EVERY SPOKEN WORD
150 min read · 30,001 words- 0:00 – 3:36
Dedication to Tom Alberg and why Amazon matters
- DRDavid Rosenthal
Hey, Acquired listeners. In the time between when we recorded this episode and now when we're releasing it, longtime 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.
- BGBen Gilbert
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 Coie and the telecommunications firms, Western Wireless and McCaw Cellular, that really make up a large part of the infrastructure we all use for our phones today. We also were lucky enough to, uh, 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.
- DRDavid Rosenthal
Yeah. Tom was the longest serving Amazon board member other than Jeff himself. I believe twenty-three years, was the lead independent director and had a huge impact on the company, and of course, on us.
- BGBen Gilbert
We'll all remember Tom. He gave back in so many wonderful ways, and this episode is dedicated to you, Tom Alberg. Thank you.
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?
- BGBen Gilbert
Welcome to season eleven, 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.
- DRDavid Rosenthal
And I'm David Rosenthal, and I am an angel investor based in San Francisco.
- BGBen Gilbert
And we are your hosts. Our story today is probably the single most interesting business of the past thirty 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-
- DRDavid Rosenthal
Ah, so great
- BGBen Gilbert
... our episode with Alfred Lin on Zappos, and of course, by referencing Bezos's famous two thousand and nine speech about outsourcing anything that does not make your beer taste better over, and over, and over again. [chuckles]
- DRDavid Rosenthal
And over! [chuckles]
- BGBen Gilbert
But we decided that no self-respecting technology business historians like ourselves could skip over this incredible, tumultuous, death-defying, and, and ultimately, very, very successful story. Today, we'll be tackling Amazon.com, the website that sells books and now everything else on the World Wide 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.
- DRDavid Rosenthal
Woo-hoo.
- BGBen Gilbert
This story is for longtime students of Amazon and newcomers alike. So while you may be familiar with Jeff's flywheel diagram, or the famed door desks, or the Barron's article from the dot-com bust headlined, "Amazon.bomb," I can tell you from staring at my mountain of notes that, uh, there are some details in here that I certainly didn't know, and you may not have known either.
- DRDavid Rosenthal
Oh, it's just such a good story, too.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
I'm so glad we did Walmart first. We almost didn't, because it just perfectly sets the stage for Amazon.
- 3:36 – 11:05
Show business: merch store launch, sponsors, and housekeeping
- BGBen Gilbert
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 onto this bit for a while 'cause we can think of no better episode to launch our internet storefront than 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 are 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, uh, if you decide to be first in this first wave of people to sport the fashionable Acquired merch, you should tweet at us, @acquiredfm, and we will retweet some of our favorites. So the link is in the show notes, or you can go to acquired.fm/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 itself.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?
- SPSpeaker
Thanks for having me, guys. It's no wonder you guys, uh, like our story, because in building Fundrise, we unintentionally created an alternative to venture capital, which, uh, you know, everybody has a love-hate relationship with. [chuckles] In two thousand and twelve, we invented the idea of raising money for real estate on the internet, and within a few years, we had a hundred and fifty copycats, a hundred and fifty 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? Did we have, like, a lot better strategy? Do we have better execution? Like, I'm saying that the main reason is that they were venture-funded, and we weren't.
- BGBen Gilbert
Hmm.
- SPSpeaker
And the venture funds ran their sort of standard playbook, and basically ran those companies out of business. So [chuckles] a little provocative here. So we took a, like, totally different path. We didn't think we wanted to raise traditional venture money. We spent, like, 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, Fundrise has raised $155 million from the public, but stayed as a private company. So we figured out a way to do it, and we did it at scale. The innovation's 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.
- BGBen Gilbert
Ben, what are the terms for investors on this fund?
- SPSpeaker
Fundrise doesn't take a carried interest. It's just 1.85% asset management fee a year, which is much less than the two and 20 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 figured out how to do it, and are launching the Fundrise Innovation Fund, which is a registered fund that raises money from the public, but invests in private tech companies. It's gonna be available to all US investors. Anybody in the US can invest in it, a $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 Fundrise 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.
- BGBen Gilbert
Fascinating.
- SPSpeaker
It's a crossover fund, so we'll own public and private tech. So if you go public, we're not gonna 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 direct-to-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 gonna bet you that within five years, the likes of Andreessen Horowitz, Sequoia, also launch funds just like this.
- BGBen Gilbert
Fascinating. Well, listeners, if you are considering a growth round of capital, if you're an entrepreneur thinking, "In the next year, I'm gonna raise a, a round," you should definitely, definitely explore raising some of it with the Fundrise Innovation Fund. Just shoot an email to notvc@fundrise.com. That's notvc@fundrise.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 fundrise.com/innovation, and our huge thanks to Fundrise. 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, like, 2016. Austin is at the Solana Foundation, very deep in the world of Web3 and crypto, and gave us a great, great primer on the world of Web3 today, so check that out. And if you want early access, it's already live for paid Acquired LPs at acquired.fm/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, uh, certainly have investments-
- DRDavid Rosenthal
[chuckles] Certainly
- BGBen Gilbert
... in the companies-
- DRDavid Rosenthal
Certainly
- BGBen Gilbert
... we will discuss this time. Do your own research, and this is for entertainment purposes only.
