of the sewage smell that covers Downtown all summer long — and realizing that “affordable housing" is a relative term — Hsieh’s employees have apparently decided en masse that they’d rather keep their existing homes and commute downtown each day instead. The army of brown shirted — brown shirted — “Downtown Rangers” that Hsieh hired to keep his workers safe at night have since all-but vanished from the streets, their presence no longer required.

Perhaps it's for the best: It was Dayvid who first tipped me off to the story that ended my friendship with Tony Hsieh. The Rangers were headed by Chris Curtis, a former cop-turned-pick-up artist who wrote a book called “Mack Tactics: The Science of Seduction Meets the Art of Hostage Negotiation.” According to Curtis: “Every interaction with a female is an opportunity.” NSFWCORP ran that story under the headline “To Protect and Perv.”

Not every lot on East Fremont is abandoned. Some, in fact are doing very well.

There’s a sprawling "doggy daycare" park.

There’s a well-stocked book store.

There are two restaurants that come recommended by the New York Times.

Yes, there’s a trailer park filled with Airstreams.

And, yes, spread out across the area controlled by the Downtown Project, Hsieh owns several tens of millions of dollars of real estate, secure behind those chain-link fences. If you can afford to wait long enough, it’s hard to lose money owning real estate in any major American city.

But that’s the thing about centi-millionaires failing: It doesn’t look the same as when you or I fail. If you or I were given $350m in hundred dollar bills, a can of gasoline, and a match, we’d struggle to incinerate the whole lot. At least a few of those bills would catch the breeze and land on a viable enterprise.

What’s inarguable is that not a single one of the banner promises made by Hsieh — the City of the Future, the Co-working Capital of the World, the 3D Printing Capital of the World, the Urban Transportation Capital of the World — has come to fruition.

Still — wait a minute!-- bold experiments fail all the time. When Elon Musk’s unmanned rocket exploded in the sky over Florida, you’d have to be a real jerk to say that he should never have tried to launch it in the first place. See also Laker Air, Delorean, Betamax, and Clairol’s “Touch of Yogurt” Shampoo.

But what doomed the Downtown Project wasn’t the scale of Hsieh’s experiments, it was his inability to stay focused long enough to see them through to completion.

The Tony Tour

"It's perfect that you're worried because I soothe women's worries." - Chris Curtis
“My hope for the Rangers is that they make people feel incredibly comfortable when they come Downtown." - Chris Curtis 

During my two years in Vegas, I watched the same scenario play out time and time again: Hsieh would attend a conference and meet some highly impressive person — a person who built co-working spaces for NASA, an Ivy League doctor, a visionary publisher. He’d invite them to visit Las Vegas, where they’d been treated to the “Tony Tour,” a walk through downtown culminating in a visit to his famous wall of Post-It notes, each one displaying a proposed business or building project.

Towards the end of the tour, Hsieh would spring his surprise: An offer — a virtual blank check — to move to Vegas and help build the future. The language was always the same: “Vegas is going to be the [whatever that person wants to do] capital of the world.” If you ever went on the Tony Tour, you’re nodding as you read this. You may even have met me on the times Hsieh would drag me in as a convincer to close the next recruit. Other times I was too busy building the Investigative Comedy Journalism Capital of the World.

Hsieh is an incredible salesman -- and not just of shoes. Soon, brilliant people were arriving in Vegas to start building their dream projects. Families were relocated, apartments rented — usually in the DTP-dominated Ogden apartment building — furniture purchased and the courses of lives permanently diverted.

Ultimately, of course, many of these dreamers would end up leaving Vegas, some unhappily. Each has his or her own story of the moment they realized it was time to go, but there are common themes: Hsieh was brilliant at painting a picture of utopia. But his famed phobia of conflict or confrontation meant he wanted nothing to do with actually negotiating the terms of delivery. For that he would hand things over to a constantly fluxing group of advisers, hangers-on, family members, yes-men, waifs and strays who would — in some vague way — be responsible for figuring out how to deliver on Hsieh’s promises.

People who had been assured by Hsieh personally that they would receive investment from Vegas Tech Fund were flabbergasted to hear Hsieh say that -- oh, didn’t he mention this before? -- his was only an advisory role. It was the other partners at the fund who would decide whether to write the check. Those naïve enough to believe Hsieh when he promised to give them one of his Downtown buildings couldn’t believe it when a stranger appeared clutching a rent contract, sometimes well above market rate.  

As one frustrated Downtown Project staffer told me “A lot of people were sold on the idea that they were signing up for the most important thing in the world. They didn’t get what they wanted, which meant they left. Not knowing what they signed up for damaged us, unfortunately.”

