Investing Microsoft’s billions in the Dotcom Era

Keeping on the theme of the dotcom era there were some interesting things that happened on the journey and some valuable learning that came out of it.  During this time everyone thought they were going to make a fortune on the stock market and stocks seemed to regularly shoot up by $5-$10 in a day.  I had a few myself – Data Return and Interliant.  Data Return I remember went over $90..if only I had sold.  On top of those great stock prices I was managing both Data Return and Interliant as the account manager.   It probably was a conflict of interest, but that was how things were run in those days.

At Microsoft HQ the CFO at the time, Gregg Maffei had an epiphany.  Why not take the Microsoft billions and invest in these companies.  We could take  an equity stake in these established companies and startups and then sell the stock for huge profits?  And thus the rush for gold began.

At the time I was a Business Development Manager working under the talented, but totalitarian Frenchman Pascal Martin (I think he would be pleased with both comments).  During the dotcom era Microsoft was a lost soul as everyone was racing for the internet and Microsoft was viewed as the Windows and Office company.  At the time we did not have a whole lot to offer.  We did, however, have one thing that every start-up on the planet needs…cash.  As much as the venture capitalists had, we had much more just sitting in the bank.  At the time Microsoft had in the bank between $15-$20 billion.

Needless to say when the investments started making the press my accounts came and started asking.  Some of the deals Microsoft did were huge, in the hundreds of millions.  The big one being AT&T – at the time AT&T owned what would later become Comcast.  There were  other big investments in what were deemed then to be major dotcom players like US Internetworking and Winstar.  From my neck of the woods came Interliant.  Their VP of Business Development, Jesse Bornfruend would be the major driver from their side and from Microsoft’s it would be myself.

The interesting thing about doing an investment deal was all the moving parts you had to bring together.  First there was my boss, Pascal Martin, to support the effort and provide his blessing.  Then we needed the product group.  From our side that meant the Microsoft Exchange team and the program Manager who led the effort was Keith McCall.  He and Jesse had a relationship dating back to their days at IBM.  We needed an attorney, who I cannot remember her name, but she was a single Mom who worked hard for us.  Then we needed the finance guy, Michael Leitner.  We only needed Michael to determine the amount of the investment.  When we needed a heavy hitter in negotiations we brought in our GM Mark Chestnut.  Mark had developed his negotiating skills during his days in the OEM business and working with IBM.

So why were even considering this deal?  To make money off of Interliant stock?  That was part of the deal but that was more about hedging our bets.  Interliant had something that Exchange team needed.  The two CTO’s at Interliant, Eric Sachs and Robert Dana had architected for Lotus Notes the ability on a single instance of Notes to house multiple companies.  This basically meant that Company A had an exclusive space for their applications.  Company B had their own space etc..  Microsoft Exchange could not do this.  If you tried to put multiple companies on an exchange server Company A would see what Company B has etc..In order to make Exchange useful for the Internet, it needed this “multi-tenant” capability.

The deal would take a few months to complete.  The main issue being to create a suitable contract for each party.  It was a fantastic learning experience.  I learned the great thing about lawyers around creating a contract, which was the correct wording of the contract, having the right definitions in the contract.  I also learned that you have to reign them in from time to time since they seem to think they own the negotiations when in reality they are there to advise.  I am sure our lawyer beyond the words had no clue what we were negotiating to acquire.

As things got close to the end it was time for us to bring Mark into the fold as from the Interliant side they had brought in Brad Feld, who was a member of the board and a major VC player in the valley. Interliant was looking for $20 million from Microsoft and we were looking to make sure we got the IP we wanted.  Things at times got heated with Mark and Brad, but in the end we reached an agreement.  However finance (Michael) had made it clear the number would not be $20 million. In the end we agreed on a $10 million investment for the right to acquire the IP from Interliant.  We received the signed contract and  Pascal and I took the contract to our VP, Thomas Koll, to sign the agreement.  Then we went out to celebrate at El Goucho, a great steak house in Seattle.

