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Hey, acquired listeners. In the time between when we recorded this episode and now when we're releasing it long time Amazon board member and Madrona venture group founder Tom Alberg sadly passed away and we wanted to Instead of our usual funny cold opener here take a moment and dedicate this episode to Tom Tom had such a huge impact on David and my careers Tom also had such a huge impact on Seattle and really the whole technology ecosystem helping to build the law firm Perkins Kui and the telecommunications firms Western wireless and Makau cellular that really make up a large part of The infrastructure we all use for our phones today We also were lucky enough to have Tom on acquired and it was really wonderful getting to spend the time in person with him Gosh four or five years ago now David. Yeah Tom was the longest serving Amazon board member other than Jeff himself I believe 23 years was the lead independent director of the net a huge impact on the company and of course on us Well, I'll remember Tom he gave back in so many wonderful ways and this episode is dedicated to you Tom Alberg. Thank you Who got the truth? Is it you? Is it you? Is it you? Is it you? Is it you? Sit me down say it straight another story on the way Welcome to season 11 episode two of acquired the podcast about great technology companies and the stories and playbooks behind them I'm Ben Gilbert and I am the co-founder and managing director of Seattle based pioneer square labs and our venture fund PSL ventures and I'm David Rosenthal and I'm an angel investor based in San Francisco and we are your hosts Our story today is probably the single most interesting business of the past 30 years For the longest time David and I resisted doing an Amazon episode because it almost felt like a trope or that we needed to do something Maybe more unexpected we've tackled bits and pieces like our interview with former board member Tom Alberg in the Amazon IPO episode episode with Alfred Lynn on Zappos and of course by referencing Bezos's famous 2009 speech about outsourcing anything that does not make your beer tastes better over and over and over again over But we decided that no self-respecting technology business historians like ourselves could skip over this incredible tumultuous death-defying and ultimately very very successful story Today we'll be tackling Amazon dot com the website that sells books and now everything else on the worldwide web as You know Amazon is also one of the rare companies that built a completely separate and dominant business in Amazon web services And we'll save that for our next episode This story is for longtime students of Amazon and newcomers alike So while you may be familiar with Jeff's flywheel diagram or the themed door desks or the barren's article from the dot com bust Headlined Amazon dot bomb. I can tell you from staring at my mountain of notes that there are some details in here that I certainly didn't know and you may not have known either It's just such a good story too. Yeah I'm so glad we did Walmart first. We almost didn't because it just perfectly sets the stage for Amazon Oh, yeah, yeah, the big thing that we're doing today is we're gonna try and answer the question How did Amazon succeed to such an incredible degree that it has where so many of their dot com siblings burst into flames? So first we have some big big news here at acquired world HQ After seven years of beating back requests, we are finally launching a merch store We've been holding on to this bit for a while because we can think of no better episode to launch our internet storefront Then here on the Amazon episode So we're partnering with what I think is the single highest quality merchandise platform on the internet cotton bureau They make really nice stuff that I have tons of in my closet. We're launching with men's and women's t-shirts sweatshirts tanks and even onesies if you like David have a little one at home and If you decide to be first in this first wave of people to support the fashionable acquired merch You should tweet at us at acquired FM and we will retweet some of our favorites So the link is in the show notes or you can go to acquired dot FM slash store Well for our presenting sponsor this episode we have a company that we're very excited about Fundrise on the Walmart episode they broke some news right here on acquired about a fascinating new product called the Fundrise Innovation Fund this enables their customers to not only invest in real estate on the platform But also now private late-stage growth tech companies This is obviously interesting because that's not an asset class that retail investors previously had access to you Had to wait until the IPO and now they've democratized that and opened the asset class to lots and lots of people just like they funded fundrise It's self it is also great news for founders as well because Retail capital is a great source of capital if you are a late-stage private company So we're back here today with Ben Miller the CEO and co-founder of fundrise So Ben can you share some more info for listeners on the innovation fund? Thanks for having me guys snow wonder you guys like our story because in building fundrise we unintentionally created an alternative venture capital Which you know everybody has a love hate relationship with In 2012 we invented the idea of raising money for real estate on the internet and Within a few years we had 150 copycats 150 different companies trying to do what we were doing with a billion dollars of venture funding So then Roll forward eight years to now and all of those companies Basically gone out of business. So what happened? Do we have like a lot better strategy? Do we have better execution like I'm saying the main reason is that they were venture funded and we weren't Hmm and the venture funds ran their sort of standard playbook and basically ran those companies out of business So for a little provocative here So we took a like totally different path We didn't think we wanted to raise a traditional venture money. We spent my years trying to figure out how we could do something that's different One of our innovations is regulatory innovation and we work with the SEC on a lot of new ideas So we figured out a way to raise money from the public but stay private and Since then fundurizes raised a hundred and fifty five million dollars from the public But state as a private company So we figured out a way to do it and we did it at scale The innovations like a hybrid of being public and private it's more passive It's more aligned and it's lower cost because we don't have the 20% carried interest that we have to pay to venture funds Ben, what are the terms for investors on this fund? Fundrise doesn't take a carried interest. It's just 1.85% asset management for your year Which is much less than the 220 of a typical venture fund? We basically became one of the biggest real estate investors in the world We're today by deployment probably top 20 in the world. So We wondered basically okay, we're doing real estate. What's next? Could we do it for other tech companies like other private tech companies and So we went back to the SEC spent a couple years with them and Figure out how to do it and are launching the fund rise innovation fund Which is a registered fund that raises money from the public but invests in private tech companies It's going to be available to all US investors Anybody in the US can invest in it at $10 minimum right so totally democratizing access The hope is basically we get to disrupt venture capital the way we're disrupted real estate private equity We're launching the fund rise innovation fund at the bottom of the economic cycle And my experience is you can't disrupt a financial sector except for in a downturn Fascinating It's a crossover fund. So we'll own public and private tech. So if you go public We're not going to sell all your shares So we basically are a much more long-term investor because of the structure of the fund I think it's the future of venture capital. So we're the first dreaded consumer VC that allows the public to invest into private tech companies, but we won't be the last This is a mega trend and I'm a bet you that within five years the likes of entries in heroists Sequoia also launch funds just like this Fascinating. Well listeners if you are considering a growth round of capital if you're an entrepreneur Thinking in the next year. I'm going to raise a round you should definitely definitely explore raising some of it with the fund rise innovation fund Just shoot an email to not VC at fund rise.com That's no TVC at fund rise.com and if you're an individual looking for exposure to growth stage tech companies Especially in this new climate we are in you can go to fund rise.com slash innovation and our huge thanks to fund rise Well, after you finish this episode go check out the LP show by searching acquired LP show in the podcast player of your choice Our next episode will be an interview with Austin Federa who many many of you know from the acquired slack where he's been a member since 2016 Austin is at the Solana Foundation very deep in the world of web 3 and crypto and gave us a great great Primer on the world of web 3 today So check that out and if you want early access It's already live for paid acquired LPs at acquired.fm slash LP All right now without any further ado David onto our story and listeners this show is not investment advice David and I may have investments I certainly have investments certainly companies are discussed this time do your own research and this is for entertainment purposes only Oh, man Amazon was my not only my idea dinner pick at the arena show But has been like my favorite company and stock and number one position in my portfolio for at least 10 years now I think more than 10 years Incredible company. I had some conversation with you in maybe 2014 about How you basically owned Amazon stock by owning Seattle real estate and you were double-leung Amazon with your very concentrated holdings in the company and owning your house in Seattle That's you the only time I've ever sold any meaningful amount was to buy our first Seattle house because I needed the capital for the down payment and I figured I was like essentially getting a tracking staka on Amazon Yep, yep, yep All right, well we start in a very fun place today Which is the end of the most recent acquired episode on Walmart? And I realized I could have sworn that we said this on the episode But I went back and I read the transcript we didn't you tweeted about it but at the end of made in America Sam writes in 1992 literally as he lays dying Say him Walton writes at the end of the biography Could a Walmart type story still occur in this day and age? Of course Somewhere out there right now There's someone with good enough ideas to go all the way Providing that someone wants it badly enough to do what it takes Oh such a good quote and he was writing that in 1992 while Jeff Bezos was ideating on what ideas could work on the internet while working at DE Shaw Oh my god if he only knew it was like the profit speaking yes He was describing Reality in history as it was happening and he had no idea Amazing yeah Well speaking of books we have a big Thank you that we owe to Bradstown and the everything store Brad is just the best we've done episodes with Brad in the past the everything store is The canonical history of the first 20 years of Amazon for sure We actually talked to Brad the other week when we're preparing for this we had to it was both the question of like okay with Ten years or whatever it's been of history what else would you want to say that wasn't in the everything story and also give us some context around it No doubt in my mind it is one of the best Business books written of the last 20 years you know of the 2000s for sure. Oh, it's a thriller. Yeah, Brad actually said this when we were talking to him He's like there's two reasons to write a business book one is it's a thriller the other is it's a how-to manual and The everything story is both of those yep all right We jump From 1992 in Benville Arkansas to Albuquerque, New Mexico on January 12th 1964 Where one jeffery Preston Jorgensen is born many people listening especially if you've read Brad's book you know this story But it's pretty amazing When young jeffries mother became pregnant she was 16 His father Ted Jorgensen was 18 They went to the same high school in Albuquerque and they were dating at the time Turns out their fathers actually worked together and this is part of the story There was a very specific reason why both of their families lived in Albuquerque and that is because Both of their fathers worked together at At Sandia national laboratories, which for folks who don't know that laboratory was established I think because it played a huge part in the nuclear programs development for the United States So Los Alamos, New Mexico, which I think is like a hour and a half north of Albuquerque I think that's where the Manhattan Project happened and that's where the atomic bomb was developed After World War II though quite a while after World War II the government split the US nuclear program Into like research and that was Los Alamos and a bunch of other labs around the country and then actual like Management of the weapons So there's like nuclear research and nuclear energy and there was nuclear weapons so Sandia is the Organization developed by the government and it's actually a private operation now that manages nuclear weapons and so both Of Jeff Bezos's biological grandfathers worked there together and Jeff's mom Jackie her dad was named Lawrence Preston Geesey pop he went by pop Geesey He actually not only worked at Sandia He was the head of Sandia. Oh wow. He ran The US nuclear weapons program and before that he was one of the original members of DARPA Whoa It encourages the development of the arpanette the internet the DARPA challenge Obviously that was much after his time, but man you can't make this stuff up. That's crazy Yeah, so their kids managed to get pregnant in high school and Ted and Jackie decide to get married before the baby is born. What should they do? The marriage Doesn't last though. I mean it's not really set up for success here and when Jeff is about 18 months old They end up getting divorced and Jackie Jeff's mom takes the baby moves back in with her parents Because she's still only like 18 or 19 years old at this point Eventually a couple years later when Jeff is four Jackie remarries and moves in with her new husband who is a petroleum engineer for exon and Her new husband's name is Miguel and yell Bezos Perez today who goes by Mike Mike Bezos. Yep Jeff Bezos's adopted father and his story is incredible and actually Sort of touches our stories in a very small way. Huh Mike is from Cuba and and he was a student at a like elite private high school in Cuba when the revolution happened and castored took over and His parents were able to get him out and send him to Miami. Wasn't there some like ex-filtration program through the church for gift of youngsters? There was Mike was part of this so he gets shipped to Miami. Doesn't know anybody in America doesn't speak English He ends up from Miami getting shipped to Wilmington, Delaware where he lives in a group home and He attends Salizia in high school, which I don't that probably doesn't mean anything to you Because he didn't do high school and Wilmington like I did but I played sports against Sally's growing up And this is so awesome. He and Jackie last year just gave a 12 million dollar donation to Salizia And I'm which I think might be like the largest single donation to a Catholic high school in America Wow, Mike and Jackie must have really made some smart investment decisions at some point They're alive to be able to make that kind of investment. Oh We will get into it David how does every single episode have some tide of southeast Pennsylvania or Delaware? I know I think we're picking favorites here. We totally are So Mike is super smart. He quickly learns English and by the next year when he graduates from Salizia Adam he ends up getting a full scholarship to go to the University of Albuquerque to study engineering and while he's there he pays his living expenses You know work in his way through college by working at a local bank where he meets Jackie They fall in love they get married Mike adopts Jeff as his adopted son They go on to have two more children and when Mike graduates He gets the job with exon he would end up working his whole career at exon and becoming like a pretty senior executive Right very senior executive so he had some capital to invest a few years later That's we will get into and they move the family to Houston a mic store is just amazing B Bezos grew up his dad worked for exon like standard oil like There's the connection right and grew up in Houston around the space program I mean, we're not gonna get into blue origin on this episode But I think the last time we would have sort of talked about Jeff's space roots would have been I think on the Virgin Galactic episode when we were talking about the development of the ex prize and sets the college Organization for students for the I think it's exploration and development of Space something like that, but basically this college space club Jeff was the head of that club the president of the one and maybe the founder of it at Princeton And so there's this very clear through line from spending time During his childhood in Houston through that and obviously blorgin I didn't think about that Definitely pop Geese his grandfather has a big influence on Jeff which we'll talk about in one sec and introduces him to science fiction and space because he was involved in all that at DARPA But I didn't think about that. Yeah, Jeff grew up in Houston during the Apollo era. This was the heyday of NASA Yep, super cool. So Jeff goes to a monastery preschool in Houston and he gets put into a new Program for gifted young students in the Houston elementary school system. This is crazy So at the time there was a woman named Julie Ray who was writing a book about this whole new concept of like gifted streams in elementary school education and Houston is one of the kind of leading school systems that's doing this so she goes to the administration and she's like Hey, is there, you know a student that I could Shadow and like see how gifted education is working and they're like we have exactly The student for you Jeffrey Bezos. I mean there's a number of ways we could highlight how special Jeff was Even as a very very young child But this is a pretty darn good one He was the student chosen for the person writing the book on this type of special program in the school selected for special gifted programs I mean he was like one of one of one and he would go on to be Valetorian of many things in his life, but here's sort of a first sort of proxy for that Super cool. There's a quote in the book. So it's a written under he's a pseudonym. He's quote-unquote Tim in the book to protect an identity of a child who can't yet pick if they want publicity right Totally. I mean he's in elementary school. So there's this quote in there where Julie the author asks Tim and Jeff's teacher what grade level he's performing at so he may must be in like second or third grade at this point And the teacher says I really can't say except that there is probably no limit to what he can do given a little guidance foreshadowing so right around the time when the family moves to Houston pop retires from sandia and He and Jeff's grandmother move back to a big ranch in west Texas and by big ranch I mean a 24,000 acre ranch in west Texas that is 100 miles from the nearest retail outlet and starting at this point so Jeff's four when this happens Jeff spends every summer on the ranch living with his grandparents 100 miles from the nearest store and he's just hanging out with his grandparents That's pretty formative and in a number of ways one of which is that his grandpa Well, one he's remote and so you can't go by anything and you need to be unbelievably self-sufficient But like what an interesting playground for the mind being around his hyper intelligent grandfather and having sort of just a Nothing but time and space you know Brad writes about this in the book But and Jeff talks about this too like I think this is one of the most formative Experiences of the person that becomes Jeff Bezos Because for the months that he's there every summer they have to do everything like they build their own tools They perform their own veterinary work. There's a story about performing surgery on one of the bird dogs tails It's crazy. They're rebuilding Farm equipment when it breaks. How have we had we went 250 episodes without a bird dog? Give her coming up and now two episodes in a room to an eruption bird dogs. I know. I know Clearly there's a there's a connection. Yes great retailers growing up around bird dogs But yeah, like you said Ben It's not like he's just doing manual labor out in the countryside He's doing it with This guy who ran the nuclear weapons program for America Man, it's so hard to do a podcast about Amazon and Jeff Bezos now because The company and Jeff as a person are a symbol for so many different things to so many different people but I think one of the sort of Things that hit me when you know, of course I follow Jeff on on Instagram and you see him in sort of his cowboy boots with the blue origin rocket And I remember when I first saw those before really understanding his past I was like well, that's sort of disingenuous like tech billionaire guy throws on his cowboy boots and heads to west Texas And he's like acting like I'm one of the locals but like but he actually grew up doing on the farm. Yeah Yeah, the ranch in Van Horn Texas. I think it is now where all blue origins Uh operations are based like yeah, it's like it's there. That's why it's in west Texas And there's a lot of space pretty good place to launch rockets. There's literally space to launch Hey, oh, all right So when Jeff's a teenager for high school Exxon moves his dad to Florida first to Pensacola and then to Miami This is like you know, so cool little cap for this episode to Mike's story He comes back to Miami, you know all these years later As this big time executive at Exxon which I think was the largest company in America at that point in time had to be yeah He goes from like literally steps off the plane in Miami has nothing and now he brings his family back to Miami With so much so cool Jeff as you said graduates high school as valedictorian and like all great talented high school graduates goes on to Princeton I'm biased of course a few of his fellow Princetonians While he's in college studying really what they had how you say it that is yes. I'm a Princetonian. I see Or a tiger for being less you know pretentious here a couple of his fellow tigers while Jeff is studying computer science at Princeton Brook shields Michelle Obama And Jeff Wilkie is also there at the same time. I don't think they I don't think they were friends Jeff was a couple years behind But they were there at the same time Fascinating so when Jeff graduates from college in 1986 he does not go into finance right away He goes and works for a startup he works for this company called Fytel Which had been founded by a couple Columbia computer science professors and was developing like a very very early Network technology for high-speed trading applications. Huh. They were like tech for I don't know if it was exactly like Today all this stuff is co-located in data centers with the NASDAQ and the New York Stock Exchange But like kind of a precursor to that So he does that for two years and then in 1988 he's like all right like I'm you know working for this startup building infrastructure for this Then completely new discipline of finance of like quantitative trading and finance Those guys are customers are actually making a lot more money Maybe I should go work for them But it is pretty good. I mean great experience at that point in time Being around early networked computing was pretty beneficial to give him not just the sort of like basic understanding of how it works But also like what all the numbers mean like when I'm watching bits and bytes fly back and forth Or I'm looking at packet counts or I'm looking at what hardware can support what bandwidth What are the practical implications so that you can sort of feel the types of applications you could build Using infrastructure of the day the reason we're spending so much time on Jeff's early years and now we're gonna spend a lot of time on this chapter It's totally like one of these Steve Jobs things like you can't connect the dots looking forward But when you look back through Jeff's past Joy Cuffey who will talk about actually has like this quote that he gives to Brad's done like It's like a straight line, you know from birth to Jeff Bezos today like it makes total sense Well, it's really hard to cover Amazon as a business without it being a Jeff Bezos biography because in so many ways Amazon is an extension of Jeff Bezos's brain like it really is a company made in his image And that's kind of the case for a lot of these types of people like you look at Apple There's very much the case for Steve Jobs Also by the way an adopted son of immigrants. Yep. I've always just found that interesting But in some ways I'm thinking okay cool. Let's get to the Amazon story But even though it's called Amazon at least for a very long time call it its first decade It really is just Jeff Bezos at scale probably arguably for longer than that. I mean until recent times Yep, so in 1988 he leaves Fytel the startup and he goes to work actually in banking I believe almost surely I don't know for sure But I can't imagine he's not doing quantitative trading and finance like he's a technical guy He's a computer science graduate. He had been working in this sort of network operations for early stage quant finance That's probably what he's doing. So he goes to the investment bank bankers trust Which then through a series of mergers as always happens on Wall Street becomes part of Deutsche Bank Deutsche Bank's gonna come back up later in the episode. Yep. Yep. He's worked at startup. See you know computer science Like he's got this entrepreneurial kind of bug. So on the side He becomes friends with a guy named Halsey minor Which uh Listen to probably a bunch of bells are going off and they almost start a Start up together at this point in time the idea was it was gonna be a financial newsletter idea But they become buddies that doesn't work out But Halsey like right around this time right after that goes on to start CNET it's crazy the internet was so freaking small then And also like if you were to squint And describe CNET at a really high level. It's like distributing the written word over this budding world wide web Which is sort of what Amazon did yeah, ultimately it distributed them through an abstraction layer where you print the words on paper first And then you ship the paper but they would go on to start businesses riding the same wave Yep, and I think they remain friends for well certainly for a while if not still to this day And Bezos does always sort of chuckle at that where people would say wait you're starting this Business that's meant to take advantage of this new piece of technology And the new piece of technology is particularly good at distributing hypertext over a globally available network And the way that you're doing that is specifically not by putting the text in the browser Which can read the hypertext directly onto a screen right it does always chuckle about that But it is funny to this day You still can't really search books you google search something you're gonna get websites You're not gonna get books and despite Amazon and Google and everyone trying the book publishers have Sort of very physically DRM to these books such that you cannot Search them in a very digitally native internet way. Yeah, it's funny even today So in 1990 Jeff gets a fateful call from a headhunter Jeff's happy where he is he was thinking about starting this startup and convinces Jeff to go interview at a new firm financial firm that has been started just a couple years earlier called de shaw and Jeff I think unexpectedly Completely falls in love falls in love in many ways at the shop So some history on de shaw for folks who don't know I didn't know a lot of this. So the founder David e shaw Was a Stanford computer science PhD from the 80s who then went on to become a computer science professor at Columbia University I assume with some of the Professors who went on to go found fight tell that Jeff originally worked for yeah, he was like a serious is a serious Academic he's actually back in academia now. He won the Gordon Bell prize. David shaw is back in academia. Yeah Oh wow not at an institution, but he's a member of the National Academy of Engineering and the National Academy of Sciences like he's the real deal His stepfather when he was growing up was a finance professor at UCLA And so he'd always kind of been interested in finance but had studied computer science and was an academic in 1986 he left Columbia to join Morgan Stanley and then started de shaw in 1988 and I think his model for this was Jim Simon's who In 1982 started Renaissance technologies and rentek. I bet actually a lot of people listening don't know like I just said that name and a lot of people like oh What's that okay great what are these guys talking about it won't hit you as like oh right the firm that consistently produces the greatest returns of all time But they're not taking any more capital and so you can't get your capital in dude rentek and Simon's is unreal I'm pretty sure they are the best performing investors of all time full stop period We should do an episode on rentek if we can get any information. I mean that's the interesting thing about rentek is like It's a fortress so supposedly The core medallion fund which is now all private capital of rentek employees and Simon's himself like there's no outside investors Mm-hmm averaged a 66.1% annual return from 1988 to 2018 30 years what at 66% compounding nobody's ever beaten that we may need to go regrade our uh, Berkshire Hathaway episodes. Yes seriously seriously, but that was the inspiration for D.E. Shaw and D.E. Shaw has not performed that well But of hedge funds today that people can actually invest in like D.E. Shaw and a couple others Are the legacy of that right and while this was the business model of D.E. Shaw being a quant hedge fund They always resisted the idea that that's what defined them They very much thought of themselves as the sort of group of creative artisans who you know invested in businesses and started businesses and came up with new ideas and viewed the world through different lenses And sure this is how they make money, but desco or desco was so much more than that Totally, well, and I think this is what Jeff Falls in love with about the firm and about David. So Jeff joins He rises through the ranks super quickly. He