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Microsoft’s M12 Venture Arm Heightens Market Investment

From the outside, M12’s mission likely seems simple to most: Invest money from the second-most valuable technology company in the world, put its monstrous go-to-market machine behind said investment, and then create a unicorn.

In reality, Microsoft’s venture arm must navigate complexities and obstacles not seen by traditional venture firms—and even many corporate venture arms—as it looks to drive returns back to the Redmond, Washington-based tech giant. At the same time, M12 must build the vast ecosystem Microsoft plays in, such as cloud, AI, business applications, infrastructure, security and deep technologies, and support the entrepreneurs it invests in.

“Over the past five years, M12 has established the expertise, playbook and growth engine to meaningfully accelerate the success of our portfolio companies,” Corporate Vice President and Global Head of M12, Michelle Gonzalez said. “We have a unique opportunity to support startups with global ambitions through Microsoft’s scale.”

M12 invests from a single fund that is replenished by Microsoft—the fund’s sole limited partner—off the company’s balance sheet. M12 does not release any details on how much it has invested since being founded in 2016 or the size of the fund currently, but just as the venture world has grown in the last five years, M12 also has increased the size and speed at which it makes investments, according to Crunchbase data.

In 2016, M12 made 15 investments in its first year as a fund, according to Crunchbase data. Last year, it made a record-high number of 55 investments and is on pace to beat that number this year already having made 39 investments through the first eight months of 2021. Overall, M12 has invested in 107 companies since its inception.

However, it’s important to understand that M12 is not your typical corporate venture fund. It is first and foremost driven by financial returns—it does not invest just for Microsoft corporate to gobble up that startup later or for “a seat at the table.”

In fact, a few years ago M12 did away with “right of first ” (ROF) terms—where an investor gets the first shot at buying the startup before any other suitor.

“We are financially focused, not strategic in that sense,” said a principal at M12 who invests in SaaS, infrastructure and health care IT for the firm Priyanka Mitra. “However, we certainly look to help out the founders and companies we invest in.”

Since the fund’s founding in 2016, nearly all of our term sheets have been clean—without any restrictive terms, she added.

“We firmly believe that being fully aligned with founders is the only way to drive value to all stakeholders,” wrote former global head of M12 Nagraj Kashyap in his blog in March 2019 when speaking of getting rid of ROFs. At the time, M12 would use ROFs or other restrictive terms when investing in companies where other corporate VCs had similar terms. Such terms were included early on in the firm’s life on only a handful of deals.

In March 2019, M12 codified its commitment, refusing to insert restrictive terms in any of its term sheets, even if other corporate VCs it invests alongside require them.

Not surprisingly, as M12 has grown and invested in more companies, the size of the checks it writes also has gotten larger—especially with the venture world being on a tear the last few years. In the fund’s first three years, it was writing checks up to $10 million, but that amount has gradually grown to about $20 million.

The firm has not just looked to invest more dollars, but to take the lead in more funding rounds. Last year, M12 led 13 rounds: a high for the firm. This year, it already has led 11 and seems like a sure bet to top 2020’s total.

Focus is one of the things that attracted Matthew Goldstein to help co-found M12—then called Microsoft Ventures—in San Francisco in 2016 and open its European office in 2019.

“It’s very unique,” Goldstein said of the fund. Since Microsoft supports the fund financially, managing directors are left to pretty much solely look at investment opportunities without worrying about a large limited partner base.

“We are looking for the best tech solution available anywhere in the world and bringing it into Microsoft’s world,” according to Goldstein, an M12 managing director who invests in cybersecurity.

M12 and Microsoft are just at the beginning of a lot of new endeavors, one of which is ring fencing a new seed-stage vehicle within its fund to get into more companies early, and where it anticipates writing more checks between $500,000 and $2 million. The firm invested a new high for itself in seed funding last year when it took part in seven such rounds.

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