Special: A Conversation with Microsoft's Head of Strategic Investments Brian Schultz

Topics covered include: Brian’s history working across “both sides of the aisle” as both a startup founder and corporate development leader at a big company, how perspective from each informs the other, and the importance of learning “customer empathy” How Microsoft approaches M&A from an organizational perspective, and the importance of fit with the company’s product roadmap How Brian approaches strategic investments at Microsoft, and the evolution over time of the Microsoft (and large technology companies as a whole) perspective on investing in other companiesBalancing the tension between partnering and investing, and what criteria Brian thinks about when evaluating companies Microsoft’s investment in Facebook in 2007 http://www.nytimes.com/2007/10/25/technology/24cnd-facebook.html (at a then-crazy-seeming $15B valuation), and more recently Foursquare https://techcrunch.com/2014/02/04/foursquare-cuts-15m-deal-with-microsoft-to-power-location-and-context-for-windows-and-mobile/, Mesosphere https://techcrunch.com/2016/03/24/mesosphere-raises-73-5m-series-c-led-by-hpe-with-microsoft-as-strategic-investor/, CloudFlare https://techcrunch.com/2015/09/22/cloudflare-locks-down-110m-from-fidelity-microsoft-google-baidu-and-qualcomm/ and othersThe current state of the tech M&A landscape, and the emergence of private equity as tech company acquirers Potentially changing corporate and foreign tax structures and how they impact acquirers’ thinking around deals (or not!) How Microsoft tracks and evaluates success of acquisitions over time, and lessons learned from successes and failures The increasing number of operating companies (technology and otherwise) looking to invest in startups, and how that landscape has evolved over time Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 Followups: Snap Inc.’s rumored IPO filing http://www.theverge.com/2016/11/15/13642612/snapchat-snap-inc-ipo-filing-valuation — and bonus discussion of how VC’s and other investors think about “exiting” their investments in companies that have gone publicHot Takes: Amazon Go! https://www.amazon.com/b?node=16008589011 The Carve Out: Ben: OK Go - The One Moment http://okgo.net/2016/11/23/the-one-moment/ David: UC Berkeley Oral History with Sequoia Capital founder Don Valentine http://digitalassets.lib.berkeley.edu/roho/ucb/text/valentine_donald.pdfBrian: Om Malik’s recent piece in the New Yorker: Silicon Valley Has an Empathy Vacuum http://www.newyorker.com/business/currency/silicon-valley-has-an-empathy-vacuum More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

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• 1:51Speaker 02

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• 2:12Speaker 03

  Welcome to episode 27 of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert.

• 2:19David Rosenthal?

  I'm David Rosenthal.

• 2:20Speaker 03

  And we are your hosts. Today's episode is a discussion about M&A at Microsoft with Brian Schultz.

• 2:26David Rosenthal?

  Brian is the Managing Director and Head of Strategic Investments at Microsoft. And Brian actually started at Microsoft in 1999 in corp dev and then left for a little detour into the startup world in the mid 2000s. He left and co-founded Ontella here in Seattle, which was ultimately acquired by Photobucket. And he did that with Dan Shapiro, who's now the co-founder and CEO of Glowforge here in town. Shout out to Dan. After that, he came back to big tech and to M&A, to Microsoft, and has been back in corp dev and now running strategic investments ever since, but remains very active in the

• 3:09David Rosenthal?

  Seattle startup scene and has been a friend to us and many others here. So, welcome, Brian, and thanks for joining us.

• 3:16Speaker 02

  Thanks for having me.

• 3:17Speaker 03

  Yeah, yeah.

• 3:18David Rosenthal?

  We are super excited to, you know, we've had, we've had Taylor Barada from Adobe on who runs Adobe's corp dev. But super excited to talk to you about kind of the bridging this world between kind of the big technology companies and running corp dev there and strategic investments, but actually having gone and founded a startup yourself. How, you know, what's your perspective? What kind of brought you back into Microsoft after tasting the startup world?

• 3:52Speaker 02

  Right. Well, there's, I think, a whole bunch of different ways to look at it. And, you know, I think the one thing that I certainly believe is that it actually has made me a better corp def person by far, having been on the other side, if you will, you know, talk about empathy.

• 4:07David Rosenthal?

  Empathy for your customer.

• 4:08Speaker 02

  Yeah, and having, you know, had to raise money and deal with these discussions that that happened between strategic investors and acquirers.

• 4:16David Rosenthal?

  Raise money and sell your company.

• 4:17Speaker 02

  All these things. And so, you know, just having, and as a CFO, COO of a startup, having been on the other side, both on the investing and acquiring side, I also, I think, I hope, avoided a lot of pitfalls and kept my cap table clean. You know, I knew a lot of things that I should be doing that I think a lot of folks can get trapped in. And so, yeah, 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. And of course, now we're getting to politics and didn't mean to do that. But going back.

• 4:55David Rosenthal?

  Was there an election this year?

• 4:56Speaker 02

  Yeah, I don't know what you're talking about. Blocked, completely blocked. You know, one good example is in a startup, of course, you have trouble getting people to call you back. You want to do partnerships, you wanted to do fundraising, whatever it is, you're just out there trying to make yourself known and actually do things. Whereas in the big company, you almost have the opposite problem, where you have too many people you have to deal with. And so, thinking specifically about M and A, I acquired a company a few years ago that was about 25 people. And I remember looking at the conference call, you know, set up on my computer, said, you have 28 people on the call. So to do the acquisition of 25 people, I was talking to 28 people.

• 5:34David Rosenthal?

  Was that just an internal Microsoft call?

• 5:37Speaker 02

  Just an internal call, right? And, you know, if you think about, you know, all the business owners, plus their lawyers, in and outside of the company, and it's just, you know, it's a big effort. Now, you know, of course, that doesn't quite scale, right? And so even doing, say, an acquisition of LinkedIn, you don't necessarily have a much bigger team on the inside. But, you know, along with.

• 5:56David Rosenthal?

  10,000 people.

• 5:58Speaker 02

  Exactly. Definitely not. Hopefully not.

• 6:01Speaker 03

  So you're the head of strategic investments. To give a little bit of context to our listeners, can you explain what that looks like organizationally inside of Microsoft and what the process looks like when you're acquiring a company? Like, do you find the company and bring it in? Or does a business owner find the company and then loop you in to start the actual formal process? How does that look?

• 6:23Speaker 02

  The corporate development team within Microsoft sits under the CFO. And we manage Microsoft's balance sheet activities. And so if you think about acquisitions, investments, divestitures and joint ventures, when we do these partnership activities as it relates to the balance sheet, that's where corporate development gets involved. And the kind of how we find companies or find our targets and have these discussions is really, it's a mix, although it's typically driven by our business groups in terms of the finding of the companies. And that is because our product teams, they know their markets much better than we do. And certainly at Microsoft, we have such a broad-based business in so many different areas.

• 7:06Speaker 02

  It would be really difficult for the central team to be all-knowing, right?

• 7:10Speaker 03

  You'd have to be a venture capitalist.

• 7:12Speaker 02

  Well, yeah, I mean, you guys obviously have these extensive maps of different spaces and it's constantly evolving. You have new players coming on board. And in any given little micro area, you might have 10, 15, 100 companies, right?

• 7:24Speaker 03

  Yep.

• 7:25Speaker 02

  And so if you think about that at the Microsoft scale across all of our products, you'd be looking at a really complex diagram. And so it's really impossible for a central team to keep up with all of that. And so we really rely on the business groups to think about what's in their space as they think about their roadmaps. And most of the M&A, I mean, obviously, the headlines go to LinkedIn and the large-size acquisitions we do. But 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. And so those are really just square up the center of where the product teams are thinking.

