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Discussion – 


Discussion – 


An Abridged Account of Amazon’s Atypical IPO

amazons ipo

In case you missed it, this past Friday (May 15) was the 23rd anniversary of Amazon’s 1997 IPO.

Yes, that was a long time ago—but if the timing seems strange for other reasons, your spidey sense is calibrated correctly. Amazon’s IPO doesn’t follow the “conventional logic” you’ve seen elsewhere, and that’s what we’re here to explain.

Today, Amazon is considered one of the Big Four tech companies, along with Apple, Google, and Facebook. Apple is by far the oldest (IPO in 1980), so put them aside. That leaves Google’s and Facebook’s IPOs, which are more familiar to us (and comparable to one another). Both companies took a similar amount of time to IPO (6 years for Google, 8 for Facebook) and both companies had bombastically high valuations on IPO day ($23B for Google and $100B for Facebook).

Amazon was founded in July of 1994 and its IPO was on May 15, 1997. That means Amazon held its IPO less than three years after its founding—and a full year before Google had been founded at all. Naturally, Amazon’s IPO valuation was modest by comparison at $438M, but Jeff Bezos never thought of the IPO as a ticker-measuring contest. An IPO is one of the most strategically valuable cards you can play, and Bezos had reasons for playing it early.

Understand first that Bezos is a Wall Street guy—before Amazon, he spent four years climbing his way up a hedge fund—so he knows how to make numbers work. He also knew that the dot-com era was going to change everything about business, and he proved he knew it long before it was common knowledge:

💰 Bezos was one of Google’s first investors in 1998 and his $250K investment was worth $3.1B in 2017. That’s a 12,400x return.

📜 Amazon’s S-1 filing (basically the first step in the IPO process) makes explicit mention of the “online commerce market” and its opportunities.

Jeff’s move to Seattle to open a bookstore might have seemed charming for a second, but there’s calculated brilliance below the surface. First of all, Seattle was the place to find tech talent in the ‘90s (because Microsoft). Secondly, bookselling was always a big market and growing, but it was pretty fragmented at that time. Third, and the master stroke: books are relatively cheap and easy to ship (a huge e-com operating expense) and Amazon was first to serve the online bookselling niche.

“Growth” has been the key word for Amazon since the very start. Jeff Bezos, with his Wall Street background, would naturally understand that growth IS opportunity; in other words, growing means making money, but it also means more money-making potential. (The phrase you’ve probably heard is “it’s easier to make money when you have money.”)

Amazon was able to IPO at such a young age because it was profitable almost immediately AND because the first couple of years in business showed dramatic but reliable growth. Either one of those things is a remarkable accomplishment by itself; finding them together is like finding a unicorn. (Jeff Bezos is the unicorn.)

The IPO raised $54 million in cash for Amazon. When a company is that young (but also that strong) and led by someone like Jeff Bezos, that kind of cash injection is like an elephant steroid minus all of the bad stuff. Rather than buy a Ferrari, Jeff is gonna drive his Honda until it dies while pumping every last dime through the arteries that make Amazon biggest and strongest. Jeff Bezos is an endgame player; if he were an MCU villain, he would be the full Thanos.

Bezos has never really tried to conceal what he is: a shark. (He even looks like one.) His stated business philosophy of “your margin is my opportunity” is probably the sharkiest thing we’ve ever heard—and legitimately scary to smaller businesses who fall under Amazon’s shadow. But (morality aside) how is it possible for him to say that?

It makes more sense when you combine the two major factors working in Amazon’s favor:

🏭 Economies of Scale. Almost universally, costs go down the more you can do or produce or purchase at a time. In immediate terms, this makes profit possible—but in the long run of adult business, it’s a substantial source of reliable growth.

Jeff Bezos is an “endgame player” in two senses: he’s a long-term thinker, yes, but he’s also someone who extends growth logic beyond typical boundaries. This is why Amazon got USPS to deliver on Sundays and why Amazon has become more and more of a carrier in its own right: eventually that was the only way to scale further.

When it comes to logistical operations, nobody is as big as Amazon—which means (A) nobody can match their output and (B) nobody can match the cost-efficiency of their output. Amazon’s scale and logistical muscle made Jeff Bezos the richest man in the world when used through…

🌐 Platforms. As we discussed in an Uber context, digital platforms are powerful because (A) they “play middleman” for the whole world and (B) nothing scales as cost-efficiently as software. Amazon, as a retail platform, is more literally a middleman than most other platforms because (by now) they’re facilitating the sale of other people’s physical stuff.

The disadvantage here (which is overwhelming just to imagine) is that you’re responsible for managing and fulfilling all of that physical stuff, with all of the overhead and operations that go into it. But if you can handle that—as Amazon evidently can—the advantage is cash flow, since you take your cut out of real trades happening in real time (which is more reliable than advertising).

How is anyone’s margin Amazon’s opportunity? Picture a kid’s lemonade stand. You pay for the original gallon by selling 3 or 4 cups, so it’s easy enough to turn a profit in a day. It’s natural for kids not to re-invest the earnings, but this example is about to grow up fast, because a competing lemonade stand just opened and they sell the same lemonade for way cheaper. In fact, the other stand’s price is so low that you would lose money by matching it—which drives you out of business. This happened for two reasons: (A) you made your lemonade 1 gallon at a time and they make their lemonade 1 million gallons at a time and (B) they might have even lost money, but they could afford to.

Here’s where it gets sinister. If they had matched YOUR price (rather than force you to match theirs), both stands could have remained in business; they just would have been more profitable than you. They drove the price as far down as they could—no matter how little they profited in the short run—because in the long run, there’s more prey left for them when they starve out the competing predators first.

With your stand gone, they can set whatever price they want for lemonade. Except that, when you’re talking about Amazon today, replace “lemonade” with an entire economy’s worth of items—which is all to say that Amazon’s early IPO clearly got it somewhere, no matter how unusual it seemed back then.

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