Microsoft VC Summit 2006: On Microsoft’s startup acquisitions

During his remarks (which I will blog when I have a bit more time), Steve Ballmer made it clear that Microsoft will continue being acquisitive, at an accelerated pace, with a price sweet spot between $30M and $200M. Of particular note was the fact that 1/3 of acquired startups are not VC-backed, just bootstrapped or angel-backed.

I found Don Dodge’s very useful post in my trackback log, in which he lists Microsoft’s most recent startup acquisitions and provides some background on the strategy:

VCs are always interested in Microsoft’s acquisition activity and direction. Over the past 12 months Microsoft has made 22 acquisitions totaling nearly $1B. This compares to just 9 acquisitions the previous year. […] Acquisitions are typically made for three reasons;

  • People – acquiring great engineering teams and operating managers
  • Technology – adding a technology to an existing product set
  • Time to market – sometimes the market moves faster than Microsoft can release a product. Security is an example. Sometimes legislation changes the market too quickly. Sarbanes-Oxley introduced new requirements for compliance, so acquisitions were made to respond.
  • New Markets – Great Plains allowed Microsoft to enter a completely new market. Teleo got us deeper into the VoIP space.

Acquisitions are rarely made based on revenues or profits. The price and multiples for these types of companies are too high. Microsoft already has great brand recognition, great sales channels and partners, and existing product lines. Small acquisitions that can be leveraged across these strengths yield the highest returns.

Here is a list of the 22 acquisitions sorted by product group;

It appears that many of these acquisitions were focused on MSN properties and consumer based services. One thing to remember about Microsoft…the product groups run the company, and they all work largely independent of each other. They make the decisions about what to acquire and when. There are acquisition teams but they tend to be called in to execute the deal after the product groups have decided what they want to do. So, there will not necessarily be a high level strategy that all these acquisitions fit into, but they make sense on an individual basis.

One of the challenges Microsoft has to overcome is the speed at which their Corporate Development function can execute these deals in a competitive bidding situation.