Editor’s Note: Tom Alberg is a central and broadly admired figure in Seattle’s transformation into a major technology hub. He has occupied a front row seat to this shift from Boeing Town to Amazonia, serving as an attorney, a leading venture capitalist, and an early investor and longtime board member at Amazon. In this excerpt from his new book, “Flywheels,” just published, Alberg sets the scene for the economic shift that created modern Seattle, as well as recounting his early encounters and sparring with Jeff Bezos. The book makes the case that the tech economic sector needs to pay more attention to the civic sector, and likewise that local governments need to work more closely with the technological inventiveness of the digital world. Alberg has long had a foot in both sectors. Ordering information for the new book, now in many bookstores, is at tomalberg.com.
My new book, Flywheels: How Cities are Creating Their Own Futures, is the story of how Seattle, once a sleepy lumber and shipping outpost in the far northwest corner of our country, became one of the two leading tech centers in the world, along with Silicon Valley, and how business, non-profit, and government leaders in other cities can build their tech-driven economies and create prosperous cities. Although many cities across the United States are already planting the seeds for growth, they need to accelerate and broaden their efforts to be successful.
A tech-driven economy is not sufficient, however, to meet the many challenges that confront twenty-first-century American cities. We also must figure out how to solve the civic and social problems of our big cities: mounting homelessness, fraying public safety, and increasing traffic congestion. Also unsolved are the older, deeper problems of systemic discrimination and inadequate public education, particularly for children of color.
My central thesis is that we can best solve these intertwined problems when city governments and tech companies work together on solutions—in ways that go beyond lip service and advisory committees. Otherwise, the economic success and livability of our cities are jeopardized.
At the end of 2019, the country celebrated the lowest unemployment in fifty years, at 3.5 percent. Seattle and San Francisco were booming with a growing class of creative workers attracted by tech jobs, city amenities, and opportunities for interacting with friends and colleagues. The downtown streets were filled with shoppers, and restaurants and bars overflowed. Amazon and Microsoft, both headquartered in greater Seattle, were two of the three most valuable companies in the world and were acclaimed as the second- and sixth-most admired companies in 2019 (and second and third by 2021).
Over 140 tech companies from Silicon Valley and elsewhere had established software engineering offices in the Seattle area, some with over five thousand employees. The vibrant startup community included hundreds of cutting-edge tech companies. Artificial intelligence, biotech, quantum computing, the internet, and wireless communications promised an even brighter future. Amazing progress was being made in understanding and manipulating our genetic code. We were beginning to use gene splicing and immunotherapy to cure what were previously believed to be incurable cancers and diseases.
But all was not as positive as appeared on the surface.
In late February 2020, I pulled on the blazer I keep in my office for formal meetings (eschewing a tie, a longstanding tech tradition) and walked four blocks to an intimate dinner meeting of the CEO members of Challenge Seattle in the elegant top-floor office suite of a downtown office building. CEOs of Microsoft, Boeing, Nordstrom, Costco, Alaska Air, and eight other major Seattle companies were present. The members of Challenge Seattle are eighteen CEOs of the leading businesses and nonprofits in Seattle (I’m a member even though not a CEO. as I am the de-facto representative of the private tech companies locally). Challenge Seattle is one of the ways that business can and should contribute to alleviating civic problems. But on this night, we were about to confront something that would upend our lives.
Midway through our meal, Susan Mullaney, northwest president of Kaiser Permanente Healthcare, interrupted our otherwise congenial discussion with a grave warning: we should prepare for a global pandemic. Steve Davis, then CEO of PATH, the global healthcare organization, reinforced her remarks. I remember thinking that if the two most knowledgeable healthcare executives at our meeting were worried, I should be worried. I promptly sent an email to my fellow partners at Madrona Venture Group that we should take the virus seriously. I think the others present departed the meeting as worried as I was—but I don’t know that any of us fully anticipated the breadth of the virus’s impact on everything from our economy to daily habits well into the future.
Four days later, on February 29, the first death from COVID-19 in the United States was reported in Kirkland, a Seattle suburb. The bad news traveled fast through Seattle’s business and political leaders, and Seattle was later praised in the East Coast press for reacting quicker than some other major cities, including New York City.
