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

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, alongside special guest Tom Alberg, co-founder of Madrona Venture Group and early Amazon board member, delve into the history of Amazon's IPO and its evolution from a startup to a tech titan. They discuss Amazon's strategic focus on customer experience, its reliance on continuous iteration, and the importance of long-term vision in driving the company's growth. Highlighting the role of key figures like Jeff Bezos and Joy Covey, the episode underscores Amazon's successful leveraging of the burgeoning internet wave and the company's ability to innovate and scale rapidly by going public. Alberg shares insights on Amazon's early financing, the decision against joining forces with Barnes & Noble, and the company's culture of innovation, which later led to the creation of AWS. The episode emphasizes the significance of timing, market understanding, and the ability to maintain a long-term perspective post-IPO.

• Pilot is a sponsor for the Acquired podcast, offering accounting, tax, and bookkeeping services.
• Pilot is the largest startup-focused accounting firm in the US.
• The company is valued at over a billion dollars and backed by Sequoia, Index, Stripe, and Jeff Bezos.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs and in fact now is the largest startup focused accounting firm in the US."

This quote underlines Pilot's comprehensive service offerings and their status as a leading accounting firm for startups in the US.

• Jeff Bezos believes startups should focus on their core product and outsource non-essential tasks.
• Accounting is highlighted as a prime example of a necessary service that has no direct impact on a company's product or customers.
• Outsourcing accounting to firms like Pilot allows companies to concentrate on innovation and growth.

"Startups should focus on what makes their beer taste better...and outsource everything else that you do as a company that doesn't fit that bill."

The quote reflects Bezos's advice for startups to prioritize activities that enhance their product and delegate secondary tasks to specialists.

• Pilot provides a full suite of financial services, including CFO services and investor reporting.
• The firm has experience with thousands of startups and continues to support companies as they scale.
• Pilot offers Acquired listeners a discount on their services.

"Pilot both sets up and operates your company's entire financial stack...Pilot takes care of all that."

This quote emphasizes Pilot's role in handling the full range of financial operations for companies, from basic bookkeeping to high-level financial management.

• Tom Alberg is a co-founder of Madrona and a long-serving board member of Amazon.
• His background includes roles in cellular communications, legal practice, and various directorships.
• Alberg was Amazon's first investor and has been involved with the company since its early days.

"Mr. Alberg has been a director of the company Amazon since June 1996...Mr. Alberg received his BA from Harvard University and his JD from Columbia Law School."

This quote provides a brief overview of Tom Alberg's professional history and his significant role in Amazon's development.

• Amazon was founded by Jeff Bezos after researching business opportunities on the Internet.
• Bezos and his wife, Mackenzie, moved to Seattle and started Amazon in a garage.
• The company was based on a long-term vision and a willingness to take risks and embrace failure.

"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."

This quote encapsulates Bezos's decision-making process, which was guided by the desire to minimize future regrets and seize opportunities in emerging markets.

• Jeff Bezos raised Amazon's first million dollars from investors, including family and angel investors.
• Amazon experienced rapid growth shortly after its website launch, indicating a promising trend.
• Tom Alberg was one of the early investors who recognized the potential in Amazon and the Internet market.

"By the second or third week there was 6000 or $10,000 in sales...it was clear there was a trend here."

The quote by Tom Alberg reflects the early signs of success for Amazon, highlighting the company's quick uptake in sales.

• As Amazon grew, it attracted attention from venture capital firms.
• Kleiner Perkins led a venture round in 1996 with John Doerr joining Amazon's board.
• The investment helped Amazon to manage its rapid growth and scale operations.

"Venture capital firms from around the country were calling...it was becoming clear that it was growing fast, that it was going to take more money than the million dollars."

Tom Alberg's quote describes the increasing interest from venture capitalists as Amazon's growth trajectory became evident.

• Tom Alberg considers Jeff Bezos to be among the top entrepreneurs he's met.
• Bezos's approach to business focuses on being in the right technology and growth area.
• The success of Amazon is attributed to a combination of Bezos's leadership and the burgeoning Internet market.

