Jon Gelsey, Director of Corporate Development from Microsoft joined us in Vancouver yesterday to share some insights on the process that he goes through when considering to “buy vs. build:”

1. Adjacency - For starters, Jon said they look for companies that are “adjacent to the core business.”  In some instances they have bought companies that are not necessarily adjacent but something they know they could benefit from moving forward. A perfect example of this is their acquisition of Aquantive in 2007, which they knew would help better monetize Microsoft’s online content.
2. Valuation – Considering valuation and doing a model helps Jon decide how much more money they will make by buying your company today vs. developing the technology in-house and releasing it in 8-10months.  ”At the end of the day, a valuation is all about what someone is willing to pay for you,” Jon said.
3. Think like a VC - Since everything moves really quick in the tech industry, Jon needs to think like a VC and have an asymmetric risk return.  Models are imprecise.  And at the end of the day, Jon and his team have to decide that based on their model and the assumptions is this acquisition “directionally correct.”  What matters most to Microsoft is taking market share and keeping it.
4. Market Traction & Technology –  Two girls in a garage with a few users vs. 20 people in an office with real customers makes a difference.  Microsoft is looking for traction, credibility and getting another point of “query share.”   That said, Jon stressed that the size of your company, number of employees, and price is all ultimately irrelevant.  Microsoft will happily consider buying a two person company or a larger entity.  However, they sweet spot is a company with less than 50 employees because of the low organizational impact.
5. Team and Culture – This is something Microsoft looks closely at.  They have passed on deals for cultural reasons.  While culture is important, Jon’s team looks for good documentation, coding and hiring practices.  And after a price is negotiated, Microsoft will hire an independent third party of your choice to delve deep to find out if your code actually does what is advertised.
6. Location – Microsoft has bought and invested in companies all over the world.  Location “matters only as much as it becomes a friction point.”  If Microsoft can manage a company remotely, then borders and location are not an issue.
7. Patent Portfolio - As a startup, you probably don’t want to be spending your money on filing patents.  VCs like Brad Feld would like to abolish software patents all togther. Jon stressed that “any technology is replicable” and if you are concerned bout people stealing your ideas, don’t share your core IP.  Jon mentioned that Bruce Sewell, Apple’s Lawyer believes that a “patent is worth pretty much what it costs to process it.” Execution is what matters.
8. Get Noticed – If you want to capture Microsoft or any acquirers attention, focus on building a quality company. Execute! Execute! Execute! Don’t worry about the exit.  Jon said, “Performance is the best advertisement.”

And once you do get noticed, be organized.  Eliminate as many friction points as possible to getting the deal done.  If Microsoft asks for your latest financials and historical projections, turn it around fast.  Let them be the bottleneck.

As you build your company, Jon recommends working with good attorneys, practicing good corporate hygiene and engineering practices and fully understanding all risks of the deals you sign.  If there are any weird contracts you sign or deals you do along the way, these can affect your success and possibility of a future exit.

Microsoft also invests in companies as a syndicate investor but they did lead the round for a multi-touch screen company called N-Trig in 2009.  ”We will only invest, when we sign a commercial deal along side it,” Jon said.  Investing is a great opportunity for both sides to build a relationship that could lead to an acquisition down the road.

If you are interested in exploring a deal, all you have to do is send Jon an email jgelsey@microsoft.com and he will happily take a look at it.

Many thanks to Jon for taking the time to come to Vancouver to meet with us and to Fasken Martineau and BCIC for helping us bring Jon to town.

If you have any other mentors you would like to connect with – leave a comment here and we will see what we can do.