Watch Out Sand Hill Road: Amazon As Venture Capitalist (AMZN)

Following on the post immediately below, "Watch out Elon: "Electric truck start-up Rivian announces $700 million investment round led by Amazon" (TSLA)" I'm going to do something we try to avoid, visit the same source more than once in a day. The only other times we've done this was with FT Alphaville, which I think long time readers understand, FTAV is in a class by itself..

In this case a bit of explanation is in order. In this morning's "Venture Capitalists are MUCH LESS ambitious than their private equity siblings" the lead-in says we were linking to "Auren Hoffman's Summation blog". I maybe should have noted who Auren Hoffman is. Let's remedy that right now. Here's his entry at CrunchBase and here's a slightly expanded version via Wikipedia:

...Hoffman founded Kyber Systems in his junior year at UC Berkeley, as a way to pay for school. Kyber was sold to Human Ingenuity in 1997. Hoffman founded Bridgepath Inc. in 1998, which was acquired by Bullhorn, Inc. in October 2002. In 2002 he sold a website GetRelevant to Lycos. He then became chair of the Stonebrick Group through 2006, which sponsored networking events in the San Francisco area such as one called the Silicon Forum. He reportedly once showed up to a meeting in a rented truck, and parked blocks away to reduce his chances of being seen. Hoffman business style is sometimes referred to as a networker. Hoffman is a speaker at events in the technology industry.

In 2006 Hoffman cofounded Rapleaf, and served as its CEO until 2012, and left the company to run a Rapleaf spinoff called LiveRamp after Rapleaf was acquired by email marketing company TowerData.On May 14, 2014 Acxiom announced that it had acquired Liveramp, for $310 Million....
[multiple footnotes omitted]

I count five exits via acquisition which is pretty damn impressive. Here's what he has to say about Amazon as VC, January 25:

Amazon could up-end and dominate venture capital and venture lending

Thought experiment: How would Amazon enter the venture capital business?  

Use data from AWS to inform investment decisions

Amazon can leverage its proprietary data from AWS (Amazon Web Services).  Amazon’s edge is that most of the best technology start-ups are built on its services.  Amazon has a lot of information about how much these companies are spending, what services they use, what technologies they use, and more.

The AWS data could be extremely predictive and give Amazon early signs that companies are growing fast or reaching an inflection point.  And it can use the data as a better diligence check of a company … for instance, the data could help determine which companies that claim they have “AI” are real and which are just marketing.  

Amazon could significant up-end venture capital (more than even Softbank did) from their proprietary access to AWS data and their willingness to reduce fees.

in the "your margin is my opportunity" department

— Auren Hoffman (@auren) January 22, 2019

 (see some great comments on this Twitter thread)

Amazon has a real investing advantage.

Using this data to invest in public companies would likely not be legal since it could be deemed as inside information.   But using it for private companies is something Amazon could do.  

Of course, Amazon’s worry is that some of their AWS customers would get mad and move to Azure (which is the biggest risk of going into the VC business) … but that could be managed.   Amazon could just use information from the AWS bill (and not have to see any real trade secret information) to make the initial selection of companies they might want to focus investing in.  Then, of a company gives its consent, the Amazon VC team can view server logs, etc.

Which leads us to the second thing: “your margins are my opportunity”

Amazon can win VC deals the way it wins in all its other businesses: price and convenience.
On price, Amazon can offer much better terms than traditional investors that need to take high management fees and carry.  Amazon wouldn’t need to do that and it would not need to, want to, or be able to (because of conflicts) take board seats.  So it would have a lot more leverage … especially in the late funding stages where data is increasingly important.
And while Amazon could potentially try to buy equity, it could also instead just focus on debt (which is a product it is already familiar with — see below).
 
Venture capital firms’ returns net of fees (management fees and carry) have historically been very low.  But if Amazon really focused on its investments, it could earn an extremely high real return. ... 

...MUCH MORE

Note that the date of Mr. Hoffman''s post, Jan. 25, is prior to both the Rivian announcement above and the Feb. 7 announcement that Amazon was investing in autonomous vehicle company Aurora.

Prescient.