The Amazon IPO with original Amazon Board Member Tom Alberg

Ben & David welcome very special guest Tom Alberg, board member and first lead investor in Amazon.com, 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! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Topics covered include: Tom’s “prolific” bio from the Amazon S-1 http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=424000Jeff 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 1994Jeff’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” valuationTom'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 https://www.wired.com/1999/03/bezos-3/.”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 https://www.youtube.com/watch?v=5jcDlGn-tZA within Amazon, as an outgrowth of maniacal focus on creating superior customer experienceAmazon'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 http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf 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 The Carve Out: Ben: the band The Album Leaf http://thealbumleaf.com/fullsite/David: Cormac McCarthy (author of All the Pretty Horses, No Country for Old Men, etc)’s contribution https://andrewbatson.com/2016/12/13/cormac-mccarthys-contribution-to-the-theory-of-increasing-returns/ to W. Brian Arthur’s landmark paper about the economics of the internet, “Increasing Returns and the New World of Business https://hbr.org/1996/07/increasing-returns-and-the-new-world-of-business”Tom: Michael Lewis’s latest book The Undoing Project https://www.amazon.com/Undoing-Project-Friendship-Changed-Minds-ebook/dp/B01GI6S7EK/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=&sr=, chronicling the Nobel Prize winning partnership between Daniel Kahneman & Amos Tversky in developing the field of behavioral economics

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

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• 2:04Speaker 02

  Welcome to episode 28 of Acquired, the podcast where we talk about technology acquisitions and IPOs. I'm Ben Gilbert.

• 2:11David Rosenthal?

  I'm David Rosenthal.

• 2:12Speaker 02

  And we are your hosts. Today's episode is on the Amazon IPO, and we have an incredibly special guest with us today, Tom Alberg.

• 2:19David Rosenthal?

  So, Tom, we know very well because he was one of the co-founders of Madrona, which actually brought Ben and me together. And none of us would be here if it weren't for Tom. But in addition to being a co-founder of Madrona, he has had another very special role over the last 20-plus years, which is board member of amazon.com. And Tom was the first investor and the first, and I guess other than Jeff, longest-serving board member of Amazon.

• 2:51Speaker 02

  Right.

• 2:53David Rosenthal?

  So, we thought it would be fun. We will get through the whole IPO story here, but to read Tom's bio from the S1 that Amazon filed in advance of going public. So, Mr. Alberg has been a director of the company, Amazon, since June 1996. Mr. Alberg has been a principal in Madrona Investment Group, LLC, a "private merchant banking firm" since January 1996. From April 91 to October 95, he was president and director of LIN Broadcasting Corporation. And from July 1990 to October 1995, he was executive vice president of McCaw Cellular Communications. Both companies were providers of cellular telephone services

• 3:36David Rosenthal?

  and are now part of AT&T Corp. Prior to 1990, Mr. Alberg was a partner at the law firm of Perkins Coie, where he also served as chairman of the firm's executive committee. He is also a director of Active Voice Corporation, Emeritus Corporation, Mosaics, Inc., Teledesic Corporation, and Vizio 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?

• 4:06Speaker 03

  No, I think, well, Vizio was acquired for a good price by Microsoft, I think over a billion dollars. But you also left out, for example, that I learned the multiplication tables in third grade and probably was class president in fifth grade. I mean, how can you miss these things?

• 4:23David Rosenthal?

  At Ballard High School, right?

• 4:25Speaker 03

  Right, Ballard High School, eventually, right.

• 4:27David Rosenthal?

  Once again, thanks to Tom for joining us. We're super honored to have him on the show. Let's start with the Amazon story. So I expect most listeners are familiar with the lore of how Amazon came to be, but we'll retell it briefly here leading up to the IPO and ask Tom some fun questions along the way. So, Amazon was founded in the summer of 1994, but actually started the idea a little bit before that when Jeff Bezos was a vice president at the hedge fund D E Shaw and Company in New York. And David Shaw, the founder of D E Shaw, assigned Jeff to think about business opportunities enabled by this new thing called the Internet.

• 5:08David Rosenthal?

  And Jeff went off and did a bunch of research, and as legend has it, he came across this one report about the growth of the Internet that projected that it would grow 2,300% annually for the next decade or so. And he kind of read that and decided, that's it, I gotta be a part of this, I don't want to miss this boat. So he and his wife, Mackenzie, who he also worked with at D Shaw, they quit their jobs and they road tripped across country to the West Coast with no particular destination in mind, other than starting a company at the end of it. Jeff writes the business plan for what would become Amazon along the way, and they end

• 5:47David Rosenthal?

  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, there's a great piece in Wired Magazine, I think from 1999, interviewing Jeff, and asked him about why he decided to leave and start, start Amazon, and 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.

• 6:29David Rosenthal?

  And I'm curious for Tom, is the regret minimization framework something that Jeff talks about in the context of Amazon? What's your experience with that?

• 6:38Speaker 03

  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 okay. Not trying things is not okay.

• 7:11Speaker 02

  Awesome. And along those lines, thinking about the origin of the idea for amazon.com. As I was reading the Everything Store, it says that Jeff and David were on a walk through Central Park when Jeff told him he was going to leave.

• 7:27David Rosenthal?

  That's David Shaw, the founder of DE Shaw, who Jeff worked for.