"I don't think he stood out as the only great entrepreneur I ever met, but certainly in the top 20 or 10%."

Alberg's quote acknowledges Bezos's exceptional entrepreneurial skills, placing him in the upper echelon of entrepreneurs he has encountered.

• Venture capital firms showed significant eagerness to invest in Amazon.
• General Atlantic and Kleiner Perkins were particularly interested, with both firms proposing different pricing structures.
• General Atlantic offered a complex deal with variable pre-money valuation based on IPO success, while Kleiner Perkins presented a straightforward offer.
• Amazon favored Kleiner Perkins, partially due to the simplicity of their offer.

"General Atlantic proposed a complicated pricing, because we're starting to talk $80 million pre money. And although that era started to get hot, it was reasonably high pre money for a first venture round. But they proposed sort of a complicated thing. It would be $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 $50 million. And Kleiner came in with sort of like a straight 60 million."

The quote explains the differing investment proposals from General Atlantic and Kleiner Perkins, highlighting the complexity of General Atlantic's offer versus the straightforward nature of Kleiner Perkins's proposal. It shows the decision-making considerations for Amazon regarding venture capital.

• Amazon's formal board of directors was established after the investment round with Kleiner Perkins.
• John Doerr from Kleiner Perkins initially declined to join the board due to other commitments but was later convinced to participate.
• Jeff Bezos insisted on having John Doerr on the board, which proved beneficial for Amazon and Kleiner Perkins.

"So Jeff, of course, did, and John joined the board, which was good for Amazon. And good for Kleiner and John, obviously."

The quote indicates that Jeff Bezos played a role in ensuring John Doerr joined Amazon's board, reflecting on the strategic importance of having influential board members.

• Amazon experienced rapid growth, surpassing its original business plan projections.
• Jeff Bezos's strategy included a "land rush" approach, aiming to establish a leading market position quickly.
• The financial markets were willing to support Amazon's growth, and the company capitalized on this opportunity.
• Competition from Barnes & Noble motivated Amazon to accelerate its expansion.

"Jeff also had one of his sort of thesis is sometimes in launching a new business, there's a land rush. You want to be first and get into the lead and stay there."

The quote captures Jeff Bezos's strategic philosophy of quickly securing a dominant market position, which was a driving force behind Amazon's rapid expansion.

• In its early years, Amazon concentrated solely on books, with Jeff Bezos declining to diversify into other categories initially.
• The focus was on perfecting the book-selling business before considering expansion into other product lines.
• Amazon eventually expanded into other categories such as music and movies around 1998.

"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."

This quote emphasizes Jeff Bezos's initial strategy to concentrate on establishing Amazon as a leading online bookstore before branching out into other product offerings.

• Investment bankers showed interest in Amazon's IPO due to the company's rapid growth.
• Jeff Bezos saw the IPO as an opportunity to raise capital for further growth and to increase brand recognition.
• The IPO discussions involved the board members, including Tom Alberg, John Doerr, and Jeff Bezos.

"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."

The quote highlights the strategic thinking behind Amazon's IPO, focusing on raising capital to fuel growth and enhance the company's brand.

• Amazon chose Deutsche Bank and specifically bankers Frank Quattrone and Bill Gurley for its IPO, despite not being the most prestigious Wall Street firms.
• The decision was based on the impression made by the individuals involved rather than the reputation of the institution.
• Jeff Bezos valued the quality of service over the brand name of the investment bank.

"You know, Jeff always had the view, and we had the view that big name companies aren't always the 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."

This quote reveals the rationale behind Amazon's decision to work with Deutsche Bank for the IPO, highlighting a preference for individual expertise over institutional prestige.

• Amazon's stock did not initially experience a significant pop post-IPO.
• The company's shares began to rise following the release of Q2 revenue numbers, which showed substantial growth.
• Amazon's stock price saw fluctuations over the years, demonstrating the market's imperfect valuation mechanisms.

"Yeah, you're right. It didn't have this enormous pop at the beginning. And, yeah, I think by, I vividly remember some of this, that it was pretty flat until those earning release came out."

