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.