Acquired - The Amazon IPO with original Amazon Board Member Tom Alberg

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2:31Welcome to episode 28 of Acquired, the podcast where we talk about technology acquisitions and IPOs. I'm Ben Gilbert, I'm David Rosenthal, and we are your hosts. Today's episode is on the Amazon IPO, and we have an incredibly special guest with us today, Tom Alberg.

2:55So Tom, we know very well because he was one of the co-founders of Madrona, which actually brought Ben and me together. And none of us would be here if it weren't for Tom. But in addition to being co-founder of Madrona, he has had another very special role over the last 20 plus years, which is board member of Amazon.com. And Tom was the first investor and the first and I guess other than Jeff, longest serving board member of Amazon. Right. So we thought it would be fun. We will get through the whole IPO story here, but to read Tom's bio from the S1 that Amazon filed in advance of going public. So Mr. Alberg.

3:41has been a director of the company, Amazon, since June 1996. Mr. Alberg has been a principal in Madrona Investment Group LLC, a, quote, private merchant banking firm since January 1996. From April 91 to October 95, he was president and director of Lin Broadcasting Corporation. And from July 1990 to October 1995, he was executive vice president of McCaw Cellular Communications.

4:08Both companies were providers of cellular telephone services and are now part of AT&T Corp. Prior to 1990, Mr. Alborg was a partner at the law firm of Perkins Kui, where he also served as chairman of the firm's executive committee. He is also a director of active voice corporation, Emeritus Corporation, Mosaic's Inc. Teledesic Corporation, and Visio Corporation. Mr. Alborg received his BA from Harvard University and his JD from Columbia Law School.

4:37So are any of those other companies still in business except for Amazon? No, I think, well, Vizio was acquired for good price by Microsoft, think over a billion dollars. But you also left out, for example, that I learned the multiplication tables in third grade and probably was class president in fifth grade. I mean, how do you miss these things? At Ballad High School, right? Right, right.

5:02Once again thanks to Tom for joining us, we're super honored to have him on the show. Let's start with the Amazon story, so I expect most listeners are familiar with.

5:12the lore of how Amazon came to be, but we'll retell it briefly here leading up to the IPO and ask Tom some fun questions along the way. So Amazon was founded in the summer of 1994, but actually started the idea a little bit before that when Jeff Bezos was a vice president at the hedge fund DE Shaw and company in New York. And David Shaw, the founder of DE Shaw, assigned Jeff to think about Business opportunities enabled by this new thing called the Internet.

5:43And Jeff went off and did a bunch of research. And as legend has it, he came across this one report about the growth of the internet that projected that it would grow 2300% annually for the next, you know, decade or so. And he kind of read that and decided, that's it. I got to be a part of this. I don't want to miss this boat. So he and his wife, Mackenzie, who he also worked with at D Shaw, they quit their jobs and they rode trip to cross country to the West Coast with no particular destination in mind other than starting a company at the end of it. Jeff writes the business plan for what would become Amazon along the way, and they end up here in Seattle, where they start Amazon on July 5th, 1994 in a garage in Bellevue. Speaking later about this journey, Jeff,

6:35would come to talk a bunch about what he terms the regret minimization framework. And this is a quote of, there's a great piece in Wired Magazine, I think from 1999 interviewing Jeff and asked him about why he decided to leave and start Amazon. He said, when I'm 80, am I going to regret leaving Wall Street? No. Will I regret missing a chance to be here at the beginning of the internet? Yes.

7:01So even in those early days, Jeff's kind of long-term thinking is evident there, and I'm curious for Tom. Is there a great minimization framework, something that Jeff talks about in the context of Amazon? What's your experience with that pin? Well, Jeff is a, yeah, he's a big picture, long-term thinker. So I don't think we've really focused so much on that. I mean, I think it was important for him in terms of that decision.

7:28but maybe it underlies a lot of his feeling on let's try things and we can only regret that we didn't try something we can never regret that we tried something even if it fails so very much in the mode of failure is okay not trying things is not okay awesome and along those lines thinking about the origin of the idea for Amazon dot com as I was reading the everything store it says that Jeff and David were on a walk through Central Park when when Jeff told him he was gonna leave and and David saw the founder of D.E. Shaw who Jeff worked for yes thank you David and it occurred to me not me although that would have been awesome it occurred to me you know the intellectual property and all this original research that had been done for Amazon would have been done at D.E. Shaw

8:21What did that look like and was that ever sort of a concern that D.E. Shaw would come back later with any sort of claim to the idea for Amazon.com? Yeah, well, Jeff had signed a non-compete and a non-solicitation agreement. And I don't remember actually worrying about the non-compete, which in retrospect is kind of interesting. But, and actually, Shaw did start a couple of early internet companies that Jeff was not a part of.

8:50They even had a voicemail, not a voicemail, but an email company that developed and then went public in the late 90s and merged with somebody. But he did, we did talk about, and Jeff paid strict attention to the non-solicitation of employees, and it was a two-year limit. And so, Jeff, you know, there were people at least one person who really wanted to desperately come with Jeff and really was Jeff Holden? No, so Jeff Holden, well Jeff Holden might have been that might have been that Jeff Holden Jeff was at DE Shock and I mean the story is that Jeff is now I think SVP of product at Uber. Yes. I think so. Yeah, Jeff has had an interesting holden. Is that an interesting career? And we once looked at investing Madonna at a company he had started the valuation was only about

9:45pre-money at $80 million or something. So we passed on that one. But the story is that when the two years expired, Jeff Bezos immediately called Jeff Holden and said, pack your bags and come to Seattle, which he did. And then several other people from D.E. Shoff followed. So in the early days of the company before It was obvious Amazon was doing well and could recruit all these former co-workers of Jeff's from D. Shaw They spend a whole year actually building the site so from the summer of 94 till the summer of 95 They build the site and then they launch Amazon.com almost exactly a year later in July 1995 and along the way they raise Amazon raises its first seed investment and Tom you were

10:40The first led that first round of angels that invested in Amazon. How did that come together? How did you meet Jeff and end up deciding to do this? Well, the short part of the story is that Jeff was out raising that first million dollars and began in kind of early 1995 and he was calling on people and a lawyer friend of mine, older lawyer called me and said his investment group. He had a little angel investment group.

