Episode 27: Special—A Conversation with Microsoft's Head of Strategic Investments Brian Schultz
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Welcome to epo de twenty seven of acquired the show about technology acquisitions and ipos.

I'm been gilbert.

i'm David, and we are your hosts. Today's episode is a discussion about ema at microsoft with brian schult.

Brian is the managing director and head of strategic investments at microsoft. And brian actually started at microsoft in nineteen and ninety nine in cork div ah and then left a little detour into the start of world in the mid of two thousands.

He left and cofounded antella here in seattle um which was ultimately acquired by photo bucket uh and he did that with the entire o who's now the cofounder and C O of glove d turn town shout out then um after that he came back to big tech and to ma uh to microsoft and has been back in corp dev and now runnings strategic investments ever since but remains very active in the seattle start up. Seen and has been a friend us and many others here. So welcome, brian, and thanks for joining us.

Thanks for happening. Yeah yeah we are um super excited to you know we've had we've had Taylor berta from adobe on who runs a dobie corp. Dev um but super excited to talk to you about kind of the bridging this world between kind of the big technology companies and running corporate there and treated investments but actually haven't gone and founded to start up yourself um how you know what's your perspective? What kind of brought you back in the microsoft after tasting the start .

of world right? Well, there's I think, a whole bunch of different ways to look at IT and and you know the one thing that I I certainly believe that I actually has made me a Better crop def person by far having been on the other side well, you to talk about empathy and yeah and having you have to raise money and deal with these discussions that that happened between strategic acquire money and the company, all these things things.

And so you're just having and the as A C F O C O of a startup having been on the other side, both out of the investing in acquiring side also, I think I hope have waited a lot of pitfalls and kept my capable clean. I knew a lot of things that I should be doing that I think a lot of folks can get trapped in. Um and so I think having the the diverse set of experiences is a great thing.

And I wish more in micros, other big companies as well as and starts had had that empathy to be able to reach across the isle. Um of course, now we're getting to politics and didn't need to do that. But going back .

election this year.

I I don't know what you're blocked completely blocked。 You know one good example is, is in a start up, of course, you have trouble getting people to call you back. You want to do partnerships, you want to to do fundraising, whatever is.

So you're just out there trying to make yourself know and and actually do things. Where is in the big company? Almost the opposite problem. We have too many people have to do that. And so thinking specifically about M A ah you know I acquired a company a few years ago, uh that was about twenty five people and I remember looking at the conference call um you'll set up on my computer said you have twenty eight people on the call so to do the acquisition of twenty five people I was talking to twenty of people.

Was that just an internal mice?

Just an internal right? If you think about all the business owners plus their lawyers in an outside of the company um and is just it's a effort now, of course, the that that doesn't quite scale, right. And so even doing so acquired of links and you don't nessy have a much .

bigger team .

on the inside with the hopefully not.

So you you're the head of strategic investments to give a little bit of context to our listeners, can you explain what that um looks like organisationally inside of microsoft and what the process looks like when when you requiring a company like do find the company and bring IT in? Or does a business owners find the company and then loop you in to start the actual formal process? How how does that look?

The corporate development team um with a microsoft sits under the CFO uh and we managed microsoft baLances sheet activities. And so you think about acquisitions, investments, investitures and joint ventures when we do these partnership h activities as IT relates to the baLances, that's where corporate development gets involved um and the how we find companies or or find our targets and and have these discussions ah this really is a mix, although it's typically driven buyer business groups in terms of for the finding of the companies.

And that is because our product teams, they know they know their markets much Better than we do and certain ly at microsoft, we have such a broad base business in so many different areas that would be really difficult for the central team to be all knowing any space. Well, yeah, I mean, I know you guys obvious ly have these maps of of different spaces and is constantly evolving. You have new players coming on board and in any given little micro area, you might have ten, fifteen, one hundred companies, right? And so if you think about that at the microsoft ale cross slb a products, you you be looking at really complex a diagram and so is really impossible for central team to keep up with all that.

And so we really rely on the business groups um to think about what's in their space uh, as they think about their road maps uh and most of the ema, obviously the the headlines go to linked in in the large size acquisitions we do. But but most of our acquisitions tend to be much smaller um and are really driven by those product road maps in terms of of where they are holes and and what they need to fill and where where they're going. And so those are really just square up the center of of where the product teams are thinking.

Yeah, i'm curious gonna go back to the fact that you have to actually been a founder and a start up and a successful one, raise money and then was acquired and and then did emini microsoft before and then came back to do IT again.

How did IT change your perspective? Vely are there particular things that you're more acutely aware of now or that you think about differently than before? And because when you join before, I think you've been an investment becking analyst, right? Many folks who come in the ema rules that companies happen, which speaking from experience myself, that's pretty far from actually being a founder of a startup. So how the perspective change?

Yeah when I got to microsoft, even when I was doing investment banking, I was thinking, uh, no, it's you're almost too removed from what's actually happening on the ground. And in terms of doing something, you're kind of advising moving things around the chess board, but you're not actually doing anything producing any, building the chest pieces. exactly.

And so know about banking is why I joined microsoft. I thought I, I, I really want to get into Operating role in a company. And that seemed like a good path to do IT.

And this was in back in nineteen ninety nine, right at the height of the dot combo m. Everything was was kind of go in a little crazy. And my thought of the time was this is going to end somewhat soon, most likely.

And I want to go get myself positioned in a place where or I could actually you still have a job in a year and actually yeah actually learn something from IT. And and so that's where that microsoft job seemed really appealing. I never been to seattle and hadn't really thought too much about about coming here to do that.

But but IT worked out nicely and we were super active in those early days. Um and then and then I got here and did did a lot of fun things and actually helps create internal start up. At the time, I was advising the windows in our kind of infrastructure teams, enterprise teams on uh security storage management and in those types of systems. And we started the security business group back then join that became windows defender.

eventually became offender and .

a how much of other things, you know, when the first things we did was acquire at the time. And I spy spire and I virus technologies and and roll those in along themselves that we built. And so I joined the start up group and and realized, I really like this start up thing, but doing with a microsoft was was not quite put what I had mind. And really I saw, you know, the person because of that and thought I would be really great to go and and actually do IT for real.

