The Bezos Letters

What twenty plus years of shareholder letters teach us about how Bezos runs Amazon

Hi friends! I read the book Invent and Wander last week, which is essentially a collection of Jeff Bezos’s letters to shareholders and interviews. While I had read some of his letters prior and many of them often make the rounds on social media, it was nice to read them all in order and almost be able to piece together the progression of Amazon over the past ~25 years.

Below are some of the things that stood out to me as I read through them.

1. Customer Obsession

Bezos often touches on Amazon’s goal to be the most customer-centric company on earth. But what exactly does that mean? Some key tenets he touches on throughout the years are below.

Customer-focused, not competitor focused

What drives Amazon is what customers want, not what competitors are doing. Bezos writes, “our energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors.” Being customer-focused also means starting with the customer, as Bezos writes:

Start with customers and work backward. Listen to customers, but don’t just listen to customers—also invent on their behalf

Identify customer pain points that stay stable over time

Identifying the key customer pain points and then being focused on solving them allows for making big, long-term bets with confidence. In Amazon’s case, they “have a strong conviction that customers value low prices, vast selection, and fast, convenient delivery and that these needs will remain stable over time. It is difficult for us to imagine that ten years from now, customers will want higher prices, less selection, or slower delivery. Our belief in the durability of these pillars is what gives us the confidence required to invest in strengthening them.”

Proactivity from customer focus

The advantage of a customer focus is that it leads to a proactive company. The company is internally driven to improve things for customers, rather than react to competitors.

“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”.

Earning Customer Trust

Bezos has a simple recipe for earning customer trust: “The, the way you develop a reputation is by doing hard things well over and over and over”

2. A Focus on the Long-term

Across the letters, perhaps the guiding philosophy that is most clear is Amazon’s long-term orientation. Bezos outlined this in his very first letter in 1997, entitled “It’s All About the Long-Term”, and Amazon has stuck to it since. It is sprinkled throughout the other lessons below, but a few core tenets are:

Take a long-term view in decision making

The most important aspect of this is to take a long-term horizon in making any decisions. Many decisions may appear as trading off the customer and the shareholder. But on a long-term horizon, what’s good for the customer is good for the shareholder. Bezos frequently writes about Amazon focusing on long-term time horizons in decision making, and how that clarifies some of the key decisions.

“We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”

Have an ownership mindset

Having a mindset of ownership is closely tied to thinking long-term. As Bezos puts it, “long-term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants.” It is this ownership mindset which then makes thinking long-term the right thing to do.

3. Educating Shareholders on Financial Measures

I was impressed by how clearly, right from the first letter, Bezos outlined a clear philosophy for how Amazon would operate and measure success. He focused on the companies long-term orientation mentioned above but also made it clear what financial measures the company would focus on, and educating his shareholders over time.

It’s all about the long-term free cash flow per share

Bezos made it clear at the outset that he cared about long term cash flows rather than any short term measures or earnings measures.

When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.

Additionally, in a world where top-line growth sometimes takes center stage so much that companies forget that at the end of the day they’re trying to drive free cash flows, I thought it was pretty refreshing that Bezos was so clear about the focus on long-term free cash flow per share, and thinking about to maximize that by both limiting dilution and maximizing overall free cash flow.

OUR ULTIMATE FINANCIAL measure, and the one we most want to drive over the long-term, is free cash flow per share. “Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.”

Companies get the shareholders they deserve

Bezos’s clear storytelling and willingness to educate his investors on how Amazon was thinking about financial measures helped Amazon earn the trust of shareholders who were long-term oriented, and willing to look past the P/E ratio or immediate GAAP margins. He often reminded investors of Amazon’s philosophy, and to only stay invested in Amazon if they were comfortable with it.

I invite you to please read the section titled “It’s All About the Long Term” [in the ‘97 letter] .. to make sure we’re the kind of company you want to be invested in.