• 8:06Speaker 03

  Yeah, I'm curious to kind of go back to the fact that you have kind of actually been a founder in a startup and a successful one that raised money and then was acquired and then did M&A at Microsoft before and then came back to do it again.

• 8:23David Rosenthal?

  How did it change your perspective? Like, are there particular things that you're more acutely aware of now or that you think about differently than before? And because when you joined before, I think you'd been an investment banking analyst, right? As many folks who come into M and A roles at companies have been, which, speaking from experience myself, you know, that's pretty far from actually being a founder of a startup. So how'd the perspective change?

• 8:50Speaker 02

  Yeah, well, you know, when I got to Microsoft, I mean, even when I was doing investment banking, I was thinking, you know, you're almost too removed from what's actually happening on the ground in terms of doing something. Right? I mean, you're kind of advising and moving things around the chessboard, but you're not actually doing anything, producing anything.

• 9:08David Rosenthal?

  Not building the chess pieces.

• 9:09Speaker 02

  Exactly. And so, you know, in investment banking, that's why I joined Microsoft was I thought, wow, I really want to get into an operating role in a company. And that seemed like a good path to do it. And this was, you know, back in 1999, right at the height of the dot com boom, where everything was kind of going a little crazy. And my thought at the time was, you know, this is going to end somewhat soon, most likely. And I want to go get myself positioned in a place where I could actually, you know, still have a job in a year.

• 9:36David Rosenthal?

  Take a seat before the music stops.

• 9:37Speaker 02

  Yeah, and actually learn something from it. And so that's where that Microsoft job seemed really appealing. And I'd never been to Seattle and hadn't really thought too much about about coming here to do that. But it worked out nicely. And, you know, we were super active in those early days. And then, and then I got here and did a lot of fun things and actually helped create an internal startup. At the time, I was advising the Windows and our kind of infrastructure teams, enterprise teams, on security, storage, management and those types of systems. And we started the Security Business Group back then.

• 10:14David Rosenthal?

  Is that what became Windows Defender?

• 10:17Speaker 02

  Eventually became Defender and a whole bunch of other things. And one of the first things we did was acquire, at the time, anti-spyware antivirus technologies and rolled those in along with some stuff that we built. And so I joined this startup group and realized, hey, I really like this startup thing, but doing it within Microsoft was not quite what I had in mind. And I saw the pros and cons of that and thought it would be really great to go and actually do it for real. And so actually, there was a company I co-founded before Ontella, which was at the time known as Genesis and then became Plectix Biosystems. And there was a Microsoft co-founder that I met and we went out and raised money for that company.

• 11:01Speaker 02

  And then I left that company after about a year after we got it funded and joined up with Dan and Charles where we founded Ontella. And so that pathway and what I realized was kind of taking the business knowledge and the core Dev knowledge as a general finance and business and strategy thinking and work with some really great technical and product folks was really a nice combination. And so that was kind of that role that I took on as kind of founder and then evolving into CFO, COO.

• 11:31David Rosenthal?

  I'm curious, you're kind of getting into your specific role, which I assume probably takes much, if not most, of your time these days in the investment side. How does that function at Microsoft? And how, and Microsoft just relaunched Microsoft Ventures, which is early-stage investing, kind of more traditional VC-type stuff. You do later-stage, larger checks, right?

• 11:56Speaker 02

  Yeah. And that's actually probably gone through more of a significant evolution than the core M&A role has in those three epochs. So in that dot-com timeframe, Microsoft was very active as an investor. And in those days, every company was going public a year after they were founded.

• 12:17David Rosenthal?

  The Series B round was your IPO.

• 12:20Speaker 02

  Pretty much. And what was commonly accepted as one requirement of your IPO, it wasn't revenue, but it was actually having a strategic investor. And so the name brands of your investors lent a lot of strength to your IPO.

• 12:37David Rosenthal?

  And those were the days, right?

• 12:38Speaker 02

  Without anything else.

• 12:39David Rosenthal?

  When the number-one VC question was, what are you going to do when Microsoft enters your space, right?

• 12:43Speaker 02

  That's right. And so Cisco, Microsoft, you know, kind of the big companies at the time were investing a lot in a lot of different startups. And we were also investing, it was a really interesting time in terms of influence and how the world was going to play out. And so we were investing in undersea fiber cables and satellite companies and cable companies and telcos and DSL coming, you name it. And so we were really spreading around a lot of money. And that didn't end so well. You know, 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

• 13:28Speaker 02

  as an operating company who's delivering revenues and profits to our shareholders. And so, even if you take a billion dollars of our balance sheet and turn it into 2 billion, 3 billion, 5 billion, you know, it doesn't really impact your stock price in the same way as doubling, tripling revenue and profit. And so, we weren't, so the reason to do it was really strategic reasons of how are you going to take those investments and turn that into leverage plays on increasing revenue and profit for the company. And that didn't really happen. And so, we really stopped doing it, for the most part, throughout the 2000s. And I think one notable exception was our investment in Facebook back in 2007.

• 14:11Speaker 02

  And so what we did do is we said, you know, we're, it's really, really deeply strategic. We'll go out and we'll do an investment. And that's what we did in Facebook's case. But otherwise, we weren't really doing this, you know, kind of, hey, we'll put some money in our balance sheet, we're a partner, why not, kind of thing.

• 14:27David Rosenthal?

  And that was, just a quick sidebar, I mean, the Facebook investment, at the time, the world thought you guys were crazy, right?

• 14:34Speaker 02

  Yeah.

• 14:34David Rosenthal?

  Was it 15 billion dollar valuation, I believe?

• 14:37Speaker 02

  That's right. I think their last round had been done at 5 billion. And so, we took it up to 15. And yeah, they certainly ridiculed us at the time, obviously in hindsight, that did okay.

• 14:50David Rosenthal?

  Turned out pretty well, yeah.

• 14:51Speaker 03

  And I remember when I was there, that began, or this was after the investment, but there was a lot of integrations, like the companies were very friendly with each other. It was when Windows Phone was kind of doing a lot of things differently than iOS and Android were doing and kind of like integrating across networks. There was a lot of like, kind of proprietary first-party type integration with Facebook and their contacts and providing Bing back to them for mapping things. And there was like a very tight integration there. So I can totally see what you're talking about on the strategic side.

• 15:24Speaker 02

  Yeah, and that was exactly that case, right? Where we could really deeply align with a partner and do the investment, create this whole win-win scenario. I think, you know, coming back to investments, you know, they're often talked about as a, you know, kind of either or, you know, you can acquire us or you can invest in us, you know, and I don't really think they operate that way as really substitutable goods. Because, you know, as a minority...

• 15:52David Rosenthal?

  Completely different.

• 15:53Speaker 02

  Oh, completely.

• 15:54David Rosenthal?

  Speaking as a shareholder in lots of startups.

• 15:56Speaker 02

  Yeah, exactly.

• 15:57David Rosenthal?

  It's very different if, you know, you create an exit for the company versus just put more money into the company.

• 16:02Speaker 02

  That's absolutely right. And if you think about, again, coming back to the strategic angle of it, you know, if we own, you know, 5%, 2%, 10%, even 20%, even with a board seat of any given startup, we really don't have any control. 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 be partners.

• 16:28David Rosenthal?

  Wall Street isn't compensating, isn't...

• 16:30Speaker 02

  That's right.

• 16:30David Rosenthal?

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

• 16:36Speaker 02

  That's absolutely correct.