And actually there was a company I I go found before antella uh which was had the time known as genocide and then became places s biosystems ah and there was a microsoft founder that that I met and we went to raise money for that company um and then I left that company after about a year after we got a funded enjoying up with down and Charles where we founded on teller ah and and so yeah kind of that pathway and what I realized was kind of taking the the business knowledge and the crop of knowledge which is a general finance and business and strategy thinking um and work with some really great technical and product folks. I was really a nice a nice combination. And so that was kind of that rule that I took on kind of founder and then evolving into A C F O C O O.

I'm curiously kind of getting into your specific role, of which I seem probit takes much, if not most of your time these days in in the investment side. How does that function at microsoft and how microsoft just we launched microsoft venters, which is early stage investing. Can a more traditional V C type stuff you do later stage larger checks, right?

Yeah and and that's actually probably gone through more of a significant evolution than the the core M A role has in those three epics. So you kind of in that duck calm time frame, a microsoft was very activist and investor uh and and in those days, every company was going public know year after they were founded a .

and the series be around was your IPO .

pretty much and and what was commonly accepted as as one requirement of your IPO IT wasn't revenue, but IT was actually having a strategic investor. And so you're of the name brands of your investors a lent a lot of strength IPO and without anything else when the number .

one VC question was, what are you going to do when microsoft is your space?

That's right. And and so you know cisco, microsoft and you kind of the big companies at the time, we're investing a law in a lot of different startups. Um and we were also investing me was a really interesting time um in terms of influence and how the world was going to uh play out.

And so we are investing in undersea fiber cables and satellite companies and cable companies. Tell goes and to get sell coming, you name IT. Um and so we're really spreading around a lot of money um and and that didn't end so well.

Um you know we we didn't really get the strategic return. And and of course, from a microsoft perspective, uh despite having uh a nice baLance sheet, our investors aren't investing in osama investor, they are investing in osa is an Operating company. He's delivering revenues and profits to to our shareholders.

And so you know even if you take a billion dollars of baLance sheet and turn them into two billion, three million, five billion, you know, IT IT doesn't really impact your stock Price in the same way is doubling, tripling revenue and and and profit. And so we we we weren't. So the reason to do IT was was really strategic reasons of how are you going to take those investments and turn that to leverage plays on increasing revenue and and and profit for the company.

And that didn't really happen. Uh, and and so we we really stop doing IT for the most part throughout the two thousands. And and I think one notable exception was a facebook back in two thousand. And so what we did do is we said where it's really, really deeply strategic will go out and will do an investment and that's what we did in facebook 的 case， uh, but otherwise, we weren't really doing this of, hey, we'll put some money into baLance gy, where a partner or why not kind .

of the quick side bar in the facebook investment at the time. The world thought you guys .

were crazy .

right now.

The last have been done at five, five billion. And so we took IT up to fifteen. And yeah, they certain ridiculous time after hindside, okay.

time.

And when I was that that began um or this was this was after the investment. But um there was a lot of integrations like the companies were very friendly with each other. There was when windows phone was kind of um uh doing a lot of things differently than IOS and a android we're doing and um kind of like integrating across networks.

There was a lot of like um kind of proprietary first party type integration with with facebook at in the contact and providing being back to them for mapping things. And there there was like a very tight integration there. Second, I can totally see you are talking about on the strategic side.

Yeah and and that was exactly the case, right? Where we could really deeply line with with the a partner and and do the investment you create this full when win scenario. I think coming back to to investments, um you know they are often talked about as a either or if you can acquire us or you can invest in us. And and I don't really think they Operate that way as really substitute goods uh because you know as a .

as a minority, completely speaking as a shareholder and lots of startups, yeah, it's very different if you know you create an exit for the company versus just put more money into the company.

that's absolutely right. And and if you think about again, coming back to the strategic angle of the um you know if we own you know five percent, two percent, ten percent, even twenty percent, even with a board seat of any given start up, uh, we really don't have any control uh and and we don't really have really anything you know yes, you have some equity and that's obviously nice. But again, that's not really what we're here for.

We're here to to be part on street is in compensate. Is this way all street isn't evaluating the microsoft share Prices based on how good you are as an investor?

That's absolutely correct. Yeah that's a fascinating um taking a step back for a listeners and thinking about um how we Normally uh evaluate companies on these episodes being an lp or let's say your event ual capital firm and you have lps, the pressure on you and the expectation is very different than being an Operate in company with shareholders like that. there.

The shareholders are looking for multiples that come from um your your Operations and your ability to um execute core business activities in a sustainable way. And when L P are are in the fund, you know there in IT for ten years, they're looking for three years. Three times are so that the, uh, capital that they put in hopefully more.

But really, it's like can you guys sustainably make these investments? And I think as an Operating company, this is not to your point, IT doesn't move the share Price. It's not that just .

business this right from from an employee. Perfect me. Take this all way down to the individual practitioners in any given corporate fund.

And again, you can, for any of you who are talking to different corporate investors, you know ask them how they can compensate, right? And most likely if it's your typical corporate c um and it's a baLance sheet activity, their their employees of the company, right and their compensations going to come in new shares and bonus's and salary a from the Operations of that company. It's not coming from you know whether or not you succeed or as abc a VC investors in a different place. And so that's why you think you have to be really careful in this world of strategic investing coming back to why we do IT.

yeah. So with all that context and having done IT in the past and realized IT didn't work, how what's the philosophy this time around?

Yeah and when you say IT doesn't work, I think you have to be careful in terms of work to do what, right? And so if your objective is, is this really deep strategic tie s and or return on your capital or both, right? I may think it's it's kind of hard to do both at the same time.

And and you think about setting valuation and being a difficult um you investor, sometimes you have have hard conversations uh as an investor with with your your companies and and you think about obviously hardest one that the board might have to do, which is changing out A C E O um U S. A partner is a strategic investor. We're not good at that. I think we we we certainly don't want to ever have to turn to our partner and say here, by the way, um you you you found you co you you're not right for this company anymore as an investor.

