Meeting entrepreneurs on their terms: Why we don’t require any “special rights”

Last week in Seattle, leading innovators, entrepreneurs and business minds came together to discuss best practices for startup funding and operations at M12’s inaugural summit. It was humbling to see almost 80 companies in our portfolio gathered from around the world, and to reflect on the progress we’ve made since we started the fund nearly three years ago. Our team has grown to more than 20 people supporting portfolio companies across 11 countries and 38 cities, seen four exits, and created new channels to ensure capital is reaching startups, such as our competitions to find female founded and led businesses and entrepreneurs innovating with AI.

In the days and weeks leading up to the summit, one thing I am particularly proud of is our pulse on the startup community, the relationships we’ve built there and our unwavering focus on doing what’s right for the entrepreneur. We’ve learned some important lessons, including one of the most egregious contributors to the poor reputation of corporate venture capitalists (CVCs) – terms and conditions like “Rights-of-first” (ROF), which we believe favor the corporation and restrict the startup.

Microsoft’s mission is to empower every person and every organization on the planet to achieve more. ROF terms restrict that for entrepreneurs. Simply put, ROF terms limit an entrepreneur’s ability to maximize their exit valuation. Stifling those options can be detrimental to a startup’s growth and consequential to the return profile of founders and all the investors. That’s why at M12, we believe ROF and similar terms are neither necessary nor valuable.

While we’ve always believed this, we weren’t following through in practice when other CVCs utilized these rights in companies we invested in, leading us to ask for the same during the first year our fund operated. And while we’ve never asked for these terms if the other investors didn’t have the same, in retrospect, we should have never asked at all. Since then, we’ve stopped asking for any special rights regardless of what other strategic investors held in the company and we’ve started actively educating entrepreneurs to resist these terms and try to remove them if they already exist.

We firmly believe that being fully aligned with founders is the only way to drive value to all stakeholders, including M12 and Microsoft. So, we want to go one step further. Instead of simply thinking, “What’s best for us,” we want to encourage the CVC community to start thinking “What’s best for all,” starting with adopting similar rules of engagement M12 currently employs to benefit the entire startup ecosystem:

• M12 will not require any ROF term as part of its investment. Ever. It’s not only the right thing to do, it’s good for business.
• As part of our due diligence, M12 will evaluate the business upside not only for our fund, but also whether we can meaningfully help you.
• If M12 chooses to invest, we’re with you for the long term, for your company’s lifecycle. That may mean different things at different times, but we won’t be driven by artificial milestones or deadlines.
• If M12 chooses not to invest, we will explain why. We will also try our best to suggest other ways you can gain funding or other resources to grow your business.

It’s time to reinvent what it means to be a CVC and live up to what makes us an attractive investment partner to begin with – empowering entrepreneurs through investments, insight, and unparalleled access to Microsoft. The next time a founder asks me if we are a strategic investor, I want to be able to say, “It shouldn’t matter because we’re all aligned in fostering your success.”

To learn more about M12, visit its website.

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