• 16:37Speaker 03

  Yeah, that's like a fascinating, taking a step back for our listeners and thinking about how we normally evaluate companies on these episodes, being an LP, or let's say you're a venture capital firm and you have LPs, the pressure on you and the expectation is very different than being an operating company with shareholders. The shareholders are looking for multiples that come from your operations and your ability to execute core business activities in a sustainable way. And when LPs are in a fund, they're in it for 10 years, they're looking for three times or so the capital that they put in, hopefully more.

• 17:19Speaker 03

  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 their business.

• 17:29Speaker 02

  That's right. And from an employee perspective, I mean, take this all the way down to the individual practitioners in any given corporate fund. And again, for any of you who are talking to different corporate investors, ask them how they get compensated, right? And most likely, if it's your typical corporate VC and it's a balance sheet activity, they're employees of the company, right? And their compensation is going to come in shares and bonuses and salary from the operations of that company. It's not coming from whether or not you succeed. Whereas, obviously, 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 and coming back to why we do it.

• 18:10David Rosenthal?

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

• 18:18Speaker 02

  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 these really deep strategic tie-ups and/or a return on your capital or both, right? I mean, I think it's kind of hard to do both at the same time. And you think about setting valuation and being a difficult investor, sometimes you have to have hard conversations as an investor with your companies. And you think about, obviously, the hardest one that a board might have to do, which is changing out a CEO. As a partner, as a strategic investor, we're not good at that, right? I mean, we certainly don't want to ever have to turn to our partner and say, by the way, you founder, you CEO, you're not right for this company anymore as an investor.

• 19:03David Rosenthal?

  Or also even, I mean, there's so many, whole set of difficult conversations that come along with being an investor in companies. But one in particular I'm thinking about is, hey, now is actually the right time to sell the company.

• 19:16Speaker 02

  To sell the company?

• 19:17David Rosenthal?

  And if you are a potential acquirer as well, then...

• 19:20Speaker 02

  That's right. Yeah. And so there's a lot of conflict there. 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. And certainly something we want to be very cognizant of is our reputation among investors, among founders and technologists is we never, you know, we never want to damage our reputation as a good partner, as a good technology company in order to achieve those investment returns. Because obviously, that's penny wise, pound foolish for us.

• 19:54Speaker 03

  So would you say the effort is more around creating like strategic partnerships through investment rather than investment to generate returns?

• 20:03Speaker 02

  Well, so it's, it's the way we've scoped it, and there's actually two components to this. One of them is relatively new, which as of earlier this year, we created Microsoft Ventures, which is an early-stage venture effort. And so Microsoft Ventures is out there looking for, you know, companies that are in, in, in generally our strategic partnership ecosystem, and they're looking to establish those relationships, starting with that, with that equity check and developing a relationship. And so they're, they're out there looking on the come, you know, and if you're using a craps analogy. And so the, you know, the fact is at the early stage, you know, kind of your, your seed, your A-type stage investment, it's, it's hard to be a meaningful strategic partner to Microsoft because of our scale, right? It's really hard to do.

• 20:48Speaker 02

  Now, you can be a potentially really interesting strategic partner. And so that's what Microsoft Ventures is there to do, which is to create those relationships and those opportunities and, and be in those conversations around, around how we can add value to, to companies. In some cases, that's going to come with that equity check and then a partnership. In some cases, you know, come just from the partnership, but they're there to have those conversations. On, on my side of the house, it's, it's almost the opposite where I'm leaning into companies that are already Microsoft partners and that are deep, meaningful ones. And it's, it's, we're doing, you know, call it five to 10 of them a year. And it's really more of, you know, an endorsement, an ecosystem leverage and tightening that

• 21:30Speaker 02

  relationship as opposed to, you know, trying to find new and interesting partnership opportunities. And so that's why I'm more of a growth investor, if you will, because these companies tend to be a little bigger, a little more mature.

• 21:43David Rosenthal?

  Yep. And are these companies like, for instance, that might be selling through the Microsoft Salesforce on the enterprise side already?

• 21:50Speaker 02

  Yes. And so we typically look, and obviously, we have lots of partners. And those partnerships come in, when I look at a strategic investment, really three criteria at its core. One is, on the partnership side, is there really interesting technology product integration between the two companies that makes this really interesting? And then the second piece, is there some sort of go-to-market, sales, marketing motion that makes the combination of the partnership powerful? And where I find really interesting components of both, right, because there are plenty of companies that have one or the other, but when you find a really, really impactful combination

• 22:33Speaker 02

  of those two things, that's where it gets more interesting as a strategic investment. And then the last part, the third part, is, is it a good investment? And just like any kind of growth investor will monitor a portfolio, you know, based on expected returns and make financially sound investments in those meaningful partners.

• 22:50David Rosenthal?

  As I have to imagine, as much as Wall Street won't reward you for being a great investor, Amy Hood, Microsoft CFO, might punish you for being a bad investor.

• 23:01Speaker 02

  Yeah, exactly. And so, yeah, that's again, why we tend not to do this in a hugely active way. And again, I'm not out there spraying billions of dollars of our balance sheet money around because that really just creates a huge liability. And so we do it, you know, where it's meaningful, where it makes sense, and where we think we're going to get a reasonable financial return, risk-based. And so over the last two years, since we've kind of done, started doing this in a programmatic way, we've done about 16 investments, investing about 250 million on this side of the house, on the growth side. Microsoft Ventures has a separate portfolio they're managing.

• 23:39Ben Gilbert?

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• 23:53David Rosenthal?

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• 24:07Ben Gilbert?

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• 24:17David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 24:35Ben Gilbert?

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• 24:51David Rosenthal?

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• 25:08Ben Gilbert?

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• 25:17David Rosenthal?

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• 25:28Ben Gilbert?

  We want to move into talking about the state of the M&A market right now at large. And you talking about a number of deals is a great segue into why have we seen so much deal activity this year, both large and small?

• 25:43David Rosenthal?

  And the largest of which being, obviously, you guys.

• 25:46Speaker 02

  Right. Well, yeah.

• 25:48David Rosenthal?

  I liked it.

• 25:48Speaker 02

  And those are, again, as we look at M&A, they are different. And we're always looking for great opportunities for us to grow. And so- The question of those large companies, we're always evaluating everything, right? And the thing with the large companies, they tend not to be suddenly found opportunities. We do, we know about LinkedIn, we know they're there, we know where all these large companies are, we know who they are. And so those are always being evaluated and obviously when something happens, whether something flips between day one and day two, or we decide, okay, now it's the time to acquire Skype, now is the time to acquire LinkedIn.

• 26:32Speaker 02

  And there's a whole bunch of things that go into that. And in terms of your asking about the trends right now, I wouldn't say that there's anything on our side of the house that makes this a better time or more exciting time to acquire. I'd say it's almost on the opposite side where it 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 technology cycle and how things get funded and how technology moves and waves and how startups get funded, there's certainly a lot of companies that are kind of coming to be a no man's land in terms of their growth relative to the last

• 27:14Speaker 02

  round, relative to their ability to raise more money and really kind of reach escape velocity into independent land, if you will. And so I think there's a lot of companies that are certainly looking to sell.

• 27:26Speaker 03

  Do you think that's motivating? Let's zoom out from Microsoft and look at the industry at large. That's motivating why so many deals are getting done because companies are so much better at marketing themselves as a great pickup?

• 27:38Speaker 02

  Yeah, I don't know if they're better at marketing themselves, but they need to. They need to be, right? If your next funding round isn't going to come, you've got to do something, right? You've either got to fund through cash flow or you got to fund through investment. And if you can't raise your revenues enough relative to your burn and if you can't raise investment, then you really have one choice.

