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Episode 28: The Amazon IPO with original Amazon Board Member Tom Alberg

Episode 28: The Amazon IPO with original Amazon Board Member Tom Alberg

Sat, 31 Dec 2016 13:08

Ben & David welcome very special guest Tom Alberg, board member and first lead investor in, to cover the IPO of "earth’s most customer-centric company". From longterm thinking to flywheels to riding big waves, this episode is chock full of lessons and stories from the journey of building one of tech’s most iconic franchises. We hope you enjoy listening as much as we did recording it!
Topics covered include:
  • Tom’s “prolific” bio from the Amazon S-1
  • Jeff Bezos’s journey from a Vice President at the New York hedge fund D. E. Shaw to founding Amazon in a Bellevue, WA garage in the summer of 1994
  • Jeff’s longterm thinking as evident in the early days of Amazon, and his approach that "failure is ok, but not trying things is not ok”
  • Raising the seed money for Amazon before product launch, how Tom met Jeff and decided to invest despite the “high” valuation
  • Tom's (and Jeff’s) focus on the power of targeting large and growing markets
  • Amazon’s actual overnight success after launching the website: according to Tom at the time, "By the second or third week… It was clear there was a trend here.”
  • How Amazon’s venture round, led by John Doerr of Kleiner Perkins, came together in the spring of 1996
  • Amazon’s torrid growth through 1996, Jeff’s mantra of “get big fast” to win the land grab of online book selling, and the board’s decision to prepare for a public offering in the spring of 1997
  • How Frank Quattrone and Bill Gurley, then of Deutsche Bank, won the lead position for the Amazon IPO, beating out more storied firms such as Goldman Sachs and Morgan Stanley
  • Development of the flywheel concept within Amazon, as an outgrowth of maniacal focus on creating superior customer experience
  • Amazon's public offering on May 15, 1997 at $18 per share (effectively $1.50 relative to today’s stock price after splits), raising $54M at a market capitalization of $438M — and subsequently trading down during the first few months following the IPO
  • Amazon and Jeff’s management of investor perceptions of the company, and ability to sell the longterm vision over short term profits — “you get the investors you ask for”
  • The creation of the first annual letter to Amazon shareholders included in the company’s 1997 annual report (and republished every year since), and then-CFO Joy Covey’s role and contributions to it
  • Raising convertible debt just before the peak of the dotcom bubble and subsequent ability to survive the burst, and the impact of the downturn on Amazon culture
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Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders so we knew there's a natural fit we know the host of founders well David Senra hi David. Hey, Ben. Hey David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is we use your show for research a lot. I listened to your episode of the story of a few more you know before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders into acquired because all of his greatest entrepreneurs investors they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence Steve jobs talked about him over and over again if you do the research and I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired we focus on company histories. You tell the histories of the individual people you're the people version of acquired and where the company version of founders listeners the other fun thing to note is David will hit a topic from a bunch of different angle. And I think this is just a little bit more of a story of the way that David was listening to an episode on Edwin land from a biography that David did David it was the third fourth time you've done Polaroid. I've read five biographies of Edwin land and I think I've made eight episodes of them because in my opinion the greatest such a product to do it my favorite entrepreneur personally is Steve jobs and if you go back and listen to like a 20 year old Steve jobs. Edwin lands my hero so the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die but the ideas never do and so Edwin land had passed away way before the apex of apple but Steve was still able to use those ideas and now he's gone and we can use this ideas and so I think what acquires doing what a founder trying to do as well is find the best ideas in history and push them down the generations make sure they're not lost history. I love that well listeners go check out the founders podcast after this episode you can search for it in any podcast player lots of companies that David covers that we have yet to dive into here on acquired so for more indulgence on companies and founders go check it out. Welcome to episode 28 of acquired the podcast where we talk about technology acquisitions and IPOs I'm Ben Gilbert I'm David Rosenthal and we are your hosts today's episode is on the Amazon IPO and we have an incredibly special guest with us today Tom Alberg. So Tom we know very well because he was one of the co founders of Moderna which actually brought Ben and me together and none of us would be here if it weren't for Tom but in addition to being co founder of Moderna he has had another very special role over the last 20 plus years which is board member of amazon dot com and Tom was the first investor and the first and I guess other than Jeff. I guess other than Jeff longest serving board member of amazon right so we thought it would be fun we will get through the whole IPO story here but to read Tom's bio from the s1 that Amazon filed in in advance of going public so mr. Alberg has been a director of the company Amazon since June 1996 Mr. Alberg has been a principle in Moderna investment group LLC a quote private merchant baking firm since Janie. Since January 1996 from April 91 to October 95 he was president and director of Lynn Broadcasting Corporation and from July 1990 to October 1995 he was executive vice president of Macaw cellular communications both companies were providers of cellular telephone services and are now part of AT&T court prior to 1990 Mr. Alberg was a partner at the law firm of Perkins Cui where he also served as chairman of the firms executive committee. He is also a director of active voice active voice corporation merit is corporation mosaics ink teledesc corporation and visual corporation Mr. Alberg received his BA from Harvard University and his JD from Columbia law school so are any of those other companies still in business except for Amazon. I think well Vizio was acquired for good price by Microsoft think over a billion dollars but you also left out for example that I you know learned the multiplication tables in third grade and probably was class president and fifth grade I mean how do you miss these things at ballad high school right right now eventually right once again thanks to Tom for joining us were super honored to have him on the show. Let's start with the Amazon story so I expect most listeners are familiar with the lore of how Amazon came to be but will retail it briefly here leading up to the IPO and. Ask Tom some fun questions along the way so Amazon was founded in the summer of 1994 but actually started the idea a little bit before that when Jeff Bezos was a vice president at the hedge fund D.E. Shaw and company in New York. And David Shaw the founder of D.E. Shaw signed Jeff to think about business opportunities enabled by this new thing called the internet and Jeff went off into a bunch of research and as legend has it he came across this one report about the growth of the internet that projected that it would grow 23 hundred percent annually for the next you know decade or so. And he kind of read that and decided that's it I got to be a part of this I don't