11:10that they had met with Jeff, and they didn't really understand this new internet thing. And would I meet with Jeff and give them advice as to whether this was for real. And your background was in the cellular industry. Yeah, I was at that time wrapping up selling my car cellular and limb broadcasting to AT&T. But I did know something about the internet, but this was very beginning to know. Netscape went public, I think, in September.

11:38that fall of 95, and three of the key employees at McCoy had been recruited by Netscape, the president, the CFO, and the general counsel. So I had, you know, I was intrigued by it, but anyway, but, you know, you never always say, no, I don't know anything about it, you say, sure. And it sounds like a very Bezos-like approach to things. Yeah, well it's a good thing I said, sure.

12:04The anyway, Jeff then called me and I met with him and he laid out what he was planning to do. And the company, the website hadn't launched at this point, right? No, it was like May of 95 and the website launching in July. And so I was impressed by Jeff to say that I foresaw what Amazon would going to become would be not true. I don't think anybody including Jeff Brighton fully I'm sure he did not foresee what it became. I mean, he was excited about the growth of the internet. He had done a lot of research. He had focused on books because it had this ability to have this enormous catalog of books that no single bookstore could afford to carry. And so I reported back to my friend and said, I think it's for real. Well, you know, it's very risky, but

12:58and Jeff is for real. He's obviously a smart guy. He's very passionate about it. And so then my friend who'd referred it to me a couple weeks later, he called me back and he said, well, we called Jeff then after we talked to you and we told him that the $6 million pre-money valuation was too high and asked him to lower it to 5 million and he was unwilling to do it. Oh my God. So for years after we passed. So he passed. So years afterwards and I really a wonderful, wonderful guy.

13:27years afterward he would give me a hard time. So the point of it is, it took Jeff almost 12 months. He didn't close until December of 95, this million dollars. Part of it came from his family and lots of people passed on it. And which is not surprising. And there were a couple of kind of small venture firms at that time in Seattle. They passed on it was too risky.

13:56I mean, they're mine and they had a lot of risk. So Tom, you've seen thousands of start-up pitches and met with countless entrepreneurs over the years. Was Jeff, like, like, head and shoulders above any other pitch? Or was this like super different? Or was it like, yeah, you know, I meet with a lot of really talented people with great ideas and some work at some don't. Yeah. Yeah. No, I think, you know, you're looking back. It's a little hard, but I don't think he stood out as the only great entrepreneur I ever met.

14:25but certainly in the top 20 or 10%. But it was a combination, like a lot of venture, we tend to think the person is very important, but also what they're doing. It's not always exactly the business plan and the financial model that's important. It's often, are they in the right kind of technology in the right area? Because you could come up with lots of reasons why.

14:51This was not going to succeed. But the internet was growing. Some commerce was probably going to work at 23, 100% a year, apparently. It strikes me with one of the things we talk about. There's a lot on this show about the importance of the market and targeting large markets. It strikes me.

15:10reading Jeff's early writing about Amazon and in particular which will get to later the first letter to shareholders after they went public. He really focuses on the market and and illustrates how large the market is even even for just books but then everything Amazon expanded into is and when you're operating in a large market a lot can still go wrong and can go wrong and you'll still be successful. So that was 1995 and when the website finally launched in the summer.

15:40It was, it's funny, you know, I mean, we work with Madrona, Tom, many, many startups and Ben and me several as well. It actually wasn't overnight success. when by the this is actually tom a quote from you in that same wired article uh quote by the second or third week there was six thousand or ten thousand dollars in sales and by the end of september they just launched in july amazon was doing twenty thousand dollars in revenue a week it was in this is tom it was clear there was a trend here yeah understatement of the century As that became clear, later into 1995 and 1996, lots of VC firms came calling. And Amazon and Jeff eventually decided to raise a larger venture around that Kleiner Perkins led in 1996 and John Doar joined the board. How did that come together? Well, you know, Jeff had formed a small advisory board of himself and three other Seattle

16:45investors including myself and so this was not there wasn't a formal company board at the point the formal company board was Jeff and but he wasn't ready for a board but he was ready for an advisory board so so we would talk about you know like a board in the sense of you know what do we need to do you know it's growing very fast we got to improve the website we need to do you know other things and so it's been coming clear that it was growing fast that it was going to take more money than the million dollars, partly just to satisfy growth. And venture capital firms from around the country were calling. And so I came home one night after work at six o'clock or something and my wife said, you know some guy named John Dore. Well, actually I do. And I had an impact on some of them.

17:40When I was on the visual board, one of his partners was on that board. And I guess a couple of different ways I had met John. And so she says, well, he calls every 15 minutes. And he needs to talk to you now. That's a very strange one of John's great strengths with his persistence. Tells you something about how to sell yourself, show your interest. A critical trait for his successful venture capital. We don't always follow that enough probably.

18:09And so I talked to John and he said, well, I'm going to meet with Jeff. I really want to be in this deal. I hope you can help me, et cetera. And so that was sort of partly the introduction. So they were really eager. Another firm that was very eager was General Atlantic, which is an East Coast firm. Yep. And I kind of went interesting point out of it, I think, is that there was some negotiation on price. And both firms were eager, both were outstanding firms.

