Bezos 37 Signals

by nikiscevak on March 15, 2010

I admire Jeff Bezos and think he is the best CEO out there (including Steve Jobs). I also think he is one of the best investors and that story will play out over a larger time line.

There is already a career making move: He was the first angel investor in Google and bought $250,000 worth of stock at 4 cents per share.

And an interesting tidbit that was disclosed by David Heineimeier Hansson of 37Signals in a podcast at Stanford a month a little bit ago was that Bezos’ investment in the company was entirely a secondary investment. That is, he bought shares from current shareholders and not a dime was fresh capital for the company.

When people talk about venture capital ‘being broken’ they don’t mean that the days of giving a firm with unproven financials $10-25m and hoping for a billion dollar exit are gone but rather that there is too much money chasing that opportunity. Fred Wilson broke the math down nicely last year.

And that’s why I think you will see this type of venture capital dramatically downsize but the 2% management fee on billion dollar funds is an incredible innovator and we all know that the bums on Sand Hill Road seats wont go without a whimper. My own personal belief is that it will be the same people in the same office under the same letter head but they will all be doing different types of investing – what is traditionally called ‘growth equity’.

Techcrunch has termed the ‘DST Deals’ but it’s nothing new and it’s nothing particularly exotic: Instead of a company issuing new shares, the firm’s existing shares are being bought. Incredibly, most venture capitalists are simply not comfortable with that.

The market that has always been broken is when an Internet or high growth technology company reached a certain scale (between $10m-$50m in revenue) there was no obvious investment market to cater to the buying of securities in these types of companies. In the late 90s it was Doctors, Dentists and Day Traders and we all know how that turned out. But now there is nothing really. Institutional investors are simply not interested and private equity firms, who might have invested a decade ago, moved upstream to leveraged mega-buyouts.

About $25-30bn a year goes into ‘venture capital’ but the traditional way of investing can probably only support $10-15bn and only then on non-spetacular returns. So what to do with the other half? Well I think exactly what Jeff Bezos did with 37 Signals, what Elevation Partners did with Yelp and what DST did with Zynga and Facebook: The majority of money is used to buy existing shares rather than the company issuing new ones.

  • There's no doubt that Conway is definitely perfect, however I actually really don't notice it for a ethical dilemma for instance your dog generally while in the referenced posting. There's no doubt that leaders with quick step startups (when Ron spends) will be submitting a deep detrimental point every time they would like to sell off its very own a guarantee. A VCs will be having profit looking forward to your 30x gain as well as online marketer is definitely providing? Does indeed a online marketer find out a little something a opportunist would not? And also is definitely he/she and not as wholly commited as being the opportunist dreams?

  • I like your comments on VCs providing growth capital even though I certainly hope that some risk capital remains - and I am sure it will. However, I find your logic about "too much money" chasing good deals and that being a problem for VCs to be faulty. I wrote about this a bit here: http://dvitanov.posterous.c...

  • Thanks for your comment Deyan. As you say in your post: "Despite 900 or so VC firms in the US, 90% of returns are coming from the top 10% of venture capitalists. (And furthermore, the top 50 VCs are investing 2/3 of all venture capital dollars "

    So that means 90 firms account for 90% of the returns. And then if just 50 of those 90 are investing 2/3rds of the capital.

    What if all of those 850 firms went away? You'd have an industry one third smaller and producing the same returns as it is. That's what spurs the 'too much money' comments. I didn't see anything in your post that suggests any other conclusion?

  • Thanks for writing! I did my original spreadsheet with those kinds of deals in mind. I hope DSTs become more commonplace. It sure is simpler than having to worry about changing everyone's percentages.

    Is it the finance people that like squashing people or the lawyers? ;-)

  • It's us finance people, thank you very much.

    But as to squashing... as an investor my best protection in doing a deal with huge information asymmetries is to ensure that if the entrepreneurs win, I win too. If our interests are aligned, then I'm willing to invest in two people and a powerpoint (and I've done just that at least a dozen times.) Otherwise, no thanks. You invest your time in the startup, I invest my money. If you get a return and I don't, that doesn't seem quite fair to me.

    By the same token, I don't ask for terms where I would get a return and you wouldn't (participating preferred, for instance.)

    As to "changing everyone's percentages", you can have your spreadsheet do that automatically.

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