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Fireside with FedTech - A Chat with Lee Feldman from M12, Microsoft's Venture Fund

Updated: Apr 21, 2022

Lee Feldman serves as a Senior Strategist at M12 - Microsoft’s Venture Fund. He spoke with FedTech Managing partner, Jake Kramer, about corporate strategy in venture capital, tips for startups to attract the attention of VC funds, and the future of cutting-edge technology in the brain-computer interfaces on Fireside with FedTech.

Watch the full Fireside Chat with Lee Feldman:


Read the full transcript below. This transcript has been edited for grammar and readability.

Jake Kramer: Welcome, everyone. We'll get started here in a few minutes, wait for more people to trickle in, and then we'll get started here.

Alright, one more minute, and I will let some more people come in and then we'll get started.

Okay, all right, let's get started. Okay, welcome everybody to Fireside with FedTech. I'm so happy to be here with Lee Feldman. For those of you who don't know me, I am Managing Partner of FedTech, and it's great to be here. This is a series we do every couple weeks where we bring in an outside guest to get their perspectives, opinions, and thoughts on topics relevant for the FedTech community.

So, without further ado, I'm going to introduce Lee Feldman here. So Lee Feldman is a Senior Strategist for M12, which is Microsoft's venture fund, based out of the greater Seattle area. He is responsible for technology trend analysis, thesis development, opportunity analysis influencing investment activities. He also conducts market and technical diligence for deals in areas of focus, including national security technology, brain-computer interface, cybersecurity data and AI, IoT, and enterprise IT.

He joined M12 from Microsoft's corporate strategy team, where he advised Microsoft's senior leadership on topics related to the business health and growth of the company. He also led strategic projects and customer engagement programs from Microsoft Executive Vice President of corporate strategy in core services, engineering, and operations.

Prior to joining Microsoft, Lee was a management consultant where he helped traditional software companies transform their business models towards "anything as a service" models. He has a Bachelor of Arts in Economics and a certification in entrepreneurship from the University of Michigan. Lee also sits on the board of directors for the Young Professionals in Foreign Policy. Welcome, Lee.

Lee: Thanks for having me.

Jake: Yeah, great to be here; great to have you, Lee.

So first question here. Thanks for your time, and excited to have you here. But let's dive into your story, how you made your way through management consulting, corporate strategy to arrive at M12, Microsoft's Venture Fund. There's a lot of people out here who are interested in taking a similar career path, or at least end up where you are, so it'd be great to hear a little bit about your story.

Lee: Yeah, definitely. And a lot of it, as I'll go through, I think it's all about timing. When I graduated from school, there was a lot of pressure at that time. And there were a lot of people in my general circles that were all going into finance and investment banking, or sales and trading, or whatever it may have been. But I liked the business and I liked the economics side, but I really loved technology. And at this time, there was a huge shift going on 2014, 2013, with cloud computing and big data and analytics. And so I kind of strayed away from the path I was going down. And I found a boutique management consulting firm out of Chicago that really was focused on helping middle market, traditional on-prem software providers transform their operating models to be as a service or to be cloud-based services. And it was pretty remarkable at the time to see how fundamentally different the business models were; everything from the sales and operations, the customer success units, the way you do pre-sales versus post-sales, the metrics that you use to measure it.

So, that was kind of what I was doing and that also gave me a nice little first intro into the startup world. So we were doing this for some of our big on-prem clients, but one of the niches that I carved out was doing one-to-many, so basically giving workshops to a bunch of different startups. I loved working in the ecosystem, and being involved there, so I started actually interviewing at a bunch of different VCs at that time.

But in the process of all that, I had an opportunity to go to Microsoft. And at that time 2015, 2016, again, Microsoft wasn't quite as prominent or cool as it has been over the last four or five years. But I was pretty inspired by some of the moves that they were making: the shift over to O365, the investments in Azure, a new visionary CEO with Satya—who I think inspired a lot of change in both innovation, as well as culture at the company. And I thought VC startups—this stuff—that's gonna be around for a little bit. Getting into this rebasing at Microsoft was a neat opportunity for me.

