Episode 27 Special—A Conversation with Microsoft's Head of Strategic Investments Brian Schultz

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest Brian Schultz, Managing Director and Head of Strategic Investments at Microsoft, delve into the intricacies of corporate development and strategic investments. Schultz, who has a rich history with Microsoft and startup Ontella, discusses the balance between financial returns and strategic partnerships, emphasizing the need for empathy and understanding in corporate investment decisions. The conversation also touches on the evolution of Microsoft's investment strategies, the complexities of managing post-IPO stock, and the challenges startups face when seeking acquisitions or investments. Schultz highlights successful integrations like Outlook Mobile, and the episode concludes with a reflection on Silicon Valley's empathy gap, underscoring the societal impacts of technological advancements.

Summary Notes

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Acquired Podcast Introduction

  • Episode 27 of Acquired focuses on M&A at Microsoft.
  • The hosts are Ben Gilbert and David Rosenthal.
  • The guest is Brian Schultz, Managing Director and Head of Strategic Investments at Microsoft.
  • Brian Schultz has experience in corporate development and has also co-founded startups, providing a unique perspective on M&A.

"Welcome to episode 27 of acquired, the show about technology acquisitions and ipos. I'm Ben Gilbert."

Ben Gilbert introduces the podcast and the topic of the episode, which is technology acquisitions and IPOs.

"Today's episode is a discussion about M and A at Microsoft with Brian Schultz."

The quote sets the stage for the episode's focus on mergers and acquisitions (M&A) at Microsoft with guest Brian Schultz.

Brian Schultz's Background and Perspective

  • Brian Schultz started at Microsoft in 1999 in Corp Dev, left to co-found Ontella, and then returned to Microsoft.
  • His startup experience gave him empathy and insight into the challenges startups face, making him a better Corp Dev professional.
  • Schultz believes having diverse experiences is beneficial for both individuals in big companies and those in startups.
  • He contrasts the challenges of getting attention as a startup with the overwhelming number of stakeholders in big company M&A deals.

"Empathy, yeah. And having had to raise money and deal with these discussions that happen between strategic investors and acquirers, raise money and sell your company, all these things."

Brian Schultz discusses the importance of empathy gained from his startup experience, which helps him understand the negotiations and challenges faced by startups during fundraising and acquisition talks.

"I think having the diverse set of experiences is a great thing. And I wish more folks in Microsoft and other big companies as well as in startups had that empathy to be able to reach across the aisle."

Schultz emphasizes the value of having a range of experiences to foster empathy and improve communication and understanding between different types of businesses.

"You have 28 people on the call to do the acquisition of 25 people."

This quote illustrates the complexity and scale of M&A activities in large companies, where the number of internal stakeholders can exceed the size of the company being acquired.

M&A and Strategic Investments at Microsoft

  • The corporate development team at Microsoft manages the company's balance sheet activities, including acquisitions, investments, divestitures, and joint ventures.
  • Acquisitions and targets are typically identified by Microsoft's business groups, who have better market knowledge.
  • Most acquisitions are small and driven by product roadmaps to fill gaps or advance development.
  • Brian Schultz's startup experience has made him more aware of the practical aspects of building a business and the importance of keeping a clean cap table.

"The corporate development team within Microsoft sits under the CFO and we manage Microsoft's balance sheet activities."

Brian Schultz describes the role of Microsoft's corporate development team, highlighting their responsibility for overseeing significant financial transactions and strategic moves.

"Our product teams, they know their markets much better than we do."

The quote explains that product teams at Microsoft are the primary drivers for identifying potential acquisition targets due to their deep market knowledge.

"Most of our acquisitions tend to be much smaller and are really driven by those product roadmaps in terms of where there are holes and what they need to fill and where they're going."

Schultz clarifies that the majority of Microsoft's acquisitions are small and strategically aimed at enhancing product offerings based on identified needs within product roadmaps.