Despite our early warning, as late as March 7, the Seattle Sounders were allowed by local public officials to play a soccer match before thirty-three thousand fans, even though by then there were ten known deaths and sixty confirmed cases in our area. Microsoft, Amazon, and other local companies had begun encouraging their employees as early as March 3 to work from home, but it was not until March 23 that Governor Jay Inslee, who had just ended his presidential bid, issued his “Stay Home, Stay Healthy” proclamation. The virus showed us that notwithstanding all of our technological prowess, we were unable to prevent or quickly contain a virus that sent millions of people to hospitals, resulting in a staggering number of deaths.
The virus forced us to wear masks; closed schools, businesses, and restaurants; and crippled our economy and civic institutions. It also emptied our downtowns as offices, stores, restaurants, and bars closed.
On May 25, George Floyd, a Black man was killed by white police officers during an arrest in Minneapolis. This set off worldwide protests in hundreds of cities. The majority were peaceful, but some turned into smashed windows, fires, and looting by individuals taking advantage of the unrest. Our normally bustling downtown streets already deserted by COVID-19 became canyons of concrete and boarded-up storefronts. The homeless began to pitch tents on sidewalks and in parks. Well-to-do city residents fled to their vacation houses. Others stayed away. Black Lives Matter exposed the racism in our society and our failure to provide adequate economic opportunity and education for our minority populations. Astonishingly, 67 percent of Black sixth graders in Seattle are unable to read at grade level compared to 18 percent for whites. Similarly, for math abilities. And they never catch up.
What are the long-term implications of the protests and COVID-19 for our society? In my new book, I make predictions but, more importantly, I advocate specific changes, policies, and programs that we should pursue to improve our lives. For example, I propose specific actions to increase the participation of Blacks and other minorities in the technology and venture worlds. I also address the urgent need to improve the quality of education at all levels for minorities and low-income students so they can be equal participants in our society.
We also should learn from our forced use of Zoom and other communications technologies to combine the best of remote working, education, and healthcare with the benefits of physical interactions. Not every meeting or healthcare appointment needs to be in-person, but we also need physical interactions. Workers do not need to be in the office every day. Schools should learn from techniques that were used successfully by some teachers and schools during the epidemic and adopt a hybrid of in-person and remote learning and communication.
In February 1967, I left New York City, where I had been a young associate at the law firm of Cravath Swaine & Moore, and came home to Seattle. New York City bubbled with excitement for a young person as the center of finance, law, and publishing. Cravath was known for representing some of America’s great inventors, including Morse, Goodyear, Westinghouse, and Tesla (Nikola, the inventor, not the auto).
I was raised in Seattle, and it was where my family had lived for generations. When I returned, Seattle was a lot smaller and quieter than New York City and what Seattle is today. It was mostly a one-company town, dominated by the Boeing Company, its biggest employer by far. Boeing rolled out the 737 that year and would launch the 747 three years later. Computers were mainframes that filled entire rooms. Windows were made of glass. Clouds were plentiful but were decades away from revolutionizing the way we use computers. The word biotechnology was hardly heard of. Seattle was solidly middle class. Its public university was good, but nothing like the research powerhouse it is today. In addition to Boeing, the leading businesses headquartered in the Seattle area represented a cross section of traditional companies: retailing (Nordstrom), truck manufacturing (PACCAR), timber (Weyerhaeuser), hospitality (Western Hotels), electric distribution (Puget Sound Power & Light Company), and medium-sized local banks (Seattle First Bank, Rainier Bank, and Peoples Bank).
Major players in the business community also included the two Seattle daily newspapers, lawyers, contractors, and developers. Microsoft and Amazon were in the future. Leading businessmen and lawyers decided most civic issues over cocktails and lunch at the exclusive Rainier Club downtown, where dominoes was the favorite game. Local public officials were cautious and parochial, with a tinge of corruption because of a police tolerance policy on gambling and other vices. But Seattle was not a wide-open town—it could best be characterized as sleepy. After all, that cloudy, rainy weather is conducive for a good night’s rest.