• 7:30Speaker 02

  Yes, thank you, David. And it occurred to me-

• 7:34David Rosenthal?

  Not me. Although that would have been awesome.

• 7:37Speaker 02

  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 DE Shaw. What did that look like? And was that ever sort of a concern that DE Shaw would come back later with any sort of claim to the idea for amazon.com?

• 7:53Speaker 03

  Yeah, well, Jeff had signed a non-compete and a non-solicitation agreement. And I don't remember actually worrying about the non-compete, which, 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 developed and then went public in the late 90s and merged with somebody. But we did talk about, and Jeff paid strict attention to the non-solicitation of employees. And it was a two-year limit. And so-

• 8:37Speaker 03

  Jeff, you know, there were people at DE Shaw, at least one person, really wanted to desperately come with Jeff and really.

• 8:43David Rosenthal?

  Was Jeff Holden?

• 8:45Speaker 03

  No, so Jeff Holden, well, Jeff Holden might have been, that might have been Jeff Holden. Jeff was at DE Shaw and I mean, the story is that-

• 8:53David Rosenthal?

  And Jeff is now, I think, SVP of Product at Uber?

• 8:57Speaker 03

  Yes, I think so. Yeah, Jeff has had an interesting, Holden has had an interesting career and we once looked at investing. Madrona had a company he had started. The valuation was only about pre-money at $80 million or something.

• 9:12David Rosenthal?

  Cheap these days.

• 9:13Speaker 03

  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 then several other people from DE Shaw followed.

• 9:32David Rosenthal?

  So, in the early days of the company before, before it was obvious Amazon was doing well and could recruit all these former coworkers of Jeff's from DE Shaw, 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.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?

• 10:15Speaker 03

  Well, the short part of the story is that Jeff was out raising that first million dollars and began in kind of early 1995. And he was calling on people and a lawyer, friend of mine, older lawyer, called me and said his investment group, he had a little angel investment group, that they had met with Jeff and they didn't really understand this new internet thing. And would I meet with Jeff and give them advice as to whether this was for real and so-

• 10:46David Rosenthal?

  And your background was in the cellular industry.

• 10:47Speaker 03

  Yeah, I was at that time wrapping up, selling my cost cellular and limb broadcasting to AT&T. But I did know something about- About the Internet, but this was very beginning, you know, Netscape went public, I think, in like September, that fall of 95. And three of the key employees at McCaw had been recruited by Netscape, the president, the CFO, and the general counsel. So I had, you know, I was intrigued by it. But anyway, but you know, you never always say, no, I don't know anything about it. You say, sure. And That sounds like a very Bezos-like approach to things. Yeah, well, it's a good thing I said, sure.

• 11:28Speaker 03

  The, anyway, Jeff then called me and I met with him and he laid out what he was planning to do. And And the company, the website hadn't launched at this point, right? No, this was like, May of 95, and the website launching in July. And so I was impressed by Jeff. To say that I foresaw what Amazon was going to become would be not true. I don't think anybody, including Jeff, probably didn't fully, I'm sure he did not foresee what it became. I mean, he was, he was excited about the growth of the Internet. He had done a lot of research. He had focused on books because it had this ability to have this enormous catalog of books that no single bookstore

• 12:12Speaker 03

  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 had referred it to me, a couple of weeks later, he called me back and he said, well, we called Jeff then after we talked to you and we told him that the $6 million pre-money valuation was too high, and asked him to lower it to 5 million, and he was unwilling to do it.

• 12:43Speaker 02

  Oh, my God.

• 12:45Speaker 03

  So for years So he passed? So he passed. Oh, my God. So years afterwards, and I'm really a wonderful, wonderful guy, years afterward, he would

• 12:54Speaker 03

  Give me a hard time.

• 12:55Speaker 02

  I bet.

• 12:57Speaker 03

  About the huge price that you paid. So the point of it is, it took Jeff almost 12 months. He didn't close until December of 95, this million dollars. Part of it came from his family and lots of people passed on it, which is not surprising. And there were a couple of kind of small venture firms at that time in Seattle. They passed on it. It was too risky in their mind and it had a lot of risk.

• 13:23Speaker 02

  So Tom, you've seen thousands of startup pitches and met with countless entrepreneurs over the years. Was Jeff like head and shoulders above any other pitch or was this like super different? Or was it like, yeah, you know, I meet with a lot of really talented people with great ideas and some work and some don't?

• 13:41Speaker 03

  Yeah. Yeah, no, I think, you know, 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 20 or 10%. 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, although that's important. It's often, are they in the right kind of technology and growth area? And, because you could come up with lots of reasons why this was not going to succeed. And, but the internet was growing. Some commerce was probably going to work.

• 14:23David Rosenthal?

  At 2,300% a year apparently. You know, it strikes me, 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 in particular, which we'll get to later, the first letter to shareholders after they went public. He really focuses on the market and illustrates how large the market is, 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.

• 15:02David Rosenthal?

  When the website finally launched in the summer, it was, it's funny, you know, I mean, we work with at Madrona, 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 $6,000 or $10,000 in sales. And by the end of September," they just launched in July, "Amazon was doing $20,000 in revenue a week." It was, and this is Tom, "It was clear there was a trend here." Good understatement. Yeah, understatement of the century.