Pascal and I flew down to Houston after the deal was done where we had lunch with Jesse and a few others from Interliant at the Hilton Hotel.  We were in the kitchen  at the chef’s table.  We had a great lunch with great wine.  On the wall was the signature of President Bill Clinton.  Life was a wonderful adventure

Within 2 months of the agreement both Robert Dana and Eric Sachs resigned from Interliant.  We had the code, we had a team of devs at Interliant, but the IP had walked out the door.  It was a good lesson to learn.  It was a stressful period with a lot of late night conference calls, lots of emails, lots of travel, lot so dinners. 

Since that time Microsoft Exchange does now have “multi-tenant” capabilities and Microsoft under the guidance of Pascal have a hosted Exchange option.  It was a lot of fun at the beginning.

A second, but smaller deal I worked was with a small ASP called Allegrix.  I will say initially Allegrix wanted the investment deal like the rest of the Dotcoms.  We started down that path, but the reality was it was late in the game and the interest in doing these type of deals was beginning to fade.  One day I flew down to San Jose for a dinner with my friends at Allegrix.  It was at Gopi’s house, where his wife, Patricia, served really awesome Indian food .  Of course the downer was I had to deliver the news that Microsoft would not be investing in Allegrix.  At that moment I think I defined the term “bad dinner guest”.  Luckily there was still a deal to de done.

It helped that the people at Allegrix from President Chris Clabaugh, to Gopi Kallayil were not just first-rate professionals but a pleasure to work with and get to know.   I still stay in touch with many of them to this day.

Allegrix had a creative marketing guy, named Mike Foster who had created this little marketing packet called “ASP in a Box”.  It turned out the partner marketing group was interested in acquiring the content, so off I went in assembling another team – lawyer, finance, partner team, etc..Since it was a smaller deal the team was smaller and the financing came from the partner marketing team as they had budget for it.  Sometimes the smaller deals are the most fun.  Because the dollars were not as large it was less stressful.   Because of the experience I had gained from the larger deal I was really able to own and drive the deal forward  and be on point for everything. The end price was $200k and by the next time I saw Mike he was already working in his next idea, something or other to do with ASP on a coffee table. 

Reflecting back on this period it does show that even though a company with as large a “recent” history as Microsoft, who was not cool or even considered the future at the time, if you have a big horde of cash you will be relevant.  In one of the earnings statements it came out that Microsoft has made $1 billion on its investments.  Wall Street was not thrilled about this as they did not see how this fit into Microsoft’s business strategy and it was also at this time that an apparent riff surfaced between Steve Ballmer and our CFO Greg Maffei.  Gregg as time would show always had ideas of a bigger role for himself.  At Microsoft it was a two-horse show: Steve and Bill.  There was no room for a third.  Gregg left not too long after the investment rush.  Microsoft got back to basics and focussed on Windows and Office (not a bad decision).  The billion we made we gave back when the dotcom went dotbomb.

Good Night and Good Luck.

Hans H Hoffmann

March 10th, 2010

6 thoughts on “Investing Microsoft’s billions in the Dotcom Era

  1. Hans, wow just found this. Thanks for the kind words; and now I know “the rest of the story”. BTW, my VP Marketing was Mike Foster, and my COO and co-founder was Scott Chapman… You will see Mike at and Scott at (either may be interesting to you!).

    In any event, it was an unexpected pleasure to have found this post. Best of continued good luck to you!

    Chris Clabaugh.

  2. Editorial note: the “creative marketing guy” at Allegrix referenced in your blog was Mike Foster (me); the co-founder of Allegrix was Scott Chapman. You listed the combined name of Mike Scott in your blog. Scott Chapman continued with his ASP/SaaS endeavors and now is President of; his company hosts MSFT EPM (Enterprise Project Management), even for Microsoft I believe. Thanks for the great note. I’m now at MediaTile, doing Windows-based and Intel-based, 3G/4G Cellular-based Digital Signage solutions that are controlled by a SaaS application.

    1. Mike,

      I shall edit this evening. Mike Scott was actually the founder of the legendary band the Waterboys. Great to hear from you and glad you had a chance to read a blog from one of the funnest periods of my career while at Microsoft

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