Amazon.com

Amazon's success story is one of the most interesting business stories in the past 30 years. Despite many dot-com companies bursting into flames, Amazon succeeded immensely. The story covers Jeff's flywheel diagram, the famed door-desks, and details that many might not know. Their dominance in Amazon Web Services is another separate business. Fundrise, the presenting sponsor of this episode, democratized the asset class of investing in private, late-stage growth tech companies. Ben Miller, the CEO and co-founder of Fundrise, says that retail capital is a great source of capital, and it's a great way to offer a different option instead of venture capital.

Fundrise has disrupted the traditional venture capital model by using regulatory innovation to raise money from the public while staying as a private company. The Fundrise Innovation Fund is a registered fund that invests in private tech companies and allows the public to invest at a $10 minimum. This move democratizes access to growth-stage tech companies and hopes to disrupt venture capital just as Fundrise did with real estate private equity. The structure of the fund allows for a more long-term investment approach with a lower asset management fee compared to a typical venture fund. The crossover fund owns both public and private tech, making it a more passive and aligned investment. This mark a megatrend in venture capital and may see other established VC firms launching similar funds in the future.

The Everything Store is considered one of the best business books of the last 20 years. Brad, the author, stated that there are two reasons to write a book on business- thriller or how-to manual. Bezos' story fits both categories. Bezos' biological grandfathers and mother's family worked at Sandia National Laboratories, where the US nuclear program was developed. Bezos' adopted father, Mike, was from Cuba, attended Salesianum High School in Wilmington, Delaware, and worked his way up the corporate ladder to become a senior executive. Mike and Jackie donated $12 million to Salesianum, the largest single donation to a Catholic high school. Jeff Bezos grew up in Houston, surrounded by the space program.

Jeff Bezos had a formative experience spending summers with his grandparents on a 24,000-acre ranch in West Texas where they had to be self-sufficient. His grandfather, Pop Gise, who had run the nuclear weapons program for America, taught Jeff that there was no limit to what he could do given a little guidance. This experience was formative for Jeff because he had to do everything, including building his own tools and performing veterinary work. He attended a gifted program in the Houston elementary school system, chosen by author Julie Ray to shadow and write about. He graduated as valedictorian from high school and went on to attend Princeton University.

Jeff Bezos' early years were instrumental in shaping his vision for Amazon, starting with his education in computer science at Princeton and then his work at Fitel developing network technology for high-speed trading applications. This experience provided him with a basic understanding of how early networked computing worked and what different numbers meant. After leaving Fitel, he went on to work in banking and became friends with Halsey Minor, who went on to start CNET. Later, Jeff joined D.E. Shaw, a financial firm started by David E. Shaw, a Stanford computer science PhD. Jeff unexpectedly fell in love with the company, which would play a pivotal role in his future successes with Amazon.

D.E. Shaw and Co., although a quant hedge fund, viewed themselves as a group of creative artisans who invest in businesses and come up with new ideas. They aimed to find the smartest people in the world, regardless of their business and finance knowledge, and figure out work for them to do. They were the legacy of Jim Simons' Renaissance Technologies as their founder, David Shaw, was inspired by him. Jeff Bezos, the founder of Amazon, worked at D. E. Shaw and was involved in recruiting and bringing in super-smart people, some of whom later became early Amazon employees. Jeff and MacKenzie, who later became his wife, were both employees at D. E. Shaw, with MacKenzie being considered the first Amazon employee.

Before the emergence of the World Wide Web, D.E. Shaw recognized the potential of the internet and started working on online opportunities, such as Juno and an online retail brokerage for financial trading. Jeff and David brainstormed ideas weekly, and Jeff researched feasibility and worked on them with employees. They eventually came up with The Everything Store, Amazon.com. Their idea was to use the internet to build an intermediary layer bypassing traditional retailers, allowing manufacturers to sell directly to consumers. However, they started by choosing one category, built the consumer brand, website, and traffic, and then expanded into other categories. D.E. Shaw's recognition of the potential of the internet showed how they were ahead of the pack.