• 15:41David Rosenthal?

  As that became clear later into 1995 and 1996, lots of VC firms came calling. And Amazon and Jeff eventually decided to raise a larger venture round that Kleiner Perkins led in 1996, and John Doerr joined the board. How did that come together?

• 16:00Speaker 03

  Well, you know, we had, Jeff had formed a small advisory board of himself and three other Seattle investors, including myself.

• 16:12David Rosenthal?

  So this was not, there wasn't a formal company board at this point, right?

• 16:15Speaker 03

  No, the formal company board was Jeff. But he wasn't ready for a board, but he was ready for an advisory board. So we would talk about, you know, like a board in the sense of, you know, what do we need to do? You know, gee, it's growing very fast. We gotta improve the website. We need to do, you know, other things. And so it was becoming clear that it was growing fast, that it was going to take more money than the million dollars, partly just to satisfy growth. And venture capital firms from around the country were calling. And so I came home one night after work at 6 o'clock or something, and my wife said, "Do you know some guy named John Doerr?"

• 16:59Speaker 03

  And I said, "Well, actually, I do."

• 17:03David Rosenthal?

  I've heard of him.

• 17:04Speaker 03

  And I had, in fact, actually, when I was on the Vizio board, one of his partners was on that board. And I guess a couple of different ways I had met John. And so she says, "Well, he calls every 15 minutes, and he needs to talk to you now."

• 17:17David Rosenthal?

  That's amazing.

• 17:18Speaker 03

  So it illustrates one of John's great strengths with his persistence. Tells you something about how to sell yourself, show your interest.

• 17:26David Rosenthal?

  A critical trait for any successful venture capitalist.

• 17:29Speaker 03

  We don't always. You know, follow that enough probably. But, um, 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, etc. And so that was sort of partly the introduction. So they were really eager. Another firm that was very eager was, uh, General Atlantic, which is an East Coast firm. Yep. And a 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, um, General Atlantic proposed a complicated pricing because we're starting to talk, you know, $80 million pre-money and that was, although that era started to get hot, it was, you know, reasonably high

• 18:14Speaker 03

  pre-money for a first venture round. And, um, but they proposed sort of a complicated thing. It would be, you know, $90 million pre-money if it went public, but if it didn't go public within two years at a certain valuation, then it was, you know, $50 million. And Kleiner came in with sort of like a straight 60 million at some point. It was a little bit lower than the upside. And I think, I think we all kind of favored Kleiner Perkins anyway, but picked Kleiner Perkins, partly though on the pricing complication.

• 18:44Speaker 02

  So when that round closed, is that when the formal board of directors was established with you and John and Jeff?

• 18:50Speaker 03

  Yeah. Yeah. Yeah. And a little bit of story there that I think come out before, but, um, Kleiner Perkins, Jeff, John actually said, well, I love you, but I'm so busy. I'm on all these other boards. Um, he was on the Netscape board, I think, at that time. Right, right. And I really don't have time. And so, but, but here I've got a great partner here that would be on the board. And Jeff, uh, sort of said, well, that's, I'm sorry, you know, too bad, sort of thing. And talked to us and, and we said, or, um, Well, why don't you just tell them that Kleiner can only invest if John comes on the board. So Jeff, of course, did and John joined the board.

• 19:32David Rosenthal?

  Wow.

• 19:33Speaker 03

  So, which was, you know, good for Amazon and good for Kleiner and John, obviously.

• 19:38David Rosenthal?

  Yeah. Well, and I'm curious on that. So in the Everything Store, it talks about how, and I don't know how much of this is causal, but after that Kleiner 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 in truth, I mean, Amazon did get very big, very fast. Was that really, was that associated with investment? What drove that mindset change?

• 20:07Speaker 03

  No, I think part of it just came from the fact that we were growing fast. The original business plan, back when he was raising the million dollars, was he had kind of a moderate growth and a fast growth, but nothing like what he was achieving. And the plan actually said he would break even in year two. And again, fortunately, that didn't happen.

• 20:29David Rosenthal?

  He meant to rate year 20.

• 20:30Speaker 03

  Right. And so, but it was growing fast. So, and Jeff also had, one of his sort of thesis is sometimes there's, in launching a new business, there's a land rush. You want to be first and get the lead, get into the lead and stay there. And other times, and this is true of launching new projects in Amazon, sometimes he feels there's a land rush and sometimes not. And so you really double down. And then the financial markets were clearly willing. I mean, we were in a hot, 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

• 21:12Speaker 03

  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.

• 21:24David Rosenthal?

  And 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 Kleiner 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, a 20?

• 21:52David Rosenthal?

  It's a, that's a, that's a large amount of growth. It's so large, I can't even calculate it in my brain. And I mean, even today, like, we don't see companies do that.

• 22:02Speaker 03

  No, not in the first year.

• 22:04Speaker 02

  And, and at this point, we were still in the era of amazon.com was only a bookstore. When Jeff was putting together kind of the pitch deck for that $60 million round and showing around, was there any inkling that it was going to be more than books at this point? Did he start to foreshadow those other categories?

• 22:20Speaker 03

  Jeff, in those early years, was very focused on books. I mean, he declined to even talk about other things for the first two or three years. And I think that was including through the IPOs, I remember. And partly was, let's do books well. And books is, is big.