Evolution of Microsoft's Investment Strategy

  • Microsoft was highly active as an investor during the dot-com era, but the strategic returns did not align with expectations.
  • The company shifted to making strategic investments where they could deeply align with partners, such as the investment in Facebook.
  • The philosophy behind corporate investing at Microsoft is strategic, not financial; it is not about controlling a startup but about partnering and leveraging investments for strategic gains.
  • Employee compensation in corporate VC is based on the success of the operating company, not the success of the investments.

"We didn't really get the strategic return. And of course from a Microsoft perspective, despite having a nice balance sheet, our investors aren't investing in us as an investor, they're investing in us as an operating company who's delivering revenues and profits to our shareholders."

Brian Schultz discusses the shift in Microsoft's investment strategy, noting that the primary goal of investments is to support the company's operations and deliver value to shareholders, not just to generate investment returns.

"We own 5%, 2%, 10%, even 20%, even with a board seat of any given startup, we really don't have any control."

This quote highlights Microsoft's philosophy regarding minority investments in startups, acknowledging that such investments do not grant significant control or influence over the startup's operations.

"Wall street isn't evaluating the Microsoft share price based on how good you are as an investor."

Schultz remarks on the difference in expectations for operating companies versus investment firms, with Wall Street focusing on the core business performance of companies like Microsoft rather than their prowess as investors.

Strategic Investment Objectives

  • Strategic tie-ups and return on capital are often challenging to pursue simultaneously.
  • Setting valuation and being a "difficult" investor can lead to tough conversations, such as changing a CEO.
  • The role of a strategic investor is not typically to manage such hard transitions within a company.

"Right. If your objective is these really deep strategic tie ups and or a return on your capital, or both. Right. I mean, it's. It's kind of hard to do both at the same time."

This quote emphasizes the difficulty in achieving both deep strategic partnerships and financial returns simultaneously, highlighting the challenges that investors face when balancing these objectives.

The Role of Strategic Investors

  • Strategic investors must navigate complex conversations, including suggesting the sale of a company.
  • Clear objectives are crucial to avoid conflicts and maintain a good reputation among founders and technologists.
  • Reputation is critical and should not be compromised for investment returns.

"And it's why I think if you want to do strategic investing the right way, you have to be really clear on what your objectives are and why you're doing it, or you create lots of conflict and in many cases they can backfire."

The quote underlines the importance of having clear objectives in strategic investing to prevent conflicts and potential backlash that could harm an investor's reputation.

Microsoft Ventures and Investment Focus

  • Microsoft Ventures is an early-stage venture effort focusing on strategic partnerships within Microsoft's ecosystem.
  • The venture aims to establish relationships through equity checks and develop partnerships.
  • Investments are made selectively, with a focus on deepening existing partnerships and leveraging the ecosystem.

"And so Microsoft Ventures is out there looking for companies that are in generally our strategic partnership ecosystem and they're looking to establish those relationships, starting with that equity check and developing a relationship."

This quote describes the role of Microsoft Ventures in seeking out strategic partnerships and fostering relationships through investments, illustrating the venture's approach to integrating new companies into Microsoft's ecosystem.

Criteria for Strategic Investments

  • Strategic investments are evaluated based on technology integration, go-to-market strategies, and financial viability.
  • The focus is on impactful combinations of technology and market strategies that align with Microsoft's goals.
  • Financial soundness is also a key consideration in strategic investments.

"One is on the partnership side, is there a really interesting technology product integration between the two companies that makes this really interesting?"

The quote highlights the importance of technological and product integration as a primary criterion for strategic investments, reflecting Microsoft's approach to selecting companies that align with its strategic goals.

Balancing Investment and Strategic Goals

  • Microsoft's investment approach is cautious to avoid liabilities and focuses on meaningful and financially sound opportunities.
  • The company has a programmatic approach to investments, with a limited number of strategic investments each year.

"And so we do it where it's meaningful, where it makes sense, and where we think we're going to get a reasonable financial return that's risk based."