becomes the fourth senior vice president at the firm So like highest level below David and I assume by far the youngest He's like in his mid to late 20s at this point He is like the future like the rising star at D.E. Shaw and he and David become super close Now there's not a lot written about this which you'll maybe see why in a second But like they were very close and I got to imagine that David kind of saw himself as like you know, I mentored Yeah, Jeff. Oh for sure. So Jeff loves it there. He's involved in recruiting bringing in all these super smart People of all disciplines into D.E. Shaw and the mo was kind of like we just want to find the smartest people in the world Doesn't matter if they know nothing about business and finance You know, it's kind of like bridge water today is kind of the inheritor of this like just bring them in here And we'll figure out stuff for them to do so a bunch of people who become really key early Amazon employees Jeff Holden I believe Bezos is involved in recruiting who would later of course join Amazon right around two years after its founding Amazing how that happens conspicuously close to two years exactly after Jeff left D.E. Shaw Yeah, but maybe like there's a non-competer or something non-solicit Nicholas love joy and Another Princeton grad who joined the firm McKenzie Scott Tuddle and that's what we were referring to of Jeff falling in in love at D.E. Shaw and more ways Than one cap Jeff and McKenzie would get married and I think technically McKenzie was the first Amazon employee Yes, it's interesting. I don't know technically in terms of like literally Was she the first person to become a W2 employee, but certainly she was already doing work I think particularly on accounting working with legal kind of setting up the operation to the business before Jeff hired Shell Capen who was the first engineer the first sort of full-time Higher other than he and McKenzie. Yeah, but McKenzie was like Definitely like an employee of the business doing work on the business. So Within D.E. Shaw kind of like you said they're this quant trading firm and like yeah, that's how they make their money But they view themselves as being kind of entrepreneurial and starting these other businesses and doing stuff And so David has Working on a bunch of this stuff the first project he leads is building out what they called the third market business And it was an idea that to create a sort of separate market from The exchanges where retail investors could trade without paying at that time You're paying a lot in commissions to your brokerage house. So super cool Which by the way this feels like it's probably the predecessor to dark pools. Oh I mean if they're making transactions off exchange and then batch shipping them to exchanges to get lower fees That is sort of the financial world that we live in today where lots of transactions happen off the exchange Then that's sort of the predecessor to payment for order flow. I mean they were at the early days of all this stuff From Robin Hood and Citadel and all that well, they definitely work because at the same time the internet is It's so early, you know, we're in like early, you know, mosaic Netscape days like 92 93 But David and Jeff, you know given their backgrounds and like David having done his PhD at Stanford They know all these people that are starting the internet and even based on himself I mean when he was I think in college He had used the internet when it was fully just command prompt based and there was no gooey It was just the very basic protocols and a unix command terminal and you can maybe tell net was around at that point But yeah, there was no worldwide web. Yes so david and Jeff get really excited about this and David kind of reassigns Jeff as one of the most senior people in the firm That the two of them are gonna work together to come up with business plans that they're gonna start Internet opportunities within D.E. Shaw so I think the first one that they do is a online Retail brokerage for financial trading like e-trade. It was a competitor e-trade And I don't know for sure, but I'm wondering if that maybe the third market business that Jeff was Working on might might have like transformed into this because it makes so much more sense over the internet Yeah, totally agree They also started Juneau which that became reasonably successful like I remember seeing commercials for it getting CDs for it And that was like really Email Juneau was one of the first free email services. That's right on the web And then they merged with net zero and became an ISP And an email provider Yeah, but it was started by Jeff and david within D.E. Shaw like both of these So like that's what they're doing during these years, you know I think that's like Jeff's main job is the two of them would meet every week. They would brainstorm ideas Jeff would then go off for the rest of the week and like Research you know the feasibility the ideas and then like work on them with employees within D.E. Shaw and then they launched them and they did this with a couple businesses And they were the only ones doing this. It's interesting how there were other people who observed Oh my god the internet and it was like okay cool like this is clearly the next technology wave like we had the PC What do we do with this thing and Microsoft is one that comes to mind? This is the rich Barton story with Expedia That's right a division of Microsoft looking at internet Potential businesses and saying how do we start them and of course? I think long time listeners will know that the way Expedia ended up happening is rich basically said Hey this online travel agency thing needs to happen if we keep it in Microsoft too long It's going to kill it nice pin it out brokering that deal D.E. Shaw I think was actually before Microsoft in realizing okay the internet's going to be huge by a handful of years But the thing that sort of led to the dot-comania was people realizing all at once. Oh my god the title wave is coming Yeah, they were ahead of the pack though for sure there were not many folks that were recognizing this at this point in time so They've done the Online trading thing the e-trade competitor that ended up getting acquired by Merrill Lynch They did Juneau And there you know brainstorming all these other ideas and One day they come up with an idea that they both get Pretty excited about and as Brad writes about in the book The name for the idea is The everything store which ends up being a pretty great name for a book So the concept was in one way Amazond.com exactly but There was also a pretty Fundamental difference in the idea at this point in time The idea was that you could use the internet to build a whole new intermediary layer Between consumers and manufacturers that would bypass traditional retail So you know the discounters Walmart came our you know sears all that physical stuff You're just gonna cut them all out and this kind of beautiful Internet business is gonna be just the kind of algorithmic matchmaker Between customers that want to buy stuff and Manufacturers who make stuff and that's sort of what Amazon is there's definitely this like well You know the internet is gonna change so much that Factories will just be able to sell right to consumers online and it's sort of like rounding away all the yeah Messy middle that we talked about on our episode with Jeremy from italic of like you've got the manufacturers You've got the product designers you've got the distributors you've got the brand then you've ultimately got retail And maybe you can own two parts of that but you're probably not gonna own all of it Yeah, it was like this sort of very Low-res picture of the way that retail landscape worked this totally wreaks of like 1999 era MBA business plan that like you know I'm gonna drop out of HBS and I've got this startup idea of business plan I'm gonna get it funded and go you know To their credit they were a few years ahead of this and like nobody knew at the time like nobody actually knew how the internet was gonna Play out yep, this seems maybe plausible, you know, and if it would work it would be beautiful, right? Like you wouldn't have to actually do anything You'd just sit in the middle and take a tax on transactions And so the idea was that the manufacturers would drop shift The orders directly to customers Oh, man right out of their factory which is totally their core competency. Yeah, totally like that's gonna work But importantly well Jeff is still at D.E. Shaw and sort of Regularly doing this ideating he starts to dive really deep on what categories could make sense for this as a starting place Yes, so the two of them they're both very excited about this as they should be Commerce pretty big market, huh? Yeah turns out like retail in the Americas Maybe other than US real estate maybe the biggest market in the world. Yeah auto I think and maybe food so they like you said Ben they they quickly realize Okay, if we're gonna do this you can't just start with the everything store you need to pick one category Build that build the consumer brand and you know the website and the traffic and then you can add categories over time on top of that So Jeff goes off you know during his weekly research activities and your researches and he's decides that books Are the ideal category for a few reasons? one they are Perfect commodities so like a paperback copy of book x Is a paperback copy of book x? Doesn't matter where you bought it how you bought it to the customer experience. It's Basically the same thing yep to There are only two major actual distributors of physical books in America There many publishers, but distributors who actually like have the inventory the books Ingram and Baker and Taylor and do you know where ingram is located? Oregon right? Yep roseberg Oregon a convenient One day drive or less half day drive from Seattle Although Jeff was not thinking about that at the time no not yet that'd be the next step So it's actually be pretty easy to enter this market because all you need to do is establish accounts with Ingram and Baker and Taylor and then you get the vast majority of the commercial market for commercial books You have access to the inventory Yep, there were a few other things too like especially books are great because when you compare them, you know with music There's six different record labels that you'd have to get each of them on boards They can consider music because obviously shipping books and shipping CDs pretty comparable experience from a Weight perspective and packing perspective and all that so to the extent that it's going to be shipping to people Then you sort of have to just look at the industry dynamics of each of those because just like books CDs are perfect copies Perfect commodities. Oh many dimensions. They're better than books later weight to ship standardize packaging etc Yes, but with books unlike where music now we talked about in our Taylor Swift episode there's six labels There are 4200 book publishers So well you can sort of very quickly get the whole catalog of the two distributors If you end up actually negotiating with publishers There's a lot of individual publishers and all these small publishers actually do matter because there's three million different books That are active and in print worldwide and the long tail matters. Yeah It's not just like everyone wants to listen to Taylor Swift in books. There are lots of Rare or out of print books that people totally want the genres. There's niches There's yep And the status quo is going to Barnes and Noble and special ordering something and paying a bunch of extra money for that So it can arrive in a month and I think David and Jeff considered music and CDs as well Yeah, I suspect this is probably the reason they decide to go with books Actually Brad quotes Jeff in the everything store Quote with that huge diversity of products 3 million books and print you could build a store online that simply could not exist in any other way You could build a true Superstore with exhaustive selection and customers value Selection you know borders and Barnes and Noble they'd like say their book superstores But I think they only stocked like 80,000 or so maybe titles like which is a lot, but it's not 3 million It's not the infinite shelf space of the internet Also worth noting Barnes and Noble and borders each only had less than 12% of the retail market each So it's not like there was somebody who already had 80% market share that you had to go fight you ostensibly could Reasonably quickly become Barnes and Noble or borders scale Yep, yep And David you said something important there which is that only with the internet could you really build this true superstar and Bezos keys on this very quickly in the very first interview that he gave which will link to in the the sources It was actually at a Conference in Seattle some one sort of just interviewed him right outside the conference And I think people have probably seen this video or screenshots of this video It's worth watching the whole few minutes because it's unbelievably pression He basically points out if you can do something in the old paradigm You should and when there's a new paradigm like the internet You basically want to find things that you could not do any other way. Oh, I love that in order to really exploit the power of the new paradigm Oh, that's such a great playbook theme that we did highlight here like I mean, I'm thinking about web 3 right like oh Yeah, like it's so obvious. Yeah, you can build stuff in web 3 that you can do in web 2 and like that sort of fine But like really you want the stuff you want to find the stuff that you can't do Otherwise, right? Don't go create the banner ad and slap it on the internet and be like see it's like a magazine But on the internet, you know invent the feed format totally. Oh, that's so great. I hadn't seen that interview That's awesome So Jeff, you know like we've been sampling he just keeps getting more and more excited about this the more he digs in and he and a couple Other employees at D. Shaw they start researching competition because there were other online bookstores at this point in time There was books calm a few kind of local physical Bookstores around the country had started up e-commerce internet storefronts. You could buy books from XYZ local bookshop around the country and have them ship it to you And so they start experimenting with the competition and they realized that Nobody's got the whole catalog so to speak the infinite selection. It's still all in this kind of Old school physical paradigm like yeah We'll put up an e-commerce storefront. We'll put up a website But we're just selling our inventory out of the you know what we got in the back here And importantly it was basically all static the notion of a web server was a very new thing There were HTML pages and you could put those up on a server so that somebody using a browser could hit it And get that static page back But this notion of like code executes when you hit a URL to dynamically generate a page That really wasn't happening yet And so all you could ever do is fetch these static sites and so it kind of just relied on whatever bookstore put up that page to make sure it was updated with what's actually in the store Yeah, so Jeff is like man This is a big idea There is a window to go do this right now. Oh somebody's gonna figure this out Do you know the stat on internet growth? Oh, yes, he gets it wrong, right? I think the stat is that as Jeff looked at two different research reports and basically approximated the middle What he was analyzing was basically the amount of traffic Yep, the number of packets sent over the internet of web packets sent over the year of 1993 It grew 2300 percent In that single year. Ah, no, no, no, no, this is the error the bad rates about in the book It grew 2300 x from January 1st 1993 to January 1st, 1994 wait he was off by a hundred yes, which is 230,000 percent what somehow I missed that yeah, he would later quote in speeches that he read this report and he saw the traffic was growing 2300 percent and like it jolted him out of his complacency and realized this idea is huge I got to go like do this on my own holy crap No, I mean I was gonna make the point of like if you see anything growing 2300 percent you should start a business on top of it But I didn't realize that I was with the outdated stat. There's a minimum threshold at which you should stop doing whatever you're doing If you see something like this and go do that that threshold is below 2300 percent But if you see something that's growing 230,000 percent in one year You really got to quit your job and go do this It is crazy like you know being in venture we sort of look for like oh, what's the next Technology wave and what's the next paradigm and is it web 3 and is it some form of VR or AR? As true you and I have never seen this in our professional lifetimes. We have never witnessed this no We have never seen anything within an order of magnitude of this Mobile didn't happen this quickly. There was no single year in mobile that was nearly as fast as the Repidity of the internet adoption And so a lot of us in venture and in startup land right now are starting businesses and investing in businesses that It's innovating around the edges and it's innovating on stuff that's pretty mature There's nothing that is the sort of fish and a barrel opportunity of suddenly everyone appeared over there Using garbage tools and all we have to do is make a pretty good tool and everyone's already on the thing Yeah, I think we should just like pause the episode right now and highlight everything comes from this like all we are doing now is like Capitalizing on the ripple effects or the aftershocks of this giant earthquake of which We will probably never see another one in our lifetimes The internet is it it's all the internet and this is the beginning everything now is still just Derivative of the internet Yeah, the idea that suddenly everyone is networked together and can obtain any information very quickly There wasn't even really an interaction model yet. It was just about obtaining information Yep, there were get requests, but there weren't post requests and I don't know if that's technically true But that's one reasonable way to think about it is you could load any web page But there weren't a whole lot of forms you could type things into to send information back to those companies or those servers You know in Jeff's head and lived experience. This is all like happening at once. He's been working on the internet stuff There's this new idea that they're working on that he's probably more excited about than any of the other ideas He reads these reports, you know, it's a double amount of his complacency. He's like dang I've got this really cosy job here at D.E. Shaw But I might need to leave this and go do this on my own Hmm what happens next is sort of uh open for debate You know Jeff wrestles with this decision for a little bit. He and McKenzie. They just got married They love their life. They love D.E. Shaw. They love living in New York Jeff really is kind of the era parent to take over D.E. Shaw And actually like I said it just a few years later in 2001 David Retires goes back to Computer science research leaves the firm in the hands of other people like Very reasonable that that could have been Jeff if he hadn't left. Yeah, absolutely Jeff calls up his parents calls up Mike Jackie It's like which they do and they're like oh you should stay a D.E. Shaw Of course, it's very successful. You get a great salary, you're well thought of and your industry Yep, how many 28 year old 30 year olds Have the kind of you know success and opportunity that you do not many As I said Jeff's thinking about what to do and he talks about He later he comes up with this framework for making the decision That he calls the regret minimization framework. I love this And really is it's such a beautiful way to think about big life decisions like this I've used it. It's really great. Absolutely me too. The framework for people who don't know Is when I'm 80 years old and I'm looking back On my life and I look back at this fork in the road here Which path am I going to regret the least What will cause the least amount of regret when I am 80 and I'm looking back and like I made that decision Do I regret it more or less than what the alternative would have been Hmm and when you look at it that way the answer is just brain dead obvious when he's 80 Looking back and he's like well, I could have built Amazon But I stayed at D.E. Shaw that's gonna be some serious regret and he really and he's just an entrepreneur It ultimately wasn't really a choice because he wasn't gonna take over this thing and be a manager of someone else's vision That's some holy unbezos, which is funny too. I've actually been coming to think like I've used the regret minimization framework to make decisions I was thinking about this preparing for the episode I would have made all those decisions anyway. It was just justification people are gonna do what is in their blood to do I think and you're so right. This was in his blood. He was gonna do this. Yep. So He goes to tell David That he's gonna leave he's gonna build the everything store on his own Yeah, not only am I gonna leave to be an entrepreneur to capitalize on the internet I'm gonna do the exact thing that we've been the most excited about that I've been working on on your dime Yes, this is where the legend is David's like let's go for a walk and They go off from the skyscraper office in Midtown manhattan go for a walk through Central Park for like two three hours they talk through it all and David supposedly says to Jeff look you got a future here I very much want you to stay and build this within De Shaw I will compensate you appropriately It will be worth your time but I also understand The entrepreneurial impulse like I left Morgan Stanley to start De Shaw. I get it. I've been in your shoes Yep, and if you leave and and do this on your own like I'll regret it, but you have my blessing That's the legend of how I went Whether that actually is what happened to like I genuinely don't know, but it's a very nice legend Let's put it that way you're suggesting that it could be a little bit more adversarial or that there could be a little bit of Avile will of hey, I thought you were working on this under the umbrella of De Shaw, right? Well Jeff goes to raise money for Amazon and he doesn't raise it from David. Yeah, right like that would be an obvious source of capital And it's not like Jeff magically had a check waiting for him Jeff ended up taking the better part of a year to raise one measly million dollars Over 60 meetings ultimately from 22 different investors to sell 20% of the company In order to raise that first million If it was an option for him to call David and shortcut that you would think he would have at the end of the day None of this matters because I am 100% Convinced there's no down in my mind nor I think should there be in anybody's that had Jeff stayed At the shot there would be no Amazon Regardless of it being worth Jeff's time or compensation like this is the beauty of venture capital and the American entrepreneurial system usually building things that are great are hard And usually when things are hard if you are just an employee making a salary and somebody else owns the company You don't have level of maniacal progress. Yes, that Amazon did in its early days certainly certainly did That we're gonna talk about so and the idea was completely flawed like the business plan was worthless Because lots of people had that business plan, you know, and it was completely unrealistic right It is interesting thinking about who the internet appealed to at this moment and It appealed to Jeff or it was on Jeff's radar because Jeff is a nerd. Yes. He has a cs background He was really into Star Trek. He loved obscure novels. He loved storytelling and the internet Appealed to technical librarians at this point in history. That's probably the best way to describe The cult following that bootstrapped the original network of the internet It was academics and it was people who loved libraries and programming It was also the counterculture movement or the legacy of the counterculture movement Which had kind of died down and morphed into this out in California For sure. So this is the sort of thing that put it on Jeff's radar. It's also the sort of thing that Really defined who would be willing to join Jeff on this crazy adventure It wasn't that he was going and recruiting right away the very sort of best and brightest out of the top institutions with the Shiniest resumes and who could really do anything It was people whose heart burned for I want to make it easier for the world to consume knowledge I want to make it easier to find rare out of print books Yep, that was the sort of seed of the original culture of the people who were attracted to Amazon both as customers and employees Which was not the e-shaw No, and I think this is also another reason why Jeff really struggled with it because He loved the e-shaw. He met his wife there. Right. He loved those people Eventually that DNA would come into Amazon, but yeah, let's talk about shell capon and the first non-mechenzie employee of Amazon to move the story along so he decides he's doing this He decides okay, I need to incorporate the company He picks a few candidate cities that he could operate the business in because Manhattan is not a wonderful place To be running a sort of bootstrapped startup at the time by this point in time I think he had finally figured it out the shoot. I might actually have to Take delivery of some of these books and then ship them back out the customers and midtown metan hadn't is Not a great place for that right But he starts sort of narrowing it down. There's three cities on the list Seattle's obviously one of them of a candidate city in part because of its proximity to Roseburg, Oregon I believe the second candidate city was bolder But anyway, they end up deciding on Seattle and of course part of it is that proximity reason The other part is related to the sort of tax environment of Washington state as folks know There is no state income tax in Washington state much like Florida or Texas But you would think given Jeff's history Florida or Texas would right make more sense But there's another big one too Well, they're two more big ones one of them is the access to technical talent Yes Microsoft was just absolutely in a tade and Jeff respected what Bill Gates and crew had built and thought You know what opening up a business right next to Microsoft if I'm going to be attracting programmers seems like a good idea Yep, and what's the fourth Well the forest You have to rewind a little bit to the recruiting of shell So shell Jeff got introduced to actually through a D.E. Shaw colleague and shell was an engineer programmer who lived in Santa Cruz, California and it worked for a bunch of kind of early Silicon Valley startups Yep In cluding Stored brand and the whole earth catalog. Oh, yeah, absolutely Yeah at the whole earth truck store in Menlo Park Which is like a rare books retailer, right? You know his counterculture it was seven It was like curiosities that Stuart thought was cool and would be in the whole earth catalog and then they sold them out of the back of a truck in Menlo Park It's perfect and for listeners who are like whole earth catalog Stuart brand. What are you talking about? Well, there's one other element of Tech history which will quickly sort of jolt you out of your seat and go oh, that's what we're talking about here When Steve Jobs who is sort of widely Attributed to the quote stay hungry stay foolish when he originally invoked that he was citing Stuart brand and it was printed in the cover I think the inside cover of the whole earth catalog. It was of the last issue the last issue When they stopped publishing it did the photo the iconic photo from outer space of The earth as seen from outer space and it said stay hungry stay foolish and was a total inspiration for Steve Jobs Yeah, so shell was working there Which is so cool because then Stuart sort of gets woven into the Amazon story and in this way of course But then Bezos also has reverence for the whole earth catalog and gets to spend time with Stuart brand and a bunch of those folks down the line too Yep, and they work on um the clock of the long now I think it is the 10,000 year clock which was an investment from Bezos expeditions I think it's a it was one of the earliest sort of projects that he backed when he became individually wealthy Hmm. Oh, how did Jeff become individually wealthy? Oh, it wasn't necessarily from selling his Amazon shares. We'll get to that. Yep You are not gonna believe it when we tell that story How Jeff Bezos became a billionaire and had nothing to do with Amazon.com That would be the clickbait if we were like a YouTube native podcasts that would be the title of the episode In fact, maybe we'll clip this into a segment and put it on the acquired stories channel We need to do a photo shoot of us in like crazy poet like oh my god Like you know title card youtubers man All right, so Jeff gets introduced to shell Shell's part of this deep legacy of everything so it can valley start up See what becomes the internet. I believe the original intention was Jeff and McKenzie We're gonna move out to Santa Cruz and they're gonna build Amazon and Silicon Valley like duh. Why wouldn't you? Yeah, maybe it's a little farther to Oregon to Angerms, but like not that much farther. It's fine But I didn't realize how recent this had happened like this all at the same time in 1992 The Supreme Court Has ruled on a decision that retail companies do not have to collect sales tax In states where they don't have Physical Presence like operations right now. It doesn't mean that customers don't have to pay sales tax When they buy items from a retailer that is not physically located in their seat Means that the burden is on the customer instead of the retailer and not on the retailer Which of course every individual is going out and saying what purchases did I make last year that I should be paying sales tax on that may not have been charged to me by the Oh my god. It's like crypto taxes. Yeah people pay taxes if it's easy. They won't if it's hard So Jeff finds that reads about this and he's like oh no no no no no no We cannot base this company in California. Not New York not New York not Texas Probably not Florida What is the vent diagram of like close to a book distributor Has access to technical talent not too populace but enough technical people like and hire But not so much that I'm cannibalizing cutting out a huge swath of my market Seattle is the obvious choice Which you wouldn't pick today because this self perpetuating thing because of Amazon and The ecosystem that they and Microsoft would jointly create here Seattle's population has been going crazy Especially with people with unbelievably high disposable income and so you would not want to in this day and age make that same decision