18:37General Atlantic proposed a complicated pricing because we're starting to talk you know 80 million dollar pre-money and that was although that era started to get hot it was you know reasonably high pre-money for a first venture round and But they proposed sort of a complicated thing. It would be you know 90 million dollar pre-money If it went public but if it didn't go public within two years at a certain valuation then it was you know 50 million dollars and Kleiner came in was sort of like a straight 60 million at some point. It's a little bit lower than the upside and I think I think we all kind of favored Kleiner Perkins anyway, but picked Kleiner Perkins partly though on the pricing complication So when that round closed is that when the formal board of directors was established with you and John and Jeff yeah, yeah

19:27Yeah, and a little bit of story there that I think come out before, but, um, uh, Clienter Perkins, Jeff, uh, John actually said, well, I love you, but I'm so busy. I'm on all these other boards. Um, he was on the Netscape board. I think at that time, right, right. And I really don't have time. And so, but, but here I've got a great partner here that'll be on the board and Jeff, uh, sort of said, well, that's, I'm sorry, you know, do bad sort of thing and talk to us and, and, uh, we said, or, Well, why don't you just tell them that Kleiner can only invest if John comes on the board? So Jeff, of course, did and John joined the board. So yeah, which was good for Amazon and good for Kleiner and John, obviously. Yeah, I'm curious on that. So in the everything store talks about how I don't know how much of this is causal, but after that Kleiner invested and John joined the

20:25the board that Jeff kind of adopted as a mantra, get big fast. How did that come together? And in truth, I mean, Amazon did get very big, very fast. Was that really, was that associated with investment? What drove that mindset change? I think part of it just came from the fact that we were growing fast. The original business plan back when he was raising the million dollars was It had kind of a moderate growth and a fast growth but nothing like what he was achieving and The plan actually said he would break even in year two And again, it's for the one unfortunately that didn't happen. He mentored at year 20 right and so but it was growing fast so I and Jeff also had one of his sort of thesis is sometimes there's In launching a new business. There's a land rush. You want to be first and get the lead get into the lead

21:22and stay there. And other times, and this is true in launching new projects on Amazon. Sometimes he feels there's a land rush and sometimes not. And so you really double down. And then the financial markets were clearly willing. I mean, we were in a high cost. Already the financial markets were bidding up other companies. And so he realized that he could raise a lot of money. And so let's grow fast. And we had the specter of of Barnes and Noble sort of saying they're going to get in the internet. So there was a reason then to really step on the accelerator. And you and Jeff did. So in 1995, which is the first half year of operations, Amazon did about 500,000 in revenue.

22:11and then in 1996, and it was the summer when Cliner invested. So only half a year with this extra capital to grow, Amazon did just a hair under 16 million in revenue, which is, what's that? That's a large amount of growth. It's so large, I can't even calculate it in my brain. Even today, we don't see companies do that. Not in the first year.

22:39And at this point, we were still in the era of Amazon.com was only a bookstore. When Jeff was putting together kind of the pitch deck for that $60 million round and showing around, was there any inkling that it was going to be more than books at this point? Did they start to foreshadow those other categories? Jeff in those early years was very focused on books. I mean, he declined to even talk about other things for the first two or three years. And I think that was including through the IPO, as I remember. And partly, let's do books well. And books is big. But other people were starting to ask and talk about, well, how about other products. And I suspect Jeff was thinking about that. But it was good, I think, in the beginning, just let's get this one right. And I can't remember when, but it was probably 98 or so that really

23:35launch the music and start to launch some other things and movies. So at the end of 96, just on 16 million in revenue, Amazon hires Joy Covey as CFO who plays a central role in the everything store. And the company makes the decision and the board makes the decision that they wanted to prepare for an IPO and go public in 1997, which so at this point we are two years into the life of Amazon as a company. One year into it being a publicly available website. You've talked a little bit about the financial markets being open, but how did those discussions? I mean, the board was you and John Doar and Jeff. Did Jeff come to you and say, hey, I think we're ready to go public? Well, I think pretty quickly investment bankers were even calling. I mean, it's once a...

24:32Something starts to get hot, you know whether there's substance in these companies or not There's sort of an investment banker and that was particularly true in the 95 to 2000 euro You know people are going public and being worth $30 billion and really didn't have much It didn't quite happen that way with Amazon because even though there was interest and I think one of one of Jeff's motivations I think the idea that we could raise money at Hopefully good valuations and then use that money to grow further was attractive. He also felt that because it was kind of a small, relatively unknown retail company that it would help the brand to get better known. And you know, I think that's true on some consumer-oriented companies. It actually can be true even on enterprise startups. We have one imping that went public this year, and they were not.

25:31widely known among CEOs. Everybody at the CIO knew them, but once you get public, you start to get picked up more on the Wall Street Journal than the New York Times. Certainly happened to Amazon after it went public. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year, an audit or a static PDF, then everyone would not, and you're done.

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27:04Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get a thousand dollars off of Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for a thousand dollars off and just tell them that Ben and David sent you. What was the Preparation process like I know now I'm in particular. I'm curious so the lead left Bank on the Amazon IPO was Deutsche Bank not Goldman Sachs or Morgan Stanley or we covered the Facebook IPO a few episodes ago and

27:50talked about the the jockeying between the two of those firms for the Facebook IPO. These are the the gold plated Wall Street firms that everybody wants one of them to be their their lead book runner for for the IPO. But Amazon went with Deutsche Bank and in particular the lead banker Frank Frank Quattrone and the lead analyst Bill Gurley who obviously is now partner at partner at benchmark. How did how did that relationship come together?