Half a century later, the city is fully caffeinated. It has a diversified tech economy, anchored by Microsoft, Amazon, T-Mobile, Costco, and Starbucks, and bolstered by hundreds of startups headquartered in greater Seattle. In numerous technology categories—like cloud computing, machine learning, artificial intelligence, e-commerce, the commercial exploration of space, the development of autonomous vehicles, and virtual and augmented reality—Seattle and Silicon Valley are the superpowers. Attracted by our growing pool of engineering talent, the 140 global tech firms that have established software engineering offices here range from Google, Facebook, and Apple to Alibaba, SpaceX, and Blue Origin.
One way or another, I’ve worked for or brushed shoulders with most of our leading companies. I’ve represented, advised, and invested in Boeing, McCaw Cellular, Amazon, Immunex, Alaska Airlines, and many smaller tech companies. I participated in the birth of the mobile phone revolution as executive vice president at McCaw Cellular and then president and chief operating officer of its 50 percent publicly owned LIN Broadcasting, where I was responsible for the cellular operations in New York City, Dallas, Houston, and Los Angeles. The venture capital group I cofounded in 1995, Madrona Venture Group, has invested over $1.5 billion in more than two hundred startups in the Pacific Northwest. But when reporters tell my story, most of them boil this success down to two key events: my first meeting with Jeff Bezos in April 1995 and my decision a few months later to become one of the first investors in his internet bookstore idea, Amazon.com, where I served as the longest-sitting director other than Jeff himself.
Accordingly, my new book is also about Amazon and Jeff and their enormous impact on Seattle, the tech world, and customers across the globe. Now with Jeff ’s February 2021 announcement that he is stepping down as Amazon’s CEO, we will witness his second act, devoted, I predict, to helping conquer outer space with Blue Origin and solving some of our most pressing problems, including global warming, education, and homelessness. He has been planting many of these seeds in recent years, and we should all expect that twenty years from now, he will be as well-known for these accomplishments as he is for Amazon.
The groundwork for my first meeting with Jeff had been laid a couple of weeks before in the spring of 1995 when I got a phone call from a lawyer named Tom Foster. Tom was a partner at Foster Pepper, a small but highly respected law firm where he represented a lot of Seattle’s movers and shakers in the developer world. I had met Tom when I was a partner at Perkins Coie, and we had worked on several business deals over the years. We’d become friends. Every summer I spent several days anchored on my sailboat in the harbor of Mink Island, which he owned with a couple of his clients, in Desolation Sound, British Columbia.
Tom belonged to a small investment group of his developer clients. Through one of its member’s young adult children, the group had heard about this guy Jeff Bezos, who was trying to raise money for an internet startup. The investment group wanted to know if it made any sense as an investment. “You’re at McCaw,” Tom said to me in a telephone call, “so you must know a lot about the internet and tech stuff like that. Could you talk to him?”
A former hedge fund analyst, Jeff had moved from New York to Seattle the year before, specifically planning to create an internet bookstore. It was a heady time in the city. Seattle was in the headlines from grunge music culture to technology. Microsoft released Windows 95 that fall, and AT&T completed its purchases of Seattle’s McCaw Cellular and LIN Broadcasting companies for a combined $18 billion (deals in which I played key roles), giving the communications giant control of a national mobile phone network. Jeff and his wife MacKenzie launched their Amazon website on July 16, 1995. I was hardly an expert on the internet, but then as now I always made time to learn about new technologies or businesses, even if there is no immediately apparent opportunity for me. So, despite being mired in negotiations with AT&T, demanding dozens of conference calls and trips to New York, I told Tom, “Sure.”
I did know a bit more about the internet’s commercial potential than most people at the time. My twenty-four-year-old son John was preparing to launch one of the first business-to-business (B2B) web services companies. Several of the executives with whom I’d worked closely at McCaw had just departed to become the CEO, CFO, and general counsel of Netscape, the first commercial internet browser. Coincidentally, I had passed up an opportunity to get in on the ground floor of the internet two years earlier when I had taken several McCaw executives to a meeting with a pair of Seattle techies at a small, local engineering company that had created a crude graphical user interface that could be used to view information from the internet. Today I recognize their invention was an early browser like what Netscape, Chrome, and Foxfire became. Unfortunately, the executives and I failed to understand the interface’s full significance, and when the techies didn’t attract any investors, they never pursued their idea.
