Microsoft Matchups

Microsoft has nearly halted direct investments in other companies, but its pace of acquisitions remains quick. Entrepreneurs who want to join Microsoft's lead-sharing programs for business partners--or even pursue an acquisition by the world's No. 1 software company--need to educate themselves on Microsoft's priorities, explain how their products can help the company compete with Linux, and avoid depending on Microsoft to generate most of their sales. That counsel came from Silicon Valley execs and venture capitalists at a Microsoft-sponsored event last week aimed at helping startups do business with the company.

"During the '90s, Microsoft was the most acquisitive company in the industry, and I think we'll also be in the 2000s," says Dan'l Lewin, Microsoft's corporate VP of .Net business development. Oracle's buyouts have had a higher dollar value, he adds, but Microsoft recently has bought about one company a month. Microsoft's stock price--stuck at about $27--hasn't slowed the pace of deals, since it typically dips into its $40 billion in cash to buy companies, Lewin says.

Many Silicon Valley startups are eschewing venture investments and hoping for buyouts by Google, Microsoft, or Yahoo.

As it has curtailed its investments, Microsoft has sought new ways to gain equity in promising companies. In May, it began an intellectual-property ventures program in which it licenses technology from its research and development groups that doesn't fit into its own products to startups in exchange for financial stakes in those companies. The program has seeded the market with technology for acoustic speakers, home networking, and wall-sized digital displays, for example. But Lewin says the effort is just getting started. "It's not something that will unfold rapidly," he says, adding that more details about this strategy will be disclosed in the spring.

Partner Prescription
According to startup CEOs and venture capitalists speaking at the event on Microsoft's Mountain View, Calif., campus, companies that want to successfully participate in Microsoft's partner programs should:

>> Explain to Microsoft's sales reps how their technology can help the software maker compete with IBM and other companies that profit from the open-source Linux operating system. "Then you get a lot of attention pretty quickly," said John Powers, CEO of distributed computing software company Digipede Technologies LLC.

>> Know Microsoft's priorities for the year, how its sales reps are measured on those, and how their business plan can help those reps meet their goals, said Sam Jadallah, a general partner at venture-capital company Mohr Davidow Ventures and a former Microsoft executive.

>> Not depend on the vendor to sell their products, even though leads provided by Microsoft can represent perhaps a third of a partner's revenue. "Expecting that Microsoft is going to drive revenue for your company is probably a going-out-of-business strategy," said James Phillips, CEO of Akimbi Systems, which makes management software for IT development teams.

>> Not shy away from people at Microsoft working on products that could compete with theirs. Startups should position their software as a complement to those products. "Something is being invented at Microsoft right now that competes with anything you guys are thinking about," Powers says.

"We want to make sure venture capitalists and entrepreneurs know how to fish in our pond," Lewin says. For every dollar in revenue Microsoft generates through direct sales, it reaps $7 to $11 in sales through independent software vendors, resellers, and other partners, he says.