28:16If you've met and know Quattrone and Gurley, the answer is Quattrone and Gurley. And, you know, a broader answer is, you know, I think Jeff always had the view and we had the view that big name companies aren't always the best, you know, Goldman and, where it's only, have been the top two then and today. And there's a lot of merit in going with them.

28:45It didn't mean that others weren't as good or potentially better. And often it is that people directly working the deal. And so I think they made a good impression. And we thought they could do the job. But there's a great story told in the everything story. After the IPO, they organized a retreat in Hawaii, right? And Mexico, I think. Oh, Mexico. That's right. I think it was Cabo.

29:14and they had an associate working on the deal who was Jeff Blackburn and Blackburn came along on this retreat and I'm sure had interacted with Jeff, there's so many Jeffs at Amazon, with Bezos and the company and the board beforehand, but the net of that was that Blackburn ended up joining Amazon and they stole the company today and member of the senior team there. Right, one of the top executives.

29:42Yeah, so one of the biggest things that people who've studied Amazon look at now and is quite well known is their ability to spin the flywheel, to add fuel at any given point and increase the momentum of other parts of the businesses in a very almost perpetual motion way. So that superior selection drives a better customer experience which increases more traffic which brings more sellers to marketplace and on and on and on.

30:10which lowers prices and increases selection. It's a recursive loop. This early in the company, before the IPO, was this something that was frequently talked about? Was this a thing on investors' minds when they were thinking about investing in the IPO? The actual flywheel concept developed in 2001 or 2002 rose out of a board meeting.

30:40meeting with an outside consultant. But some of the basis of that, I mean, Jeff from the very beginning was very focused on customer experience. And you know, and he talked in the meeting with me about we're going to have the world's best customer experience. And it was hard to do in those days because the web wasn't very good. We, you know, when we launched it was a black and white website. There was no publication date on the book. So if you wanted to buy a travel book, you didn't know if it was published 20 years ago or six months ago. And on a travel book, it's very important. But nonetheless, it was like it was genetic that customer experience. And so how do you do that? Well, prices inventory. And so it was in the background, certainly, and focused some of those elements.

31:35The Flywheel metaphor became useful later, I think. Hearing you talk about that had been one as long time listeners of this show know we are great admirers of Ben Thompson and his aggregation theory. But one of the core tenets of that is that superior customer experience is win in a world where you're accessible customer base is infinite and distribution costs are low, which is the internet. And really interesting here that even in those early days when the internet was so poorly understood by so many people, Jeff got that at his core that providing the superior customer experience would lead to winning the market. And not all companies get that. I mean, partly they're focused on short-term, partly how to squeeze another two cents out of the customer.

32:29We cut out this product and we saved money so all of this happens Quattrone and Gurley win the business Lead the IPO and on May 15th 1997 so less than three years after the company was founded and less than two years after the product launch I mean we were talking last week about how Snapchat is to be lauded for going public having the courage to go public courage four years after company founding. This was less than three years Amazon prices its IPO at $18 a share raises $54 million at an initial market cap of $438 million which is thinking back today we'll wrap up at the end of the show with where the market cap is today but

33:16It trades up on the first day, closes at $23.50, but then for the first couple of months, it actually trades down. And it's not until the company reports it's Q2 revenue numbers later that summer that the shares, when they report that they did 28 million in revenue in Q2 of 1997, which was much more than Q1 and more than they did in all of 1996, then the shares rise again.

33:45What was it like in those first couple months after the company went public and the stock traded down? Yeah, you're right. It didn't have this enormous pop at the beginning. And yeah, I think by, you know, I vividly remember some of this, that it was pretty flat for until those earnings release came out. And even by the end of the second quarter, so late June, I think it was. So the equivalent to today, so if you, there's been three or four splits, which are equivalent for 12 for one. So if you divide 18 by 12, you get to $1.50. Yep. And so it was trading about $1.50 in late June. And then just a couple of other key points, because you can do this endlessly. But by the end of the year, it was like $5. And then it went to 100 over three years or so in those in today's numbers. And then the stock split multiple times after that.

34:44But by 2001, when you had the recession and all the crashes, it was back down to like six dollars. So there were moments when you could have bought in a good prices and everybody, you know, it shows partly that the market is not perfect at valuation. But on the other hand, you know, the country was in a recession by 2001 and Amazon is a retailer. And it was losing a lot of money. And many people were predicting even then that it was going to die.

35:13But yeah, it's kind of fascinating to go back over those numbers. Oh, yeah, I bet one of the things we talk about a lot on this show is we try to assess whether an acquisition or an IPO was a good move and you know how successful was it and one of the measures that we we use for that with IPOs is what going public enabled that company to do that they would not otherwise have been able to do. So what in the near term those next few years after the IPO, did they plow that new influx of capital into? Well, I think Amazon has been rightly known for not making any money and being willing to invest and to the extent that the financial markets allow you to.

36:03And so I think if it had been in the hands of let's say an acquiring party, you wouldn't have seen this kind of growth and then innovation and expansion. So Jeff has had a unique ability to think long-term and make it clear he's thinking long-term so that the investors understand that this is a long-term investment and he likes to say that you get the investors you ask for me meeting that if you focus on you know two cents more profit per quarter then you get investors who focus on that and if you you know takes you a while I think to get the the right kind of investors but if if you say long-term cash flow is how we measure the business pretty soon you get investors who are willing to to invest on that basis and I mean it's possible if you don't grow the

37:02weren't going to like your message itself, but you end up with fewer short-term investors and more long-term. I think that's helped Amazon a lot. I'm super curious on this. We were chatting before a little bit before the show, and this is the perfect place in the story too. So at the end of 1997, Amazon wraps up the year with 148 million in revenue, up from 16 the year before.