• 28:00David Rosenthal?

  Well, you have two choices, one is happier than the other.

• 28:04Speaker 02

  Yes, fair point. I'm talking about the companies that actually have something, right? And so there will be a price for companies that actually have something, right?

• 28:12David Rosenthal?

  So I'm curious on that front, the fact of life in startups is unfortunately more companies than not end up in that situation. You know, where they've built something, you know, they've built a product, it's getting usage, they have revenue, but it's either not going to get to a scale where they can cover their burn and thus the company has faces the prospect of going out of business. Or we see this plenty of times too, the business grows to a certain scale, it becomes profitable, but then the growth just stalls and you realize you're not going to get to a point where you could be a standalone independent company. I'm curious for you guys, like you probably see these companies, you know, many times a week.

• 28:55David Rosenthal?

  How do you think about whether they make sense, whether an asset like that makes sense for you?

• 29:01Speaker 02

  Yeah, well, it goes back to what you were talking about earlier in terms of who's driving that decision and it's, you know, and again, different companies are different here, right? And so we are typically a product driven company when it comes to M and A and comes to our business generally. And so we're not out there looking to assemble in kind of business conglomerate sense, an amalgamation of random software companies. And so you could certainly have that kind of business, right? Where you go out and find interesting software companies that then you can, through synergies of overhead and sales and other things can, can make good money at. We're not really in that game, you know, we're here to grow our franchises and our products and really be a leading technology company.

• 29:43Speaker 02

  And so we're looking really at our technology roadmap and saying where things need to fit in, which is partly why we're, we're less of that opportunistic buyer.

• 29:51David Rosenthal?

  Yep.

• 29:52Speaker 02

  That's out there kind of just buying companies that have, you know, fallen, fallen angels, if you will. Now, there's still plenty of fallen angels that we, that are interesting to us, but you know, there's two things are different. Yes, it's related to the roadmap. And so where those two things intersect, where you have a fallen angel that's on a roadmap, that that's where things get exciting for us. And, you know, the other piece of that, again, from a Microsoft perspective is we're typically not looking to acquire businesses. We are typically looking to acquire teams and products and technologies. And again, thinking about that roadmap piece where holes are in the roadmap. We sell the office suite. And so where things can plug into that, that's great. But if we're acquiring a business, you know, sometimes that's oftentimes that's incompatible with with selling as the suite.

• 30:37Speaker 02

  And so in some cases, actually having a large sales force and a large business could be actually value destructive relative to how we think about things. And so there's, there's plenty of companies that are great, but because they have such infrastructure and raise such money, that it actually takes it out of our, our ability to really find any interesting intersection of, of deal value relative to what they need and want to sell for.

• 30:59Speaker 03

  Wow, that's, that's fascinating to think about the, the conflicts there because we listeners of the show who have kind of listened to our, our more classic analyze a single acquisition episodes will remember that we, we analyze whether a, an 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 acquirer, if the acquirer is not looking to create a conglomerate, right? Of like separate and potentially even competitive businesses under the same management structure. So for you guys, you know, I, when, when we did the LinkedIn episode, we were looking

• 31:41Speaker 03

  at, you know, it was like an eight X multiple of revenue that, that LinkedIn was acquired for. And we were like, well, you know, it's actually a pretty good business on its own, even if there aren't a lot of synergies 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 they're good businesses and like, you know, we hope to cash flow them for the long term. It's actually a strategic integration and they have to be compatible with our existing business.

• 32:07Speaker 02

  That's right. Now, now, obviously, and that's one of the reasons that, you know, you look at the larger businesses we buy, you know, like a Yammer or like a Mojang on the Minecraft side or like LinkedIn. You know, generally you're, you're to make those deals work, you're generally not going to destroy their business. And so if you have enough critical mass and it makes sense on, on the strategic side, that's, you know, it's a different game too. And so, you know, all these things do fit together and every deal is different. But you know, I'm just saying on the whole, when we're thinking about these things, those are some of the things we think about and consider is, you know, how does that business play? As you said, with our existing businesses, is that something that we value or something that we don't? Or in some cases, something that actually is a cost to us?

• 32:49David Rosenthal?

  One, kind of tying together both of these topics on growth and sort of the the roadmap and strategic imperative for Microsoft. At the opposite end of the spectrum, a trend that's emerged or reemerged in 2016. And I'm curious, your take on and whether you talk to these guys is the, the appearance of private equity in the, in the software market and sort of the P fueled or P led buyouts of software companies.

• 33:25David Rosenthal?

  How much, you know, in, in many ways, that's the exact opposite of what you're talking about. That is the, you know, if not in some cases, an attempt to create a conglomerate of multiple software companies together, but in other cases, just, you know, hey, we're, we're just going to take this private solely for its own business line. Why do you think we've seen that emerge? Because traditionally P has shied far away from technology. These are typically not cash flow positive companies. You can't put debt on them. What's changed?

• 33:57Speaker 02

  Well, I think, I think that has changed, right? I think there are a lot of now mature software companies that have legacy businesses where, where you have nice cash flow. And if you think about your typical technology company's business where a lot of money goes to R and D because you're always trying to grow and chase the next, next generation. If you strip out all that cost, in some cases, you can have a really nice profitable business because the marginal cost of producing and selling software is relatively low. Or I should say the cost of producing is relatively low, the cost of selling, it can be high. But you know, where you find that, that right, that right model where, where if you strip out a lot of costs from the business and you, you think you have this pretty solid revenue stream

• 34:39Speaker 02

  from customers that, that even if you don't invest is just going to fade out over time. You can actually have some really nice traditional looking LBOs. And so we've certainly seen that. Those aren't always so exciting to us, but we actually have co-invested with some private equity firms in a few of these take privates or LBOs or resettlings. And the one that was announced is Informatica, where Primera bought them, and we invested in that. And what's actually exciting about that one is there's a component of that business that has legacy, but there's also a really good growth component to it,

• 35:22Speaker 02

  which is what gets us excited. And the opportunity to really go deep in a partnership with them was what got us excited about the partnership and the investment. And kind of on the quarter to quarter basis, sitting under a public company, you know, street mentality of managing that, it's often hard for them to really make the hard decisions and both the cuts as well as the investments that they need to make to kind of modernize that company. And so in many cases, it's better suited in a private, you know, kind of private equity based format. And so that can actually be really interesting and really exciting. And there's certainly a lot of those businesses that are out there.

• 35:57Speaker 03

  I just want to highlight real quick for listeners, because I'll admit, I just Googled it. LBOs are leveraged buyout.

• 36:03Speaker 02

  Oh, sorry.

• 36:04Speaker 03

  No, no problem at all.

• 36:05Speaker 02

  That's funny.

• 36:07Speaker 03

  We've got a good mix of kind of like product and engineering types that listen to the show, as well as people that are kind of much more versed in the corporate development and financial world.

• 36:16David Rosenthal?

  And I tend to perhaps overindex 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 equity firms and LBOs have really started paying attention to tech. And Brian, for really the reasons that you were saying, that the industry's matured. But typically, these firms would buy, you know, like Heinz ketchup, right? The types of things that Berkshire Hathaway would buy.

• 36:50Speaker 02

  Exactly. It's more Warren Buffett style in a way.

• 36:52David Rosenthal?

  Yeah.

• 36:53Speaker 02

  Yeah. And actually, I mean, it was back when I was an investment banker that Silver Lake, which I think was the first true private equity, traditional private equity tech-focused firm was formed. And I remember meeting with them, thinking, you know, how odd, right? Really, these two models are somewhat incompatible. But certainly, over time, and being the first, they were able to create a really nice business to go and take that traditional private equity model into tech. And now there are a whole bunch of other folks that play in that space as well.