Books are ideal commodities for online sales due to their standardization and the small number of major distributors. The vast catalog of books that are available make it possible to create an online superstore, with exhaustive selection and customer value. The long tail of individual publishers and rare or out-of-print books make it important to negotiate with publishers. The power of the Internet lies in the ability to find things that could not be done otherwise. Jeff Bezos's research on online bookstores helped him realize the potential of Amazon to become a superstore, and their experimentation with the competition revealed the lack of an infinite selection. Establishing accounts with distributors made it easy to enter the market, with the potential to become Barnes & Noble or Borders scale.

The growth of the Internet from 1993 to 1994 was a staggering 230,000%, a rate of acceleration never before seen and unlikely to ever be seen again. This growth was the inspiration for Jeff Bezos to leave his cushy job and start Amazon, and serves as a reminder that when something is growing at such a rate, you should stop what you're doing and go do that instead. The Internet changed everything, and everything now is still just derivative of the Internet. Jeff's decision to leave his job was guided by the regret minimization framework, which encourages individuals to consider what decision they'll regret the least when they look back on their life at 80.

If you have an entrepreneurial impulse, you should follow it regardless of potential regrets. The American entrepreneurial system allows for the beauty of venture capital to support building great things. Amazon would not exist if Jeff Bezos stayed at D. E. Shaw, despite the fact that he loved it there. The original culture of Amazon was defined by people whose hearts were burning to make it easier for the world to consume knowledge and find rare out-of-print books. Jeff struggled with leaving D. E. Shaw because he loved the people there, but eventually, he followed his entrepreneurial impulse, incorporated his company, and continued building on his vision.

Seattle was chosen as the headquarters of Amazon due to its proximity to Roseburg, Oregon and the tax environment of Washington State. Access to technical talent was another factor, as Microsoft was in its heyday and Jeff Bezos respected what they had built. The fourth factor was the recruitment of engineer-programmer Shel, who had worked for early Silicon Valley startups including Whole Earth Catalog. Jeff had reverence for the Catalog and Steve Jobs was inspired by it. Originally, Santa Cruz seemed like a good location for Amazon, but in 1992, the Supreme Court ruled that retail companies don't have to collect sales tax in states where they don't have a physical presence. Jeff didn't want the burden to fall on the customer, so he chose Seattle which is not a good choice today due to its high population and cost of living.

Jeff Bezos and his team were able to create Amazon by taking risks, being adaptable, and making smart choices. From the initial decision to turn towards Seattle instead of going to California, to incorporating the business while on the road, to finding the perfect name in Amazon, they navigated challenges and obstacles with perseverance and creativity. By hiring talented people like Shel, they were able to make smart technology decisions that were critical to Amazon's success. They also leveraged personal connections like Jeff's relationships with Ingram and Baker & Taylor to get their foot in the door of the industry. By staying customer-centric and focusing on creating a great online store experience, they were able to build a company that would revolutionize the retail industry.

In the early days of Amazon, front-end engineer meant consumer-facing and back-end meant warehouse-facing technology. Shel built an engine called Obidos that passed IDs through URLs to dynamically generate web pages which allowed Amazon to be a dynamic web application without the use of cookies. Jeff ignored the suggestion of building an email-based storefront and focused on the web interface which turned out to be fruitful. Early engineers had to invent ways to deal with security issues with credit card information as people were not yet comfortable entering credit card details on the Internet. It is important for enterprise technology companies to not ignore startups, as was seen when Sybase did not return Shel's call and he chose Oracle over them.

Amazon's launch in 1995 was a perfect product/market fit. It went from obscurity to mass consumer appeal seamlessly within weeks, without any marketing spend. The initial insight of providing a wide range of books to solve a real problem struck a chord with millions, creating a super cool and useful product. The success wouldn't have been possible today. The founders' vision, and those who believed in them, that the internet was going to be a thing, was remarkable. FOMO is a natural reaction while reading this story, and it's important to question whether we would have recognized such an opportunity if we were around during this time.

Amazon's early success was due to their ability to efficiently build and operate a logistics supply chain and distribution for ecommerce that no one else in the world was doing. They took advantage of early Internet technologies and used low-level languages to develop algorithms that made their early infrastructure stand out. Amazon's competitive advantage and moat resulted from their ability to handle logistics, where they handled the entire process themselves. They moved to ordering from the distributor as soon as they got an order, and used clever hacks to get around the minimum order sizes restriction. Their native logistics system was able to beat those of Walmart, Kmart, and Barnes & Noble who had their own logistics systems tuned for physical stores.

