by Brad Stone
D. E. Shaw was ideally situated to take advantage of the Internet. Most Shaw employees had, instead of proprietary trading terminals, Sun workstations with Internet access, and they utilized early Internet tools like Gopher, Usenet, e-mail, and Mosaic, one of the first Web browsers. To write documents, they used an academic formatting tool called LaTeX, though Bezos refused to touch the program, claiming it was unnecessarily complicated. D. E. Shaw was also among the very first Wall Street firms to register its URL. Internet records show that Deshaw.com was claimed in 1992. Goldman Sachs took its domain in 1995, and Morgan Stanley a year after that.
Shaw, who used the Internet and its predecessor, ARPANET, during his years as a professor, was passionate about the commercial and social implications of a single global computer network. Bezos had first encountered the Internet in an astrophysics class at Princeton in 1985 but hadn’t thought about its commercial potential until arriving at DESCO. Shaw and Bezos would meet for a few hours each week to brainstorm ideas for this coming technological wave, and then Bezos would take those ideas and investigate their feasibility.6
In early 1994, several prescient business plans emerged from the discussions between Bezos and Shaw and others at D. E. Shaw. One was the concept of a free, advertising-supported e-mail service for consumers—the idea behind Gmail and Yahoo Mail. DESCO would develop that idea into a company called Juno, which went public in 1999 and soon after merged with NetZero, a rival.
Another idea was to create a new kind of financial service that allowed Internet users to trade stocks and bonds online. In 1995 Shaw turned that into a subsidiary called FarSight Financial Services, a precursor to companies like E-Trade. He later sold it to Merrill Lynch.
Shaw and Bezos discussed another idea as well. They called it “the everything store.”
Several executives who worked at DESCO at that time say the idea of the everything store was simple: an Internet company that served as the intermediary between customers and manufacturers and sold nearly every type of product, all over the world. One important element in the early vision was that customers could leave written evaluations of any product, a more egalitarian and credible version of the old Montgomery Ward catalog reviews of its own suppliers. Shaw himself confirmed the Internet-store concept when he told the New York Times Magazine in 1999, “The idea was always that someone would be allowed to make a profit as an intermediary. The key question is: Who will get to be that middleman?”7
Intrigued by Shaw’s conviction about the inevitable importance of the Internet, Bezos started researching its growth. A Texas-based author and publisher named John Quarterman had recently started the Matrix News, a monthly newsletter extolling the Internet and discussing its commercial possibilities. One set of numbers in particular in the February 1994 edition of the newsletter was startling. For the first time, Quarterman broke down the growth of the year-old World Wide Web and pointed out that its simple, friendly interface appealed to a far broader audience than other Internet technologies. In one chart, he showed that the number of bytes—a set of binary digits—transmitted over the Web had increased by a factor of 2,057 between January 1993 and January 1994. Another graphic showed the number of packets—a single unit of data—sent over the Web had jumped by 2,560 in the same span.8
Bezos interpolated from this that Web activity overall had gone up that year by a factor of roughly 2,300—a 230,000 percent increase. “Things just don’t grow that fast,” Bezos later said. “It’s highly unusual, and that started me thinking, What kind of business plan might make sense in the context of that growth?”9 (Bezos also liked to say in speeches during Amazon’s early years that it was the Web’s “2,300 percent” annual growth rate that jolted him out of complacency. Which makes for an interesting historical footnote: Amazon began with a math error.)
Bezos concluded that a true everything store would be impractical—at least at the beginning. He made a list of twenty possible product categories, including computer software, office supplies, apparel, and music. The category that eventually jumped out at him as the best option was books. They were pure commodities; a copy of a book in one store was identical to the same book carried in another, so buyers always knew what they were getting. There were two primary distributors of books at that time, Ingram and Baker and Taylor, so a new retailer wouldn’t have to approach each of the thousands of book publishers individually. And, most important, there were three million books in print worldwide, far more than a Barnes & Noble or a Borders superstore could ever stock.
