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RISKY BUSINESS

Amazon and venture capitalists have the same risk-taking philosophy

AP Photo/Ted S. Warren
The Fire Phone, a signature Amazon failure.
  • Alison Griswold
By Alison Griswold

Reporter

This article is more than 2 years old.

On Sept. 14, after unveiling a $2 billion charitable venture, Amazon founder and chief executive Jeff Bezos did a rare public interview with David Rubenstein, co-founder of private equity firm the Carlyle Group. While telling Rubenstein about how Amazon came up with its signature Amazon Prime membership program, Bezos, the richest person in the world, briefly digressed to describe his and the company’s risk-taking philosophy:

Getting it wrong isn’t that bad. That’s the other thing. When we make mistakes—and we’ve made doozies, like the Fire Phone, and many other things that just didn’t work out—we don’t have enough time for me to list all our failed experiments. But the big winners pay for thousands of failed experiments. So you try something like Prime.

This strategy is strikingly similar to how venture capitalists approach startup investing. It’s commonly said that 90% of startups fail, and of the ones that don’t fail, most aren’t smash hits. A typical venture firm investing in early- to mid-stage startups might aim to earn back or double their money on a third of investments, double or triple their money on 10%, and return more than three times their initial investment on just 5% of bets. The goal is to have a couple big wins—think an Uber or an Airbnb—that pay for the companies that fizzle or do only OK.

Here is well-known venture capitalist Fred Wilson talking about it in 2009:

…if you are an early stage investor (like our firm Union Square Ventures), then it is a different story. I’ve said many times on this blog that our target batting average is “1/3, 1/3, 1/3” which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments.

Bezos and Wilson are basically saying the same thing: to win big, you have to be willing to fail sometimes, maybe even quite often. It’s how Amazon got the Fire Phone, a spectacular bust. It’s also how Amazon got one of its biggest and most enduring wins with Amazon Prime.

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