In 2015, a director on Amazon’s corporate development team, where the company did mergers and acquisitions, had an idea to spread Amazon’s tentacles even further into the world of dealmaking. Paul Bernard had joined the corporate development team two years prior, after holding a similar position at Nokia and working at investment bank Goldman Sachs, and saw an opportunity for the company to leverage its access and dealmaking chops in a new way.
Bernard wrote a sixpager, Amazon’s internal mechanism for making pitches on business ideas, about creating a new program that straddled corporate development, where deals were done, and its new hit product: the Echo smart speaker. The idea was to create an internal venture capital arm to find the world’s most promising technology companies that were excited about voice technology and invest in them at the earliest stages. The fund would also help build out Amazon’s Alexa ecosystem, helping these companies integrate with Alexa.
Amazon CEO Jeff Bezos liked the pitch, and in June 2015, the Alexa Fund launched with an initial $100 million to invest in startups.
The Alexa Fund was “open to anyone with an innovative idea for how voice technology can improve customers’ lives,” according to its press release. On its website, entrepreneurs could apply for the chance to meet with Alexa Fund executives for funding. All they had to do was hand over their number of customers, annual revenue, and other information into a portal that the Fund’s team would evaluate.
The traditional goal of venture capital firms is to find promising startups to invest in at their earliest stages. These venture capital firms use their investors’ money to take a stake in these technology companies, essentially making a bet that they will become big successes. The startups, in turn, use the venture capital funds as a way to finance their businesses and grow. Once the company reaches a size where it can sell itself or go public, the venture capital fund cashes out at a multiple of its original investment. For example, Sequoia Capital turned a roughly $60 million investment in messaging app WhatsApp into a $3 billion windfall when Facebook bought it in 2014. But there is, of course, the other path: investing in startups that don’t achieve their targets and shut down, causing the venture capital firm to lose its investment. Traditional venture capital firms are ranked based on their returns for investors. Not every investment is a hit, but the big wins offset the duds and create ample returns for the firm’s investors.
Amazon’s venture capital fund had different goals. An exit, such as the sale or IPO of the companies it invested in, was not a priority. Neither was it driven primarily by financial gain. “It really was positioned as an idea of getting more people to build on Alexa. It was really about funding the developer community,” said a former Alexa Fund employee. Instead of making money through exits, Amazon was seeding the most innovative companies in a space it had helped popularize — voice assistant technology. Companies that weighed investments from the Alexa Fund often skeptically wondered what was in it for Amazon if they weren’t after financial returns.
Amazon declined to comment about whether the Alexa Fund has profit targets and would not provide the rate of the Alexa Fund’s returns.
“There’s a certain amount of healthy skepticism or fear with any product you have that you introduce to their ecosystem. We are all aware of the fact that Amazon can destroy your business overnight if they want to do that,” said venture capitalist Jeff Morris about entrepreneurs meeting with Amazon’s Alexa Fund.
Even so, droves of founders contacted the fund for a meeting and a chance to secure financial backing.
Reservations about the Alexa Fund
Jonathan Frankel was one of the founders wooed by the Alexa Fund. Frankel did not fit the profile of most technology entrepreneurs. He wasn’t a hoodie-sporting bro who had dropped out of Stanford to create the next hot tech startup in his garage.
Frankel was a Philadelphia-based rabbi with a degree from Harvard Law School. People who interacted with him often describe him as one of the nicest people they’ve ever met.
Frankel was having trouble keeping track of his three young sons throughout his three-story Philadelphia home. He wanted to be able to check in on where they were throughout the house when he heard the inevitable tussle between them or needed to reach them on different floors. After consulting with a contractor on an intercom with camera functions, he was quoted $3,500 for a clunky intercom system that was as advanced as the ones his own parents used in his childhood. He then went online to find a cheaper alternative, but also struck out. Identifying a gap in the market, Frankel decided to create a wireless intercom system with screens himself at a reasonable price point: $250.
He and two cofounders researched the market, found a product-engineering laboratory to make a prototype, and worked tirelessly to bring the product to fruition.
In 2016, their company, Nucleus, launched and quickly gained traction. Home improvement store chain Lowe’s carried the product in hundreds of its locations. Nucleus was also selling through Amazon.com. Later that year, the trio engaged the Alexa Fund and other venture capital firms simultaneously. They were thrilled to receive a seed investment from venture capitalists, including BoxGroup and Greylock Partners. The $5.6 million investment was led by Amazon’s Alexa Fund. The Alexa Fund wrote a check for more than $1.5 million, making it one of its biggest investments at the time of the deal.
Behind the scenes, the other co‑investors had reservations about letting Amazon into the deal. They worried that it would be like letting a fox into a henhouse. They were concerned that Amazon, with its sprawling empire and giant push into voice technology, would glean information from the startup as a result of its investment. While there hadn’t yet been Alexa Fund recipients that raised the alarm about working with the venture arm, there was an acknowledgment that Amazon had become a true conglomerate and was rapidly expanding into any area of opportunity it found. Nothing was too off target for Amazon, which in this period operated in areas as diverse as air cargo, was working on developing delivery drones, and had a number of its own devices, including a Dash button that customers could push to repurchase consumer goods like detergent.
“Our biggest concern at the time that we invested was that Amazon could come up with a competing product,” one of the investors said.
Amazon relied on touting the firewall that the company had to assuage concerns. In this case, Alexa Fund representatives told co‑investors there is a firewall between the Alexa Fund and Amazon itself, the investor said.