Look past short-term stock price fluctuations

In 2000, Amazon’s stock price was down over 80% and it might have been tempting to focus on short-term measures, but Amazon stuck to their ultimate financial measure, and Bezos continued to remind investors of this approach and long-term orientation.

So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company

4. Decision-Making Principles

Throughout the years, Bezos touches on the importance of decision making to organizations and how to make good decisions as an individual or an organization. Here are a few of his key guiding principles and frameworks.

Use Different Processes for Type 1 and Type 2 decisions

Type 1 decisions are very consequential and nearly irreversible. Type 2 decisions on the other hand are changeable, reversible—they’re two-way doors. Type 1 decisions should be made very carefully, slowly, and with a lot of deliberation and consultation. Type 2 decisions on the other hand can and should be made quickly by high judgment individuals or small groups.

Recognize the level of data and judgment involved in decisions

Recognize whether a decision can be made completely with data or experimentation or if the prime ingredient in the decision is judgment. Data-based decisions “command wide agreement, whereas judgment-based decisions are rightly debated and often controversial”.

Leverage the quantitative when possible, but don’t shy away from controversy in the judgment-based decisions, since that will limit experimentation and innovation. Instead, encourage the use of “disagree and commit”. Allow people when they have a conviction on a particular direction even though there’s no consensus to say, “Look, I know we disagree on this, but will you gamble with me on it? Disagree and commit?”

Make high-quality high-velocity decisions

What distinguishes Day 1 and Day 2 (companies that are on the verge of irrelevance) companies is not the quality of decision making, but rather the speed of it. One element is recognizing the above distinction between Type 1 and 2 decisions and using a different more light-weight process for Type 2 decisions. A second is to make decisions with somewhere around 70% of the data you wish you had. If you wait for 90%, you’re likely being too slow.

Focus on the big decisions

Most people spend too much of their time focused on decisions that don’t really matter as much, and Bezos encourages people to focus on those select decisions that really matter. “As a senior executive, what do you really get paid to do? You get paid to make a small number of high-quality decisions. Your job is not to make thousands of decisions every day.”

Use the regret minimization framework

This framework is what Bezos used in his decision to leave DE Shaw to start Amazon, and involves thinking about which path minimizes regret in the future.

“I want to have minimized the number of regrets I have. I knew that when I was eighty, I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the internet that I thought was going to be a really big deal. I knew that if I failed, I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day.”

5. Failure and Experimentation

Bezos touches a lot on the importance of failure and experimentation over the years. I especially appreciated the idea that the size of failures should grow as a company grows because the bets should be large enough that the ones that do work cover for many of the failures

Invention Necessitates Failure

Bezos believes that invention can’t happen without failure, and as such has created a culture that normalizes failure. He wants Amazon to be a place where it’s okay to fail and in fact believes “we are the best place in the world to fail (we have plenty of practice!”) as long as the failure is fast and leads to learning.

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. When this process works, it means our failures are relatively small in size (most experiments can start small) ... However, it’s not always as clean as that. Inventing is messy, and over time, it’s certain that we’ll fail at some big bets too.

Bets Should Get Bigger as a Company Scales

The size of a companies experiments (and failures!) should grow as a company grows. The reason for this is that any new segment or business is worth pursuing only to the extent that it can be meaningful to the business in the long-term. What’s meaningful for a company when it is at a $1B market cap is different from at a $50B market cap. Bezos puts it as such:

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.

Look for Asymmetric Upside Bets

So failure is okay, and the sizes of failures should grow over time. But at the same time, companies should explore experiments which if they pay off, have the potential for a huge upside. While the downside is the initial investment, the upside of bets can be 100X or even 1000X, which can pay for the ones that didn’t work out. Amazon believes in starting small with experiments but “when we hit on something that is really working for customers, we double-down on it with hopes to turn it into an even bigger success”

Bezos draws a comparison to baseball:

[In baseball] … 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 one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

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