This quote reveals Microsoft's strategic and conservative investment philosophy, focusing on meaningful opportunities that are expected to yield reasonable, risk-adjusted financial returns.

  • The current market may be conducive for companies looking to sell rather than for acquisitions.
  • Technology funding cycles and startup growth stages influence M&A activity, with some companies reaching a point where selling becomes necessary.
  • Microsoft evaluates large company acquisitions continuously, with strategic fit being a key factor in the decision-making process.

"And so I think there's a lot of companies that are certainly looking to sell."

The quote suggests that market conditions have led to an increase in companies seeking to sell, which impacts the landscape of mergers and acquisitions.

Private Equity in the Software Market

  • The emergence of private equity in tech reflects the industry's maturity and the presence of cash-flow-positive legacy businesses.
  • Private equity can strip costs and manage mature software companies differently than public companies.
  • Microsoft has co-invested with private equity in some cases where there is a growth component and potential for a deep partnership.

"I think there are a lot of now mature software companies that have legacy businesses where you have nice cash flow."

This quote explains the rationale behind private equity's interest in technology companies, indicating that mature software companies with steady cash flows are attractive targets for leveraged buyouts.

Acquisition Strategy and Compatibility

  • Microsoft's acquisition strategy is product-driven, focusing on technology roadmaps and strategic integration.
  • The company is less interested in acquiring businesses that do not align with its product strategy.
  • Larger acquisitions, like LinkedIn, are exceptions where the acquired business is substantial enough to operate independently while still aligning strategically.

"We're here to grow our franchises and our products and really be a leading technology company."

The quote clarifies Microsoft's strategic intent behind acquisitions, which is to enhance and grow its technology products and franchises rather than simply acquiring profitable businesses.

Tax Structures and International Acquisitions

  • Microsoft is aware of the impact of regulatory and tax regimes on large international acquisitions.
  • Acquisitions like Skype had additional benefits due to being domiciled outside the US.
  • Changing corporate and foreign tax structures are considered in the context of large deals.

"Yeah, we're certainly always cognizant of the regulatory regimes and tax regimes."

The quote acknowledges that Microsoft takes into account regulatory and tax considerations when evaluating large international acquisitions, demonstrating the complexity of such deals.

Microsoft's Management of IP and Taxation

  • Microsoft must manage complex issues regarding intellectual property (IP) and taxes.
  • The company is not primarily focused on financial engineering, but it has to consider it due to the complexity of operations.
  • Deals are pursued based on strategic value rather than financial engineering, with examples including Skype and LinkedIn acquisitions.

"And again, these things get really complex in terms of where IP lives... And so again, it's a very complex issue that we certainly pay a lot of attention to."

This quote highlights the complexity of managing IP and tax strategies in a global business context, particularly for technology companies like Microsoft, which must navigate international laws and regulations.

Role of Tax Lawyers in Banking and M&A

  • Tax lawyers are integral to banking and M&A deals due to the complexity of tax laws.
  • They are part of the larger team involved in financial transactions.

"I was always amazed when I worked in banking, like, how many tax lawyers we had running around on every deal."

Taylor Barretta emphasizes the prevalence and importance of tax lawyers in banking, reflecting the intricate nature of tax considerations in financial deals.

Microsoft's M&A and Strategic Investment Functions

  • Microsoft engages in both mergers and acquisitions (M&A) and strategic investment activities.
  • Strategic investments are made for reasons that align with Microsoft's broader strategic goals.
  • Investments can lead to product integrations and partnerships that benefit both Microsoft and the invested company.

"Do you have any good examples of investments that Microsoft has made in the last few years that ended up becoming product integrations or like success stories for a business or some payoff with that strategic alignment?"

The host inquires about successful strategic investments by Microsoft that have led to product integrations, emphasizing the practical outcomes of strategic investment decisions.

