Amazon’s Annual Letter to Shareholders has become a must-read for entrepreneurs, investors, and business leaders – and the recent 2015 letter provides great insights into how Jeff Bezos thinks and how one of the most successful companies on Earth operates (this year, Amazon became the fastest company ever to reach $100 billion in annual sales).
Readers of this blog know that I am a big fan of Jeff Bezos and have taken several key lessons from him over the years. The one thing about Amazon is that they have always been an invention machine. Their ability to innovate is mainly due to two things: the way they look at risks and the way they make decisions at the company. Jeff talked about both in his letter:
Risk taking: you need to be prepared to lose a lot if you want to win big
Jeff talks at great lengths about the importance of failure: “failure and invention are inseparable twins.” To get those outsized returns, you need to be willing to swing-for-the-fences and embrace the string of failed experiments that come along the way.
In his words:
“One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, 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 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
In this respect, making investment decisions as a corporation is very similar to making investment decisions in venture capital. Earlier this month, Fred Wilson wrote about the importance of taking risk, having your share of mistakes and learning from your losers. He summed it up: “Making bad investments is humbling, frustrating, annoying, time sucking, and most of all, a big part of the VC business. I look for VCs who have done it a lot, have done it with grace and respect, and continue to learn from it. They are the best VCs to work with.”
Decision making: how to stay nimble as you scale
Now that Amazon is a giant among giants, they face the same challenges plaguing larger organizations: slowness, aversion to risk, and lower rates of innovation. Jeff discussed this challenge in terms of the decision-making process and how much weight to put on each decision: because not every decision is an irreversible, one-way door.
“Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.
As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.”
In the early stages when you’re working hard to get to product-market fit, neither of these two points come into play much: practically everything is an experiment and risk. But as you scale up, remember these lessons from Amazon. Their home runs were scored alongside a long string of experiments and strikeouts.