Building a company that lasts
Lessons from Jeff Bezos’ annual shareholder letters
Disclaimer: You don’t have to read this post if you can manage some time to read the original letters because they are amazing and teach you so much! Go read them here or reach out to me for PDF.
Amazon’s story has never been told like how Jeff Bezos tells it through his annual shareholder letters. Amazon didn’t earn any profit for the first 6 years, and today it’s one of the most valuable companies out there and an $825 billion behemoth.
From starting by selling books online to building Marketplace, Prime and the revolutionary AWS business — all while sticking to the basics from when Amazon started in 1994. I recently read all the annual shareholder letters that Jeff Bezos has been writing to Amazon’s shareholders since 1997 (the year of its IPO).
This journey of more than two decades by Amazon is one of the best and rare stories of successful modern business. But behind this success, as I understood from the letters, is a strong foundation that Bezos had set on “Day 1”. And since then, the company has truly created differentiation for itself through continuous “innovation, experimentation and improvement”.
While I’d recommend everybody who is interested in understanding how to create lasting tech companies to read these letters, here are some of my favorite excerpts, observations, and lessons from all of the shareholder letters that Jeff wrote from 1997 to 2018.
1. Obsess over your customers
Jeff, in one of his early letters, had set the vision of building “world’s most customer-centric company”.
But there is no rest for the weary. I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us — right up until the second that someone else offers them a better service.
Lower prices, better convenience, reduced time of delivery, allowing third-party sellers on their marketplace and alerts for repeat orders by customers—there are many examples of how Amazon kept its customers as central to everything.
A remarkable customer experience starts with the heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.
For companies, especially the ones that see extraordinary growth, it’s super critical to constantly up their bar of customer experience. This definition of customer experience from Amazon seems to be most on-point.
At Amazon.com, we use the term customer experience broadly. It includes every customer-facing aspect of our business — from our product prices to our selection, from our website’s user interface to how we package and ship items. The customer experience we create is by far the most important driver of our business.
As it turns out, this customer-centric approach also helped Amazon built a culture of proactiveness and creativity. A culture where you don’t have to wait for the right time or the need to arise, but the one where you are driven to do things that will bring the most value to customers (and hence the company).
One advantage — perhaps a somewhat subtle one — of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to
And, as they say, what a company celebrates is what a company values!
We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience.
Fun Fact: Jeff uses “customers” over 335 times and “customer experience” over 48 times in total (including all his letters)!
2. It’s all about the long-term
In the first letter (as a public company) in 1997, Jeff had shared his approach of building and scaling Amazon—he clearly mentioned Amazon would never focus on profits or shareholder returns directly, but the focus will always be on building value for its customers.
We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise…Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies.
In every letter that followed, Jeff mentioned this focus of creating long-term value. And this hasn’t changed for over two decades! It was this approach that led to Amazon’s culture of experimentation, trials and innovation.
If you’re going to invent, it means you’re going to experiment, so you have to think long term.
The offerings from Amazon —Marketplace, Prime and AWS—probably started out as bold bets at first! Throughout the letter, Jeff brings back this quote from Benjamin Graham that says, “In the short-term, a stock market is a voting machine; in the long-term, it’s a weighing machine”. So in the year 2000, when Amazon’s stock fell by 80%, Jeff relentlessly moved forward with a vision to build a “heavier” company.
Fun Fact: Check out relentless.com!
Long-term thinking levers our existing abilities and lets us do new things we couldn’t otherwise contemplate. It supports the failure and iteration required for invention, and it frees us to pioneer in unexplored spaces. Seek instant gratification — or the elusive promise of it — and chances are you’ll find a crowd there ahead of you. Long-term orientation interacts well with customer obsession. If we can identify a customer need and if we can further develop conviction that that need is meaningful and durable, our approach permits us to work patiently for multiple years to deliver a solution.
I think this was one of the biggest reasons of Amazon’s success. Because if you think about it, it’s very easy to succumb to Wall Street and investor pressure when the long-term needs of your company do not coincide with the profitable thing in the short term.
