$350 Million Might Not Be Enough to Save Las Vegas

Spending millions to revitalize a struggling portion of the city might seem like a good bet, but the current effort led by a billionaire CEO is facing major challenges.

Emily Wilson/The Downtown Project

LAS VEGAS—There's been a lot of hubbub about the effort tech whiz Tony Hsieh and his crack team of acolytes have put into revitalizing downtown Las Vegas.

In case you missed it, Hsieh, the CEO of Zappos, in January 2012 announced that he was putting $350 million into the Downtown Project, which would fund new businesses in an economically depressed part of the city seven miles north of the Las Vegas Strip. He also wanted to create a tech hub in a city better known for gambling and tourism, which some journalists dubbed the newest "techtopia."

Hsieh’s money has already made a big splash downtown, where the Downtown Project has begun to alter the 60 acres Hsieh bought. There’s Container Park, an outdoor hangout space and shopping center made out of shipping containers where Sheryl Crow played a live concert last year, new restaurants which will serve food as diverse as handmade Cajun sausages and vegan pizza, the new independent bookstore that just opened, founded by Scott Seeley, who is imported from Brooklyn and once ran Dave Eggers' 826NYC.

But the last six months have showed that even $350 million might not be enough to revitalize a city.

This fall, the Downtown Project laid off 30 employees. Some Downtown Project employees who hadn't been laid off left of their own accord. David L. Gould, who had been a professor at the University of Iowa until Hsieh convinced him to move to Las Vegas and take the title "Director of Imagination," wrote a public resignation letter blaming the layoffs on “a collage of decadence, greed, and missing leadership.”

“While some squandered the opportunity to ‘dent the universe,’” he wrote, “others never cared about doing so in the first place. There were heroes among us, however, and it is for them that my soul weeps.”

At the same time, local and national media seized on the suicides of three separate entrepreneurs who worked for the Downtown Project or whose projects had been funded by it. One of the startups, Ecomom, had a particularly nasty and public crash.

Still, visit downtown Las Vegas today and you’ll see little sign of this tension. Yes, there are still boarded-up buildings, some owned by the Downtown Project, but there are also new restaurants and bars opening, and more planned throughout the spring. They're not all funded by Hsieh—other business owners have opened bars called Park on Fremont, and Commonwealth, nearby, for example, and the area is slowly becoming one of the hippest in the city.

“We used to come downtown and you just never came into this area [on Fremont Street] unless you were looking for crack or something—it was honestly, so absolutely unsafe,” Donald Lemperle, the chef and owner of VegeNation, a new vegan restaurant opening with Downtown Project funding, told me. “The changes have really been drastic.”

The hiccups and the successes illustrate what's difficult about changing a city, and raise questions about just how far money can go. After all, downtowns, especially these days, would seem a good bet, what with the preferences of Millennials and Boomers alike to spend time in walkable areas. And Las Vegas is a city where people like to spend money, especially on new experiences or hip areas of town.

But creating a whole new industry hub from scratch, especially in a town with few anchor institutions save casinos and hotels, may be a little more difficult.

"The region's going to be a difficult sell as a tech haven because the numbers don't bear out," said Robert Lang, a professor of urban affairs at UNLV and the director of Brookings Mountain West. "You really need all kinds of startup firms and a culture that region-wide nurtures innovation."

The downtown Container Park (Emily Wilson/The Downtown Project)
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For a long time, Scott Seeley immersed himself in the literary world of Park Slope, Brooklyn, rarely venturing far from the borough and its world of books, culture, food, and intellectuals. Seeley, who is tall and bearded, like half of Brooklyn, was the co-founder and executive director of 826NYC, the Dave Eggers brainchild that taught creative writing to kids.

Then Tony Hsieh and the Downtown Project invited Seeley and his husband Drew Cohen to visit Las Vegas, and offered them money to start their own independent bookstore. It was an easy decision—Seeley told me he'd been wanting to move somewhere completely different for awhile.

They moved to Las Vegas a year and a half ago and their bookstore, Writer’s Block, had its official opening in February, complete with a ribbon-cutting ceremony with Las Vegas mayor Carolyn Goodman. The store, located in an old tattoo parlor, has traces of 826NYC: They teach kids writing in the back, and the space doesn’t spare on the whimsy, with an artificial bird sanctuary, and a ‘bird adoption agency’ near the checkout counter.

"On a much smaller scale, it does remind me of what Brooklyn was going through 15 years ago when nobody really wanted to live there—it was just the cheapest place," he told me, about downtown Las Vegas. "I really respect the visionaries behind it."