37:30Incredible growth but I think to my mind the most incredible thing that happens at the end of 1997 is Jeff publishes his first annual letter to shareholders So the company's been public for seven or eight months at this point and Jeff writes this this amazing letter that is included in the annual report and he's included every year since with his then current year letter as well and the document is a Masterpiece of long-term thinking. How did that document come together? Did Jeff just walk into a board meeting one day and say, hey, I think I'm gonna write a letter to all of our shareholders. Well, I wasn't, you know, I didn't help him write it. Unfortunately, I wish I was a co-author, but I think, you know, one of the key people in this early days was this Joy Covey, who had been recruited as the CFO and thinking back a little bit on that when

38:26We started talking about going public. John Dora said, well, I'm going to vote against going public unless you bring in some more senior management. You can't go public with you and a couple of technical people. Wow. And so I mean, it's been a rule that sometimes we violate, but it's a very good, I think, rule that you need. Being private is different than going public. Even if you're growing pretty well, you need a really first-class CFO. You need some more marketing power.

38:55It's when David Rischer was recruited for Microsoft who was a very important strong Senior executive in those days. We brought in hired some more Rick Delzel all that he he was actually a Walmart and Jeff started trying to recruit him in January of 97 before the IPO and didn't get him until after the IPO but the But so and I think Jeff wasn't reluctant on that either but it was really John a lot of ways saying you've got to have a stronger bigger team to go public and I think it's a good good lesson for for lots of people so joy was and she also really joy was unusual she was very smart she hadn't graduated from high school she ended up graduating from Harvard Business School she came in second in the nation on the national accounting

39:50Because I have so clearly she was smart and somehow yeah, and she all she had done in some ways She'd taken she'd been CFO of a small company and the East Coast had gone public I believe she was in her early 30s when she joined very young But you know and Jeff was interview Jeff's a very tough interviewer in the sense that you know, he he will interview a whole bunch of people until he finds somebody that he likes and thinks can do the job he talks about you know setting the bar very high and He had a great lunch with her. He was impressed with her. And she's very smart. Nicely aggressive, personable. And so she really drove the IPO in a lot of ways. And I like to say, you know, we set a record for the start of the IPO to the finish. But she was also involved in that letter, I think. Wow.

40:40Speaking of the IPO start to finish, was that hard for the company in an era where it had been doing so much PR and so much marketing and Jeff had been doing all these public appearances to endure that quiet period? Yeah, I think yeah, I mean it was an era when yes the company was starting to get a lot of attention and I don't know that the quiet period made a lot of difference. We did get some criticism then and even today on How much we disclose beyond what the securities laws in New York you know the NASDAQ requires that you know you disclose everything you have to but there's always this sort of area of well what's the cost of a customer and how many customers do you have or how fast is books growing versus video and Amazon has always felt that that's proprietary

41:40they don't want to let their customers know. They also don't want people focusing on what are in some ways short-term small things and it'll work out in the long-term. I think maybe bricks and mortar retailers, do they release monthly sales numbers or something, you at least see them? Yeah, same store, month or month round. Right, right. Well, you know, that's an example then of something. And so there's always been a little bit of tension with the analyst wanting more and feeling Well, it's only going to help our competitors. So I think that was going on even then. It was sort of like, oh, who are you to tell us these things? Well, it's interesting in thinking about company creation from the earliest stages. You get so focused on that cost to acquire a customer number and making that go down and increasing your lifetime customer value.

42:28In Amazon's life as a public company, they're so reserved about releasing that information. Have you ever experienced in other private companies, someone who felt that that was proprietary, and that was not something they would divulge in their pitch decks or anything like that? Yeah, I don't know about that specific piece. I mean, I do think sometimes it also comes up. Well, another one for some of our companies that have gone public has been backlogged.

42:57And backlog off and if some companies have backlog in some don't in different ways, but And that wasn't really an issue with Amazon because it was sort of instantaneous sales from any any any day, but a lot of companies don't want to disclose it because it's misleading sometimes and maybe it tells things that others Yeah, and so I think a lot of companies refuse to do that and analysts would love to have it and it also relates to predicting a range for next quarter or next year, some of our companies will give you next year's general expectation and some won't. Yeah, I think there's a lot of variation in that. So one more, we're now post IPO and we'll wrap up the IPO story in a minute with some fun stats but one topic that happened a couple of years later that I want to ask you about Tom is

43:56In 1999 so two years after the IPO Amazon did a convertible debt offering and raised a billion and a quarter dollars in the debt markets I'm curious that and then that ended up being I believe the last money into the company through the internet bubble How getting that large capitalization at that point How did that help the company survive the crash that came thereafter? How did it dig itself out of you mentioned the stock price went back down to five dollars at that point? Yeah, so It was part of the You know money was available. We're growing rapidly. Let's take advantage of the fact that and the interest rates I believe it was it was four and three quarters I believe are right around there which today

44:50It's sort of where maybe interest rates are but you know given the 20 year history that was those were low low interest rates and I think we ended up we did a two or three debt deals totally in a couple of maybe two billion dollars So on the one hand it did give us money to grow You know sometimes for companies having a lot of money lead to bad habits and just You know you acquire maybe some companies you wouldn't have acquired you know that our marginal or you over build and so forth. And so Amazon was increasingly losing money when that recession hit. And I don't think we were any better predicting recessions than anybody else or the peak of the market. But it was part of taking advantage of the fact that money was available. And then when the recession hit, and we're losing a lot of money, as I remember, some of those