So I went over and joined a small team; it was called the SWAT team as part of our corporate strategy and development organization that advises senior leaders on the health and growth of the company. So basically, we go off and do what I would call special projects. My particular niche within there was on new growth initiatives. So basically, it wasn't only what are the next big things, but how do we, as a company, make sure that we're tracking them? What are the mechanisms that we can put in place to constantly capture signals that'll tell us what that next big thing is? That was a really unique and cool opportunity, because not only did I get to nerd out and look out into the future and think about the next big things—how do we not miss the next mobile, for example—but I also got to meet some of the coolest people who are still in my network today. I got to talk to external futurists and technologists and executives, I got to talk to internal executives and product leaders. And I think—perhaps relevant for this, but also a personal highlight for me—was really thinking about tech transfer out of our labs, and out of our research groups. Microsoft has—obviously—one of the biggest R&D departments in the world, and how can I extract the signal coming from there? And that was something that I put a lot of effort into, as well.

I like to say definitely wasn't my biggest project when I was in corporate strategy, but it was the most fun for me, was probably about a half-a-year to a year-long research effort in brain-computer interfaces, figuring out what's the future there? What does it mean for Microsoft? What does it mean for the way that we had thought about modality and interacting with computers in the past? How is that fundamentally different? So I worked really closely with our research division on building a business case for why we should be investing there. Eventually, that did lead to a research group, you can look it up Microsoft Research brain-computer interfaces. I think, later on, we'll probably talk a little bit about how that actually led to some dual-use opportunities as well. But that was really one of the coolest things I got to work on.

Fast-forwarding a little bit, as part of that, the leader who came on and was part of who led Microsoft corporate strategy; his name was Kurt Delbene. He came on and then took over our massive 15,000 person, global IT, and ops org. So we went from this 35 person strategy over to a global 15,000 person organization. And his mission was to transform this: how do we take 40 years of legacy, technical debt, and processes and operations, and completely rethink that, rethink the culture surrounding them? Everything from people, to technology, to the processes themselves need to be completely transformed.

And so I was doing some strategy work for him on designing this new org; that eventually turned into a full-time gig and I went over to become his Head of Strategic Initiatives. Through that work is really where I started working with the government, and with dual-use companies, and with the Defense Department in particular. He was the executive sponsor of our DoD business, as well as many of our Five Eyes relationships. If you think about a couple of years ago, that's when JEDI was happening; that's when IVAS was happening. That's when all these major acquisitions were being floated. And it was a really interesting time for me to sit down and hear about the problems with procurement, the systems that need to be set up to do business with them; how do we actually become compliant to have best-in-class services for the government? And I spent a lot of time in that space.

The other experience—that I think is relevant for this—was my boss at the time, who I was obviously very glued to, being sort of right-hand person for strategic initiatives, he was on the Defense Innovation Board. So a lot of these papers around zero-trust networking, or 5G, or improving relations between Silicon Valley and the Pentagon, I was kind of behind the scenes doing a lot of that work. So I got to learn about all that.

Fast forward to today, I went over to M12, which is Microsoft's venture arm; I will tell you a little bit about that shortly. And the goal of me coming over was to start this new group called the Strategy and Research Group. Basically, in the past, we had been mainly opportunistic in the way that we invest; we had a couple core themes, which again, I'll tell you about. But in addition to that, it was investor relationships, startup relationships; references would come in and we would look at those.

My goal was to shift the balance a little bit to be more thesis-driven, to think about thematically. What areas should we be investing more? And where is there some Greenfield opportunity that we don't have subject matter expertise in yet today, but we probably should? And I'll go out and basically develop a thesis of why—or why not—we should be investing in a particular area. And then source deals and those areas, help build up the ecosystem, and work on those kinds of deals. I also work on some of our more obscure or technical deals that require a different way of thinking about the deal itself. And that's where we are today.

Jake: Wow, okay. Thanks, Lee. That's a lot to dive into there. I heard a lot of interesting things.

The first thing I want to talk about and dive into a little bit more is tech transfer at M12, and Microsoft in general. So we work with many research labs—DoD, NASA, DOE, NNSA—all these different research labs across the country in universities, finding the best technologies; I see some of our team in the audience here who do that. And they've created great frameworks and rubrics for understanding and figuring out which ones will be able to be commercially viable and a lot of times in dual-use space, so use with the government and commercially, as well. But, would love to hear what are some of the things that you think about when you're looking at the technology, internal to Microsoft, that you're developing as to what makes this technology special? What can we invest more in? What's gonna give us more ROI? And what should we phase out and sunset?

