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For those of you not in Silicon Valley, to understand this column, you have to understand the terminology of venture capital investing. Broadly speaking, there are three types of venture-based investments in start-ups:
- Angel investing: typically made by individuals or small firms, angels invest in companies based on an idea, a team, or a demo. The risk is very high but the return (when there is one, is astronomical). The amount an angel invests ranges from as ‘little’ as $25,000 and up to $1 million or slightly more;
- Venture capital: Professional firms of venture capitalists make investments in new companies that are a little further along the path to success than an angel investment. This can mean that the company already has released a product, or has clients, or is actually profitable. Venture capital firms usually invest at least $1 million and will sometimes invest $15 to $20 million in a company.
- Private equity: Private equity firms invest large amounts of money in established companies. The expectation is lower returns but lower risk. Private equity companies are usually looking to put anywhere from $10 million to $100 million or more into a company.
I’m sure my friends in the venture community will disagree here and there with my categorization, but hopefully everyone will agree that this is ‘directionally’ correct.
When I say that Google is like an angel, then, what I mean is that Google makes a lot of small bets and expects some of these to succeed but many of these to fail. Think of all the Google product releases in the last few years (I am not going to attempt to list all of them). Some of these releases have had great adoption in the market, others have failed miserably and quickly faded into obscurity. To quote a college friend of mine referencing his dating strategy, ‘if you swing at the ball enough times, eventually you’ll get a hit.’ That seems to be the Google M.O.
Now compare that to the way Amazon releases products. Amazon releases very few new products. Over the last few years, the things that come to mind for me are Kindle, Mechanical Turk, Cloud Hosting, and Warehouse/Inventory management. Amazon’s success rate for their product releases seems much higher than Google’s, but of course they also release many fewer products.
If you agree with my analogy, the next question to ask is this: which strategy is better? My sense is that Amazon has the proper strategy. If you look at Amazon’s product releases, they are all interconnected to Amazon’s core businesses. Kindle obviously works well with Amazon’s book selling, and the various AWS products all help merchants to better integrate their products and services with the Amazon Marketplace. Google, on the other hand, has products that often seem hard to reconcile with their core businesses. Corporate email (Google Apps), Nexus One (cell phone), Chrome (browser) – yes you can certainly make arguments that they will eventually help Google sell ads, but its hard to see how all of this together is part of a grand scheme.
The irony here, is that this is the very same disjointed “attack all opportunities” approach that gave Google the chance to dethrone Yahoo; Yahoo was far too willing to cede search to Google and focus on email, media, job boards, and a variety of other distractions. Amazon is driven by one goal – be the best at ecommerce. Google has so many projects going at once, that they appear to have released two mobile phones – the Android and Nexus One!
There are plenty of angel investors who have done very well financially – just ask Google’s original angel, Ron Conway (known as the “godfather of Silicon Valley” for his role in so many successful start-ups). Angel investing, no doubt, is ‘sexier’ than private equity and is probably more an adrenaline rush to boot. At the end of the day, however, the short-term rush of many small victories is no match for a calculated, long-term strategy.