- DRDavid Rosenthal
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. It's an incredible company.
- BGBen Gilbert
I had some conversation with you in maybe 2014 about how you basically owned Amazon stock by owning Seattle real estate. [chuckles]
- DRDavid Rosenthal
Yes. [chuckles]
- BGBen Gilbert
And you were doubly long Amazon with your very concentrated holdings in the company and owning your house in Seattle.
- DRDavid Rosenthal
That's true. The only time I've ever sold any meaningful amount was to buy our first Seattle house, 'cause I, I needed the capital for the down payment. [chuckles] And I figured I was, like, essentially getting a tracking stock [chuckles] on Amazon.
- BGBen Gilbert
Yep. Yep, yep.
- 11:05 – 25:46
From Sam Walton’s prophecy to Bezos’s formative years
- DRDavid Rosenthal
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-
- BGBen Gilbert
Oh, yeah
- DRDavid Rosenthal
... in 1992, literally as he lays dying, Sam 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."
- BGBen Gilbert
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 D.E. Shaw. Oh, my God, if he only knew.
- DRDavid Rosenthal
It was like the prophet speaking.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
He was describing-... reality and history as it was happening, and he had no idea. Uh, amazing.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Well, speaking of books, we have a big thank you that we owe to Brad Stone 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 twenty years of Amazon.
- BGBen Gilbert
For sure.
- DRDavid Rosenthal
We actually talked to Brad the other week when we were preparing for this.
- BGBen Gilbert
Well, 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 wanna say that wasn't in The Everything Store? And also give us some context around it.
- DRDavid Rosenthal
No doubt in my mind, it is one of the best business books written of the last twenty years, you know, of the 2000s, for sure.
- BGBen Gilbert
Oh, it's a thriller. Yeah.
- DRDavid Rosenthal
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," [chuckles] and The Everything Store is both of those.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
All right. We jump from 1992 in Bentonville, Arkansas, to Albuquerque, New Mexico, on January 12th, 1964, where one Jeffrey 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 Jeffrey's mother became pregnant, she was sixteen. His father, Ted Jorgensen, was eighteen. 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 Sandia National Laboratories.
- BGBen Gilbert
Which, for folks who don't know, that laboratory was established, I think, because it played a huge part in the nuclear program's development for the United States.
- DRDavid Rosenthal
So Los Alamos, New Mexico, which I think is, like, an hour, 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. [laughing] 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 Giesy. Pop, he went by Pop Giesy. He actually not only worked at Sandia, he was the head of Sandia. [chuckles]
- BGBen Gilbert
Oh, wow!
- DRDavid Rosenthal
He ran the US nuclear weapons program, and before that, he was one of the original members of DARPA.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
He encourages the development of the ARPANET, the Internet, the DARPA Challenge. Obviously, that was much after his time, but, man, you can't make this stuff up. That's crazy.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
So their kids managed to get pregnant in high school, and Ted and Jackie decide to get married before the baby is born, which they do. The marriage doesn't last, though. I mean, it's not really set up for success here, and when Jeff is about e- eighteen months old, they end up getting divorced. And Jackie, Jeff's mom, takes the baby, moves back in with her parents 'cause she's [chuckles] still only, like, eighteen or nineteen 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 Exxon, and her new husband's name is Miguel Angel Bezos Perez, today, who goes by-
- BGBen Gilbert
Mike
- DRDavid Rosenthal
... Mike Bezos.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Jeff Bezos's adopted father, and his story is incredible, and actually sort of touches our stories in a very small way.
- BGBen Gilbert
Huh.
- 25:46 – 40:34
Early career: startups, Wall Street, and the D.E. Shaw crucible
- DRDavid Rosenthal
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 Fitel, 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.
- BGBen Gilbert
Huh?
- DRDavid Rosenthal
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-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... 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, [chuckles] you know, working for this startup, building infrastructure for this then completely new discipline of finance, of, like, quantitative trading and finance. Those guys, our customers, are actually making a lot more money. [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
Maybe I should go work for them.
- BGBen Gilbert
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?
- DRDavid Rosenthal
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 those Steve Jobs things. Like, you can't connect the dots-
- BGBen Gilbert
Yes
- DRDavid Rosenthal
... looking forward, but when you look back through Jeff's past, Joy Covey, who we'll talk about, actually has, like, this quote that she gives to Brad Stone. Like, it's like a straight line, [chuckles] you know-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... from birth to Jeff Bezos today. Like, it makes total sense.