My own “fuck this for a game of soldiers” moment came when, a week before closing our final round of funding, I realized we were going to be a few thousand dollars short on payroll. Our relationship with the Downtown Project was already strained but the company’s advisors all agreed that, as our lead investor, Hsieh would surely be willing to extend a small loan — $10,000 maybe — to make sure everyone on the team got paid. (Like the cliched, self-righteous founder of a cash-strapped startup, I wasn’t taking a salary).

Hsieh arrived at our late-evening meeting surrounded by his usual entourage and clutching a Solo cup filled with happiness. I explained the crisis, entirely of my own making, and asked — begged really — for him to put our personal disagreements aside in order to ensure my employees could make rent. I’d repay the loan with interest as soon as our (already committed) funding came in.

It wasn’t his answer that brought me close to tears, rather his unwillingness to give one. Instead he suggested we try to close our new round sooner. Every entrepreneur who has lived the gap from “yes” to cash knows what a punch in the gut that is. Hsieh then invited a member of his entourage into the room and asked me to repeat my tale of woe to him. After I'd humiliated myself for a second time, Hsieh asked the interloper: “What do you think I should do?”

“I think you should give them the loan,” came the reply.

“Then why don’t you give them the loan?” said Hsieh.

After half an hour more of this it became clear that Hsieh wasn’t going to give us the loan, but nor was there a bad cop on hand to actually say "no." It’s ironic that the closest I’ve come to tears in my professional life was in a meeting with the author of Delivering Happiness.

Of course it wasn’t just Hsieh’s promises that brought so many people to Vegas. In fact, coming from anyone else, his eccentricities might seem like full blown mental illness: At one point he insisted he’d only buy property that fell within an outline of a llama he’d drawn on a map of Vegas. It was Hsieh’s success at Zappos that acted as the convincer. 

There is, however, a huge difference between Zappos and Downtown Project: The former had Alfred Lin. Anyone involved in the pre-Amazon days of Zappos will tell you how Tony and his business partner Alfred worked their good cop / bad cop management style. Tony was the good cop, always coming up with happiness delivering ideas like the cash bonus to quit and hosting carnival-atmosphere all hands meetings, fueled by endless shots of Fernet. No idea was too big, no bar tab too long. Whenever an employee needed to be fired, it was bad cop Alfred who Tony would call on to wield the axe. Likewise it was Alfred who would rein Tony in when one of his ideas threatened to put a dent in the company’s finances. The system worked, at least until Zappos was acquired by Amazon, and Lin left to join Sequoia. The Downtown Project was all good cop.

Insert Misleading Headline Here

 “All happy families are alike; each unhappy family is unhappy in its own way.” - Leo Tolstoy, Anna Karenina

“If you think of every employee as a human sensor of tension, everyone gets their tension processed,” the soft-spoken Hsieh told me one night over artisanal popsicles. -- Re/Code

Hsieh’s relentless happiness, mixed with his fear of conflict, makes it difficult to discuss the failure of the Downtown Project. For one thing, he simply refuses to accept that anything has gone wrong.

Not long after my trip to Vegas, I wrote to Hsieh with a list of questions about Zappos and the Downtown Project. His response was pure Tony, to the point where it almost made me nostalgic for the good old days. He even did his old trick of copying in other people to handle the tougher questions — in this case Holacracy creator Brian Robertson and Zach Ware who, after shuttering SHIFT earlier this year, is now the sole full-time partner at Vegas Tech Fund.

“Despite the misleading headlines and articles,” Hsieh wrote, “DTP continues to be on track. We’re about 3.5 years into our 5-year plan and are happy with our progress as well as how downtown has continued to evolve.”

To hear Hsieh tell it, the fenced-off buildings, the shuttered startups, the broken promises, the continuing talent exodus — all of it — were all part of his plan from the start. It’s as if Hsieh believes that, if he says it with enough certainty, those of us who witnessed the early months of the project will remember that, oh yes!, alongside the Post-It notes marked “yoga studio” and “100 Teslas” were shining yellow squares promising “misery,” “failure,” "sexual assault," and “suicide.” It’s only “misleading headlines and articles” that would have us remember otherwise.

I asked Hsieh about the startups that had failed, most recently Digital Royalty, which announced its closure last week. What were some of the most successful companies still remaining in Vegas? Hsieh said he didn’t have the full list. “Off the top of my head, OrderWithMe is doing well, as are Rolltech and Zirtual,” he wrote by email. When I spoke to Ware later on the phone, he added online polling startup Wedgies to the list, bringing the total to four. Vegas Tech Fund’s AngelList profile lists 97 startups that have received funding from Hsieh and his partners.   

