Invent and Wander: The Collected Writings of Jeff Bezos

by Jeff Bezos

To illustrate with a hypothetical and very simplified example, imagine that an entrepreneur invents a machine that can quickly transport people from one location to another. The machine is expensive—$160 million with an annual capacity of one hundred thousand passenger trips and a four-year useful life. Each trip sells for $1,000 and requires $450 in cost of goods for energy and materials and $50 in labor and other costs. Continue to imagine that business is booming, with one hundred thousand trips in Year 1, completely and perfectly utilizing the capacity of one machine. This leads to earnings of $10 million after deducting operating expenses including depreciation—a 10 percent net margin. The company’s primary focus is on earnings; so based on initial results the entrepreneur decides to invest more capital to fuel sales and earnings growth, adding additional machines in Years 2 through 4. Here are the income statements for the first four years of business: Earnings (in thousands) Year 1 Year 2 Year 3 Year 4 Sales $100,000 $200,000 $400,000 $800,000 Units Sold 100 200 400 800 Growth N/A 100% 100% 100% Gross profit 55,000 110,000 220,000 440,000 Gross margin 55% 55% 55% 55% Depreciation 40,000 80,000 160,000 320,000 Labor and other costs 5,000 10,000 20,000 40,000 Earning $ 10,000 $ 20,000 $ 40,000 $ 80,000 Margin 10% 10% 10% 10% Growth N/A 100% 100% 100% It’s impressive: 100 percent compound earnings growth and $150 million of cumulative earnings. Investors considering on...