The Everything Store

Jeff Bezos and the Age of Amazon

Little, Brown and Company

CHAPTER 1

The House of Quants

Before it was the self-proclaimed largest bookstore on Earth or the Web'sdominant superstore, Amazon.com was an idea floating through the New York Cityoffices of one of the most unusual firms on Wall Street: D. E. Shaw & Co.

A quantitative hedge fund, DESCO, as its employees affectionately called it, wasstarted in 1988 by David E. Shaw, a former Columbia University computer scienceprofessor. Along with the founders of other groundbreaking quant houses of thatera, like Renaissance Technologies and Tudor Investment Corporation, Shawpioneered the use of computers and sophisticated mathematical formulas toexploit anomalous patterns in global financial markets. When the price of astock in Europe was fractionally higher than the price of the same stock in theUnited States, for example, the computer jockeys turned Wall Street warriors atDESCO would write software to quickly execute trades and exploit the disparity.

The broader financial community knew very little about D. E. Shaw, and itspolymath founder wanted to keep it that way. The firm preferred operating farbelow the radar, deploying private capital from wealthy investors such asbillionaire financier Donald Sussman and the Tisch family, and keeping itsproprietary trading algorithms out of competitors' hands. Shaw felt stronglythat if DESCO was going to be a firm that pioneered new approaches to investing,the only way to maintain its lead was to keep its insights secret and avoidteaching competitors how to think about these new computer-guided frontiers.

David Shaw came of age in the dawning era of powerful new supercomputers. Heearned a PhD in computer science from Stanford in 1980 and then moved to NewYork to teach in Columbia's computer science department. Throughout the earlyeighties, high-tech companies tried to lure him to the private sector. InventorDanny Hillis, founder of the supercomputer manufacturer Thinking MachinesCorporation and later one of Jeff Bezos's closest friends, almost convinced Shawto come work for him designing parallel computers. Shaw tentatively accepted thejob and then changed his mind, telling Hillis he wanted to do something morelucrative and could always return to the supercomputer field after he gotwealthy. Hillis argued that even if Shaw did get rich—which seemedunlikely—he'd never return to computer science. (Shaw did, after he becamea billionaire and passed on the day-to-day management of D. E. Shaw to others.)"I was spectacularly wrong on both counts," Hillis says.

Morgan Stanley finally pried Shaw loose from academia in 1986, adding him to afamed group working on statistical arbitrage software for the new wave ofautomated trading. But Shaw had an urge to set off on his own. He left MorganStanley in 1988, and with a $28 million seed investment from investor DonaldSussman, he set up shop over a Communist bookstore in Manhattan's West Village.

By design, D. E. Shaw would be a different kind of Wall Street firm. Shawrecruited not financiers but scientists and mathematicians—big brains withunusual backgrounds, lofty academic credentials, and more than a touch of socialcluelessness. Bob Gelfond, who joined DESCO after the firm moved to a loft onPark Avenue South, says that "David wanted to see the power of technology andcomputers applied to finance in a scientific way" and that he "looked up toGoldman Sachs and wanted to build an iconic Wall Street firm."

In these ways and many others, David Shaw brought an exacting sensibility to themanagement of his company. He regularly sent out missives instructing employeesto spell the firm's name in a specific manner—with a space between theD. and the E. He also mandated that everyone use a canonicaldescription of the company's mission: it was to "trade stocks, bonds, futures,options and various other financial instruments"—precisely in that order.Shaw's rigor extended to more substantive matters as well: any of his computerscientists could suggest trading ideas, but the notions had to pass demandingscientific scrutiny and statistical tests to prove they were valid.

In 1991, D. E. Shaw was growing rapidly, and the company moved to the top floorsof a midtown Manhattan skyscraper a block from Times Square. The firm's strikingbut sparely decorated offices, designed by the architect Steven Holl, included atwo-story lobby with luminescent colors that were projected into slots cut intothe expansive white walls. That fall, Shaw hosted a thousand-dollar-a-ticketfund-raiser for presidential candidate Bill Clinton that was attended by thelikes of Jacqueline Onassis, among others. Employees were asked to clear out ofthe office that evening before the event. Jeff Bezos, one of the youngest vicepresidents at the firm, left to play volleyball with colleagues, but first hestopped and got his photo taken with the future president.