In April, a few days after I spoke with Tom, Jeff Bezos called and introduced himself. We set up a time for a meeting, and he said he would send me his business plan in advance. I’ve still got it in my office. It was a photocopy of an original that he’d given to somebody else—their name was still on its cover. He’d scribbled a hand-written note to me: “This is a bit out of date now, but it does a good job describing our vision. Jeff.” Forty-seven single-spaced pages, it describes in rich detail the online internet bookstore he envisioned. It includes succinct descriptions of the internet; thoughtful analysis of book pricing and the publishing industry at large; and long descriptions of the marketing, advertising, and public relations initiatives the proposed business would deploy. Its bottom-line summary was: “More titles, lower prices.”
Amazon’s site was not yet live, but Jeff had been developing it for about a year at that point, using his own money—and his parents’—to pay the bills. Believing that software developers “are better characterized as artisans or craftsmen than as scientists or engineers” and that “the productivity of a programmer . . . can range over a factor of one hundred or more,” he had carefully selected two software developers to write the code. MacKenzie, Jeff ’s wife, was in charge of finances. They had recently moved the operation from their garage into a warehouse south of downtown Seattle where the rent was $995 a month, including utilities—an increase from the $293.70 they’d charged themselves for the garage.
Several of the major themes that Jeff sounded back then remain core to Amazon’s philosophy today, including the fundamental importance of software developers, rigorous hiring standards, and the competitive advantage in offering customers low prices, convenience, and broad selection. At the time, his forecasts sounded wildly bold. “The company expects to take its stock public in 5 years, when it expects its annual sales to be $65 million, its pre-tax income to be $4.6 million, and its valuation to be in the range of $90 million to $130 million,” he’d written. Those projections turned out to be wide of the mark. In 2000, five years after we met, Amazon’s annual sales were not $65 million but $2.7 billion. This extraordinary growth was offset by losses of $1.4 billion—rather than breakeven. At the end of 2000, Amazon’s stock value was $5 billion, thirty-eight times Jeff ’s high-end prediction of $130 million.
We met for the first time several days later at my LIN Broadcasting office in Kirkland, across Lake Washington from downtown Seattle. Jeff struck me as very smart and confident but not overbearing. He was passionate about his idea, but his arguments for it were well reasoned. He was engaging. And he had that great, deafening laugh that has become a hallmark. Jeff didn’t take me through the document systematically, as I’d assumed he would. Instead, he talked off the cuff about what he was trying to build and why. He told me how he’d become intrigued with the internet while working as an analyst at the hedge fund D. E. Shaw in New York; though the technology was still in its infancy, he’d come to believe that someday soon it would connect hundreds of millions of people, all around the world.
Although the internet’s origins date back to the late 1960s when researchers developed the ARPANET so the Department of Defense computers could exchange messages, use of the internet did not begin to grow significantly until 1990, when Tim Berners-Lee developed the first web browser, effectively inventing the World Wide Web. Usage spread quickly when programmer Marc Andreessen launched his Mosaic browser (later Netscape) in 1993, which made it possible to include color graphics and pictures. Jeff was inspired to start Amazon in 1994 after he read a study that said internet usage was growing by an annual rate of 2,300 percent. For Jeff, this was “Day 1” of a future of unlimited opportunities—a theme that Jeff carries to this day: that we are still in Day 1.
Hardly any internet companies that we would recognize today existed at that time, although eBay was launched in 1994 as an auction venue for third parties selling used items, and Yahoo began as a site that listed interesting websites. A few sites sold music and items such as flowers to retail customers. There already were a couple of online booksellers. The use of email was just beginning, spurred by the rapid growth of AOL, which signed up five million subscribers by 1996 after flooding the country with mass mailings of its installation CDs.
Convinced that the business opportunities of the web had hardly been scratched, Jeff researched several different ideas and settled on book retailing, because the internet could provide a complete and easily searchable inventory of virtually every book in existence—something a physical store could never match. Brick-and-mortar stores were limited not only by space constraints but by how much money they were willing to tie up in unsold inventory. All Jeff needed to do was list books that were in print; when a customer bought one, Amazon simply ordered it from its publisher or a wholesaler. If he ran the operation efficiently, he believed he could deliver most titles in just two or three days and make a profit.