Execute this strategy and make that decision about Washington state but totally Jeff. A's was hadn't created Amazon yet And so therefore it was a perfect place actually I kind of resonate with this my own personal story Jeff had Zero connection to Seattle ain't I know anybody I was exactly the same way when I came to Seattle in dude It was the place where you got a VC job offer and you were like I want to be a VC. It's the land of opportunity Yep, and it was the land of opportunity for Jeff phases You know the legend is that he and McKenzie are driving across country. They realize this they like Veer hard to the right in Texas and instead of going Do west to California they go northwest to Seattle Meanwhile, I think they've been on the phone with lawyers or a lawyer incorporating the business while they've been driving out and that's the whole Thing about the name. That's probably a story worth telling Definitely the veering to the right while driving that didn't happen But it's a good story, but I think a thing that did happen while McKenzie is driving and Jeff is sort of working on the drive out is Jeff's on the phone with the lawyer. He's like incorporate the business I want it to be called cadabra cadabra like oh, it's magic. I can get you know, whatever I want anything I want whenever I want and you know Jeff's like yeah cadabra and he's like cadabra and so that was like the first sign of This may not be the best name He would have a series of other potentially bad names too. Really bad Relentless.com Relentless.com which still goes to Amazon redirects to Amazon Yeah, supposedly he and McKenzie both really liked Relentless.com This may be completely false so like you know, don't hold me to this But I wonder if that's a little subtle dig a D.E. Shaw of like I'm gonna go be an entrepreneur Relentless like I wouldn't be relentless if I were in a cushy skyscraper in Manhattan It's not a very customer centric name. No, it's definitely not It's very much like I'm gonna come at you competitors. Well, that's what I wonder like where did that come from? Yeah, I mean you would you would use it to describe Jeff's personality, but it's an odd name for the business Definitely so eventually Friends convinced them that relentless sounds kind of sinister and The story goes Jeff starts looking in the dictionary at a words now I don't know if he was specifically looking at a words if so he was very smart because a names are Name starting with the letter a he actually was because sites like Yahoo like portal sites directory sites listed alphabetically Totally. I mean this like we've been such a beneficiary of this and acquired This is our secret sauce. I cast the last vestige of the old internet Totally because things are listed alphabetically on what we will talk about Yahoo He's looking at a names and he's going through the list and he sees Amazon Perfect earth's largest river earth's largest selection on Amazon.com a to z how could it be any more perfect? So perfect so They just need one more thing they've hired Shell at this point. He's moving up to Seattle. They rent a house in Bellevue famously You actually bike by it the other day, right? I did I was in the neighborhood and I was listening to Great podcast on the internet history podcast with friend of the show Brian McCullough He was interviewing Shell about the early days about this, you know House that Jeff McKenzie lived in and they have the garage retrofitted to be an office Amazon's first office and Shell is programming sitting in that garage And I looked at it as a few blocks from me. I was like I get a ride by you texted me the photo I was so so jealous which felt wrong, you know Someone lives there and all that but it is a historical landmark in the world. Well, you didn't go knock on the door now But yeah, I think that's fine. So they just need one more thing Which is Capital, you know Jeff McKenzie had done great at D Shaw So they put in $95,000 to start Shell himself puts in $5,000 this takes me back to the Walmart episode and got so smart of like having your employees Actually invest dollars in the business Jeff's parents Mike and Jackie put in another $100,000 so they have $200,000 That's enough. They hire a couple more engineers to work with Shell Start building out the site Jeff goes and starts working on relationships with Ingram and Baker and Taylor McCenzie's doing all the bookkeeping and is sort of like the first CFO of the company Jeff this is fun also echoes of Sam Walton. Did you read about this how He goes down and takes a course in book selling down in Portland? Yes That was awesome At like the national booksellers or book retailers association, right totally. Oh so smart I assume that's how he starts to build relationships in the industry and get Baker and Taylor and Ingram to take him seriously So great. Yeah, it's worth pointing out at this point So you know, we sort of glazed over like all right. Shell gets hired and he starts programming There's very interesting set of technology choices that are made here and Shell turns out to be the perfect hire Jeff got very lucky I don't think Amazon would exist today if it weren't for Shell and I think that's sort of a widely acknowledged thing among the early team Including Jeff But there's not really like a spec Jeff. I think coded up the first HTML web page himself That's sort of white one with the a with the Amazon river running through it that predates the logo But when he starts describing it to Shell Shell is pretty much like okay cool like I know it to build It's going to be a store and there's not like a lot of these yet But like it's a website where you can buy stuff online great and he just sort of starts coding and There's a couple interesting things here one of which is the technology choice of databases And do you know what database they would eventually sort of choose to standardize on because Shell was not a database guy before this I'm tempted to say Oracle Definitely Oracle. Yeah, interesting. It was a bakeoff between two and Shell basically It was like okay cool. What database software am I gonna procure and the choices were cybase and Oracle and cybase did not return Shell's call and so he chose Oracle Oh my god Talk about freaking foreshadowing here like if you are an enterprise technology company You ignore startups at your own peril I'm not a barrel absolutely. I love that story. Oh, that's amazing. There's a couple other interesting things here And anybody who's been a PM or an engineer working on like an engineer PM team or a business guy tech guy team We'll sort of know this feeling and remember the internet at this point. It's just very Very pathetic like it's just not the internet as you think about it today in terms of Speed or graphics or interface or trust or anything Especially trust around credit cards like people were not yet comfortable entering credit cards on the internet In fact more people were comfortable entering credit cards via email even though it was no more secure They actually got more people emailing them their credit card information And they had a way in which you could do stuff like enter just five digits of your credit card and then call us And then we would get the rest of it from you and match it up with the five you would enter it on your order But Jeff tells Shell hey people are gonna want to Uh, access this store via two different Methods one of them is the web which is of course up and coming the other of which is email which people seem to trust a lot So build two storefronts one that's accessible via email and one that's accessible via web and Shell kind of just ignores the email thing. He's like ah I'm in this technology a lot. I don't think it's gonna be an email based store And it's a good thing that he started with web and by the time they had sort of gotten that Stowed up it was clear that Jeff had sort of lost interest in the email based store But it was almost like a posterist type approach where they're like what if you could Browse and buy from your email That's how crappy the web was is it wasn't clear that that was a better form factor than email in Brad's book I get the sense that that's very typical of early Jeff management style of we gotta go do this And then you know some of them like you actually got to do then some of you like well if I ignore this for a little while Yeah, we're gonna do the right thing here Yeah, it also became clear in listening to a lot of these interviews with early engineers that They use the word front-end engineer and back-end engineer differently than we do today Today when we say front-end and back-end it means front-end being like client side JavaScript typically stuff that executes in your browser which of course did not really work or exist then and back-end meant server side but what was clear at Amazon in the early days was front-end meant consumer facing and back-end meant warehouse facing technology and It was basically all server side in fact there weren't even cookies yet And so shell had to basically invent this way for users to maintain favorited items or a shopping cart without leaving a cookie And so how do you do that without cookies or sessions? He invented this really insane engine is basically a rendering engine called obi dose which if anybody knows their South American geography It's a tributary to the Amazon right? Yeah, and for people who remember browsing Amazon in the early days You'd go to like amazon.com slash exec slash obi dose slash something something something oh I definitely didn't do this. This is awesome. It was a part of the URLs And so what obi dose did was it could append I-D's to the URL and pass them through so that the back end as we know it in today's parlance that the server could match up Oh, this customer just added this other thing to their cart and so dynamically generate a new web page for them that includes that other thing in their cart or what would go on to be include You may also like or similar products or recommended personalized products. Oh, so cool This was the very first thing that allowed Amazon to be like a dynamic web application without the use of cookies And it was just passing these IDs through the URL And it was all this obi dose sort of dynamic web serving engine that shell built I love it. I love it. That's so cool. Yeah So yeah shell is like you're so right like He was the right guy for the job Yep, this was a grizzled sort of veteran Of building software systems that could work on the internet There were not many people who could do that at that point in time. No, and in fact in job postings I think bezos put things like experience with websites would be a bonus but not required because like there weren't web developers Because there weren't web applications You would think about it like hey, I need someone who can write some ccode and then figure out the glue To make it so that that interfaces with the HTML that gets generated But that was all sort of like brand new at the time. Yeah, amazing So shell and the early team of Engineers that they bring on working together They get a beta bill like pretty fast really fast It was summer of 94 when jiffon mccenzie leave D. Shaw And then it takes a few months to figure all the stuff out in the garage and Bellevue In April of 1995 They ship a beta version of the site they send out a link to friends and family like try it out. You can buy any book you want Shells friend john wainwright makes the first purchase on April 3rd 1995 a book called fluid concepts and creative analogies By Douglas Hofstetter Doug Hofstetter's awesome. He wrote girdle Escherbach. Oh It's super cool. I'm anyway. It's all like about the nature of consciousness and like a carve out for another day Yeah, but super cool and very apt geeky first purchase on amazon.com again illustrating who the types of people who are interested in amazon and the movement at the time were Yep, and then shortly after that July 16th 1995 They launched the site to the public I totally understand now What mark and reason was saying when he was like a freaking missed it. I mean, I guess mark was part of starting this wave So he was talking about the previous wave, but like Me now looking back. I'm like we freaking missed it Ben. I have phomo you have phomo Yeah, this would never happen today. They launched it And people came people loved it like it freaking worked immediately. Yeah Yeah, and it went very quickly from like a thing that obscure nerds wanted to This has a good enough user experience where regular people are using it quickly and deriving real value It's not just like it had growth rates of a bunch of bots interacting with each other and therefore the volume looks high bots this is very real people Who are one or two clicks out from the early adopters solving real problems that they had before and it's just Everybody telling their friends in fact. I think there's a stat the entire first year after the public launch They spent zero marketing dollars and it was all word of mouth at inbound media inquiries because what they were doing was so novel and so useful to the mass market consumer Oh inbound media inquiries Okay, so they launch it in the first two weeks They do $25,000 in revenue. Well, there's just people telling their friends. I can't do that today like $25,000 in revenue like in two weeks You launched something today nobody's gonna use it And then they get an inbound media inquiry two weeks after they launch it from David phyllo and Jerry Yang saying hey We heard about the your site Amazon it looks pretty cool. Do you mind if we feature it on our Home page and Jeff's like wait a minute your homepage I think a lot of people go to that and that was the brand new at that point like literally brand new Yahoo dot com David and Jerry of course had started their Guide to the web when they were at Stanford grad students the year before in 1994 and they had just Incorporated raised money from Sequoia capital Turn it into an actual business and created Yahoo only in March of 1995 Wow, it's all happening all at once. Got to assume it was the first place to buy books featured on the front page with the letter a On Yahoo dot com Growth hack so apparently they get the email and had they raised their seed round their million dollar angel round yet? No, no, no, so all that context you had on shell all this makes so much more sense now I thought he was just being conservative, but he knows what he's doing They get the email and they're all talking about what to do and shells like guys I don't think we're ready for this I don't think we can handle what's about to happen here Because he's only been at startups that didn't really work. Yes. He made stuff functional And he was thinking of a certain scale, but he wasn't thinking like million scale Of course Jeff being Jeff is like Damn the torpedoes like full speed ahead. We're doing this We're gonna say yes to Yahoo So they do it within the next two weeks So we're just four weeks after launch here They have sold books to people in all 50 states in the country and 45 countries around the world There by the end of those two weeks they are doing 20,000 in sales a week on books These things cost like 20 or 30 bucks each and people don't read books You know, yeah, there's Barnes and Noble and Portville like people don't read books They made all their money on DVDs and CDs nobody reads books We read you and me and the acquired community like we read books, but we're a vast minority Most Americans read one book a year. I think that's like the mode of number of books per year per person Totally so that first half year that the site is live to the public They do half a million dollars in revenue in six months with the two hundred thousand dollars in friends and family funding The initial insight is like pretty perfect product market fit right out of the gate I mean, it's one of these situations. It's like an Uber or a Twitter where you have this idea And then you put it up and then that's exactly the thing that people want I'm sure there will come an age again like this but in some way shape or form But I can't stress enough that this does not happen today Right, I'm feeling the fobo The question is David would you have recognized it right? That's the thing We all have to be intellectually honest with ourselves over like would we be hanging out in these circles with these people And truly believing like they did not in 1996 that the internet was going to be a thing in 1993 that the internet was going to be a thing. Yeah, we started this a little bit not Intentionally with podcasting I think and acquired yeah a little bit. We got a similar type with Right, honestly though judging by what you and I were doing a few years later I do actually think we would have had the personality characteristics and the interests If we were not young children at this time to be in on this caught up in all this oh yeah In some ways I'm feeling the massive fobo of like god if I was just born five or ten years earlier Yeah, yeah, I mean, it's this is who we are And I imagine who many of our listeners are too Yeah, I imagine if you're listening to three-hour podcasts then you're the type of person who wanted to buy an obscure book from Someone on the internet where you had to call in your credit card number The infrastructure is just completely falling apart one thing They did do right in the infrastructure though because by the way very quickly they became oracles largest ever Instance by traffic the oracle people were like oh my god, we can't help you But no one else is seeing this many reads or writes per seconds. So let us make a new version for you But one thing that was very clear is that shell and the team were building things at a very low level of abstraction I mean they were building everything in basically a click-out from assembly most of the stuff was in C some of it was in purl But they're not really writing in high-level languages or using sort of high-level frameworks. So Even though The technology at the time sucked. I mean there was no bandwidth Compute was really really really hard to come by you had to be unbelievable efficient as you're starting to roll out things like and I know we'll get to this Reviews and the collaborative filtering stuff where it was like you may also like people who bought this also bought The algorithms mattered a lot But the environments that you were writing them in the low-level languages were really important Yep, and they basically could take advantage of these early internet technologies before the bandwidth and compute was really ready for most people to develop applications for them Totally right. I guess I sort of meant technology to some extent the tech in infrastructure I meant more like the garage here is the kicker of why this is never would have worked with indisha It's super clear you can't do dropshipping. Amazon's got to handle the logistics Themselves to make this work and the way they were doing that was not to take inventory at the time They were ordering retail first from other bookstores and then reselling it and just eating the margin as the pre-fif concept But then they were moving to this world where they would just order from the distributor as soon as they got an order And it was taking obviously forever to actually get that to the customer the distributors had minimum order sizes So they were ordering big boxes of stuff Come into the garage. Do you know the hack? Let's say they ordered a popular book where pretty quickly you could get to 8 out of 10 Let's say the minimum order size was 10 they'd wait to get two more. I think it was 10 Yeah, and that way they could place an order with the distributor the hack Was if it's sort of an obscure book and they know we're never going to get to 10 They would take that one book and they would order nine of a book that they knew was not in stock The system would let them make the order since 10 books could be shipped out And then of course they would get the rejection of hey this book's out of stock So that was their hack to make us other distributors would actually send them the one copy of the one book that they wanted The sales levels were talking about there's a lot of boxes Coming and going out of the garage. Yes, so quickly they get a warehouse in Sodo in the kind of industrial neighborhood down by the kingdom at that point in time They start staffing it up with temp workers famously They tell the staffing agency to quote send us your freaks Which made it through to print in an article and of course that was the sort of clickbait thing that everyone anchored on This was the era of grunge in Seattle's all these grunge club musicians are like working in amazon warehouses after their gigs It's super cool. Yep famously nick lovejoy from D. Shaw he comes up with the idea of packing tables this becomes like amazon lore get first They're literally just reassembling you know and doing shipping just like on their hands and knees on the floor He's like you should get some tables to do this up above the floor Yeah, and on the send us your freaks thing There's this great interview with Jane slade that Brian McCulloded where she's the one who gave the quote in that interview about send us your freaks And she said that because the temp agency was like sending them all these people that were basically professionals They would expect to use modern tools and at amazon The low-level software thing wasn't just for their infrastructure They expected their customer service people to like use unix terminals and write commands So that what someone write right in and they're like where's my order like everything's on command line And so jade's using that to try to articulate to the temp agency Here's the profile of person that we need because All these people are kind of useless to us if they expect a bunch of very good tools to do their job I didn't know that context that's awesome What's cool here is these are quaint stories, but this is the beginning Of the competitive advantage and the moat that Amazon starts to build and we're gonna talk about eBay in a minute here But it's just like the Walmart story and fighting against kmart and other people like amazon now is building a native Logistics supply chain and distribution for e-commerce That they are gonna own and operate That nobody else literally nobody else in the world is doing this not Walmart Not kmart not Barnes and Noble. They all have their own incredible logistics systems But they're tuned for I've got this book superstar of 80,000 titles and I've got thousands of them across the country Amazon's Building distribution for I have millions of customers Across the world and basically no two orders are the same So I always need to put a unique brand new combination of books into a box every single time That is a totally different combinatorial problem to solve Then the Walmart thing of hey, we need to make sure that a truck goes from this distribution center to this store once a day With about this stuff and you know, maybe there could be a little variance It's completely new and so Amazon needed to fail completely Invent something new tailored to their use case and then suddenly be the industry leader For the way you do that thing on the internet and packing tables is such a great first paradigm of oh Our warehouses will need these but other distribution centers in the Walmart land and that old school world don't Yeah, and that would just happen 10,000 times again compound and compound and compound well with coolers like Yeah, there are big differences between the Walmart supply chain and the Barnes and Noble supply chain and Amazon bill ebay sure as hell is in building packing tables Yeah, so they need some more money to capitalize all this So Jeff goes out to raise that first seed round that we did the whole episode with Tom allberg about Back in early acquired days Tom is just the best Tom is the best I really listen to that episode and I was thinking like it was gonna be terrible because this was like very early and acquired It's so not and it's very listenable and Most of that is because Tom is an unbelievable guest He's kind and he also is so earnest but lived the whole thing I mean he was an early check in Amazon in that one million dollar on five million dollar post money round and Stayed the course with Jeff all the way through the late 2010s as a board member Yeah longest serving board member in Amazon history other than Jeff so cool So there is that one million dollar round from a bunch of kind of local business folks in Seattle of which Tom is one and one of the most involved in the company Nickhan hour a bunch of local business folks here. So in 1990 sex remember they did half a million in revenue for the half year of 1995 that they were live they do 15.7 million in revenue In 1996 they have a tiger by the tail here You would have to be accelerating so much to go from right whatever the run rate was in December of 95 so they about 15x and their first year but they 15x to off a base of 500,000. It's not like Ralph of nothing. Yeah, they didn't go from like 5 to 100 or something like that when I'm looking at SaaS companies. I'm like, oh my god. You quadrupled That's like nearly unheard of yeah good companies triple and then you look at it And it's like you went from 20k or do 100k or right and this is yeah wow 500k in six months to 15.7 the following year. Okay, so that's 1996 that's 1996 so as this rise is happening obviously more and more People start paying attention and go listen to the whole episode But Tom tells the story on our episode with him. I'll just quote from Tom here So I come home one day after work at like 6 p.m. or something and my wife says Do you know some guy named John Doer And I said well actually I do and she said well He calls every 15 minutes and keeps saying he needs to talk to you now And then Tom says it was one of John's great strengths Which is his persistence tells you something about how to sell yourself and show your interest And of course that is the legendary John Doer of Client and Perkins It's been many years and so there's lots of names of key folks at Sequoia and at Benchmark and at Andres and Horowitz that And we think of as like wow these incredible venture capitalists John Doer was pretty widely known to be the greatest fall time at this point in history He was like all of today's All Stars in venture capital within the industry and among founders If you aggregate all of those All Stars Into one single person that would have been John Doer at that point in time So this shows you how much cloud John had Well, hey just the hustle the persistence even though he was the legendary John Doer He's calling Tom like every 15 minutes calling Tom's wife to get a lead on the deal Amazon ends up Choosing Cliner to lead their series a $8 million at a $60 million post money Evaluation and I think they were competing against general Atlantic Many firms including general Atlantic which was the first runner up Now there was some structure to the deal so it wasn't like a clean the Cliner time she was clean I don't remember exactly what the structure was but Tom refers to this on our episode. They were a New York firm You know general Atlantic But they were offering like double the valuation close to double I think wow and Amazon and Jeff went with John and Cliner Because they were John and Cliner and there's a fun little sidebar of John wins the deal And this is kind of his playbook at the time Great, you know, I'm gonna be involved but I got this great associate I'm gonna put I'm gonna put on your board and it's gonna be great VCs still do this today Jeff wasn't too happy about this so he goes to talk to Tom like what should I do about this and Yeah, the brain start and they come up with an idea and Jeff calls John back and is like I'm really sorry. I really wanted to work with Cliner Perkins then But I guess we're gonna be going with general Atlantic if you're not gonna join my board That was really the appeal for me You know and John's like out of the bandwidth. I'm too many other boards right now. He's got what net scape Net scape compact Sun micro systems into it This is before Google we will definitely talk about Google in a minute But he's a little busy nothing to sneeze at but This was such a hot deal and Jeff was so persuasive that John made time and I think he's probably glad that he made time to join the board Yeah, so there is this money from Cliner Jeff does two things and this was seven million Eight million eight million so so far in the lifetime of the companies raised nine million dollars A little more than nine because there was the friends and family money the basso's family as a whole 92 that is actually more like nine four because the basso's family as a whole Not just Jeff's parents Jackie Mike, but also his siblings Hmm put a little more money in before the Cliner around That was what we were alluding to at the beginning of the show of Gosh man Mike and Jackie they must have done some good investing Which is funny because like that's baseless as siblings having some of the greatest investment returns of all time It proves venture capital is access access access. Oh, I cannot wait to talk about how Jeff phases in McKenzie got wealthy It's got to wait just a little bit longer. I got to wait a little longer. All right. All right So Jeff does two things after he raises the round from Cliner I didn't write down the quote but somebody who was involved in the company at that point said something like Jeff viewed this stamp of imprimatur from Cliner and jandora as like a shot of steroids Into himself and the company. It's certainly emboldened his vision He sort of used this as like someone waving the flag of like go go go like you should feel free to have a much much more ambitious plan now Jeff I don't think is the kind of person whoever felt like he needed permission But to the extent he did feel like he needed permission or that the right thing to do was to get big fast Which is one thing that he does that he makes that the motto which literally became the motto which printed on t-shirts at the company The holiday party. Yeah, get big fast. Yep The Cliner around and John joining the board was absolutely That for him So he also makes a critical critical higher Which is the first official professional CFO into the company Joy Covey to come on at this time who originally had zero interest This is another person who unbelievably accomplished really brilliant Curious but she lives in California. She's not gonna move to Seattle She's only marginally interested but Jeff And she meet and she's completely turned around. She's like oh my god I have to work with this guy and oh my god. This is the best Mrs model of all time And I'm sure John had something to do with this my understanding from the history is that like one of John's real superpowers was recruiting It was winning deals obviously but helping companies recruit too Yeah, Joy's story is just amazing She dropped out a high school and then ended up becoming a CPA she took the CPA exam in California And got I think like the second highest score in history the history of the exam ended up