Inside Writer's Block (Alana Semuels)

I visited the store on the day of its official opening, and was surprised at the crowds. Inside the store, which is next to an auto-body shop and a boarded-up motel, a woman read her children a book in one corner of the store, a man browsed the well-stocked fiction category in another. In the back, a handful of of people from small businesses also located downtown served free food and drink: A man with tattoo sleeves watched as two women sampled tea from a startup called Tealet, a nationally-ranked barista (yes, there are barista rankings), poured specialty coffee.

This is exactly what Hsieh envisioned when he first decided to invest in Las Vegas’s downtown. The idea first came in 2012, when Hsieh was looking for a place to move his expanding company, Zappos, then headquartered in Henderson, a Vegas suburb. Hsieh wanted to create a campus for Zappos’ 1,500 or so employees, much like Google or Apple had in Silicon Valley.

“One of the things he didn’t love about those campuses was that they were very exclusive,” Maria Phelan, a Downtown Project spokeswoman told me. “He liked the idea of more of a NYU-campus feeling—you don’t know for sure where the campus ends and begins.”

Stores in the downtown Las Vegas Container Park (Alana Semuels)

Hsieh learned that the Las Vegas city government had moved out of the old City Hall, and decided to move his company there. But he wanted downtown to be a place where his employees felt comfortable living and working, somewhere they’d want to spend lots of time before, after, and during work. He launched the Downtown Project in 2012 and started investing. Of the $350 million: $200 million went to real estate development, $50 million to tech investments, $50 million to arts and education investments and $50 million to small businesses.

If you’re not familiar with the city, here’s a quick primer—the Strip, where most tourists go, is seven miles south of downtown. The airport is south of that. Downtown lies at the intersection of four freeways, but few companies are headquartered there: It’s instead an array of government buildings, parking garages, and a dated neon area called The Fremont Street Experience, with a few hotels and casinos.

Hsieh’s goal, in terms that perhaps aren't out of place for a guy who wrote a book called Delivering Happiness, was to “help make downtown Vegas a place of Inspiration, Entrepreneurial Energy, Creativity, Innovation, Upward Mobility and Discovery,” according to the Downtown Project’s website.

Now, there are dozens of businesses opened thanks to Hsieh’s investments: a boutique hotel, a private school, and hostel, a toy store, numerous bars and restaurants. In a document about the project, Hsieh wrote that he employs more than 900 people across the various entities “affiliated with myself and/or the Downtown Project.” The businesses have spread from the Container Park down Fremont Street, and down Las Vegas Boulevard toward Neonopolis.

The Writer's Block, in downtown Las Vegas (Alana Semuels)

The various investments of the Downtown Project may seem haphazard, but one of Hsieh’s big ideas is investing in people—whether or not they have expertise in the matter at hand. If people come up to him after he speaks at a conference, or run into him on the street, or meet him through a friend of a friend of a friend, and have a good idea, he or his staff will recruit them to join the Downtown Project. These connections are what Hsieh calls “collisions,” and he says that being in a walkable-downtown area allows for more collisions between people.

It’s an idea that may seem challenging in Vegas, where everyone drives, and even young people still seem interested in homes in the suburbs.

Indeed, the city of Las Vegas had tried to revitalize its downtown for decades, with little success. As early as 1986, Mayor Oscar Goodman created a redevelopment agency to focus on downtown, but it initially chased after office buildings and other projects that would not have benefited an urban, walkable core, Steve van Gorp, an urban planner who was a senior planner with the city of Las Vegas, told me. In the late 1990s and early 2000s, the redevelopment agency focused on attracting more residential development, and promoted new urbanism principles such as walkable, tree-lined streets. The city adopted a Centennial Plan in 2000 that laid out areas of investment for the downtown area, and 45 residential projects were entitled for downtown, van Gorp told me.

Only about 10 percent of those projects were built before the recession hit. In 2008, everything ground to a halt, and the grand plans for Las Vegas’s downtown all but ended, van Gorp said.

But Hsieh’s money has jump-started the process, and made investors scared off by the recession think again about putting money into downtown.

“His investments have really been the major investments in the downtown over the last two-plus years,” van Gorp told me. “The Downtown Project has really given a surge of confidence to the downtown area.”

The reasons the retail aspects of the Downtown Project have worked are pretty obvious. People visit Las Vegas to spend money, to eat and drink, to buy things to bring home. Not all of them want to spend all of their time in the casino haze of the Strip. Some want to have a different experience than their friends, others want to try new restaurants.

Many of the downtown investments create that new, fun experience: There’s a giant praying mantis statue, imported from Burning Man, that breathes fire, giant board games in the backyard of a lounge called the Gold Spike, and there's one live music venue and another in the works.