Bezos was in his midtwenties at the time, five foot eight inches tall, alreadybalding and with the pasty, rumpled appearance of a committed workaholic. He hadspent five years on Wall Street and impressed seemingly everyone he encounteredwith his keen intellect and boundless determination. Upon graduating fromPrinceton in 1986, Bezos worked for a pair of Columbia professors at a companycalled Fitel that was developing a private transatlantic computer network forstock traders. Graciela Chichilnisky, one of the cofounders and Bezos's boss,remembers him as a capable and upbeat employee who worked tirelessly and atdifferent times managed the firm's operations in London and Tokyo. "He was notconcerned about what other people were thinking," Chichilnisky says. "When yougave him a good solid intellectual issue, he would just chew on it and get itdone."

Bezos moved to the financial firm Bankers Trust in 1988, but by then, frustratedby what he viewed as institutional reluctance at companies to challenge thestatus quo, he was already looking for an opportunity to start his own business.Between 1989 and 1990 he spent several months working in his spare time on astartup with a young Merrill Lynch employee named Halsey Minor, who would latergo on to start the online news network CNET. Their fledgling venture, aimed atsending a customized newsletter to people over their fax machines, collapsedwhen Merrill Lynch withdrew the promised funding. But Bezos nevertheless made animpression. Minor remembers that Bezos had closely studied several wealthybusinessmen and that he particularly admired a man named Frank Meeks, a Virginiaentrepreneur who had made a fortune owning Domino's Pizza franchises. Bezos alsorevered pioneering computer scientist Alan Kay and often quoted his observationthat "point of view is worth 80 IQ points"—a reminder that looking atthings in new ways can enhance one's understanding. "He went to school oneverybody," Minor says. "I don't think there was anybody Jeff knew that hedidn't walk away from with whatever lessons he could."

Bezos was ready to leave Wall Street altogether when a headhunter convinced himto meet executives at just one more financial firm, a company with an unusualpedigree. Bezos would later say he found a kind of workplace soul mate in DavidShaw—"one of the few people I know who has a fully developed left brainand a fully developed right brain."

At DESCO, Bezos displayed many of the idiosyncratic qualities his employeeswould later observe at Amazon. He was disciplined and precise, constantlyrecording ideas in a notebook he carried with him, as if they might float out ofhis mind if he didn't jot them down. He quickly abandoned old notions andembraced new ones when better options presented themselves. He already exhibitedthe same boyish excitement and conversation-stopping laugh that the world wouldlater come to know.

Bezos thought analytically about everything, including social situations. Singleat the time, he started taking ballroom-dance classes, calculating that it wouldincrease his exposure to what he called n+ women. He later famously admitted tothinking about how to increase his "women flow," a Wall Street corollary todeal flow, the number of new opportunities a banker can access. JeffHolden, who worked for Bezos first at D. E. Shaw & Co. and later at Amazon, sayshe was "the most introspective guy I ever met. He was very methodical abouteverything in his life."

D. E. Shaw had none of the gratuitous formalities of other Wall Street firms; inoutward temperament, at least, it was closer to a Silicon Valley startup.Employees wore jeans or khakis, not suits and ties, and the hierarchy was flat(though key information about trading formulas was tightly held). Bezos seemedto love the idea of the nonstop workday; he kept a rolled-up sleeping bag in hisoffice and some egg-crate foam on his windowsill in case he needed to bunk downfor the night. Nicholas Lovejoy, a colleague who would later join him at Amazon,believes the sleeping bag "was as much a prop as it was actually useful." Whenthey did leave the office, Bezos and his DESCO colleagues often socializedtogether, playing backgammon or bridge until the early hours of the morning,usually for money.

As the company grew, David Shaw started to think about how to broaden its talentbase. He looked beyond math and science geeks to what he called generalists,those who'd recently graduated at the tops of their classes and who showedsignificant aptitude in particular subjects. The firm also combed through theranks of Fulbright scholars and dean's-list students at the best colleges andsent hundreds of unsolicited letters to them introducing the firm andproclaiming, "We approach our recruiting in unapologetically elitist fashion."

Respondents to the letters who seemed particularly extraordinary and who hadhigh enough grade point averages and aptitude-test scores were flown to New Yorkfor a grueling day of interviews. Members of the firm delighted in asking theserecruits random questions, such as "How many fax machines are in the UnitedStates?" The intent was to see how candidates tried to solve difficult problems.After the interviews, everyone who had participated in the hiring processgathered and expressed one of four opinions about each individual: strong nohire; inclined not to hire; inclined to hire; or strong hire. One holdout couldsink an applicant.

Bezos would later take these exact processes, along with the seeds of other Shawmanagement techniques, to Seattle. Even today, Amazon employees use thosecategories to vote on prospective new hires.