Amazon's success can be attributed to their ability to create unique solutions tailored to their specific needs, rather than following industry norms. Their innovative approach to solving problems, such as the development of packing tables, sets them apart from other companies in the market. Additionally, their investment in capitalizing on their early success shows the importance of having a strong financial foundation in order to sustain growth. The persistence and drive of key individuals, such as John Doerr, can make all the difference in securing deals and partnerships that push a company to the next level. Overall, Amazon's success can be attributed to a combination of innovative thinking, strong financial backing, and a dedicated team of individuals.

Jeff Bezos was emboldened by the $8 million round from Kleiner and John joining the board. He hired the first official professional CFO into the company, Joy Covey, who co-architected the strategy of reinvesting every single dollar of profit they had to grow the business further. Covey was brilliant, curious, and recruited by John, who had a real superpower in recruiting. She wrote the original 1997 letter to shareholders with Jeff, reflecting the level of clarity, vision, potential, and values that he brought, which led to Amazon's juggernaut success. The company is consistent with the original ideas of the founder. Jeff is one of the most capable and effective founders ever, and Amazon is still in its early stages in spite of Covey's tragic death in 2013.

Amazon's success was not just due to their original idea of an online bookstore, but also their ability to learn from failed attempts and their brute force approach to finding success. They identified a product/market fit with longtail books and provided an appealing alternative to in-person shopping. Amazon's founder, Jeff Bezos, pushed for the company to be seen as a technology company, a move that helped them become a dominant player in ecommerce. Going public in 1997 was a strategic marketing move that paid off in mainstream media coverage. Amazon's ability to identify and execute on a successful operational model, as well as their willingness to adapt and learn, ultimately drove their success.

Pilot.com offers integrated services for finance, accounting, taxes, CFO services, investor reporting, and strategic planning, freeing up startup founders to focus on their core business. The product is fully integrated with fin-tech stacks like Stripe, Brex, Gusto, Shopify, and Square via APIs, and the platform is backed by Bezos Expeditions, Sequoia Capital and other venture capital firms. Unlike the early days of Amazon, there are standardized technologies available now which allow you to choose from a sea of technology providers and focus on being best-in-class. Pilot's seamless integration with most of the popular tech providers reduces the headache of finance and accounting, letting startup founders work with a combination of human-powered and product-powered customer service to make their businesses thrive.

The rivalry between Amazon and Barnes & Noble dates back to the early days of online bookselling. The Riggio brothers, founders of Barnes & Noble, met with Jeff Bezos to discuss either buying out Amazon or crushing them. They later launched barnesandnoble.com and sued Amazon for false claims. However, Amazon's focus on customer experience and massive selection eventually led to their dominance in the industry, despite predictions from industry experts that Barnes & Noble would win out. The Riggio brothers later spun off Software Etc. into GameStop. Today, Barnes & Noble Education Inc has a much lower market cap than GameStop, showing the unpredictable nature of the business world.

Amazon's success in building a native distribution logistics supply chain for e-commerce helped them beat Barnes & Noble. They recruited Rick Dalzel from Walmart, who was instrumental in implementing the best technology for distribution, and convinced him to join Amazon. Though there was a risk involved in making the jump, it paid off hugely for Amazon as they were able to overcome Barnes & Noble's struggles in competing online. Barnes & Noble was reluctant to lose money on e-commerce and didn't prioritize it as much as Amazon did. Jeff Bezos knew that they would win after recruiting Rick and building a strong distribution supply chain. This strategy made Amazon a darling stock and inspired investors.

Amazon's transformation from servicing physical stores to mailing small orders to individual customers was long, painful, and full of customer service errors, but it gave birth to world-class technology and supply chain organizations. The influx of MBAs, technologists, and Walmart executives like Rick Dalzel helped in building Amazon's sophisticated fulfillment centers and optimizing individual orders for end-customers. Amazon's supply chain is its largest part of the moat making them beat e-commerce giants like Barnes & Noble and eBay. The company employs 1.6 million people, has 185 fulfillment centers, 96 airplanes, a maritime company, and 300,000+ delivery vans. From a customer's viewpoint, all of this is free, making Amazon a cut above the rest.

