Why is Microsoft investing $500 million in startups?

Why is Microsoft investing $500 million in startups?

Microsoft has recently pledged to inject $500 million over a two-year period into a program designed to help startups accelerate the commercialization of their products and grow customer bases.

The program, Microsoft for Startups, plans to offer various joint sales agreements to startups, which will give participating companies the ability to tap into the tech giant’s omnipresent market presence. The various co-selling options available to participating startups also come with access to marketing and sales expertise, and participating companies will be able to tap into Microsoft Reactors, the physical locations where entrepreneurs network and attend various events. In a signal of how seriously Microsoft is taking this, the company is also opening up dedicated office locations in Berlin, London, Sydney, Tel Aviv, Beijing, and Shanghai. What we’re seeing, in other words, is a globally-scaled tech incubator.

The fact that one of the largest tech companies in the world is rebranding its incubator and pumping millions of dollars into it is an indication that Big Tech firms are seeking to increase global influence and continue to build on market momentum in order to attract capital, customers and talent. Such a massive investment may also a signal a coming arms race in the startup sphere, as Big Tech firms flush with cash look to invest. Both Google and Amazon have similar incubate-and-accelerate programs for startups.

In typical fashion, companies like Microsoft and Google, by their willingness to adapt, expand, and diversify, are disrupting the natural life cycle of industry pioneers. Retail is a prime example. In the mid-to-late nineteenth century, department stores like Macy’s and Marshall Field’s popularized the all-in-one shopping experience, expanding rapidly as they did so and choking off resources for much smaller, more specialized companies. In the 60s, Walmart, K-Mart, and Target came along and shifted the model by dropping prices, expanding inventory, and housing all of their products in giant warehouses. The market shares for stores like Macy’s, JC Penney, and Marshall Field’s declined, with various department store brands being passed along among various companies, and some, like Marshall Field’s, even ceasing to exist. In the mid-90s, Amazon was founded, and after a difficult start as a human-curated online bookstore, it diversified its inventory and was able to offer lower prices than mega-stores like Walmart, thanks to its (at the time) unique distribution model. Amazon did not have a physical staging area for its products, and thus was able to avoid costly expenses like building leases and retail employees. We know what’s happened since – Amazon’s market share has increased exponentially, while brick-and-mortar retail continues to decline.

Tech giants, by investing early and often in startups, are seeking to avoid becoming victims to this trend. Microsoft, in particular, has focused on investing in cybersecurity, cloud technology, mobile tech, and AI.

Microsoft for Startups will be tailored to fit whatever stage the startup is in when they join the program. For those at later stages, or those that have finished initial rounds of financing, Microsoft ScaleUp will be the main resource. ScaleUp is the arm of Microsoft that explores co-marketing and co-selling opportunities for growing technology firms. For the startup technology firms who have yet to receive funding, Microsoft Ventures can provide financial support in the form of direct investments.

The benefits of pairing with Microsoft are obvious: startups are given the rare opportunity to learn from an industry legend and grow their business with access to the company’s near-limitless resources and massive customer base. The drawback is simply that Microsoft will have its fingers all over your business. Your application or solution will be running on Azure, Microsoft’s cloud computing platform. Any other resources you use, like email and customer databases, will also likely be utilized through Microsoft technology, like Office 365 and Dynamics 365. Co-selling, too, means that, in one way or another, you'll likely be sharing revenue with Microsoft, since they’re opening up their customer base to you.

For Microsoft, too, the benefits are obvious, but one stands out: there’s a real battle going on between Amazon, Microsoft, and Google over cloud computing, and by hosting startups on Azure, Microsoft is increasing its market share.

While Amazon Web Services (AWS) has been dominant, Azure has been cutting into its share. As CNBC reports, in the fourth quarter of 2017, AWS’s market share decreased from 68 to 62 percent year-over-year, while Azure’s jumped from 16 to 20 percent. Google’s share increased as well, from 10 to 12 percent.

Bonus round:

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Cambridge Analytica, the data firm behind President Trump’s surprise victory in the 2016 election, “harvested private information from the Facebook profiles of more than 50 million users without their permission…making it one of the largest data leaks in the social network’s history.”

  • Facebook, which has come under intense scrutiny over the leak, has since banned Cambridge Analytica from its platform.
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header image: steven zwerink / flickr

Chinese conglomerate hits employees up for cash in its attempt to stay afloat.

Chinese conglomerate hits employees up for cash in its attempt to stay afloat.