want to miss this boat. So he and his wife McKenzie who he also worked with the D.E. Shaw they quit their jobs and they road trip to cross country to the west coast with no particular destination in mind other than starting a company at the end of it. And Jeff writes the business plan for what would become Amazon along the way and they end up here in Seattle where they start Amazon on July 5th 1994 in a garage in Bellevue speaking later about this journey Jeff would come to talk a bunch about what he terms the regret minimization framework. And this is a quote of there's a great piece in wired magazine I think from 1999 interviewing Jeff and ask him about why he decided to leave and start start Amazon he said when I'm 80 am I going to regret leaving Wall Street. No will I regret missing a chance to be here at the beginning of the internet. Yes. So even in those early days Jeff's kind of long term thinking is evident there and I'm curious for Tom is there a great minimization framework something that Jeff talks about in the context of Amazon how what's your experience with that been well Jeff is a yeah he's a big picture long term thinker so I don't think we've really focused so much on that I mean I think it was important for him in terms of that decision. But maybe it underlies a lot of his feeling on let's try things and we can only regret that we didn't try something we can never regret that we tried something even if it fails so very much in the mode of failure is OK not trying things is not OK. And along those lines thinking about the origin of the idea for Amazon dot com as I was reading the everything store it says that Jeff and David were on a walk through central park when when Jeff told him he was going to leave and and David saw the founder of the show who did work. Yes thank you David. And it occurred to me. Although that would have been awesome. It occurred to me you know the intellectual property and all this original research that had been done for Amazon would have been done at D. Shaw. What did that look like and was that ever sort of a concern that D. Shaw would come back later with any sort of claim to the the idea for Amazon dot com. Yeah well he Jeff had signed a non compete and the non solicitation agreement. And I don't remember actually worrying about the non compete which you know in retrospect is kind of interesting but. And actually Shaw did start a couple of early internet companies that Jeff was not a part of and they even had a voicemail not a voicemail but an email company that. And then we public and in the late 90s and merge with somebody but but we did we did talk about and Jeff paid strict attention to the. Non solicitation of employees and it was a two year limit and so Jeff you know there were people at D. He shot at least one person really wanted to desperately come with Jeff and really was was Jeff Holden. No so Jeff holden Jeff holden might have been that might have been the Jeff hold Jeff was at D. He's shocked and I mean the story is that Jeff is now I think S. V. P. of product at Uber. Yes I think so yeah Jeff has had an interesting holden is that an interesting career and. We once looked at investing Madonna had a company he had started the valuation was only about the premium money at 80 million dollars or something. See so so we passed on that one but the but the story is that when the two years expired Jeff Bezos immediately called Jeff Holden and said pack your bags and come to Seattle which he did and and then several other people from D. He's off follow up so in the early days of the company before before it was obvious Amazon was doing well and could recruit all these former co workers of Jeff's from D. He's off they spent a whole year actually building the site so from the summer of 94 till the summer of 95. They build the site and then they launch Amazon dot com almost exactly a year later in July 1995 and along the way they raise Amazon raises its first seed investment and Tom you were the first led that first round of angels that invested in Amazon. How did that come together how did you meet Jeff and end up deciding to do this well the short part of the story is that Jeff was out raising that first million dollars hand. And and began and kind of early 1995 and he was calling on people and lawyer friend of mine older lawyer called me and said his investment group yet a little angel investment group that they had met with Jeff and didn't really understand this new internet thing and would I meet with Jeff and give them advices to whether this was for real and so and your background was in the cellular industry. Yeah I was at that time wrapping up selling my car cellular and limb broadcast and AT&T but I did know something about about the internet but this was very beginning to know net scape went public I think in like September that fall of 95 and three of the key employees at at macaw had been recruited by net scape the president the CFO and the general counsel so I had you know I was intrigued by it but anyway. But you know you never always say no I don't know anything about it you say sure and it sounds like a very baseless like approach to things yeah well it's good thing I said sure the anyway Jeff then called me and I met with him and he laid out what he was playing to do and and the company the website hadn't launched it was like May of 95 and the website launching into lie. And so I was impressed by Jeff just say that I for saw what Amazon would going to become would be not true I don't think anybody including Jeff bright and fully I'm sure he did not foresee what it became I mean he was he was excited about the growth the internet he had done a lot of research he focused on books because it had this ability to have this enormous catalog of books that no single bookstore could afford to carry. And so I reported back to my friend and said I think it's for real well you know it's very risky but and Jeff is for real he's obviously a smart guy he's very passionate about it and so then my friend who referred it to me a couple weeks later he called me back and he said well we call Jeff then after we talk to you and we told him that the $6 million pre-money valuation was too high and asked him to lower it to 5 million and he was unwilling to do it. Oh my god so for years after we passed so he passed so years afterwards and I really wonderful wonderful guy years afterward he would give me a hard time. I bet about the huge price. So the point the point of it is it took Jeff almost 12 months he didn't close until December of 95 this million dollars part of it came from his family and lots of people passed on it. Which is not surprising and there were a couple of kind of small venture firms at that time in Seattle they passed on it was too risky in their mind and they had a lot of risk. So Tom you've seen thousands of start-up pitches and met with countless entrepreneurs over the years. Was Jeff like like head and shoulders above any other pitch or was this like super different or was it like yeah you know I meet with a lot of really talented people with great ideas and some more. Yeah yeah no I think you know you looking back it's a little hard but I don't think he stood out as the only great entrepreneur I ever met. But certainly in the top you know 20 or 10 percent but it was a combination you know like a lot of venture you know we tend to think the person is very important. But also kind of what they're doing I mean it's not always exactly the business plan and the financial model that's important it's often are they in the right kind of technology and the right. Yeah yeah and because you could come up lots of reasons why this was not going to succeed and but the internet was growing. Some commerce was probably going to work at 23 hundred percent a year. You know it strikes with one of the things we talk about this a lot on this show about