Advice: Microsoft Should Invest Y Combinator-style

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Former Microsoft employee and current founder and CEO of web startup Blist Kevin Merritt has some advice for Microsoft: rather than throwing around billions to try to acquire Yahoo! or buying unproven search startups for reportedly twice their valuation, try throwing a little cash at young engineering talent with startup ideas. The results could be well worth your while.

Last October, Microsoft CEO Steve Ballmer said that the company planned to acquire 20 companies per year ranging from $50 million to $1 billion for the next five years. Merritt’s plan, which he outlined in a blog post yesterday, would cost significantly less than that.

According to Merritt, Microsoft could benefit from investing heavily in small startups at a fraction of the cost of acquiring established companies (but still with a larger investment than Y Combinator and most of its clones, which would make the Microsoft opportunity likely very attractive to startup founders). Here’s how Merritt envisions the Microsoft implementation of Y Combinator working:

  • A three person team comprised of Ray Ozzie, Don Dodge and Dare Obasanjo would be the investment committee.
  • Anyone can submit a 10-slide business plan. No NDA protection, which is the norm in the VC industry.
  • Plans are reviewed once a quarter. Those that make it through the screening are invited to a 90-minute in person demo and pitch.
  • At the end of the 90-minute demo & pitch, the three-person Ozzie/Dodge/Obasanjo investment committee makes an immediate decision. It’s pass/fail. You’re in or you’re out. American Idol style. You’re going to Hollywood or you aren’t.
  • If you pass, here’s what you get: an investment of $100,000 cash plus $25,000 per founder, but never more than $175,000; all the Microsoft software you need; unlimited, free use of Microsoft’s cloud computing infrastructure for 3 years; mandatory office space for up to 5 people for the first year in either the Redmond or Silicon Valley Campus; all the non-sense administrative support services that typically saps a startup, a collegial environment working with other Microsoft funded startups.
  • In exchange, Microsoft gets: 10% of the company in common stock with no special preferences or rights; your commitment to exclusively use Microsoft development software and operating systems for 3 years, other than with written exception by Microsoft; your commitment to deploy your software to Microsoft platforms first (i.e. if you build a mobile app, it has to run on Windows Mobile before iPhone).
  • How much will it cost? A lot less than the $45 billion Microsoft offered Yahoo!, and even less than the $100 million they reportedly spent on Powerset. “Let’s guess that they’ll take 100 companies through the program each year,” writes Merritt, doing some back of the envelope math. “That’s about $15M in cash plus office space and support for up to 500 people. Office space and support is about another $7M to $8M. Let’s just call it $25M all in. From the perspective of an R&D budget it’s nothing.”

    Nevermind that Y Combinator has yet to have a truly spectacular success (it has had some successful exits — such as Reddit’s sale to Conde Nast or Parakey’s sale to Facebook — and has taken a number of startups through successful venture rounds, but it has never had an exit on the scale of say YouTube to Google or Zimbra to Yahoo!). Microsoft doesn’t need to fund the next Google — they’d be happy if it happened, but this program would be aiming in a different direction.

    Microsoft knows that computing is slowly moving to the cloud, and they also know that much of that development and deployment is being done using tools that they don’t control — PHP, Ruby on Rails, Linux, Apache, Amazon’s Web Services, etc. — the Microsoft Y Combinator clone would ensure that a number of next gen web startups would be created using their tools and a new breed of developers would be introduced to those tools as well as a result.

    Further, as Merritt points out, the failed investments that come out of this program could still result in a steady stream of potential Microsoft employees. “My bet is that Microsoft will flat out buy some of the companies during their year of incubation,” writes Merritt. “And if you assume each startup will have 3 to 5 people, even the ones that fail will produce a good stream of folks who could easily become employees.”

    And those who don’t succeed or become Microsoft employees? They go get jobs somewhere else and bring their knowledge of Microsoft development tools with them — also a win for Microsoft.

    Merritt’s plan looks great on paper and essentially costs nothing for Microsoft to try. For $25 million per year — or about the cost of of 1/1800th of a Yahoo! — Microsoft could push a few hundred smart kids through this program. Just yesterday Google announced their intent to set up a VC arm of their own, which provides even more incentive for Microsoft to try something like this.

    What are you thoughts? Let us know in the comments.

Josh CatoneJosh Catone
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Before joining Jilt, Josh Catone was the Executive Director of Editorial Projects at Mashable, the Lead Writer at ReadWriteWeb, Lead Blogger at SitePoint, and the Community Evangelist at DandyID. On the side, Josh enjoys managing his blog The Fluffington Post.

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