- BGBen Gilbert
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, 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, that was very much the case for Steve Jobs. Also, by the way, an adopted son of immigrants.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Probably arguably for longer than that. I mean, until recent times?
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So in 1988, he leaves Fitel, 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. [chuckles] Deutsche Bank's gonna-
- BGBen Gilbert
Ah
- DRDavid Rosenthal
... come back up later in the episode.
- BGBen Gilbert
I didn't realize that.
- DRDavid Rosenthal
Yep, yep. He's worked at startups, you know, computer science. Like, he's got this entrepreneurial kinda bug. So on the side, he becomes friends with a guy named Halsey Minor, which, uh, listeners, probably a bunch of bells are going off, and they almost start a startup 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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep, and I think they remained friends for... Well, certainly for a while, if not still to this day.
- BGBen Gilbert
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."
- DRDavid Rosenthal
Right.
- BGBen Gilbert
And, uh, he does always chuckle about that, but it is funny, to this day, uh-... you still can't really search books. You Google search something-
- 40:34 – 50:01
The Everything Store concept and choosing books as the wedge
- DRDavid Rosenthal
There were not many folks that were recognizing this at this point in time. So they've done the, the online trading thing, the E-Trade competitor. That ended up getting acquired by Merrill Lynch. They did Juno, and they're, you know, brainstorming all these other ideas, and one day they come up with an idea that they both get pretty excited about. [chuckles] And, uh, as Brad writes about in the book, the name for the idea is The Everything Store. [chuckles]
- BGBen Gilbert
Which ends up being a pretty great name for a book.
- DRDavid Rosenthal
So the concept was, in one way, Amazon.com. [chuckles] 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, Kmart, you know, Sears, all that physical stuff, you're just gonna cut them all out, and this kind of beautiful Internet business-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... is gonna be just the kind of algorithmic matchmaker between customers that wanna buy stuff and manufacturers who make stuff, and that's sort of what Amazon is.
- BGBen Gilbert
There's definitely this like, well, you know, the Internet is gonna change so much that, um, [tsking] factories will just be able to sell right to consumers online, and it's sort of like rounding away all the-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... messy middle, uh, 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.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
It was like this sort of very low-res picture of the way the retail landscape worked.
- DRDavid Rosenthal
This totally reeks of, like, 1999-era MBA business plan. [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
That like, you know, I'm gonna drop out of HBS, and I've got this startup idea and a business plan. I'm gonna get it funded and go, you know. But 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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
This seemed maybe-... plausible. You know, and if it would work, it would be beautiful, right? Like, you wouldn't have to actually do anything.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
You'd just sit in the middle and take a tax on transactions. And so the idea was that the manufacturers would drop ship [laughing] the orders directly to customers. Oh, man.
- BGBen Gilbert
Right out of their factory, which is totally their core competency.
- DRDavid Rosenthal
Yeah, totally, like that's gonna work.
- BGBen Gilbert
But importantly, while 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.
- DRDavid Rosenthal
Yes. So the two of them, they're both very excited about this, as they should be.
- BGBen Gilbert
Commerce, pretty big market, huh?
- DRDavid Rosenthal
Yeah, turns out, like, retail in America is maybe, other than US real estate, maybe the biggest market in the world.
- BGBen Gilbert
Yeah. Auto, I think, and maybe food.
- DRDavid Rosenthal
So they, like you said, Ben, they, they quickly realized, 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, doing his weekly research activities, and he researches, and he 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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Doesn't matter where you bought it, how you bought it, to the customer experience, it's basically the same thing.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Two, there are only two major actual distributors of physical books in America.
- BGBen Gilbert
Yep.
- 50:01 – 1:00:44
Regret minimization and the break from D.E. Shaw
- DRDavid Rosenthal
Yep. So Jeff is like, "Man, this is a big idea. There is a window to go do this right now."
- BGBen Gilbert
Oh-
- DRDavid Rosenthal
"Somebody's gonna figure this out."
- BGBen Gilbert
Do you know the stat on internet growth?
- DRDavid Rosenthal
Oh, yes. He gets it wrong, right?
- BGBen Gilbert
I think the stat is that as J- Jeff looked at two different research reports and basically approximated the middle, what he was analyzing was basically the amount of traffic.
- DRDavid Rosenthal
Yep, the number of packets sent over-
- BGBen Gilbert
The internet
- DRDavid Rosenthal
... of web packets sent over the year of 1993.
- BGBen Gilbert
It grew 2,300% in that single year.
- DRDavid Rosenthal
Ah, no, no, no, no, this is the error-
- BGBen Gilbert
Oh
- DRDavid Rosenthal
... that Ben writes about in the book. It grew 2,300X from January 1st, 1993, to January 1st, 1994.
- BGBen Gilbert
Wait, he was off by 100?
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
X?
- DRDavid Rosenthal
Which is 230,000%.
- BGBen Gilbert
What? Somehow I missed that.