Going on to both Harvard Business School and Harvard Law School She dropped out a high school her life was going in one direction and there's so many people like that involved in Amazon that are Yeah, just like these incredible stories of perseverance as a lot of folks know We're talking about joy in the past tense because she sadly passed away in 2013 and a bicycle accident a car hit her So absolutely tragic brilliant kind person who the world lost too early just to keep going on joy a little bit We're gonna talk about the Amazon letter which many of you have read that original 1997 letter to shareholders which she wrote with Jeff and of course as we talk about Amazon really the playbook of how they got big We'll talk a lot about them Reinvesting every single dollar of profit they had to plow it back in to grow the business That is of course attributable to Jeff But is in large part a joy-covey invention too. I mean she was really the sort of co-architect of that strategy She spent a lot of time with Brad as he was writing the everything store She wrote him this email right before she had the accident and tragically passed away and Brad published Is the whole thing at the end of the book and I'll just quote firm in here A joy's telling Brad I think about the early days and the level of clarity vision potential and values that Jeff brought and then I look at Amazon Today this is in 2013 and reflect on some conversations. I have had with him in the intervening years It is easy to draw a straight line from the vision he had back then to the Amazon of today There were a few little wobbles and detours in places But really I don't know any other company that has created such a juggernaut that is so consistent with the original ideas of the founder It's almost like he fired an arrow and then followed that arc I think Jeff is one of the most capable and effective founders ever And I think the Amazon juggernaut is still in its early stages What she would have been right about in 2013. Oh my god We're not gonna get to 2013 in this episode But that was a crazy thing to say in 2013 Amazon was a 120 billion dollar market cap company when she said that Not many people would have said that Amazon's just this incredible Rorschach test There is a way to look at it where it is he shot an arrow and then followed the arrow straight There's another way to look at it which is They tried way more things that did not work than ones that did but were Unbelievable at learning from the mistakes and quickly following them the only thing that Amazon launched that had perfect product market fit right away Was Amazon.com was Amazon.com was the original idea and then everything else was a brute force algorithm for finding your way through a maze Where it's just like try this pathway. Oh crap. Nope backup backup backup backup refine turn They Amazon brute force their way to success a lot and just finding out where all the doors were by trying all of them Yep That is a great way to put it It is worth highlighting this period of time this 94 to 97 this pre-going public time Even though they had the impromatur as you put it David of Cliner Perkins and even though they were located in Seattle near Microsoft and even though they had this product market fit and unbelievable 15x year over year growth In revenue dollars not like usage revenue and customer retention was increasing like every single metric of the business is like oh my god Oh my god, oh my god The internet is going crazy and a bookstore actually doesn't look like an interesting thing on the internet to most engineers So they actually had a recruiting problem where talented engineers who were like oh my god. This is a really interesting Next generation technology that I want to build on Are much more interested in working at other companies who are building web applications things like search engines Even things like you mentioned eBay that we'll get to here in a second. Yeah, that's a much in many ways a much harder computational problem of Building a good experience and back end system for facilitating a real-time auction Marketplace yeah and countdowns and the online bookstore thing seems kind of boring And so it's remarkably hard for them to recruit there a couple great Eric Schmidt quotes in the everything store Yeah, Eric Schmidt of course former CEO of Google This is so great and they're like so like begrudging backhanded compliments to Amazon and Jeff But one of them is talking about AWS is like Ah the book guys figured out computer science Yes, of course like we're telling this to like Jeff freaking new computer science you know back in the oh And he was fighting that narrative from day one he wanted it to be a technology company Everyone was like your retailer and even one click down your book retailer He's like we are a technology company and he's sort of like will them being a technology company into existence And I don't think anybody now is like oh they're a retailer or are there any specific category of retailer They're like yeah, they're a dominant technology firm. Yeah now he probably wishes That people will like oh don't worry about Amazon, you know Okay, back to the story So Joy joins right at the end of 96 right after the client around and Jeff definitely because he wanted to do it and you know is consistent with get big fast Maybe it was also sort of like this test for his new high potential CFO like I'm gonna see what she's really made of He's like we're gonna go public Now Now You know Tom talked about this 200 interview with him part of it was the capital markets were open The revenue growth was insane like the dot com Mania is just starting to heat up strength leads to strength all of that Jeff also thought That it would be a great marketing event for the company and like he was totally right You know the amount of coverage they got in mainstream media they went from even though John Dore joined the board average person didn't give a crap about John Dore venture capital or startups It was not like today John Dore was a legend Insilicon Valley, but that was a very small place Amazon needed to appeal to Millions of people of all types all over the country in the world Yep, it turned out they did get something right in this notion of like long-tailed books There's very few people who want one particular book in the long tail But most people want something in the long tail and so their product market fit sort of originally came from We can get you special order books quickly and easily and your user experience and buying them will be basically the same as buying in Harry Potter book in a best seller This gets sort of alluded to in the everything store and a function of Amazon dot com that was appealing to mainstream America was Buying stuff that you wouldn't necessarily want to walk into a store and order yourself in person from your neighbors Like every new technology like every new technology. Let's just leave it at that Yes And the other thing to point out about them identifying books is there's this seminal Wall Street Journal piece about the company in 1996 that drives a lot of traffic It's like the Yahoo event on steroids and they have this really interesting stat which is in 1995 The web attracted more than 100,000 retailers Which I would not have guessed that happened until like Shopify, but apparently that happened in 1985 With some spending more than a million dollars each on eye-popping sites yet worldwide retail sales on the web Amounted to just 324 million last year which averages out to slightly more than 3000 in sales per retailer Oh, so Amazon nailed a category and an operational model Where they were able to be like the one dominant e-commerce site and they know this predates pets dot com this predates Cosmo dot com eBay They were almost the earliest they were of the first wave and just nailed it on a bunch of vectors where there's this great quote from Jane's Blade there were no grownups that could help us every time they would bring an avenger for like customer service software Or database offer or anything the implementation reps would just look at all the numbers and be like what Our software actually can't help you And so they had to build a lot of this stuff in house because they were basically the only successful big retailer of this scale using the internet Mem Well like we learned on the Walmart episode If the infrastructure off the shelf for what you need to do to make your beer Doesn't exist if you want to make your beer taste better. You got to build your own infrastructure For sure. Well, this is probably a good time David before we dive into the IPO road show to tell us about something else That can help you make your beer taste better by taking the stuff that doesn't make your beer taste better off your plate Pilot dot com Ben Perfect to you up. I love it You like how I moved it? I do We should say on this episode and our next one to pilot dot com Backed by Bezos expeditions and Jeff Bezos himself And of course many other great venture capital firms like Sequoia Capital Index and others So Pilot as many folks now know one of our absolute favorite companies on acquired they Set up and operate the entire financial stack that you need as a startup and a growing company So that's finance accounting tax even higher level to joy-cuffee like CFO services like investor reporting strategic planning All of which otherwise you would hire an old school accounting firm or go try and recruit a joy-cuffee to do But in today's startup world unlike Amazon back in the day All of this stuff is standardized. It does not make your beer taste better You just need best in class and you need access and you need it done and pilot does that for you And of course you might be thinking well My stuff is too specialized. I need someone in house. I need a firm of people to help me Pilot has recognized this and they say look we're a product and we have people that you work with They're a combination of human powered and product powered and of course the product is not just Log in and you get some nicer UX on your bookkeeping software It is fully integrated with whatever fancy financial stack they're using because the founders started it pretty recently in this era And their technologists themselves. This is not their first company. They sold their last company to Dropbox And the other thing that's completely changed for most companies and startups now versus the Amazon days is There is a whole Sea of technology providers that you need to use as a company that impact your finances The stripes the plaids the modern treasuries all of these Companies that you build your product on and your revenue on They all have APIs an old school accounting firm is not going to connect directly to your stripe API But pilot of course does so they take literally all of the headache of finance and accounting off your plate Pilot this is their beer they integrate with stripe brex gusto Shopify square etc Everything and they all make it work seamlessly with your books and your financial reporting So going over to pilot.com slash acquired or click the link in the show notes Make your life way easier as a founder get back to focusing on what makes your beer taste better And eliminate the pain of tax prep and bookkeeping from your company for good and thanks to the founders who we refer to We see him Jessica and Jeff all good buddies and acquired friends acquired listeners if you use that link you will get 20% off your first six months of service So many of the companies I invested now and work with use pilot highly recommend them Thanks pilot Okay, so joy joins at the end of 1996 Just like we're gonna go public now. So spring of 1997 They filed a go public with lead underwriters not Goldman Sachs not Morgan Stanley Deutsche Bank and some might say it's Uber bankers Frank Quattrone and Bill Girlie. Yes. Leading the IPO so cool and we asked Tom on the Amazon IPO episode that we did Why did Jeff and Amazon choose Deutsche Bank over the gold plated, you know Never get fired for choosing Goldman Sachs or Morgan Stanley and Tom's answer was Well, if you knew Quattrone and girly you would know that the answer is Quattrone and girly Yeah, and of course Frank Quattrone has gone on to do a bunch of very impressive deals at catalyst and Bill Girlie became future Bill girlie so yes, but this is in his banking career now When they file to go public but before they actually do go public Just like Jeff was envisioning this attracts a lot of attention And that's mostly a good thing He's correct on the marketing exercise This is a big way to legitimize them to consumers and enables many more people to feel comfortable typing their credit card on the internet Things like that Everything like that and also this other thing ultimately is a good thing too Not at the time it attracts the attention of the radio brothers Who are the founders and CEO and chairman separately CEO and chairman Of Barnes and Noble you know they knew about Amazon. I'm telling whatever you know Amazon Internet like you know we don't need to worry about that. Well all of a sudden There's a little company in Seattle is filed to go public and is claiming to be Earth's largest bookstore Yeah, they like huh That doesn't sound right to us I just think of like borders like yeah, Barnes and Noble is great but borders was the big thing But now we know from the Walmart episode Borders was out of the game came aren't had acquired them and yep the founders had moved on Louis Bordered moved on To start web van to start web van so great so great and that crazy Barnes and Noble was the juggernaut now the radio brothers when Amazon files for an IPO They fly out to Seattle and they Scheduled a dinner with Jeff and Jeff brings along Tom his Tom in addition to being just wonderful human great advice mentor to both of us He was a lawyer earlier in his career He was like a very high profile corporate lawyer. He's got the right set of skills to bring to this dinner Yes, so the radio brothers their father Was a New York City cab driver and a semi-professional boxer who twice defeated Rocky Graziano Len the kind of lead of the two of them. I think the only brother. He technically did go to NYU, but like let's just say They went to the University of Hard Knocks They're way of doing businesses very different Also We got to talk about this. I don't think you have any idea Do you know just like we talked about last episode about the whole crazy you know borders came our web van Kiva came out of web van which of course Amazon acquired and is Kiva robotics Yep incredible history Do you know what the radio brothers spun out of Barnes and Noble? I'm not talking about the nook Or Barnes and Noble.com You're never gonna guess this no it actually makes sense Game stop No way I'm dead serious It was actually software, etc I gotta look at the stock price of both of these Game stop is the merger of software, etc Which spun out of Barnes and Noble and Babages software remember Babages back in the day Rrrr sounds vaguely familiar. They were like a video game and computer software retailer. Yeah game stop freaking game stop Oh my god Okay, what do you think Barnes and Noble education ink is from a market cap perspective today off Maybe 500 million 100 and 43 million Okay, what's game stop today 10.3 billion. Yeah Yeah Built purely from an intrinsic value model that I have here in front of me. Stonks baby I assume Barnes and Noble education ink is Barnes and Noble the big company BNED is their ticker. I think there might have been a bankruptcy in there I'm not sure. Yeah, that makes sense I don't think you end up Cratering this far without some kind of recapitalization or something happening Well speaking of Barnes and Noble cratering This dinner didn't help These two like you know tough New York guys they're like where you come at These guys have nerd out and see out all like Goals nor episode with Tom his personality is not blustery, you know brash New Yorker You know like I'm sure the radio has came to this dinner and they were just like we're gonna freaking crush these You know geeks Oh boy did they not so they go home after the dinner and the dinner was sort of like a Soft we want to buy you or was the dinner a soft we're gonna run you out of business. It was both Yeah, it was hey, we've heard about you You know we're Barnes and Noble right and You know we've been thinking about doing the internet. We're gonna do it We could buy you and you could be our internet thing or we could crush you I think that's how the dinner went and by the way the 1996 Wall Street Journal piece that did wake the world up to this was titled Wall Street Wiz finds niche selling books on the internet hey I always think back on the Wall Street Wiz for Jeff Bezos Well and actually what the Rizio brothers are saying this is what everybody thinks So when Amazon does go public it's not a great IPO. They Price on May 15th 1997. They raised $54 million at a $438 million market cap and then they trade down on day one It was like $17 a share that they went public at and then I think They trade down on day one but they would eventually trade all the way down to like five bucks a share in the dot com bust Well, it would rock it back up. They went through the wave and then the fall yes, but the Head of forest or research you know the big research firm. They write a note about Amazon in the industry called Amazon dot toast They title it Amazon dot toast And it's not because of eBay. It's not because of blah blah blah. It's not because of the dot com crash It's because they think burns and nobles gonna kill them Oh boy, so what are the Rizio brothers doing they go back home To New York and they do two things one They launch a new project new you know, initiative within the company With the code name book predator In case there was any confusion case. There's any confusion about what the intent of this is And that they're gonna kill Amazon with the new Barnes and Noble dot com the other thing they do is Sue Amazon and they conveniently for them or an In conveniently for Amazon announced the lawsuit three days before the IPO prices brutal hence the Amazon dot toast memo and they sued them for Ben what you said of Amazon claiming to have earth's largest selection of books And I think the suit is like well, you don't have a store. You can't go select the books. It's so pedantic and annoying So Like I said the IPO happens. It's not great the stock trades off But a couple weeks later Amazon does their first quarterly financial reporting as public company They report q2 1997 earnings of $28 million remember they only did 15.7 the whole year before they did 28 million that quarter unbelievable so Wall Street reverse his course the stock takes off for the full year of 1997 They do just a hair under 150 Million dollars in revenue. So that's 10x The year before oh my god 10xing on that kind of base Especially right when you're going public. I mean this is the stuff that makes investors go nuts You can see how this very quickly becomes a darling stock now when I said that Barnes and Noble was gonna launch book predator and beat Amazon. I was like, okay. What do I mean by okay? This starts a pattern It would be hubris of Jeff joy and McKenzie and everybody and tell I think Amazon to just say okay and not do anything about it But this is Amazon and they know this is a problem They know they can beat them, but they have to go beat them and they know what the path is Jeff made in America is like his bible. Yes, he knows the Walmart story By the way listeners, we weren't gonna do the Walmart story We actually were gonna do this as the first episode of the season and we got into researching Amazon and realized how much Jeff respected and borrowed from the Walmart strategy and we were like, I guess we got to tell that story first There are a couple moments coming up where he interacts with Walmart and he brings along his copy his like scrolled in notes and marked up and dog-eared copy of made in America to like show These people who we're gonna talk about they're like no like I sam is my hero I'm not just some geek. I understand what we're doing here. Yeah, and so Jeff because of this because he's read made in America He knows that he can be Barnes and Noble But the way to do it is through distribution by building native distribution logistics supply chain for e-commerce Not for physical stores, and it is different enough that just like Walmart could build native distribution For their network of Walmart super centers and that was very different than The came aren't coming out of kresky distribution that they were piggybacking off of Jeff's like we can do the same thing here, but we have to do it and I know we need to do it But I can't really do it But I know some people who can So In early 97 he enjoyed together I think according to Brad who's very much a joint effort of both of them probably John Dore was involved too They start traveling Bentonville on recruiting trips canvass and poach to canvass and poach and they They zero in on a target Rick dollzel their number one draft pick Rick Dollzel and I think they had been courting him before the IPO, but he didn't end up joining till after this It was like a year long recruitment process to get Rick to join and at one point He actually commits to joining and then backs out and he was really conflicted about this He am he super plugged in in the Bentonville community is an important part of Walmart Not only was he deeply embedded in the Bentonville community So Rick was technically the number two person in IT at Walmart and as we talked about last episode You naively might hear that sentence and be like number two person in IT at Walmart like who's that no Walmart was a Amazing technology company and especially distributions apply chain logistics They're the best in the world at this point. They had been the largest computerized logistics A distribution company in the world and operated their own private satellite network to communicate amongst all their stores And had been doing that for a dozen years a very impressive back end technology. They were the first Big Corporation in America to adopt technology and say That is going to be like the heart of what we do and Rick was the lieutenant who implemented it all he was the hands-on guy doing it So Jeff and Joy and John and the board days here are like if we can get this guy he's the key so They go through this year long recruitment process like I said At one point they convince Rick to join and then he calls him back and is like no, I'm not gonna do it He calls them back Because Lee Scott Walmart CEO the third CEO of Walmart in history Takes Rick aside when he hears this and he's like Rick You've got a future here you could be A future CEO of Walmart. You're making a big mistake He says you're making a big mistake and B He says which he's totally right on he's like look We've studied these Amazon guys Walmart is no Barnes and Noble they know what's going on He's like we know how they're doing distribution over there They're gonna hit a brick wall When they get to any kind of scale which clearly they're gonna get to this year It's gonna all fall apart over there you know that you know how this works you would be committing career suicide If you go take this job Which that was the risk I mean It paid off in a huge huge way largely because Rick was very successful at doing what needed to be done But that is for sure the risk of making the jump eventually Amazon Jeff and Joy and everybody they convinced Rick to make the jump and so right before the IPO in early 97 he joins and Jeff knows they're gonna win at this point So Brad writes in the everything store Bezos had predicted that Barnes and Noble would have trouble seriously competing online And in the end he was right the rigios were reluctant to lose money on a relatively small part of their business And didn't want to put their most resourceful employees behind an effort that would siphon sales away from the more profitable stores On top of that their company's distribution operation was well entrenched and geared towards servicing physical stores By sending out large shipments of books to a certain number of locations The shift from that to mailing small orders to individual customers was long painful and full of customer service errors For Amazon that was just daily business Hmm there we go. So Rick He alone joining is like Huge he also air lifts about a dozen executives out of art to come join him So when he finally does officially accept the offer Walmart's like you're dead to us And so he gets escorted out of his office by security the whole thing which In retrospect was a mistake by Walmart because that just makes Everybody more curious inside Walmart like dang red. He could have been CEO at this place And he just went to go be head of IT at this company and see I better go find out what they're doing Like I want to follow Rick and at this point Amazon is well underway from transforming of a culture of misfits and geeks who want to be able to ship rare books online To like MBA city. This is where they're getting experienced executives They're really turning on the recruiting engine from top business schools and Walmart in Walmart There's sort of two different ways to look at Amazon and I think on this show we focus a lot on the sort of business side of it Where there's the unbelievable cash flow dynamic that we'll talk about there's the whole get the investors you ask for There's the constant reinvesting in growth. But up to this point, you know when you listen to these interviews with Shell Capin or reading all the stories on Greg Linden's blog Who's an early engineer or all the interviews Glenn Fleischman has given it really is about Adapting technologies that were not really ready yet Being the first and biggest and being with misfits on the internet There was a big exiting of the sort of 94 to 97 crowd in 98 and 99 as Del Zell and his people and all the MBAs sort of come in to say Okay, it's working and it's not just about this quest for odd books. Yeah I actually would put Del Zell on the Walmart crew I think they're three key categories of people that Were necessary for Amazon to succeed. They were the technologists Shell in the early days and the Freaks and Geeks but then that evolved into a world-class technology organization over time There were the MBAs that we're going to talk about in a minute The Andy jassies the Jason Kylar's the Harrison Miller's the Jeff Blackburns And then there were the Walmart people the Rick Dalzel Jeff Wilkie didn't come from Walmart But he's very much cut from that cloth the back-end retail logistics distribution people and you really needed world-class all three of those to make this work Yeah, so on the distribution and supply chain Front more than a dozen Walmart executives come over to Amazon in late 1998 Walmart suz Amazon for trying to steal trade secrets the case settles with no damages But there was damage it happened that DNA came right out of Walmart and right into Amazon Yep, and to be fair like we said It's a different thing than the Walmart supply chain that they're building It's the Amazon supply chain which They didn't realize enough of that first there was all sorts of false starts in Amazon getting good at distribution because Even though they knew better they sort of were copying the Walmart playbook and they were doing the classic Amazon thing They were brute-forcing their way through the maze learning from mistakes backing up turning left and going the other direction But they needed to go bump into that wall to do it. Yep. So When Del Zell comes over and all the Walmart folks they had the warehouse in Seattle and they say like no You don't want a warehouse you want a distribution center because a distribution center That's the Walmart model that's Walmart where the first distribution centers like you want something more sophisticated So they go in 1998 from the one warehouse in Seattle to six distribution centers the Seattle warehouse becomes one Delaware and Nevada, Georgia, two in Kentucky You notice they're going to all these states that are like close to big population states But not but in the states yes, but then it actually was will key later Who said no, we don't want distribution centers. We want fulfillment centers and so that's what Amazon is today and there is a fundamental difference So we're not distributing a bunch of goods to stores. We are fulfilling and customer orders To end customers every single one uniquely and we need to optimize them to Make every single order happen for the very first time. It's ever happened totally in a sort of unpredictable way I mean predictable and mass, but not on an individual level for years and years nobody Realized this but what Amazon's building up on this side of the business is An enormous if not the largest part of their moat today Amazon has 185 fulfillment centers around the world they have 96 airplanes of their own airline They have a maritime company. They have 200,000 delivery vans. They've got another 100,000 electric delivery vans on order I mean the company employs 1.6 million people most of which do this Yes, and here's the moat from the view point of the customer All that is free Jeff obviously wasn't envisioning that specifically, but like this is why they're going to be burns a noble And this is why they're going to be db and this is eventually why they're going to be Walmart in e-commerce Yeah Well, tell us about ebay if you were to pitch me on both of these businesses and put on my venture capitalists hat And you told me that I could take this really asset heavy inventory business With an unbelievable amount of capex that needs to be built out with all these fulfillment centers with Amazon Or I could run the high-gross margin asset light business of ebay 99 times out of 100 I want to invest in ebay, but Amazon dominated ebay. So how'd that play out? So The competition with ebay the Barnes and Noble thing. Yeah, that was the first Battle the Amazon wins, but it was obvious they were going to win that ebay like this is a real fight. So At first They're different ebay is auctions. It's beanie babies. It's pes dispensers Which by the way that whole legend of PR started ebay. So his wife could collect pes dispensers That was a PR person made that up to humanize the story. That's not what happened auction web not ebay So as all this is happening you mentioned the NBAs Jeff and Amazon start hiring Andy jacy Jason Kylar Victoria picket Harrison Miller Jeff Blackburn blah blah blah all these people who are coming in all these MBAs They're all tasked with adding a new category of tamazon Music and CDs. That's what jacy does Kylar does DVDs Victoria does box software Harrison Miller does toys Chris Payne does electronics Jeff Blackburn leads bd and starts buying all these other internet companies pretty quickly Amazon and ebay They're competing Much more head to head than People originally thought so ebay started as auction web in 1995 by Piero midi are didn't turn into like a real venture back company and changed its name to ebay until 1997 after amazon was already public and