The little-known deal that saved Amazon from the dot-com crash

Last week, Jeff Bezos became the second-richest person in the world, with a net worth of $76 billion. If Amazon’s stock continues its meteoric rise, Bezos could soon surpass Bill Gates, whose fortune is worth $83 billion, to become the world’s wealthiest person.

Today Amazon is a powerhouse that sells everything from e-books to diapers, so it’s easy to think its rise was inevitable. But Amazon almost didn’t make it. During the dot-com boom of the 1990s, the company posted larger and larger losses, financed by investor funds that came pouring in. But the mood of the market turned abruptly in 2000, catching many companies off guard.

So how did Amazon survive the bust? History doesn’t necessarily point to having the best idea or the savviest management. To a large extent, Amazon got lucky by raising a ton of money right before the market crashed, giving the company the cushion it needed to ride out the turmoil of the early 2000s. It’s a good reminder that the fate of high-flying, money-losing startups like Uber or Snap may depend as much on luck as on the skill of their CEOs.

Bezos biographer Brad Stone explained in his 2013 book how close Amazon came to going bankrupt in the wake of the 2000 market crash:

Early in 2000, Warren Jenson, the fiscally conservative new chief financial officer from Delta and, before that, the NBC division of General Electric, decided that the company needed a stronger cash position as a hedge against the possibility that nervous suppliers might ask to be paid more quickly for the products amazon sold. Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors. This time, with the stock market fluctuating and the global economy tipping into recession, the process wasn’t as easy as the previous fund-raising had been. Amazon was forced to offer a far more generous 6.9 percent interest rate and flexible conversion terms — another sign that times were changing. The deal was completed just a month before the crash of the stock market, after which it became exceedingly difficult for any company to raise money. Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year.

If Bezos and his team had waited a few weeks longer to raise those extra funds, people today would lump Amazon in with other dot-com-era failures like Webvan, Kozmo, and Pets.com — big-spending companies with unworkable business models that collapsed under their own weight.

Interestingly, a lot of what ultimately made Amazon successful was invented only after the dot-com crash. For example, Bezos has tried to nurture innovation within Amazon by breaking the company into “two-pizza teams” — teams small enough to feed with two pizzas — that operated autonomously and were held accountable for their results. According to Stone, he only announced these ideas in 2002.

Another key insight that crystallized only after the dot-com crash was the idea that Amazon could be a platform to support others businesses. Marketplace, Amazon’s platform for third parties to sell used books (and later lots of other stuff), launched in November 2000. Amazon debuted Prime in 2005, and later opened up its two-day shipping technology to some third-party sellers. Amazon Web Services, which allow third parties to build websites using Amazon’s own infrastructure, didn’t launch until 2006.

This has interesting implications for Uber, a company that — like Amazon at the turn of the century — has suffered mounting losses as it has grown. There’s a lot of reason to be pessimistic about Uber, which has suffered a series of largely self-inflicted setbacks — from sexual harassment allegations to accusations of stolen technology — in recent months.

But fundamentally, Uber is the dominant company in a big market that’s likely to grow even more in the coming years. CEO Travis Kalanick has made a lot of mistakes, but with tenacity, time, and some luck, he may be able to — like Jeff Bezos 15 years ago — change the company’s culture and prove the doubters wrong. After all, Amazon wasn’t perfect either.