you know the importance of the market and targeting large markets and it strikes me reading Jeff's early writing about Amazon and particularly which we'll get to later the first letter to shareholders after they went public. He really focuses on the market and and illustrates how large the market is even even for just books but then everything Amazon expanded into is and when you're operating in a large market a lot can still go wrong and can go wrong and you'll still be successful. So that was 1995 and when the website finally launched in the summer it was it's funny you know I mean we work with at Madrid on a Tom many many startups and Ben and me several as well. It actually was an overnight success when by the this is actually Tom a quote from you in that same wired article quote by the second or third week there was six thousand or ten thousand dollars in sales and by the end of September they just launched in July Amazon was doing twenty thousand dollars in revenue a week it was in this is Tom it was clear there was a trend here. Good good. I'm a statement. Yeah understatement of the century as that became clear later into nineteen ninety five and nineteen ninety six lots of VC firms came calling and Amazon and Jeff eventually decided to raise a larger venture around that corner park insled in nineteen ninety six and on door join the board how did that come together well you know we had a Jeff had formed a small advisory board of himself and three other Seattle investors including myself and so this was not there was no formal company board was Jeff and but he wasn't ready for a board but he was ready for advisory board so so we would talk about you know like a board in the sense of you know what do we need to do you know it's growing very fast we got to improve the website we need to do you know other things and so it's been coming clear that it was growing fast that it was going to take more money than the million dollars partly just to satisfy growth and and venture capital firms from around the country we're calling and so I came home one night after work at six o'clock or something and my wife said you know some guy named John door when I said well actually I do and I hit action when I was on the visual board one of his partners was on that board and I guess a couple of different ways I I admit John and so she says well he calls every 15 minutes and he needs to talk to you now that's a very strange one of John's great strengths with his persistence tells you something about how to sell yourself show your interest a critical trade for yeah successful venture capital we don't always you know follow that enough probably but I'm and so I talked to John and he said well I'm going to meet with Jeff I really want to be in this deal I hope you can help me et cetera and so that was sort of the partly the introduction so they were really eager another firm that was very eager was general Atlantic which is a east coast firm yep and I kind of one interesting point out of it I think is that there was some negotiation on price and both firms were eager both were outstanding firms and general Atlantic proposed a complicated pricing because we're starting to talk you know 80 million dollar pre-money and that was although that era started to get hot it was you know reasonably high pre-money for a first venture round and but they propose sort of a complicated thing it would be you know 90 million dollar pre-money if it went public but if it didn't go public within two years that a certain valuation then it was you know 50 million dollars and Clinder Canyon was sort of like a straight 60 million at some point it's a little bit more than the upset and I think I think we all kind of favored I kind of perkins anyway but I picked a kind of perks partly though on the pricing complication so when that round closed is that when the formal board of directors was established with you and John and Jeff yeah yeah yeah and the little bit of story there that I think come out before but Clinder Perkins Jeff John actually said well I love you but I'm so busy I'm on all these other boards he was on the Netscape board I think at that time right right and I really don't have time and so but here I've got a great partner here that be on the board and Jeff sort of said well that's I'm sorry you know do bad sort of thing and talk to us and and we said or well why don't you just tell him that Clinder can only invest if John comes on the board so Jeff of course did and John joined the board so yeah which was good for Amazon and good for Clinder and John obviously yeah well I'm curious on that so in the everything store talks about how I don't know how much of this is causal but after that Clinder invested and John joined the board that Jeff kind of adopted as a mantra get big fast was that how did that come together and truth I mean Amazon did get very big very fast right was that really was that associated with investment what drove that that mindset change for I think part of it just came from the fact that we were growing fast original business plan back when he was raising the million dollars was kind of a moderate growth and a fast growth but nothing like what he was achieving and the plan actually said he would break even in your two and again it's sort of one fortunately that didn't happen the inventory your 20 right and so but it was growing fast so Jeff also had one of his sort of thesis is sometimes there's in launching a new business there's a land rush you want to be first and get the lead get into the lead and stay there and other times and this is true and launching new projects and Amazon sometimes he feels there's a land rush sometimes not and so you really double down and and and then the financial markets were clearly willing I mean we're in a high list already the financial markets were bidding up other companies and so he realized that he could raise a lot of money and so let's grow fast and we had the specter of Barnes and Noble sort of saying they're going to get in the internet so there was a there was a reason then to really step on you know the accelerator and and you you and Jeff did so in 1995 which is the first half year of operations Amazon did about 500,000 in revenue and then in 1996 and it was the summer when when Cliner invested so only half a year with this extra capital to grow Amazon did just a hair under 16 million in revenue which is what's that that's a 20 it's a that's a large amount of growth and it's so large I can't even calculate it in my brain and I mean even today like right we don't see companies do that no not in the first year and and at this point we were still in the era of Amazon dot com was only a bookstore when Jeff was putting together kind of the pitch deck for that 60 million dollar round and showing around was there any inkling that it was going to be more than books at this point to the start to foreshadow those other categories Jeff and those early years was very focused on books I mean he declined to even talk about other things for the first two or three years and I think that was including through the IPO is I remember and partly was let's do books well and books is is big yeah but other people were starting to ask and talk about well about other products and you know I suspect Jeff was thinking about that but we but it was good I think in the beginning just let's get this one right and was I can't remember when but it was probably 98 or so that really watched the music and started to watch some other things and movies so at the end of 96 just on 16 million in revenue Amazon hires Joy Covey as CFO who plays a central role in the store and and the company makes the decision and the board makes the decision that they wanted to prepare for an IPO and go public in 1997 which so at this point we are two years into the life of Amazon as a company one year into it being a