of course famously benchmark invest 6.7 million in ebay in the fall of 1997 producing one of the greatest venture investments of all time So that was fall of 97. I think they own like 25% or something of you know a fair assumption We'll go tell that whole history soon, but ebay goes public in September of 1998 At a two billion dollar market cap. I mean ebay was the winner at this point in time I mean everyone just looked at it was like oh, that's the best calm business and Also think about that series a and 97 raising seven million dollars two billion dollar market cap IPO in 98 Yes Come on. I remember thinking how insane it was when snap went public after what was it four years four years? This was at all time insane moment with ebay going public and mainly at an all-time high Oh, they're legendary stories of administrative assistance at benchmark retiring the little piece of the carry of the one investment in Yeah, the market cap didn't stop it two billion when ebay went public by the next year in 1999 They hit a 25 billion dollar market cap That's a big company by today's standards and we have trillion dollar companies now And it's effectively four years from auction web, but it's two years from ebay. That's impressive. Yep But as all this is happening in the summer of 1998 right before the ebay IPO, but as Amazon and eBay are more like wait a minute. We're kind of going in the same direction here Ha ha ha ha Meg Whitman and Pierre Fly up to Seattle Meg Whitman of Disney strat planning fame Disney high margin media company keep all this in mind. That's the DNA of Of Meg they fly up to Seattle to meet with Bezos and blackburn remember Amazon's the public company at this point ebay still this little startup that it raised the series a from benchmark They're hot, but you know, they're still startup Jeff and Jeff take them on a tour of the Seattle fulfillment center Pierre is like he's such a like engineer. He's like oh, this is super cool You know, then they sit down to meet the two Jeffs make a kind of maybe not quite like the Barnes and Noble dinner But they make a sort of oblique reference of well, maybe Amazon should Will acquire you supposedly according to Brad. They sort of float like a six hundred million dollar number if such a thing were to happen So Meg and Pierre get back to Silicon Valley and supposedly According to Brad Pierre's like wow that was really cool man that fulfillment center they're building something very different And she did maybe we should think about that and Meg supposedly says I think this is from an interview with Pierre in the book Make says Pierre this is not a direct code I'm paraphrasing Pierre warehouses are not cool We never want to operate warehouses. You know what is cool? high margin internet businesses. That's cool You don't want to be mucking around with warehouses well, and this is the very very very starkest illustration of What's the best business model over the next few years and What's the best business to be in long term well the best business to be in long term period is Delighting your customers more than they ever imagined and The best business to be in certainly for the next few years maybe even the next decade if your eBay is a high margin true internet business But Bezos is thinking in decades and he's thinking How are we possibly going to be the best place to buy something on the internet a decade from now unless it's Extremely reliable shipping times very short shipping times. We have it in stock They're buying it from a vendor that they trust that is secure All these things sort of require us to either be the merchant or at least be the ones who fulfill it and keep it in a Distribution center of fulfillment center so They're both right on different time frames and my favorite Bezos quote is and this I think comes from that very first interview that I referenced earlier I may have watched every interview Bezos is given in prep for this But that one has all the highlights in like three to four minutes and you know, he's still got hair So long term there is never any misalignment between customer interest and shareholder interest so Jim and that's such a Dramatic statement because I think a lot of people would argue with that and He's thinking on an infinite time frame. What happens after this meeting with Megan Pierre I think really illustrates Just how special Jeff in Amazon as a company are because He makes a mental and emotional leap that I don't know many people could have made He both believes everything you just said I've read made in America. I'm building out this advantage It's going to be my mode. I'm going to like customers. This is the way and desperately wants to beat eBay at auctions well, it desperately wants to be eBay, but he's like and eBay is also right and this starts at journey, but Amazon today is that Amazing back-end distribution like we were just saying you can get stuff from Amazon Faster and better and cheaper than just about anywhere else on the internet and certainly an aggregate of everything you can buy Amazon is head and shoulders above anybody else and You can buy from other people who are not amazon.com on Amazon and that is all thanks to that meeting Yeah, I mean this is again Amazon having to run into a wall back up try it again So obviously they don't buy eBay Obviously they naturally do have to do the next thing which is even though Amazon is focused on the customer They're also focused on their competition. Of course they are Jeff has all these quotes about how the customers I think this is in the 98 letter maybe the 99 letter We believe that our customers are very loyal up until the moment that there is a better way for them to solve their problems than buying from us And so that's off the top of my head. It's not exact, but it's close and I think His realization is okay if eBay is grown really fast and there's a way to get something Rareer or cheaper or something we kind of have to be in business doing that too So this is Amazon's first very expensive failed experiment with Amazon auctions So after the meeting Jeff bases turns to Jeff Blackburn is like auctions could be the future We're gonna start a secret project to clone eBay within Amazon It's almost like the book predator with Barnes and Noble except they're actually competent And it's not like we're gonna like learn from eBay and apply it to our business go for a different segment than eBay or like two auctions differently We're gonna go directly at a eBay doing exactly what they're doing. Yes now makes sense why this would be secret It's also secret because Scott Cook the founder of into it is on the board of both companies So Amazon starts working on Amazon auctions literally Exactly on of eBay now eBay did not have PayPal at this point in time So paying on eBay was this huge source of friction and a huge advantage for Amazon Amazon has your credit card Amazon finds out that of course Megan Pierre and her they're not dumb at eBay. They know this is a problem They're talking to startups about acquiring startups. They couldn't you know solve payments on eBay now. This is summer 1998 There's no PayPal yet. Confinity the first kind of you know, yeah They didn't even get started until the end of 98 like early 99 Wow eBay is talking to a startup called accept.com And it wants to acquire them to handle payments on eBay Bezos swoops in and Amazon steals the deal and acquires except calm Mostly so that eBay doesn't get it and they just went public you know Amazon's got all this cash from that so they're feeling themselves and feeling like they can do stuff like this Yeah, you may can't do this yet. You know, Amazon's got highly valued liquid stock all this cash blah blah blah If that had gone otherwise, I don't know about PayPal like there's probably no PayPal There might not be a PayPal mafia. Yeah, great point man. So they can valley like totally Turns on a knife point at this moment in time. Okay, so March 99 Amazon launches Amazon auctions clones eBay computer eBay and shocker you haven't heard of Amazon auctions It's a flop So here's an interesting comment on it So Greg Linden writes on his blog again this early engineer who worked on personalization the noxians a bunch of other stuff So when the site launched it was technically superior to eBay's faster better search and several new useful features The inventory was reasonable but not large This is one of those things where the flywheel was just already in motion When you have the network effect of more buyers attracting more sellers and more sellers attracting more buyers like eBay had And they were a couple years ahead It was just already in full swing and even if you have a more technically superior Interface and the advantage of traffic on amazon.com that they could send there like it didn't matter Yep, we didn't have the network effect and Amazon wasn't really prioritizing it So you go to a product detail page on amazon They had invented this pretty amazing thing that really pissed off all the booksellers Which was when you look at a product detail page you could buy new and used They're like a same book So we'll put them both right there And of course that pisses off the book publishers because they're like wait our whole thing is that you want to go buy the new book And you can't buy a used one right next to the new one that the used books are on this other distribution channel And Amazon's like we don't care The customer can choose which they want from one singular unified product detail page Which flash way forward to Market for sale Yes, it's the same thing today you're competing as a third party seller to be the one that gets the traffic from the product detail page when people click the buy button So they weren't doing that with amazon auctions yet no it was a separate tab separate say auctions.amazon.com It was not getting Amazon's traffic. Yeah, didn't have a network effect another reason people like eBay man They just totally shrugged off Amazon as a competition beautiful business model. So their market cap continued to go nuts Yep, now Jeff so you acquired him except calm to keep it out of the hands of eBay They go start acquiring like a lot of companies a lot of startups in this era partially I think to keep them from eBay and other people partially because I don't know everybody was drunk back then and they were investing in a bunch of them as kind of hedges They looked at pets calm and they thought oh, we're not going to get into ship and dog food for a while In fact, I think they had tried to ship some cat litter at the same shipping rates as everything else and it was super expensive That's an example that's referred to very often by early amazon employees as sort of a failed distribution Totally mispricing thing. Yeah, they sent a bunch of money into pets calm Cosmo, I think they owned like 40% of it or something at some point totally So the craziest of all of these acquisitions just from the story is a company called Jungly Yes, which was referenced on the Walmart episode Indeed, we're not going to talk about what jungly actually did it was a comparison shopping site started by three Stanford computer science PhDs and a business guy from net scape What it was doesn't matter that business guy from net scape his name was rom shri rom That might sound familiar to some folks, but probably not to most people So amazon acquires this company for like a 150 175 million dollars something like that They're in Palo Alto But Amazon's like you can't work there anymore. We can't have a tax nexus in California I remember this is still in those days. You got to move up to Seattle So the jungly team like all right, well you just gave us a bunch of money. Okay. We'll move up to Seattle They hate it the acquisition doesn't work out. It's ill-conceived from the get go within a few months They all quit and they move back to Palo Alto Which by the way, then they would go on to ultimately start the thing that would be acquired by Walmart Which became Walmart Labs, which became yes probably the second biggest reason that Walmart is a very real competitor And e-commerce now second only to jet and mark lory So they're back in Palo Alto rom the business guy from net scape I assume through his co-founders the Stanford CS PhDs He gets hooked up with two other Stanford computer science PhDs two guys named Larry Page and Sergei Britt He he he he Jungly got an acquired they made all this money, you know and Sergei and Larry are like oh we want to raise a little money for this thing that we're doing Also how crazy is it that we're nearly three hours into the story of Amazon? Amazon's already public. Yes, and we're talking about Larry and Sergei at Stanford before Google's founded so Rom's like sure you guys seem promising this whole back-ra paid rank thing. I get it. It's got potential Great He invests the first $250,000 in Google and he joins the board of Google now a couple months go by About six months to be exact Jeff and rom kind of stay in touch and even though they left Amazon their friendly Yep, here's about Google calls up rom and he's like hey, I want to come meet these guys Rom's like sure come on down to Silicon Valley. I'll host you all at my house And was Jeff interested in search yet Amazon got obsessed with search and that sort of a nine era of 2004 Did they have any seeds yet? I think this leads to that. Okay, so Jeff and McKenzie Fly down to Silicon Valley They all go over to Rom's house They have a big, you know nice breakfast A lot of backslaping rom Larry Sergei Jeff McKenzie after the breakfast Larry and Sergei leave Jeff takes Ramicide and he's like hey, I want to put some money in these guys too and rom's like dude The seed clues six months ago and like Clinars Sequoia like they're circling about doing a series a like Jeff's like I don't care Just like I'm Jeff Bezos. Yes, that means nothing to me I want in and I want you know in the same terms as you So Rom goes to Bathroom and he convinces Larry and Sergei to take another $250,000 of Jeff and McKenzie's personal money at the seed price Which was I couldn't figure out what it was But the series a that would happen shortly thereafter of Google famously split between John Dora Kleiner and Mike Meritz at Sequoia was at a hundred million dollar post money valuation Which was insane for the point time and Mike Meritz came in and told Doug Leone as Doug told it on our interview with him Even after making this investment. He's looking at Google and goes we've never paid so much for so little Yes, oh, if I got that episode with Doug. Oh Amazing what I highlight. Okay, so that's done at a hundred so we can say like I'm in a guess somewhere 20 million 25. I know I mean ROM led this 10 My best guess is 10 or maybe even lower post so you think rom got like a 10 to 20 X from the series a I think so I don't know ramen Jeff we should say And McKenzie I think it is probably safe to say that Jeff and McKenzie only did least one percent of Google personally Probably even after dilution from the series a cuz they didn't raise another venture around That's right Google went public just on that series a they did Google one of the most immediately cash generative businesses of all time. My god Well, they had to you know walk in the woods before they found the paid search business model and you know all that but like My god So Jeff has never commented he's been asked he's never commented on Whether or not he and McKenzie sold their Google shares But they wouldn't have even had a chance to sell before the IPO So at a minimum he held to the IPO Like one plus percent of Google probably held longer than that like I don't know That's how Jeff and McKenzie got wealthy So in 2004 Google IPOed for 23 billion dollar market cap. Yep So their shares would have been worth 230 million dollars quarter billion At IPO Which was 18 years ago And since then over the last 18 years Google has 65 x from there That was me laughing there, but you listeners you should just imagine Jeff Bezos laughing there Yes Oh man, so Yes, even if Bezos wasn't selling any Amazon shares for a while he had plenty of capital to work with for doing things like investing in Crazy cool clocks and rocket companies and venture funds Benchmark PSL which also I don't think it was the eBay fund it couldn't have been the eBay fund But yeah, then Bezos becomes a large personal investor in Benchmark in the future Of course the main backer of eBay. So yeah, it's also in zestress think about it this way too What if Jeff still owns a percent of Google Whether Google cloud wins or whether AWS wins Yes, especially now that Jeff's just a board member of Amazon Scott Cook was a board member of Amazon and eBay. What is he on like 17% of Amazon today something like that something like that. So he's only 17 x more incentivized for Amazon to win than Google win We're making up numbers here. We're sort of we're speculating quite a bit on what price he got it and everything And he got access because Amazon bought a company and then they all left but he maintained the relationship I mean these things life is long Amazing I feel like there's a lesson there and the lesson is Investing Google I think yeah, that's all I can take away too Back to Amazon despite this Unbelievably bountiful win fall for Jeff and McKenzie personally things are pretty bad At Amazon at this point in time the dot com Euphoria is starting to Wain some cracks are starting to show barons in the spring of 1999 publishes the famous amazon.bomb article amazon dot bomb There were some analysts who were still very very excited about Amazon at this time A Morgan Stanley analyst with the name that some people will definitely know from her Clienter Perkins days and now bond days Mary Meeker at the time just at Morgan Stanley as an analyst wrote right around IPO time that amazon is the leading retailer Merchandiser on the internet She said the valuation gives us heartburn of gargantuan proportion But she did conclude we do not want to miss this one and she was right a lot of her career at this point would come from sort of trading on the professional capital that came from being extremely right about Amazon Totally, but that doesn't change the dot com bubble starting to show cracks and then eventually pop She would be out in the cold here by herself because The amazon dot bomb peace comes out Amazon reports. I think either q2 or q3 earnings in 1999 and I mean it's the same story like lots of revenue growth hugely unprofitable. We we didn't say joy And then her success she worked super hard for three years totally burned out her successor Warren jensen took over a cfo from delta Airlines is where he came from Joy first and then and then Warren to they orchestrate raising about two billion dollars in convertible debt on the debt markets Which totally saves amazon skin and was way more than they raised in the IPO way more they only raised 55 million Yeah, sometimes people are like oh amazon. What a great example of capital light They raised 10 million dollars in venture and 55 in their IPO and built amazet like none of them Hmm. There is another two billion dollars and they used it and they used it amazon would have been amazon dot toast Had it not been for that So summer in 1999 the stock starts falling The board gets pretty worried about the company about Jeff I mean it's hard to remember this, but yeah this happened the board asks Jeff To bring in a coo The compliment him that's so painful to read this and like go back that this happened and They bring in bill Campbell coach the legendary bill Campbell who we should say he's legendary He's the moon speaks very highly of him He was brought in to twitter and then worked as a pseudo nefarious agent on behalf of the board to house the CEO You got a wonder what was going on here too No, it's not just twitter like bill. I think probably genuinely was amazing and The testimony of so many people to him even people like Scott Cook who he came in and replaced So it wasn't just twitter apple with Steve Jobs Google with you know Eric Schmidt into it with Scott Cook It's amazing that the thing that he got reputation for was being a coach when in fact the thing that he really did repeatedly It was convinced the founders to move aside and bring in the adult supervision Yes, there's a fact pattern here for sure doesn't mean he probably wasn't amazing and like didn't help all those companies and you know, but Yet the Amazon board brings him into Amazon and simultaneously asked Jeff to go find a coo So supposedly actually a leading candidate for the job was Jamie diamond That's right. Isn't that crazy? What could have been they settle on Joe Galley Who had been an executive at black and decker and he had actually Signed to go take an executive role at Pepsi running the Frito lay division What other coo transition to CEO of tech company came from Pepsi John scully that would be John scully So there's a scully situation going on here at Amazon in 1999 So Bezos does take this seriously he reorgs he has everyone report to Joe black and decker guy to Joe and You know, he says my early direct report is now Joe and At the same time he's also like you look your coo you're not CEO and Joe's sort of under this impression Probably from talking to Bill Campbell. We don't know for sure and probably from talking to other board members I think I'm supposed to do CEO type stuff and like I mean I think I'm supposed to like be the coo for a while and then Move into this role and you know do it my way We're gonna do it the way that we did it at black and decker and from the world where I came from and Amazon rejects this so Joe starts running Amazon sort of he starts sort of trying to get people to start Moving to his way of doing things and his style of leadership by the way while he's commuting back to the east coast every single weekend Rather than being on the ground in Seattle. Oh man. That wasn't the worst offense the Amazon executives just Reject this like a bad organ transplant Everything you need to know about the culture clash here is that Joe Was one of those old school executives who the way he did email When he had his secretary printed out and read it to him and then he would tell her What to respond yeah actually that sounds pretty awesome. I would love that I would love did you definitely would yes, I would do that all day long or actually for it's little time as possible as He's in often as possible as rarely as possible, but yeah, that's not gonna work running Amazon So Joe's out. Yeah, he does though make one Absolutely incredible lasting contribution to Amazon which is He was a key part of recruiting Jeff Wilkie I think Jeff and everybody was too, but that absolves a lot of sense And for listeners unfamiliar with Jeff Wilkie what did Jeff go on to do at the company? Jeff basically inherited and then expanded Rick Delzels Roll and then eventually when Bezos Started a step back and jazzy became CEO of AWS and Bezos was CEO of the whole company Jazzy's counterpart and CEO of Amazon retail was Jeff Wilkie So he's got a little bit of a legacy at Amazon Joe does as he parts ways Yeah, and he would go back to the World he came from he became CEO of the holding company that makes Hoover and dirt devil vacuums and I think Did very well there, so probably sold a lot of money Amazon over the years probably sold a lot of them on Amazon Yes, yes indeed All right, so Amazon's woes though are real they now have a big debt service to pay based on this big convertible bond offering And 1999 they're still growing at what is honestly an insane pace It's not the amount that they were growing before I think they're about tripling revenue which to be clear in 99 is like 600 million to 1.8 billion I believe a blempressive But their stock price the previous year from 98 to 99 had 10xed and so expectations are through the moon for this company It's not just solid fundamentals that we're valuing it the way people are valuing Amazon is Sure, there's no net income or gap profitability coming out today But they're growing so fast they appear to have category leadership And if the internet's really going to be the thing that we think it all is I just want to own a piece Yep, and so this is of course how bubbles happen then bubbles of course pop Oh my gosh, we wouldn't know anything about this in recent history would we? No, not at all So by 2001 it's becoming clear that they got a pullback and so in 2001 they lay off 1300 people And this is almost like Amazon have been so dominant for so long today that it's hard to even think about the fact that I don't know how close to death They were but they almost Well, they weren't dominant and that feels weird saying today remembering a time where it wasn't always succeeding. I think they were pretty close to death. So after the whole galley incident what's called an incident and Jeff kind of Reaffirms. Hey, I do want to be CEO here. I'm putting my hands back on the wheel He changes the motto of the company from get big fast to quote get our house in order I think they also had t-shirts made of that that reminds me a lot of uh, what did Facebook change from it was move fast and break things it was like move fast with a stable infrastructure or something like that. That was so funny Not quite the same not quite the same. No, I don't know how related it was to the whole Coach Campbell galley thing or probably was more just about the competitive dynamic but certainly after that I don't know which side initiated it but One side or the other are both came to Scott Cook and we're like dude You can't be on both of these boards anymore And telling Lee Scott chooses eBay and there's he actually has a quote to Brad in the everything store He says up until that point I had seen Jeff only at one speed the go-go speed of grow at all costs I had not seen him drive toward profitability and efficiency Most execs particularly first time CEOs who get good at one thing can only dance what they know how to dance Frankly, I didn't think he could do it And a everything about that is telling but like the whole world thinks the same thing too. They don't think Amazon can do this Yeah, Jeff though Yeah, I think he always believed he could do this. So he announces uh internal company goal That he announces the whole company part of the get our house in order mantra that they will be profitable By the fourth quarter of 2001 So they start looking at any possible way to increase cash flow and necessity being the mother of invention here They start looking around like okay. What do we have? What can we do? We've got a pretty good e-commerce website A lot of people want to have e-commerce websites What if we start going to other companies who want to have good e-commerce websites And we offer to sell them are Website like our infrastructure almost like being Shopify Yeah, this is like Shopify not AWS and they do it in a ludicrously high-touch manner Yeah, it's not like we're just gonna open up our platform This whole obsession with interfaces and platforms and APIs that exist with Amazon today hasn't really happened yet No, so they're like who can we basically do weird one-off partnerships with to create some sort of co-branded Website for them using our technology and all of our people to sell the stuff that they have relationships with Manufacturers on and customers and and that we can then just get paid like a software fee for yes So they do this with ToysRUs and then they do it with borders. I remember the borders branded Amazon. It was really weird. I remember this I would get borders gift cards And you could put them into the border site But because it was also the same back end as Amazon you could then use that on Amazon I wrote totally remember doing this and it worked the other way direction too The clarity of vision on Amazon seems so clear in hindsight But there's these weird things that happened along the way where we were like oh no They were just like in a corner and did something Pretty antithetical to what the drum beat of the culture and the strategy was like How is this strategic with everything that Bezos has been writing in his letters? It wasn't but they needed the money. Yeah So they do it with target. They literally ran targets website for years which I'm honestly they announced that deal on September 11th 2001 Oh rough they even Go pitch the idea to Walmart to do the same thing with Walmart Walmart is uh they're like Yeah, no thanks guys No nice try Here's the super fun part so Amazon is going around pitching all these other retailers Let us take over for you, you know run your website blah blah blah eBay Nose they know Amazon's in a tight spot. They probably heard about galley and Campbell and all this stuff in the fall of 2000 Make Whitman and Jeff Jordan fly up to Seattle And they pitch Bezos on the opposite idea eBay Takes over the failed Amazon auctions and all of third party selling so it'd become Z shops Which we'll talk about now on Amazon just let eBay we know how to do this You keep rather Amazon.com the retail and we'll do third party selling for you with eBay technology I'm it was like wow. Oh my gosh You know that the Michael Jordan meme of like I took that personal Yes, I think from the last dance. I think Jeff took that personal. Yes, I agree. Yes. I think he took that very personal So he calls a meeting remember they're just trying to like survive Get the profitability generate cash flow. They're doing this crazy stuff with target and twice our us I mean at this point they've got over two billion of debt on the balance sheet I think it actually increased from 2000 to 2001 and 2001 to 2002 So they're like really just making the interest payments here and trying to reduce the debt load and produce some Net income profitability, which still hasn't happened still hasn't happened no no, which it was intentional for the longest time But now that they need to do it they need to grow the muscle to do it. Yes So Jeff calls an emergency meeting of at this point it was the esteem the senior leadership Was the J team the Jeff team and then when golly took over and everybody reported to Joe then it became the esteem the senior team which it stayed the esteem which it stayed That seems more appropriate than the Jeff team, but anyway I calls weekend emergency esteem meeting at his house To discuss third party selling on Amazon now I said z shops So auctions I can't remember if that it was still live or not They had tried saying okay, well maybe auctions don't make sense on Amazon But we still want to allow other people to sell on Amazon What if we just do fixed price you know like a regular retail type listing? So they started this thing called z shops But again, it was a separate tab website wasn't like right on the product page of amazon.com They weren't leveraging the strategic asset that they had which was traffic and customer loyalty and What they realized is in one way to look at the real key thing and I think this is very true today The differentiates Amazon positively versus eBay and Pretty much everywhere else selling on the internet is they have an authoritative Product catalog you know if you're on a product page for amazon.com You know