• 37:23Speaker 03

  Yeah, I think in quite short order, I forget, maybe two years, they three X'd Skype before selling it to Microsoft.

• 37:30Speaker 02

  That's right.

• 37:31Speaker 03

  Pretty wild.

• 37:32David Rosenthal?

  Yeah.

• 37:33Speaker 02

  Yeah.

• 37:34David Rosenthal?

  Which obviously, then, that was a tech buyout that you played on the other side.

• 37:39Speaker 02

  Yep. That's right.

• 37:41Speaker 03

  This is actually a pretty good segue. So on the Skype episode, we talked a lot about the implications of having a lot of cash overseas and that, you know, Skype was actually a really great way to deploy some of that capital because it would have a pretty heavy tax burden when attempting to repatriate it. And so the question for you is, are potentially changing corporate and foreign tax structures on your mind as you think about large deals?

• 38:06Speaker 02

  Yeah, we're certainly always cognizant of the regulatory regimes and tax regimes. You know, most of these larger acquisitions, you know, have a large and complex international component to it, which means we're dealing with that anyway, even at the kind of more operating internal level of any given, you know, company. I mean, if you look at, you know, at Skype, if you look at LinkedIn, if you look at a whole bunch, they all have pretty complex operations that you've got to think about.

• 38:43Speaker 02

  You know, Skype, of course, happened to be domiciled not in the US. And so that was certainly a nice benefit that we were certainly aware of. But, you know, these things are always changing. And if you think about from the Microsoft overall planning perspective of how we manage those environments, it really has to sit within our overall management. And then again, these things get really complex in terms of where IP lives. You know, Apple and others have been in the news a lot lately in terms of how they do those transfers of tech and how that creates or avoids or distributes their taxes in different ways.

• 39:26Speaker 02

  And so, again, it's a very complex issue that we certainly pay a lot of attention to. Again, I wouldn't say that, going back to why we do M&A in the first place, we certainly aren't financial engineers as a business. And so we're always looking out for the right strategic thing. And if that deal happens to be Skype that's based outside of the US, or if that deal happens to be LinkedIn that's based here in the US, we go do the right deal, assuming we can come up with the right terms and structures that makes the deal work. And so we're not out there to be financial engineers. So that's certainly a part of what we have to do, just given the complexity of operations through these companies.

• 40:06David Rosenthal?

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

• 40:13Speaker 02

  Certainly part of those 28 people I discussed earlier.

• 40:16David Rosenthal?

  Yeah.

• 40:17Speaker 03

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

• 40:48Speaker 02

  Uh, you know, in terms, payoff in terms of.

• 40:51Speaker 03

  Maybe like you made the strategic investment and then there was something in the product in the ensuing years, either on the Microsoft side or on that, that company's side to, that took advantage of the, the sort of strategic alignment between the companies.

• 41:07Speaker 02

  Yeah, sure. I mean, we can look at a couple of examples in the recent past that I've been, been involved with. If you look at, say, Foursquare, we've made an investment in Foursquare and we've, you've developed a great partnership around their data and data asset that feeds into Cortana.

• 41:25Speaker 03

  Oh, interesting.

• 41:26Speaker 02

  And so that's, yeah, that's, that's pretty cool. If you look at DocuSign.

• 41:32Speaker 03

  What does that look like with, with Foursquare? Is that like when, when people ask Cortana about what's a good place to eat and it surfaces recommendations from Foursquare data or?

• 41:43Speaker 02

  Yeah, I mean, Foursquare is one of the sets of data that we leverage in that case. Yeah. We certainly have a lot of our own, own data as well. And we pull data from multiple sources, but Foursquare has a great, great set of data on.

• 41:55David Rosenthal?

  And lots of Foursquare data gets used in all sorts of location use cases that aren't even related to, you know.

• 42:02Speaker 02

  That's right. And in fact.

• 42:03David Rosenthal?

  And user recommendations.

• 42:05Speaker 02

  We were, we were kind of a prototype for them doing that kind of deal. And now they've basically created a whole business out of licensing that data to others, which is part of our investment thesis in, in that company. And then if you look at DocuSign, we had a, it's a different example, but we, we've had a great partnership with them going back many years in terms of how you could utilize their electronic signatures in Office 365. There's some good selling and marketing motions that 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 partnership itself had come to be.

• 42:43Speaker 02

  And then if you look at a more recent one, which is Mesosphere, the container space, and we're doing a whole bunch of interesting things, both with them and the other container players. And we really like that partnership as well, both on the technical and go-to-market side.

• 42:59Speaker 03

  Do you ever see any sort of conflicts arise where you want to be horizontal and participate with everyone, kind of, let's just say it's all the container players in a very democratic and open way, and yet you have this strategic bet that you've placed on one of them?

• 43:17Speaker 02

  We certainly do. I mean, we, I mean, obviously it depends on the space in terms of how democratic you want to be, if you will. But again, we're first and foremost technology partners, and the commercial deals will speak for themselves. And so if we're going to go and do some sort of exclusive or semi-exclusive, whether it be, you know, kind of implied or purposeful exclusivity in any given area, you know, the commercial partnership and how we do that and talk about it, we'll mention that. And the investment is, again, a separate deal. And so one good example there would be if you look at a company called Cloudflare that we invested in, you know, they actually, you know, doing what they do, they need to

• 44:01Speaker 02

  be and want to be, you know, kind of a neutral party. And to do that and to hammer it home, it was actually an interesting approach by that CEO founder to use his investment round as a way to reinforce that message of neutrality. And so he got Baidu, us, Qualcomm, and Google all to co-invest together in the same round.

• 44:21Speaker 03

  Very interesting.

• 44:22Speaker 02

  And so, you know, you can use these investments as tools. And again, given the right commercial partnership, we certainly had no qualms with those guys as investors.

• 44:31Speaker 03

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 44:44David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 45:01Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 45:16David Rosenthal?

  And that's how you get features that customers love, like Tabular Review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Ligora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 45:40Ben Gilbert?

  And they recently launched Ligora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 45:59David Rosenthal?

  And Ligora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Ligora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Ligora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 46:29Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at ligora.com/acquired and just tell them that Ben and David sent you.

• 46:54David Rosenthal?

  Maybe good time to jump to, you know, we discussed with Taylor at Adobe when we chatted with him a few months ago, kind of what the right way was for startups to, you know, build a relationship over time with potential acquirers. 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, a potential acquirer one day and have a deal done, you know, by the next week. But I'm curious on the investing front, you know, for you guys, obviously, you know, different companies have different policies on this and approaches to strategic investments. But what's the, what's the best way for an earlier mid-stage company to start building

• 47:37David Rosenthal?

  that relationship with, with Microsoft?

• 47:40Speaker 02

  Yeah, I think, you know, piling on with, with the Adobe guys on that, you know, it is amusing or unamusing sometimes where, you know, we'll get these calls saying, hey, we have a term sheet in hand from X, you know, would you like to also put in a, in a bid, you know, let us know within the next week to be acquired, right? And, and that's, it's generally not very productive. And it is indeed a relationship. And the thing to think about as a startup founder is, you know, getting acquired is almost like going through a hiring exercise. And you do have to develop a relationship and trust. And essentially, the acquiring entity is indeed making a hiring decision, you know, on the company as well as the specific people. And so if you don't have a relationship in

• 48:22Speaker 02

  place, it's really hard to, 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 acquirers, you know, well in advance. And it leads into what I will say on the investing side, which is certainly on the strategic investing side, for me, all those roads lead through a partnership anyway. And so you need to have that dialogue with us on the partnership side.