publicly available website you've talked a little bit about the financial markets being open but how did those discussions of the board was you and john doer and Jeff did Jeff come to you and say hey I think we're ready to go public well I think you know pretty quickly investment bankers for even calling I mean it's you know when once a something starts to get hot you know whether there's substance in these companies are not there's sort of investment banker and that was particularly true in the 95 to 2000 Europe you know people are going public and being worth $30 billion and really didn't have much it didn't quite happen that way with Amazon because even though there was interest and I think one of one of Jeff's motivations I think the idea that we could raise money at hopefully good valuations and then use that money to grow further was attractive he also felt that because it was kind of a small relatively unknown retail company that it would help the brand to get better known and you know I think that's true on some consumer oriented companies it actually can be true even on enterprise start up some we have one we have one in pinch that went public this year and they were not widely known among CEOs everybody at the CIO knew them but once you get public you start to get picked up more on the Wall Street Journal in the New York Times certainly happened to Amazon after went public. What was the preparation process like I know now I'm in particular I'm curious so the lead left bank on the Amazon IPO was Deutsche Bank not Goldman Sachs or Morgan Stanley we covered the Facebook IPO a few episodes ago and talked about the the jockeying between the two of those firms for the Facebook IPO these are the gold plated Wall Street firms that everybody wants one of them to be there their lead book runner for for the IPO but Amazon went with Deutsche Bank and in particular the lead banker Frank Frank Quattrone and the lead analyst Bill Gurley who obviously is now partner at partner at benchmark how did how did that relationship come together if you've met and no Quattrone and Gurley the answer is Quattrone and Gurley and you know a broader answer is you know I think Jeff always had the view and we had to view that big name companies aren't always the best you know a Goldman and in Morgan Stanley have been the top two then and today and there's a lot of merit in going with with them but it didn't mean that other others weren't as good or potentially better and often it is the people directly working the deal and so I think they made a good impression and we thought they could do the job and there's a there's a great story told in the everything store that after the IPO they organized a retreat in Hawaii right and and that makes go I think oh Mexico that's right I think it was Cabo and and they had an associate working on the deal who was Jeff Blackburn and Blackburn came along on this on this retreat and I'm sure had interacted with with Jeff with there's so many Jeffs at Amazon with Bezos and the company and and the board beforehand but the net of that was that Blackburn ended up joining Amazon and they stole the company today and member of member of the senior team there right one of the top executives yeah so one of the biggest the biggest things that that people who've studied Amazon look at now and is quite well known is their ability to spin the flywheel to add fuel at any given point and increase the momentum of other parts of the business is in a very almost perpetual motion way so that that superior selection drives a better customer experience which increases more traffic which brings more sellers to marketplace and on and on and on and this all which lowers prices and increases selection and yeah it's a it's a recursive loop it is had had this this early in the company you know before the IPO was this something that was frequently talked about it was this a thing on investors minds when they were thinking about investing in the IPO so the actual flywheel concept developed in like 2001 or two rose out of a board meeting and meeting with an outside consultant but some of the basis of that I mean Jeff from the very beginning was very focused on customer experience and you know you had talked in the meeting with me about we're going to have the world's best customer experience and it was hard to do in those days because the web wasn't very good we you know bench when we launched it was a black and white website there was no publication date on the books so if you wanted to buy a trap I mean I complained about this if want to buy a travel book you didn't know if I was published 20 years ago or or six months ago and on travel book it's very important so you know but nonetheless he was like it was genetic that customer experience and then so how do you do that well prices inventory and so it was in the background certainly and and focused you know some of those elements the flywheel metaphor became useful later I think hearing you talk about that one as long time listeners of this show know we are great admirers of Ben Thompson and his aggregation theory but one of the core tenets of that is that superior customer experiences win in in a in a world where you're accessible customer base is infinite and distribution costs are low which is the internet and really interesting here that that even in those early days when the internet was so poorly understood by so many people Jeff got that at his core that providing the superior customer experience would lead to winning the market and not all companies get that I mean partly they're focused on short term partly yeah how to squeeze another two cents out of the customer and we cut out this product and we save money so all of this happens quattroon and girly win the business lead the IPO and on May 15th 1997 so less than three years after the company was founded and less than two years after the product launch I mean we're looking last week about how snapchat is to be lauded for going public having the courage to go public courage four years after company founding this was less than three years Amazon prices its IPO at $18 a share raises $54 million at an initial market cap of $438 million which is thinking back today will well we'll wrap up at the end of the show with where the market cap is today but it trades up on the first day closes at $23.50 but then for the first couple months it actually trades down and it's not until the company reports it's q2 revenue numbers later that summer that the shares when they report that they did 28 million in revenue in q2 of 1997 which was more than all of well much more than q1 and more than they did in all of 1996 than the shares rise again what was it like in those those first couple months after the company went public and the stock traded down and yeah you're right it didn't have this enormous pop at the beginning and yeah I think by you know that it was pretty flat for until those marine release came out and even by the end of the second quarter so late June I think it was so the equivalent to today so if you there's been three or four splits which are equivalent for 12 for one so if you divide 18 by 12 you get to $1.50 and so it was trading about $1.50 in late June and then just a couple of other key points because you can do this you know endlessly but by the end of the year it was like $5 and then it went to 100 over three years or so in those in today and then the stock split multiple times after that but by 2001 when you had the recession and all the crashes it was back down to like $6 so there were moments when you could have bought in it good prices and everybody you know it it shows partly that the market is not perfect at valuation but on the other hand you know the country was in a recession by 2001 and Amazon is a retailer and it was losing a lot of money and many people were predicting even then that it was