what that thing is that you're gonna buy I mean they invented anybody's ever used against the API Like they have asans as I am. It's a unique Amazon identifying number for a product that They have an authoritative catalog on everything they sell and anybody who's ever bought something on eBay You don't really know what you're getting right It's almost like Amazon starting as a bookstore had the benefit of ISBN numbers It's like they decided we're gonna create a proprietary ISBN system for the world. Yes. Yes for all products So they come up with this crazy idea in this meeting and there's some backstory that leads to a which is they on the product pages They had links to z shop listings and that was the only thing that kind of drove actual converting traffic and they're like what if We put listings from third-party sellers. Oh, yes on our own Product pages. That's what eBay wants to do. That's why eBay's interested in talking to us What if we just do that and completely revamp how we think about Third-party selling on it, but honestly everything about the product page and we call it Amazon Marketplace and so they launched this in a matter of months in November of 2000 they launched marketplace first with books And this is like nuts. Yeah people are pissed at Amazon, but you're a category manager at Amazon Your competition, you know Brad writes about this just went from like being Outside the walls of Amazon.com. You just let all your competition Inside your walls in the castle on your product page And I don't know exactly how it works. I think it's more sophisticated than this But basically like if some third-party seller is verifiably selling the same exact product And they're doing it for a cheaper price then the buy button doesn't come from Amazon the buy button buys the competing vendors, you know the third-party sellers product and so you as a category manager If you've got a number next to your name that doesn't accrue to your number nope That goes to a totally different team within Amazon, but kind of just like Amazon Dotcom originally it turns out customers really like competition paying lower prices being able to buy more stuff getting more selection They launch it in November and Even though it launched in the middle of q4 in 2001 Which was a no-no until this point you basically don't launch anything going into the Christmas season You're literally not a lot to push code up until this point and Amazon's history around that time It accounts for 15% Of all customer orders on Amazon.com market place While today market place is over 50% so over half of everything that is sold on Amazon.com is not sold by Amazon I remember the annual letter in 2018 when it eclipsed it and Jeff proudly proclaimed that the third-party sellers are kicking our butt We're very excited about that What did Jeff thing to say this is when founder leadership becomes really important They have an immediate organizational design problem where a whole bunch of people are incentivized and comped against their fiefdom And what you've just done is you've created a brand new business strategy that tells people that the greater good is more important than their fiefdom and In order to rearrange every one without creating massive infighting and churn to march in this new strategic direction It's pretty hard to do that as a non-founder I'm so in awe of Bezos doing this because he almost just got ousted out of his company He's on thin ice the company's on thin ice and this could have blown up the company too I mean this a different business model All of the emotional incentive that I would imagine for somebody in this amount of pressure is like to the board the shareholders every that just be like Okay, I gotta come back. I gotta save can't rock the boat. We got a you cost cut blah blah and he's like Nope, we're gonna like make this radical shift in this dire moment. You're totally right not only is this something only a founder can do It's only something that a very special founder would have the confidence to do Amazingly it works Jeff's crazy goal of the company is gonna hit profitability Q4 of 2001 that you just like plucked out a thin air when he kind of came back after the galley Incident they do it marketplaces a big component of this the website deals with target and toys are us or big component of this In Q4 of 2001 they do 1.1 billion of revenue 59 million of operating income 35 million of pro forma Adjusted net income excluding stock based comp and other you know non cash expenses, which wall street's like yeah, yeah, blah blah blah but they do million dollars Honest to god you can touch it taste it take it home put it in your bank account Gap net income for the fourth quarter of 2001 this is huge they announced results the stock jumps 25% in one day Which no other internet stocks were jumping up in that moment in time right I mean people are looking their wounds after 2004 three years four years Yeah, it was in them an amazing achievement Amazine had seen big jumps before like the Henry blodget thing during the dot com era where it was trading Below 100 and suddenly jumped to like 250 or something and all at once just on Henry blodget saying I think it's gonna go to 400 Yeah, they were no stranger to massive fluctuations in their stock price But you're right. This is one bright spot in a multi-year dark period for tech This is post September 11th. This is like today, you know in the stock market like yeah a year ago Yeah, it stocks jump 25% of the day like, you know great everybody's doing you know This is like everybody else is going down and we went up yep And this is kind of the start of where you start to see oh Amazon might become bigger than eBay eBay basically doesn't have a thriving comeback in the post dot com bubble burst No, it would be a long journey, but Amazon stock price tripled in 2007 while eBay's fell by over 50% And during that year for the first time since like eBay's IPO Amazon finally passes eBay and market cap today eBay's market cap it is large they've done a nice job It's 27 billion dollars even after the big drawdown that we've experienced It's a little bit weird to look at that number because it comes you know, it's got the divestiture of paypal in it It had the acquisition and then divestiture of Skype. So there's some wonkiness. They're post 2015 has been pretty good Yep But still I mean, I think we can declare Amazon the winner here in the long run. Yes I can't tell you the last time I bought something on eBay and god, I'm afraid to look at my Amazon total Okay Few more stories we got to tell about this kind of era of Amazon Before we talk about Another era of Amazon on the next episode So we talked about Google as the years go by after the dot com crash and portal sort of go away and the browse motion on the internet becomes kind of inefficient because the internet's freaking huge and growing really fast Turns out search is really important and so Amazon's looking at Google. They're like god. They've got an unbelievable business It's kind of a monopoly the gross margins are incredible Finding things on the internet seems really important. We should get into that too. Yep It's both an opportunity and a problem for us We want to be the place where people find stuff to buy on the internet Honestly, I mean, I think this is drawing too broad of a brush But I think Google killed eBay, right? You know, the best way to search eBay is Google It's not eBay and the issue with Amazon for a while was the best way to search Amazon was Google right and deaf I mean, of course, you guys are very direct connection to Google He saw this problem certainly before eBay, but you know before lots and lots of people Yep, he has a quote on Google from like the pretty early days of Amazon kind of dealing with this He says to focus on Amazon treat Google like a mountain you can climb the mountain But you can't move it use them, but don't make them smarter As in like, hmm, don't make them smarter about searching our product catalog So for the first time Knowing like what a strategic priority Search is becoming on the internet and thus to Amazon Amazon breaks down and starts a secret subsidiary in California in Palo Alto They do a whole bunch of legal gymnastics to like oh, it's a separate subsidiary. It's not Amazon It doesn't generate any revenue, but this is the beginning of the end like you know eventually after the financial crisis a whole bunch of stuff Happens and they have to just give in and say great. We've got operations. We're charging tax everywhere I think it's a misunderstanding of Amazon to say they're They don't want to pay sales tax because they're being cheap They view it as a competitive advantage where shoppers will shop with them because the items can be five to ten percent less Because there's no sales tax on them again because it's technically putting the notice on the consumer And they're like well corporate income taxes a whole separate thing and you know, no this is about Attracting customers. We have our own methods of paying the smallest amount of that possible But yeah, this is purely about beating competitors to get the customer spend 100% after I graduated from college and I was living on my own for the first time with my own salary and expenses You know, a light bulb went off on my head one day. I was like I'm gonna buy everything on Amazon because I don't pay sales tax Yep, fortunately now I'm in a place where that doesn't matter to me now It's kind of like the one-part episode if saving five to ten percent on your groceries on your item like that matters A lot to a lot of people Totally so Bezos Amazon they see Google they Start a subsidiary in Palo Alto like we can like try and not make Google smarter and play defense here We got to play offense too. We got to improve our own search capabilities So they start hiring search PhDs leaders at this subsidiary in Palo Alto that they call a nine short for algorithms a plus nine letters you algorithms a And like you said at first they're like oh, we should start our own Separate search engine and compete with Google well turns out there's a network effect in search as well Yeah, which is the more data you have on the more searches happening the better searches you can return So that's a full-sare and but There is actually one corner of the internet where Amazon has better Data on searches than Google and that is searches that happen on Amazon.com. Yep Because as much as Google can index all of Amazon's product detail pages They don't have the data on what people are actually searching for on Amazon The demand data the intent data and they don't see conversion And plus there's the review system which we haven't talked about was completely Genius huge to Amazon success. Did you know shall wrote that over a weekend in 96 the original review system? I know amazing one of the first things on Amazon.com But of course those signals from the review system the star ratings the sentiment of the reviews themselves That becomes a really important factor in waiting search. You know, and today like My god search on Amazon like why would you search for products anywhere else? The got Amazon's choice you've got the rankings you got the filtering it's way better. Yep This is the beginning of all that and like we're saying I think it's also the beginning of the end for eBay because as Google gets better Deep linking from Google into eBay becomes the best way to search the chaotic marketplace of eBay And eBay's paying the Google tax on all that you know and Google's the strategic intermediary Amazon is terrified of the same thing happening to them And meanwhile over in Google labs man, I loved when Google was a smaller company I think it was a labs tab and you could click on all these weird little Experiments they were doing that wasn't like Google X Google moonshot stuff. It was like Useful stuff where Google images came out of and like Gmail and those sort of things maps and yeah Yeah, and run of them was called frugal. It was f-r-o-o-g-l-e And I think it was like product search and I think it was Kind of what Google shopping became Dude frugal I may be speaking out of turn without researching the full history But I used to use that all the time again as a broke post college student I'm not bra I mean as an investment baker but like I was making 60k a year living in Manhattan many mattered and I believe frugal was insanely popular and I think Kind of morphed it and shut it down for an I trust concerns. Oh really understanding like I think it actually was like There was a lot of demand for that product. Huh I mean it was comparison shopping I think is ultimately what it what it was So the other thing and this is what's just getting Amazon is so good and we're gonna spend a huge portion of the next episode talking about It's not just that they make search on Amazon better and play defense against Google They do that They also play offense and it you know first it was like oh, we're gonna make our own search engine and that was bad idea Well, what is the business model of search? It's advertising advertising and what do they realize We can build an advertising business With search on Amazon just absolutely brilliant Any web platform of sufficient scale Can layer on for free a second business of advertising because they just have the traffic and they can put stuff in front of people And they can prioritize it however they see fit and I think Amazon's ad business I haven't done the research yet for next episode But I think it's somewhere around 40 billion dollars in revenue now. It is 30 billion dollar revenue run rate of Incredibly high. I mean they don't break out the margins, but like it's so to add It's basically a hundred percent margin business. Yes. You already have those customers. There's no customer acquisition costs You don't have to pay any one out any amount of that revenue for any reason You know, it's like a Facebook ad. It's the best gross margin business in history The other Incredibly impactful thing that comes out of A9 and search and improving search on the m amazon.com website is that Really is one of the catalyst that pushes the company to transition from a model with software architecture To microservices independent microservices and that is amazing for amazon playing defense And that is also amazing for providing Web services to other developers out there Yes, might be able to imagine that are you leaving us there david? I would leave you there. I would leave you there But this is a very special episode and a very special company We've got a kota and are we getting into hardware is that where we're going here? I don't know we've probably done it more than once, but in my mind the canonical acquired episode kota Is the PlayStation on the Sony episode? Oh, yeah, where you thought wow look at all those 70 years of history It feels like we're done and then actually they create their most successful business unit. Yes Regardless of how good we you and I did or didn't do on it like just the story of Sony is one of the most incredible of all time Yes, and then you you know you don't you're done and then The PlayStation and then one engineer in a corner who yeah barely has expressed written consent from management To go build something. Well, it's funny. You know That story is AWS for amazon The story we're going to tell is not as impactful from a business standpoint, but the story is just as good And that's The story of the Kindle and I'm actually quite curious what the business impact is I think it's they don't break it out But I'm curious if you did any analysis at all on what does Kindle allow them to do that? Otherwise might have lost market leadership on or something like that Well, I didn't do any financial analysis, but as we'll talk about in the story Similar to the defense against Google with search It was defense against Apple and the iPod the iPhone the iPad and today I love Kindle My Kindle is one of my favorite things in the whole world. It's amazing But I think probably the way most people consume most content on Kindle is apps on Other devices So the Kindle story This is one of those they were like five people in The internet and Silicon Valley. Oh, I could not believe the people's names behind the original Kindle inception All right, laid on us when I found this out and I texted you as just like oh my god Okay Do you know I know you know because I we talked about it, but listeners I bet very few of you know who Inspired the idea for Jeff and Amazon to pursue the Kindle And let's give a little bit of hints. So when we say inspired they started an independent company Doing Kindle like things e-reader things before one of the first e-readers. Yes The first successful e-reader, but long before it would take off it was not with yink It was with a predecessor technology. It was with LCD Which was a big problem with LCD. How else might you know them? They're the founders of something that their name is not associated with But someone else's name is massively associated with Well, they would take the money that they made from this company and roll it into another little Company that they would then start after this in 2003 called Tesla Motors that's right Martin Neverhard and Mark Tarpening Inspired Jeff Bezos name was on to build the Kindle Here's the story So in 1997 Martin and Mark We're working in Silicon Valley Napster was happening The music industry was getting digitized and eviscerated and you know bottle all the stuff MP3's MP3 players You know it was Total of people and lots of people the two of them included were like It's only a matter of time until other media categories go through the same thing And Videos gonna take a while because bandwidth and file sizes of video is a lot and broadband isn't a thing yet For most people But books are really obvious right smaller file sizes than MP3's Very easily digitizable This should be a thing now what's holding back the industry like unlike MP3's where like it's pretty good experience Downloading them from Napster playing them on your computer MP3 players are becoming a thing There's no equivalent of an MP3 player for a book you don't want to read a book on your computer. You're gonna read a book on a book So they develop they you know go around they like talked a bunch of explore much technology and they're like We can make the equivalent of an MP3 player for a book an e-reader So they start a company they call it newvo media and they make the rocket book If they make a prototype But then it's hardware they need to like bring it to market they need capital they need the largest of Just like their future hardware startup Tesla the largest of a wealthy person who might want to see this Happen so who do they call they fly up to Seattle name me with Jeff Bezos this is in the bubble era and Bezos is really interested and I think Amazon's public at this point yes Amazon's public had just come public Jeff totally gets it. He's like I mean our business is selling books. We're an internet company I see what's happening with Napster. This is happening at some point in some way This is for sure happening at some point in some way. This is the first time I've seen this. This is the first real Like I'm very interested So they negotiate for three weeks and they they want Amazon to become you know to sell books You need like books to sell ebooks you need relationships with publishers They want Amazon to become the store or a store. This is the sticking point a store for the rocket book and Bezos also wants to do it, but he's like look If we're going to do it we want exclusivity I don't want you going and doing the same deal with Barnes and Noble or anybody else right Why would we fund the development of this right and all the customer acquisition for you if we're not going to be the exclusive provider? So like any good entrepreneurs and they hear this they're like all right well Martin and Mark they fly to New York and they talk to the radio brothers They're like hey, we're talking to Jeff. I love that these guys are back in the story. I know they're back in the story And of course Barnes and Noble wants to crush Amazon at this point. They're like great. We'll do the deal with you We don't need exclusivity, but we'll invest in the company. We'll bring Burdell's men the German media company in as well You'll get your publisher relationships. You'll get your store We'll do this and we know Jeff won't do the deal eventually Cisco invests as well In 1999 the device launches to the public and like it's too early, but like Oprah makes it one of her 10 favorite things for the year like it's It's a hit So ultimately gem star TV guide pretty quickly after acquires the company for almost 200 million dollars So Martin and mark they get pretty wealthy and these guys are flush with some cash and you know that literally leads to Tesla like freaking crazy Also, just wild that like if Amazon and Bezos hadn't acquired except calm like Probably no PayPal which means Elon doesn't have the money which means interesting man like the tangled web here is amazing amazing so Jeff and Ever heard They kind of remain friends through all this and like just like all right, you know, no hard feelings like there's plenty of other stuff going on at Amazon and As the years progress they kind of stay in touch and Jeff was always asking Martin like Hey, when do you think the technology, you know, we're thinking about this When do you think it might be ready then in 2003? Apple and Steve Jobs well in 2001 they launched iTunes in the iPod Yeah, amazing people love it. Okay, but it's Apple tiny market share you have to have a Mac to use iTunes to use the iPod great for students, but not changing the world here Yes, not the Apple we know of today And a 2003. Oh, I'm so fun going back and remembering this They launch iTunes for Windows That was such a huge moment for Apple and Steve Jobs knew it like he totally freaking knew it so Bezos and a couple other folks Go down to meet with jobs after iTunes for Windows launches Because they're like shoot you know like we saw a lot of CDs on Amazon Right and jobs is like yeah, you saw a lot of CDs on Amazon good luck with that and by the way like We're not just thinking about CDs and you know music here So um there's now a new threat to Not just any business within Amazon, but like the original core Books is immediately what they're thinking about which is still like a huge Part of their sales at this point or at least media books CDs DVDs. That's a huge part of Amazon's business totally So there's now some urgency in Amazon to deal with this so Jeff calls Martin back up But they've already started Tesla at this point I mean Yeah, we got to do this now and Martin's like okay, well The LCD screen that we used on the rocket book had a whole bunch of problems with it I talked to these guys at the MIT Media Lab about this technology they were developing called E-Ink And it wasn't quite ready yet, but you might want to go like Check them out and see if it's Ready now and in particular the LCD uses too much battery It's bright so it's not good for night reading necessarily You can't really read it in the sun What do you want to do with a book you want to take it to the beach you want to read it outside You want to read it in bed all these things that LCD screens especially at the time are not good for yep So This is such a priority This was after a nine so they already had the one subsidiary in Palo Alto They set up a second subsidiary in Palo Alto called lab 126 With the secret mission of make an iPod like e-reader device And I mean it took them a while years I mean two full years And then they slipped their release date by a full year it was supposed to be out for one holiday season didn't come out till the next But when it came out it was earth shattering Not only is it shocking that Amazon is doing hardware because that is not a thing that they've ever done before and that's not what we expect out of them And there's only a few big successful companies that make consumer computing hardware that sort of thing But it really was the introduction of e-ink as a viable technology people really hadn't seen it before in consumer devices I mean they were Gosh go back and look at photos of we'll look to some of the sources of That original kindle that launched It took till 2007 It had that keyboard on it yeah, it had the keyboard It had a wonky scroll wheel because Bezos was like I've got a scroll wheel on my blackberry and I want a scroll wheel on my gimbal Oh, yeah, like he was constantly fighting with the design firm that they had hired to produce it and putting him to his own beliefs about how it should be even though they are the designers And they would come back and they would say they would have input on the business model and he's like Not only are you you're going to take my design advice and you're definitely not giving me Jeff Bezos business model advice and that's the thing The device nailed a couple things e-ink technology Actually wireless which was a Bezos thing like because Wi-Fi still wasn't quite everywhere Whisper sink I think was the name of the whisper sink. Yep or whisper net There were obviously things wrong with it like the keyboard this girl wheel But the device was good enough to have a book like experience and then on the business side You can buy any book Ever made anywhere anytime for $10 and now is just Unbelievable completely changed the industry gosh There's too much to get into on this episode But that would be the seed of massive amounts of unrest and lawsuits in the entire book publishing industry involving Amazon Apple all the big publishers allegations of collusion This was the thing that violently shook the book industry like Amazon kind of did by launching and by aggregating so much of the power But then the thing that really Upended and truly disrupted the industry was this We're launching a consumers at $10 which is funny. It wasn't piracy. It wasn't like the music industry right It was $10 for an e-book. Yeah, so that I mean the Kindle itself incredible story, but then that leads to Fire tablets echoes The lady who lives in your echo Fire TV prime video ring hero like all this stuff and freaking audible Oh my god right after the Kindle launch they buy audible Amazon buys audible for $300 million dollars today Audible has a 40 plus percent market share of Audio books, which is a five billion dollar industry growing 25% Wow every year. I tweeted about this. This is gonna be one of my like most liked tweets ever I cannot believe it like audible would be a 10 billion dollar company on its own more. I don't know It's crazy. Yeah, you're right In some ways the on its own thing is the coffee out there because so much of their demand comes from being on the product detail page of a book When you go to check out and me having the trust and everything that comes guaranteed from using my Amazon account for it all right, so That's audible So we've got Kindle we've got audible. There's a lot more to talk about here before we get into AWS, but I think um Like I really want to dig into prime But let's save that for playbook because I feel like that's gonna be a good place to hit sort of what's going on there Great and before we transition to powers and playbook and our analysis section I want to thank our friends at NZS capital indeed So This is a very unusual sponsor for us. This segment is brought to you by our friends at NZS capital brinton Brad joe and john and we reached out to them initially to propose this idea of Hey, do you guys want to do a paid sponsorship? Thought it was kind of a crazy thing to propose and they jumped on it and for those of you who listened in the last episode You know that they gave us one very large caveat They said that the only thing we could ask listeners to do is read one white paper Think about it and then offer feedback to further refine the thesis And we got a bunch of feedback from people that what NZS is observing here is really interesting And so for people who are new listening to this episode We want to dive into that same topic again So many of you know them from the special episode we did last fall on complexity investing in semi-conductors But for those who don't know they're a long only global equity fund that manages money for institutional and accredited investors They have over a billion dollars under management and the team work together for many years before starting NZS in 2019 They're among our very favorite thinkers on acquired and they are just some of the most genuine down to earth curious knowledge seeking folks We know So today we want to talk about the idea that really started NZS's investment philosophy 10 years ago complexity investing This grew out of research work on complexity by the famous Santa Fe institute The idea as applied to investing is that it is literally impossible to predict the future Which many try to do in investing because every market and every company is a complex adaptive system This means that an investor simply cannot take in the vastness of inputs to a company like their competitors or geopolitical changes or new technology inventions like the internet hence complex To consider how all of these inputs then interplay with each other and cause the system itself to change hence adaptive To predict the future with really any level of precision I feel like we could say this about any episode but like Amazon more than anything I mean we just told This kind of first part of the history of Amazon and so many moments where like if you had all of the inputs and you're looking at Amazon from the outside You would call this company Amazon dot-tost or Amazon dot bomb but Jeff changed the company changed They adapted and here we are So if you're willing to Accept this as fact that you can't predict the future as an investor or really anybody Then the question is what should you do? Well, NZS's thesis that they lay out in the paper is that you should invest based on two dimensions Resilience and optionality Resilience meaning how resilient is a given company to varying degrees of change? Is it a company like Amazon that is able to withstand and thrive through even very large Shocks to the operating environment like you know, covid or the dot com crash or 2008 the financial crisis or you name it Or is it more like another great company Tesla? specifically in the early days of Tesla that was a very highly Path dependent situation Everything had to go right and if one thing changed or didn't go according to plan the Tesla or SpaceX Wasn't gonna make it dot-tost now of course that makes Tesla and SpaceX sound bad But resilience is not alone enough to tell if something is a good investment the other dimension you want to pay attention to is Optionality and obviously early Tesla early SpaceX had huge optionality associated with them and By optionality NZS means really very similar to venture capital what we talk about so much on the show asymmetric upside So many things could derail something that has high optionality But if it goes right is the upside worth the amount of risk that you're taking Obviously in the case of those examples we just