We are also the whole set of difficult conversations that come along with the united stor in companies. But no one in particular i'm thinking about is a hey, now is actually the right time to .

sell company to sell the company to to fold the company as well.

then that's right now.

And so there's a lot of conflict there and and it's why you think if if you want to do strategic investing the right way, you have to be really clear and what you objectives are and why you're doing IT or or you create lots of conflict.

And in many cases, they can back fire and certainly something we want to be very cogers of is our reputation among investors, among founders and and technologists is as we never we never want to damage our reputation as a good partners, as a good technology company. Uh in order to achieve those investment returns. Um because obviously that's that's pending wise panful lish for us.

So would you say that effort is more around creating like strategic partnerships through investment rather than investment to generate returns? Well, so it's it's the .

way we've scoped IT and there's actually too components to this. One of them is is relatively new, which as a earlier this year, we created microsoft enters uh, which is an early stage efforts. Um and so I just have entries is out there looking for um companies that are in in in generally our strategic particular system and they're looking to establish our relationships, uh, starting with that with that equity check in and developing a relationship. Uh and so they are out they're looking on the calm of sing a crap logy.

And so you know the fact is that the early stage you know of your seed, your a type stage uh investment, it's it's hard to be a meaningful strategic partner to microsoft because our scale right IT is really hard to do ah now you can be a potentially really interesting tragic partner. Uh and so that's what microsoft rest is there to do, which is to create those relationships and those opportunities and and be in those conversations around um around how we can now value to two companies. In some cases as onna come with that equity checking that a partnership in some cases, uh you know come just from the partnership.

But there are there to have those conversations uh on on my side of the house, uh, it's almost the opposite where i'm leaning into companies that are already microsoft partners and and that are deep, meaningful ones. Uh, and it's it's we're doing called five years, ten of them a year uh, and it's really more of an endorsement in ecosystem average and entitling that relationship um as opposed to you're trying to find new and interesting partner ship opportunities. And so that's why i'm i'm more of a growth investor fuel because these companies tend to be a bigger animal mature.

Are these companies like like for instance, that might be selling through the microsoft sales force on the enterprise side?

yes. And and so we typically look at the obviously have lots of partners um and and those partnerships. H when I look at a tragic investment, really three three criteria at its core. One is, uh, on the partnership side, uh, is there really interesting your technology product integration, uh, between the two companies that makes this really interesting.

Uh, and then the second piece is there is some sort of good to market sales marketing motion, uh, that makes the accommodation the partnership powerful and where I find really interesting uh, components of both, right? Because there are plenty of companies I have one or the other. But when you find a really, really impactful combination of those two things, uh, that's where IT is more interesting as a strategic investment. And the last part, the third part is easy to get investment. And and just like any kind of growth, investor will moderate portfolio based on expected returns and make financially sound investments in those meaningful partners.

As as I have to imagine, as much as wall street won't reward you for being a great investor and amy hood, microsoft F I might punish you for being a bad investor.

Yeah exactly. And so yeah, that's again why um why we we tend you not to to do this in a hugely active way. I'm not out there spring billion of dollars of value money around because that, that really just creates a hugely ability.

We do IT you know where is meaningful, where that makes sense and where we think we're going to get a reasonable financial return as repeat. And so over the last two years, since we done started doing this in a programatic way, we've done about sixteen investments investing about two hundred fifty million on on the side of the house on the growth side. Um in microsoft, Chris has a separate portfolio aging.

That's a great transition. We we want us moving into talking about the state of the eminent market right now at large. And uh um you talking about uh, number of deals is a great segway into why have we seen so much deal activity this year, both large and .

small and and the largest of which being obviously you great.

Well, yeah in those again, you know as we look at am a, they are they are different and and were always looking for great opportunities for us to grow. And and so are the question of a those large companies, uh, we're always evaluating everything, right? And the thing with the large companies, they tend not to be suddenly found opportunity.

We do we know about linton, we know they're there. You we know where all these other companies are. We know who they are.

And and and and so you know those are always being evaluated and obviously, you something happens whether you know something flips between here day one and day two or we decide and that's the time to to acquire type. Now is the time to acquire linkin. Um and you know that there's all bunch of things that go into that.

Uh and in terms of your you're asking about the trends right now, um you I wouldn't say that there's anything on our side of the house um that, that makes us a Better time, more exciting time to acquire. I say almost on the opposite side, where might be a really good time to sell. And so there's a lot more companies that are trying to market themselves in that way.

And if you think about the the technology cycle um and you kind of how things get funded and how technology moves and waves ah and and how startups get funded, uh there's certainly lot of companies that are you coming to be a no man's land in terms of their growth rills up to the last round round into their ability to raise more money and and really kind of reach escape of all city into independent land, if you will. Um and so I think there's a lot of companies that are certainly looking to sell. Do you .

think that's motivating? Let's zoom out for microsoft and look at the industry large. That's motivating why so many deals are getting done because companies are so much Better marketing themselves .

as as a great pickup yeah an earth Better marketing themselves. But they need to they need to be right. If your next funding right isn't get to come, you've got to do something. You get to fun through cash for you to fun through investment. And if you can't raise your revenues enough for ult, if you're burn and if you can't investment, he really have one .

choice .

to well, yes, good first point. I think about the company is actually have something right. And so there will be a Price um for companies that actually something right. So I am .

curious on that front. The fact of life and startups is unfortunately more companies than not end up in that situation. Um you know where they built something, they built a product, it's getting usage, they have a revenue, but it's either um not gonna get to a scale where they can cover their burn.

And thus, the company has faced the prospect of going out of business or we see this plan at times too, the business growth to a certain scale IT becomes profitable, but then the growth just stalls and you realized you're not onna. Get to a point where you could be a standard on independent company. I'm curious for you guys is like you probably see these companies you know many times a week. Um how do you think about whether they make sense, whether an asset like that makes sense for you?