If he couldn’t build a true everything store right away, he could capture its essence—unlimited selection—in at least one important product category. “With that huge diversity of products you could build a store online that simply could not exist in any other way,” Bezos said. “You could build a true superstore with exhaustive selection, and customers value selection.”10
In his offices on the fortieth floor of 120 West Forty-Fifth Street, Bezos could hardly contain his enthusiasm. With DESCO’s recruiting chief, Charles Ardai, he investigated some of the earliest online bookstore websites, such as Book Stacks Unlimited, located in Cleveland, Ohio, and WordsWorth, in Cambridge, Massachusetts. Ardai still has the record from one purchase they made while testing these early sites. He bought a copy of Isaac Asimov’s Cyberdreams from the website of the Future Fantasy bookstore in Palo Alto, California. The price was $6.04. When the book appeared, two weeks later, Ardai ripped open the cardboard package and showed it to Bezos. It had become badly tattered in transit. No one had yet figured out how to do a good job selling books over the Internet. As Bezos saw it, this was a huge, untapped opportunity.
Bezos knew it would never really be his company if he pursued the venture inside D. E. Shaw. Indeed, the firm initially owned all of Juno and FarSight, and Shaw acted as chairman of both. If Bezos wanted to be a true owner and entrepreneur, with significant equity in his creation and the potential to achieve the same kind of financial rewards that businessmen like pizza magnate Frank Meeks did, he had to leave his lucrative and comfortable home on Wall Street.
What happened next became one of the founding legends of the Internet. That spring, Bezos spoke to David Shaw and told him he planned to leave the company to create an online bookstore. Shaw suggested they take a walk. They wandered in Central Park for two hours, discussing the venture and the entrepreneurial drive. Shaw said he understood Bezos’s impulse and sympathized with it—he had done the same thing when he’d left Morgan Stanley. He also noted that D. E. Shaw was growing quickly and that Bezos already had a great job. He told Bezos that the firm might end up competing with his new venture. The two agreed that Bezos would spend a few days thinking about it.
At the time Bezos was thinking about what to do next, he had recently finished the novel Remains of the Day, by Kazuo Ishiguro, about a butler who wistfully recalls his personal and professional choices during a career in service in wartime Great Britain. So looking back on life’s important junctures was on Bezos’s mind when he came up with what he calls “the regret-minimization framework” to decide the next step to take at this juncture in his career.
“When you are in the thick of things, you can get confused by small stuff,” Bezos said a few years later. “I knew when I was eighty that I would never, for example, think about why I walked away from my 1994 Wall Street bonus right in the middle of the year at the worst possible time. That kind of thing just isn’t something you worry about when you’re eighty years old. At the same time, I knew that I might sincerely regret not having participated in this thing called the Internet that I thought was going to be a revolutionizing event. When I thought about it that way… it was incredibly easy to make the decision.”11
Bezos’s parents, Mike and Jackie, were nearing the end of a three-year stay in Bogotá, Colombia, where Mike was working for Exxon as a petroleum engineer, when they got the phone call. “What do you mean, you are going to sell books over the Internet?” was their first reaction, according to Mike B
ezos. They had used the early online service Prodigy to correspond with family members and to organize Jeff and MacKenzie’s engagement party, so it wasn’t naïveté about new technology that unnerved them. Rather, it was seeing their accomplished son leave a well-paying job on Wall Street to pursue an idea that sounded like utter madness. Jackie Bezos suggested to her son that he run his new company at night or on the weekends. “No, things are changing fast,” Bezos told her. “I need to move quickly.”
So Jeff Bezos started planning for his journey. He held a party at his Upper West Side apartment to watch the final episode of Star Trek: The Next Generation. Then he flew out to Santa Cruz, California, to meet two experienced programmers who had been introduced to him by Peter Laventhol, David Shaw’s first employee. Over blueberry pancakes at the Old Sash Mill Café in Santa Cruz, Bezos managed to intrigue one of them, a startup veteran named Shel Kaphan. Bezos “was inflamed by a lot of the same excitement as I was about what was happening with the Internet,” Kaphan says. They looked at office space together in Santa Cruz, but Bezos later learned of a 1992 Supreme Court decision that upheld a previous ruling that merchants did not have to collect sales tax in states where they did not have physical operations. As a result, mail-order businesses typically avoided locating in populous states like California and New York, and so would Bezos.