3. Find the right and ambitious people
We all understand what the right team can do for a company. Amazon from the start believed in only hiring the best people, ones who can be leaders. Amazon was built by a bunch of owners!
We seek leaders who can invent, think big, have a bias for action, and deliver results on behalf of customers.
In hiring meetings, Jeff explained, they consider three questions before making a decision:
- Will you admire this person?
- Will this person raise the average level of effectiveness of the group they’re entering?
- Along what dimension might this person be a superstar?
This recruiting framework and Amazon’s belief in high-bar for hiring, where everybody they hire acts as an “owner” is was the key force behind Amazon’s success. And I think the best thing about people with an “owner” mindset is that they do what is best for the customers, team and the company.
The bar has to continuously go up. I ask people to visualize the company 5 years from now. At that point, each of us should look around and say, “The standards are so high now — boy, I’m glad I got in when I did!”
One of the things that I believed earlier was that companies have a constant culture, but I now realize that it’s something that gets shaped every single day—with every new hire, every exit, every decision. But the early days of the company establishes the foundation for what the culture gets shaped in to!
A word about corporate cultures: for better or worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it — not creating it…..The reason cultures are so stable in time is because people self-select.
One of my personal favorite stories from the Amazon team comes from the 2007 letter where Kindle is introduced. Kindle was a revolution in itself breaking our habit of hundreds of years of reading physical books. There was no need for Kindle—books were doing the job. But the way the team explains the launch and adoption of Kindle is impressive in itself. The same approach, if you closely notice, is something that can be seen reflected in every offering from Amazon.
Fun Fact: Amazon had never built a hardware product before Kindle!
4. Inputs over financial outputs
Even though Amazon took financial outputs seriously, the key focus was always on inputs. It’s very easy to benchmark success on quarterly and annual financial results because that’s how the board makes the assessment. But if your inputs align with your customer needs, they are most likely going to convert into financial wins. Execution at Amazon was much more important than the results itself!
We believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time.
From the start, Jeff focussed on “cash flow per share” as the metric that would define the value for Amazon shareholders because “a share of stock represents a share of that company’s future cash flows”. Profit made by any company is the wrong metric to measure success for any company! Amazon or Jeff always communicated that this strategy may or may not be the “right” one, but it was Amazon’s strategy.
No reasonable person would know how to drive up the stock price, but by working backward we identified a tangible input of improving picking efficiency to manage towards. This will drive down costs, which will increase free-cash-flow, which will drive up the stock price. This is only one of many strategies.
Amazon from the start maintained a disciplined approach towards their operating cash flows, this was also the reason that Amazon managed to remain afloat when a lot of others fell. From its approach to maintaining limited inventory to collecting payments from customers before paying suppliers helped in maintaining the right cash conversion cycle.
Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows, more than any other single variable, seem to do the best job of explaining a company’s stock price over the long term.
I think this was especially incredible because of how much pressure founders have around the quarterly earnings result. But the reason tech companies are successful is because of the power of fixed costs. Building a feature for 1 million customers will always cost much much more than building the same feature for 10 million customers. Great businesses are built on fixed costs!
Earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows.
Fun Fact: For 2010, Amazon had set about 452 company goals. In these 453 goals, the terms net income, gross profit or margin, and operating profit were not used even once.
5. High-velocity decision making
Every company has a way of making decisions, and the process constantly changes with the scale of the company. With my biased mind, I expected Amazon to make a lot of decisions based on data. But I now understand that not all decisions can be made based on data. Some can only be made based on judgment! This makes sense, especially for Amazon, because Math can support short-term gains over long-term value creation.
Math-based decisions command wide agreement, whereas judgment-based decisions are rightly debated and often controversial, at least until put into practice and demonstrated. Any institution unwilling to endure controversy must limit itself to decisions of the first type. In our view, doing so would not only limit controversy — it would also significantly limit innovation and long-term value creation.
Amazon Prime would have never made sense if the decision was to be made based on data. But Amazon’s idea was to increase the purchase volume by lowering the prices and build greater customer loyalty with time. We all know how this has paid off!
Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten….The difference between baseball and business, however, is baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate you can score 1,000 runs.
Another one of the insightful things I loved from the letter was the “skills-forward” and “working backward” approach by Amazon.
The skills-forward approach says, “We are really good at X. What else can we do with X?”. That’s a useful and rewarding business approach. However, if used exclusively, the company employing it will never be driven to develop fresh skills.
When you contrast this with the “working backward approach” from what the customer needs, it helps in building new competencies within teams. Even if the first steps, in this case, are uncomfortable and awkward, this approach leads to more innovation.
For businesses that scale rapidly, the quality of decisions matters a lot. But so does the velocity of decisions! For high-growth businesses, speed is everything and slow-decisions can often lead to unwanted setbacks. Some of the tips from Bezos to help make better decisions are below:
Most decisions can be made with 70% of the information that you wanted, waiting for 90% of information will make you slow. Have a bias for action! There are two kinds of decisions you may have to make at any given point—reversible and irreversible.
In reversible situations, make the best decision possible based on the available information and quickly make amendments if needed in the future.
If you’re good at course correcting, being wrong is less costly than you think, whereas being slow is going to be expensive for sure.
Some decisions are more consequential and nearly irreversible. They need a more careful approach. As organizations grow, this type of approach starts dominating the decision-making process. This often results in slow, failure to experiment and “diminished invention”.
In groups and between individuals if consensus is not possible, Jeff insists on a “disagree and commit” approach. You can disagree with the decision but remain committed to a successful outcome, this helps in avoiding the exhaustion because of constant arguments and result in quick escalation scenarios.
Fun Fact: Jeff Bezos attached his first shareholder letter (1997) with every letter that he sent thereafter!
6. Embrace failure and nurture innovation
Jeff Bezos in almost every letter has highlighted the importance (and necessity) of failure and risk tolerance. According to him, there is no invention without failure! He encourages his team to take risky decisions if the potential outcome is significant enough with an outsized payoff.
Failure comes part and parcel with invention. It’s not optional. We understand that and believe in failing early and iterating until we get it right.
It’s important to expect failure and mistakes happen all the time! Throughout his letters, he never denies the possibility of failure. But says that Amazon will have success and failure—both of which will teach something.
I know that we will make mistakes along the way — some will be self-inflicted, some will be served up by smart and hard-working competitors. Our passion for pioneering will drive us to explore narrow passages, and, unavoidably, many will turn out to be blind alleys. But — with a bit of good fortune — there will also be a few that open up into broad avenues.
This culture at Amazon is also the reason behind its innovation and experimentation nature. Nobody fears problems because they know they have the ability to invent solutions! At Amazon, ideas are nurtured before they thrive.
In some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. In my view, Amazon’s culture is unusually supportive of small businesses with big potential, and I believe that’s a source of competitive advantage.
According to Bezos, even if a new business enjoys runaway success, it will only begin to contribute meaningfully to company economics in three to seven years. And Amazon, as a company, accepts this timeframe! As a result of this are the many successful offerings including FBA, AWS, and Alexa—all of what started as seed investments.
As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.
Amazon made room for innovation, nurtured ideas, and encouraged distributed decision-making. And now, one of my favorite (most) quotes from Jeff!
Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empower others to unleash their creativity — to pursue their dreams.
Fun Fact: Check out some of Amazon’s failed products here (they are over 10) and that’s okay!
I have never built a company and I don’t think I can advise on building one. But I can always follow these successes clues and someday hope to start one of my own! Out of all the lessons from this letter (so many that are beyond this post), I think what I learned the most is the importance of communication.
Amazon’s clear, consistent message for over 20 years has continued to attract the world. And everything said and done, Amazon’s foundation to scale journey is inspiring. The view of Amazon’s heart (culture) and mind (strategy) through these letters is helpful for anybody interested in building their own company or working in tech. Amazon’s tools—customer obsession rather than competitor focus, heartfelt passion for invention, commitment to operational excellence, and a willingness to think long-term—are what make it a great company! But more than that, it’s the people behind it.
Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.
It’s still Day 1!