Yeah well, IT IT goes back to time but earlier in terms of whose driving that decision and and it's you again, different comes are different here, right? And so we are typically a product of an company when IT comes to m comes to our business generally. And so we're not out there looking to assemble in of business conglomerate sense and amalgamation of random of our companies.

Uh, and so you could certainly have that kind of business right where you go out and find interesting soft companies that then you can, through centuries of of overhead and sales and other things, can can make good money at. We're not really in that game. We're here to to grow our our franchise in our products and really be a leading technology company.

And so we're looking uh really at our technology road um and and saying where things need to fit in, which is partly why we're less of that opportunistic buyer that's out there kind of just buying companies that, that have you're fall, fAllen in Angels, if you will. Now there are still plenty of following Angels that we that are interesting to us but you know but more or two things are different. Yes, it's really into the road map and the two things intersect where you have a fAllen Angel that's on a road map.

That's where things get exciting for us. Um and you know the other piece of that again from a microsoft specter is we're typically ally not looking to acquire businesses. We are typically looking to acquire teams and and products and technologies. Um and again, thinking about that road map piece were holders on the road map. Um we we sell the office suite um and so where things can plug into that, that's great. But if acquiring a business, uh you know sometimes that's often times it's incompatible with with selling as the sweet ah and so in some cases is actually having a large sales force and a large business could be actually value destructive a relative to how we think about things. And so there's companies that are great, but because they have such infrastructure, very much money that IT actually takes IT out of our our ability really find any interesting your intersection of of deal value relative to what they need and want to self are.

well, well, that's faster to think about the the conflicts there because we listen to the show who a kind of listen to our are more classic and analyze a single acquisition episodes will remember that we we analyze whether a acquisition was technology, product, business line, people, asset or other. And we've got these kind of categories.

And it's interesting to think about if it's a business line that can't be incompatible with the existing business line of the the acquire. If the acquire is not looking to create a conglomerate right love of like separate and potentially even competitive businesses under the same management structure. So for you guys I did when we did the link in episode, we are looking at um you know I can can ax multiple of revenue that that lincoln was acquired for. And we are like, you know it's actually a pretty good business on its own even if there aren't a lot of energies and integrations. And it's interesting to think about like you you sort of pushing back on that notion of like, no, we don't just buy businesses because are good businesses and like we hope to cash flow them for long time is actually a strategic and integration and they have to be compatible .

with that are existing business, right? No, I B C. And this one of the reasons you know you look at the larger businesses we buy, you like a yma, like moya on the mine raft side or like linked. And um you generally to make those deals work, you're generally not going to destroy their business. So if you have enough critical mass and that makes sense on the street to exide, that's it's a different game to um and so you all these things do fit together and every deals different. Um but yeah, i'm just saying on the whole, when we're thinking about these things and those are of the the things week think about and consider is how does that business play? Is he said with the action business, is that something that we value or something .

that we do? More things that are these topics growth and sort of the the road map and strategic imperative for microsoft at the opposite into the spectrum trend that emerged or reemerged in twenty sixty. And i'm curious you're take on and whether you talk to these guys is the the appearance of private equity in the um in the software market uh and sort of the p fueled or p LED biot of software companies.

Um how much you know in in many ways that's the exact opposite of what you're talking about. That is the if if if not， in some cases, an attempt to create a clamp multiple software companies together but in other cases just um you know hey, we're we're just going to take this private solo for its own business line. Um why do you think we've seen that emerge? Because traditionally P E has shed far away from technology.

These are typically not cash for passive companies. You can put dead on them. Um what's changed? Well.

I think I think that has changed. I think there are a lot of now mature um software companies that have legacy businesses, uh, where where you have nice cash.

And if you think about your typical technology companies business where a lot of money goes to R N D, because I always trying to grow and chase the next next generation, if you strip at all that cost in some case that you can have a really nice, nice profile business because the marginal cost of the cost of cost of selling IT um where you find that that right um that right model where where if you strip out a lot of cost from the business and you you think you have this pretty solid revenue stream from customers that that even if you don't invest is just going to fade out over time. Um you can actually have some really nice traditional looking L B S. Uh and so we've certainly seen that those those are always so exciting to us.

Uh but we we actually have co invested a with some private action firms in a few of these take private or albs or 2 settlings uh and and the one that was announced， a informatica or premier brought them ah and we we invested in that. And and what's actually exciting about that one is there is a component of that business um that is legacy, but there's also a really good growth component to IT, uh, which is what is so exciting, ted. And the opportunity to really go deep in a partnership with them was what got a succeed about the partnership and the and the investment and of on the quarter quarter basis, uh sitting under a public company in street mentality of managing that, it's often hard for them to really make the hard decisions and the both the cuts as well as the investments uh that they need to make to kind of modernize that company.

And so in many cases, it's Better suited in a private private equity based um format. And so. That can actually be really interesting and really exciting. There are certainly lot of those businesses that are that are out there.

I just want to highlight request for listeners because I, I, I just GLE that lbs are leverage bio, sorry.

yes, no.

no problem at all. It's something we've .

got a good mix of like .

product and an engineering types that was into the show as well as people that are kind of much more versed in the the corporate development .

and financial world. And I tend to perhaps over index on being a recovering investment banker myself. I just imagine everybody knows these things. But yeah and typically, you know the reason we're talking about this is it's only been very recently that private actually firms in lbs have really started paying attention. Attack brian, for really reasons you are saying that the industry is matured um but typically these these firms would buy you like you hints catch up right the types of things the picture half way would buy.

Yeah and actually ea is back when I was investment banker um that silver lake uh which I think was the first true private equity traditional private equity tech focused firm was formed and I remember meeting with them thin you know how odd right? Really these two models les are somewhat incompatible but certain ly over time and being the first they were they able able to create a really nice business to to go in and take that traditional private equity model um to attack another old bunch other folks that playing this space as well.

