How do wealthy people get rich?
On August 5, 2013, Jeff Bezos purchased the Washington Post for $250 million. Jeff is the CEO of Amazon.com, reportedly worth about $25.2 billion (according to Forbes).
A lot of the coverage has focused on why Bezos would buy the Post, and what he's going to do with it.
To me, the more interesting question is: how the heck did he get that $25.2 billion?
The answer is hidden in news articles, like this one from Forbes in 2011:
[In 2011] Jeff Bezos added $6.5 billion to his fortune. Bezos’ boost comes on the back of an impressive 55% rise in Amazon shares, pegging his net worth at $19.1 billion.
In one year, Bezos' wealth increased by nearly 52% all because of Amazon stock going up. Wow. Wall Street is writing Bezos big, big cheques.
Bezos is interesting: nearly all of his wealth comes from Amazon, and specifically, its stock price. As the stock rises, so does his wealth. And risen it has! AMZN has gone up 642% in the last 10 years:
Wow! Amazon must be the amazing money-making machine. Well... not really:
That revenue might look impressive, but revenue doesn't make a business: profit does. That tiny sliver each year called "Net Income" tells the truth about Amazon: it doesn't really make money. This is what makes Jeff Bezos' incredible wealth so puzzling. Mark Gimeon illuminates this point in his January 2013 Bloomberg piece:
Comparing Bezos’s fortune to Amazon’s earnings highlights how deeply puzzling that increase has been. Since 2003, the first year in which Amazon earned a profit, through the end of 2011, Amazon has reported a total of $5 billion in earnings. Think of it this way: if Bezos had started the company himself, still owned all of it, and had taken out every penny in profit, his bank balance would be less than one-quarter of what his shares are worth. Or think of it another way: Apple’s profit for the last quarter alone is well over twice Amazon’s profit over its entire existence.
So Jeff Bezos is a rich man. He is a rich man because Wall Street is betting that his company, Amazon, will one day experience unprecedented profit (and will sustain them for many consecutive years).
Wealth fascinates me. Bezos' wealth confuses me.
Fascinated by wealth and how it's is created, I started my first businesses in high school. I've started a handful more since. It seemed like the formula for creating wealth was simple:
make way more money than you spend
It's a simple rule I thought applied to both business and personal finances. When I went to business school, this was Finance 101. It's supposed to be one of the "rules of the game" we're all bound to.
What's frustrating is that many of today's "great entrepreneurs" don't seem bound by this rule. They're buoyed by Wall Street and venture capital, and seem to live in an alternate universe where basic math doesn't apply.
Instead of being rewarded for creating profit, they're being rewarded for other things: eyeballs, users, units sold, total revenue. Surprisingly, there's always someone "upstream" in the investment chain willing to pump more money in. It's like entrepreneurs are racetrack bookies: they're taking bets from investors on their own unrealized potential - "Trust me I'm a fast horse, I'll start winning races one day!"
Am I delusional?
Maybe it's me who's wrong. Maybe significant wealth has always been created this way. Maybe the "new" entrepreneurship is about selling to investors, instead of selling to customers.
But to me it feels wrong. To me it doesn't feel like a real business unless you've earned 2 dollars, and you have one left over at the end of the day.
"Little" entrepreneurs like me don't have much choice. I can't ask my grandma to invest in my company up-front based on unrealized future earnings of 10 billion.
What do you think?
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