• 48:49David Rosenthal?

  With the business.

• 48:50Speaker 02

  With our product teams.

• 48:51David Rosenthal?

  Yeah.

• 48:52Speaker 02

  With the business units and the product teams, you know, to get those partnerships in place long before I could potentially invest. And, you know, and so that's, that's really the best way to do it. And I'm always happy to, to help get folks set up with the right folks at Microsoft if they don't have a path in otherwise. But, but that's, that's really what has to start. And certainly then, you know, as those conversations are going, to then have a separate, parallel relationship development with, with my team is certainly not a bad thing. But again, first and foremost, we're a technology partner and the investing thing is really secondary to everything we do. So if there's limited resources in any given site, I wouldn't bother with me, as much as that hurts me to say, and really focus

• 49:37Speaker 02

  on those strong relationships on the product level. It's also more leverage for them. I mean, if they can get a situation where there's cross-selling motions, I mean, the Microsoft field and sales team is really powerful, and I've certainly seen a lot of startups get a lot of leverage from that. And if you can make that work, that's really impactful to a small company.

• 49:56David Rosenthal?

  Yeah. And it's funny, as we, anybody who's in the startup world knows, it always just happens to work out that any time that you're very close to a major milestone, whether it be cementing a partnership with somebody like a Microsoft or a sales milestone, it 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.

• 50:25Speaker 02

  Yeah, no, I mean, I certainly don't mean to make light of that really difficult challenge, and I've obviously been there. And so one philosophy, though, going back again to our investing approach, we're not looking to make companies or make rounds, except in those really rare cases like the Facebook investment. And so we tend not to lead rounds. And we tend to just put a little bit of money in. I mean, again, we're not looking to be the primary funding source here in any given round or deal or company. And so we're not, you know, we're not your typical investor. We're not going to jump in and save a company if they're running out of money. And so we're the wrong folks

• 51:07Speaker 02

  to rely on that basis. Anyway, and so the relationship can certainly be very helpful, and both on the M and A front and the investment front, for us to have that dialogue, that's always a good thing. But if the running out of money thing is something that you're trying to avoid, it's usually not, I'm not usually a good call to make.

• 51:28Speaker 03

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

• 51:50David Rosenthal?

  We realized that we were selling ourselves short.

• 51:52Speaker 02

  That's right.

• 51:54David Rosenthal?

  Our ambitions short.

• 51:55Speaker 03

  Right, right. In that vein, I'm very curious, how on the M&A side of the house at Microsoft, do you judge acquisitions and do you decide if this worked out well and we're glad that we did this five, 10 years later?

• 52:08Speaker 02

  Yeah, we certainly do. 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 in tech, you know, two, five years hindsight wise, things look a lot different than they did initially.

• 52:25Speaker 03

  Yeah, maybe 10 is the wrong number here.

• 52:26Speaker 02

  Yeah. And so, you know, it's really, it's really difficult to think about how to judge an acquisition and whether it's successful or not on any really rigorous way in tech. You know, that said, we certainly try. And so with any given acquisition, we'll have a set of agreed judgment milestones, metrics, and various criteria, which usually include retention, you know, are all the folks or some folks of the acquired company still here, you know, six months, one year, two years later, are they happy? You know, have we shipped X, Y, and Z product or feature? Have we done, you know, A, B, and C integration?

• 53:10Speaker 02

  Have we, you know, pick your, you know, the revenue targets or profit targets? Are there some sort of accelerated, you know, either schedules or unit volumes for some product or feature we have? You know, pick your set of things that form the basis for why we went and did a deal. And we lay that all out and we cement that in and then we do track that. And then the owner, someone in Microsoft owns that, someone in the product team, product teams owns that, that team and then signed up for either that revenue or those features or retention or whatever it is. And so we certainly do judge those over time. And that's, I think, the closest we can get. And again, even with that, we have to be cognizant

• 53:52Speaker 02

  of, of how things shift and change. And often that person might not be the same person who's managing them, you know, those acquired employees six, 12, 24 months later.

• 54:02Speaker 03

  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?

• 54:11Speaker 02

  Yeah, and I think there certainly are. And one thing I think that's, that's fun to watch is our changing approach to these things. And, you know, I think in a lot of companies, and certainly in Microsoft, it, it used to be the case where, you know, let's say you're the, you know, product team for Outlook and you're trying to ship a mobile client and it's not going so well. And then you get management buy off to go buy, buy a mobile client, in this case, maybe a Comply, let's just say as an example. And, and then you, you bring those folks into the company and now that startup that you just acquired is reporting to the same people who were failing before. That usually ended up being a recipe

• 54:52Speaker 02

  for, for, just not, not, let's just say that the acquired companies are more excited to be in that position. And let's say that the managing folks there, you know, essentially went and continued to try and do the same thing, but now just with new people working for them. And so that usually didn't end well, surprisingly. And so, you know, I think with the Comply and with, with other companies we've acquired recently, we've done that differently. And we've taken those folks and empowered them. And assuming they've been successful, we've continued to, to expand their scope and given them more and more. And so, you know, I think you're, you're seeing the benefit of that approach with, with Outlook

• 55:30Speaker 02

  Mobile and iOS and, and how that, how that's worked. And so, you know, I think that's, that's a case where I think we're, we're pretty excited. And you could say the same thing, thing for, I think, a lot of the other companies we've acquired recently.

• 55:46Speaker 03

  Yeah, it's interesting to, I always love.

• 55:49David Rosenthal?

  Thinking about what those, you know, as the organization matures, you know, the corp dev organization matures, or, you know, from my world, you know, as a VC firm grows and sees many cycles and as individuals within those organizations grow, you know, you start to learn these, you know, VC is all about pattern matching, but you get these, you know, sort of senses that develop and kind of informal rules. And then what's really interesting is when you decide to break the rules. But I'm thinking about like, you know, one that actually be relevant to my carve out, you know, in VC that you learn pretty quickly

• 56:29David Rosenthal?

  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. Madrona makes that mistake. Even the other great VC firms make that mistake all the time. But and then you always remind me like, God, why did I do that, you know? But, but, you know, for you, for you and for Microsoft now, you know, for decades, having been able to practice the craft of, you know, of M and A, and I think about, you know, VC is the same way. You definitely get these, you know, these rules that kind of evolve like, oh yeah, maybe we shouldn't, if we're buying a product to replace one that's failing, we probably shouldn't have them report to people who are, who are,

• 57:14David Rosenthal?

  who are not successfully shipping the current product.

• 57:18Speaker 02

  No, that's right.

• 57:18Speaker 03

  Yeah. One final note, kind of before we move into follow ups, hot takes and carve outs. Are there any other people or companies who you admire that you think do corporate development or strategic investing really well?

• 57:31Speaker 02

  Uh, that's a good question. I think you see lots of different models. If we're talking about just the investing side, you know, and 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. And I think that's 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're essentially out there competing with any other VC. For $4, you know, that can take away some of the strategic components to it too. And so there's, you know, all sorts of views on the spectrum. Corporate VC has gotten, I think, really hot for some reason over the last number of years. And just about everyone, I think I was

• 58:15Speaker 02

  reading today that, you know, I think it was Tyson Foods, you know, the folks who make chicken, they now have a VC looking at new protein replacement opportunities. So, you know, Sesame Street has a VC, you know, pretty much everyone has a VC these days, right?

• 58:31David Rosenthal?

  I've been amazed. I mean, it's been so much talked about in the last couple of years, but you drive around in Silicon Valley and you see all the auto companies have their Silicon Valley centers now.