going to die so but it yeah it's kind of fascinating to go back over those numbers. Oh yeah I bet one of the things we talk about a lot on this show is we try to assess whether an acquisition or an IPO was a good move and you know how successful was it and one of the measures that we we use for that with IPOs is what going public enabled that company to do that they would not otherwise have been able to do so what in the kind of near term those next few years after the IPO did they you know plow that new influx of capital into. Well I think you know Amazon has been rightly known for not making any money and being willing to to invest and to the extent that the financial markets allow you to and so I think if it had been in the hands of let's say an acquiring party you wouldn't have seen this kind of growth and then innovation and expand. So Jeff has had a unique ability to think long term and make it clear he's thinking long term so the investors understand that this is a long term investment and he likes to say that you get the investors you ask for me meaning that if you focus on you know two cents more profit per quarter then you get investors who focus on the investors. So investors who focus on that and if you you know takes you a while I think to get the right kind of investors but if you say long term cash flow is how we measure the business pretty soon you get investors who are willing to do to invest on that basis and I mean it's possible if you don't grow they weren't going to like your message itself but you end up with fewer short term investors and more long term I think that's helped. So I'm super curious on this we were we were chatting before a little bit before the show but and this is the perfect place in the story too so at the end of 1997 Amazon wraps up the year with 148 million in revenue up from 16 year before incredible growth but I think to my mind the most incredible thing that happens at the end of 1997 is Jeff publishes his first annual letter to shareholders. So the company's been public for seven or eight months at this point and Jeff writes this this amazing letter that is included in the annual report and he's included every year since with his then current year letter as well and the document is is a masterpiece of long term thinking how how did that document come together did did Jeff just walk into a board meeting one day and say hey I think I'm going to write a letter to all of our shareholders. Well I wasn't you know I didn't help him write it and first I wish I was a co author but I think you know one of the key people in that early days was this joy cubby who had been recruited as the CFO and thinking back a little bit on that when we started talking about going public. John door said well I'm going to vote against going public unless you bring in some more senior management you can't go public with you in a couple technical people wow and so I mean it's been a rule that sometimes we violate but it's a very good I think rule that you you need. Being private is different than going public even if you're growing pretty well you need a really first class CFO you need some more marketing power it's when David Rischer was recruited for Microsoft who was a very important strong senior executive in those days we brought in hired some more. And I think I think Jeff was not reluctant on either. But it was really John a lot of ways saying you've got to have a stronger bigger team to go public and I think it's a good good lesson for lots of people so joy was. And she also really joy was unusual she was very smart she hadn't graduated from high school she ended up. Graduating from Harvard Business School she came in second in the nation on the national accounting exam so clearly she was smart somehow. And she all she had done in some ways she had taken she'd been CFO of a small company and he's coast they gone public I believe she was in her early 30s when she joined very young but you know and Jeff was interview Jeff's a very tough interviewer in the sense that you know he he will interview a whole bunch of people until he finds somebody that he likes and thinks can do the job he talks about you know setting the bar very high and he had a great lunch with her he was impressed with her. And she's very smart nicely aggressive personable and so she really drove the IPO in a lot of ways and I like to say you know we set a record for start of the IPO to the finish but she was also involved in that letter I think. Wow speaking of the IPO start to finish was that hard for the company in an era where it had been doing so much PR and so much marketing and Jeff been doing all these public appearances to endure that quiet period. Yeah I think yeah I mean it was an era when yes the company was starting to get a lot of attention. And I don't know that the quiet period made a lot of difference we did get some criticism then and even today on how much we disclose beyond what the securities laws in New York you know the. NASDAQ requires that you know you disclose everything you have to but there's always this sort of area of well what's the cost of a customer. And how many customers do you have or how fast is books growing versus video and Amazon is always felt that that's proprietary they don't want to let their customers know they also don't want people focusing on what are in some ways. And there's short term small things and it will work out in the long term and I think I think maybe bricks and my retailers do they release monthly sales numbers or something you see them same store month or month or right well you know that's an example then of something and so there's always been a little bit attention with with the analyst wanting more and feeling well you know it's only going to help our competitors so I think that was going on even then it was sort of like who are you. To tell us these things well it's interesting in thinking about company creation from the earliest stages you get so focused on that cost to acquire a customer number and making that go down and increasing your lifetime customer value. In Amazon's life as a public company there they're so reserved about releasing that information have you ever experienced in other private companies someone who felt that that was proprietary and that was not something they would they would devolge in there their pitch decks or anything like that. Yeah I don't know about that specific piece I mean I do think sometimes it also comes up well another one for you know some of our companies that have gone public has been backlog and backlog off and if some companies have backlog in some different ways but and that wasn't really an issue with Amazon because it was sort of instantaneous sales from any any any day but a lot of companies don't want to disclose it because it's misleading sometimes. And maybe it tells things that it is and so I think a lot of companies refuse to do that and analysts would love to have it and it also relates to predicting you know arrange for next quarter or next year some of our companies will give you next year's kind of general expectation and some won't I think yeah I think there's a lot of variation. So one more we're now post IPO and and we'll wrap up the IPO story in a minute with some fun stats but one topic that happened a couple years later that I want to ask you about Tom is in nineteen ninety nine so two years after the IPO Amazon did a convertible debt offering and raised a billion and a quarter dollars in the debt markets. I'm curious that and then that ended up being I believe the last money into the company through the internet bubble how getting that large capitalization at that point how did that did that help survive help the company survive the crash that came thereafter and how did it dig itself out of you know you mentioned the stock price went back down to five dollars at that point. Yeah