45:51Some of the terms of some of these debts had no interest for several years and then interest kicked in and so we're facing You know more interest payments the debt holders that value the debt had gone down. There was a lot of pressure from the debt holders so really in 2001 or so The decision Jeff in the board so we need to cut cost and expenses and so You know, I think we barely did it in time in some ways we waited quite a while and because we're hoping you know kind of grow out of it and at some point said no we really need to and there were lots of Wall Street people calling it Amazon dot toast yeah all these famously you know you're gonna go out of business and so we cut costs and there was this famous saying cut the crap which meant

46:47you know they were they were shipping bags of dog food was a great example you know 20 pound dog of bag food and charging you know three dollars for shipping and losing a lot of money on well let's stop selling which is amazing because I now get dog food for my dog from Amazon well we cut it out for a while I assume Amazon has figured out how to do it profitably now again it was you know so it isn't blind all speed ahead it is you know when you need to you you cut back yeah It's interesting to think about the fact that the pressure from that debt holders forced cost-cutting which was ahead of the rest of companies who had to go to immediate emergency cost-cutting mode and most of them didn't make it. What other factors do you think played into Amazon making it through? Yeah, surviving the burst when so many other companies didn't.

47:39Well, you know, it's easy sometimes to look at these and think, you know, boy, they're just following crazy strategies, but I don't think that's true. It was true even that at Amazon. I mean, they were still focused on customers and they were getting a lot of orders. And the leverage was was a concern or the problem. But underlying economics were not bad.

48:08I think that helped a lot and having good management that stuck it out was able to focus down on cost controls. And they're great stories in the everything story about those years of the Amazon and the impact it had on the culture of it. And I think there was after those years, did Jeff put a moratorium on M&A because they had acquired so many companies.

48:34It wasn't working. Yeah. No, and Emerson's, you know, not famous for overspending on. That's one way to put it. Yeah. We've talked about that on this show. We won't ask you about it. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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50:24So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So to wrap up, this has been an incredible story and having Tom join us for it has been special. So today we're sitting here in December 2016.

50:48as of this morning, Amazon's market capitalization was $363 billion. Up, not quite 1,000X from the IPO when it was $438 million market cap, but a pretty healthy return. I was in, let's see, I was in middle school when Amazon IPO'd. So I really wish I'd put my bank account into Amazon at that point in time. I was buying Amazon products, but Anyway, an incredible journey and super cool to relive this moment in history. Let's move to talking about what would have happened otherwise. We touched on this a little bit, but had Amazon not gone public at that moment, where would we be? And I guess in particular, I'm curious.

51:41was a path of being acquired by somebody in those early days, did it ever come up where people seriously interested? And even if not, it sounds like it, you know, from our conversation so far and just knowing the lore of Jeff's mission that very unlikely that he wanted to sell to someone. Was it ever on the table to raise more private capital or wait it out longer? Yeah, I think, I mean, I think we could have, it would have been slower growth because you couldn't have afforded If you didn't have access to capital. And particularly when we began to broaden the product mix when we started, we would get an order for a book and then we would contact the distributor and have them ship us the book and then we'd reship it. So we didn't even really have inventory. And so once you start buying product,

52:39building warehouses to put it in. You do need capital. And so obtaining capital in different ways has been, yeah, very important for Amazon. And so I think it would have it would have constrained growth. I mean, I know a lot of companies these days, they want to stay private as long as they can. And it does depend on their business model. If you've got a business model that doesn't require a lot of capital, then that's that's a viable thing. But Amazon's business model, particularly as it grew, did require capital.

53:08I feel like Amazon exhaust all the options. Yeah, we did two kind of events relating to that financing and so forth. One, we had that famous meeting with Barnes and Noble back in pre-IPO where the regional brothers came to Seattle and wanted to do some kind of a joint deal with Amazon. They weren't actually offering to acquire, but they said, You can you can you can you can build our website and your own and you can we can both have websites or we could do it jointly we could jointly own it and Jeff I think rightly decided he didn't want to do that and Then they filed a lawsuit the day before or three days before the IPO because we were using the phrase the world's book store I mean there are lessons and all that for anybody who wanted to go public that year

54:06competitors sometimes do try to take it take it but really neither they nor anyone else really made a run at us and Partly because I think a lot of traditional companies always thought we were Overvalued and so that was actually a benefit now why nobody tried it when we were five dollars you know in 2001 That's when you know they should have tried. I'm not sure they would have succeeded but People, you know, the whole everybody becomes pessimistic the same time. Everybody becomes optimistic at this time. Well, it's interesting to, you know, Amazon, obviously, it would be a shocker if anybody would buy Amazon today. I seriously doubt that's even possible. But Amazon as an acquirer, it feels like it's kind of internalized those lessons. And I think about the, the Zappos acquisition during the 2008 recession, 2008, 2009, or the, or the quid Z acquisition.

55:03which both of which are written about extensively in the everything store. It almost feels like Jeff and the company taking that lesson to heart that when there are good businesses targeting large markets and for whatever reason are out of favor or in the midst of a recession, that's the time to go shopping. You don't always have that luxury but it would be nice if you could. Should we move on to tech teams? Let's do it. Ben, you want to kick it off?

55:28Sure. And this part of the show is where we analyze specifically looking at the IPO or acquisition that we're talking about, what tech themes can we extrapolate, either from a true technology perspective, or from an investment technology perspective.

