Amazon Web Services

1. DRDavid Rosenthal0:00

   People, turns out, loved the amazon.com episode. That was so awesome. Makes me a little nervous for this one.

2. BGBen Gilbert0:08

   Oh, massively. By far and away, our biggest episode ever. Uh, is this how George Lucas felt when he was doing Empire Strikes Back? [laughing]

3. DRDavid Rosenthal0:17

   [laughing] You did not just compare us to George Lucas, did you? [laughing] I swear we're humble.

4. BGBen Gilbert0:23

   All right, let's do this.

5. SPSpeaker0:24

   Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?

6. BGBen Gilbert0:41

   Welcome to Season 11, Episode 3 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.

7. DRDavid Rosenthal0:56

   And I'm David Rosenthal, and I am an angel investor based in San Francisco. Cold San Francisco, here in August. [chuckles]

8. BGBen Gilbert1:04

   [chuckles] And we are your hosts. All right, David, let's say you run a lemonade stand. You sell me the highest quality lemonade you can for the lowest price, one dollar a cup, and when you add up all your costs, the variable ones, like the lemons, and the fixed ones, like the table that you rented, it costs about ninety-eight and a half cents to give me that lemonade. And you're happy with your turn to profit, I'm sure, but man, you are gonna have to sell a lot of lemonade.

9. DRDavid Rosenthal1:32

   So you're telling me I'm amazon.com in the fourth quarter of two thousand and one, which is actually where we're gonna start our story.

10. BGBen Gilbert1:39

    Perhaps. But you discover something interesting. By making all this lemonade, you get really good at the stuff it takes to run a lemonade business, the perfect cups, and ice, and lemons, everything, and it turns out, all that stuff that you just got good at, you can sell to other businesses. And guess what? You realize further that when you sell your services to other companies, when you charge them a dollar, it only costs you seventy cents to make it. So thirty percent margins instead of something like a percent and a half, you're gonna have to sell a lot less of those services than you ever did on lemonade to make the same amount of money.

11. DRDavid Rosenthal2:17

    Well, then, if you told me that, I would dig into it even further, and I would realize that the existing companies that sold stands, and cups, and whatnot, they were actually making seventy percent margins on their stands and cups. [chuckles]

12. BGBen Gilbert2:33

    [chuckles]

13. DRDavid Rosenthal2:33

    And so I would be quite happy to take thirty percent margins and disrupt them, and still do better than my lemonade business.

14. BGBen Gilbert2:41

    Well, listeners, of course, on our last episode, we talked about Amazon's retail business, and today, we are talking about Amazon Web Services, the cloud computing pioneer, and those margin percentages that I just used are the real ones for the retail business and for AWS. AWS's revenue is only about fifteen percent the size of Amazon's massive retail business, but their profits, or the operating income, to be specific, from AWS, are, in total, the same, if not more, than their e-commerce store. I think it's the case that every year since twenty fifteen, when they started breaking out AWS's financials, the total operating income from AWS has actually been bigger than [chuckles] the retail business.

15. DRDavid Rosenthal3:25

    There may have been some quarters where it was off, but generally, that trend is accurate.

16. BGBen Gilbert3:31

    Wild. So we're gonna talk about a completely different type of business today than we talked about last time. Sort of... There's a lot of similarities, and a lot more than you would sort of guess when looking at an online retailer that started as an online bookstore and a cloud computing pioneer. Well, speaking of e-commerce, we have huge news. You can finally, finally buy Acquired merch on the internet. That is available at acquired.fm/store, or click the link in the show notes. You can grab your favorite tee, crew neck, hoodie, tank, or even a onesie, since I know a lot of you out there are like David and have little ones at home. Now, for our presenting sponsor this episode, we have a company that we are very excited about, Fundrise. On our amazon.com episode, they shared some news about a fascinating new product they have called the Fundrise Innovation Fund that enables their customers not only to invest in real estate, but also now private, late-stage growth tech companies, which is, of course, a very interesting place to be investing right now, now that prices are very different than they were six and twelve months ago. We are back today with Ben Miller, CEO and co-founder of Fundrise.

17. DRDavid Rosenthal4:40

    We know that you, Ben, personally love dissecting investing markets from first principles, and you've been noodling on how to disrupt VC for a while. Tell us why you think growth VC in the traditional sense is broken, and why what you're doing with retail investing in private companies is the future.

