In early 1995, when Amazon.com was still just an idea in Jeff Bezos’ head, a lawyer friend of venture capitalist Tom Alberg asked him for a favor.
“This friend said his little angel-investment group had met with Jeff and they really didn’t understand this new internet thing, and would I meet with Jeff and give them advice as to whether this was for real,” recalls Alberg, a co-founder of Seattle’s Madrona Venture Capital and a member of Amazon’s board, on a new episode of the Acquired podcast that delves into Amazon’s history, IPO and evolution as a company.
Amazon was still six months away from launching its website, and Bezos was seeking a $1-million seed round to fund the launch. Alberg, a former McCaw Cellular Communications executive, agreed to take the meeting.
Bezos made a strong positive impression on Alberg — even though the young founder didn’t seem, at the time, the tech titan he has turned out to be.
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 — I’m sure he did not foresee what it became. . . . I reported back to my friend and said, “I think it’s real. It’s very risky, but — and Jeff is for real. He’s obviously a smart guy. He’s very passionate about it.” . . . I don’t think he stood out as the only great entrepreneur I ever met. But certainly in the top 20 or 10 percent.
Alberg shares that story and others about Amazon’s remarkable success in an interview on the Acquired podcast, hosted by Ben Gilbert of Pioneer Square Labs and David Rosenthal of Madrona Venture Group. The show examines startup exits for lessons learned about the deals themselves and about the course of business and tech innovation.
Still not sold
Despite Alberg’s favorable impression of Bezos and his plans, Alberg’s unnamed friend still declined to invest, because he considered Bezos’ $6-million pre-money valuation of the company too high. But Bezos wouldn’t lower it. In the end, it took Bezos nearly a year to raise the money, which came partly from his family, because “lots of people passed” on the offering, including “a couple of small venture firms in Seattle” that found it too risky, Alberg recalled.
Bezos launched his company in July 1994 and opened the Amazon.com website in July 1995. “By the second or third week, Amazon had made $6,000 to $10,000 in sales, and by the end of September Amazon was making $20,000 each week,” Alberg said in a 1999 Wired story quoted during the podcast. “It was clear there was a trend here,” he concluded in a remarkable understatement.
Today the world’s largest online retailer has a market capitalization of $363 billion, more than 800 times its IPO value of $438 million.
Venture firm Kleiner Perkins won out over General Atlantic and others for the right to lead a larger venture round in 1996. Bezos by then had formed an advisory board with himself and three Seattle investors, including Alberg. “He wasn’t ready for a formal company board,” Alberg said. “The formal company board was Jeff.”
General Atlantic proposed a complicated pricing model for the round, depending on when and whether Amazon went public, while Kleiner Perkins offered $60 million with no complications. When that round closed, Doerr became a member of the now-formalized board of directors.
Rapid growth continued, far exceeding plans. In 1995, Amazon posted revenue of about $500,000. The next year, with only half a year of the Kleiner Perkins investment capital to help it grow, it did just under $16 million in revenue, a 32-fold increase. The projected break-even point in Year Two proved elusive as Bezos relentlessly pursued growth even at the expense of profits, as he has ever since.
Beefing up the Amazon team
At the end of 1996, Amazon’s board decided to go public the next year. But the May 1997 IPO wouldn’t have happened if Doerr hadn’t insisted on expanding the executive team to include CFO Joy Covey, Alberg said.
Doerr said, “I’m going to vote against going public unless you bring in some more senior management.” . . . Joy was unusual. She was very smart. She hadn’t graduated from high school. She ended up graduating from Harvard Business School. She’d been CFO of a small company on the East Coast that had gone public . . . and was very young. Jeff is a tough interviewer . . . and he had a great lunch with her, he was impressed with her. She’s nicely aggressive, personable. So she really drove the IPO in a lot of ways.
Only 33 when she joined Amazon, Covey died in a bicycle crash at age 50, in September 2015.
The IPO happened well before Amazon became celebrated for its “flywheel,” a concept that posits a virtuous cycle of superior selection making for a better customer experience, which increases traffic, which brings more sellers to the marketplace, which lowers prices. The concept arose, Alberg said, in 2001 or 2002 during a board meeting with an outside consultant. But it wasn’t easy to implement, he said.
In the early days, “the website was black-and-white, and there were not publication dates on the books, even on travel books,” he said. But “Jeff from the very beginning was very focused on customer experience. He talked with me about having the world’s best customer experience. So how do you do that? Prices, inventory.”
Amazon has continued to impress Alberg with its performance, especially when it comes to pioneering new business ideas such as Amazon Web Services. Gilbert and Rosenthal cited Microsoft co-founder Bill Gates as defining a platform as software you provide that lets other participants realize the vast majority of the revenue and lets you collect a small percentage of the profits. They asked whether Microsoft “DNA” contributed to the creation of AWS as a platform, and they noted the extreme rarity of a company having two big “hits,” like Microsoft’s Windows and Office — and Amazon’s online retailing and AWS computing services.
I don’t think we thought we were following a Microsoft model, though everyone at Amazon recognized that Microsoft in the cloud had the potential to be the most important competitor, as they have become. But platforms were considered somewhat static . . . I’ve never heard this from Jeff or others, but it seems to me with AWS, why it’s been able to take the lead and keep it, partly it’s being first, and the constant iteration AWS. They had 600 new features or something this year. . . . Jeff and several of us thought the Internet was going to be a very big deal and there was lots of potential. That often happens with technology, where you realize something is going to be very big. But knowing the details, that today AWS could come out of that — there was no way to predict that.
What might come next for Amazon? It’s hard to say, Alberg said.
“Jeff likes to say it often takes 10 years to prove” that a concept is going to work. “After you go public, it’s important to continue to innovate. You’re not going to survive if you don’t. And you have to somewhat ignore what the market is doing.”
Listen to the full interview with Alberg on the latest episode of the Acquired podcast.