Amazon's success against eBay was due to their focus on building a reliable and efficient distribution center and fulfillment center. While eBay was more interested in high-margin internet business, Amazon was focused on delighting their customers with reliable shipping times, trusted vendors, and secure transactions. This required Amazon to be the merchant or at least fulfill the orders themselves. Meg Whitman and Pierre Omidyar of eBay failed to see the value of operating warehouses and instead prioritized high margins. However, Bezos understood that long-term, there is never any misalignment between customer interest and shareholder interest. As a result, Amazon became the best place to buy something on the internet and ultimately dominated eBay.

Amazon's attempt to clone eBay through Amazon Auctions failed due to eBay's established network effect and Amazon's lack of prioritization. However, Amazon's acquisition of accept.com, a startup eBay was eyeing to handle payments, prevented the creation of PayPal. This highlights the importance of competition and the need for companies to adapt to changing markets. It also shows that sometimes, even with a technically superior product, established network effects can be difficult to overcome. Amazon's focus on prioritizing the customer while also paying attention to competition is evident in its decisions, and it paved the way for future successes and continued growth.

Amazon's early acquisitions and investments, though seemingly ill-conceived, were made to keep other competitors at bay and as hedges. Despite the failure of some acquisitions like Junglee, it indirectly led to Jeff Bezos investing in Google at the seed stage on the same terms as Ram Shriram. This investment turned out to be one of the most profitable ones for Jeff and MacKenzie, as they owned at least 1% of Google even after dilution. Google, being one of the most cash-generative businesses of all time, went public just on the series A with a post-money valuation of $100 million, but Jeff's entry was earlier at a much lower price point.

Amazon's success was not just due to its IPO and early venture funding, but also a $2 billion convertible debt raising that saved the company during the dot-com bubble. Additionally, Jeff Bezos' personal financial success was not solely tied to Amazon as he likely held a stake in Google through its IPO. Board concerns and the dot-com bubble led to the hiring of legendary coach Bill Campbell and Joe Galli as COO, respectively. It is important to understand the full context of a company's history and financial successes.

Amazon's early growth was marked by a culture clash between old school executives and the fast-paced tech industry. The company's success was also driven by high expectations and a focus on growth rather than profitability, leading to a big debt service and eventually layoffs in 2001. Jeff Bezos made key changes to the leadership team and company strategy, including bringing in Jeff Wilke, who later became CEO of Amazon Retail. The transition from 'Get Big Fast' to 'Get Our House in Order' marked a shift towards efficiency and profitability, a necessary move to avoid failure. The experience highlights the importance of balancing growth with sustainable business practices, a lesson that remains relevant to tech companies today.

Amazon's early success was largely due to their ability to find innovative solutions to generate cash flow and become profitable, including selling their infrastructure to other companies like Toys R Us, Borders, and Target. They even considered a partnership with Walmart, but were unsuccessful. This led to a meeting where Jeff Bezos took eBay's pitch to run Amazon's third-party selling personally and called an emergency meeting with his team. They eventually realized the value of leveraging their authoritative product catalog and created zShops, a fixed-price listing platform directly on the product page of amazon.com. This differentiation, along with their ASINs, is what still sets Amazon apart from other e-commerce sites today.

Amazon's success with Marketplace, where over 50% of everything sold on their website is from third-party sellers, was a radical shift in business strategy. Founder leadership became crucial in ensuring the greater good was prioritized over individual fiefdoms. Bezos, facing immense pressure and on thin ice, had the confidence to make the radical shift that ultimately led to the company hitting profitability in Q4 of 2001. This success led to Amazon's stock price tripling in 2007, while eBay's fell by over 50%, and Amazon finally passing eBay in market cap. The lesson learned is that continually adapting and innovating your business strategy, even in the face of pressure and adversity, can lead to big successes and growth.

Search is a strategically important priority for Amazon, which led them to start a subsidiary in Palo Alto to improve their own search capabilities. Though they initially planned to create their own separate search engine, they soon realized that network effect of search won't work in their favor. Amazon has better search data than Google as they have access to more demand data and intent data, reviews system, and conversion data. They started hiring search PhDs and algorithms experts for A9 to wait search. With Amazon's choice, rankings, and filtering, search on Amazon has become much better than anywhere else. eBay was hit hard as deep linking from Google into eBay became the best way to search their chaotic marketplace.

