Intuition and Conviction

The Everything Store, the story of Amazon by Brad Stone, has a number of interesting stories, one in particular about Bezos’s time at the hedge fund D. E. Shaw.

David Shaw saw the opportunity in the internet early and tapped Bezos to help him investigate. As Stone writes, “Intrigued by Shaw’s conviction about the inevitable importance of the internet, Bezos started researching its growth.”

It was only then that Bezos learned from the February 1994 issue of Matrix News, a monthly newsletter with facts and analysis about the internet, that from January 1993 to January 1994, essentially the first year of the internet, the number of bytes transmitted over the internet had increased by a factor of 2,057. Another fact was that the number of packets had increased by a factor of 2,560. Bezos summarized the two facts to say that the internet had grown by a factor of about 2,300 in its first year. (It's worth noting that Bezos later mistakenly characterized the growth as 2,300%, which while still large, is still off by two orders of magnitude.)

Shaw and Bezos went on to investigate three ideas:

  • Email. They created a free, advertising-supported email system called Juno, which went public in 1999 and merged with rival NetZero.
  • Online trading. Shaw created FarSight Financial Services, an early E-Trade, in 1995 and sold it to Merrill Lynch. 
  • The everything store. They also discussed e-commerce, the idea of “an Internet company that served as the intermediary between customers and manufacturers and sold nearly every type of product, all over the world.”

Bezos dived into “the everything store” idea and concluded that such scope would be impractical at first. He listed twenty categories, including software, office supplies, apparel, and music, and concluded that books were the ideal starting point. It was then that Bezos decided to leave D. E. Shaw to pursue the idea.

What I find fascinating about this story is that it’s actually not what common lore about Amazon’s founding leads you to believe. Legend says that Bezos was led down the Amazon path when he saw the 2,300 times growth, when in fact, it was David Shaw that saw the opportunity first. It was conviction first, research and facts later.

Shaw saw the opportunity because of his technology orientation and his framework for D. E. Shaw:

While the rest of Wall Street saw D. E. Shaw as a highly secretive hedge fund, the firm viewed itself somewhat differently. In David’s estimation, the company wasn’t really a hedge fund but a versatile technology laboratory full of innovators and talented engineers who could apply computer science to a variety of different problems. Investing was only the first domain where it would apply its skills. 

Framed differently, others had access to the same data in Matrix News that Bezos saw. It was those facts and analysis overlaid on the framework and mindset from Shaw that compelled the idea.

This echoes what I’ve seen elsewhere in early stage companies: conviction emerging from experience and intuition matter more than facts and analysis. In fact, almost by definition with early stage opportunities, the facts and analysis won’t justify the opportunity.