so it was part of the money was available we're growing rapidly let's take advantage of the fact that and the interest rates were that I believe it was five percent four and three quarters I believe are right around there which today is sort of where maybe interest rates are but you know given the twenty year history that was those were low low interest rates and I think we ended up we did a two or three debt deals. Totally in a couple of maybe two billion dollars so in the one hand it did give us money to grow. You know sometimes for companies having a lot of money lead to bad habits and just you know you acquire maybe some companies you wouldn't have acquired you know that our marginal or you over build and so forth and so Amazon was increasingly losing money when that recession hit and I don't think that's a good deal. We were in a better predicting recessions than anybody else and or the peak of the market but so but it was part taking to take advantage of the fact that the money was available and then when the recession hit and we're losing a lot of money and some of the as I remember some of those some of the terms of some of these debts had no interest for several years and then interest kicked in and so we're facing you know more interest payments the debt holders that value the debt had gone down there was a lot of pressure from the debt holders so really in that 2001 or so the decision Jeff in the boards so we need to cut cost and expenses and so you know we I think we barely did it in time in some ways we waited quite a while and because we're hoping you know kind of grow out of it and at some point so we're going to get a little bit more money. But and at some point said no we really need to and there were lots of Wall Street people calling it Amazon dot toast yeah all these famously you know you're going to go out of business and so we cut costs and there was this famous saying cut the crap which meant you know they were they were shipping bags of dog food was a great example you know 20 pound dog of bag food and charging you know $3 for shipping and losing a lot of money on well. Let's stop selling which is amazing because I now get the dog food for my dog from Amazon. Well we cut it out for a while I assume Amazon has figured out how to do it profitably now again it was you know so it isn't blind all speed ahead it is true you know when you need to you you cut back. It's interesting to think about the fact that the pressure from that debt holders force cost cutting which was ahead of the rest of companies who had to go to a media emergency cost cutting mode and most of them didn't make it what other factors do you think played into Amazon's. Amazon making it through yeah surviving the the burst when so many other companies didn't well you know it's easy sometimes to look at these and think you know boy they're just following crazy strategies but I don't think that's true that was true even that at Amazon I mean they they were still focused on customers and they were getting a lot of orders and the leverage was was concerned a problem. But underline economics were not bad yeah so I think that helped a lot and you know having good management that stuck it out you know was then folk was able to focus down on on cost controls and their their great stories and the everything story about. About those years of the Amazon and the impact it had on the culture and it and I think there was after those years did you put a moratorium on M&A for the required so many companies and was working yeah no and amissons you know not famous for overspending on on one way to put it yeah we talked about that on the show we will ask you about it but good. So to wrap up this has been an incredible story and having Tom join us for it has been special so today we're sitting here in December 2016 as of this morning Amazon market capitalization was 363 billion dollars up not quite a thousand x from the IPO when it was 438 million dollar market cap but. A pretty healthy return I was in let's see I was in middle school when Amazon IPO so I really I really wish I'd put my you know bank account in day I was on that point time I was buying Amazon products but anyway an incredible journey and super cool to really this this moment in history let's move to talking about what would have happened otherwise we touched on this a little bit but. But you know had Amazon not going public at that moment where where would we be had and I guess in particular I'm curious was a path of being acquired by somebody in those early days did it ever come up where people seriously interested and even if not it sounds like it you know from our conversation so far and just knowing the law of Jeff's mission that very unlikely that that he wanted to sell to someone yeah what was it. Yeah what was it ever on the table to you know raise more private capital or we had out longer yeah I think I mean I think we could have it would have been slower growth because you couldn't have afforded if you didn't have access to capital and particularly when you know we we began to broaden the product mix when we know when we started we we would get an order for a book and then we would contact the the distributor and have them ship us the book and then we'd re-ship it so we didn't even really have inventory and so once you start buying product building warehouses to put it in it you do need capital and so obtaining capital in different ways has been yeah very important for Amazon. And so I think it would have it would have constrained growth I mean I know a lot of companies these days they want to stay private as long as they can and it does depend on their business model if you've got a business model that doesn't require a lot of capital and that's that's a viable thing but Amazon's business model particularly as a group did require capital. Yeah I feel like Amazon exhaust all the options. Yeah we did two kind of events relating to that financing and so forth. One we had that famous meeting with Barnes and Noble back can be pre IPO where they the regional brothers came to Seattle and you know wanted to do some kind of a joint deal with Amazon and it was they weren't actually offering to acquire but they said well you can you can you can you can build our website and your own and you can we can both have websites or we can do it jointly we could jointly own it and Jeff I think rightly decided he didn't want to do that and then they filed a lawsuit the day before or three days before the IPO because we were using the phrase the world's book store. I mean there are lessons and all that for you by going to go public that your competitors sometimes do try to take it take it but really neither they nor anyone else really made a run at us and partly because I think a lot of traditional companies always thought we were overvalued and so that was actually a benefit now why nobody tried it when we were five dollars you know in 2001 that's when you know they should have tried I'm not sure they would have succeeded but people you know the whole everybody becomes pessimistic the same time everybody is optimistic in the city. Well it's interesting the you know Amazon obviously it would be a shocker if anybody would buy Amazon today I seriously doubt that's even possible but Amazon as an acquirer it feels like it's kind of internalized those lessons and I think about the Zappos acquisition during the 2008 recession 2008 2009 or the or the quid Z acquisition which both of which are written about extensively in the everything store it almost feels like Jeff and the company taking that lesson heart that when there are good businesses targeting large markets and for whatever reason are out of favor or in the midst of a recession that's the time to go shopping. You don't always have that luxury but yeah nice if you could remove on the tech names let's do it and you want to