How Microsoft does M&A and strategic investing, with Brian Schultz

Executive overview

Microsoft's M&A and strategic investment activity is driven by product roadmaps, not financial engineering. Brian Schultz — managing director of strategic investments and a former startup founder — explains how the two functions work and how startups should approach both.

The key insight: Microsoft buys teams and technology to fill roadmap gaps, not businesses to run as profit centres — and strategic investment is only worth doing when it deepens a commercial partnership that already exists.

Who drives deal flow and how Microsoft is organised

• Corporate development sits under the CFO and covers acquisitions, investments, divestitures, and joint ventures
• Business groups surface most targets; the central CorpDev team can't track every micro-market at Microsoft's scale
• Most acquisitions are small and tightly tied to product roadmaps; headline deals like LinkedIn are the exception
• Two distinct functions: core M&A (CorpDev) and strategic investments (Schultz's remit, growth-stage) plus the separate Microsoft Ventures for early-stage

Why Microsoft mostly stopped investing — and why it resumed

• In the dot-com era, Microsoft invested broadly in telcos, cables, and startups; it generated poor strategic returns
• Wall Street values Microsoft as an operating company; doubling investment returns moves the stock far less than doubling revenue
• The one exception: Facebook at $15B in 2007, ridiculed at the time, done for deep product integration with Windows Phone
• Microsoft resumed programmatic investing when it could identify clear technology + go-to-market partnerships
• In two years under the current approach: ~16 investments totalling ~$250M on the growth side

The three criteria for a strategic investment

• Strong technology or product integration between the two companies
• A go-to-market or co-selling motion that amplifies both businesses
• Sound financial return on a risk-adjusted basis — Amy Hood will penalise bad investments even if Wall Street won't reward good ones

Why corporate VC incentives differ from traditional VC

• Corporate investors are employees compensated in salary, shares, and bonuses tied to the parent company's performance
• They are not compensated on fund returns, so their incentives diverge sharply from founders and traditional VCs
• Minority stakes (even with a board seat) give little real control and create conflicts around hard decisions — timing a sale, replacing a CEO, winding down
• Strategic investors are the wrong source of rescue capital; Microsoft does not lead rounds or save companies running low on cash

How Microsoft thinks about what to acquire

• Primarily acquires teams, technology, and products — not businesses to operate as standalone units
• A large acquired sales force and customer base can be value destructive if it conflicts with selling the Office suite
• "Fallen angels" are interesting only when they also sit on a product roadmap gap
• Acqui-hires work best when the incoming team is empowered rather than absorbed under the managers who were already failing

How Microsoft judges acquisition success

• Pre-agreed milestones: talent retention at 6, 12, 24 months; product or feature shipment; revenue or integration targets
• A named product-team owner signs up for the outcomes and is tracked over time
• Hard to do rigorously in tech because the destination shifts — what looked right at close may look wrong in two years

How to build a relationship with Microsoft as a potential partner or acquiree

• Start with the product teams and business units, not with CorpDev or strategic investments
• Investment conversations are downstream of a meaningful commercial partnership
• Do not call with a live term sheet and a one-week deadline — that rarely works
• An acquisition is essentially a hiring decision; trust must be built well in advance
• Microsoft's field sales organisation is a powerful lever for startups that can make a partnership work

Real examples of strategic investment payoffs

• Foursquare: investment paired with a data-licensing partnership feeding location data into Cortana; Microsoft was an early prototype for Foursquare's data-licensing business model
• DocuSign: long-running partnership integrating electronic signatures into Office 365, followed by a private-round investment
• Mesosphere: container-space partnership on both technical and go-to-market dimensions
• Cloudflare: CEO used the investment round to signal neutrality by bringing in Baidu, Microsoft, Qualcomm, and Google as co-investors simultaneously

The state of M&A and the rise of PE in software (late 2016)

• More companies are seeking exits because growth has stalled relative to their last round and re-financing is unavailable
• PE has entered software because many mature companies now have predictable cash flows that support leverage
• Strip out heavy R&D, keep the recurring revenue base, and some legacy software businesses look like traditional LBOs
• Microsoft has co-invested alongside PE in select take-privates (e.g., Informatica with Vista) where a growth component justifies partnership
• Public companies under quarterly earnings pressure often cannot make the hard cuts or investments needed to modernise — private ownership removes that constraint

Founder empathy and the value of operating experience in CorpDev

• Having been a founder makes Schultz a better CorpDev practitioner — he understands cap table hygiene, fundraising dynamics, and the difficulty of getting callbacks
• Big-company M&A problem is the opposite of a startup's: too many internal stakeholders, not too few (28 people on an internal call to acquire a 25-person company)
• CorpDev people who have only been investment bankers are too removed from what it means to build something