- DRDavid Rosenthal
Yeah, he would later quote in speeches that he read this report, and he saw the traffic was growing 2,300%, and, like, it jolted him out of his complacency and realized, "This idea is huge. I gotta go, like, do this on my own." [chuckles]
- BGBen Gilbert
Holy crap. No, I mean, I was gonna make the point of, like, if you see anything growing 2,300%, you should start a business on top of it. But I didn't realize [chuckles] that I was with the outdated stat.
- DRDavid Rosenthal
There's a minimum threshold at which you should stop doing whatever you're doing-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... if you see something like this, and go do that. That threshold is below 2,300%. But if you see something that's growing 230,000% [chuckles] in one year, you really gotta quit your job [chuckles] and go do this.
- BGBen Gilbert
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 Web3, and is it some form of VR or AR?"
- DRDavid Rosenthal
It's true. You and I have never seen this in our professional lifetimes.
- BGBen Gilbert
We have never witnessed this, no.
- DRDavid Rosenthal
We have never seen anything within an order of magnitude of this.
- BGBen Gilbert
Mobile didn't happen this quickly. There was no single year in mobile that was nearly as fast as the rapidity 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-in-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.
- DRDavid Rosenthal
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. [chuckles] Everything now is still just derivative of the internet.
- BGBen Gilbert
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.
- 1:00:44 – 1:17:39
Seattle choice, naming Amazon, and the first technical foundations
- BGBen Gilbert
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, 'cause Manhattan is not a wonderful place to be running a sort of bootstrapped startup at the time.
- DRDavid Rosenthal
By this point in time, I think he had finally figured it out that, "Shoot, I might actually have to-... take delivery of some of these [chuckles] books and then ship them back out to customers, and Midtown Manhattan is not a great place for that.
- BGBen Gilbert
Right. 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 Boulder, 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.
- DRDavid Rosenthal
But you would think, given Jeff's history, Florida or Texas would-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... make more sense.
- BGBen Gilbert
Right, right. But there's another big one, too.
- DRDavid Rosenthal
Well, there are two more big ones.
- BGBen Gilbert
One of them is the access to technical talent.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Microsoft was just absolutely in its heyday, 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 gonna be attracting programmers, seems like a good idea."
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
And what's the fourth?
- DRDavid Rosenthal
Well, the fourth, you have to rewind a little bit to the recruiting of Schell. So Schell, Jeff got introduced to actually through a D. E. Shaw colleague, and Schell was a engineer, a programmer, who lived in Santa Cruz, California, and had worked for a bunch of kinda early Silicon Valley startups-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... including Stewart Brand and the Whole Earth Catalog. [chuckles]
- BGBen Gilbert
Oh, yeah, absolutely.
- DRDavid Rosenthal
Yeah, at the Whole Earth Truck Store in Menlo Park.
- BGBen Gilbert
Which is, like, a rare books retailer, right?
- DRDavid Rosenthal
You know, it was counterculture. It was seven- it was like curiosities that Stewart 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.
- BGBen Gilbert
It's perfect. And for listeners who are like, "Whole Earth Catalog, Stewart 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 Stewart Brand, and it was printed in the cover, I think the inside cover, of the Whole Earth Catalog.
- DRDavid Rosenthal
It was of the last issue.
- BGBen Gilbert
The last issue.
- DRDavid Rosenthal
When they stopped publishing it, they had the photo, the iconic photo from outer space of the Earth as seen from outer space, and it said, "Stay Hungry, Stay Foolish," [chuckles] and-
- BGBen Gilbert
So good
- DRDavid Rosenthal
... was a total inspiration for Steve Jobs. Yeah, so Schell was working there.
- BGBen Gilbert
Which is so cool 'cause then Stewart sort of gets woven into the Amazon story, in, in this way, of course, but then Bezos also has reverence for the Whole Earth Catalog and gets to spend time with Stewart Brand and a bunch of those folks down the line, too.
- DRDavid Rosenthal
Yep, and, uh, they work on, um, the Clock of the Long Now, I think it is, the 10,000-year clock.
- BGBen Gilbert
Which was a investment from Bezos Expeditions. I think it's a, uh... It was one of the earliest sort of projects that he backed when he became individually wealthy.
- DRDavid Rosenthal
[chuckles] Oh, how did Jeff become individually wealthy? Hmm. Ooh, it wasn't necessarily from selling his Amazon shares. We'll get to that.
- 1:17:39 – 1:30:28
Launch and immediate product-market fit: Yahoo boost and scaling pain
- DRDavid Rosenthal
Yeah. Amazing. So Shel and the early team of engineers that they bring on working together, they get a beta built, like, pretty fast.
- BGBen Gilbert
Really fast.
- DRDavid Rosenthal
It was summer of 'ninety-four when Jeff and MacKenzie leave DE Shaw, and then it takes a few months to figure all the stuff out in the garage in 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." [chuckles] Shel's friend, John Wainwright, makes the first purchase on April 3rd, 1995, a book called Fluid Concepts and Creative Analogies by Douglas Hofstadter. Doug Hofstadter's awesome. He wrote Godel, Escher, Bach.