Back in New York, Bezos informed his colleagues that he was leaving D. E. Shaw. Bezos and Jeff Holden, a recent graduate of the University of Illinois at Urbana-Champaign who had worked for Bezos as an engineer on the third-market project, went out one night for drinks. The two were close. Holden was from Rochester Hills, Michigan, and as a teenager, under the hacker nom de guerre the Nova, he had grown adept at cracking copyright protection on software. He was an avid Rollerblader and a fast talker; he spoke so rapidly that Bezos liked to joke that Holden “taught me to listen faster.”
Now they were sitting across from each other at Virgil’s, a barbecue place on Forty-Fourth Street. Bezos had tentatively decided to call his company Cadabra Inc. but was not committed to the name. Holden filled both sides of a piece of notebook paper with alternatives. The one Bezos liked best on the list was MakeItSo.com, after Captain Picard’s frequent command in Star Trek.
Over beers, Holden told Bezos he wanted to come with him. But Bezos was worried; his contract with D. E. Shaw stipulated that if he left the firm, he couldn’t recruit DESCO employees for at least two years. David Shaw was not someone he wanted to cross. “You’re just out of school, you’ve got debt. And this is risky,” Bezos said. “Stay here. Build up some net worth and I’ll be in touch.”
Later that month, Bezos and MacKenzie packed up the contents of their home and told the movers to just start driving their belongings across the country—they said they would call them on the road the next day with a specific destination. First they flew to Fort Worth, Texas, and borrowed a 1988 Chevy Blazer from Bezos’s father. Then they drove northwest, Bezos sitting in the passenger seat, typing revenue projections into an Excel spreadsheet—numbers that would later prove to be radically inaccurate. They tried to check into a Motel 6 in Shamrock, Texas, but it was booked, so they settled for a road motel called the Rambler.12 When MacKenzie saw the room, she declined to take off her shoes that night. A day later, they stopped at the Grand Canyon and watched the sunrise. He was thirty-one, she was twenty-four, and together they were writing an entrepreneurial origin story that would be imprinted on the collective imagination of millions of Internet users and hopeful startup founders.
More than a year passed before Jeff Holden heard from his friend again. Bezos had settled in Seattle, and he e-mailed Holden a link to a website. They were now calling it Amazon.com. The site was primitive, mostly text and somewhat unimpressive. Holden bought a few books through the site and offered some feedback. Then another year passed, and finally, a few months after Bezos’s do-not-poach agreement with David Shaw expired, Holden’s phone rang.
It was Bezos. “It’s time,” he said. “This is going to work.”
CHAPTER 2
The Book of Bezos
Usenet bulletin-board posting, August 21, 1994:
Well-capitalized start-up seeks extremely talented C/C++/Unix developers to help pioneer commerce on the Internet. You must have experience designing and building large and complex (yet maintainable) systems, and you should be able to do so in about one-third the time that most competent people think possible. You should have a BS, MS, or PhD in Computer Science or the equivalent. Top-notch communication skills are essential. Familiarity with web servers and HTML would be helpful but is not necessary.
Expect talented, motivated, intense, and interesting co-workers. Must be willing to relocate to the Seattle area (we will help cover moving costs).
Your compensation will include meaningful equity ownership.
Send resume and cover letter to Jeff Bezos. US mail: Cadabra, Inc. 10704 N.E. 28th St., Bellevue, WA 98004
We are an equal opportunity employer.
“It’s easier to invent the future than to predict it.”
—Alan Kay
In the beginning, they knew they needed a better name. The magical allusions of Cadabra Inc., as Todd Tarbert, Bezos’s first lawyer, pointed out after they registered that name with Washington State in July of 1994, were too obscure, and over the phone, people tended to hear the name as Cadaver. So later that summer, after renting a three-bedroom ranch house in the East Seattle suburb of Bellevue, Bezos and MacKenzie started brainstorming. Internet records show that during that time, they registered the Web domains Awake.com, Browse.com, and Bookmall.com. Bezos also briefly considered Aard.com, from a Dutch word, as a way to stake a claim at the top of most listings of websites, which at the time were arranged alphabetically.
