Earlier this year, Microsoft quietly announced a “new” mission and investment strategy for its nearly seven-year-old venture fund, M12. The post, published with little fanfare in early January, was kind of vague, and I was curious to find out more—about what the changes practically meant for M12 within the overall VC space and for its portfolio companies. What I found was that there’s been a big shift at the fund over a year in the making, which has prompted “tough” internal conversations under new management, while at least eight employees have left M12 since the summer of 2021.
I dug into the before and after at M12 in my latest deep dive. As an independent corporate VC fund set up by Microsoft in 2016, M12 built on the company’s long history of backing founders, all the way back to its massive venture losses during the Dot Com bust. M12’s founders Peggy Johnson (now the CEO of Magic Leap) and Nagraj Kashyap designed the fund to be “a different kind of corporate VC,” as Kashyap wrote in 2018. The fund focused primarily on financial returns—that was their “true Northstar,” as one former employee told me. But since mid-2021, things have been changing.
Chris Young, Microsoft’s executive vice president of business development, strategy, and ventures, told me that when he joined in 2020, he felt the M12 team had done a “phenomenal” job setting up the fund, but that it wasn’t focused enough in its investment areas. He hired Michelle Gonzalez in July of 2021 as M12’s new global head, and she told me that now the firm is more “strategically aligned” to Microsoft, focusing more on connecting startups with the tech giant’s ecosystem of divisions and customer networks. As I wrote:
But since the new leadership came on board, the former employee said that M12 has “changed dramatically.”…
[Gonzalez] says that M12 continues to have autonomy from Microsoft, but while previously the fund was “primarily a financial VC with loose affiliation to Microsoft,” now they have closer connections with stakeholders. It’s something the former employee felt as well: “There was a desire to say, 'Okay, great financial return, [but] we want to see more strategic value.' And that's always the tension with a corporate VC,” they said.
I’ll let you dig into all the details yourself, but a few changes to highlight: M12 now focuses on investing in a few core “thesis” areas, including cloud infrastructure, cybersecurity, and, of course, A.I. M12 is also more open to co-leading and participating in rounds, versus leading (although they say they’ll continue to lead). And, interestingly to me, Microsoft CEO Satya Nadella appears to be involved with M12 himself: Gonzalez told me he “sometimes” sends notes about companies he thinks are interesting.
The changes were brought about through conversations with Microsoft management and portfolio company founders, Gonzalez told me, who expressed they wanted closer connections within Microsoft and help with customers. But as I found through my reporting:
...Apparently not everyone was excited about the new strategy. According to the former employee, some people inside M12 felt like the new mission was not what they had signed up for. “When you have a big strategy shift,” the former employee said, “you can either embrace it or it can alienate you or you're still along for the ride. And I think it certainly played out for many folks that way.” The former employee described “tension” as changes were being rolled out.
When asked about the turnover at M12, Gonzalez says they’ve had some “tough conversations” as they’ve made the changes, and that “the new strategy wasn’t for everybody” in terms of being more focused versus “generalist” and the tighter ties with Microsoft. M12 says over the last year they’ve added 15 people to the team.
This all comes at a time when VCs of all kinds are contending with a trickier environment, and historically during recessions, corporate VCs have tended to pull back and prioritize the company’s current results.
But what I see as the big takeaway here is that Microsoft is clearly trying to be more intentional with its approach to investing in startups and how those relationships benefit the company and the way it’s innovating. We see that through the firm’s massive investment in buzzy A.I. startup OpenAI and ChatGPT’s integration with Bing, and now through M12 putting its stake in the ground with these thesis areas. And for the venture community overall, it seems like they can expect a different M12 moving forward: One more strategically focused and dedicated to connecting its portfolio companies to Microsoft’s vast network and divisions, and perhaps not so much one battling it out to lead a round. As for startups? They can expect to get a lot more Microsoft with that M12.
You can read my full story here.
Have a great weekend,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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