• 22:39David Rosenthal?

  Yep.

• 22:41Speaker 03

  But other, people were starting to ask and talk about, well, what 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 it was, I can't remember when, but it was probably 98 or so that really launched music and started to launch some other things.

• 23:02David Rosenthal?

  And movies. So, at the end of 96, just on 16 million in revenue, Amazon hires Joy Covey as CFO, who plays a central role in the everything store. And, 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, the financial markets being open, but how did those discussions? I mean, the board was you and John Doerr and Jeff. Did Jeff come to you and say, hey,

• 23:47David Rosenthal?

  I think we're ready to go public?

• 23:49Speaker 03

  Well, I think, you know, pretty quickly, investment bankers were even calling. I mean, it's, you know, once, once a

• 23:57Speaker 03

  Something starts to get hot, whether there's substance in these companies or not. There's sort of this investment banker. And that was particularly true in the 95 to 2000 era. People were 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 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.

• 24:40Speaker 03

  And I think that's true on some consumer oriented companies. It actually can be true even on enterprise startups. We have one, Impinge, that went public this year and they were not widely known among CEOs. Everybody at CIO knew them, but once you get public, you start to get picked up more in the Wall Street Journal and the New York Times. Certainly happened to Amazon after it went public.

• 25:07Ben Gilbert?

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• 25:21David Rosenthal?

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• 25:35Ben Gilbert?

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• 25:45David Rosenthal?

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• 26:03Ben Gilbert?

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• 26:19David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 26:36Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 26:45David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. What was the preparation process? Like, and 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 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 their lead bookrunner for the IPO. But Amazon went

• 27:28David Rosenthal?

  with Deutsche Bank and in particular, the lead banker Frank Quattrone and the lead analyst, Bill Gurley, who obviously is now partner at Benchmark. How did that relationship come together?

• 27:41Speaker 03

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

• 28:24David Rosenthal?

  There's a great story told in the Everything Store that after the IPO, they organized a retreat in Hawaii, right?

• 28:34David Rosenthal?

  Mexico, I think. Oh, Mexico, that's right. I think it was Cabo.

• 28:39David Rosenthal?

  And they had an associate working on the deal, who was Jeff Blackburn. And Blackburn came along on this retreat and I'm sure had interacted with Jeff. There's so many Jeffs at Amazon, with Bezos and the company and the board beforehand. But the net of that was that Blackburn ended up joining Amazon and is still at the company today and a member of the senior team there.

• 29:05Speaker 03

  Right, one of the top executives.

• 29:07Speaker 02

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

• 29:36David Rosenthal?

  Which lowers prices and increases selection and it's a recursive loop.

• 29:41Speaker 02

  It is. Had this early in the company, before the IPO, was this something that was frequently talked about? Was this a thing on investors' minds when they were thinking about investing in the IPO?

• 29:56Speaker 03

  So, the actual flywheel concept developed in like 2001 or 2002. It rose out of a board meeting and a 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 he talked in the meeting with me about, "We're going to have the world's best customer experience." And it was hard to do in those days because the web wasn't very good. We, eventually when we launched, it was a black and white website. There was no... Publication date on the book. So if you wanted to buy a travel, I mean, I complained about this. If you want to buy a travel book, you didn't know if it was published 20 years

• 30:38Speaker 03

  ago or or six months ago. And on a travel book, it's very important. So, you know, but nonetheless, he, it 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.

• 31:05David Rosenthal?

  Hearing you talk about that, I've been one, as long time listeners of this show know, we are great admirers of Ben Thompson and his aggregation theory. But one of the core tenets of that is, is that superior customer experience is win in, in, in a world where your accessible customer base is infinite and distribution costs are low, which is the Internet. And really interesting to hear 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.

• 31:44Speaker 03

  And not all the companies get that. I mean, partly they're focused on short term, partly, yeah, how to squeeze another two cents out of the customer. Gee, we cut out this product and we save money.

• 31:57David Rosenthal?

  So all of this happens, Quattrone and Gurley win the business, lead the IPO, and on May 15, 1997, so less than three years after the company was founded and less than two years after the product launch. I mean, we're talking last week about how Snapchat is to be lauded for going public, having the courage to go public courage, four years after a 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.

• 32:34David Rosenthal?

  Which is thinking back today, 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 of months, it actually trades down. And it's not until the company reports its 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, then the shares rise again. What was it like in those, those first couple of months after the company went public and the stock traded down?

• 33:15Speaker 03

  Yeah, you're right. It didn't have this enormous pop at the beginning. And yeah, I think by, you know, I vividly remember some of this, that it was pretty flat for, until those earnings release came out. And even by the end of the second quarter or 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.

• 33:46David Rosenthal?

  Yep.

• 33:47Speaker 03

  And, 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's numbers.

• 34:07David Rosenthal?

  And then the stock split multiple times after that.

• 34:09Speaker 03

  Yep. 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 at 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

• 34:31David Rosenthal?

  And Amazon is a retailer.

• 34:32Speaker 03

  And it was losing a lot of money. Many people were predicting even then that it was going to die. But yeah, it's kind of fascinating to go back over those numbers.

• 34:42Speaker 02

  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 how successful was it? And one of the measures that 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 plow that new influx of capital into?