get off sure so I miss this part of the show is where we we analyze you know specifically looking at the IPO or acquisition that we're talking about what tech themes can we extrapolate either from a true technology perspective or sort of from an investment technology perspective and there's a few here I mean I think the biggest one that we've already touched on is the flywheel when I think about Amazon is just like the canonical call. The canonical colloquial example of how to build the world's best flywheel business where so many things feed into so many other things and fuel the business but you know that wasn't really part of the IPO is Tom taught us earlier that didn't really get formalized until 2001 so you know as we we think about lessons learned from the IPO it's a lot about you know timing your timing company creation correctly around new waves yeah I mean the internet was you have to believe that something is going to be a wave and be a little more contrary and then other people I think that you know that's evidence by the investors that passed in the earliest stages thinking that it was it was too risky but the big thing for me is yeah you have to believe whole heartedly that you're on the press of a wave and it's not possible to create you know top 10 in the world business without being on without being writing a massive wave I think for me the the flip side of that coin that I think really shines through in reading about and reading this history of Amazon at that time is the long term thinking that Jeff and the company in the board had even in those early days you know you have to if you believe you've identified a wave like that if it truly will become as big as you think it will it's going to take a long time you know decades you know Jeff is famous you know in I don't know if this is when he introduced the phrase but in that shareholder letter in 1997 said you know it's a day one for the internet and for Amazon and that that perspective is is really rare to lots of people say they have it but to actually behave that way and make investments accordingly is quite impressive it also you know applies even today when when you talk about new projects or initiatives at Amazon or other companies and I know Jeff likes to say it often takes 10 years to prove it and so you've got to make after you go public it's equal important to one continue to innovate don't stop right stop innovating just because you feel like you're at the top of the mountain you're not going to survive if you don't keep innovating on the others maintain that long term thinking the IPO gives you the opportunity to do that because you didn't have the money to do it you have to somewhat ignore what the market is doing though that's another important part after you go public I think yeah it's interesting you bring up Amazon today as a just an observation from the outside one trend that I think we can observe from Amazon is actually doing corporate innovation well I have like long held this belief that every company has every like really great company has one multi billion dollar innovation in them and it's usually they're not only in the building and they build that business and they tried desperately to build other ancillary businesses around it and some are bigger and some are smaller sometimes you get a Microsoft that has an office and a windows and but usually Google right and you know not that they're on great businesses within Google but it's search you know yeah I mean it's it's 90% on Google display ads that's that or search ads that's most the revenue so the thing that's amazing to observe in Amazon is an incredible DNA for the organization and small teams and doing things in a lean way and as we've observed there's already been one business that's on the scale of Amazon's original retail business with AWS and it bigger fast yeah yeah and it'll be fascinating to continue to watch the company and see see what that's quickly it's it's obviously this happened much later than the IPO story but about AWS the listeners to our show might also listen to Ben Thompson and James always podcast exponent and on one of their recent shows they were talking about platform mentality and the importance of that at Amazon and and perhaps how much DNA came from Microsoft into Amazon in terms of thinking about AWS as as a true platform and and Ben and and and the show you know they they posit that this great Bill Gates quote that a platform is when other participants on top of you realize the vast majority of the economics in the industry and you only collect a certain you know a small percentage you know it's not a it's not like a high margin you know Google like business how much you know thinking on that level happened at Amazon and during that creation well I don't I don't think we thought we were yeah kind of following and a Microsoft model although I think from the beginning everybody in Amazon recognized that Microsoft had the potential on the cloud to be the most important competitor in that that as they have become but the difference in a way was platforms were somewhat considered static in the sense that you built the platform and then every couple years you revised it or you set out new software or machines and Internet was so much constant iteration and so I think that I mean I'm you know I've never heard this from Jeff or others but seems to me with AWS the difference in a lot of ways why it's succeeded and been able to take this leading keep it. Bartlett was being first point others bail back but the constant iteration of AWS I mean it's like it's like revising your Internet site you know they had 600 new features this year or something well the old days platforms didn't do that. They you came out with windows 8 or 10 but it was two or three years of massive coding so I think the world even on that has changed a lot right at a great point one other question before we move out of trends and themes is as you're looking at at companies that are pitching Modrona for investment in recent history what are things that you learn from Amazon being so successful that you sort of look for in other companies as a pattern matching based on Amazon. Well you know every company isn't going to go public and every company isn't in it probably for long term but I really do prefer founders who have a long term vision and at least in the beginning say they're going to stick with it and I think it's almost genetic though and you don't know it until it happens and there are lots of reasons to sell your company and your market didn't turn out quite what you thought but you're going to get a good price but what I really you know hope is that a founder if he's writing the wave as you say or has other reasons doesn't sell out when he could be in it for the long term and again it's somewhat personality and I think you know I was very fortunate that Jeff was in this for long term and so even at moments when he could have gone out sold to company was an interesting he wanted to build something for the long term and you know when you think about a lot of the great companies they've had founders who really wanted to accomplish something kind of beyond making the profit. We're going to change how people think about software we're going to change how people do search so I think you know that that doesn't guarantee a successful company but if only always like that longer term they're thinking about it and hopefully going to be a good deal. And hopefully going to seek it. Cool thanks. Should we wrap up? Yeah you want to grade it? Yeah I mean this is in some ways this is tough I'm thinking of the end the code to the everything store which is joy-cubby and the letter that she wrote to Brad an email that she wrote to Brad's own and she was one of the key sources for the book after having done all the interviews and just reflecting back on her time in the Amazon