Formerly principal at Split Rock Partners before coming on board at what was then Microsoft Ventures in 2016 – now M12 – Leo de Luna has a wealth of venture capital experience. That experience serves him well at M12, which unlike many corporate venturing units, is solely financially driven.
He said: “I have been in venture since 1999, in traditional funds. The thing about my team is that we all came from outside Microsoft. We came with pre-existing relationships, and importantly, an ethos of: ‘Let’s generate great returns, first and foremost.’ ”
For de Luna, working under Peggy Johnson, Microsoft’s executive vice-president of business development, is the perfect arangement for a venturing unit. Investing off the balance sheet, with lots of flexibility for size of their initial cheque, M12 is looking at series A through to series C investments.
“We take the long-term view of things and this is a very long-term relationship business. We, and I personally, have had many relationships with VCs. Coming to Microsoft and helping start this, we bring those relationships and then see the additional dealflow. That is carried through to how active we have been.
“It has been a little over two years, and we have done over 60 investments. We are now on to our second and third investments with the same venture capital firms, like Emergence Capital, General Catalyst, Kleiner Perkins, Lightspeed. These are high-quality firms that said: ‘We are going to give you a shot, based on the relationship.’ The second and third opportunity comes because we are going to deliver.”
How does M12 deliver? De Luna’s pitch to portfolio companies is about as straightforward as it gets.
“If I walk into a room, particularly in a conference setting where there are many VCs trying to pitch to an entrepreneur, I always say to them: ‘You as a great entrepreneur can pick your partner, and I think we may be the right partner for you, because we will get you unfair access to the best business-to-business assets in the world.’ No one else can make that proposition.”
De Luna views the initial cheque as the beginning of the relationship, while Microsoft’s wealth brings advantages of its own.
“We want to be a capital partner through the life of the relationship. Unlike some other corporates where you only get one shot, we support companies through their lifecycle. We might go higher in later-stage deals, where there is an opportunity to build ownership.
“Potential portfolio companies know we are a capital partner that has strong reserves, and we are patient capital, because we do not have to force an exit at certain points in time. That gives the entrepreneur the sense that we are aligned for the long term.”
Despite its relative youth, M12 has a clear focus and charter. While other CVCs often focus on information-gathering and building networks first, M12 made internal and external outreach a priority.
“When the team hit critical mass, at five or six people, we went to Redmond [Microsoft’s headquarters] and did 35 meetings in two days with every senior person we could find, to let them know we existed. Externally, we had to be very focused on branding and getting the word out. We were doing roadshows with other VCs, saying: ‘This is the team, this is what we do, give us a shot.’ ”
De Luna is confident about what M12 brings to the table, highlighting how the approach benefits all stakeholders, not just Microsoft’s balance sheet.
“Not only do we have an investment team, but we have two other important teams under the M12 umbrella. We have portfolio development, led by Lisa Nelson, who also leads our VC engagement team. We call portfolio development our secret weapon – that is truly our value-add piece. Once a portfolio company joins our family, they get matched to a portfolio development manager. It is a one-to-one relationship, where all she or he thinks about 24-7 is ‘How do I make my company successful within Microsoft?’ We want to do this programmatically of course, but it is things like integrations with software packages Dynamics or Office.
“The other thing portfolio companies really care about is: ‘Can you add revenue to my top line?’ We have this unique program called Co-Sell. We have 40,000 sellers in the field. How do we tap that? We have given our field the following incentives – they will get quota retirement or 10% of the total contract value of the deal, paid by Microsoft. When we put our companies on this plan, they say: ‘Wow, this is phenomenal, I get this free large go-to-market channel.’ ”
That improves the revenue of the portfolio company, which improves its value, which improves value for M12 and its co-investors, meaning M12 gets the call next time a co-investor has a lead deal. I would rather not compete with everyone on Sand Hill [the Silicon Valley home of many VCs] trying to get that lead position. Invariably there is a percentage of ownership left over that they want to call someone for, and now they are calling us first.
“Our VC engagement team brings Microsoft executives and engineers out to Silicon Valley and centres of excellence to get exposure to innovation. Part of the reason I got excited about joining Microsoft, was Satya [Nadella, CEO] taking the leadership position. He has changed the culture of the company. It is an awareness that pervades all of Redmond, that innovation does not come from Redmond necessarily, so let’s get outside of these four walls.”
Being founder-friendly is key to M12, with the entire organisation dedicated to financial returns through maintaining good relationships with all stakeholders.