• 35:09Speaker 03

  Well, I think, you know, Amazon has been rightly known for not making any money and being willing to invest and to the extent that the financial markets allow you to. And so I think if it had been in the hands of, let's say, an acquiring party, you would not have seen this kind of growth and then innovation and expansion. So, you know, Jeff has had a unique ability to think long term and make it clear he's thinking long term so that the investors understand that this is a long-term investment.

• 35:54Speaker 03

  And he likes to say that you get the investors you ask for, meaning that if you focus on, you know, two cents more profit per quarter, then you get investors who focus on that. And if you, you know, it 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 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, but you end up with fewer short-term investors and more long-term. I think that's helped Amazon a lot.

• 36:37David Rosenthal?

  So I'm super curious on this. 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 the 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 amazing letter that is included in the annual report, and he's included every year since with his then-current year letter as well.

• 37:21David Rosenthal?

  And the document is a masterpiece of long-term thinking. How, how did that document come together? 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?

• 37:33Speaker 03

  Yeah, well, I wasn't, you know, I didn't help him write it. Unfortunately, I wish I was a co-author. But I think, you know, one of the key people in those early days was this Joy Covey, who had been recruited as the CFO. And thinking back a little bit on that, when we started talking about going public, John Doerr said, well, I'm going to vote against going public unless you bring in some more senior management. You can't go public with you and a couple of technical people.

• 38:03David Rosenthal?

  Oh, wow.

• 38:04Speaker 03

  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 Risher was recruited from Microsoft, who was a very important, strong senior executive in those days. We brought in, hired some more, Rick Dalzell, all that.

• 38:34Speaker 03

  He was actually at Walmart and Jeff started trying to recruit him in January of 97, before the IPO and didn't get him until after the IPO. But the, but so, and I think Jeff wasn't reluctant on that either. But it was really John in a lot of ways saying, you've got to have a stronger, bigger team to go public. And I think it's a good, good lesson for, for lots of people. So Joy was, and she also really, Joy was unusual. She was very smart. She hadn't graduated from high school. She ended up graduating from Harvard Business School. She came in second in the nation on the National Accounting Exam. So clearly she was smart and somehow. She was an amazing woman, yeah.

• 39:19Speaker 03

  Yeah, and she, all she had done in some ways, she had taken, she'd been CFO of a small company in the East Coast that had gone public. I believe she was in her early 30s when she joined Amazon. Yeah, right, very young. But, you know, and Jeff was, 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, 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.

• 40:03Speaker 02

  Wow. Speaking of the, the IPO, start to finish, was that hard for the company in an era where it had been doing so much PR and so much marketing and Jeff had been doing all these public appearances to endure that quiet period?

• 40:16Speaker 03

  Yeah, I think, yeah. I mean, it was an era when, yes, the company was starting to get a lot of, 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, the 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?

• 41:01Speaker 03

  And Amazon's 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, short-term, small things and it'll work out in the long term. And I think, I think maybe bricks and mortar retailers, do they release monthly sales numbers or something? You at least see them.

• 41:22David Rosenthal?

  Yeah, same store, month over month.

• 41:23Speaker 03

  Right, right. Well, you know, that's an example then of something. And so there's always been a little bit of tension with, with the analysts 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, oh, who are you to not tell us these things?

• 41:41Speaker 02

  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, in Amazon's life as a public company, they're, 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 divulge in their, their pitch decks or anything like that?

• 42:10Speaker 03

  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 often, if some companies have backlog and some don't in different ways. But, and that wasn't really an issue with Amazon because it was sort of instantaneous sales from any, any, any day. But a lot of companies don't want to disclose it because it's misleading sometimes and maybe it tells things to competitors. And so I think a lot of companies refuse to do that and analysts would love to have it.

• 42:50Speaker 03

  And it also relates to predicting, you know, a range for next quarter or next year. Some, some of our companies will give you next year's kind of general expectation and some won't. I, yeah, I think there's a lot of variation in that.

• 43:07David Rosenthal?

  So the one more, we're now post IPO and, and we'll, we'll wrap up the IPO story in a minute with some fun stats, but, but one topic that happened a couple of years later that I want to ask you about, Tom, is in 1999, so two years after the IPO, Amazon did a convertible debt offering and raised a billion and a quarter dollars in, 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?

• 43:51David Rosenthal?

  And how did it dig itself out of, you know, you mentioned the stock price went back down to $5 at that point?

• 43:56Speaker 03

  Yeah. So it was part of the, you know, money was available, we're growing rapidly, let's take advantage of the fact that, and the interest rates were then five percent.

• 44:11David Rosenthal?

  I believe it was, I think it was four and three quarters, I believe, or right around there.

• 44:15Speaker 03

  Four percent or something, which today is sort of where maybe interest rates are. But, you know, given the 20 year history, that was, those were low, low interest rates. And I think we ended up, we did two or three debt deals. totaling a couple, maybe $2 billion. So on the one hand, it did give us money to grow. You know, sometimes for companies having a lot of money lead to bad habits. And just, you know, you acquire maybe some companies you wouldn't have acquired, you know, that are marginal, or you overbuild and so forth. And so, Amazon was increasingly losing money when that recession hit. And I don't think we were any better predicting recessions than anybody else.

