Microsoft’s M12 lays out investment strategy, aims to make the corporate VC community more ‘founder-friendly’

Nagraj Kashyap, corporate vice president and global head of M12, speaks at the M12 Summit. (Nate Gowdy Photo)

In just a matter of weeks, Microsoft went from a customer of Directly’s to an investor.

The San Francisco-based company finds and compensates expert users of a product to help come up with detailed answers to complicated support issues that can later be used to automate the customer service experience. Directly did a 45-day test with Microsoft, recruiting expert Excel and Xbox users to supply customer service intel for the respective departments. Apparently Microsoft enjoyed the experience, because just a few weeks later, the tech giant invested in the startup.

“The impact was not only the ability to transform their support equation, but to start to make automation work at scale and they saw an impact across not just Microsoft, but potential for all of Microsoft’s customers,” Directly CEO Antony Brydon told GeekWire. “We had light connections (with) the venture group before that, and … we just started talking and it became an investment in about three weeks.”

Directly is one of 78 companies Microsoft’s venture capital arm M12 has invested in since it was founded three years ago. The investment unit has about 25 employees today, and only about half of them are actually working on investing in companies. The rest are working directly with the companies in M12’s portfolio to help them succeed and find the right resources at Microsoft.

Directly CEO Antony Brydon. (GeekWire Photo / Nat Levy)

“That is actually the biggest thing we do,” Nagraj Kashyap, corporate vice president and global head of M12 said about helping companies out post-investment.

Last week, M12 representatives, venture capital firms, Microsoft executives and leaders of the nearly 80 portfolio companies came together for the first time at the inaugural M12 Summit. GeekWire got access to a portion of the event, as the tech giant took over the Four Seasons Seattle hotel.

As top Microsoft executives like CEO Satya Nadella and Executive Vice President of Business Development Peggy Johnson spoke, more than 200 meetings between startup leaders, M12 and other investors sparked and continued conversations around partnerships and big funding rounds. Microsoft aimed to show how serious it is about M12 as a major investor to both bolster the Seattle tech ecosystem and become a global name in the investment community.

Kashyap helped spin up M12 three years ago, coming over from Qualcomm, where he led the chipmaker’s venture capital arm. From Qualcomm he brought a philosophy of focusing on the founder and the startup, rather than his own company.

“If you do right by the company that you’re investing in, they will do well,” he said. “And if they do well, not only do you get a financial return, but the reason you’re doing it, you get some mutual benefit to your parent company.”

Kashyap and M12 are pushing the corporate venture capital community to be more founder-friendly, unveiling a plan to get other investors to adopt some core priorities. Those include being upfront about why M12 chooses to invest or pass on a company and ending terms that favor Microsoft over the startups that it invests in.

The M12 Summit in Seattle. (Nate Gowdy Photo)

What Microsoft is and isn’t looking for

Microsoft is focused on selling to big corporations primarily. So M12 is looking for startups that do the same thing. And that means consumer-facing companies are typically not a great match for M12.

“We don’t want to invest if we cannot add value to the company,” Kashyap said. He continued: “Why would somebody take my money if I can’t help them afterwards? So a company that’s doing purely consumer stuff is very hard for us to help.”

M12 has invested in companies focused on Microsoft hotspots such as AI, cybersecurity and employee productivity. But it has also gotten involved with companies outside Microsoft’s traditional areas of expertise, including retail. Cooler Screens, for example, is a Chicago-based company that makes digital cooler doors.

M12 has invested in Seattle-area startups such as Zipwhip, Pixvana and Outreach. It has invested in startups in 11 countries, and M12 has offices in New York, San Francisco, Seattle, London and Tel Aviv. M12 also recently expanded its footprint to India.

Kashyap emphasized that the financial health of the startups is key to M12’s decision process. They need to be able to stand on their own, with or without help from the tech giant.

Each of the startups GeekWire interviewed described a rigorous due diligence process before Microsoft decided to invest. However, the company was straight forward throughout the process.