Bezos and his wife grew fond of another possibility: Relentless.com. Friends suggested that it sounded a bit sinister. But something about it must have captivated Bezos: he registered the URL in September 1994, and he kept it. Type Relentless.com into the Web today and it takes you to Amazon.
Bezos chose to start his company in Seattle because of the city’s reputation as a technology hub and because the state of Washington had a relatively small population (compared to California, New York, and Texas), which meant that Amazon would have to collect state sales tax from only a minor percentage of customers. While the area was still a remote urban outpost known more for its grunge rock than its business community, Microsoft was hitting its stride in nearby Redmond, and the University of Washington produced a steady stream of computer science graduates. Seattle was also close to one of the two big book distributors: Ingram had a warehouse a six-hour drive away, in Roseburg, Oregon. And local businessman Nick Hanauer, whom Bezos had recently met through a friend, lived there and urged Bezos to give Seattle a try. He would later be pivotal in introducing Bezos to potential investors.
That fall, Shel Kaphan drove a U-Haul full of his belongings up from Santa Cruz and officially joined Bezos and his wife as a founding employee of Amazon and as its primary technical steward. Kaphan had grown up in the San Francisco Bay Area and as a teenage computer enthusiast explored the ARPANET, the U.S. Defense Department–developed predecessor to the Internet. In high school, Kaphan met Stewart Brand, the writer and counterculture organizer, and the summer after he graduated, Kaphan took a job at the Whole Earth Catalog, Brand’s seminal guide to the tools and books of the enlightened new information age. Sporting long hippie-ish hair and a bushy beard, Kaphan worked at Brand’s Whole Earth Truck Store in Menlo Park, a mobile lending library and roving education service. He tended the cash register, filled subscriptions, and packed books and catalogs for shipment to customers.
After earning a bachelor’s degree in mathematics in an on-again, off-again decade at the University of California at Santa Cruz, Kaphan logged time at a number of Bay Area companies, including the ill-fated Apple-IBM joint venture called Kaleida Labs, which developed media-player software for personal computers. He tended to display the d
isappointment of those experiences in what his friends considered a gloomy countenance. When he got to Seattle, Kaphan, characteristically, had severe doubts that the young startup was going to succeed. He immediately began worrying about the company’s name. “I was once part of a little consultancy called the Symmetry Group, and people always thought we were the Cemetery Group,” says Kaphan. “When I heard about Cadaver Inc., I thought, Oh God, not this again.” But Kaphan (by now shorn of his long locks and beard, balding, and in his early forties) was inspired by what he saw as Amazon’s potential to use the Web to fulfill the vision of the Whole Earth Catalog and make information and tools available around the world.
At first, Kaphan figured he’d write some code and return to Santa Cruz to work remotely, so he left half his belongings at home and stayed with Bezos and MacKenzie in Bellevue for a few days while looking for a place to rent. They set up shop in the converted garage of Bezos’s house, an enclosed space without insulation and with a large, black potbellied stove at its center. Bezos built the first two desks out of sixty-dollar blond-wood doors from Home Depot, an endeavor that later carried almost biblical significance at Amazon, like Noah building the ark. In late September, Bezos drove down to Portland, Oregon, to take a four-day course on bookselling sponsored by the American Booksellers Association, a trade organization for independent bookstores. The seminar covered such topics as “Selecting Opening Inventory” and “Inventory Management.”1 At the same time, Kaphan started looking for computers and databases and learning how to code a website—in those days, everything on the Internet had to be custom built.
It was all done on a threadbare budget. At first Bezos backed the company himself with $10,000 in cash, and over the next sixteen months, he would finance the startup with an additional $84,000 in interest-free loans, according to public documents. Kaphan’s contract required him to commit to buying $5,000 of stock upon joining the company. He passed on the option to buy an additional $20,000 in shares, since he was already taking a 50 percent pay cut to work at the startup and would, like Bezos, earn only $64,000 a year. “The whole thing seemed pretty iffy at that stage,” says Kaphan, who some consider an Amazon cofounder. “There wasn’t really anything except for a guy with a barking laugh building desks out of doors in his converted garage, just like he’d seen in my Santa Cruz home office. I was taking a big risk by moving and accepting a low salary and so even though I had some savings, I didn’t feel comfortable committing more than I did.”