• 58:43Speaker 02

  Yeah, I mean, I did a deal recently with GE and Caterpillar and others. I mean, it, you know, kind of, you know, everybody's getting into the game and I think that's going to be interesting to watch over time. And so to kind of flip your question, you're kind of, I think there's a lot of folks who I'm 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 what they think they're going to get out of it. And as a former startup founder, certainly at the early stage, you certainly have to be careful about tying your wagon to really anyone, because you want to maintain optionality at the early stage if you can. And so that's a hard thing to balance against the corporate entities and keeping in mind what we already talked about in terms of their incentives, which is really for their company and their

• 59:27Speaker 02

  equity versus a traditional investor who's really, you know, looking to you to make a gain. And those incentives are very different. And that manifests itself in the boardroom, that manifests itself in shareholder votes and follow on rounds and all sorts of things that I think folks are going to have to be careful of. So I think there's, you know, a whole bunch of folks who are out there doing, you know, doing a good job. Qualcomm Ventures certainly does. And I think Google has a pretty good reputation and Salesforce is very active and we've co-invested with them before. So I've been very impressed with a lot of the teams I've seen in corporate VC. And again, we'll have to see how the whole space shapes out.

• 1:00:06David Rosenthal?

  Indeed. Indeed. Should we do follow ups and hot takes? Yeah, let's do it. We've got some fun ones. I realized. We were negligent last episode on the Marvel episode and didn't discuss, I believe, we discussed Snapchat's Snap Inc.'s Spectacles launch and initial very positive reviews. I can't wait to try them. But we did not discuss the elephant in the room, which is news that they are rumored to be preparing to file for an IPO.

• 1:00:37Speaker 03

  Yeah, really interesting to think about. They're a younger company than Uber and a lot of these other kind of like super unicorns.

• 1:00:44David Rosenthal?

  Yep.

• 1:00:45Speaker 03

  And in true Snapchat fashion, just not necessarily going with the trend. Like they just continually think of themselves as a different company or a different type of company than a lot of these other, other big companies, big private companies of their generation. And so I think, you know, there are reasons why it makes more sense for Snapchat to be IPO-ing and companies like Uber to be waiting. There's a lot of Uber in China, I think is kind of the, the big reason they're waiting. But with Snapchat, I continue to be impressed and I'm a buy at any price.

• 1:01:22David Rosenthal?

  Note to self, do not give money to Ben.

• 1:01:27Speaker 03

  Yeah, don't take my investment advice.

• 1:01:30David Rosenthal?

  Yeah. Also, really interesting with Snapchat. I mean, one, you know, to kind of as we talked about on the Facebook IPO show and then afterward as well, I think it's great to see a company that is four years old, but clearly has achieved scale and is in the process of building a meaningful revenue business and eventually hopefully profits as well. Take this step and do this.

• 1:02:01Speaker 03

  Yeah, they've achieved domestic scale. I'm very curious to see how they do internationally as they really start to expand there. Because I think, you know, what we keep seeing Instagram copy a lot of Snapchat's functionality. And if you're already an avid Snapchat user, you often are not really compelled by the Instagram features. You're like, I can already have my network, my habits. But then you think about all these people that are in countries where Snapchat hasn't gotten big yet. And now the sort of question is, will Snapchat ever get big in those countries since?

• 1:02:34Speaker 03

  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, sort of seed company bets where you just say, I wouldn't bet against that person. And like, I want to, I have a lot of faith in their ability to figure that out. And that's how I feel about Evan Spiegel and the kind of leadership at Snapchat. But I think it's important to like, note a risk that they've achieved domestic scale and we'll see how they do.

• 1:03:04David Rosenthal?

  Well, it'll be a very interesting S1 to read.

• 1:03:07Speaker 03

  Yeah.

• 1:03:07David Rosenthal?

  No matter what.

• 1:03:08Speaker 03

  Yeah, the risk to the business section is going to be awesome.

• 1:03:11David Rosenthal?

  I'm curious, I don't think Microsoft is a shareholder in Snap Inc. But Alphabet, Google Alphabet is, as are several other strategic companies. I'm kind of curious, Brian, like when, when you guys have had investments that then go public, what do you guys do with the stock?

• 1:03:36Speaker 02

  Yeah, we, we, depends on the situation. And we, we generally don't comment on what we do with it. And this goes back to, to the whole question around how, how and why we're doing strategic investing is, is, you know, selling a partner is usually a really difficult thing to do. And so we generally just don't talk about these things. And so, you know, people will ask, hey, Facebook, if you sold your stock? And we just don't answer. And it's for good reason, which is, assuming we're under the threshold, of course, for

• 1:04:13David Rosenthal?

  Yep.

• 1:04:16Speaker 02

  Yeah, then there's really no benefit whatsoever to talking, talk about how we, how and what we're doing with those, those stakes.

• 1:04:23David Rosenthal?

  Yeah. Which is actually interesting, something that I didn't realize even until I'd been working in venture for quite a number of 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.

• 1:04:43David Rosenthal?

  Oftentimes, we can't even if we wanted to. And so you have VC firms that are holding shares of companies that went public long ago. And figuring out, it's actually a big, it ends up being a meaningful kind of strategic discussion within VC firms of for each investment. When's the right time to sell? When 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 rather than selling on the 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, or give the shares back to our LPs.

• 1:05:20Speaker 03

  Is that LP decided, or is that decided by the management of the VC?

• 1:05:23David Rosenthal?

  It's decided by the management of the VC firm. And then so the risk of, you know, the sort of LP argument, typically, they want us to distribute as fast as possible because like, hey, you know, that's our investment. We invest in you. These are shares. They're now liquid on public currency. We have people that manage public stocks. You should give them to us.

• 1:05:42Speaker 03

  Right.

• 1:05:43David Rosenthal?

  The tension, though, is if we do that, and we think there's a meaningful chance that they might just sell those shares, then that can be detrimental to the company. If a whole slug of shares gets, comes on the market at once, that can depress the share price. So it's a complicated situation.

• 1:06:01Speaker 03

  Yeah.

• 1:06:02David Rosenthal?

  Hot take, this is just today as we're recording this, Amazon announced Amazon Go. We got to talk about this.

• 1:06:11Speaker 03

  Yeah, so Amazon Go is a driverless, drive-through store?

• 1:06:17David Rosenthal?

  Autonomous AI. It is all of these things. It's a grocery store here in Seattle that you walk into and there are scanners and sort of turnstile-like things when you walk into the store. You scan the Amazon Go app on your phone, and then it identifies you. And then, once you're in the store, you just pick up anything that you want to buy. You put it in whatever, you hold it, you put it in your backpack, you put it in your purse, and you just walk out of the store. No, no checkout aisle, no cashiers, no nothing. It just automatically tracks what you picked up and you pay for it through the app automatically.

• 1:07:00Speaker 03

  Yeah, I don't know if this will work, but I love, it's impossible to overstate how much I love Amazon's muscle for experimentation and ability to like do tens or hundreds of these sorts of things at once. And it's interesting, I'd love to know how big the team was that pulled this off. I'm willing to bet it's a lot smaller than you'd think.

• 1:07:21David Rosenthal?

  Yep. What's also interesting, we don't know, but 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, which is in U Village here.

• 1:07:38Speaker 03

  Yeah.

• 1:07:39David Rosenthal?

  Certainly, it's a very different model of the store. Super cool. Love to see this innovation. I can't wait to, it'll be open to the public in early 2017. I can't wait to go try it.

• 1:07:49Speaker 03

  Yeah, Brian, what's your take? You gonna check it out?