Microsoft's Investment in Foursquare

  • Microsoft invested in Foursquare for its valuable location data.
  • The partnership resulted in the integration of Foursquare data into Microsoft products, such as Cortana.
  • Foursquare's business model evolved to license its data to other companies.

"If you look at, say, Foursquare, we made investment in Foursquare and we've developed a great partnership around their data and data asset that feeds into."

Brian Schultz provides an example of a strategic investment that led to a productive partnership, showcasing how Microsoft leverages external data to enhance its services.

Microsoft's Partnership with Docusign

  • Microsoft has a longstanding partnership with Docusign, integrating electronic signatures into Office 365.
  • The collaboration includes cross-selling and marketing efforts beneficial to both parties.
  • Microsoft participated in Docusign's last private funding round, reinforcing the partnership.

"And then if you look at Docusign, we had a different example, but we've had a great partnership with them going back many years in terms of how you could utilize our electronic signatures in office 365."

Brian Schultz discusses the integration of Docusign's electronic signature technology with Microsoft Office 365, illustrating a successful strategic partnership.

Microsoft's Investment and Partnership Philosophy

  • Microsoft aims to be a technology partner first, with investments being a secondary aspect.
  • Strategic investments often arise from existing partnerships with product teams.
  • The company avoids leading investment rounds and is not a primary funding source.

"We're first and foremost technology partners, and the commercial deals will speak for themselves."

Brian Schultz explains that Microsoft prioritizes technology partnerships and that commercial success is a key indicator of the viability of these relationships.

Building Relationships with Potential Acquirers

  • Startups should build relationships with potential acquirers well in advance of any acquisition talks.
  • Acquisitions are likened to hiring exercises, requiring trust and a good fit between companies.
  • Strong relationships at the product level can lead to powerful cross-selling opportunities.

"It's always a good idea to be developing those relationships with potential acquirers well in advance."

Brian Schultz advises startups to cultivate relationships with potential acquirers early on, suggesting that these connections are crucial for successful acquisitions.

Challenges of Startups and Investment Timing

  • Startups often face the challenge of securing funding or partnerships while managing financial constraints.
  • Microsoft's investment strategy is not to rescue companies in financial distress but to support strategic partnerships.
  • Startups should not rely on Microsoft as a primary funding source but focus on building product-level relationships.

"But if the running out of money thing is something that you're trying to avoid, I'm not usually a good call to make."

Brian Schultz acknowledges the financial challenges startups face but clarifies that Microsoft's strategic investments are not aimed at saving companies from financial difficulties.

Evaluating the Success of M&A

  • Microsoft assesses acquisitions based on predefined milestones and metrics.
  • Metrics may include employee retention, product shipment, integration success, and financial targets.
  • The evaluation process considers the dynamic nature of the technology industry and shifting objectives.

"We certainly do judge those over time and that's I think the closest we can get."

Brian Schultz describes how Microsoft evaluates the success of its acquisitions, using a set of established criteria to measure outcomes over time.

Microsoft's Evolving Acquisition Strategy

  • Microsoft's approach to acquisitions has evolved to empower acquired companies.
  • Successful acquisitions are integrated in a way that builds on their strengths and expands their scope.
  • Empowerment of acquired teams has led to successful products like Outlook Mobile.

"And so I think with the comply and with other companies we've acquired recently we've done that differently and we've taken those folks and empowered them."

Brian Schultz reflects on Microsoft's improved acquisition strategy, which now focuses on empowering acquired teams to continue their successful trajectories within the company.

Corporate Development and Strategic Investing Practices

  • Different companies adopt various models for corporate development and strategic investing.
  • Google has created a separate fund and team for its investments, aiming for a traditional VC approach.
  • The effectiveness of different models is judged over time, with strategic alignment being a key consideration.

"Google has taken the approach of creating a separate fund and a whole separate team and creating those walls and trying to create a real VC."

Brian Schultz comments on Google's distinct approach to corporate investing, setting up a separate entity similar to a venture capital firm.