mentioned yes was the answer Now one of the other key insights that NZS has is that These are not inversely correlated variables often they are but you can also find companies very rare companies They call rootmose resilient without of the money optionality companies that are both highly resilient and have optionality Still associated with them and those are obviously the very very best types of companies to invest in If you're looking at a company you think as a rootmo then you're sort of investing at a resilient company But you might get some skunk works project that they're working on as optionality for quote-unquote free because it's not priced into the future value of All the cash flows from the current resilient business You know like web services from the internet's largest retailer in 2008 or 2009 something like that something like that Well to close out the segment if you're interested you should check out the fascinating white paper from NZS Which has some killer diagrams in it by clicking the link in the show notes It is well worth reading and we say this literally just has fans of their ideas We are not clients of NZS And they really do want feedback on their ideas So you can of course email brinton and brad from their email addresses right there on the paper or even better We are going to do a zoom call with them to talk about these ideas together There is a second link in the show notes to add that to your calendar very soon after this episode on Tuesday August 16th 2022 at 4 p.m. Pacific time we would love to see you there Indeed thank you NZS all right our thanks to NZS and now back to Amazon Well David let's talk about power. So of course this is us referencing the Hamilton Helmer book seven powers And the core idea is really investigating what it is that enables a business to achieve persistent differential returns Or basically be more profitable than their closest competitor and do so sustainably And the seven options the seven powers that Hamilton identifies are counter positioning scale economy switching costs Network economies process power branding and cornered resource and David as I was preparing for this episode again I mentioned this earlier, but I tried to watch literally every Jeff Bezos talk especially from the early days And there's this amazing one that he gives at Stanford at GSB Literally the week that Amazon Prime first launched Oh so cool, and he's sort of talking about it as this brand new things like it's $79 a year And he's observing this really fascinating thing about the business where He wants to transform customer experience from a variable cost into a fixed cost And he sort of describing what if you could shift all of that to a really really big fixed cost basically to get operating leverage on it And one example that he talks about is that they have this great feature and everybody's experience As I'm sure when you go to buy something on Amazon There's a little banner that tells you you already bought this if you already bought it And while that may seem like it can diminish short-term revenue his view is it builds trust with the customer for the long term Because you say oh thanks Amazon maybe I already have this in my house or maybe there is a chance you wanted to buy the same thing And you just get that delightful customer experience that reassurance that this is indeed the exact same asin Or an Amazon identifier of a specific product that you are looking for Well, he points out well this would cost us the exact same amount to build this thing that provides customer confidence Whether we had a million customers or 70 million customers And what he's describing is the most perfect vivid example of scale economies Where once they get all these customers and once they acquire them all to prime So they are all loyal subscribed guaranteed to shop here customers Then you can amortize every new investment and every new feature across a massive customer base So how could anyone build as good of an experience as you can because they have to fund it with revenue from fewer customers? I'm not saying that Amazon only has this as one of the powers that enables them to achieve persistent differential returns versus competitors But it was like Jeff was writing that part of the book as he was sort of giving the speech and it just sent alarm bells off in my ears That's awesome. Well Maybe now actually is the right place to talk a little bit about prime and this dynamic yes so true Now as you say Amazon isn't necessarily the only company that this is true for you could say some other things of Walmart Especially now that they have Walmart plus You could vary Certainly say the same thing of another one of our favorite companies that we have not covered on acquired that we have to now after these first two episodes of the season That would be Costco Oh, yeah, Seattle hometown heroes. So You mentioned prime we skipped over this in History and facts, but I think let's talk about it a little bit here great Jim Senegal and Jeff are buds they're tight. Well At least they were And at least Jeff credits a particular lunch with Jim from teaching him a lot of lessons in particular The one I think you're referencing which is customer loyalty is the thing that matters and in particular because as we all know Jeff is absolutely laser focused on not gross margin percentage But the absolute Dollar amount of margin dollars over a full customer lifetime that you can sort of get which is Oh such a lesson from Costco and it was not a lunch It was very famously a coffee In the Starbucks of the Bellevue Barnes and Noble which Jeff will go to great lengths at any point in time to talk about how he was doing business meetings in the early Amazon days Literally in his competitors coffee shops Not that he's you know competitor focused or anything. No definitely not definitely no But yeah, no, so this coffee where they meet for the first time Jim from Costco is just like oh I've never met him, but he must just be such a match. He's old school. He's got the sole price DNA work for sole price You know new Sam Walton his whole thing he talks about this later. He's like the reporter asked him I don't think it was Brad. I think it was somebody else like you gave a lot of key information to Jeff Bezos who you know you became friends with and then he certainly one of your biggest competitors And you know Jim's are fonds is just like this is retail like you shop your competitors Sam did this I did this we all did this we all shamelessly steal good ideas. Yeah from each other This is how it works and Jim famously has said that some of his highest performing Costco's are across the parking lot from Sam's clubs Lee Relish's competition Yeah, so actually the purpose of the meeting was that Jeff wanted to pitch Jim on uh, this was like early days when they were expanding the categories on Amazon And there was a bunch of products that they couldn't get yet. They didn't have relationships with suppliers So Jeff wanted to pitch Jim on Costco selling on Amazon for like the products that Amazon didn't carry yet That didn't go too far But yeah, Jim gives him like this master class on the Costco model And it sounds insane if you're not familiar with it from the outside But then makes total sense if you realize you're focused on gross margin dollars Over the life of a customer not percentage. So the Costco model is They make essentially it's more complicated than this, but essentially they make 0% operating margin on Their retail operations. They sell at such a low price I think I looked into this when we were working on the Walmart episode something like five to seven percent gross margin business I think it's a little higher than that, but it is basically set that such that like When you take out the cost of running both the backend logistics and the warehouses themselves They are making no profits Yep on the actual retail business And all of the profits of the company come from the memberships the annual memberships So the merchant dice just needs to provide you enough value to then renew your membership for the next year Right and the beauty is it perfectly plays on customer psychology Ordinarily you'd be like why would anybody pay money for the right to shop at something you can just walk into a Walmart You don't have to pay Sam any money to shop there Well, once you've done that and you've made that sunk cost If you then believe that you are going to get the lowest prices absolutely anywhere In as a result of having that membership you get this insane combination of like the sunk costs affect plus the endowment effect And you become crazy loyal you're like I have paid the money for this membership I need to get the return on the membership and I feel like I'm part of this club I've this guarantee that I'm going to get this benefit that nobody else who our members gets I'm now going to do all of my shopping at Costco Oh yeah, it's pretty amazing you get these loyal customers that stay with you for a long time spend tons of money Not that you're making profit on that money, but that then helps drive the scale to get prices even lower It also means you don't have to advertise Costco does basically no Traditional advertising because it's all word of mouth Because the customers are so insanely loyal about their memberships Yep Now what Jeff Bezos chose to do here was a little bit different because I don't think he's running a break even Retail business and just making money on prime I think he sort of realized One of the effects you were talking about which is once you've made your deposit you're $79 a year to prime You're gonna keep Shopping on Amazon. He almost flipped it and is like oh, I want to use that same psychology But I don't need to run a yeah, I don't need to make zero dollars running the business and make everything on prime and Part of the reason he had this Perspective that he could make money in both ways was because the way that prime came about was actually The legacy of a couple of other shipping programs they had tried Super saver right yep. Yep exactly if you spent enough then you'd get free shipping or if you were willing to Wait for your goods for a while and get him batched up you could get free shipping and this idea was really Somebody inside the company sort of pitching. It was a engineer named Charlie Ward. I believe submitted it has an idea And he's thinking about we're getting better and better at fulfillment What would we need to charge customers in order to guarantee two-day shipping on everything they ordered basically no matter what really lean into that convenience Part of the retail holy trinity of price convenience and selection and so it was this really interesting dual collision path of Okay, how much do we have to charge people in order to give him two-day shipping and then this Jeff realization from Jim Senegal at Costco of wait a minute if we charge people anything that'll actually be more loyal Which is the ultimate thing that we care about yep totally and again demonstrates Jeff and everybody at Amazon Thinking through like what is the nature of their business? What is the nature of e-commerce in physical commerce Those dimensions of the holy trinity or at least maybe the aspects of what matter of the retail holy trinity are Different convenience is different in physical. Yeah, it's a little less convenient to shop at Costco versus Walmart of yeah Maybe you got to like reach up higher on the warehouse shelves But it's not really that different, you know whereas Shopping online getting your stuff in two days or next day or same day That's a big difference than getting your stuff two weeks from now like that's a really important difference Yeah, totally now all that said even though we're saying hey, you know, Amazon is not fully saying we just want to make a bunch of money on prime I think they do make over twenty billion dollars in revenue per year on just primes subscriptions Wow, I'm pretty sure they lose money on just prime if I'm thinking about my own habit For the amount of stuff that I heard from Amazon if I actually had to pay shipping would I be paying more than $129 in shipping Absolutely and what about all that stuff that I watch on prime video absolutely so there's definitely An element to it where you're like wow. Yeah, it's worth over 20 billion to them in revenue But I'd be fascinated to see the internal Amazon accounting on how they choose to justify the cost that 20 billion You know whether they're making any like actual Profits out of that are not debatable, but this is where it just ties so tightly into The Amazon flywheel, which is another key piece we didn't discuss in history in fax but comes from They do a management offsite in 2001 with Jim Collins author of good degree where he writes about the flywheel It's actually before a good degree came out right didn't they get a little preview of it you're a little preview, but But because of prime and this kind of guarantee to all these people who sign up for prime that you're going to get two day shipping That kind of upfront funds Amazon's investment in better distribution and logistics everything we talked about on the whole episode And then like the more capital that they get to fund that and the more customers they get that are using that the more leverage They get and the better they can perform and optimize like nobody else has their own airline with 96 planes I like Walmart doesn't have their own airline with 96 planes So they have more predictability they have more loyalty So they have longer customer lifetime So they have more absolute margin dollars from purchases coming in but a thing we haven't talked about which is Another just amazing insight is the cash flow dynamic of this Amazon charges me $129 at the beginning of the year before I make any purchases on their website and they get to do stuff with that cash It is an incredible form of float on top of many other forms of float that they have going on in their business Just to complete the flywheel Amazon through having all of this leverage that we just talked about in their operation this operating leverage and float and all these wonderful things They can work on charging even lower prices providing even more vendor selection and even better convenience like all three on the Holy Trinity They get better at that that attracts more customers More customers than Attract more sellers and suppliers on the platform and then that allows Amazon to get more operating leverage And then the cycle just repeats itself over and over and over and over and then drives itself Around many many many times a year. I think now I could be wrong on this I believe Amazon's inventory turns per year or something like 16 or something like Insanely high Probably not as high as like a Costco But for the complexity of Amazon's operations and the breadth of items that are sold in the store to get that kind of inventory And that's just the first party. I mean 57% of Amazon sales right now are from third-party sellers where Amazon's just collecting margin dollars And holding no inventory. So yes scale economies. They got that one Absolutely, I was I don't think that's the only one that they have no I think they definitely have brand no doubt in my mind that they have brand like the definition of brand power is you would Buy a commodity at a higher price from brand with power over a brand that doesn't have power. I absolutely do this 100% and Amazon exploits this. This is part of the legacy of search and all the algorithms in the company very smart pricing and dynamic pricing on the website, but yeah, I'm sure I could buy stuff cheaper Most things but you don't love that I'd get them on Amazon But I don't even look because I'd have to wait two weeks or I'd have to go find it or like I wouldn't have the Smooth customer experience like of course. I'm just gonna go to Amazon And it used to be so for a while I remember my development over the course of being an Amazon customer here So think like 2008 to 12 time frame when I was in college. I would comparison shop for sure Amazon versus everything else and I would do that now would do that And Amazon would win so consistently because they do the Walmart thing where they would go out and scrape every other site and create a bot And make sure that they could be the lowest price anywhere on of any reputable retailer and so Enough times that happened where I got conditioned to just stop looking because they were lowest price anywhere Then I think about five more years went by and whenever I would compare us in shop if I really spent 10 or 15 minutes I could always find somewhere selling it cheaper But something was worse to your point. I didn't recognize the brand name of the seller And so there's a branding power there that's very clearly being demonstrated or the shipping or I wouldn't be confident that I could return it or There's just all these little things about Amazon where then it became this interesting explicit choice where I now know I probably could find this somewhere else cheaper and I still don't comparison shop That is an incredible incredible Brand power that they've built There's then a third hop of I don't even comparison shop anymore Because it's not worth my time to do that right Because I know that I'm going to find something potentially marginally cheaper and still not pull the trigger again This is a difference versus like when we were broke post college students Yes, you know, what are you going to save on stuff? You're gonna get a save ten bucks like you're gonna spend half an hour To save ten bucks for a lot of people that makes a lot of sense but like and then have Potential headache one of every ten things that I buy in that way from a merchant that is not Amazon I will have some headache with and so therefore If you probability adjust the amount of dollars that I'm saving in terms of potential time cost later in headache It's just not worth it totally especially I got a baby now like I got time for that like hell no Amazon so that scale economies that's branding Network effect for sure at this point, you know originally Amazon didn't but because they adapted stole because Jeff Bezos took a personal With third party sellers you're talking with third party sellers. Yes with marketplace absolutely more customers drives It being more attractive for the sellers to come on which attracts more customers There's that network economies interestingly there are no Supply to supply side or demand to deban side network economies. Yeah, I think that's right the fact that you're an Amazon customer And I'm as an Amazon customer. I don't care. I don't benefit from that at all And it's interesting. They've never really leaned into that at all. Yeah, it's interesting. I mean maybe well No, this is scale economies. I was gonna say maybe a little bit on the seller side because You know more scale for Amazon. Let's them do fulfillment by Amazon and a bit that scale economies That's not yeah network effects But definitely that two-sided network effects and you see that power with You know, just run a couple Google searches and like Lots of Amazon sellers are unhappy with Amazon. They got too much leverage There's competition blah blah blah. They go do their first party brands They don't leave Oh, why don't they leave because you need that Amazon sales juice where else are you gonna sell that much online? Yep Yep, absolutely Do we think they have any others? Maybe some lightweight process power process power is always so hard to actually put your finger on that I hesitate to name it here Switching costs and not really. I mean I can buy this stuff on walmart.com or we're not talking about AWS here We're talking about Amazon retail There's counter positioning in the era that we're talking about Barnes and Noble and subsequently walmart Because those folks would have to invest so much and did while walmart did at least To completely reinvent the way that they do distribution and all their distribution centers to be fulfillment centers And actually go directly to consumers by not letting people shop in big stores And not having to have infrastructure for that Amazon counter position against everyone whose cost structure was set up to do that We talked to the end of the walmart episode about how walmart is currently Closing down Sam's clubs and turning them into Online walmart.com fulfillment centers. That tells you everything you need to know right there Yep Yep, absolutely and certainly counter position Versus Barnes and Noble I mean the Brad Stone quote we read earlier in the episode of you know Barnes and Noble wasn't gonna go all on in on this because Their distribution network was not Tuned for e-commerce. They would have to redo it and then to do that They would have had to like majorly prioritize it within the company put all their best executives on it change the You know, it would be less profitable for them They would lose money in the short run versus the hugely profitable stores like it just all the incentives were not to do it Yep Yep, absolutely Today, I don't know that you can say they still have counter positioning now That was just to take off face thing. Yep. I have been just frothing at the mouth to do playbook on this one Sorry, let's get into it. All right Well, I want to open with a quote from the very first 1997 letter to shareholders which I always think it's fascinating This is such a ubiquitous letter at this point that if you google in incognito mode 1997 letter This letter from Jeff Bezos comes up also we got to do a A shout out to our friend and long time acquired community member Preat and on who absolutely made a podcast feed reading the shareholder letters You're taking the words right out of my mouth. Thank you, Preat I listened to him while I was doing some work in the yard yesterday So The quote is and there's many great quotes in here that really highlight the idea that you get the shareholders that you ask for When forced to choose between optimizing the appearance of our gap accounting and maximizing the present value of future cash flows Will take the cash flows I thought this line by joy, Covey and Jeff is so incredibly Prussian that he really is focused on the absolute dollars of free cash flow metric and I think there's this misconception that people have about Amazon That they're sort of trading off growth for margin percentage And I don't think that's ever actually what was happening people often look at startups today and they're like Profitability or growth. I think the way that Jeff always thought about it was well We care about free cash flow in the long run right in the long run That is the way that every business is measured and so the key words here are maximizing the present value of future cash flows which necessitates Building a brand around your stock which I think Elon is sort of the king of today because when you're talking about the present value of future cash flows since future cash flows are unknown You do have to kind of build religion around your company today If your goal is to really get investors on board with your long long long term vision And Amazon sort of got thrown in with all these other.com companies when you sort of read that barons article Amazon.bom And a lot of those companies Cosmo.com, you know for no shipping you can order a pack of gum to be delivered to your house and it would arrive in an hour You're like clearly they're losing money on this and I'm not necessarily a loyal subscriber to this Well, Amazon always was gross margin profitable. They was at solid unit economics But they would choose to super aggressively reinvest in something and as we were preparing for this episode among the Number of people we paying in addition to Brad Stone and some of the other folks that we were chatting with they were early Early Amazon or sort of around the company We reached out to friend of the show Michael Moison to see if he had any materials from this time and he's had more than a spidey sense that he would have strong opinions about Amazon at this time Our episode with Michael I think is what like the seventh most Listen to acquired episode of all time. Yes. It's very widely listened to yeah, which is amazing He's your favorite investors favorite investor. He's the ultimate finance professor if you haven't listened to that go listen to it Yes, so he made this presentation at Amazon in 1999 really advocating for exactly the strategy that they were running and just starting to sort of articulate it and put it into a framework form And we have the deck here. So one really fascinating observation he makes is that it's really about the weighted average cost of capital that WACC or whack and you don't need to be a finance professor like Michael to understand this. So here's how it sort of works Suppose you want to invest in building a new distribution center so you can either expand the reach of shipping goods and say a new country Or decrease the ship time for existing customers. This is baseless is sort of insight of how do I turn Customer experience into a fixed cost. Well, let's say you have no cash in your bank account Well, you have to raise capital so either you can sell part of your company with an equity financing like their IPO to get it Or you could raise debt and pay some percent of interest say 10% a year Which they did which they did that too to the tune of what close to two billion dollars two billion So that capital has a cost to it and the investments that you make in this distribution center need to outrun your cost to obtain that capital for it to be profitable But let's say you have a pile of cash in your bank account that you got as profits from selling goods That cash is effectively free for you to use So if you have a competitor who's financing the growth with debt and you can do it purely with those profit dollars Well, you can beat them in the long term even better and we'll put the slide up on the video format here for Michael's presentation If you have all the dollars from selling goods not just the margin dollars And you don't have to pay your suppliers for like a month after the customer bought it from you or two months or three months or four months Yes, you can invest heavily into this new distribution center With many many more dollars not just the margin dollars And as long as you're confident that that growth will continue and you'll have even more cash on hand at the date that you need to pay the supplier For the thing that you sold months ago that you now owe them for well that works really well Yes, oh boy So Ben you're saying it's almost like Another large operation we may or may not have talked about for 10 hours on acquired Where they like you know right insurance premiums and reinsurance premiums and the right the policies and they get those premiums from those policies in And then they don't have to pay the money out until a disaster actually happens and they get to use all that money in between You're saying it's like float. Yes, and Amazon today Is a 1.5 trillion dollar company that has not raised any material capital sense that debt offering that they paid off in 2004 five-ish they are financing the business entirely with Float until of course we'll get to AWS and now they can actually finance it a lot more with just straight up operating income Actually though we should say I think strictly speaking that is not a true statement They have been issuing debt, but I think that is not for financing the business I think it's like a treasury capital management. Okay. All right. All right. All right fine It's not like the debt they issued in the early days. Yes very much not But as you can see in putting this slide up Michael sort of cheekily calls amazon.com cashflow.com as if it's really pioneering this new model where in the old school businesses Something would enter your inventory you'd pay the supplier Three months after it enters your inventory and then it has to sit on your shelf for a while and then finally a customer buys your book and then the payment Ends up being received and so there's sort of a few months between when you have to pay your supplier and when you get paid Whereas what Amazon is doing is completely flipping it on the head The book can enter your inventory the customer buys the book You then receive their payment pretty soon after that or immediately after that Just after some credit card days and then you can have a month or two before you need to pay your supplier So the internet business model and e-commerce totally flips it on its head because of the completely different way that The distribution works and that inventory works. Yep even further adds depth of understanding to this point of the larger the scale of Of amazon's operations in the flywheel the more capital dollars that they're you know cashflow dollars That they're able to get out of it to continue to fund building out the larger scale of their operations It's a killer insight that cost of capital and having a negative cash conversion cycle are directly related Yes, or I suppose inversely related Yeah, you just have to think about it. You're like Yeah, capital has a cost but here they're sort of getting paid To use the capital right it is a negative cost. It's amazing Well, and that's where prime is really this on steroids. Yes I'm paying him is on $129 the beginning of the year and asking for zero in return And in fact, I'm giving them my loyalty in addition to paying them And they're going to do interesting stuff with my cash in the meantime is really genius. All right. What else you got? Well, another one is from another early baseless interview that I was watching where he had to do a lot of fighting of Stock analysts in the early days who were saying yeah lipstick on a pig you're just a retailer And I don't understand how your cost structure is really any different sure you sell it on the internet But you're just a razor thin retailer. Why is this an interesting business? Right. What's the line that people always say whenever Wall Street becomes Disillusioned with Amazon. They say it's a charity being run for the benefit of the American consumer. Yes A lot of people are laughing all the way to the bank on the other side of that bet So he makes this great point which is okay. Let's say we are just a retailer with a retail business model Well, there's a few things that are pretty different and a Gigantic cost in the retailing business is your rent and If you are in a retail space and it's funny when he's saying this It's much less expensive than it is now in a prime place in a city He cites it could be like $7 a foot for a great retail space You killed me here, whereas Thinking about San Francisco real estate Whereas if you're running a warehouse somewhere where it really makes sense for a house to have a distribution center It's like 30 cents a foot which is such a valuable point Stores have to store all of their inventory or a lot of their inventory in very expensive real estate Amazon totally does not Man, that is such a good point That's such a good point and I'd actually ever heard this argument before doing this research That's a fantastic point Even