I recently finished reading The Everything Store – Jeff Bezos and the Age of Amazon.” I didn’t know much about the history of Amazon so it was quite enlightening. While looking back it is easy to assume that Amazon’s great success was a foregone conclusion, nothing could be farther from the truth. There were many failures, crisis points, and near death experiences. Sounds like Tesla, right? In fact I was amazed at the number of similarities between what Tesla has gone/is going thru and the earlier days of Amazon. Here’s what I found, supported by some passages from the book.
- Amazon needed outside capital in order to fund its growth. While the bear narrative whenever a Tesla bull tries to compare the two companies is that Amazon grew only by investing cash flow from operations, that is not true.
To open new categories and build new warehouses, Amazon needed more than a plan; it needed additional capital. So that May [1998] the company raised $326 million in a junk-bond offering, and the following February, another $1.25 billion in what was at the time the largest convertible debt offering in history…In those highly carbonated years, from 1998 to early 2000, Amazon raised a breathtaking $2.2B in three separate bond offerings.
Note that Amazon’s revenues were only $2.8B in 2000, up from $600M in 1998.
- Amazon could have gone bankrupt during the dotcom crash.
In February [2000] Amazon sold $672 million in convertible bonds to overseas investors…Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms…Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.
- Amazon’s financial situation was under attack by negative Wall Street analysts for a long time.
Working from Amazon’s latest quarterly earnings release, Suria [Lehman Brothers] analyzed the heavy losses of the previous holiday season and concluded that the company was in trouble, and in a widely disseminated research report, he predicted doom.
“From a bond perspective, we find the credit extremely weak and deteriorating,” he wrote in what would be the first of several scathing reports on Amazon over the next eight months. Suria said that investors should avoid Amazon debt at all costs and that the company had shown an “exceedingly high degree of ineptitude” in areas like distribution. The haymaker was this: “We believe that the company will run out of cash within the next four quarters, unless it manages to pull another financing rabbit out of its rather magical hat.”`
`For the next eight months, Ravi Suria continued to pummel Amazon with negative reports…those who felt the coming wave of changes threatened their businesses, their sense of the natural order, even their identities, were likely to embrace the sentiments of Suria and like-minded analysts and believe that Amazon.com was nothing more than a crazy dream built on an irrationally exuberant stock market.
- Like Elon’s epiphany that Tesla needed to be a leader in manufacturing, Bezos came to the conclusion rather later that distribution/fulfillment needed to be a core competency for Amazon.
Bezos and Wilke were asking themselves a fundamental question that seems surprising today. Should Amazon even be in the business of storing and distributing its products?...At the end of the day, Bezos Wilke and their colleagues reached a conclusion: the equipment and software from third-party vendors simply wasn’t designed for the task at hand…Amazon would have to rewrite all the software code. Instead of exiting the business of distribution, they had to reinvest in it. Over the next few years, “one by one, we unplugged our vendors’ modems and we watched as their jaws hit the floor. They couldn’t believe we were engineering our own solution.”
- Like Musk, Bezos is extremely demanding and hard to work for. Executive and management turnover was/is very high, probably higher than at Tesla.
Over the next year Amazon executives quit in droves... Some were tired and just wanted a change. Others felt Bezos didn’t listen to them and wasn’t about to start…The company reached incredible levels of attrition in 2002 and 2003…People left and afterward they took a breath and felt disoriented, like they had escaped a cult. Though they didn’t share it openly, many just couldn’t take working for Bezos any longer.
- Unions tried unsuccessfully to organize at Amazon, just like at Tesla.
Over the years, unions like the Teamsters and the United Food and Commercial Workers ried to organizew associates in Amazon’s U.S. FCs, passing out flyers in the parking lots and in some cases knocking on the dorrs of workers’ homes….”The number one thing standing in the way of Amazon unionization is fear.” Employees are “afraid they’ll fire you – even though it’s technically not legal.”
I’m not trying to say the Amazon and Tesla are equivalent. But I believe that to build a disruptive company, especially in a large, historically low margin business, you need a ruthless visionary tyrant who is willing to bet the company multiple times to reach the audacious goals that must be met in order to succeed. The result: management burnout and high turnover, many more non-believers than believers, attacks on many fronts by those you stand to lose from the disruption, etc. So this movie has been seen before, just not very often.