It’s not just tourists who are visiting, either. The Downtown Project has tried to make the area family-friendly, putting a giant jungle gym in the middle of the Container Park and couches for sitting, attracting toy stores, BBQ restaurants, and cake shops.

A park in the middle of the Container Park (Alana Semuels)

The funding Hsieh is offering attracts all sorts of people who have lived in Vegas for years and have wanted to break out from the casinos and start their own ventures. That includes Donald Lemperle, the chef of VegeNation. He’d worked at a restaurant at the MGM Grand for a long time, but decided to put together a business proposal after hearing that the Downtown Project was looking to fund restaurants. After he cooked them a 12-course vegan meal, they agreed to fund him with the traditional Downtown Project funding model: a loan, which Lemperle will pay back, and after the business is in the black, Lemperle will split the profits 50/50 with the project.

Many of the investments thus far have been food and drink enterprises like Lemperle’s. There's O-Face Doughnuts, EAT, Perch, Nacho Daddy, and Carson Kitchen. And the Container Park, which is owned and operated by the Downtown Project, is a landlord to dozens more stores.

“It you want to revitalize a downtown core, you want to bring families downtown,” said Maggie Hsu, a Downtown Project staffer. “Why will they come downtown? It’s often to eat and drink and hang out.”

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But as Las Vegas knows all too well, a city based solely on shopping and eating and drinking can struggle when people aren’t spending money anymore. One of the reasons Las Vegas was hit so hard by the recession was that tourism numbers dropped and people started spending less on gambling. Fewer conventions were held there during the recession, and that meant less business for Strip restaurants and hotels, which led to layoffs, and in turn foreclosures.

“Everything is driven by tourism,” Mike Montandon, the former mayor North Las Vegas told me. “We try very hard as policymakers to diversify the economy, but no matter what, our base is one-third tourism, and it never really changes.”

Part of the Downtown Project's plan was to try and diversify this mix, creating a tech hub that could drive the economy, much in the same way startups are now thriving in places such as Pittsburgh. It doesn’t seem like that much of a stretch, after all, Zappos has thrived in the region. Nevada has no income tax, which could be appealing to entrepreneurs looking to relocate. And there are a host of call centers located in the Las Vegas area, which provides experienced workers for a certain kind of business.

But it’s much more difficult to build a whole new industry from scratch than it is to install a handful of restaurants and stores in a city that loves to spend. Few home-grown startups come out of Vegas, and many of the ones located there have come for Hsieh's money or for the cheap cost of living, not because they need to be there to access talent.

“It’s not a nurturing space—the region, in general, is not an interesting space for tech, the larger numbers are in gaming or tourism,” Lang, of UNLV, said.

Las Vegas residents at a Downtown Project community meeting (Alana Semuels)

There are other cities that have focused on replacing disappearing industries such as steel or autos with technology, but they have big research universities or hospitals that naturally feed students and startups, Lang said. Pittsburgh, for instance, has Carnegie Mellon, which has focused on turning campus ideas into new businesses. And Cleveland has the Cleveland Clinic, which has spurred the creation of medical device startups. But Las Vegas has UNLV, which has not yet had a track record for exiting startups.

Even a place like Orlando, which is also strong on tourism, has more startup infrastructure than Las Vegas does, Lang said. That’s because Orlando has big entertainment companies such as Universal Studios and Disney World, where there is game development and entertainment.

"Orlando puts Vegas to shame in tech," Lang said. "There's less technology here than the boosters would lead you to believe."

Ultimately, Las Vegas’s downtown may succeed as a tourism destination, Lang said, but it will have a much harder time driving a tech sector.

“It’s like a lifestyle enclave,” he said. “It’s not an innovation district yet, it’s not like Pittsburgh, which has legitimate innovation.”

Many entrepreneurs seem to see Vegas as a place to grind their teeth and work hard and save money. The money and advice from the Vegas Tech Fund are a powerful lure, even for people who would rather be surfing every day, like Elyse Petersen.

Petersen moved her business, Tealet, to Vegas from Honolulu because she knew she needed to be located on the mainland, and because she received funding from the Vegas Tech Fund. She rented a house on what she calls “Startup Block,” because there are other entrepreneurs living near her, and often holds tea parties for the friends she met there. Is Las Vegas her favorite city in the world? No.

But “I’m here for a purpose," she told me. "This is not my dream place, but right now, I know I need to be hustling and traveling and making things happens, and this is the place I need to be doing that.”

Residents sample tea from Tealet in the back of the Writer's Block store (Alana Semuels)

It’s true that $50 million goes far when spread over many early-stage tech investments, especially in a city like Las Vegas where the cost of living is relatively low. The Mill, founded last year with Vegas Tech Fund money as an idea accelerator, gave $5,000 to a new entrepreneur ever week, along with access to mentors and a co-working space. Eight of the 44 received funding from the Vegas Tech Fund or other investors after the initial contract period. It’s now adding on a startup accelerator that will dole out even more money.