- BGBen Gilbert
Oh.
- DRDavid Rosenthal
It's super cool. Uh, anyway, it's all, like, about the nature of consciousness and, like, a carve-out for another day.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
But super cool and very apt, geeky first purchase on Amazon.com.
- BGBen Gilbert
Again, illustrating who the types of people who were interested in Amazon and the movement at the time were.
- DRDavid Rosenthal
Yep. And then, shortly after that, July 16th, 1995, they launched the site to the public. I totally understand now what Marc Andreessen was saying when he was like, "I freaking missed it." I mean, I guess Marc 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 FOMO."
- BGBen Gilbert
You have FOMO, yeah.
- DRDavid Rosenthal
This would never happen today. They launched it-... And people came. People loved it! Like, it freaking worked, immediately.
- BGBen Gilbert
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.
- DRDavid Rosenthal
[chuckles] Bots.
- BGBen Gilbert
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 and inbound media inquiries because what they were doing was so novel and so useful to m- the mass market consumer.
- DRDavid Rosenthal
Oh, inbound media inquiries. Okay, so they launch it. In the first two weeks, they do $25,000 in revenue. This is just people telling their friends. You can't do that today, like $25,000-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... in revenue, like, in two weeks. You launch something today, nobody's gonna use it. And then they get an inbound media inquiry two weeks after they launch it from David Filo 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 homepage?"
- BGBen Gilbert
And Jeff's like: Wait a minute, your homepage, I think a lot of people go to that.
- DRDavid Rosenthal
And that was the brand-new, at that point, like, literally brand-new-
- BGBen Gilbert
Yahoo.com
- DRDavid Rosenthal
yahoo.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.
- BGBen Gilbert
Wow!
- DRDavid Rosenthal
It's all happening all at once. Gotta assume it was the first place to buy books. Featured on the front page with the letter A on yahoo.com.
- BGBen Gilbert
Growth hack.
- DRDavid Rosenthal
So apparently, they get the email-
- BGBen Gilbert
And had they raised their seed round, their million-dollar-
- DRDavid Rosenthal
No
- BGBen Gilbert
... angel round yet?
- DRDavid Rosenthal
No.
- BGBen Gilbert
Okay.
- 1:30:28 – 1:50:04
Seed and Series A: Tom Alberg, John Doerr, and ‘Get Big Fast’
- DRDavid Rosenthal
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 Alberg about back in early Acquired days. Tom is just the best.
- BGBen Gilbert
Tom is the best. I re-listened to that episode, and I was thinking, like, "Oh, this is gonna be terrible," 'cause this was, like, very early in 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, uh, 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.
- DRDavid Rosenthal
Yeah, longest-serving board member in Amazon history, other than Jeff. So cool.... So they raised 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.
- BGBen Gilbert
Nick Hanauer, a bunch of local business folks here.
- DRDavid Rosenthal
So in 1996, 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 [laughing] -
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... in 1996. They have a tiger by the tail here. You would have to be accelerating so much to go from-
- BGBen Gilbert
Right
- DRDavid Rosenthal
- whatever the run rate was in December of '95.
- BGBen Gilbert
So they about 15 X'd in their first year, but they 15 X'd off a base of 500,000. It's not like-
- DRDavid Rosenthal
Right
- BGBen Gilbert
... off of nothing. [chuckles]
- DRDavid Rosenthal
Yeah, they didn't go from, like, five to 100 or something like that. [chuckles]
- BGBen Gilbert
When I'm looking at SaaS companies, I'm like: Oh, my God, you quadrupled? That's, like, nearly unheard of!
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Good companies triple. [chuckles]
- DRDavid Rosenthal
And then you look at it, and it's like you went from 20K ARR to 100K ARR. [chuckles]
- BGBen Gilbert
Right. And this is... Yeah, wow, 500K in six months to 15.7 the following year. Okay, so that's 1996.
- DRDavid Rosenthal
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 night after work at, like, six PM or something, and my wife says, 'Do you know some guy named John Doerr?'" [laughing] 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 Doerr of Kleiner Perkins.
- BGBen Gilbert
It's been many years, and so there's lots of names of key folks at Sequoia and at Benchmark and at Andreessen Horowitz that, you know, we think of as like, wow, these incredible venture capitalists. John Doerr was pretty widely known to be the greatest of all time at this point in history.
- DRDavid Rosenthal
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 [chuckles]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... into one single person, that would've been John Doerr at that point in time. So this shows you how much clout John had. Well, A, just the hustle, the persistence, even though he was the legendary John Doerr, he's calling Tom, like, every 15 minutes, calling Tom's wife to get a lead on the deal. Amazon ends up choosing Kleiner to lead their Series A, $8 million at a $60 million post-money valuation.