Nucleus’s co‑founders had similar concerns about Amazon copying them and raised this to Alexa Fund leader Paul Bernard. He calmed the cofounders’ concerns about some troubling legalese they found in their contract for the deal. He told them it was just boilerplate language used in every Amazon contract and that Amazon wasn’t working on, nor did they plan to work on, anything similar to Nucleus’s product.
He was persuasive enough, and Nucleus’s cofounders signed on the dotted line. As a result of its investment, an Alexa Fund executive earned a board observer seat at the company and got access to Nucleus’s financials, strategic plans, and other proprietary information. It is not uncommon for venture capitalists to get board seats at firms they invest in, depending on the size of their investments.
Giving Amazon access
On the corporate development side of the business, where acquisitions were struck, Amazon had assembled a top-notch army of lawyers and former bankers to meet with hundreds of companies that could help Amazon expand further beyond its retail roots. Their job was to find the next big ideas, the ones the company couldn’t develop from within. It was a long-odds business. For every company they would acquire, like a Quidsi or Whole Foods, there were dozens more they would meet with and inspect, only to pass.
But it turns out even the passes weren’t always a loss.
Few passed up a meeting with Amazon, even skeptics. This gave the company unfettered access to the world’s most interesting and innovative companies. Under the auspices of potentially buying or investing in these companies, Amazon had detailed access to them, in the process scooping up proprietary information on their customers, financial reports, engineering, and underlying technology.
While the corporate development team snapped up companies like Zappos and video game company Twitch, and the Alexa Fund made investments in Ring doorbells, it also left a trail of burned entrepreneurs in its wake.
These companies were sometimes strung along for months, giving Amazon a wealth of information and roadmaps to their product and strategy. And then it happened again and again: Amazon would suddenly lose interest, only to turn up later with a competing product. Numerous founders described a pattern to me: they would meet with Amazon’s team for months and share proprietary information with the understanding that Amazon would possibly invest in them or buy them, only to experience the business world’s equivalent of ghosting a love interest on Tinder. Later, Amazon would issue a press release touting something eerily similar to what the founder shared with Amazon. And while founders have their own gripes about traditional venture capitalists, traditional VCs don’t launch their own companies and compete with startups.
“The diligence process is where everything goes horribly wrong,” said a former senior Alexa Fund employee. “Part of the mandate was to bring in internal experts from either inside of Alexa or inside AWS to do the diligence on a product, and the people that were doing that work were not part of the Alexa Fund. There was no reason for them to not use the info that they got. We’re bringing in people who have no incentive but to take your good ideas and use it on their teams and build their things.”
These entrepreneurs felt that both the Alexa Fund and Amazon’s massive corporate business development arm operated less in the fashion of typical dealmaking and more like a corporate espionage unit.
Eight months after starting their partnership, Amazon announced its Echo Show device, an Alexa-enabled video-chat device that did many of the same things as Nucleus’s product. The night before the announcement, an Amazon Alexa executive called one of the Nucleus cofounders with a heads up about the impending product announcement and ended with a contrite apology.
Nucleus’s founders and their investors were furious. One of the founders held a conference call with some investors to seek advice. He said there was no way his small company could compete against Amazon in the consumer space, and began brainstorming ways to pivot Nucleus’s product.
An Amazon spokeswoman said that the Alexa Fund told Nucleus about its plans for an Echo with a screen before taking a stake in the company. Several people on the Nucleus side of the deal disputed that claim. In fact, Nucleus had even spotted the clause in the contract before signing, and Amazon had told them not to worry, some of the people said; Amazon had no interest in building products that would compete with Nucleus, they were told.
Before Amazon created its copycat, the Nucleus device was sold at major retailers such as Home Depot, Lowe’s, and Best Buy. Once the Echo Show hit the market, those sales declined sharply and retailers stopped placing orders. Amazon was somehow selling its Echo Show for less than it even cost Nucleus to make theirs, making it impossible to compete. A few months after the Echo Show launched, Nucleus laid off half of its employees.
Nucleus threatened to sue Amazon. At a meeting with Amazon’s lawyers, Nucleus was given two options. “They said ‘If you sue, we will put the full weight of Amazon behind this, or you could settle,’” said a person familiar with the meeting. Nucleus chose to settle, with Amazon agreeing to pay Nucleus $5 million (a fraction of the $38 million valuation it once was worth) without admitting wrongdoing.
Nucleus reoriented its product to the healthcare market, where it has struggled to gain traction. “There was $15 million invested into it, but it will never be worth $15 million,” said one of the people.
Nucleus would hardly be the last of Amazon’s partners to feel it was abused in such a way. Amazon had gotten so big, and so smart about using the vast amounts of data it collected from its various arms, that it could predict and anticipate consumer needs; identify, create, or clone solutions to those needs; and destroy the very “partners”-turned-competition whose own work and labors supplied the consumer insights it needed to displace them—all under the guise of supporting them through what appeared to be a traditional venture capital firm.
“They are using market forces in a really Machiavellian way,” said Jeremy Levine, a partner at venture capital firm Bessemer Venture Partners. “It’s like they are not in any way, shape, or form the proverbial wolf in sheep’s clothing. They are a wolf in wolf’s clothing.”
Excerpted and adapted from THE EVERYTHING WAR by Dana Mattioli. Copyright © 2024 by Dana Mattioli. Used with permission of Little, Brown and Company, an imprint of Hachette Book Group. New York, NY. All rights reserved.