Yes yeah I think in quite short order I forget IT maybe two years they three x skype before before selling a very .

soft yeah which obvious than that was A A A take bile that you played the on on the other side.

you right this is actually a pretty good uh segway. So on the skype episode, we talked a lot about um the the implications having a lot of cash overseas and that um you know the skype was actually a really great way to to deploy some of that capital um because he would have a pretty heavy tax burden attempting to repeated. And so the question for you is are are potentially changing IT in foreign tax structures on your .

mind as you think about large deals? Um yeah where we're certainly always cognizant of the regulatory regimes and to tax regimes. Um you most of these larger acquisitions, um you have A A large and complex international component to IT um which means were dealing with that anyway, you even at the kind of more Operating internal level of any given your company.

If you look um yeah at sky, if you look at linked and if you look at the home unch, they all have pretty complex Operations. Ah you ve got ta think about um you know skype of course happen to be domicile not in the us. Uh and so that was certainly a nice benefit that we were certainly aware of.

Uh but you know these things are are always changing. You think about from the microsoft overall planning perspective of how we manage those environments. Um he really has to sit within or overall management.

And again, he thinks that really complex and to where I P lives, you know apple and others have been in the news a lot lately in terms of of how they do those transfers of tech uh and how that creates or avoids are or distribute their taxes in different ways. Uh and so again, it's it's a very complex issue that we certainly pay a lot of attention to. Again, I wouldn't say that going back to to why we why you do m day in the first place.

Uh, we we certainly aren't financial engineers as a as a business, uh, and so were always looking out for the right strategic thing. And if that deal happens to be sky pets, best of the U S. Or if that deal happens to be linked in the base here in the us, um no, we go to the right deal um so me we can come up with the right new terms and structures that that makes the deal work um and so we were not out there to be financial engineers. So that's certainly a part of what we have to do. I just given the the complexity of the Operations.

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

But certainly part of those twenty eight people I discuss early .

yeah in thinking about sort of the two different functions. There's ema activity when microsoft acquires companies and then there is strategic investment activity, which is what um we've been talking a lot about on this episode where you choose to deploy a capital into someone for for strategic reasons. Do any good examples of a investments that that microsoft has made in the last few years that um you know ended up becoming product integrations or like uh success stories for a business or some pay off with .

that strategic alignment? Un pay off in terms of maybe like .

you made the the strategic investment and then there was something in the product in the ensuing years, either on on the microsoft side or on that that company company side to um that advantage of the the sort of strategic um alignment between the companies.

Yeah share me. We can look at a couple of examples in the recent past that i've been um been involved with. Um if you look at a square, um we made investment for square and and we've helped a great partners around their data h and data asset um the the feeds into garta a interesting so that um yeah that that's uh pretty cool. If you look at the a dog sign.

what is that like with with four square? Is that like when when people ask cortona about um what's a good place to eat and its surfaces? Recommendations from force are data or yeah I think .

force was one of the sets of data that that we leverage in that case. Yet I am we certainly have our own data as well. When we pull data from multiple sources, are has a great .

set of a gets used in all sorts of location use cases that aren't even related to know and in fact.

recommendations of a prototype for them doing that kind of deal. And now they've basically critical business out of licensing, just part of our investment thesis in in that company. Um and then if you look at dark sign um and we had a um the different example, but we've had a great partnership with them going back many years um in terms of how you can utilize our electronic signatures in office three sixty five ah there are some good selling and marketing motions to go along with that as well that go in both directions. And we participated in their their last private round as well long after the part nerves itself had come to be. And then if you look at a more recent one, which is messed here, the container space and and we're doing whole bunch of interesting things, both of them and and the other container players and and we really like that partnership as well, both on the technical and and go to markets.

The ed you ever see any sort of conflict arrived. You want to uh be horrors on all and participate with everyone. Kind of you say it's all the container uh players um in a very democratic and open way and yet you have this strategic bet that you've placed on one of them.

We certainly do. I mean, we obvious ly depends on the space in terms of of how democratic you want to be, if you will. But again, what we're first, some for our most technology partners and and and the commercial deals to speak for themselves.

And so we are going to go and and do some sort of exclusive or some I exclusive, whether be you kind of imployed or or purpose executives ity in any given area know the commercial partnership and and how we do that and talk about IT will will mention that and the investment is is going to separate a separate um and so one good example there would be if you look at a kind of cloud flair that we invested in, um you know they actually uh you're doing what they do. They need to be and want to be kind of a neutral party uh and and to do that and to hammer home was actually interesting approach by that co founder to use his investment round as a way to reinforce that message of neutrality. And so he got by do us qual com and google all the co invest together in the same round. And and and so you know, you can use these investments as as tools. Again, given the the right commercial partnership, we certainly know clums with those guys as as investors.

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good a time to jump to um we discuss with with tailor at a dobe when we had with him a few months ago kind of what the right way was for startups to you build a relationship over time with potential inquiries and he really stressed the importance of that. IT is a relationship. You know don't expect that you're just going to call up, you know potential acquire one day and have a deal done you know by the next week. Um but i'm curious on the investing front, you know for you guys, I was have different companies, have different policies on this and approaches to strategic investments. But but what's the what's the best way for an earlier next stage company to start building that relationship with with microsoft?

Yeah and I think you piling on with the with the top guys on that IT is amusing unamusing sometimes wear we will get these calls and ah we have a term sheet and hand from x would you like to it's also put in a bit let us know within the next week to be acquired, right? And and that's it's generally not very production and that IT is indeed relationship.

And the thing to think about is the start of founders is um getting acquired is is almost like going through a hiring exercise. And you do to develop relationship and trust. And essentially, the quiring entity is indeed making a hiring decision on the company is also the specific people.

And so you don't have A A relationship in place. Um it's really hard to speed that through in a rapid way. And so it's it's always a good idea to be developing. Those relationships with potential requires well in advance. And that leads into what I will say on the investing side, which is certainly the strategic investing site for me.

All those roads lead through partnership anyway um and so you need to have that dialogue with us on the partnership side with the product teams yeah with the business units and and the product teams um you to get those partners PS in place uh, long before I could potentially investment. And so that's that's really the best way to do. And i'm always happy to to help get folks set up with the right focus and microsoft if they don't have a path and otherwise.

