Highlights from Amazon’s beginnings

The following is a digest of the early chapters of Brad Stone’s The Everything Store. All credit for the information goes to the author.

In 1993 Jeff Bezos was working at D.E. Shaw. It is now widely known as a quant hedge fund, but in those days its founder, David Shaw, saw it differently. He saw it as a lab for computer scientists and technologists to solve all kinds of problems and make money from it. At the time, Shaw called upon Bezos to investigate internet business opportunities. While reading a Feb. 1994 issue of Matrix News, Bezos learned that the amount of transmitted web bytes grew by a factor of ~2,057. He calculated that this was a growth rate of 2,300 percent per year — this was a math error. It was actually 230,000 percent. “Things just don’t grow that fast,” Bezos later said. “It’s highly unusual, and that started me thinking, What kind of business plan might make sense in the context of that growth?”

Despite discussions at D.E. Shaw surrounding the concept of an “everything store” — “an Internet company that served as the intermediary between customers and manufacturers and sold nearly every type of product” — Bezos didn’t think a true everything store would be feasible to start with. He wanted to narrow it down, so he made a list of twenty possible product categories, including computer software, office supplies, apparel, and music. What he settled on were books. Why?

  1. Buyers always knew what to expect from a book; the content didn’t change between stores.
  2. There were two primary distributors of books at that time, so a retailer wouldn’t actually have to approach each of the thousands of publishers.
  3. One physical bookstore could never hold all of the three million books in print worldwide. “With that huge diversity of products you could build a store online that simply could not exist in any other way,” Bezos said. “You could build a true superstore with exhaustive selection, and customers value selection.”

Bezos loved this idea and was really, really excited. He went on to investigate some of the existing online bookstore websites, and actually ordered a book from one of them. When it arrived badly tattered due to transit, Bezos saw a huge opportunity: the problem of selling books on the internet was still unsolved. All of this gave him so much conviction that he decided to leave his job.

“When you are in the thick of things, you can get confused by small stuff,” Bezos said a few years later. “I knew when I was eighty that I would never, for example, think about why I walked away from my 1994 Wall Street bonus right in the middle of the year at the worst possible time. That kind of thing just isn’t something you worry about when you’re eighty years old. At the same time, I knew that I might sincerely regret not having participated in this thing called the Internet that I thought was going to be a revolutionizing event. When I thought about it that way… it was incredibly easy to make the decision.”

Bezos’s parents thought he was crazy. Regardless, Bezos flew to California to meet two experienced programmers who were introduced to him by a colleague. Over blueberry pancakes at a cafe, he managed to get one of them on board.

Soon after that trip, Bezos and his wife, MacKenzie, packed up the contents of their home and told the movers to just start driving their belongings across the country, without even having a specific destination. It ended up being Seattle: a talent-filled tech-hub with less sales-tax and proximity to a major book warehouse. The couple flew to Texas, borrowed a car from Bezos’s father, and drove all the way there. Bezos sat in the passenger seat and typed revenue projections into an Excel spreadsheet, and they stayed in motels along the way.

The first Amazon offices were in the garage of Bezos’s house in Seattle. Bezos built the first two desks out of wooden doors from Home Depot. He also drove down to Portland, Oregon, to take a four-day course on bookselling sponsored by the American Booksellers Association. The seminar covered topics such as “Selecting Opening Inventory” and “Inventory Management.” At the same time, the programmer Bezos recruited in California, Shel Kaphan, started looking for computers and databases and learning how to code a website.

At first, Bezos backed the company with $10,000 of his own cash. Over the next 16 months, he took out an additional $84,000 in loans. In early 1995, Bezos’s parents, Jackie and Mike Bezos, invested $100,000 in Amazon. “We saw the business plan, but all of that went over our heads to a large extent,” says Mike Bezos. “As corny as it sounds, we were betting on Jeff.”

Soon they hired Paul Davis, a programmer from the University of Washington’s computer science department, who joined Kaphan and Bezos in the garage. He worked on servers that drew so much power they often blew fuses in the home. Eventually they had to run orange extension cords from other rooms to put the computers on different circuits, making it impossible to run a hair dryer or vacuum cleaner in the house.

Still searching for a name, Bezos was poring through the dictionary when he reached the word “Amazon”, and he loved it. It was “not only the largest river in the world, it’s many times larger than the next biggest river. It blows all other rivers away,” according to Bezos.

By now the company had moved from the garage to a small office above a Color Tile store with a ~200-sq-ft basement warehouse. One early challenge was that the book distributors required retailers to order ten books at a time. Amazon didn’t yet have that kind of sales volume, so they found a loophole. According to Bezos, “Their systems were programmed in such a way that you didn’t have to receive ten books, you only had to order ten books. So we found an obscure book about lichens that they had in their system but was out of stock. We began ordering the one book we wanted and nine copies of the lichen book. They would ship out the book we needed and a note that said, ‘Sorry, but we’re out of the lichen book.’ ”

No one had been hired yet to pack books, so when volumes rose and the company fell behind on shipping, Bezos, Kaphan, and the others would pack customer orders in the basement. The next day, Bezos, MacKenzie, or an employee would drive the boxes to UPS or the post office. Employees painstakingly assembled orders on the floor, until a new employee made the obvious suggestion of adding packing tables to the warehouse.

Nick Hanauer, a Seattle businessman Bezos had met through a friend, went through a list of about 60 potential investors and, with Bezos, pitched each one, asking for their money. They were looking for the 20 who would each put in $50,000, for a total of $1 million. The “investment tour” kicked off at the home of a stockbroker who was one of Hanauer’s closest friends. In the investor meetings, Bezos presented a shaky picture of Amazon’s future. The company had lost $52,000 in 1994 and was on track to lose another $300,000 that year. Then he would go on to state his projection of $74 million in sales by 2000 if things went moderately well, and $114 million in sales if they went really well. (Actual net sales in 2000: $1.64 billion). Bezos also predicted the company would be moderately profitable by that time (net loss in 2000: $1.4 billion). He wanted to value the firm at $6 million, a figure which he seemingly pulled from thin air. And he told investors that the company had a 70 percent chance of failing. Yet Amazon actually did end up raising $1 million, but at a $5 million valuation, rather than $6 million.