18. SPSpeaker5:00

    When you wanna start a big business, you find a big problem. You find something that's broken. Twenty percent of the upside of a company's success goes to the people who work at the VC fund, twenty percent of carried interest. So who creates the value? People who build the company, people who invest in the company. So the team, in my view, creates the value. They put in two thousand five hundred hours a year. How many hours does a typical VC put into a company? A hundred? Fifty? So that's, like, two percent of what a typical employee does. So what happens when, like, a sector is, like, overcompensated, overpaid? It gets overcrowded, or it gets overfunded. It gets undisciplined. When you look at twenty twenty-one, you can see it in what's happening in venture, is because it's overcompensated, it's basically gotten messed up. So we basically created the Fundrise Innovation Fund with the idea of eliminating the carried interest, give it back to the team, give it back to the employees. So obviously, capital deserves a good return for taking the risk.... but twenty percent of that return shouldn't necessarily go to GPs who didn't actually put up the money, didn't actually do the work. In the long term, markets get more efficient, so probably those returns get split between the investors and the team members. But our mission is basically to lower basically the fees of the intermediaries and increase basically the benefits to the people who are taking the risk and doing the work. And that is really, I think, the future of venture. I mean, it's like a nightmare for the venture guys. The worst thing that could ever happen to them is to lose their twenty percent carried interest. It's the most disruptive thing we could do, if you think about us being a disruptor. But yet, the future of markets is markets become more efficient. The vast majority of public stock managers do not take a twenty percent carried interest. It's not justified by the efficiency of the market. And when the venture industry started thirty, forty years ago, the market was inefficient. There was very little money, and it was justified. But as the market's gotten much, much larger, huge, and all the data, every company, it's all available to anybody, it's just not justified anymore. So you can do the job and still have successful amount of profits without taking the twenty percent carried interest. I mean, the biggest public asset manager is BlackRock, and you don't see them taking a carried interest, right? They have, uh, AUM fee, but by having really good efficient systems and scale, they're a great business. And so it's structure and incentives dictate behavior. It's like what Charlie Munger says, and so we're trying to restructure the whole venture industry.

19. BGBen Gilbert7:43

    Our thanks to Fundrise, the largest private investment platform in the world for retail investors. If you wanna join the over three hundred and fifty thousand individuals investing with Fundrise, you can click the link in the show notes. And if you're a founder and you wanna get in touch about having the Innovation Fund participate in your next funding round, email notvc, that's notvc@fundrise.com. After you finish this episode, come discuss it with David and I, and thirteen thousand other smart members of the Acquired community at acquired.fm/slack. And if you're dying for more Acquired in the meantime, go check out The LP Show by searching Acquired LP in any podcast player. The next episode is with David's partner in crime and Kindergarten Ventures, Nat Manning, talking about his company, Kettle, and how the business of reinsurance works. That, of course, is already live if you are a paying LP, which you can become at acquired.fm/lp. Now, without further ado, David, take us in. And listeners, as always, this show is not investment advice. David and I may, certainly do, have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

20. DRDavid Rosenthal8:56

    Well, we left off the amazon.com episode in 2007 with the sort of Sony PlayStation-like coda of the Kindle story and the new chapter, one might say, that it seemed at the time to the outside world that Amazon was opening as a true technology company with the Kindle. I believe the quote from Eric Schmidt in The Everything Store was, "The book guys finally got technology." [laughing] And of course, as we talked about, Jeff Bezos always got technology. This was not a shift. And in particular, this was not anything new because of everything we are going to talk about on this whole separate episode today. So to do that, we need to rewind back, as I said above, to the end of 2001, kinda early 2002, the immediate post-dot-com bubble popping crash era. And Bezos and Amazon, as hard as it is now to remember, he was like an embattled CEO at this point. They had just gotten rid of COO Joe Galli. The board has brought in Coach Campbell. Amazon's fighting for its life against both eBay and Wall Street.

21. BGBen Gilbert10:13

    Is it insane to think that the board was sort of in the place with Jeff Bezos, thinking, "We really need some adult supervision to be a, uh, scale CEO and help this guy out"? Frigging Jeff Bezos! Obviously, that did not pan out, and Bezos came valiantly riding back in and ran the business for another twenty years.

22. DRDavid Rosenthal10:32

    Another twenty years, until handing the reins to somebody else, who we're going to spend a lot of time in just a little bit here talking about, of course, current Amazon CEO Andy Jassy.

23. BGBen Gilbert10:47

    Yep.

24. DRDavid Rosenthal10:48

    So I don't even know what the right word is to use to describe AWS. I was gonna say, I wrote behemoth in my notes.

25. BGBen Gilbert10:55

    Pioneer, inventor.

26. DRDavid Rosenthal10:57

    I don't think there's anything you can say that captures how big and how important AWS is. It is one of the biggest and most important businesses, technologies, products of the modern world.

27. BGBen Gilbert11:15

    Yep, no doubt.

28. DRDavid Rosenthal11:17

    I don't think it's controversial to say even much more so than amazon.com.

29. BGBen Gilbert11:22

    Yeah. I mean, it's interesting. During the pandemic, you could argue that amazon.com was more important because everybody needed to sort of buy goods and get them at home.

30. DRDavid Rosenthal11:30

    But everybody also needed to be on the internet, and the internet [chuckles] runs on AWS.

Episode duration: 2:49:32