Decision principleCompany insightFounders and companiesCapital allocationGrowth and business models
Given a choice between flattering earnings and future cash flows, take the cash flows
Jeff Bezos · Amazon's 1997 letter to shareholders · 1998
The idea
Amazon's first letter, written when the company had 1.5 million customers and had just grown revenue by 838 percent, tells investors how it will be run. Decisions will be driven by long-term market leadership rather than short-term profit or market reaction. Asked to choose between optimising GAAP accounting and maximising the present value of future cash flows, it will take the cash flows. Hiring is the most important element of success and pay is weighted to stock. It is the founding text of the long-term, cash-flow-first philosophy that investors still use to judge high-growth companies, and it was written before the company had earned anything.
Tell investors in advance that you will optimise long-term cash flows over reported earnings, then do it, so the market can price the choice rather than be surprised by it.
When it works
Any growth company valuation, any founder letter, and the interview question of how to value a company that reports no profit.
When it may fail
The letter is also the template for companies that borrow its language without its discipline. The test is whether the long-term metrics are stated, measurable and later reported against.
How to use it
Reading a loss-making company, ask whether the losses are investments with a stated return or costs with a story. The 1997 letter is the template for the first kind: it names the long-term metric it is managing to.
Where it came from
Letter Amazon's 1997 letter to shareholders · Jeff Bezos
What the source says. Bezos commits to decisions driven by long-term market leadership rather than short-term profit, says that given a choice between flattering GAAP results and the present value of future cash flows Amazon will pick the cash flows, and calls a high hiring bar the most important element of success.
Connected ideas
Takes it further
Day 2 begins when a company manages to proxies and treats decisions as one-way doorsCheck whether the metric is still the goal or has become the goal, and reserve the heavy process for decisions that cannot be undone.
Says something similar
Refuse quarterly guidance, keep control, and tell investors they are betting on the teamA founder-controlled company should say what control is for and what investors give up; the 2004 letter is the template for saying it plainly.
Says something similar
Forgo the revenue you could capture if the platform grows more by letting others earn itA platform that lets others earn on it grows faster than one that captures every dollar; the forgone revenue is the investment.
Concepts
Put it to work on L3VLUP
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