How Jeff Bezos Found Risky Startup Capital For Amazon (2024)

By now, everyone knows that Jeff Bezos started Amazon and went on to become the richest man in the world (now the second richest). But do you know how he funded the early stages of Amazon? I've raised capital for early-stage companies a few times, so I'm always interested in how successful companies made it happen at the very beginning.

Some companies can get started with very little funding. A very rare few can bootstrap their way to billions. However, a lot of companies, like Amazon, need enough capital to build their product, prove their concept, and gain momentum.

In 1994, Bezos started with nothing but a plan to capitalize on the burgeoning potential of the Internet. He invested $10,000 from his personal savings to incorporate a company called Cadabra, Inc. Eventually, he changed the name to Amazon after one of his attorneys misheard the name as Cadaver. Then came his most risky investment. His parents invested $250,000, a significant portion of their savings. This is the most risky money you can get. If you lose your own money, you can get over it. If you lose money from wealthy investors, they can get over it. If you lose your parents' retirement money, you have to think about that for the rest of your life. He even told them that he had a 70% chance of failing.

After about a year of development and beta testing, the website went live. Then, according to Richard Brandt's book about Amazon, "One Click," additional startup capital for Amazon was acquired through good old-fashioned networking during 1995 and 1996.

Brandt states that "[a] Seattle-based stock broker named Eric Dillon was interested in investing but thought the valuation Bezos had put on the company—$6 million—was pulled out of thin air, until Bezos sat down with him to show how much other Internet companies were trying to raise. Dillon talked Bezos down to a $5 million valuation and put in some money. A Seattle businessman named Tom Alberg was impressed with Bezos's projection that Amazon could turn over the equivalent of an average bookstore's inventory 20 times a year, compared with 2.7 times for most bookstores—with details to back up the claim."

He continues, "In the end, [Nick] Hanauer managed to get some commitments by making the first investment himself. Others followed, and by the end of the year, another twenty investors kicked in money, most of them around $30,000 apiece. Bezos raised $981,000."

In June of 1996, Amazon raised an $8 million Series A round from Kleiner Perkins. This investment and strategic partnership allowed Amazon to grow all the way to an IPO in 1997. The IPO raised $54 million for Amazon, giving the company a market value of $438 million. After that, the company plowed everything back into growth for years, producing a staggering 178,000% increase since that time.

Of course, the story of Amazon is a very rare exception. Not too many people can obtain $250,000 from their parents. Not many companies can raise an $8 million Series A after one year of operation. And very few companies go public with only $9 million invested and two years of operation.

It's estimated that 90% of startups fail. Even venture-backed startups fail 75% of the time. It's even more likely that a startup never gets off the ground at all. Lots of people have ideas, and they're never able to raise the capital required to try them out. Even Amazon would not be here today without the risks taken by Jeff Bezos's parents and the 20 or so brave angel investors.

#leadership #innovation #technology #jeffbezos #amazon