Walmart Where Walmart stores are not in multi-hundred dollar a square foot prime Prime funny choice of word primo urban real estate It's still a higher cost of real estate than where Amazon fulfillment centers are Yep, absolutely So it's one of these things where like it was interesting reading all the bear cases on Amazon There's plenty of little quips where you it would be fun to tweet them out and be like this person was so freaking wrong But a lot of the criticisms Were reasonable this particular one isn't reasonable the one that that we just sort of push back on with the cost per square foot There's another one that wasn't really reasonable which was this is a money losing business just like all the other comms because they actually Were profitable if they weren't continuing to reinvest in growth which would give them this unbelievably durable mode around consumer experience The one that is always an interesting thought experiment to me is people Would sort of ask well what do you own when you own a share of Amazon because Much like a lot of stocks over the last couple of years the price in 98 99 was completely disconnected from the reality of the underlying fundamentals And so you had a business that was growing massively That was generating no gap income and Was doing things like reinvesting the float 100% of the revenue dollars they were getting in so they needed to keep growing In order to ever pay their suppliers back like if the music ever stopped and they didn't keep growing This isn't just magical free money with no cost the cost is if the party ends right your screwed It's musical chairs Yes, and so the reason why Amazon wasn't totally screwed is because they were right in their bet that this was a gigantic market That they could basically grow into forever and sure they had a couple of tough years and had to raise some debt capital to get through it But the naysayers were right if it wasn't a crazy high-growth Business for three decades. It just so happened that Jeff was right about that Are you saying he was right about it being day one for the internet? I am saying that if it wasn't day one for the internet it would have been a Ponzi scheme Let me put a finer point on that it would have been like me going and opening up a credit card to pay off other credit cards That I owe debt on that is the type of thing we were talking about with the float situation This is a little bit of a sidebar here, but Through the Probably two months at this point since we decided we were going to do yep this episode that we've been researching I've just kind of had in the back of my mind. I'm like I wouldn't have even thought about this a couple years ago, but Magic of compounding acquired here. We are if by some miracle at some point we get to interview Jeff I think that's the biggest question I want to ask him Is it still day what like you step back? Forget Amazon. Let's just talk about the internet What you thought you might want to do or the board you know or coach Campbell thought you might want to do in 1999 2000 of like step back pursue your other interests You decided no wait. It's still day one here Is it still day one now like that is a phenomenal phenomenal question Okay, but to your point on that is it still day one for the internet which I love this question in particular Here is a quote from the 1999 letter to shareholders and the thing to note here is he's justifying why they're investing so much money in Technology to reduce costs like just keeps reinvesting powering money back in he ends with we still believe that some 15% of retail commerce may ultimately move online Ha May ultimately guess what e-commerce penetration is right now 15% 15% it went from like 12% to like 17% during COVID and is is falling a little bit right now and is hovering right around 15% So if what he says is we believe that it may move online to the tune of 15% Maybe it's no longer day one for the internet. It's a good question. Certainly not day one for e-commerce I Personally, I'm definitely not ready to say it's day two, but I'm just very curious like what is Jeff genuinely think? Well, these things are subject to definition too. How many days is it out of is this an innings situation? Is this a 365 days? Is it god created their earth in seven days situations? So we're you know is out of seven. What's the denominator? The other thing that I keep thinking about is like How could I possibly spend more money online? I'm not sure more of my spend or my time could move on the internet and And internet penetration is gotta be in like the 90 plus percent in America and like Getting up there for the rest of the world too So if you just look at like we're running out of hours in a day and we're running at a household spend to spend on things You could buy over the internet so I think really like this is the question like harking back to what we talked about towards the beginning of the episode You and I have fortunately in our lifetimes when we were kids, but in our professional careers We have never experienced anything like 1992 93 94 95 where Traffic on the internet was growing 230,000 percent a year like we've never experienced that we're still We're benefiting from the aftershocks of that still yeah, I think that's the question like where are we in the aftershocks of that or Is there going to be another event like that in our lifetimes? I mean, I think everything in our time that we've Thought of as that is mobile cloud web 3 you know, we are all like It's all still just the internet those are aftershocks. That's not right the event going back to this credit card game or Ponzi or Peter to pay Paul I don't like this mental model of borrowing against something in the future Like paying your suppliers in order to do interesting things with the dollars today I've been giving that a little bit more thoughts since I sort of threw it out I think the reason why it all worked out is that the internet ultimately provided a ton of consumer value on an ongoing basis even when the bubble burst if you look at traffic during 2000 2001-2002 people kept adopting the internet these tech stocks Equity investors sort of ran away from backing them because people got so ahead of their skis investing on clicks and not even Revenue like clicks and eyeballs let alone gross margin dollars and hopefully eventually free cash flow But the fact the matter is even though investors got scared it provided an incredible amount of consumer value And so the fact that people kept doing it meant that Amazon kept growing their customer base and the customer loyalty and the number of transactions and so There was a there there. Yeah, and they could survive the bubble because ultimately More consumers kept getting more value so the party could keep going over at cashflow.com Yes It's just I'm thinking back on my personal experience living during that time, you know, I'm curious for you like did you have any awareness of The tech bubble and or the tech bubble protein In 1999 right right right but I remember September 11th, but I don't remember that it came after a bubble bursting right But you probably Remember your experience of the internet and it growing in your life right For sure it sort of grew with me Growing up so I remember like oh now I'm old enough to have a computer in my room And oh now I'm old enough for it to be on our Apple talk network and old enough for it to be connected to the actual internet So I can use things like aim. I always thought those things were like if I really think back at it like rights of passage for someone growing up And I don't think I realized at the time These are becoming things exactly at the pace that I'm growing up. Yes, totally You know, it's so funny when you're younger like now there's like no difference in our age But like I think because I'm what like four years five years older than you For I think yeah, for I think yeah, I was probably like just a little bit ahead like I was aware of stuff going on With stocks related to tech companies But like I knew that was happening, but I didn't think about it in relation to what I was doing But like yeah like I just think back of like The percentage of my time and mental energy directed at and on the internet It's just growing growing grew exponentially during that time right turns out having the entire world of information at your fingertips is unbelievably valuable Yeah, and like it just permeated everything. Yeah Okay, I have more yeah, we go for it. I've got two. I want to share so all right save me room for two I will so here's the thing we really didn't talk about but is very important to understand about Amazon They were ludicrously ludicrously private they never broke AWS out as a segment when it was they basically had to they have always kept everything in this sort of just like gigantic Amalgamation of the fewer numbers we can report the better and so in their s1 they never said anything about any sort of cohorts or cost to acquire customer or lifetime value And Amazon customer no one in the outside world no 10k's no s1 nothing has ever said anything about that information And Jeff just believes you know, he's famous Bezos charts where he's like you know announcing this cool thing for Alexa And he's like this was the best year ever and you just see an unlabeled axis. That's like oh, it's upper and to the writer That has served them really well They're able to do a lot of maneuvering versus competitors with their suppliers with third-party sellers By just never really disclosing any key information. Yeah, same story with advertising as with AWS So at a certain point they're gonna have to break out advertising. You know, it's 30 40 billion dollar Right business at this point. Yeah, but for a long time nobody really knew or understood What was happening inside Amazon with that? Yep You know, there's this other one for listeners who are watching on video You can see that it's now dark out for David and I and we took a break to go have dinner and then reconvene and It's last put baby to bed. Yeah, I was thinking myself over dinner man Like I don't know if we're doing a good job with this episode. It's not really a cohesive story And then I think it kind of hit me that like that is the point Amazon was doing so much stuff so fast concurrently and learning from it that it's kind of a brute force path-finding algorithm That has a bunch of concurrent stuff going on. I mean, it's unbelievably entrepreneurial It is the most successful scale innovator in the world that has ever existed The two pizza teams thing which I'm sure many people are familiar with Which I think might have been a Rick Dalzel Innovation. Oh interesting The fact that for decades Most of the best entrepreneurial and talent in Seattle just stayed at Amazon right right right And the knock on Seattle for so many years was that you know, thank God Amazon's a pretty big Kind of bureaucratic company at this point and people are leaving to start companies Oh the best people stayed look at jassy Totally the biggest impediment to the Seattle startup ecosystem was the fact that Amazon facilitated entrepreneurship over and over and over again for people at all stages in their career with all levels of ambition and is really really impressive But doesn't really make for a clean story Yeah, and rather than sort of beating myself up over that mid episode here I was like I think that's actually the point Let's do hardware. Let's do a subscription business. Let's buy a bunch of planes I mean they started the company in IPOed within three years So like everything that this company has ever done has been super fast and often concurrent Yep, how did you phrase it? I think you texted me the surface area of this company is just immense. It's just ludicrous. Yes. It's so large It's kind of impossible to cover I actually made a list when I was sort of thinking about okay Is this maze thing the right analogy of things that failed and then they backed up and turned left and tried another thing instead and sort of this heat seeking brute force algorithm It's incredible when you look at auctions z shops We didn't even talk about the Sotheby's partnership where they were oh yeah, oh my gosh trying to do a border style thing with Sotheby's We didn't talk about the fire phone the fire phone a nine search engine Which was just wildly underfunded relative to Google search engine block view which was the predecessor to what the Google figured out with huge investment to make street view Investing tens of millions of dollars and startups like homegroucher.com and pets.com is just Over and over and over again. There's these huge failures and yet It's the most successful company of our time There's so many other companies where compare it to Elon Musk for example you look at SpaceX it worked Tesla it worked PayPal it worked boring company We don't know yet, but like seems like it could work Nurellink juries out. It's really early But it's not a failure. He doesn't go start These things that are completely dead ends the way that Amazon had did dozens and dozens and dozens of times But Amazon is so damn good at learning. So there's this great quote again in the 97 letter Which is we will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages Some of these investments will pay off others will not and we will have learned another valuable lesson in either case and My big takeaway is If you're going to look at Amazon as a straight line It was a philosophical straight line Hmm. It was a strategically squiggly line, but it was a tactically random set of dots that there was just a fact finding algorithm going to figure out man, I love that that is such a good point But that was the strategy Jeff says it in the shareholder letters all along. Yep. Absolutely All right, what do you got? Okay, so my two that I want to highlight one is The opposite of what Jeff talks about all the time of or not competitive focus or your customer focus blah blah like yeah Of course, they're customer focus. Yes, we've clearly painted the picture that they care about customers The customer experience focused customer long-term customer loyalty is the most important thing blah blah blah Is it great that there's these Jeffisms that like you and I can shorthand because we're pretty sure that our audience knows them at this point because every interview he's ever done. He sort of says the same things Yes So funny, but Jeff is also There's such a part of the lineage of great retail entrepreneurs starting concurrently in before Sam Walton But sole price Sam Walton Jim Senegal Jeff Bezos you shop your competitors and you take their best ideas and then you refine them and make them even Better that Sam Walton quote that I just loved from you know made in America of like go shop our competitors Come back don't tell me what they're doing wrong. Tell me what they're doing right. They're doing right. Yeah, and Amazon did the same thing And like the eBay story doesn't Brad Stone have a way that he sort of frames when Amazon is Customer focus versus competitor focused. I think it's in his second book in Amazon Unbound. Oh, yeah It might be an unbound. I always thought this was a good way to approach it where if it's in a Emerging market their customer focus because they can afford to be especially when they're the market leader They're out ahead, but when they're in a competitive market like what grocery became because when they were first starting all their grocery efforts It was a very sort of where the leaders in online grocery Amazon fresh is this sort of crazy experiment and Ultimately they sort of fell behind you have to be very competitor focused when you're in a crowded market where you're behind and so I think They like to be in markets where they have the luxury of being purely customer focused, but they aren't always that's not always the case Yeah, and like in some sense it's a luxury in some sense it's a luxury to have great competitors Because they figured out good stuff, you know Yeah, and Bezos didn't just steal from other retailers the other thing about Jeff is he comes from a finance background Whereas a lot of the classic retailers come from a merchandising background or an operations background Well, and certainly internet entrepreneurs very few came from a finance background I mean, there's a lot of John Malone in here when you sort of look at their tax strategy the fact that They're generating all this free cash flow But somehow never reporting a gap profit and they're never paying corporate income tax because they have no corporate income and yet Somehow they're a trillion and a half dollar company and they have started paying more taxes recently because they have started being profitable blah blah blah But for a long time they really were running kind of the TCI John Malone book of people count trying not to ever show your profitability Oh, we got to do that episode for sure for sure Okay, so that's my one of two two of two Which was what pushed us over the edge to do this episode now Which is the period of time Amazon got started a little on the early side before the tech bubble benefited all throughout the tech bubble and then got hammered arguably harder than any other surviving internet stock when the bubble burst and in the crash and It was during that kind of nuclear winter when Amazon I mean leading up to it Not that they weren't doing this all along, but the hard work was done from 2000 to 2007 Where they built out everything they gave them like the hugely wide modes that we've talked about on this whole episode that was the time to build and Jeff was completely unafraid to do so Got it just makes me think so much about like right now Makes me think about FTX right Amazon Granted most of it was debt capital, but during the go-go years they sucked in billions of dollars of capital And yes, some of it was spent unwisely But then when the crash came they invested through it they built through it and distanced themselves By miles from their competitors. Yeah, it's just like a huge lesson like obviously you got to be smart You got to be right, you know, you got to have Managed your company in a way that you have access to capital during those times But that's the best time to build modes Yep Yeah, absolutely How should we grade this one? Yeah, greeting I think the best thing to do we talked before the episode of LA Like maybe we grade Amazon retail here and then we'll grade Amazon web services on the next one But like you said, this is like a tangled octopus of a company you can't you know We only got up to 2007 2008 in the history here Right, I don't feel based on everything we've discussed in this episode qualified to assess Amazon retail as it is today So I think we should scope it to the time period We didn't talk about Zappos We didn't talk about diapers.com. We didn't talk about Whole Foods Pill pack. I mean echo you know all the way we mentioned it but one medical one medical Although echo to me falls under AWS, but oh, oh, that'll be fun to talk about yeah I mean clearly it's both right so I think we should grade Amazon from Founding until Just before the financial crisis Okay, it's interesting So if the company were to have ended in 2007 I think they were doing about a billion dollars a year of operating income Their market cap It's very interesting to be grading on a time frame with a company that's thinking in a much longer time frame So if they're generating like a billion-ish dollars of operating income And I think their market cap at that point was something like 30 billion dollars If you're a shareholder they haven't really realized those future cash flows yet So the sort of like pedantic way to look at it would be like Well, if the music stopped there that would have been pretty bad Yep, but of course it didn't and of course AWS would still come their market cap would absolutely explode A lot would sort of change and they've turned on the ability especially with AWS to get very profitable in the future So that's probably the wrong way to look at it Like what if the company shut down? It's more about how do they execute to set themselves up for Ultimately realizing all that value for shareholders humans are such funny creatures The hedonic adaptation is crazy if you go back in time to 2007 What did you say market cap was what like 30 billion? Ish that was a big company back then yeah, I mean, I remember when I started adventure a couple years later in 2010 You weren't playing for Exits in the like tens of billions of dollars if you said like oh, well, I got under a you know this investment Do I think what are the odds that this is going to be worth 30 billion dollars like people would be like what are you talking about like laugh you had like it's like no We need like you know this to be worth a couple hundred million dollars. That's a huge win Yeah, we just hadn't realized yet how big this stuff could get which is in part why people Needed to be more ownership sensitive or certainly there were more funds obsessed with ownership Then there are now I still actually believe pretty strongly and in ownership especially as a lead investor And why that's important in architecting a fund model But at the time if what you're playing for is three four hundred million dollar outcomes Then like it's pretty important for your multi-hundred million dollar fund to own like a quarter of that company Yes, yes Certainly Tom was very happy with their Amazon investment at that point in time So yeah, I mean, I think we have to give it an a And especially you know as we talked about like gosh like just Incredible execution through that time. I do have sort of this fun stat from the IPO if you had bought a hundred shares At the IPO which I think if did we say 17 18 market cap of four 38 yeah Million if you bought a hundred shares for call it 1800 dollars of total investment today You'd have two point six million dollars and you would have made 1500 x Yeah, which is bonkers so then the question becomes should we grade Tom's investment in Amazon as of 2007? Oh, I love that Great a great a Well Unless he sold in 2007 in which case F Yeah 2007 it was worth about the resolutions pretty low and the so somewhere between 30 and 40 billion dollars So let's say you're buying in at five million and that goes up to 40 billion You're pretty happy that's a 10,000 x Yeah Is crazy if you really start following the the ripples out yeah Seattle's whole startup ecosystem Yeah, I mean of course there was Microsoft before too and so many great folks came out of Microsoft to build companies and still like Nick at record, but yeah, I mean Amazon. It's just a juggernaut Yeah, I don't even know how to apply a letter An A plus I mean the other thing is like surviving the dot com crash basically no one did google did But google was started like right at the tail end of it every other Retailer I mean in half of them were things that Amazon was invested in but drugstore.com and pets.com and all these completely one under And eBay. I mean eBay survived. It's around of course, but it didn't win, you know Yeah pretty unbelievable to make it through That sort of three year absolute drought of the availability of capital and a complete souring I mean, you couldn't IPO So you know if you weren't already out like Amazon was there's basically no chance that you were going to until I think google Finally IPO'd in 2004 2004. Yeah, and even then it wasn't like it opened the floodgates right I yeah, we got a go. A plus execution. Yeah great. Yeah We'll do the whole thing on our next episode I can you know if I were to predict a grade for Amazon web services. I would predict an A plus Wow, why even listen to the episode David? Yeah, right I think it'll be worth listening to the episode By the way, I've been saying two trillion this whole time. I finally just looked it up Amazon was a 1.9 trillion dollar company and today is a one trillion dollar company It is crazy what has happened over the last two years But they just reported Q2 earnings and uh the market liked it so pop 15 percent I bet it's closer by the time well who knows what if we could predict the future We wouldn't be fans of NZ. Yes, but by the time this comes out probably fair to say ballpark one and a half Trillion ish who knows yeah Yeah, we'll see we'll see All right great episode should do some quick carveouts. Let's do carveouts what you got So I have a carve out and I can't remember if you recommended this to me privately or if it was a previous carve out of yours And that's how I heard it But I just listened to the Rick Rubin episode of the Lex Friedman podcast and my god is that a good interview So good you think it's a good interview at the beginning And then like you get like 90 minutes in and you're like this is a really good interview And I think that happens a lot on the Lex Friedman podcast Uh, yeah, it's so good Lex is uh to good interviewer like his skill as an interviewer is Just top notch There's a level of intimacy that he gets with people where it's uncommon to have a level of intimacy And I don't think it's because he previously knows them. I think it's because Everybody knows that's what you bring when you're on the Lex Friedman show So yeah, if it's anywhere in your sort of oh, I should listen to that some point soon And especially if you're a music fan and especially if you're a heartfelt music fan Like you're someone who really likes to feel and put yourself in the place of maybe the artist or something they were going through There's just so much. I mean in particular the way he goes into the the Johnny Cash sort of final album of oh yeah The covers that he did And the uh hurt by Trent Rezner. Yeah, the Trent Rezner I heard yeah, oh man The number and breadth of like Musical history moments that Rick was part of just sitting there producing for Creating yet not even to sit there like creating with the artist. Yeah Oh, it's like forest gump in real life. What a legend. Yeah. All right. I was gonna do just one I actually think it's just trying to decide what to do. I think it's appropriate to do a Poverty a suite of different Types of media here given that that's Amazons DNA like probably Bought or consumed most of this through an Amazon service one way shape or form Books I have been reading a few books by Ursula Laguin Very famous American author great both sci-fi work and fantasy work both which I really enjoy Hmm sci-fi I read her I think probably best known sci-fi novel. It's called the left hand of darkness Excellent book highly recommend and they kind of in that same vein of like I feel like it was written in the 60s Maybe 50s or 60s. I could be wrong on that but that era of type of sci-fi and it's very not it's a Character driven sci-fi so less about like crazy technology and more about as a setting to exploit characters great and then I'm just starting her earth-sea fantasy series which I had no idea and now I'm like reading it to him like oh and some of the reviews on Amazon talk about This is probably part of the inspiration for Harry Potter So super super cool to go get that little bit of history Harry Potter by the way broke a lot of Amazon's algorithms I was listening to a couple interviews with early engineers who were saying like The you may also like or people who like this also like Basically everyone liked Harry Potter and so they would have to either special case it or tune some parameters to make it So it just wasn't always recommending Harry Potter with any other product because any other product had a similarity if buyers with Harry Potter That's funny. It's like the Justin Bieber server at Twitter late 90s early 2000s. Yeah like cultural Touchdowns for the world. Yeah, okay, then music I Just today was re-listing to my beautiful dark twisted fantasy Bikanya dissect Yes, and then I remember me I tweeted about this. I think that was your carve out years ago Season two of dissect the dissect podcast. Oh, I mean the album is a master master work I and I didn't realize what a masterpiece the album was until listening to the podcast and then gained this just the appreciation you get for Kanye's an artist and every single element musically and lyrically of every single song is just Next level we joke about this by feel we should do a Kanye episode at some point You know be the follow up to the Taylor Swift episode Yeah, the the Jedi and the Sith Yeah, exactly My last piece of media is a throwback to carve out of mine from not that long ago to Elden Ring the video game I finally beat it months later If you're doing anything else and if you like have a baby like you're talking months to beat this thing Unreal achievement of a game like so amazing. I kind of say that I also tweeted about this I was a little disappointed at the end. I think I felt like it lost Steam but like I I can totally forgive it because I mean this is like if every other game you know if old games You know, we're like running a like you know 100-meter dash and then like it got to the point where like The achievement of making a triple-a game was like running a marathon This from software and Miyazaki you created it. This is like running an ultra marathon The amount of work and content and just like Incredibleness that went into this game is on a scale that I like no other game has ever matched so worth playing Worth thinking months of your life into if you have several months. Yeah exactly. Yeah Awesome listeners. Thanks for going on the journey with us Man, I cannot wait to dive into AWS research. I try not to have research two episodes at once because it's too hard to hold all this in our heads concurrently So I've been sort of resisting diving into the annual letters from 07 onward and really trying to understand the landscape of cloud today But it's gonna be a great one. This was such a journey. We're only halfway there There's more to come Yeah, absolutely Well, our thanks to Fundrise pilot and NZS capital after you finish this episode come discuss it with all of us at acquired DataFem slash slack got a job board if you're looking for the next move in your career go to acquire dataFem slash jobs Big change in all the things that we're calling to action for and even if that's the right calling you Toward action upon how many weird propositions can I throw these closing calls to action? Merch holy crap It's finally here Amazon inspired us thanks Jeff Bezos your contributions have been many but you convincing us to start a store on the internet is perhaps your Gracie yet, so thank you for that you can go to acquired.fm slash store and find some of the finest t-shirts hoodies crewneck sweatshirts one Z's what else is there tanks and even one Z's available and we'd love your feedback as we consider Expanding the store as well and I don't think we have the infrastructure yet for third-party sellers to come on and create their own acquired merch But perhaps we'll explore that if we can get a wide enough user base to amortize those fixed costs of making a great user experience for you all across I got to stop I gotta end this check out the LP show You can find it in any podcast player and with that listeners. We will see you next time Who will see you next time