- BGBen Gilbert
And I think they were competing against General Atlantic?
- DRDavid Rosenthal
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 Kleiner term sheet 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, [chuckles] you know, General Atlantic.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
But they were offering, like, double the valuation, close to double, I think.
- BGBen Gilbert
Wow!
- DRDavid Rosenthal
And Amazon and Jeff went with John and Kleiner 'cause [chuckles] they were John and Kleiner. And there's a fun little sidebar of John wins the deal, and this was kinda his playbook at the time. "Great, you know, I'm gonna be involved, but I've got this great associate [chuckles] who I'm gonna put-
- BGBen Gilbert
[chuckles]
- 1:50:04 – 2:09:41
IPO, Barnes & Noble’s ‘Book Predator,’ and the logistics counterattack
- DRDavid Rosenthal
Okay, so Joy joins at the end of 1996. Jeff's like, "We're gonna go public now." So spring of 1997, they file to 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 Gurley-
- BGBen Gilbert
Yes
- DRDavid Rosenthal
... 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 Gurley, you would know that the answer is Quattrone and Gurley." [chuckles]
- BGBen Gilbert
Yes, and of course, Frank Quattrone has gone on to do a bunch of very impressive deals at Catalyst, and Bill Gurley became future Bill Gurley. So [chuckles] yes, but this is in his banking career.
- DRDavid Rosenthal
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.
- BGBen Gilbert
He's correct on the marketing exercise. This is a big way to legitimize them to consumers. It enables many more people to feel comfortable typing their credit card on the internet, things like that.
- DRDavid Rosenthal
Everything like that, and also, this other thing ultimately is a good thing, too, [chuckles] not at the time. It attracts the attention of the Riggio brothers, who are the founders and CEO and chairman, separately CEO and chairman, of Barnes & Noble. You know, they knew about Amazon, but they're like, "Whatever. You know, Amazon, internet, like, pssh, you know, we don't need to worry about that." Well, all of a sudden, this little company in Seattle has filed to go public.
- BGBen Gilbert
And is claiming to be Earth's largest bookstore.
- DRDavid Rosenthal
Yeah, they're like, "Huh, that doesn't sound right to us." [chuckles] I just think of, like, Borders. Like, yeah, Barnes & Noble is great, but Borders was the big thing, but now we know from the Walmart episode, Borders was out of the game. Kmart had acquired them, and-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... the founders had moved on. Louis Borders had moved on.
- BGBen Gilbert
To start Webvan.
- DRDavid Rosenthal
To start Webvan! So great. So great.
- BGBen Gilbert
Isn't that crazy?
- DRDavid Rosenthal
Barnes & Noble was the juggernaut. Now, the Riggio brothers, when Amazon files for an IPO, they fly out to Seattle, and they schedule a dinner with Jeff, and Jeff brings along Tom, 'cause 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, so he's got the right set of skills to bring to this dinner.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So the Riggio 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 older brother, he technically did go to NYU, but, like, let's just say, uh, they went to the University of Hard Knocks. [chuckles] Their way of doing business is very different.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
Also, we gotta talk about this. I, 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, Kmart, Webvan, Kiva came out of Webvan, which, of course, Amazon acquired and is-
- BGBen Gilbert
That's right, Kiva Robotics.
- DRDavid Rosenthal
Yep, incredible history. Do you know what the Riggio brothers spun out of Barnes & Noble? I'm not talking about the Nook [chuckles] or barnesandnoble.com.
- BGBen Gilbert
Uh...
- DRDavid Rosenthal
You're never gonna guess this.
- BGBen Gilbert
No.
- DRDavid Rosenthal
It actually makes sense. GameStop.
- BGBen Gilbert
[chuckles] No way! Really?
- DRDavid Rosenthal
I'm dead serious. [chuckles] So, okay.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
It was actually Software Etc.
- BGBen Gilbert
I gotta look at the stock price of both of these.
- 2:09:41 – 2:29:46
eBay rivalry: why the ‘asset-light’ model lost to Amazon’s fulfillment + Marketplace pivot
- BGBen Gilbert
Yeah. Well, tell us about eBay. If you were to pitch me on both of these businesses, and put on my venture capitalist 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, ninety-nine times out of a hundred, I'd wanna invest in eBay. But Amazon dominated eBay, so how'd that play out?
- DRDavid Rosenthal
So the competition with eBay... The Barnes & Noble thing, yeah, that was the first battle [exhales] that Amazon wins, but it was obvious they were gonna win that. eBay, like, this is a real fight. So [chuckles] at first, they're different. eBay is auctions, it's Beanie Babies, it's PEZ dispensers, which, by the way, that whole legend of Pierre started eBay, so his wife could collect PEZ dispensers, that was a PR person made that up-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... to humanize the story. That's not what happened.
- BGBen Gilbert
AuctionWeb, not eBay.