“I think it’s always difficult when you’re raising money and talking to VCs and working with partners if there’s ambiguity and you never really know where you stand in the process, but M12 [was] always very clear,” said Matt Fairhurst, CEO of Skedulo, one of M12’s most recent investments. “They run a really clean, tight process and they were clearly committed to giving us some kind of indication whether it was a yes or a no.”

Skedulo CEO Matt Fairhurst. (GeekWire Photo / Nat Levy)

M12 led a $28 million funding round for Skedulo, bringing the company’s total funding to more than $40 million. The startup has offices in San Francisco, Vietnam, Australia and the U.K. and aims to simplify managing a mobile workforce and scheduling jobs for groups like field technicians and caregivers.

Once you’re in with Microsoft, the founders said, the company lives up to its end of the bargain of putting the resources of the tech giant behind the startups. One of the main reasons to take an investment from a big company is to integrate with various parts of the organization, such as the products and sales teams.

However, a lot of corporate venture capital arms promise more than they can deliver. Venture arms want to help startups, but the rest of the company sometimes doesn’t share that same commitment, founders said.

“I think a lot of other corporate VCs, the team means well, but the entity doesn’t intend to the same thing,” said Deidre Paknad, CEO of WorkBoard. “The commitment stops at the edge of the fund and the VC group and doesn’t go deeper into the organization.”

WorkBoard CEO Deidre Paknad. (GeekWire Photo / Nat Levy)

M12 first invested in WorkBoard’s $9 million Series A round in late 2017 and re-upped with the startup’s Series B round announced just last week. WorkBoard helps companies see through their strategic plans by using analytics and artificial intelligence on a cloud-based platform that works across mobile apps.

Microsoft wants to live up to its promises by using its massive global sales teams to help sell the startup’s products and integrate them with widely-used tools such as Skype and Microsoft Teams. Harnessing the power of one of the world’s most valuable companies is a boon to startups, but just as important is access to key executives, veteran product and marketing teams and more.

The involvement of Microsoft’s Peggy Johnson in M12 is important for the venture arm. As Microsoft continues to evolve under Nadella, having a high ranking champion for the investment division assures that it will continue to get buy-in at the highest levels.

“You just get access that would be harder to get for a smaller company: access to key executives, access to teams,” said Omar Tawakol, founder and CEO of Voicea, an enterprise voice collaboration startup with its own digital assistant named Eva.

Before Voicea, Tawakol led BlueKai, a company that operated a large repository of customer data that allowed advertisers to better target messages to specific audiences and was acquired by Oracle in 2014. Tawakol, whose company is part of M12’s vast portfolio, said it still takes work to make the relationship with Microsoft a strong one, but it can propel a startup to the next level.

“They’re not going to do anything irrational. They’re not going to just be nice and roll out the carpet and hand you some integrations,” Tawakol said. “But it’ll give you a chance. And if you do it right, that’ll be very helpful for you.”

Omar Tawakol, founder and CEO of Voicea. (GeekWire Photo / Nat Levy)

Doing what’s best for the founder

Microsoft wants to start a movement in the corporate venture community to present more favorable terms for startups. Kashyap promised that M12 will no longer include right of first refusal terms in its investments. That’s when a startup wants to sell all or some of the business, but the corporate investor gets the first shot at buying before any other suitor.

These terms are challenging for startups because they can scare away potential investors or buyers. Kashyap says M12 tries to limit its use of right of first refusals, but it has employed them in the past. But M12 pledged to stop using terms like these in its investments entirely.

Kashyap wants to encourage fellow corporate investors from big companies such as Amazon, Google and others to join M12’s pledge to give more favorable terms to startups. He acknowledges it will be a challenge to get buy-in from others, but Kashyap said he believes that if investors do right by startups, the companies will do well, which benefits the entire ecosystem.

“Not everybody’s going to like it, but change doesn’t happen if you’re not willing to take the lead,” Kashyap said. “And so we felt that we were in a position where we are established, we’ve shown a track record of being founder-friendly. So we can speak from a place of truth. And that’s why we want to push this.”