Proliferation of Corporate Venture Capital (CVC)

  • The prevalence of corporate venture capital (CVC) is increasing, with various companies, including those outside the traditional tech sector, establishing their own venture arms.
  • CVCs have different incentives compared to traditional investors, focusing more on strategic benefits for their parent companies rather than purely financial gains.
  • Startups need to be cautious when partnering with CVCs to maintain flexibility and avoid potential conflicts of interest.
  • Some CVCs, like Qualcomm Ventures, Google, and Salesforce, have built strong reputations and have been successful in their venture efforts.

"Everybody's getting into the game, and I think that's going to be interesting to watch over time."

This quote highlights the growing trend of companies from various industries entering the venture capital space, which is changing the investment landscape.

"And so that's a hard thing to balance against the corporate entities."

This quote points out the challenge for startups when aligning with corporate entities due to differing objectives and the potential for conflicts of interest.

Snapchat's Potential IPO and Market Position

  • Snapchat's rumored IPO is noteworthy given its younger age compared to other "super unicorns" like Uber.
  • Snapchat's approach to business differs from its peers, and its potential IPO reflects its unique corporate strategy.
  • The company has achieved domestic scale and faces the challenge of expanding internationally, especially with competition from platforms like Instagram.
  • The discussion also touches on the potential impact of large shareholders, like Google Alphabet, when a company goes public.

"But with Snapchat, I continue to be impressed. And I'm a buy at any price."

This quote indicates strong confidence in Snapchat's potential and success, regardless of its market valuation.

"It'll be a very interesting S-1 to read, no matter what."

This quote suggests that Snapchat's S-1 filing will provide valuable insights into the company's business model and market strategy.

Post-IPO Strategies for Venture Capitalists and Strategic Investors

  • When a VC-backed company goes public, VCs do not necessarily sell all their shares immediately.
  • Decisions on when to sell, hold, or distribute shares to limited partners (LPs) are complex and strategic.
  • VC firms must consider the potential market impact of distributing shares to LPs, as a large influx of shares could depress the company's stock price.
  • The management of the VC firm, not the LPs, typically makes the decision on share distribution.

"We can distribute the shares directly to our investors so we can just give them the shares rather than selling on the open market."

This quote explains one of the options VC firms have post-IPO, highlighting the strategic considerations around share distribution.

Amazon Go and the Future of Retail

  • Amazon Go is an innovative grocery store concept that eliminates the need for checkout lines by using AI and scanners to track purchases.
  • The store is a testament to Amazon's commitment to experimentation and innovation within the retail space.
  • The technology could potentially address the issue of shoplifting and be desirable to other retailers if it proves successful.
  • The implications of such technology on traditional retail jobs and shoplifting prevention are also discussed.

"I'm excited to go buy stuff and walk out and see what happens."

This quote conveys enthusiasm for the novel shopping experience offered by Amazon Go and its potential to change retail.

Impact of Technology on Society and the Empathy Gap

  • The tech industry is encouraged to consider the broader societal impact of its innovations, particularly in light of job displacement and cultural changes.
  • The discussion includes the potential consequences of emerging technologies like AI and self-driving trucks on employment.
  • An article by O'Mallek in the New Yorker titled "Silicon Valley has an empathy vacuum" is recommended as a thought-provoking piece on the subject.

"Silicon Valley has an empathy vacuum."

This quote, referencing the title of the article, suggests that the tech industry may lack consideration for the societal implications of its advancements.

Crusoe and AI Workloads

  • Crusoe is a cloud provider that specializes in AI workloads, partnering with Nvidia and utilizing stranded or clean energy for their data centers.
  • The company's model offers cost savings and environmental benefits due to its use of energy that would otherwise go to waste.
  • Crusoe's approach contrasts with other cloud providers who need to be located near major internet hubs, as they handle a broader range of services.

"Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy."

This quote summarizes Crusoe's unique selling proposition, combining specialized AI infrastructure with an environmentally conscious energy strategy.

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