Software startups at an industry event Tuesday received a clear message from the venture capital community and Microsoft: Do not automatically look to Microsoft as a rainmaker.
Fledgling companies were instructed not to set out to be acquired by Microsoft. Moreover, Microsoft usually relies on venture capitalists to seed startups rather than funding companies on its own.
Software executives in attendance were told not to expect Microsoft to be their sales channel, either.
While emphasizing the symbiotic relationship between Microsoft and smaller software companies, speakers at an IBDNetwork event entitled "Partnering with Microsoft: The Insider's Guide for Startups," stressed that partners cannot simply ride the Microsoft wave to profitability. While Microsoft can provide a great deal of assistance through its partner programs, third-party software must complement Microsoft and offer value, speakers said during presentations held at Microsoft offices here.
"Microsoft is not a channel, and expecting that Microsoft is going to drive revenues [for you] is probably a going-out-of-business strategy," said James Phillips, CEO and co-founder of Akimbi Systems, a virtualization software company that partners with Microsoft. Startups should not expect Microsoft to sell their product for them, he said.
Microsoft also is not likely to buy your company, according to Sam Jadallah, a general partner at venture capitalist Mohr Davidow Ventures and a former executive in Microsoft's partnering program.
While at Microsoft, Jadallah said he witnessed 100 companies a week coming in seeking to be acquired by Microsoft. He left Microsoft in 1999 after being there for 12 years. But Microsoft does not buy as many companies as it used to and the price may not be what a startup expects to receive, he said.
Companies seeking to be acquired often were struggling or thought they would be a perfect fit at Microsoft, Jadallah said. But startups are better off pursuing a partnership strategy with Microsoft and taking control of their own destiny, he said.
Providing further guidance, Jadallah said ISVs should not plan to close a deal with Microsoft by a certain date. They should not plan on having Microsoft provide their first customers and they should not skip ISV programs.
What gets Microsoft's attention is when a startup has customers, he said. "With Microsoft, customers speak louder than anybody," said Jadallah.
The many ISV programs at Microsoft usually can fit a startup. "It's very unlikely that they don't have a program that works for you," Jadallah said.
But it can be tough to navigate through Microsoft at first. "It's kind of Byzantine to look at Microsoft and figure out, 'Where do I start to engage?'" said Jadallah.
Microsoft is generally not in the venture capital game, according to Daniel Lewin, corporate vice president for .Net Business Development at Microsoft. "We typically find the venture capital community would prefer to put their own money in because there's plenty of money in the venture community," and these firms are good at handling their investments, Lewin said.
Third-party companies benefit from aligning with Microsoft, he stressed. "For every dollar that we make, somewhere between US$7 and US$11 is made by someone else" through the Microsoft ecosystem, Lewin said.
The issue of ISVs developing technologies that Microsoft itself may be working on was broached. Companies have to show how their solution rides on top of Microsoft's similar offering, said John Powers, president and CEO of Digipede Technologies, which makes grid computing software built on top of Microsoft's .Net platform.
"Something is being invented at Microsoft right now that competes with everything you guys are thinking of right now. You have to be able to work with that," Powers said.
More than 96 percent of Microsoft's revenue is generated through partners, said Mark Barry, managing director of Microsoft's U.S. venture capital and emerging business team. Partners can engage a number of programs, such as Empower for ISVs, which is for early-stage ISVs to accelerate development, and the Emerging Business Team, which works with new companies. The Microsoft ISV Royalty Licensing program allows ISVs to embed some Microsoft software in their own products.
Microsoft tends to work with venture capital-backed companies because that way, Microsoft knows there has to have been a level of due diligence undertaken in order for a company to get funding, Barry said.
One ISV in attendance, however, described difficulties in fitting in with Microsoft's partnership efforts. It was difficult to get traction with Microsoft, said Patrick Gilbert, president and CEO of 4SmartPhone, which makes mobile solutions.
"We didn't have an agenda of being bought out or what have you," Gilbert said. The first company to call 4SmartPhone was not Microsoft but Palm, he said.
Jadallah responded that it was important for ISVs to know who their advocate is going to be at Microsoft.