"Microsoft will acquire my company"

Entrepreneurs confidently tell Venture Capitalists "Microsoft will acquire my company". VCs roll their eyes...they have heard it a million times. But, Microsoft does have a rich tradition of acquisitions.  The first, and most important, acquisition was QDOS from Seattle Computer Products which became MS-DOS. What kind of companies does Microsoft acquire? How do they decide to acquire versus build internally?

First lets start with a review of some of the most successful Microsoft acquisitions. Some of these may surprise you.

• QDOS became MS-DOS
• ForeThought became Powerpoint
• SoftDesign became Microsoft Project
• Vermeer became FrontPage
• PlaceWare became Live Meeting
• Vicinity became a key part of MapPoint
• nCompass Labs became Content Management Server
• Bungie Studios became Halo
• HotMail
• Visio
• Great Plains
• Groove Networks

Microsoft has acquired an average of 10 companies per year over the past 10 years. Many of them are smaller (less than $50M) acquisitions that go unnoticed by the press. These smaller acquisitions usually provide a great team of people, and a few key features in a much larger existing Microsoft product. At the other end of the spectrum, Great Plains is an example of a multi billion dollar acquisition that created a whole new business unit for Microsoft. For a more complete list of Microsoft investments and acquisitions see http://www.microsoft.com/msft/InvestmentandAcquisitionsList.mspx

What is most important to Microsoft when making acquisition decisions? People are the most important factor in any acquisition. Microsoft looks for talented engineering teams with vision and passion and experienced management teams. Second is technology and IP that can add value to an existing Microsoft product. Third is the opportunity to acquire stand alone products for existing customers. Examples include Visio, Hotmail, and Vermeer.  Another, more rare, decision point is the opportunity to enter whole new markets. Great Plains and PlaceWare are excellent examples.

How does Microsoft decide to acquire rather than build internally? This is the toughest question in any acquisition discussion. Microsoft has thousands of very talented software engineers that can build just about anything. How can you justify paying hundreds of millions or even billions for something a team of 30 engineers could build in a year or two. That translates to about $12M of development cost versus a huge acquisition cost. Technology is not the issue here. It is all about marketing channels, sales expertise, and market leadership in segments where Microsoft is not strong.

It comes down to this; if the company in question has a product that is squarely in the domain of an existing Microsoft product than the valuation is a small premium over the internal development cost. If the company has market leadership in a new product space or market segment than the valuation goes up significantly.

Entrepreneurs should remember this. The "barriers to entry" are most often market position, not technical brilliance. I have heard start-ups say "we have a two year lead on our closest competitor". In fact, I have said it myself at previous start-ups. I was wrong.  Most technologies can be replicated by a talented engineering group within a year or less. Many times a similar technology can be licensed immediately and a new product shipped within months.

Many start-ups have failed by focusing too much on their technology and not enough on the value they bring to customers and the channels they use to service the customer. Many times the early innovator fizzles, and a "fast follower" comes in and makes all the money. That will be the subject of my next post.

Comments

[Mick]

That link to the Microsoft page only shows 2003 and back and that doesn't look right. Even if you click to the nav and go to 2005, you only get the old ones.

Is there an up to date page somewhere?

Interesting blog point too. I wouldn't have thought that people were so important since thtey have a fat pipe to good people and since people who start good businesses are often entrepreneurial anyway. Of course that spirit is good, but they don't often hang around long - they get itchy feet. And as a serial (pun intended) entrepreneur, I wouldn't see Microsoft as a melting pot of innovation.

[Alexander]

Very nice

[scapola]

What about Firefly? That was a great company - propably the first start up with the concept of web communities and it started the whole concept of agents, and methods of suggesting products similar to those of your friends or people of same interests.

That was an interesting company which dissappeared into the Microsoft machine - leaving as the only souvenir the Passport concept (Firefly was the first to introduce that - and bn.com was their first site to support it).

[DonDodge]

Firefly was a great idea/company. Collaborative Filtering was ahead of its time then, but it seems appropriate now.

There are several new search engine start-ups using collaborative filtering to generate better results. I saw a tiny company named Jookster last week that does exactly this. Very interesting.

[Peter]

So the key question is this: I have a cool idea for a new product. I know that Microsoft can replicate that product about as quickly as I can develop it (I have a slightly better and more agile technology team, but Microsoft has a decent bit of the technology already in place). I know that if Microsoft were to develop it, they'd make hundreds of millions on it. If I were to develop it, and Microsoft was to not follow, I'd probably make tens of millions. But, in the most likely case, I'd develop it, and then Microsoft would replicate it and crush me, and I'd come out broke. How does one build a business model in this scenerio? Microsoft would save maybe a year's time if they were to acquire me, and get a few good engineers, but since we both knew that they could crush me, they'd probably offer me a pretty lousy deal.... (this is about a real product I am contemplating developing)

[DonDodge]

There are lots of companies that have built very nice businesses by adding value on top of Microsoft products. In fact, there are thousands of partner companies that we work with, and recommend to customers, who do just this.

Sometimes the product groups will come out with a similar product or service but it is typically years later, and typically more broadly focused. Microsoft tends to stick to "platform" and "infrastructure" and not get very specialized on applications or services. There are also lots of companies that build "add-ins", or small features for existing Microsoft products.

In most cases smaller start-ups can release products to the market much faster than Microsoft can due to its size and userbase. Start-ups need to continue to innovate and add value. In fact, I wrote a blog on just this subject called "Ride the bear-innovate or be eaten alive". You can find it on the left side bar under "Best Posts".

[Abhishek Sethi]

This article brings forth a very valid point. I share the same concern of Peter. And why only microsoft.. there are get "aquired or perish" stories everywhere. Just that microsoft is in every field of software development, that the news items are more. Oracle, SAP and also follow the same practice. There will always be a big fish. I suggest forming a school of Piranhas while you are snall.. consortiums of small companies.. Japanese are known to have done this. They partner in innovation and even taking on competition as a single big company would. Part your ways later. A company doesn't require incubation only in its early days when its innovating, but also in the initial period when it ventures the rough waters.

[Quario]

good info.