• 44:59Speaker 03

  And, or the peak of the market. But, so, but it was probably taking, taking advantage of the fact that the, that money was available. And then when the recession hit, and we were 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.

• 45:20David Rosenthal?

  And then it kicked in, yeah.

• 45:21Speaker 03

  Interest kicked in, and so, we were facing, you know, more interest payments. The debt holders, the value of the debt had gone down. There was a lot of pressure from the debt holders. So, really, in 2001 or so, the decision Jeff and the board felt, we, we need to cut costs 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 said, no, we really need to, and there were lots of Wall Street people calling it, "Amazon dot toast."

• 45:59David Rosenthal?

  Yeah.

• 46:00Speaker 03

  All these famous, you know, you're gonna go out of business. And, so, we cut costs, and there was this famous saying, "Cut the crap." Which meant, 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 it. Well, let's stop selling.

• 46:22David Rosenthal?

  Which is amazing, because I now get my dog food for my dog, from Amazon.

• 46:26Speaker 03

  Well, we cut it out for a while.

• 46:28David Rosenthal?

  I, I assume Amazon has figured out how to do it profitably now.

• 46:30Speaker 03

  But, again, it was, you know, so it isn't blind. All speed ahead. It is, you know, when you need to, you you cut back.

• 46:41Speaker 02

  It's it's interesting to think about the fact that the pressure from that debt holders forced cost cutting, which was ahead of the rest of companies who had to go to immediate emergency cost cutting mode, and most of them didn't make it. What other factors do you think played into Amazon's

• 46:59Speaker 02

  Amazon making it through? Yeah, surviving the the burst when so many other companies didn't.

• 47:04Speaker 03

  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 at was true even then at Amazon. I mean, they they were still focused on customers and they were getting a lot of orders. And the leverage was was a concern or a problem. But underlying economics were not bad.

• 47:32David Rosenthal?

  Yeah.

• 47:32Speaker 03

  So I think that helped a lot. And, you know, having good management that stuck it out and, you know, was then was able to focus down on on cost controls.

• 47:43David Rosenthal?

  And there there are great stories in the Everything Store about about those years at Amazon and the impact it had on the culture. And I think there was after those years, did Jeff put a moratorium on M and A for because they'd acquired so many companies and it wasn't working?

• 48:01Speaker 03

  Yeah, no, and Amazon's, you know, not famous for overspending on

• 48:07Speaker 02

  It's one way to put it.

• 48:08David Rosenthal?

  We've talked about that on this show. We won't ask you about it.

• 48:12Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 48:25David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 48:42Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 48:57David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 49:21Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 49:40David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 50:10Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you.

• 50:35David Rosenthal?

  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's market capitalization was $363 billion, up not quite 1,000x from the IPO when it was $438 million market cap, but a pretty healthy return. I was in, let's see, I was in middle school when Amazon IPO'd. So I really, I really wish I'd put my, you know, bank account into Amazon at that point in time. I was buying Amazon products, but anyway, an incredible

• 51:19David Rosenthal?

  journey and super cool to relive 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 gone 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? Were people seriously interested?

• 51:47Speaker 02

  And even if not, it sounds like, you know, from our conversation so far and just knowing the lore of Jeff's mission, that very unlikely that, that he wanted to sell to someone.

• 51:57David Rosenthal?

  Yeah.

• 51:58Speaker 02

  Was it ever on the table to, you know, raise more private capital or wait it out longer?

• 52:03Speaker 03

  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, you 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 reship it. So we didn't even really have inventory. And so once you start buying product, building warehouses to put it in, you do need capital. And so obtaining capital in different ways has been, yeah, very important for Amazon.

• 52:48Speaker 03

  And so I think it would have, it would have constrained growth. I mean, I know a lot of companies these days. They want to stay private as long as they can and it does depend on their business model. If you've got a business model that doesn't require a lot of capital, then that's a viable thing. But Amazon's business model, particularly as it grew, did require capital.

• 53:07Speaker 02

  Makes sense. Yeah. I feel like Amazon exhausted all the options.

• 53:11Speaker 03

  Yeah.

• 53:11Speaker 02

  Instead, they went.

• 53:12Speaker 03

  Yeah. Yeah. You know, we did two, two kind of events relating to that financing and so forth. One, we had that famous meeting with Barnes and Noble back in pre-IPO where they, the Regio brothers came to Seattle and, you know, wanted to do some kind of a joint deal with Amazon. And they weren't actually offering to acquire, but they said, well, you can, you can, you can build our website and your own and you can, we can both have websites or we could do it jointly. We could jointly own it. And Jeff, I think rightly decided he didn't want to do that. And then they filed a lawsuit the day before,

• 53:56Speaker 03

  or three days before the IPO because we were using the phrase, "The world's biggest bookstore."

• 54:01David Rosenthal?

  The world's biggest bookstore, yeah.

• 54:02Speaker 03

  So I mean, there are lessons in all that for anybody wanting 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 $5, 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 at the same time. Everybody becomes optimistic at the same time.

• 54:39David Rosenthal?

  Well, it's interesting that, 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 has kind of internalized those lessons. And I think about the Zappos acquisition during the 2008 recession, 2008, 2009, or the, or the Quidsy acquisition, which, both of which are written about extensively in the Everything Store. It almost feels like Jeff and the company taking that lesson to heart that when there are good businesses targeting large markets and for whatever reason are out of favor or in the midst of a recession, that's the time to go shopping.