55:43And there's a few here. I mean, I think the biggest one that we've already touched on is the flywheel. What I think about Amazon is just like the canonical colloquial example of how to build the world's best flywheel business where so many things feed into so many other things and fuel the business. But that wasn't really part of the IPO as Tom told us earlier that didn't really get formalized until 2001. So as we think about lessons learned from the IPO, it's a lot about Timing your timing company creation correctly around new waves. Yeah, I mean the internet was You have to believe that something is going to be a wave and be a little more contrarian than other people. I think that you know that's evidenced by the investors that passed in the the earliest stages Thinking that it was it was too risky

56:34But the big thing for me is, yeah, you have to believe wholeheartedly that you're on the precipice of a wave. And it's not possible to create, you know, top 10 in the world business without being on. Without being writing a massive wave. And I think for me, the flip side of that coin that I think really shines through in reading about and bringing this history of Amazon at that time is the long-term thinking that Jeff and the company in the board had even in those early days you know you have to if you believe you've identified a wave like that if it truly will become as big as you think it will it's going to take a long time you know decades you know Jeff is

57:22Famine you know in in I don't know if this was when he introduced the phrase but in that shareholder letter in 1997 said you know it's a day one for the internet and for Amazon and that that perspective Is is really rare to lots of people say they have it but To actually behave that way and make investments accordingly Is is quite impressive yet also you know applies even today when when you talk about new projects or initiatives at Amazon or other companies and I know Jeff likes to say it often takes 10 years to prove it and so you've got to make after you go public it's equally important to one continue to innovate don't stop innovating just because you feel like you're at the top of the mountain you're not going to survive if you don't keep innovating on the others maintain that long-term thinking the IPO gives you

58:15the opportunity to do that because you didn't have the money to do it. You have to somewhat ignore what the market is doing though. That's another important part after you go public, I think. Yeah, it's interesting you bring up Amazon today as a just an observation from the outside. One trend that I think we can observe from Amazon is actually doing corporate innovation well. I've like long held this belief that every company has Every really great company has one multi-billion dollar innovation in them and it's usually their founding insight and they build that business and they try desperately to build other ancillary businesses around it and some are bigger and some are smaller Sometimes you get a Microsoft that has an office and a windows in them, but usually Google right and you know, not that they aren't great businesses within Google but

59:02It's search. Yeah, I mean, it's it's 90% on Google display ads. That's that or search ads. That's most the revenue. So the thing that's amazing to observe in Amazon is an incredible DNA for experimentation and small teams and doing things in a lean way. And as we've observed, there's already been one business that's on the scale of Amazon's original retail business with AWS and it's bigger for us. Yeah, yeah. And it'll be fascinating to continue to watch the company and see what else.

59:30I wanted to ask quickly, it's obviously this happened much later than the IPO story, but about AWS, the listeners to our show might also listen to Ben Thompson and James Alors podcast exponent. And on one of their recent shows, they were talking about platform mentality and the importance of that.

59:53at Amazon and perhaps how much DNA came from Microsoft into Amazon in terms of thinking about AWS as a true platform and Ben and the show, they posit that this great Bill Gates quote that a platform is when other participants on top of you realize the vast majority of the economics in the industry and you only collect a small percentage. It's not a high margin Google-like business. How much thinking on that level happened at Amazon during that creation? Well, I don't think we thought we were following a Microsoft model, although I think from the beginning everybody in Amazon recognized that Microsoft had the potential on the cloud to be

1:00:48the most important competitor in that as they have become but the difference in a way was platforms were somewhat considered static in the sense that you built a platform and then every couple years you revised it or you set out new software or machines and internet was so much constant iteration and so I think that I mean I'm you know have never heard this from Jeff or others but seems to me with AWS the difference in a lot of ways why it's succeeded and been able to take this lead and keep it. Bartlers being first when others bail back but the constant iteration of AWS I mean it's like it's like revising your internet site you know they had 600 new features this year or something well the old days platforms didn't do that um they you know you came out with Windows 8 or 10

1:01:42But it was two or three years of massive coding. So I think the world even on that has changed a lot. Right, that's a great point. One other question before we move out of trends and themes is as you're looking at companies that are pitching Madonna for investment in recent history, what are things that you learned from Amazon being so successful that you sort of look for in other companies as a pattern matching based on Amazon. Well you know every company isn't going to go public and every company isn't in it probably for long term but I really do prefer founders who have a long term vision and at least in the beginning say they're going to stick with it and I think it's almost genetic though and you don't know it until it happens and there are lots of reasons to sell your company and your market didn't turn out quite what you thought but you're going to get a good price

1:02:40But what I really hope is that a founder, if he's writing the wave as you say or has other reasons, doesn't sell out when he could be in it for the long term. And again, it's somewhat personality. And I think I was very fortunate that Jeff was in this for long term. And so even at moments when he could have gone out and sold a company, it wasn't interesting. He wanted to build something for the long term. And when you think about a lot of the great companies, They've had founders who really wanted to accomplish something kind of beyond making the profit. We're going to change how people think about software. We're going to change how people do search. So I think, you know, that doesn't guarantee a successful company, but if only it was like that longer term, they're thinking about it and hopefully going to seek it. Cool. Thanks. So do we wrap up? Yeah, you want to grade it?

1:03:40Yeah, I mean this is, in some ways this is tough. I'm thinking of the end, the Coda to the Everything Store, which is Joy Covey and the letter that she wrote to Brad, an email that she wrote to Brad Stone, and she was one of the key sources for the book. After having done all the interviews and just reflecting back on her time in Amazon and then the experience of talking about the story, And she said, you know, Jeff and the company kind of like he knew in the very beginning exactly where he was going. And you know, so many ways we talk about on the show, so many startup stories and IPO stories and M&A stories are twists and turns and wild rides. And it feels inevitable that the company would have went public when it did, especially, you know, just hearing the story now.

1:04:32It was completely rational. It made sense. It gave the company the scale and the capital and the visibility that it needed to grow and outpace competitors. So in some ways, I mean, I guess I think I give it an A. I do give it an A, but this might be like the least controversial or thought-provoking decision we've had so far on this show for me.