"A constantly fluxing group of advisers, hangers-on, family members, yes-men, waifs, and strays would — in some vague way — be responsible for figuring out how to deliver on Hsieh’s promises."

Ware explained to me that in recent months, Vegas Tech Fund has changed its investment strategy to pay more attention to companies outside Vegas. Many of the companies Ware is most excited about — including Pando, he said, ever the loyal investor — were not based in Vegas but were those for which Vegas Tech Fund could add real value.

Ware has a personal interest in widening Vegas Tech Fund’s vision. At Pandoland last month, he told a group of entrepreneurs that one of the reasons SHIFT had failed is that he had resisted moving the company away from Vegas. “I wanted to stay faithful to our investor’s vision,” he said. That investor, of course, was Tony Hsieh.

If there’s no longer an expectation that entrepreneurs will live in Downtown Vegas, what about Zappos employees?

“It’s never been about Zappos employees moving downtown,” Hsieh told me. “We never wanted to create ‘Zappos-town’… It’s about creative and entrepreneurial people moving to Downtown in general, from all different backgrounds and industries.”

In response to my specific question about approximately how many Zappos employees had moved to Downtown rather than commuting in from Henderson, he replied, “I don’t know.”

In September of last year, the Downtown Project announced it was laying off 30 percent of its staff, and Hsieh called a surprise “all hands” meeting in his Inspire Theatre building -- which has since been handed over to the Bum Fights people -- to announce that he would be stepping from his role as head of the project and appointing former McKinsey consultant Maggie Hsu as the Downtown Project’s new chief of staff.

According to Re/Code:

“[Hsieh] said, ‘I see myself as adviser and investor, but I’m going to appoint someone as our strategy implementation lead,'” one source who attended the meeting said.

Another person close to Downtown Project said the new businesses — like an artisanal doughnut shop and a high-end flower vendor — were “bleeding money.”

“It seems like it’s being run by kids — that’s because it’s being run by kids,” one source said about the Downtown Project.

A little over six months later, Hsieh announced his “rip the bandaid” strategy at Zappos. Whether or not you accept Hsieh’s insistence that all is well in downtown Vegas, there can be no denying that in recent months Hsieh has turned his attentions away from the Downtown Project and back towards Zappos.

“Despite the misleading headlines and questions…”

Oh for goodness sake.

“My time spent on DTP and Zappos hasn’t really changed over the past two years,” Hsieh responded when I asked him about the switch. “What I actually do on any given day at Zappos or DTP does change though. I basically dive in wherever I think I can add the most value in both organizations.”

Whatever the reason, in April 2015 Hsieh decided that he could add the most value to Zappos by “heroically releasing authority into the system’s embrace” and turning Zappos fully Holacratic.

* * * *

And so we come back to the “why” and the “why now?" Given his struggles with the Downtown Project, why not just enjoy the fact that Zappos, at least, seemed to be working. He and Alfred Lin had built the perfect machine and -- astoundingly-- the multi-billion dollar company who acquired it hadn’t broken it.

Everyone I spoke to for this story had a pet theory why Hsieh is so determined to force Holacracy on Zappos. Some suggested that, with Amazon increasingly absorbing parts of the company — warehousing, fulfillment, technology — Holacracy gives Hsieh the opportunity to prove to Jeff Bezos that he can still add value as CEO.  

Others had more charitable explanations, with one senior insider arguing that Holacracy would allow Zappos to work more efficiently. Hsieh had become tired of trying to convince middle managers to implement his big ideas at the company and wanted to clear the decks. “Zappos was getting bogged down by useless managers and Tony wanted to get rid of that.”

I asked Hsieh about this theory but he dismissed it, while at the same time not really dismissing it at all:

“No. In general, as companies get bigger, things move slower — that’s just a byproduct of the normal hierarchical command and control structure. My frustration was in us moving slower as we continued to grow, and realizing the problem was with the structure itself, not with the employees.”

My own theory as to why Hsieh’s eyes widened when he first saw Brian Robertson’s presentation is that here, finally, was a management system designed for bosses who hate conflict. In his book, Holacracy founder Brian Robertson says that many bosses who move to Holacracy find the abdication of ultimate responsibility “a tremendous relief.” The fact that Medium and Zappos are the biggest companies to try Holacracy isn’t a coincidence. Both Hsieh and Williams are famously conflict averse, each going to ridiculous lengths to avoid saying no.

Given Hsieh’s hero status inside the company, Holacracy would still allow him to retain huge control over his workers — much more so now that he’d driven out all the managers except himself — while using Holacracy as the perfect excuse for delegating the tough decisions to other people.