• 55:21David Rosenthal?

  You don't always have that luxury, but it'd be nice if you could. Should we move on to tech themes?

• 55:26Speaker 02

  Let's do it.

• 55:27David Rosenthal?

  Ben, you want to kick it off?

• 55:28Speaker 02

  Sure. So, and this, 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, there's a few here. I mean, I think the biggest one that we've already touched on is the, the flywheel. When I think about Amazon, it's just like the canonical colloquial example of how to build the world's best flywheel business where so many things feed into so many other things and fuel the business. But, you know, that wasn't really part of the IPO. As Tom told us earlier, that, that didn't really get formalized until 2001. So, you know, as we, we think about lessons learned from the IPO,

• 56:10Speaker 02

  it's a lot about, you know, timing your, uh, timing company creation correctly around new waves.

• 56:17David Rosenthal?

  Yeah.

• 56:17Speaker 02

  I mean, the, the internet was, uh, you have to believe that something is going to be a wave and be a little more contrarian than other people. I think that, uh, you know, that's evidenced by the investors that passed in the, the earliest stages, thinking that it was, it was too risky. But the, the big thing for me is, is yeah, you, you have to believe wholeheartedly that you're on the precipice of a wave. And it's not possible to create, you know, a, um, top 10 in the world business without being on.

• 56:48David Rosenthal?

  Without being, yeah, riding a massive wave. And I think for me, the, the, uh, flip side of that coin that, that I think really shines through in, in reading about and, and reading this history of Amazon at that time is the, the long-term thinking, uh, that Jeff and, and the company and the board had, even in those early days, you know, you have to, um, 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, in, I don't know if this was when he introduced the phrase, but in that shareholder letter in 1997 said, you

• 57:27David Rosenthal?

  know, it's 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.

• 57:44Speaker 03

  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 equally important to one, continue to innovate. Don't stop innovating just because you feel like you're at the top of the mountain. You're not going to survive if you don't keep innovating. And the other is maintain that long-term thinking. 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.

• 58:24Speaker 02

  Yeah, it's, it's interesting you bring up Amazon today as a, just an observation from the outside. One trend that I think we can observe from Amazon is actually doing corporate innovation well. I've like long held this belief that every company has, every like really great company has one multi-billion dollar innovation in them. And it's usually their founding insight. And they build that business and they try desperately to, to build other ancillary businesses around it. And some are bigger and some are smaller. Sometimes you, you get a Microsoft that has an Office and a Windows in them, but usually...

• 58:58David Rosenthal?

  You're talking about Google, right? And, you know, not that there aren't great businesses within Google, but it's search, you know?

• 59:03Speaker 02

  Yeah, I mean, it's, it's 90% on Google display ads. That's the, or, or search ads. That's most of the revenue. So the, the thing that's amazing to observe in Amazon is an incredible DNA for experimentation and small teams and doing things in a lean way. And as we've observed, there's already been one business that's on the scale of Amazon's original retail business with AWS and it-

• 59:24David Rosenthal?

  Or bigger perhaps.

• 59:25Speaker 02

  Yeah, yeah. And it'll be fascinating to, to continue to watch the company and see, see what else.

• 59:30David Rosenthal?

  I wanted to ask quickly, it's, it's, obviously this happened much later than the IPO story, but about AWS, the-

• 59:38David Rosenthal?

  Listeners to our show might also listen to Ben Thompson and James Allwes's podcast, Exponent, and on one of their recent shows, they were talking about platform mentality and the importance of that at Amazon and perhaps how much DNA came from Microsoft into Amazon in terms of thinking about AWS as a true platform. And Ben and the show, they posit that, this great Bill Gates quote, that a platform is when other participants on top of you realize the vast majority of the economics in the industry and you only

• 1:00:19David Rosenthal?

  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 during that creation?

• 1:00:32Speaker 03

  Well, I don't, I don't think we thought we were, yeah, kind of following 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 and that, as they have become. But the difference in a way was platforms were somewhat considered static in the sense that you built a platform and then every couple of years you revised it or you sent out new software or machines. And internet was so much constant iteration. And so I think that, I mean, I'm, you know, I have never heard this from Jeff or others,

• 1:01:14Speaker 03

  but it seems to me with AWS, the difference in a lot of ways, why it's succeeded and been able to take this lead and keep it, partly was being first when others bailed 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, in the old days, platforms didn't do that. They, you know, 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.

• 1:01:50Speaker 02

  Right, that's a great point. One other question before we move out of trends and themes is, as you're looking at companies that are pitching Madrona for investment in recent history, what are things that you learned from Amazon being so successful that you sort of look for in other companies as a pattern matching based on Amazon?

• 1:02:13Speaker 03

  Well, you know, every company isn't going to go public and every company isn't in it probably for the 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 riding 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,

• 1:02:55Speaker 03

  I was very fortunate that Jeff was in this for long term. And so even at moments when he could have gone out and sold the company, he wasn't interested. 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 doesn't guarantee a successful company, but I've always liked that longer term, they're thinking about it and hopefully going to seek it.

• 1:03:35Speaker 02

  Cool. Thanks.

• 1:03:36David Rosenthal?

  Should we wrap up?

• 1:03:38Speaker 02

  Yeah, you want to grade it?