But but that's that's really what has to start. And certainly then as those conversations are going up to then have a separate parallel relationship development with with my team is certain ly not a bad thing. But you know in person for most were technology partner of the investing thing is really second or IT everything we do.

So if if there's limited resources and given inside, I won't I wouldn't ther with me as to me to say uu and really focus on those strong relationships on the product level. It's it's also more leverage for them. I mean, they can get a situation where cross selling motions, I need microsoft to field and and sales team as is really powerful and accidentally ly seen a lot of start, get a lot of leverage from that if you can make that work that is really impacted to to a small company.

Yeah and it's fly as we anybody who's in the start of world knows, IT always just happens to work out at any time that you're very close to a major milestone, whether be cementing a partnership with somebody like a microsoft T A sales milestone also just happens to be when you're running out of money and founders are tearing their hair out trying to baLance the two of them .

yeah I mean it's and I know I don't mean to make light of that really difficile chAllenge and I been there. So one philosopher, those are going back again um to to investing approach um you we're not looking to make companies or make grounds, uh, except in those really uh rare cases like the facebook investment. And so we tend not to lead rounds and and we tend to just put a little bit of money.

And I mean, again, we're not looking to be the primary funding source here in any given round ordeal company. And so we're not we're not you're typical investor. We're not going to jump in and save a company of the running out of money.

Uh, and so we're the wrong folks to a to rely on, you know on that basis, uh, anyway. And so the relationship can certainly be very helpful. And and both on the M N. A front and the investment front for for us to have that dialogue is always a good thing. But if if the running out of money thing is, is something that you're trying to avoid, that is usually not i'm .

not usually a good problem. yes.

Well, well, jumping back over to the M N A side of the house, one of the theses at this show when we first set out was to figure out what makes acquisition successful. And selfishly so the David ni can really understand how to build companies that will become um successfully acquired and will fit into another business. Or more recently, we will actually have a successful IPO process.

We realized that we are selling ourselves short, but our ambition sort right in.

In that vein, i'm very curious how are on the ema side of the house at microsoft, do you judge acquisitions? And do you decide if if this worked out well and we are glad that we did this five, ten years later?

Yeah, we certainly do. Um it's a really hard thing to do. And of course, the chAllenge there is that the destination is often changing as you're going through the process. And certainly tech two, five years hind sight was things look a lot different, maybe ten good initially. yeah.

And so it's really is really difficult to think about how to judgin acquisition and and whether successful or not um on any really rigorous way in in tech know that said, we certainly try. And so with any given acquisition will have a set of agreed um judged milestones metrics um in various criteria which which usually include retention. Are all the folks some folks of the the acquired company is still here, know six months, one year, two years later um are they happy?

Um you know, have we ship dex Y Z product or feature? Have we done you A B N C integration? Have we know pick you the revenue targets or private targets? There are some sort of accelerated know either schedules or univocal for some product feature.

We have you know pick your set of things that form the basis for why we went to do to deal and and and we lay that all out, uh, and we cement that and and then we do track that and then the owner, someone to microsoft owns that. Someone in the product team, uh product teams owns that, that team and and signed up for either that revenue. The features are our retention or whatever is ah and so we certainly to um you judge those over time uh and that I think the closest we can get.

And again, even with that, we have to be coders in of how things shift and change. And often that person might not be the same person who's managing them. Know this is acquired employees six, twelve, twenty four months later.

Are there any that you think went particularly well in the last five years that that are worth saying like wow that that one went really phenomenally .

um yeah I think there certain ly aren't. And one thing I think that's that's fun to watches or changing approach to these things. Um and no, I think in a lot of companies and uncertain in microsoft used to be the case where you know let's say you're the your product team for outlook uh, and you're trying to ship a mobile client, uh and it's not going so well um and then you you get management buy off to go by by a mobile cent, in this case maybe a company, let's just say as an example uh and and then you bring those hooks into the company and now that start of these just acquired as reporting to the same people who are fAiling before, that usually ended up being a recipe for for just not not let's just say that the quiet computers we were excited to be in that position.

Let's say that the managing folks there, essentially when I continue to try do the same thing, but now just with people looking for them a and so that usually in end, surprisingly. And so you think with the company and with with other companies we regard recently， um we've done that differently um and we've taken those folks and impowered them. And and assuming we've been successful, we've continued to to expand their scope and given them more and more.

So you I think you you're seeing the benefit of that approach with without look mobile and IOS um and and how that how that's worked ah and so you know think that uh, that's the case. We think we were pretty excited um and and you could say the same thing thing for I think a lot of the other is quiet. Yes, interesting.

The I always love thinking about what those you know as the organization matters, the court deb organization materials are my world. You know, as a VC firm grows and seize many cycles, and as individuals within those organizations grow, you, you, you start to learn these is all about pattern matching. But you you get these, you know, sort of senses that develop and kind of informal rules.

And what's really interesting is when you decide to break the rules. But i'm thinking about like ah you one that actually be relevant to my car about you know in bc that you learn pretty quickly is it's really hard to build a big company if you're not targeting a big market and plenty, you know, I make that mistake, major na makes that mistake, even the other great busy firms to make that mistake all the time. But and then you always remind like god, what did I do that you know but but for you and for microsoft now, you know, for decades, having been able to practice the craft of, you know, a man, I think about B, C, is the same way you definitely get these these rules that involved. Oh yeah, maybe we shouldn't if we're buying a product to replace one that fAiling repetition have report to people who are who are who are not successfully shipping the current product.

No that yeah um one file note kind of before we moving to follow up of hot takes in car bouts, are there any other people or companies who you admire that you think do corporate development or strategic investing really well?

Um let's a question yeah I think you see lots of different models um for time, just the investing side um and google has taken the approach of of creating a separate fund in whole separate team and in creating those walls and trying to create a real VC. And I think that certainly one one way to go and the market will will judge over time if they're doing a good job with that or not.