DESCO's massive recruitment effort and interview processes were finely tuned toBezos's mind-set; they even attracted one person who joined Bezos as his lifepartner. MacKenzie Tuttle, who graduated from Princeton in 1992 with a degree inEnglish and who studied with author Toni Morrison, joined the hedge fund as anadministrative assistant and later went to work directly for Bezos. Lovejoyremembers Bezos hiring a limousine one night and taking several colleagues to anightclub. "He was treating the whole group but he was clearly focused onMacKenzie," he says.

MacKenzie later said it was she who targeted Bezos, not the other way around."My office was next door to his, and all day long I listened to that fabulouslaugh," she told Vogue in 2012. "How could you not fall in love withthat laugh?" She began her campaign to win him over by suggesting lunch. Thecouple got engaged three months after they started dating; they were marriedthree months after that. Their wedding, held in 1993 at the Breakers, a resortin West Palm Beach, featured game time for adult guests and a late-night partyat the hotel pool. Bob Gelfond and a computer programmer named Tom Karzesattended from D. E. Shaw.

Meanwhile, DESCO was growing rapidly and, in the process, becoming moredifficult to manage. Several colleagues from that time recall that D. E. Shawbrought in a consultant who administered the Myers-Briggs personality test toall the members of the executive team. Not surprisingly, everyone tested as anintrovert. The least introverted person on the team was Jeff Bezos. At D. E.Shaw in the early 1990s, he counted as the token extrovert.

Bezos was a natural leader at DESCO. By 1993, he was remotely running the firm'sChicago-based options trading group and then its high-profile entry into thethird-market business, an alternative over-the-counter exchange that allowedretail investors to trade equities without the usual commissions collected bythe New York Stock Exchange. Brian Marsh, a programmer for the firm who wouldlater work at Amazon, says that Bezos was "incredibly charismatic and persuasiveabout the third-market project. It was easy to see then he was a great leader."Bezos's division faced constant challenges, however. The dominant player in thespace was one Bernard Madoff (the architect of a massive Ponzi scheme that wouldunravel in 2008). Madoff's own third-market division pioneered the business andpreserved its market lead. Bezos and his team could see Madoff's offices in theLipstick Building on the East Side through their windows high above the city.

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

So in 1994, when the opportunity of the Internet began to reveal itself to thefew people watching closely, Shaw felt that his company was uniquely positionedto exploit it. And the person he anointed to spearhead the effort was JeffBezos.

D. E. Shaw was ideally situated to take advantage of the Internet. Most Shawemployees had, instead of proprietary trading terminals, Sun workstations withInternet access, and they utilized early Internet tools like Gopher, Usenet, e-mail, and Mosaic, one of the first Web browsers. To write documents, they usedan academic formatting tool called LaTeX, though Bezos refused to touch theprogram, claiming it was unnecessarily complicated. D. E. Shaw was also amongthe very first Wall Street firms to register its URL. Internet records show thatDeshaw.com was claimed in 1992. Goldman Sachs took its domain in 1995, andMorgan Stanley a year after that.

Shaw, who used the Internet and its predecessor, ARPANET, during his years as aprofessor, was passionate about the commercial and social implications of asingle global computer network. Bezos had first encountered the Internet in anastrophysics class at Princeton in 1985 but hadn't thought about its commercialpotential until arriving at DESCO. Shaw and Bezos would meet for a few hourseach week to brainstorm ideas for this coming technological wave, and then Bezoswould take those ideas and investigate their feasibility.

In early 1994, several prescient business plans emerged from the discussionsbetween 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 Gmailand Yahoo Mail. DESCO would develop that idea into a company called Juno, whichwent public in 1999 and soon after merged with NetZero, a rival.

Another idea was to create a new kind of financial service that allowed Internetusers to trade stocks and bonds online. In 1995 Shaw turned that into asubsidiary 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 everythingstore."

Several executives who worked at DESCO at that time say the idea of theeverything store was simple: an Internet company that served as the intermediarybetween customers and manufacturers and sold nearly every type of product, allover the world. One important element in the early vision was that customerscould leave written evaluations of any product, a more egalitarian and credibleversion of the old Montgomery Ward catalog reviews of its own suppliers. Shawhimself confirmed the Internet-store concept when he told the New York TimesMagazine in 1999, "The idea was always that someone would be allowed to makea profit as an intermediary. The key question is: Who will get to be thatmiddleman?"
(Continues...)Excerpted from The Everything Store by Brad Stone. Copyright © 2013 Brad Stone. Excerpted by permission of Little, Brown and Company.
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