• 1:03:39David Rosenthal?

  Yeah, I mean, this is, in some ways, this is tough. I'm thinking of the end, the coda to the Everything Store, which is Joy Covey and the letter that she wrote to Brad, an email that she wrote to Brad Stone, and she was one of the key sources for the book, after having done all the interviews and just reflecting back on her time at 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 much, as we talk about on the show, so many startup stories and IPO stories and M and A stories are twists and turns and wild rides.

• 1:04:24David Rosenthal?

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

• 1:04:54Speaker 02

  Yeah, it's funny. I was just thinking that the same thing. There's, there's actually not a lot of analysis that needs to go into it. I mean, you look at the, 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 the 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.

• 1:05:20David Rosenthal?

  It feels like unnatural to think about an alternative history here.

• 1:05:24Speaker 02

  Right. And I, you know, as, as someone who works on early stage startups, a lot of the time there, there's all these like really vague questions around, okay, we think we, we have an idea in the space and we're learning as we're going and, you know, oh, should we be a platform provider or should we be the, you know, business that sits on top of it? Or should, should it all be combined? Or should we be a horizontal or a vertical business in, 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, of the company was, at least, at least the retail business.

• 1:06:04David Rosenthal?

  So, so Tom, you know, hearing that, do you agree? Or are you laughing at us saying like, oh, easy, easy to say from this vantage point?

• 1:06:13Speaker 03

  Well, on the one hand, I, I don't think any of us really did understand what would Am- 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 knew where this could take you. And I think that often happens with technology where you realize that something is going to be very big, but knowing the details, you know, that today AWS would have come out of that, there was no way to predict that or think about that in those days.

• 1:06:54Speaker 03

  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, you know, hiring good people. So you should not neglect that for inevitability.

• 1:07:23Speaker 02

  Right.

• 1:07:24David Rosenthal?

  Okay. With that, carve-outs. And it will be interesting to think, how many of our carve-outs will be available on or in some way served to you by Amazon?

• 1:07:36Speaker 02

  I'm sure. Amazon's in delivery there somewhere.

• 1:07:39David Rosenthal?

  No matter what your carve-out is, Amazon is involved in it.

• 1:07:42Speaker 02

  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 be shipped 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 retail's only on their own site. So I don't know.

• 1:08:03David Rosenthal?

  Site that is not hosted on AWS.

• 1:08:05Speaker 02

  Yeah.

• 1:08:06David Rosenthal?

  Or uses technologies as part of the site that are not hosted by AWS. It would practically be impossible, so.

• 1:08:11Speaker 02

  Yeah. 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 longtime fan of the band. They're some of the best working music that you can imagine. It's a lot of percussion. It's a lot of very like mellow synth, but it's got a little bit of punch to it. So it's kind of hard to describe, but check out The Album Leaf. They're on Spotify. I'm sure they're on Amazon and great band.

• 1:08:47David Rosenthal?

  Cool. That's, I'll do, I'll do a quick side carve out then. It made me think Jenny and I went to the Stevie Nicks show this weekend in, in Seattle and she was awesome. Her 24 karat gold tour, so great songs, you know, some of her hits, some of Fleetwood Mac's hits. But mostly, and what I enjoyed the most was just songs, you know, from the vault, as she called them, that, you know, people don't know. Super great. My 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.

• 1:09:32David Rosenthal?

  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, they, the bigger you got, you know, the, 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 contributed to sort of the spiritual antecedent to, to aggregation theory and Amazon and many of the things that have happened.

• 1:10:18David Rosenthal?

  Super fun thing that came out is it turns out that Cormac McCarthy, the author, the novelist who, you know, wrote All the Pretty Horses and No Country for Old Men and many other, you know, Pulitzer Prize winning author. Brian Arthur, the economist who wrote the article, he went to Cormac McCarthy for help writing this piece. And so Cormac like basically dismantled the whole piece. They reassembled it together. And when you read it, it reads extremely cogently, not like a typical economic, you know, academic paper. And this story came out recently. Very fun.

• 1:10:51Speaker 03

  Oh, well, I should appropriately say that on my Amazon Christmas gift list.

• 1:10:58Speaker 03

  That actually I've given to my wife is The Undoing Project, a 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, a popular subject around Madonna. We've been reading books on things like that. But here's one that's not particularly focused on numbers or technologies, but a di- well, a different kind of technology, which is the psychology of people, which again is super important in business. So I think I look forward to reading it.

• 1:11:29David Rosenthal?

  Yeah, I haven't read it yet either, but I can't wait. Danny Kahneman, the book's about Danny Kahneman and Amos Tversky, Nobel Prize winners for basically developing behavioral economics. And Daniel Kahneman was and is now an emeritus professor at Princeton and Michael Lewis is esteemed Princeton alum as well. And I took Kahneman's course when I was in school there. Sadly, it was the first year that he had retired and he didn't teach it. So somebody else did, but I took his course and had a huge impact on me and looking forward to reading the book. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 1:12:12Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:12:22David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:12:42Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:12:55David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:13:06Speaker 02

  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.

• 1:13:25David Rosenthal?

  Thank you to Tom for joining us.

• 1:13:26Speaker 02

  Thank you. That was fun.

• 1:13:28Speaker 04

  Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Huh? (music)