And they are essentially other competing with in the other VC uh uh four dollars um you know that can take away some of the strategic components to IT to and and so there's all sorts of views on the spectrum。 Corporation c is gotten, I think, really hot for some reason over the last number of years. And just about everyone I think I was reading today um that I think with tyson foods in the folk and make chicken, they now have a VC looking at a new protein replacement. The opportunities. So your system e street as A B C, no previous everyone .

has a right been amazed. I think it's been so much talked about last couple years. But and he driving around in silicon valley and you see all the auto companies have there in silicon valley centres now yeah I mean.

I did to deal recently with G, E and caterpillar and and others. I mean, you know know everybody's getting into the game and and I think that's going to be interesting to want to over time. And so to kind of flip your question, um you kind of I think there's a lot of folks who am not sure if they're doing IT, right? And we'll have to see and again, going back to why these folks are setting IT up and and what they think they are going to get out of IT and as a former start up found her.

Un certain in the early stage um you certainly have to be careful about tying your your wagg into a truly anyone because you want to maintain an opponent at the early stage, if you can uh and so that's A A hard thing to baLance against uh the the corporate entities and keeping among we are to talk about terms of for their incentives, which is really for their company in their equity. First of traditional investor is really looking to you to make again and those incentives are very different and that manifests itself in the board room, that manifests itself and in shareholder votes and for follow on rounds and all sorts of things that think folks have to be be careful of. So I think there's you know how much of folks who are out there doing and doing a good job call convention or certainly does. And then I think google is a premium putting and sales force is very active, and we've contest with them before. I've been very impressed with a lot of the teams of seen incorporate VC um and and going off to see uh how how the whole space uh .

shapes out indeed .

deed should we do follows and how we get I realized um we were negligent last episode on the marvel episode and didn't discuss I believe we discussed snap chat snap in uh spectacle launch h and initial very positive reviews can wait try but we did not discuss the elephant the room which is news that they are rumored to be preparing to file for a ibo yeah uh really interesting .

to think about there a Younger company then um uber and a lot of these other kind of like super unicorn um and in true Snapchat fashion, just not necessarily going with the trend, like they just continually think of themselves as a different company or different type of company than a lot of these other um other big companies, big private companies of their generation.

And so I think um you know there are reasons why IT makes more sense for first naps C2Be IPO ing and com panies lik e ugh to be wai ting. There's a lot of uh uber in china, I think is kind of the big reasons and they are waiting. But um with with snapped, I continue to be impressed and i've a bite any Price.

But don't notice.

do not money.

don't. Ah yeah um also really interesting with snapt a everyone you know to as we talk about on the facebook IPO show um and then afterward as well, think it's great to see a company that is four years old but clearly has a cheap scale and is in the process of building a meaningful uh revenue um business and and eventually hopefully profits as well um take this step and do this um they're achieve domestic .

scale and very curious to see how they do international. They really started to to expand there because I think, um you know what we keeps seeing a instagram copy, a lot of snapshot functionality. And uh if you're already an event snapshot user, you often are are not really compelled by the instagram features here, my network, my habits.

But then you think about these people that are in countries where Snapchat t hasn't gotten big yet. And now that sort of question is, will snapshot ever get big in those countries sense? Um since instagram kind of has a lot of that functionality now and they already use instagram all the time.

And i'm still bullish because I this is one of those like uh, sort of seed company bets where you just say, yeah, I wouldn't get against that person and like I want to I I have have a lot of faith in their ability to figure that out. That's how I feel about even speak and the kind of leadership at snap chap. But um I think it's important to like note a risk that they .

do what you no matter what the risk of the .

business sections .

going to be awesome. Uh, I don't think microsoft is a shareholder in snapping, but uh, alphabet google alphabet is um as are several other strategic companies can't curis brand like when you guys i've had investments that then go public, what do you guys do with the stack?

Yeah we we depends on the situation and we we generally don't comment on what we do with that. And this goes back to to the whole question around how how and why we're doing tragic investing is is um you're selling a partner um is is usually a really difficult to do because if we generally don't talk about these things uh and so you know people will ask if facebook, if you soldiers stock and and we just don't answer um and in is a good reason, which is swiming rounder, the threshold, of course, for him to be yeah then there's really no benefit. What's over to talking talk about how we how what we're doing with the stakes uh.

something that um I didn't realize even until i've been working adventure for quite a number years. But I think most people don't realize about the VC ecosystem. It's actually kind of the same thing. You know, when companies go public like it's not like there's a magic moment and like we sell all our shares um often times we can even if we wanted to.

Uh and so um you have V C firms that are holding shares of companies that went public long ago uh and figuring out it's it's actually a big um IT IT ends up being a meaningful kenda strategic discussion within bc firms of for each and invest what is is the right time to sell. And we also have the complication. We can distribute the shares directly to our investors so we can just give them the shares is rather than selling on open market. So that's another lever we can pull. We can we can hold, we can sell or we can give the shares away h or give the shares back to our L, P, S.

Is that L P decided? Is that decided by the management .

of the decided by the management of the c. And then so the risk of the set of lp argument, typically, they want us to distribute as fast as possible because he that's our investment. We invested in you.

These are shares. They are now liquid on public currency. We have people that manage public stacks you should give them to us.

Detention now is if we do that and um we think there's a meaningful chance that they might just sell those shares, then that can be detrimental to the company if whole slugging shares gets comes on the market at once, that can depress the share. So it's a complicated situation. Yeah hectic. Um this is a just today as we're recording this, amazon announced amazon go. We got to talk about this.

yes. So amazon go is a driver list drive through store autonomous .

ai IT is all of these things. Uh it's a grocery store here in seattle um that you walk into and there are scanners and start turn style like things. When you walk into the store, you scan amazon go APP on your phone um and then that identifies you.

And then once you're in the store, uh, you just pick up anything that you want to buy. You put IT in whatever you hold IT, you put in your backpack, you put in your purse and you just walk out the store. No, no, a check out all, no cashiers. No, not that just automatically, uh, tracks what you picked up and you pay for IT through the APP automatically.

