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.
"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs and in fact now is the largest startup focused accounting firm in the US."
This quote highlights Pilot's role as a comprehensive service provider for accounting needs, emphasizing its status as the largest firm in its niche in the U.S.
"Every company needs it. It needs to be done by a professional. You don't want to take any risk of anything going wrong, but at the same time, it has zero impact on your product or customers, things you do uniquely well."
The quote explains the importance of professional accounting services for companies, which is necessary but does not directly affect the product or customer experience.
"Pilot takes care of all that. And they've been doing this now for years across thousands of startups in Silicon Valley and beyond."
This quote emphasizes Pilot's experience and expertise in providing accounting services to a large number of startups, not just in Silicon Valley but also in other regions.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
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This quote summarizes Crusoe's unique selling proposition, combining specialized AI infrastructure with an environmentally conscious energy strategy.