- DRDavid Rosenthal
So as all this is happening, you mentioned the MBAs. Jeff and Amazon start hiring Andy Jassy, Jason Kilar, Victoria Pickett, 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 to Amazon. Music and CDs, that's what Jassy does. Kilar does DVDs. Victoria does box software. Harrison Miller does toys. Chris Paine does electronics. Jeff Blackburn leads BD and starts buying [chuckles] all these other internet companies. So pretty quickly, Amazon and eBay, they're competing much more head-to-head than-
- BGBen Gilbert
Mm-hmm
- DRDavid Rosenthal
... people originally thought. So eBay started as AuctionWeb in 1995 by Pierre Omidyar. Didn't turn into, like, a real venture-backed company and change its name to eBay until 1997, after Amazon was already public. And then, of course, famously, Benchmark invests six point seven million in eBay in the fall of 1997.
- BGBen Gilbert
Producing one of the greatest venture investments of all time.
- DRDavid Rosenthal
So that was fall of '97. [chuckles] I think they owned, like, twenty-five percent 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.
- BGBen Gilbert
I mean, eBay was the winner. At this point in time, everyone just looked at it and was like: "Oh, that's the best dot-com business." And also, think about that, Series A in '97, raising seven million dollars, two billion dollar market cap IPO in '98.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Come on. I remember thinking how insane it was when Snap went public after, what was it, four years?
- DRDavid Rosenthal
Four years, yeah.
- BGBen Gilbert
This was an all-time insane moment, with eBay going public and mania at an all-time high.
- DRDavid Rosenthal
Oh, there are legendary stories of administrative assistants at Benchmark retiring.
- BGBen Gilbert
The little piece of the carry of the one investment in... Yeah.
- DRDavid Rosenthal
The market cap didn't stop at two billion when eBay went public. By the next year, in 1999, they hit a twenty-five billion dollar market cap. [chuckles]
- BGBen Gilbert
That's a big company by today's standards, and we have trillion-dollar companies now.
- DRDavid Rosenthal
And it's effectively four years from AuctionWeb, but it's two years from eBay. [chuckles] That's impressive.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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 kinda going in the same direction here"-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... Meg Whitman and Pierre fly up to Seattle.
- BGBen Gilbert
Meg Whitman of Disney strat planning fame.
- DRDavid Rosenthal
Disney, high-margin media company. [chuckles] 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's still this little startup that had raised the Series A from Benchmark. They're hot, but, you know, they're still a 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 kinda, maybe not quite like the Barnes & Noble dinner, but they make a sort of oblique reference of, "Well, maybe Amazon should acquire you." Supposedly, according to Brad, they sort of float, like, a six hundred million dollar number if such a thing were to happen.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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 differentiated. Maybe we should think about that." [chuckles] And Meg supposedly, uh, says... I think this is from an interview with Pierre in the book. Meg says, "Pierre..." This is not a direct quote. I'm paraphrasing. "Pierre, warehouses are not cool. We never want to operate warehouses. [chuckles] You know what is cool? High-margin internet businesses. That's cool. You don't wanna be mucking around with warehouses." [chuckles]
- BGBen Gilbert
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 you're eBay, is a high-margin, true internet business. But Bezos is thinking in decades, and he's thinking: How are we possibly gonna 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 or a 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 mean, I've watched every interview Bezos has 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. He says: "Long term, there is never any misalignment between customer interest and shareholder interest."
- DRDavid Rosenthal
So true.
- 2:29:46 – 2:39:59
Dot-com crash, near-death financing, and the ‘Get our house in order’ profitability turn
- DRDavid Rosenthal
Back to Amazon. Despite this unbelievable, bountiful windfall for Jeff and Mackenzie personally, things are pretty bad at Amazon at this point in time. [chuckles] The dot-com euphoria is starting to wane. Some cracks are starting to show. Barron's, in the spring of 1999, publishes the famous Amazon.bomb article.
- BGBen Gilbert
Amazon.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 Kleiner Perkins days and now Bond days, Mary Meeker-
- DRDavid Rosenthal
Hmm
- BGBen Gilbert
... 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 wanna miss this one," and-
- DRDavid Rosenthal
She was right.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Totally.
- BGBen Gilbert
But that doesn't change the dot-com bubble starting to show cracks and then eventually pop.
- DRDavid Rosenthal
She would be out in the cold here by herself because the Amazon.bomb piece 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 successor... She worked super hard for three years, totally burned out. Her successor, Warren Jensen, took over as CFO from Delta Airlines, is where he came from. Joy first, and then, and then Warren, too. They orchestrate raising about $2 billion in convertible debt on the debt markets, which totally saves Amazon's skin.
- BGBen Gilbert
And was way more than they raised in the IPO.
- DRDavid Rosenthal
Way more.
- BGBen Gilbert
They only raised $55 million.