We discussed pros and cons, such as the presence of the giant Barnes & Noble in the book market. It wasn’t brilliantly obvious—at least not to me—that Amazon would be as big as it is today. It was an intriguing idea, though, and I could see the potential.
Jeff had originally incorporated the company as Cadabra, a reference to the magic of the internet, but his lawyer suggested to him that it sounded too much like cadaver. The story is that he named his store Amazon after the river because it is so large—but probably equally important because having a company whose name began with the letter A meant that it would always be at or near the top of any list of internet retailers. (Lists were an important way for users to find sites in those early days—though there were a few search engines. Google didn’t publicly launch as a search engine until 1998.)
Jeff told me that he had spent several months raising roughly half of the $1 million that he needed to get his business off the ground. I told him that it sounded like he was going door-to-door to ask for it. What I didn’t know was that much of this seed money had come from his parents. I wish I’d been prescient enough that I could tell people today, “Oh, I could see how brilliant Jeff was,” or that I immediately recognized that Amazon would get to be a hundred-billion-dollar company. But the truth is I couldn’t have imagined the full extent of what Amazon would become, and I don’t think Jeff did either. But he did not doubt that he could compete with bigger companies.
“What about Barnes & Noble?” I asked him. Remember that by the mid-1990s Barnes & Noble had become the dominant bookseller in America. In the same way Walmart was seen as threatening Main Street retailers in the 1980s, Barnes & Noble was viewed as the enemy of small independent bookstores. In the 1998 film You’ve Got Mail Tom Hanks as the owner of a Borders or Barnes
& Noble look-alike was pitted against Meg Ryan, the owner of a boutique bookstore. Jeff ’s online bookstore was laughable within that context, but he was confident.
“I think I can move faster than them. And I think they probably won’t compete aggressively online because it would cannibalize their huge investment in physical stores.”
“Well, I love going into bookstores,” I said. “It’s nice to feel the books. It’s sort of a social experience.”
Jeff replied, “I like bookstores, too, but they don’t have the inventory. And there are other disadvantages. But there’s room for both.”
We talked about his love of books, and I was to see ample evidence of it in the coming years. Jeff has always liked what he calls “long-form content,” which might surprise some people since it’s the antithesis of much of what’s popular on the internet. He regularly holds book club sessions with his top executives and sometimes with the Amazon board. You can learn a lot about his thinking from his syllabus. The first book he assigned us, The Innovator’s Dilemma (1997), was by Clayton Christensen, who conceived the disruptive innovation theory of business. Jeff used it to emphasize a historical truth that guides his thinking: nearly all of the most successful companies of the last hundred years eventually succumbed to younger challengers, who innovated with new products or business models, while the established company failed to change its strategies because they were so lucrative. The only way to meet such challenges, Jeff believes, is to aggressively pursue new strategies, even at the expense of undercutting your core business in the short term. Another book for our book club was Jacquie McNish’s and Sean Silcoff ’s Losing the Signal (2015), which describes the demise of BlackBerry.
Jeff and I discussed the potential investment by Tom Foster and his group, but he also pitched me, directly. “I need to think about that,” I said. “I’m intrigued, especially by the way you want to use the internet. So let me think it over more. In the meantime, I’ll talk to Tom.”
According to the financials Jeff gave me a few months later, breakeven would occur in September 1996 when cash flow would be positive, with monthly revenues of $707,019. Jeff said it would be easy to keep the operating expenses low because the company didn’t hold any inventory. Jeff would fax a list of the day’s orders to a large wholesale book distributor called Ingram that had a warehouse in Roseburg, Oregon, and they would send the books by UPS for delivery to Amazon in Seattle the next day. At the Amazon offices, Jeff and MacKenzie helped repack the books for shipment to individual customers, who received them in just a few days, depending on how far they were from Seattle. Today, of course, Amazon stocks millions of items in its fulfillment centers spread across the United States as well as in a growing number of other countries, and it can deliver many of them within an hour.
Amazon’s early incarnation had another advantage, which continues to this day: customers paid by credit card. That meant instant cash for Amazon, while its payment terms with suppliers are in thirty days or more. The bigger they got, the greater their cash flow advantage.