“There is this air of opportunity here—people come out here knowing if there isn’t something here, they can build it,” Sara Hill, the CEO of The Mill, told me. “It brings out special people with a certain tenacity and resilience.”

Still, many of these people may see Vegas as a short-term place to get some funding and perhaps live for a few months or years, but once they get funding, they often leave. There just isn’t the developer pool and tech talent in Las Vegas that there is in other cities, including the Bay Area, or really even a knowledge economy in Vegas, said Chris Leinberger, a fellow at the Brookings Institution.

People watching a concert in the downtown Container Park (kennejima/Flickr)

Downtown Project-funded Rumgr, for instance, an app that allows people to sell used items to one another, was sold to eBay in October, and its founders moved to the Bay Area to continue to work on the business. Of the startups that received funding after going through The Mill, only three are still in Las Vegas. Romotive, a personal-robot service also funded by The Vegas Tech Fund, also moved from Las Vegas to Silicon Valley after receiving funding.

“As we scale over the next few years, our focus will be on working in close proximity to strategic partners and hiring brilliant senior talent,” the CEO, Keller Rinaudo, said in a farewell letter. “That’s the reason that we have decided to move to the Bay Area.”

I asked Vicki Zhou and Herbert Moore, who relocated their company, WiseBanyan, from New York City in November, whether they planned to stay in Vegas for the long run. Although they were talking to me in front of a Downtown Project spokeswoman and the guy in charge of giving them money, they didn't commit to staying. It wouldn't necessarily make sense for their whole company, which does financial advising, to be outside of New York, they said.

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There’s one other factor that could play into the fate of the Downtown Project: the desire of people, young and old, to live and work somewhere more walkable. It’s been a trend that’s been slower to take hold in Las Vegas, but developers are taking note.

The way Hsieh has invested in real estate downtown has spurred other developers to spend money there, too. An Arizona company that has owned a piece of land downtown since 2008 is finally putting up an event space there, and it’s already taking bookings.

Vegas is famous for land speculation, and Hsieh has taken advantage of that, leaking information about deals so that other developers will jump on buying up land downtown and building on it.

“He’s really good at effectively leveraging his money,” said Montandon, the former North Las Vegas mayor. “And of course he’s leveraging Millennials, too, creating something that old gray hairs like me don’t understand.”

A man sits in the Container Park in downtown Las Vegas. (Alana Semuels)

Part of the idea of the Downtown Project was to recognize that not everyone wanted to be part of the sprawl of Las Vegas, Hsu said. And that's the part that seems to be succeeding. Not just because Millennials want to be downtown, but because many people in the fast-growing city want the feeling of a community that a downtown can bring.

The population of Las Vegas is expected to continue to boom for the next decade, which can only be good for business. But that boom, and the way the region's economy is headed, will probably favor service and retail businesses more than it will tech-heavy startups. That could mean parts of the Downtown Project succeed, while others fail.

After all, Hsieh’s statement about the downsizing of the Downtown Project talked about “streamlining our operations,” which indicates there's little patience left for endeavors that don't make money. And tech startups are notoriously slow to do so.

Lizzy Newsome was involved with the Austin tech scene before moving to Vegas to open a toy store, Kappa Toys, which is funded by the Downtown Project. When the fall layoffs happened, she said, her inbox was blowing up with friends wondering if she'd made a horrible mistake.

But her business, which opened in August, is already making money. She loves living close enough to her store, which is in the Container Park, to be able to walk to work.

"It's impossible not to notice" that people are leaving, she told me. "But I think it's good, because more people showed up than there was room for at the table."

Lizzy Newsome in her new store, Kappa Toys (Alana Semuels)

Newsome's store is a colorful mix of quirky toys and paper dolls and bright colors that always seems busy. International tourists from the Strip and locals in Las Vegas have come to check it out, she said, and even to spend money. The big spenders who have started coming back to Las Vegas are one reason that Hsieh's retail projects may continue to thrive, even if his tech investments don't.

“A toy store is going to succeed if the toy store is good—the community doesn’t really attach us to the Downtown Project,” she said. “If this project is going to succeed, it’s more about Las Vegas than it is about Tony and the tech scene.”

If people in Las Vegas stop spending money, though, it’s another story. The first endeavor to revitalize downtown Las Vegas dried up during the Great Recession, after all. If the tech industry doesn't take off in Vegas, then this downtown project could be just as dependent as the last one on residents and tourists in Nevada continuing to spend.