Jeff Bezos invested $250,000 in Google in a very-early round because he liked the entrepreneurs — Larry Page and Sergey Brin. Based on the success of this investment, an analyst suggests that the ordinary investor can consider an online platform “for anyone eager to contribute to and grow with emerging leaders in technology and business.”
Here are 4 factors to help you understand Bezos’s smarts and decide whether you should consider investing via an online platform.
#1. Beating the odds in Amazon.com.
Since many of the smartest VCs had rejected Google, Bezos was either brilliant or lucky. Given his track record, we can attribute his insight and decision to brilliance. He is said to have sifted through about 600 products before picking books as Amazon’s first product, which was brilliant because there is a huge list of books, most of which are not in bookstores. He could also discount the price because he did not have the fixed costs of bookstores, and the books could be drop shipped by the wholesaler. The key lesson for entrepreneurs: Find the right combination of emerging trend, product on the emerging trend, customer segment that will benefit the most from the product on the emerging trend, and direct competitors that can be beaten by better execution. Bezos got his edge in the product, while other unicorn-entrepreneurs got their edge in the customer (Sam Walton, Michael Dell and Brian Chesky) or the strategy (Bill Gates).
#2. Investing in Google as an angel.
Not many small investors get to see ventures like Google because most home runs are in Silicon Valley, or they seek high amounts per angel, and it is impossible to identify a home run like Google before there is proof of potential. Bezos got to see Google at a very early round because he had already launched Amazon, and he was able to detect the brilliant potential of Google even though other, more experienced VCs had rejected Google. Given that only about 1 out of 100,000 ventures becomes a home run shows that Bezos was both brilliant and lucky.
#3. The odds of investing success via crowdfunding sites.
Here is an example where the entrepreneur, Palmer Luckey did great by selling his venture to Facebook. His crowdfunding angels did not do as well. The reality is that early-stage VCs fare well because they have the clout to control the venture and the resources to be the early dominators of an emerging industry. Most of the others in the venture funding chain do not do as well. So, crowds may have to be satisfied with non-financial returns. Crowdfunding sites are a great tool for entrepreneurs to raise capital from many investors without loss of control. But whether these sites are great for investors is debatable. Given that about 2% of VCs earn about 95% of VC profits suggests that 98% of VCs do not earn much. And VCs have more clout than crowds to negotiate a better deal. Early VCs often have the right to change CEOs to recruit professionals if the entrepreneur is not capable, and they invest much later than crowds and angels when the risk is significantly reduced. Few angels win in venture financing.
#4. The odds of investing success if you invest because you like the entrepreneur.
Only if you have Bezos’s instincts – given that VCs, the major professionals in early-stage VC fail on 80% of their deals. Most billion-dollar entrepreneurs succeeded due to their skills, but it is tough to evaluate skills until there is proof of potential – not just a pitch deck. About 10 VCs rejected Apple because they were not impressed with Jobs, and the board fired Jobs. So, if you like the entrepreneur, feel free to invest. But be prepared to lose your investment due to the high risk. And be prepared for the entrepreneur to dilute your interests when the venture can attract venture capital. Also, be prepared for the entrepreneur to find a “better class” of friends and family when the venture takes off.
MY TAKE: It would be great if journalists who tout crowd funding and angel investing studied the odds and made sure that crowds and angels know the risks. There is a difference between buying a lottery ticket and “investing” all your savings in lottery tickets.
So, is Bezos smart or lucky? No one can deny that he is smart. But is he also lucky? He won the “ovarian lottery” as Buffett so eloquently put it. Bezos was born in the right place, with the right genes and skills, and at the right time to jump on the emerging Internet trend for which he was supremely qualified. And Google turned out to be one of the greatest investments of all time. Is that brilliance or sheer luck?
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