Amazon's success with their advertising business through search on their platform allows them to both play offense and defense against Google. Their improvement of search on their website also propelled them to transition from a monolith software architecture to independent microservices, which is impactful for providing web services to other developers. The story of Kindle was a defense against Apple's iPod, iPhone, and iPad, and was inspired by one of the first few successful ereaders created by the founders of a company that is not associated with their name, but with someone else's name massively.

The digitization of the music industry inspired Martin Eberhard and Marc Tarpenning to create a hardware startup called Nouveau Media and make the Rocketbook, which Jeff Bezos of Amazon was interested in. However, the sticking point was exclusivity for the A-store for the Rocketbook, which led Martin and Mark to make a deal with Barnes & Noble and Bertelsmann. Oprah's endorsement and a $200 million acquisition by Gemstar-TV Guide followed. Martin and Mark's new wealth led to the creation of Tesla Motors. Additionally, the launch of iTunes for Windows by Apple in 2003 made Amazon realize the need to deal with the threat of digitization in the books business, which prompted Jeff to call Martin back up.

The launch of Kindle by Amazon was a game-changer that disrupted the entire book industry. The device nailed a couple of things, including E Ink technology, wireless connectivity, and the introduction of viable technology. It provided an unforgettable book-like experience. The Kindle led to the launch of Fire Tablets, Echos, and other products. Audible, which Amazon acquired for $300 million, has a 40% market share of audiobooks, making it a $5 billion industry growing 25% annually. The Kindle launch resulted in massive amounts of unrest and lawsuits involving Amazon, Apple, and publishers. It is noteworthy that Kindle made it easy for readers to buy any book for $10, changing the publishing industry's outlook.

Investing based on resilience and optionality, as proposed by NZS, can be a wise strategy as it acknowledges the impossibility of predicting the future due to complex adaptive systems. Resilience refers to a company's ability to adapt to change, like Amazon's ability to thrive through shocks to the operating environment, while optionality refers to the asymmetric upside and potential for out-of-the-money projects like early Tesla or SpaceX. ROOTMOs, rare companies that exhibit both resilience and optionality, are the most desirable investments. Hamilton Helmer's Seven Powers investigate what enables a business to achieve persistent differential returns and sustainably be more profitable than competitors, with Amazon's fixed cost transformation of customer experience being a notable example. By acknowledging the limitations of predictability and investing based on resilience and optionality, investors can potentially mitigate risk and increase returns.

Amazon's scale economy is one of the powers that enables them to achieve persistent differential returns versus competitors. It builds customer trust for the long term. The company can amortize every new investment in every new feature across a massive customer base. Costco model suggests that customer loyalty is the thing that matters. The company is focused on gross margin dollars over the life of a customer and not on percentage. All of the profits of the company come from the memberships, the annual memberships.

Membership programs like Costco and Amazon Prime create insanely loyal customers who keep coming back for the guaranteed benefits. Jeff Bezos realized that once customers pay the subscription fee, they are more likely to continue shopping on Amazon, leading to more revenue. Amazon makes over $20 billion per year on Prime subscriptions, but may not actually be profitable on just Prime alone. However, the upfront funds from Prime subscriptions allow Amazon to invest in better distribution and logistics, leading to more leverage and better performance. Membership programs also offer predictability, loyalty, and longer customer lifetimes, resulting in more absolute margin dollars. Cash flow dynamics of subscription fees provide an incredible form of float for Amazon's business.

Amazon's success can be attributed to their leverage in operation, float, dynamic pricing on the website, and brand power. This attracts more customers and sellers to the platform, which leads to more operating leverage for Amazon. Their network effect is driven by the attractiveness for sellers and customers, but not between customers themselves. The power of their brand drives customer loyalty and reduces the need for price comparison. Amazon's success makes it a challenge for its sellers to leave the platform. Amazon has leveraged its scale to enable the Fulfillment by Amazon program. Amazon's lightweight process power cannot be determined, and they do not have significant switching costs compared to other retailers.