“It’s not about avoiding conflict,” Hsieh insisted when I shared my theory, “it’s about integrating multiple perspectives. Part of the reason why I’m drawn to Holacracy is that the processes enable multiple perspectives to be integrated without one side ‘losing’ and the other side ‘winning’ or a lone voice being outvoted by the boss of the majority.

“Separate from that, the fewer decisions I can make, the faster here organization can move — otherwise I become one of the bottlenecks… It’s much more efficient for 1500 employees to each make one decision a day than it is for me to try to make 1500 decisions a day.”

But isn’t Hsieh worried that without him acting as a clear boss, his staff might feel lost rather than empowered?

“If you use the analogy that a company is like a greenhouse that houses a lot of plants, where the plants are employees, and usually the boss or leader is the biggest/tallest plant that the other employees strive to one day become, then that’s not me… Instead I view my role as helping architect the greenhouse that enables all the plants to flourish and thrive.”

Go Home and Go Big

"If I go there will be trouble. An' if I stay it will be double." - The Clash

No one — not even Hsieh — denies that Holacracy will require a fundamental change in the way his company runs. In his email to staff he acknowledged that “self-management and self-organization is not for everyone” and anticipated that a large number of employees would resign.

So then the giant question is: Why, off the back of a bruising three and a half years trying and failing to build the city of the future, would Hsieh decide that now is the time to return to Zappos with his biggest roll of the dice yet?

Anyone who knows Hsieh well will see the answer to that right there in the question. Hsieh is a gambler, both literally and metaphorically. A regular fixture at the annual high roller poker game at the Code conference, Hsieh is never happier than when making huge bets. Whereas others choose to risk thousands inside Vegas’ casinos, Hsieh risked millions actually buying downtown casinos — not to mention hotels, bars restaurants, and even city hall — in the hope of winning big.

Depending on the performance of that real estate, Hsieh may still come out even, or even ahead, on those bets. But there’s a second aspect to Hsieh’s public personality that isn’t about winning, but about being seen to win. Celebrated for it, even.

Readers of Hsieh's book, Delivering Happiness, will know how Hsieh sold his apartment and poured every last dime he had into Zappos when the company was flailing. The bet paid off and now Hsieh has developed a second career as a best-selling author and motivational speaker, flying from conference to conference telling others entrepreneurs how to run their companies.

With the Downtown Project seen as a damp squib, and Zappos just another SKU in Amazon’s giant corporate warehouse, the Delivering Happiness message sounds increasingly dated. Hsieh’s obsession with misleading headlines speaks to a resentment that the press is starting to snicker where once they bowed and scraped. Hsieh needs a win.

Again, Hsieh is a brilliant salesman — possibly the best in the world. He knows the best way to distract from the Downtown Project’s failure, and to prove to the press that his success at Zappos wasn’t just a fluke, is to announce something even bigger, even bolder.

I’m a sucker for stories of giant risks and giant rewards, so it took me a while to figure out why Holacracy made me feel queasy rather than excited. I’d watched before as Hsieh had made big announcements which turned out to be disasters. People had lost their jobs before, and there had even been suicides. Why did his plan for Holacracy somehow seem even more reckless?

It was as I started to speak to Zappos workers past and present, that the difference snapped into focus. With the downtown project everyone involved knew the risks, me included. If I regret having believed in Hsieh’s vision — and, honestly, I’m not sure that I do — then that’s all on me. No one pressed a gun into my temple and ordered me to move to Vegas. No one forced me to take Hsieh’s money, just as every other startup, consultant, doctor, teacher, musician and co-working space expert — all being of sound mind — decided that Vegas could make their dreams come true. We all made our choice, and it’s us, not Tony Hsieh, who are to blame for what followed.

Many of the 210 Zappos employees who took Hsieh up on his golden parachute offer did so because they knew they could find jobs elsewhere. Having spoken to some of those who remain, it’s clear that many stayed behind because they lacked any other options. These are not young, single entrepreneurs, they are customer service employees and rank-and-file workers, who have mortgages to pay in Las Vegas and children in school. If they leave Zappos, there aren’t many other jobs waiting for them — particularly if they don’t relish the long hours and pinched bottoms that come with customer service work on the strip.

When I ask Zach Ware if he thinks Holacracy will be successful at Zappos, he demurs. It’s still early days, he tells me, and there’s not enough information yet to know how staff are taking to it. “I can’t handicap whether it will work,” he says.

And if it does fail? What will happen to everyone who still works at Zappos?

“It’s a big risk,” he says. “They have nowhere else to go.”