The quote reflects on the initial market reaction to Amazon's IPO and the subsequent increase in stock value following strong revenue reports.

• Amazon's willingness to reinvest profits and focus on long-term growth was enabled by the IPO.
• The company sought to attract long-term investors by communicating a clear vision of long-term value creation.
• Jeff Bezos's approach to investor relations aimed to align shareholder expectations with Amazon's strategic priorities.

"Jeff has had a unique ability to think long term and make it clear he's thinking long term. So the investors understand that this is a long term investment."

The quote underscores Jeff Bezos's emphasis on long-term thinking and how it shaped investor perceptions and the company's ability to pursue sustained growth.

• Jeff Bezos's first annual letter to shareholders was a significant document that outlined Amazon's long-term strategic vision.
• The letter has been included in every annual report since, reinforcing the company's commitment to long-term goals.
• The creation of the letter was a key moment in communicating Amazon's philosophy to shareholders and the broader market.

"You know, I didn't help him write it, unfortunately. I wish I was a. 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."

While the quote does not directly address the content of the shareholder letter, it acknowledges the contributions of key individuals like Joy Covey in shaping Amazon's financial strategy during its formative years.

• Rischer, a senior executive from Microsoft, was recruited to join the company.
• Rick Dalzell, who was at Walmart, was recruited by Jeff after a persistent effort that started before the IPO and concluded after it.
• The importance of building a strong, bigger team to go public was emphasized by John.
• Joy, who did not graduate from high school initially, showed exceptional intelligence by graduating from Harvard Business School and coming second in the national accounting exam.

"Rischer was recruited from Microsoft, who was a very important, strong senior executive in those days." "And Jeff started trying to recruit him in January of 97 before the IPO, and didn't get him until after the IPO."

The quotes highlight the strategic recruitment of key executives from major companies like Microsoft and Walmart to strengthen the company's leadership team, particularly in preparation for going public.

• Joy's academic achievements and intelligence were highlighted, despite her unconventional educational background.
• She played a significant role in driving the IPO process.
• Jeff's high standards in recruitment are mentioned, with Joy impressing him during an interview.

"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." "And she's very smart, nicely aggressive, personable. And so she really drove the IPO in a lot of ways."

The quotes describe Joy's exceptional capabilities and how her unique background and intellect contributed significantly to the success of the IPO process.

• There was a tension between Amazon's desire to keep certain information proprietary and analysts' demands for more transparency.
• Amazon preferred not to disclose certain metrics to avoid giving competitors an advantage and to prevent short-term focus on the business.
• The company faced criticism for not disclosing as much as some believed they should.

"Amazon's always felt that that's proprietary. They don't want to let their competitors know."

This quote explains Amazon's strategic decision to withhold certain information that they considered proprietary, which was a point of contention with analysts and investors.

• Amazon's approach to proprietary information is compared to other private companies.
• There is variation in how companies handle the disclosure of information like customer acquisition costs and backlog.
• Some companies refuse to disclose certain information to avoid giving competitors an advantage or because it can be misleading.

"I do think sometimes it also comes up, well, another one for some of our companies that have gone public has been backlog and backlog."

The quote discusses the reluctance of some companies to disclose specific information, such as backlog, which can be proprietary or potentially misleading.

• Amazon's convertible debt offering in 1999 was crucial for the company's capitalization.
• The capital raised was used for growth but also led to increased pressure during the recession.
• Cost-cutting measures were implemented in response to the recession and pressure from debt holders.

"So it was part of the money was available. We're growing rapidly. Let's take advantage of the fact that, and the interest rates were, I believe."

The quote reflects the strategic financial decision to raise capital through debt offerings, taking advantage of available funds and favorable interest rates to fuel growth.

• Amazon faced a need to cut costs as the recession hit and losses increased.
• The company stopped certain unprofitable practices, such as selling heavy items at a loss.
• Good management and focus on customer service were crucial for navigating the tough times.

"So really in 2001 or so the decision, Jeff and the board felt we need to cut costs and expenses. And so I think we barely did it in time."

This quote highlights the critical decision-making and timely cost-cutting measures that were necessary for Amazon to survive the economic downturn.

