Alex Previts

CASE: MICROSOFT’S IP VENTURES

Discussion Questions:

1. How does Microsoft engage in corporate venturing? What alternative models could it have
adopted? What are the advantages and disadvantages of the approach that Microsoft took?
- Microsoft’s IP Ventures unit provided access to Microsoft’s research in order to “smooth
relations” with venture capitalists and improve research by motivating researchers and keeping
up with technology developments.
o Corporate Venture Capital Model
o Other option was New Venture Groups (Create under umbrella of firm)
 Mansour suggested adding royalty feature and “put” feature
- Advantages:
o Allows Microsoft to experiment in the market
o Researchers want their ideas to be commercialized, Microsoft eases this
o Worst case, they learn more about the market/technology
- Disadvantages:
o May lose important patents
o May create significant competitors
o May relinquish important technology

2. Can Microsoft’s approach be scaled beyond its current size? Why or why not?
- The approach is meant for companies in its infancy, which is very risky, and at the rate that they
are investing, it may not be financially viable to increase the size of its approach.
- The increase in productivity and the ability to invest with IP rather than a fund means
helps Mansour’s case, but increasing the scale of the approach also increases the scale
of the risk.
- Mansour would need to increase his teams size and be able to convince Microsoft to
grow the unit. The increased risk requires more time and resources that may be deemed
to be excessive.

3. How can Microsoft structure its investment to reduce dilution?

- Lowering their initial ownership percentage while maintaining anti-dilution rights would prevent
dilution, but may companies may be less likely to accept that since it places more risk on them.
- Mansour proposed the full ratchet, rather than the weighted average, mechanism to
reduce dilution. Otherwise, more in-depth valuation could reduce the risk of dilution.

4. What are the key factors to making Microsoft’s model work?

- IP-for-Equity, open research, trustworthiness, no fund.
o Identifying the technology desired, building a strong team, offering valuable intellectual
property
 o Keeping open dialogue, researching in and outside the firm, encouraging external
researchers, incentivizing innovation, conveying benefits.
o Maintaining a positive relationship with the VC community, positive press, positive track
record of helping invested companies as well as Microsoft.

5. If you were a venture capitalist, would you want to fund one of Microsoft’s IP Ventures?
- Since there is a lot of uncertainty surrounding the sustainability of the project and their exit
strategies and they do not offer any money with the IP, I would probably invest elsewhere.
Despite their positive track record, even they acknowledge the amount of risk and uncertainty in
the program.