• 1:07:52Speaker 02

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

• 1:07:57Speaker 03

  Feeling like I'm shoplifting, but it being totally legit.

• 1:08:00Speaker 02

  Exactly. Exactly. I mean, this is going to create all sorts of consternation for shoplifters. I mean, how they're going to get around this is going to be an interesting question.

• 1:08:10David Rosenthal?

  Yeah, I wonder into the, you know, the product and the model for this, how much they thought about that. I mean, shoplifting is like a meaningful, you know, it's a meaningful cost to retail stores and grocery stores. This solves that problem.

• 1:08:25Speaker 02

  Maybe. I mean, obviously, if they have technology that solves that problem generally, you know, in theory, everybody, everybody who does retail is going to want to buy it. You have, you have lots of companies, or I shouldn't say lots of companies, but a few companies around that have anti-theft, anti-shoplifting technologies. I did some work actually as an investment banker for a company called Sensormatic back in the day, which has some of those. And, you know, they have some that you put in clothes, and if you try and walk out, it does the ink splash across, across the clothes to ruin them, just like you find with bank robbers. They put in those ink things that explode. Others that just make the thing go beep. But obviously, shoplifters, you know, have ways to

• 1:09:02David Rosenthal?

  Still prevail.

• 1:09:03Speaker 02

  Deal with those things. Yeah.

• 1:09:04David Rosenthal?

  Can't be no artificial intelligence, though.

• 1:09:06Speaker 02

  So there's an interesting question, right, with tech that Amazon's using here as to how they think this is going to work.

• 1:09:13David Rosenthal?

  Yeah. All right. Carvouts.

• 1:09:16Speaker 03

  Yeah. So mine is

• 1:09:21Speaker 03

  For years now, maybe even a decade, OK Go has been producing really incredible music videos and upleveling their game, every single one. So for anybody that remembers, maybe, I don't know, probably like 10 years ago, the treadmills video where it went totally viral and they shot it themselves in their backyard and, you know, there's people dancing and they've just choreographed, the band members having a choreographed dance on treadmills. And they uplevel their game over and over and over again. And maybe a year or two ago, they did this incredible drone shot one where it was, you know, the first music video that I saw that really took advantage of, oh, my God, what if we have this slowly rising drone go into the sky? And, you know, you can see patterns formed by thousands of people

• 1:10:06Speaker 03

  on the ground, all wearing different things. And they've upleveled their game again. So their new video for "The One Moment," the entire video is shot in a super high frame rate camera and-

• 1:10:19David Rosenthal?

  Snapchat spectacles?

• 1:10:20Speaker 03

  Yeah, it's not, it's not, but it's exploding paint and like bullets going through things and it's all-

• 1:10:28David Rosenthal?

  Oh, so it's like The Matrix?

• 1:10:29Speaker 03

  It takes place in like four seconds, like the whole music video, but it's all super slowed down. And so you have like three minutes of super high frame rate footage-

• 1:10:39David Rosenthal?

  Oh, that's cool.

• 1:10:40Speaker 03

  And it all actually lines up with the words they're singing and the music. It's really, really cool.

• 1:10:44David Rosenthal?

  That's really cool. That's really cool. I gotta watch that. Mine, which I alluded to earlier on the show, is UC Berkeley. I just found out about this recently and read it. They do this really cool oral history, this program that does oral histories with people that have been instrumental in kind of the development of the Bay Area. And one of the aspects is business in the Bay Area. And they have Don Valentine, who was the founder of Sequoia. And he founded Sequoia in the early 70s. He had been, he was at Fairchild

• 1:11:28David Rosenthal?

  Semiconductor. He was not part of the Trader S8 that I believe was the Trader S8 left-

• 1:11:36David Rosenthal?

  Where was it? They founded Fairchild and then he went to National Semiconductor and then he founded Sequoia, but these were like, this was the birth of Silicon Valley. Anyway, there's this great kind of 75 page, it's all a transcript of hours of interviews with Don and it's fantastic just to hear him talk about that, that history of the early days of the Valley and the semiconductor industry, but also the philosophy behind Sequoia, how it started, how they evolved their thinking process about things and they're still, you know, among the best in the business and how they've evolved over the years. Really cool. Will link to it in the notes.

• 1:12:16Speaker 02

  Cool.

• 1:12:17David Rosenthal?

  Brian, we know you've got one too.

• 1:12:19Speaker 02

  Yes, yes, I do. I find this particularly in light of everything that's going on right now in terms of the election is an article that O'Malley published in the New Yorker about a week ago called Silicon Valley Has An Empathy Vacuum. And I think it's just a really interesting thought piece for all of us just to think about, you know, how what we do affects everything and everyone else and whether or not there's more we could or should be doing or less that we could or should be doing relative to that. And that's relative to job displacement, relative to kind of changes in society that our technology

• 1:13:00Speaker 02

  can foster, such as how we're impacting journalism, how we're impacting culture and communities and all sorts of things. And so it's, it's really interesting.

• 1:13:10David Rosenthal?

  Yeah, it's a great piece and certainly something I and Ben and I in the show have been thinking about a lot over the last, you know, month or so is, you know, lots of questions to be asked, but I don't think we can, I don't think we should as a tech industry continue to operate just in ignorance of even trying to think about the broader impact of what we're doing, especially as we head into, you know, this age of Artificial intelligence and you know, all of the great things that are going to come from that and all of the social challenges as well. So it was a great piece by, by him.

• 1:13:49Speaker 03

  Yeah. And to, to just pile on like it's, I'd recommend everyone read it for sure. Something we have struggled with, I think, David and I and a lot of other people that, that I've talked to in the last few weeks and even before the election.

• 1:14:08Speaker 03

  We celebrate a lot of the things that, that technology does, growth to hyperscale.

• 1:14:16David Rosenthal?

  Instagram having 13 employees at when it was acquired.

• 1:14:20Speaker 03

  In shock and awe of the, 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 this software with zero marginal cost to the world at, at gigantic, enormous scale. And now with the internet making that even more accelerated. Yes, generally in the long term, more jobs are created after a single, one or two generations of, of a gap by an advanced technology, but it, as an industry, we really do over celebrate these gains in the short term and really do not come up with solutions for all the people that are disenfranchised because, because of

• 1:15:04Speaker 03

  it. And I think that, that this piece is really great. I think we are about to have a self-driving truck, huge change. And if anybody looks at that, that

• 1:15:19Speaker 03

  graphic that was floating around the internet about a year ago of truck driving is like the top job in 20 states.

• 1:15:26David Rosenthal?

  Yeah, including California.

• 1:15:28Speaker 03

  Including California and like 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 too long now.

• 1:15:39David Rosenthal?

  You can't ignore the consequences.

• 1:15:40Speaker 03

  No, no. And I'm, I know I'm rambling a little bit on this, but it really.

• 1:15:45David Rosenthal?

  We're glad you brought it up, Ryan. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:15:54Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:16:05David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:16:26Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:16:38David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started. All right.

• 1:16:50Ben Gilbert?

  Should we bring it home?

• 1:16:51David Rosenthal?

  Yeah.

• 1:16:52Ben Gilbert?

  Awesome. Well, Brian, thank you so much. To our listeners out there, if you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you've been a longtime listener of the show, or maybe you're a new listener and you just want to help us out, we would love, love, love a review on iTunes or a tweet or a share on Facebook or any way that you can help grow the show. So thank you so much. Thanks for listening.

• 1:17:16David Rosenthal?

  Thanks to Brian, and we'll see you next time.

• 1:17:18Ben Gilbert?

  Yep.