After Jeff left, I called Tom and said, “I met with Bezos. He’s got a good plan, and he’s for real. So is the internet. You guys make your own decision. But I might well invest.” It just wasn’t yet entirely clear to me that Amazon was a fabulous investment, but it didn’t need to be entirely clear. Tom thanked me for confirming for him that this was not a crazy idea, at least not from the technology side. He would talk to his fellow investors.
A couple of weeks later, in early May, Tom called me back. “We talked to Jeff, and we think his valuation is too high”—Jeff ’s postmoney valuation of Amazon was around $5.2 million—“we told him that we would invest if he lowered it to $4 million. But Jeff said no, he was going to stick with his valuation. So we’re not going to invest.” I replied, “Well, I’m not that sensitive to whether his valuation is $5 million or $4 million. I might invest.”
By then I was feeling quite positive about Jeff ’s proposal. After all, it was the internet, which was already growing exponentially. I felt that I could probably invest $50,000. But I still needed to think about it. I’d made angel investments of $10,000 and $20,000 in other tech companies. But $50,000 was a lot of money for me at that point; in fact, it would be the largest investment I’d ever made.
A couple of weeks later, in June, Jeff called me again. I told him, “I’m really pretty interested, but I’m not quite ready to make a decision. Let’s wait and see when you launch.” The truth was, I had mostly made up my mind. One of the things that swayed me was a visit to a local bookstore to buy a gift for my son John. I had a specific book in mind for him, because I thought he would find it helpful while he was setting up his own internet business. I couldn’t quite remember the title, though I did remember that the author was Peter Drucker.
I couldn’t find it on the shelves myself, so I asked a clerk for help. He searched around, and at first he couldn’t find the author. Then when he found the shelf that had the Drucker books, the one I wanted, The Effective Executive (1966), wasn’t in stock. (Much later, I learned that this is one of Jeff ’s favorite books and that he recommends it to his managers.) As I set out for another store, where I hoped to have better luck, I thought, “You know, it would have been great to go on the internet and buy the book. I wouldn’t have to drive all over town. It would just come to me.” I should mention that today I shop online and in person, frequenting Seattle’s many quality bookshops that cater to local tastes and have built convivial communities.
When Amazon launched on July 16, 1995, its home page looked nothing like it does today. It was black and white, with clickable words or phrases in blue. There were no fancy graphics (unless you count a somewhat stylized large A in a blue box), and it contained only a few images of book covers. The book descriptions were limited and dry. I complained to Jeff that they lacked publication dates—essential information if one wanted to buy the latest edition of a travel guide, for example. But the site listed hundreds of thousands of books in its inventory, any of which could be delivered in five days or less.
Over the next few months, I would periodically get phone calls and sometimes a fax from Jeff. “Well, we’re making progress,” he’d say. “We’ve sold books in five states now.” One time he called and said, “We’ve got our first European order!” He sent me weekly sales figures. For example, for the week beginning July 23, 1995, his second in business, he’d received orders totaling $14,792. Sales continued at roughly this rate, so in August I called him back. “Okay, I’m in for fifty thousand. But only when you’ve got the whole million dollars committed—I don’t want to invest until then. So stay in touch and let me know when you’ve done it.”
I had learned over the years that startups often fail not because the idea is bad but because they can’t raise the necessary capital. Jeff was not put off by what you could call my careful approach. As recently as a couple of years ago, I was with him and a group of Amazon directors and executives and Jeff said, “One thing I always admired about Tom—he wouldn’t put his money in until he knew I could raise all I said I needed.”
Even with his parents’ help, it would take Jeff a full year to raise his million dollars, most of it in chunks of $50,000 or less. Besides Foster’s investment group, at least one venture fund turned him down. They told me they didn’t think Amazon would be able to compete when Barnes & Noble launched its website. Over the years, people in Seattle would tell how they turned Jeff down. Foster remained a friend and loved to tell his Amazon story.
In early December 1995, about eight months after first meeting Jeff, I wrote him my check.
Adapted from Flywheels: How Cities Are Creating Their Own Futures by Tom Alberg published by Columbia Business School Publishing. Copyright (c) 2021 Tom Alberg. Used by arrangement with the Publisher. All rights reserved.