When Amazon went public in 1997, the company’s IPO was unusual for several reasons.First, because many investors were convinced the company was a joke–an “online bookseller” with “no barrier to entry” that would quickly go bust. (Oops.)
Second, because Amazon picked as its banker not Morgan Stanley or Goldman Sachs but the unheralded “DMG Technology Group,” which was run by the legendary Valley banker Frank Quattrone. Quattrone had only recently defected to DMG from Morgan Stanley, and Amazon was one of his first big wins.
Third, because Amazon’s founder and CEO Jeff Bezos wrote a frank letter to shareholders in which he explained Amazon’s philosophy, which was (and is) quite different from the philosophies of most public companies.
Most public companies–with Yahoo being a particularly timely and pathetic example–are obsessed with appeasing short-term shareholder demands. This means constantly maximizing profitability and stock performance for the next quarter and year, rather than focusing on long-term investments and value creation.
Since the beginning, Amazon has taken exactly the opposite approach. No matter how much its public shareholders bitched about all the money it was spending, no matter how often idiot armchair pundits opined that it “could never make money” and “would go bankrupt,” no matter how much the stock got clobbered over the short and intermediate term, Amazon focused on the horizon.
And now, 14 years later, Amazon is the only one of early Internet leaders that is still thriving.
(AOL, Yahoo, Excite, Lycos, eBay, Netscape, and other 1990s giants have since collapsed).
Amazon’s approach should be a lesson to all companies, not just Internet companies.
It takes a long time to build sustainable long-term value. It takes a big long-term vision and obsessive focus on the few things that really matter (in Amazon’s case, customer satisfaction). It takes a thick skin and the willingness to ignore the screaming and disgust of shareholders looking for a quick score (which, because of the intense competition in the money-management business, means most shareholders).
It takes, in other words, the willingness to refuse to do what many pundits and CEOs and investors insist that companies have a duty to do: Deliver “results” (read: stock appreciation) quarter after quarter, year after year, come hell or high water.
As Warren Buffett has often observed, it is the market’s insistence on ever-improving “quarterly results” that leads many management teams to make decisions that help profits (and stock option value) in the short-term and hurt companies in the long-term. Sometimes these myopic decisions just result in companies under-investing in promising long-term opportunities. Sometimes they lead to corner-cutting and brand damage. And sometimes they lead to fraud.
Amazon has never done that. And that’s the primary reason the company is so dominant today. And it’s the reason Amazon shareholders who bought the stock on the IPO and held onto it have now earned 140X their money.
Of course, this shouldn’t surprise anyone.
14 years ago, when he took Amazon public, Jeff Bezos told everyone that this is exactly what Amazon was going to do. His 1997 Letter To Shareholders is still a playbook for building a great company.
(via Eric Jackson)