Amazon's focus on maximizing free cash flow and building religion around the company's long-term vision allowed it to counter-position against competitors like Barnes & Noble and Walmart, who were not equipped to adapt to the ecommerce landscape. By reinvesting aggressively and focusing on gross margin profitability, Amazon built a brand around its stock and was able to weather the dot-com bust while other companies faltered. Michael Mauboussin's 1999 presentation at Amazon highlighted the importance of the weighted average cost of capital and turning customer experience into a fixed cost. Amazon's focus on long-term vision and financial metrics like free cash flow allowed it to outmaneuver competitors and remain a dominant force in ecommerce.

Amazon's business model is based on negative cash conversion cycle where the capital they use has a negative cost. They finance the business entirely with float until they can finance it solely with operating income. The internet business model and ecommerce totally flips the traditional retail business model on its head because of the completely different way that the distribution works and inventory works. The larger the scale of Amazon's operations in the flywheel, the more capital dollars, cashflow dollars, they're able to get out of it to fund the larger scale of their operations. Amazon's cost structure is different from traditional retail businesses because a gigantic cost in retail is rent, whereas Amazon's warehouses have a much lower cost per foot.

Amazon's advantage over traditional stores lies in the fact that it doesn't have to store inventory in expensive real estate, giving it a cost advantage. Additionally, Amazon's success is due to its ability to continuously reinvest in growth and expansion into new markets, leading to an increasingly durable moat around customer experience. The question of whether or not it's still 'day one' for the Internet, and ecommerce specifically, is up for debate. While ecommerce penetration has grown significantly, there may be limits to how much more spending can shift online. However, with the pace of technological innovation and changing consumer behavior, the future of ecommerce remains somewhat uncertain.

The tech bubble burst of 2000/2001 did not stop the growth and value of the Internet. Consumer adoption of the Internet continued, providing an incredible amount of value. The success of Amazon, which was able to survive the bubble, was due to its ability to provide ongoing consumer value. Amazon's pathfinding algorithm is a brute force approach that has multiple concurrent developments. Amazon's success as a scale innovator has kept some of the best entrepreneurial talent in Seattle. Additionally, Amazon has kept its information very private, making maneuvering versus competitors, third-party sellers, and suppliers easier. Eventually, Amazon will have to disclose more information, especially for its advertising business.

Amazon's success is a result of its tactically random set of dots. The company invested in various businesses, some of which failed while others succeeded. Despite numerous failures, Amazon was good at learning from them. The company's strategy was to make bold investment decisions to gain market leadership advantages. Amazon was not just customer-focused, it also learned from its competitors and took their best ideas to refine and make them better. The company's success can be attributed to its philosophical straight line and strategically squiggly line. Jeff Bezos' background in finance played a vital role in Amazon's growth, and the company also followed John Malone's TCI playbook of avoiding showing profitability.

During the tech bubble, Amazon benefited and then got hammered harder than any other surviving internet stock. However, they invested and built through the crash, distancing themselves from their competitors. This period from 2000-2007 was the time to build moats which Jeff Bezos did unafraid. Amazon's ability to be profitable in the future was turned on, especially with AWS. To evaluate Amazon, we should grade them from founding until just before the financial crisis, which Forbes gave an A for incredible execution. If you bought 100 shares of Amazon at the IPO for $1800, today it would be worth $2.6 million, making a 1500X increase. Seattle's whole startup ecosystem, including Rec Room, benefitted from Amazon's success.

Amazon's success is unparalleled. Surviving the dot-com crash set them apart from every other retailer. Even surviving a time of complete souring as an industry leader is no small feat. Amazon is now a $1 trillion company, with an ever-growing market share. Amazon's success is due to A+ execution. The success of their Web Services is predicted to be an A+. The company is so successful that it broke algorithms and is now a cultural touchstone. Listening to interviews of thought leaders in different industries helps understand what it takes to achieve legendary status.

The amount of work and content that went into Elden Ring, a video game, is on a scale that no other game has ever matched. It's worth sinking months of your life into. However, it's important to give oneself breaks and not research two episodes simultaneously because it's hard to hold all the information in one's head. Additionally, calling listeners to action is an effective way to engage and expand user base. Recently, Acquired Merch was launched to sell t-shirts, hoodies, and other items. The experience can be further expanded by amortizing the fixed costs and providing a great user experience. Overall, deep appreciation is evident for artists like Kanye and video game creators who put in lots of effort, time, and content in their work.