and then the experience of talking about the story. And she said you know Jeff and the company kind of like he knew in the very beginning exactly where he was going and you know so many ways we talk about on the show so many startup stories and IPO stories and M&A stories are twists and turns and wild rides and it feels inevitable that the company would have went public when it did especially you know just hearing the story now it was completely rational it made sense it gave the company the scale and the capital and the visibility that it needed to grow and outpace competitors. So in some ways even I guess I think I give it an A I do give it an A but it's this might be like the least controversial or thought provoking decision we've had so far on the show for me. Yeah it's funny I was just thinking the same thing there's actually not a lot of analysis that needs to go into it I mean you look at the scale of Amazon today and even the scale in the years shortly after the IPO. The only way that they could have achieved the outcome that they did was by going public and I think that one reason why we had so much trouble in that earlier section of what would have happened otherwise is it just it just doesn't seem like there was a lot of choice. It feels like unnatural to think about an alternative history here right and I you know as someone who works on early stage startups a lot of the time there's all these like really vague questions around. Okay we think we have an idea in the space and we're learning as we're going and you know oh should we be a platform provider or should we be the you know business it's on top of it or should it all be combined or should. We be a horizontal or a vertical business in this space and you even go back and forth long after you started the business kind of playing both sides there and it just doesn't seem like Amazon had any ambiguity over what the long term vision of the company was at least at least. At least at least the retail business so Tom you know hearing that do you agree or are you laughing at us saying like easy easy to say from this vantage point. Well on the one hand I don't think any of us really did understand what would Amazon could become but I think the fact that Jeff and and several of us thought the internet was going to be a very big deal. And there was lots of potential and who know who knew where this could take you and I think that often happens with technology where you realize that something is going to be very big but knowing the details you know that today. Today a WS would have come out of that there was no way to predict that or think about that in those days but again you know that fits very well when you look back and say what the assets of Amazon were but also what. The technology development so I think joy is right in the sense that it was in some ways inevitable I'm just not sure we knew how inevitable it was but it took you know fabulous commitment to innovation and really hiring good people so you should not neglect that for inevitability. Okay with that carve outs and it will be interesting to think how many of our carve outs will be available on or some way serve to you by Amazon. I'm sure is Amazon's in delivery there somewhere either no matter what your carve out is Amazon is involved in it that would be interesting to look back at our previous carve outs and figure out are there any that are not served to you either on AWS or be able to ship to you or we'd have to pick something that's basically not a physical good. A physical good that's on some very very stubborn retailer that that retails only on their own sites I don't know I mean. The site that is not hosted on AWS or uses technologies as part of the site that are not hosted by it it would practically be impossible so yeah I guess that's why Amazon deserves that a that we mentioned a few minutes ago. So my carve out is a band called the album leaf I actually went to their show last night here in Seattle I've been a long time fan of the band there some of the best working music that that you can imagine it's a lot of percussion it's a lot of very like mellow synth but it's it's got a little punch to it so it's kind of hard to describe but check out the album leaf there they're on Spotify I'm sure they're on Amazon and great band. Cool that's I'll do I'll do a quick side carve out then maybe think Jenny and I went to the Stevie Nick show this weekend in in Seattle and she was awesome her 24 karat gold tour so great songs you some of her hits some of Fleetwood max hits but mostly and what I enjoy the most was just songs you know from the vault as she called them that you know people don't know super great Mike official carve out though is it's a great song. Mike official carve out though is there's a great article that we'll link to in the show notes very fun there's a seminal paper in Harvard business review from the mid 90s right around when Amazon was being started by Brian Arthur and it's called increasing returns and the new world of business and it's it's somewhat academic in topic but the thesis is that in an internet world where distribution costs are very low and your accessible market is everyone you can actually you know this old economic theory of diminishing returns that you the bigger you got you know the classic example is coffee plantations you know the more coffee you produce you're going to go to worse and worse less and less fertile ground and your coffee is going to get worse and worse and so you get diminishing returns on the internet you actually get increasing returns that the bigger you are the bigger you get and the better your customer experience becomes and that contribute to sort of the spiritual antecedent to to aggregation theory and Amazon and many of the things that have happened super fun thing that came out is turns out that corn mccarthy the author the novelist who you know wrote all the pretty horses and no country for old men and many other you know pull surprise winning author Brian Arthur the economist who at the article he went to corn mccarthy for help writing this piece and so corn mcc like basically dismantled the whole piece they reassembled it together and when you read it it reads extremely cogently not like a typical economic you know academic paper and the story came out recently very fun oh well I should appropriately say that on my Amazon Christmas gift list that that actually given to my wife is the undoing project book by Michael Lewis and I think a lot of us you know I like to read books on new technologies machine learning is you know popular subject around but drone and we've been reading books on things like that but here's one that's not particularly focused on numbers or technologies but a different kind of technology which is a psychology of people which again is super important in business so I think I look forward to reading it yeah I haven't read it yet either but I can't wait Danny Conn of the books about Danny Conn of an Amos Tversky Nobel Prize winners for basically developing behavioral economics and Daniel Conn of was and now an emeritus professor of Princeton and Michael Lewis is a esteemed Princeton alum as well and I took Conn of course when I was in school there and sadly it was the first year that he had retired and he didn't teach it so somebody else did but it took his course and had a huge impact on me and looking forward to reading the book. Great well that's all we've got if you aren't subscribed and want to hear more you can subscribe from your favorite podcast client and if you feel so inclined and you're a long time listener of the show or if you're new and just joining us for this episode we would love love love a review on iTunes or if you share it on social media with your friends so thanks so much for listening and have a great day. Thank you to Tom for joining us thank you that was fun.