Yeah, I don't know if this will work, but I I love, uh, it's impossible to overstate how much I love amazon's muscle for experimental and ability to like do tens or hundreds of these sorts of things I wants and it's interesting i'd love to know how big the team was that pulled this off. IT, I willing to bet, is also more than you think.

It's also interesting, we don't know. But um one of the cool things about how amazon works is there are these small teams within the company that are focused on innovative projects that they're doing. There's a good chance this might be completely separate from the amazon bookstore, uh, which is in new village here.

Certainly, it's a very different uh, model of the store. Um super cool. Love to see this innovation. I can wait to it'll be open to the public in early twenty seventeen and I can't .

wait to go try IT yeah right. What's your take? You check IT out.

I am excited to go bed stuff and walk out and see what happens.

Feel me like i'm shop lifting, but it's being totally exactly .

this is going to create all sorts of consideration for shop lifters. I mean how they're going to get around .

this this ah yes, I want to you know product in the model for this. How much they thought about them in shop lifting is like a meaningful um you know it's a meaningful cost to retail stores and girls y stores. Um this solves that problem.

baby. I mean, I ously if they have technology that solves that problem, generally in theory, everybody everybody who does retail gonna to buy IT, you have you have lots of companies actually, say a lots of company ies, but a few companies around to have. And I theft and touch shop lifting technologies.

I did some work, actually an investment bank of a critical sensor matic, uh, back in the day, which h has some of those and and you they have some that you put includes. And if you try and walk out, IT does IT splash across across the closed the room. And then just like you, you find with bank robbers to put on those things, things that explode, others that just make the thing go beep um but obviously shop liers have ways to thanks yeah I don't know intelligence though so question right with the tech amazon is using her. They think this .

is gonna work yeah um I .

carvel yeah. So mine is for years now, maybe be in a decade, OK go has been producing really incredible music videos and up leveling their game every single one. So for anybody that remembers, I may be played ten years ago the tread mills video, where they went totally viral and they they shot of themselves in their backyard and you people dancing, and they're this choreograph ed, the band members having a choreographed dances on treat meals, and they up over their game over, turn over and over again.

And maybe a year two ago, they did this incredible drone shot, one where IT was, you know, the first music video that I saw, that that a really took advantage of, oh my god, what if we have this? A slowly rising drone go into the sky, and, you know, you can see patterns formed by thousands of people on the ground or wearing different things and they have they have up level their game again. So there the new video for the one moment um the entire video is shot in a super high frame rate camera and .

now it's not it's not .

but it's it's exploding paint and like bullets s going through things and it's so it's like the .

magic that takes .

place in like four seconds, like the whole music video but it's well super slowed down and so you have like three minutes of of super high frame rate footage and cool actually lines up with the words, are singing and know the music. It's it's really .

really cool that's really cool um that's really cool. Ah I got to watch that um mine which I lead to earlier on the show is uh you see berkelium I just found out about this recently in redit um they do this really cool uh oral history, this program that is oral history uh with people that have been instrumental in kind of the development of the bay area um and one of the aspects is business in the the area and they have don valentine who was the founder of zoia and he found zoia in the early seventies.

He had been um he was a fairchild semiconductor ah he was not part of the trader is a that I believe was the trader say left where was IT but they founded fairchild h and then he went to national semiconductor and any founded zoia but these were like, this was the birth of silicon valley. Anyway, this is great kind of seventy five page. It's all a transcript of hours of interviews with done and it's some it's fantastic just to hear him talk about the history of the early days, the value in the mi conductor industry but also the philosophy behind sqa. How I started um how they evolved their thinking process about things and they're still you know among the best in the business um and how they have evolved over the years are really cool, willing to IT in the notes cool brand. We know .

you've got one, two. Yes, yes, I do I find this particularly light of everything that's going on uh, right now.

Uh, terms of the election is an article that old male published in the new york kr about a week ago called a silicon valley has and empathy vacuum um and I think is just a really interesting thought peace for all of us just to think about know how what we do um affects a everything and everyone else and whether or not there is more we could or should be doing or or less than we could or should be doing uh relative to that and that's relative to job displacement and relative to um your kind of changes in society that our technology can can Foster such as how impacting journalism know how impacting. Culture and communities and and all sorts of things. And so it's it's really interesting.

Yeah it's great piece and certainly some I bent in the show been thinking about a lot over the last you know what so is you know lots of questions uh, to be asked. But I don't think we can H I don't think we should as a tech industry continued to Operate just in ignorance of even trying to think about the broader impact what we're doing, especially as we head into you know this age of artificial intelligence. And um we know all of the great things that are going to come from that and all of the social chAllenges as well. So is a great piece .

by home yeah to just pile on like i'd recommend everyone read IT for sure um something we have struggled with I think um David nine and a lot of other people that that i've talked to in the last few weeks and even before the election. Um we celebrate a lot of the things technology does uh growth to hyper scale um being gram having thirteen employees .

that was acquired in shock and of .

the um you know the model actually originally kind of created by microsoft of incredibly high fixed costs, but then oh my god, you can sell licenses to the software with zero marginal cost to the world at at giant's anonymous scale and now with the internet making that even more accelerated, yes, generally in the long term more jobs are created after a uh sing one or two generations of of uh a gap by an advanced technology.

But IT um as an industry, we really do over celebrate these gains in the short term and really do not um come up with solutions for all the people that are are disfranchise because of IT. And I think that um this piece is really great. I think we are about to have a self driving um huge change if anybody looks at that that um uh graphic that was floating around the internet um about a year ago of a truck driving is like the top job in twenty states yeah .

including california.

California and auto has just like acquired by uber, has just completed successful self driving truck trips like IT IT just doesn't feel like it'll be um too long now can .

ignore .

the consequence is no no.

And I I know i'm rambling a little bit on this, but IT really .

we're glad you brought IT up brand .

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slash acquired in home。

Yeah awesome. Well, brian, thank you so much um to our listeners out there. If you aren't subscribed and you want to hear more, you can subscribe from your favorite ite podcast client.

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Thanks to bran.

and we'll see the next time.

Easy you, easy you with that, you who we got the true.