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

A special episode of Acquired — a discussion of M&A at Microsoft with Brian Schultz, Managing Director and Head of Strategic Investments. Brian started at Microsoft in 1999 in corp dev, left in the mid-2000s for a startup detour: he co-founded Ontela in Seattle (ultimately acquired by Photobucket) with Dan Shapiro, now cofounder and CEO of Glowforge. After that he returned to big tech and M&A, running Strategic Investments ever since — while staying very active in the Seattle startup scene.

Asked what brought him back after tasting the startup world, his core answer is empathy: having been on the other side — raising money, living through the discussions between strategic investors and acquirers — "it actually has made me a better corp dev person by far." As a startup CFO and COO he hopes he avoided a lot of pitfalls, kept his cap table clean, and knew the traps others fall into. He wishes more people in big companies and startups had that "empathy" to reach across the aisle.

One vivid example of the difference: in a startup, you have trouble getting people to call you back — partnerships, fundraising, whatever, you're out there trying to become known and actually do things. In a big company, the opposite problem: too many people to deal with. On M&A specifically: a few years ago he acquired a company of about 25 people and looked at his conference-call setup: "you have 28 people on the call." All the business owners plus their lawyers, inside and outside the company. Of course that doesn't scale — even doing LinkedIn, the inside team isn't necessarily much bigger, despite the 10,000-person target.

Organizationally, corporate development sits under the CFO and manages Microsoft's balance-sheet activities: acquisitions, investments, divestitures, joint ventures — partnership activities as they relate to the balance sheet. How targets get found is a mix, but typically driven by the business groups, because the product teams know their markets much better — Microsoft is so broad that a central team can't be all-knowing; "you need to give space."

Ben maps it out: they have extensive, constantly evolving maps of different spaces; any given micro-area might have 10, 15, 100 companies — at Microsoft's scale of crossover products you'd have a really complex diagram, impossible for a central team to keep up with. Most M&A — beyond the headlines of LinkedIn and large deals — tends to be much smaller, driven by product roadmaps: where there are holes, what they need to fill, where they're going. "Those square up the center of where the product teams are thinking."

Before his first Microsoft stint, Brian was an investment banking analyst — and even then he felt too removed from actually doing things: "you're advising and moving things around the chessboard but you're not actually doing anything, producing anything." "You're not building the chess pieces." Hence Microsoft in 1999, at the height of the dot-com boom: his read was the boom would end somewhat soon, so he wanted to position somewhere he'd still have a job in a year and learn from it. He'd never even been to Seattle.

It worked out nicely. Early days were super active; he advised the Windows and infrastructure/enterprise teams on security, storage management, and those systems — and helped create an internal startup: they started the security business group back then (eventually becoming Windows Defender and a whole bunch of other things). One of the first things they did was acquire anti-spyware and antivirus technologies and roll those in alongside what they built. Joining that startup-in-Microsoft group, he realized: "hey, I really like this startup thing" — but doing it within Microsoft wasn't quite what he had in mind; he saw the pros and cons and wanted to do it for real.

Before Ontela there was actually a company he co-founded called Djinnisys, later Plectix Biosystems, with a Microsoft cofounder; they raised money, and he left about a year after funding to join Dan and Charles in founding Ontela. The insight: pairing business knowledge and corp-dev knowledge — general finance and business-strategy thinking — with really great technical and product folks is a really nice combination; that was the founder role evolving into CFO and COO.

The investment side (probably most of his time these days) has evolved more than the core M&A role across the three epochs. In the dot-com timeframe Microsoft was a very active investor — every company went public a year after founding; "the Series B round was your IPO." A commonly accepted IPO requirement wasn't revenue but having a strategic investor: brand-name investors lent strength to the IPO. "The number one VC question was: what are you going to do when Microsoft enters your space?" Cisco, Microsoft, the big companies invested a lot in lots of startups — undersea fiber cables, satellite companies, cable companies, telcos, DSL, you name it. Lots of money spent — "and that didn't end so well": no strategic return. From Microsoft's perspective, despite a nice balance sheet, investors don't hold them to investing enough as an investor — they hold them to delivering revenues and profits as an operating company.

So even turning a billion dollars of balance sheet into two, three, five billion doesn't move the stock price the way doubling or tripling revenue and profit does. The reason to invest had to be strategic: turning investments into leverage plays on increasing revenue and profit — and that didn't happen. So they mostly stopped through the 2000s. One notable exception: the 2007 Facebook investment — where it's really, really deeply strategic, they'll go out and do it.

"At the time the world thought you guys were crazy." "They thought we're nuts." The valuation was $15 billion — the last round had been done at $5 billion, so they took it to 15 — and they were certainly ridiculed. "Obviously in hindsight, that did okay." Ben recalls the aftermath: lots of integrations, the companies very friendly; in the Windows Phone era of doing things differently than iOS and Android, there was a lot of proprietary first-party integration with Facebook — and providing Bing back to them for mapping. "I can totally see what you're talking about on the strategic side."