“One of the ways it manifests is in our investment terms. We try to do a 180 from what most corporates are doing, where our founders have found out, [corporates] will ask for rights of first refusal, rights of first notification, things that are just unproductive in our view. We do not ask for any of those things, because they just cause conflict and a divergence of interests down the road.”
In fact, M12 is a going a step further. As a frequent co-investor, M12 reaches out to strategic CVCs over these terms. “We have tried to ask them to say: ‘This does not feel right, maybe we should rethink that.’ ”
Given that M12 is financially-driven, and the breadth of Microsoft’s areas of interest, where does M12 choose to invest, and how does it choose to invest in those areas?
“Once an investment meets all the parameters, I ask: ‘Do I think that this would be a good venture investment?’ Number two, and it is a little more nuanced, is: ‘Do I think that this would be a fantastic venture investment if Microsoft got involved, and we did our job right?’ It has got to be more than just the money.
“We have focused on seven areas that align with where Microsoft is going strategically, investing in alliances with the engineering teams that are heads down and wanting to build. One is software-as-a-service, and then we have got AI and machine learning, which we have basically reworked the company around. Adjacent to that is big data and analytics. We go full stack on the enterprise side, so we also look at infrastructure, even down to the silicon level. We do look at frontier as well – we have a couple of drone investments – and then, because we are a productivity company, we have a specific category around the future of work, which is what I focus on. Last is security which is foundational. Within our team, we have hired for diversity of thought and diversity of experience, along those areas.”
De Luna is part of a team that is both culturally and racially diverse, not just in terms of subject matter expertise and professional experience. As a founding member, that was deliberate.
“It is one of the benefits when you create a new platform. You get to decide what the values should be.”
How does the combination of professional and personal diversity inform the work that he and M12 does?
“As a venture capitalist, ultimately you are a partner with the founder. The earlier you can get that collaboration going the better. It starts at that first meeting. If we bring a company into our office and they see faces they can align with, with experiences they can resonate with, that collaboration of trust can start being nurtured faster.”
With diversity of experience comes diversity of opinion. How do those differences of opinion add to M12, and how is it leveraged to generate success?
“That is the value of our team, that we do have differences of opinion. We are respectful, because that is one of our core values, but it is an intellectually honest team, because it is the responsibility of the team member to speak up if they disagree. If you track some really great investments within the industry, they have come from investments that were highly controversial within the partnership.”
“We have a much more defined efficient deal process – how we vote on decisions and decide to invest – and as folks understand the process and grow more confident, they are more willing to speak up and challenge existing assumptions. Lately, we have had really great discussions about companies that went through the process. As a result of those spirited conversations, what was exposed was blind spots to focus on post-investment.”
What excites de Luna?
“We have made a couple of investments where we are excited around the future of work and productivity, around automation and helping augment the knowledge worker, like an AI exoskeleton. One company is called Voicera. Voicera is basically saying: “Meetings suck.” They are unproductive, and their enterprise voice assistant, Eva, will listen into your meetings, take notes and transcribe them, and will assign action items. The bigger vision is this – we all have email inboxes, and if you believe that voice input as a medium is pervasive, in the future you will have a conversations inbox. Voicera wants to manage that inbox.
“The other company is called Directly. It is trying to make customer service better, and its view is that the best customer service agent is actually the customer. Directly makes your power customers your agents, where with every successful resolution, that customer agent will get a reward. Directly manages that whole process, skill-testing and verifying agents, funnelling them the tickets and questions. The best answers get upvoted, so the best agents will always get the answers. You now have agents who are earning thousands of dollars a week in supplementary income.
“Customer satisfaction, response time and cost to serve are an order of magnitude better than you would expect. The other cool thing is the automation. They see clusters forming around specific topics, they will send that to a subject matter expert, and they can write an automated answer. They send that automated answer as questions come in, and for every answer that is served, the agent receives a residual. When they are sleeping, they are earning money. It is a very humane way of winning with a chatbot.”
What does the future hold for M12? De Luna clearly has enthusiasm for the mission of M12, beyond the technology and the money, into the wider VC ecosystem itself.
“We want to be in this business for decades, and we are trying to set a foundation in our early years, so that we set up an institution that will outlast me and the existing team. We want M12 to be here for a long time.”
“Our industry is going through an important long-overdue change, which is about diversity. We have embraced it, we are excited to see other firms embrace it. We have been purposeful about how it is manifested in our team. We are by no means perfect. Now we are trying to help our companies adopt it. Anything we can do to help move that along from a CVC standpoint is something we are happy to do.”