• Amazon's rapid growth might have been constrained without access to capital.
• Traditional companies often viewed Amazon as overvalued, which may have deterred acquisition attempts.
• Amazon's broadening product mix and infrastructure investments required substantial capital.

"Yeah, I think it would have been slower growth because you couldn't have afforded if you didn't have access to capital."

The quote emphasizes the importance of capital access for Amazon's growth and suggests that without it, the company's expansion would have been limited.

• Amazon's strategy includes acquiring companies during economic downturns when they may be undervalued.
• The company learned from its own experiences with financing and the importance of timing in the market.

"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."

This quote reflects on Amazon's approach to acquisitions, particularly during times when potential targets are undervalued due to market conditions.

• Successful businesses often ride massive waves of change or innovation.
• Amazon's early days were marked by long-term thinking, even when the potential of the internet was not fully realized.
• Jeff Bezos introduced the concept of it being "day one" for the internet and Amazon in his 1997 shareholder letter.
• This long-term perspective is rare and challenging to maintain, especially post-IPO.

"Without being riding a massive wave. And I think for me, the flip side of that coin that I think really shines through in reading about and reading this history of Amazon at that time is the long term thinking that Jeff and the company and the board had."

The quote emphasizes the importance of identifying and capitalizing on significant trends or "waves" of innovation, coupled with a commitment to long-term thinking, as key factors in Amazon's early success.

• Innovation should not cease post-IPO; it's crucial for survival.
• Long-term thinking must be maintained even after going public, despite market pressures.
• IPOs provide the funds necessary for continued innovation and growth.

"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."

This quote highlights the necessity of continued innovation for a public company to remain competitive and successful in the long term.

• Amazon has a unique DNA for experimentation and small team-based innovation.
• AWS is an example of a multi-billion-dollar innovation that rivals Amazon's original retail business.
• Amazon's approach to innovation is lean and iterative, which is key to its success.

"So 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."

The quote describes Amazon's approach to innovation, which involves experimentation, small teams, and lean methodologies, contributing to the company's ability to launch successful new ventures like AWS.

• Amazon's platform mentality and AWS's success may have been influenced by Microsoft's approach.
• AWS's continuous iteration and improvement are contrasted with traditional static platforms.
• The internet allows for constant updates, which AWS leverages to maintain its lead.

"But the constant iteration of AWS, it's like revising your Internet site. They had 600 new features this year or something."

The quote explains how AWS's strategy of constant iteration and feature updates is a departure from traditional platform models and is a key factor in its success.

• Investors like Tom Alberg look for founders with long-term vision.
• Founders who are committed to the long-term potential of their companies are preferred.
• The desire to build something significant beyond profit is a common trait among successful companies.

"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."

This quote underscores the preference for investing in founders who demonstrate a commitment to long-term goals and vision, which is seen as a positive indicator of potential success.

• Amazon's IPO felt inevitable and rational due to the internet's potential.
• The IPO provided Amazon with the necessary scale, capital, and visibility.
• The clarity of Amazon's long-term vision reduced ambiguity in its strategic direction.

"And it feels inevitable that the company would have went public when it did, especially just hearing the story now, it was completely rational."

The quote reflects on the rationality and inevitability of Amazon's IPO, given the company's clear vision and the opportunities presented by the internet.

• Technology's potential often appears clear, but specific outcomes are unpredictable.
• Amazon's commitment to innovation and hiring talented individuals was crucial to its success.
• The inevitability of Amazon's growth was not fully understood at the time, but in retrospect, it aligns with technological advancements and the company's strengths.

"So you should not neglect that for inevitability."

This quote stresses that while Amazon's success may seem inevitable in hindsight, it was the result of a strong commitment to innovation and hiring the right people.

• The speakers share personal recommendations and interests, ranging from music to literature.
• These recommendations provide a glimpse into the speakers' personal lives and interests outside of the business discussion.

"So my carve out is a band called the album Leaf."

The quote is a personal recommendation from one of the speakers, sharing their interest in a music band, which serves as a lighter, personal touch to the conversation.