Building a company that lasts

Lessons from Jeff Bezos’ annual shareholder letters

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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”.

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.

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.

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).

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.

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.

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.

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, So in the year 2000, when Amazon’s stock fell by 80%, Jeff relentlessly moved forward with a vision to build a “heavier” company.

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!

In hiring meetings, Jeff explained, they consider three questions before making a decision:

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.

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!

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.

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!

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.

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.

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!

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.

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!

Another one of the insightful things I loved from the letter was the “skills-forward” and “working backward” approach by Amazon.

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.

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.

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.

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.

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.

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.

Amazon made room for innovation, nurtured ideas, and encouraged distributed decision-making. And now, one of my favorite (most) quotes from Jeff!

Final thoughts

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.

It’s still Day 1!

Small things make me happy! I write about things I read, learn, my life and everything in between. I hope to someday chase my big dreams in small towns of India

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