- DRDavid Rosenthal
Yeah. Sometimes people are like, "Oh, Amazon, what a great example of capital light. They raised $10 million in venture and fifty-five in their IPO and built Amazon." Like, no, no, no. [chuckles] They raised another $2 billion.
- BGBen Gilbert
And they used it.
- DRDavid Rosenthal
And they used it. Amazon would've been Amazon.toast had it not been for that. So-... Summer of nineteen ninety-nine, the stock starts falling. The board gets pretty worried about the company, about Jeff. I mean, it's hard to remember this, but-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... this happened. The board asks Jeff to bring in a COO to complement him. [chuckles] It's so painful to read this and, like, go back, but this happened, and they bring in Bill Campbell, the coach, the legendary Bill Campbell.
- BGBen Gilbert
Who, we should say, he's legendary. He's-- everyone 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 oust the CEO. You gotta wonder what was going on here, too.
- DRDavid Rosenthal
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, [chuckles] who he came in and replaced, so it, it wasn't just Twitter. Apple, with Steve Jobs, Google [chuckles] with, you know, Eric Schmidt, Intuit with Scott Cook.
- BGBen Gilbert
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-
- DRDavid Rosenthal
It was convince the founders to move aside and bring in the adult supervision. [chuckles]
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
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 yeah, the Amazon board brings him into Amazon, and simultaneously asks Jeff to go find a COO. So supposedly, actually, a leading candidate for the job was Jamie Dimon, if you can believe that.
- BGBen Gilbert
[chuckles] Oh, that's right.
- DRDavid Rosenthal
Isn't that crazy?
- BGBen Gilbert
What could have been?
- DRDavid Rosenthal
They settle on Joe Galli, who had been an executive at Black & Decker, and he had actually s- signed to go take an executive role at Pepsi, running the Frito-Lay division. What other COO transitioned to CEO of tech company came from Pepsi?
- BGBen Gilbert
John Sculley?
- DRDavid Rosenthal
That would be-
- BGBen Gilbert
Yep
- 2:39:59 – 2:52:54
Post-crash survival tactics: ‘powered by Amazon’ partnerships and eBay’s takeover pitch
- DRDavid Rosenthal
Jeff, though, yeah, I think he always believed he could do this. So he announces a internal company goal, that he announces to 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 wanna have e-commerce websites. What if we start going to other companies who wanna have good e-commerce websites, and we offer to sell them our website, like, our infrastructure?"
- BGBen Gilbert
Almost like being Shopify.
- DRDavid Rosenthal
Yeah. [chuckles] This is like Shopify, not AWS.
- BGBen Gilbert
And they do it in a ludicrously high-touch manner.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
It's not like we're just gonna open up our platform. This whole obsession with interfaces, and platforms, and APIs that exist with Ama- Amazon today hasn't really happened yet.
- DRDavid Rosenthal
No.
- BGBen Gilbert
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?
- DRDavid Rosenthal
And customers, and, uh, and that we can then just get paid, like, a software fee for.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So they do this with Toys"R"Us, and then they do it with Borders.
- BGBen Gilbert
I remember that Borders branded Amazon. It was really weird.
- DRDavid Rosenthal
I remember this. I would get Borders gift cards, and you could put them into the Borders site, but because it was also the same back end as Amazon, you could then use that on Amazon. I re- totally remember doing this, and it worked the other way direction, too.
- BGBen Gilbert
The clarity of vision on Amazon seems so clear in hindsight, but there was these weird things that happened along the way where you're like, "Oh, no, they were just, like, in a corner and did something pretty antithetical to what the drumbeat of the culture and the strategy was." Like, how is this strategic with everything that Bezos has been writing in his letters?
- DRDavid Rosenthal
It wasn't, but they needed the money.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
So they do it with Target. They literally ran Target's website for years, which ominously they announced that deal on September 11th, 2001, so-
- BGBen Gilbert
Oof.
- DRDavid Rosenthal
Oof, 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." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
"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 knows, they know Amazon's in a tight spot. They probably heard about Golly, and Campbell, and all this stuff. In the fall of 2000, Meg Whitman and Jeff Jordan fly up to Seattle, and they pitch Bezos on the opposite idea. [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
eBay takes over the failed Amazon Auctions and all of third-party selling, so it, it becomes zShops, which we'll talk about now, on Amazon. Just let... "eBay, we know how to do this. You keep running Amazon.com, the retail, and we'll do third-party selling for you with eBay technology [chuckles] " on Amazon. Like, wow! Oh, my gosh. You know the, the Michael Jordan meme of, like, "I took that personal?" [chuckles]
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
I think from the The Last Dance, um, I think Jeff took that personal. [chuckles]
- BGBen Gilbert
Yes, agree.
- DRDavid Rosenthal
Yes, I think he took that very personal. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
So he calls a meeting. Remember, they're just trying to, like, survive, get to profitability, generate cash flow. They're doing this crazy stuff with Target and Toys"R"Us.
- BGBen Gilbert
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.
Episode duration: 4:24:19
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