1:04:56Yeah, it's funny. I was just thinking the same thing. There's actually not a lot of analysis that needs to go into it. I mean, you look at the scale of Amazon today and even the scale in the years shortly after the IPO. The only way that they could have achieved the outcome that they did was by going public. And I think that...

1:05:12One reason why we had so much trouble in that earlier section of what would have happened otherwise is it just it just doesn't seem like there was a lot of choice it feels like unnatural to think about on the alternative history here right and I you know as someone who works on early stage startups a lot of the time there's all these like Really vague questions around okay, we think we have an idea in the space and we're learning as we're going and you know, oh should we be a platform provider or should we be the you know business that's on top of it or should it all be combined or should We be a horizontal or a vertical business in this space and

1:05:50You even go back and forth long after you started the business, kind of playing both sides there. And it just doesn't seem like Amazon had any ambiguity over what the long-term vision of the company was, at least the retail business. So Tom, you know, hearing that, do you agree or are you laughing at us saying like, oh, easy, easy to say from this vantage point? Well, on the one hand, I don't think any of us really did.

1:06:19understand what would Amazon could become. But I think the fact that Jeff and several of us thought the internet was going to be a very big deal. And there was lots of potential. And who knew where this could take you. And I think that often happens with technology where you realize that something is going to be very big. But knowing the details, you know, that today AWS would have come out of that. There was no way to predict that or think about that in those days. But again, you know, that fits very well when you look back and say what the assets of Amazon were, but also what the technology development. So I think joy is right in the sense that it was in some ways inevitable. I'm just not sure we knew how inevitable it was. But it took, you know,

1:07:16Fabulous commitment to innovation and really hiring good people. So you should not neglect that for inevitability. Right. Okay. With that, Carvouts. And it will be interesting to think about how many of our Carvouts will be available on or some way serve to you by Amazon. I'm sure is Amazon's delivery there somewhere either. No matter what your Carvout is, Amazon is involved in it.

1:07:43That would be interesting to look back at our previous carveouts and figure out are there any that are not served to you either on AWS or be able to ship to you or we'd have to pick something that's basically not a physical good, a physical good that's on some very, very stubborn retailer that retails only on their own site. So I don't know. I mean, site that is not hosted on AWS or uses technologies as part of the site that are not hosted by it. It would practically be impossible. Yeah.

1:08:12I guess that's why Amazon deserves that A that we mentioned a few minutes ago. So my carve out is a band called The Album Leaf. I actually went to their show last night here in Seattle. I've been a long time fan of the band. They're some of the best working music that you can imagine. It's a lot of percussion. It's a lot of very like...

1:08:36mellow synth, but it's it's got a little of a punch to it. So it's kind of hard to describe, but check out the album leaf. They're they're on Spotify. I'm sure they're on Amazon and Great Band. Cool. That's I'll do it. I'll do a quick sidecar about them. Maybe think Jenny and I went to the Stevie Nick show this weekend in Seattle, and she was awesome. Her 24 karat gold tour. So great songs, you know, some of her hits, some of Fleetwood Max hits.

1:09:05But mostly, and what I enjoy the most was just songs, you know, from the voltage, she called them, that, you know, people don't know. Super great. Mike, official carve out, though, is there's a great article that we'll link to in the show notes. Very fun.

1:09:22There's a seminal paper in Harvard Business Review from the mid-90s right around when Amazon was being started by Brian Arthur and it's called Increasing Returns and the New World of Business and it's somewhat academic in topic but the thesis is that in an internet world where distribution costs are very low and you're accessible.

1:09:44market is everyone. You can actually, you know, this old economic theory of diminishing returns that the bigger you got, you know, the classic example is coffee.

1:09:55plantations, you know, the more coffee you produce, you're going to go to worse and worse, less and less fertile ground, and your coffee is going to get worse and worse, and so you get diminishing returns. On the internet, you actually get increasing returns, that the bigger you are, the bigger you get, and the better your customer experience becomes. And that contributes sort of the spiritual antecedent to aggregation theory and Amazon, and many of the things that have happened. Super fun thing that came out is...

1:10:21It turns out that Cormick McCarthy, the author, the novelist who wrote all the pretty horses and no country for old men and many other Pulitzer Prize winning author.

1:10:32Brian Arthur, the economist who wrote the article, he went to Cormac MacArthur for help writing this piece. And so Cormac, like basically dismantled the whole piece, they reassembled it together. And when you read it, it reads extremely cogently, not like a typical economic, you know, academic paper. And this story came out recently. Very fun. Oh, well, I should appropriately say that on my Amazon Christmas gift list.

1:10:59that actually I've given to my wife is the undoing project booked by Michael Lewis and I think a lot of us you know I like to read books on new technologies machine learning is you know popular subject around the drone and we've been reading books on things like that but here's one that's not particularly focused on numbers or technologies but a different kind of technology which is the psychology of people which again is super important in business so I think I look forward to reading it. Yeah, I haven't read it yet either, but I can't wait. Danny Conner, the book's about Danny Connerman and Amos Tversky Nobel Prize winners for basically developing behavioral economics and Daniel Connerman was and is now an emeritus professor at Princeton and Michael Lewis is a esteemed Princeton alum as well and I took Connerman's course when I was in school there and

1:11:55Sadly, it was the first year that he had retired and he didn't teach it, so somebody else did, but it took his course and had a huge impact on me and looking forward to reading the book. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

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1:13:06Great, well that's all we've got. If you aren't subscribed and want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined and you're a long time listener of the show or if you're new and just joining us for this episode, we would love, love, love a review on iTunes or if you share it on social media with your friends. So thanks so much for listening and have a great day. Thank you to Tom for joining us. Thank you. That was fun.