Lee: There's two different angles that I could speak to this from, which is my current role in M12 or my corporate strategy role, where I really was doing some of this tech transfer. So I'll talk about the corporate strategy days. And frankly, I think that—just like in government—it's challenging to do this anywhere, right? Because when you're talking about massive companies and organizations and product priorities, and customer needs of today versus customer needs of five years out, there's a lot of balance and prioritization that needs to happen. And I think that it can be frustrating. And I think a lot of times it kind of works itself out, but sometimes may be slower than it should. And I think the fundamental thing here that needs to be clear is what are the organization's priorities and visions for the future?

For example, take Microsoft right; At one point, Azure was pretty much an incubation project, right? This wasn't a full-fledged product at that time, but we kept investing resources in it. Hank hung in there because somebody believed in the vision of cloud computing for the future or many people did. And people needed to fight for resources and for keeping the lights on to these different things. But once you have that sponsorship; you get people bought in on the vision, you get people to understand why this is the way the world is going to go and how what I'm providing can be a critical enabler to that. I think that's the North Star right there; it's defining the North Star. It's also the Holy Grail. And I think that relationships are a big part of it.

This was something I think that's difficult for a lot of technologists, and it's even difficult for me in many ways: how do you market your work, right? How do you do it in a way where people are familiar with what you're doing? And it's very clear how you plug into their vision. A lot of that is relationship-based. A lot of that's also a narrative, right?

And I'm not suggesting that you just make something up to make your audience happy, but you should also be thinking about, "does my vision align with the vision of the organization or the technology direction that this stakeholder wants to go with it?" And that requires a holistic understanding of the priorities, who your audience is, and deciding is this a fit or is it not a fit?

Jake: That's a really salient point because we also work with large companies and researchers in those companies and in the national labs, and federal labs, and universities. And what they think a lot of times technologists feel like, if I do the great work, I put my head down, and kind of create great technology. Of course, everybody is going to buy into it, I'm going to get more funding, and it's great. I don't really need to worry about this whole softer side, which is—in addition to relationship building—just selling internally. It's something that's overlooked. And I don't really think it's taught too much in Ph.D. courses, right?

So that's not a skill that's kind of built-in or been honed, and it's just getting more and more important to be able to sell your story; not from a snake oil salesman, but more from getting buy-in. And I think I think you hit the nail on the head with getting the priorities, understanding the priorities of the organization, and how that ties into what you're doing, so you can weave a nice story to be able to influence and persuade people to give you more investment, funding, focus, resources, or whatever you need.

Lee: That's right. And the last thing I would say on that actually is: I think there's a difference. And it depends on what your mandate is, of course. Your goal should be to not be thought of as a science project, right? Like, not something that you go share it with execs and they're just like, "This is so cool, but what do I do with it?" Unless that is your mandate, though. Because there are certain groups, certain folks, or certain researchers that what they really should be doing is moving the needle in ways that people aren't thinking about at all. And that's okay, as long as your goal isn't necessarily near-term commercialization.

But if it is, one way that I like to think about that is in horizons, right? So if you're thinking about a corporation—or even a government, for that matter—is how do you define these different horizons? Horizon one, two, and three.

Horizon Zero: basically being the businesses of today that may be sunsetted in the future.

Horizon One being our next big growth lever; these are the areas of heavy investment today, we know what they are, we know what we need on

Horizon Two being these areas that are like, this is the next evolution of our existing product; these are the features on top. For example, let's say Microsoft Teams; how do we innovate on Teams? How do we change that experience? How do we bring it into the metaverse someday, or whatever it may be?

And then I think Horizon Three, Horizons Three+: What's the next version of this? What's the next big paradigm shift that's going to impact the platform itself that we need to start investing in capabilities for? So that's one way to think about it as well.

Jake: Yeah, that's a great point.

And the other thing that you mentioned—just switching gears to BCI, brain-computer interfaces—others ever brain-machine interfaces, but a lot of names for the system. This has been around; this is not new technology. In its origin, I think it was in the 70s or 80s when it first got started for health purposes. And for those who don't know, reading signals in your brain as the input and then having the output be something related to mobility or something else to make somebody's life easier—a lot of times around people who have diseases like cerebral palsy, other kinds of motor function issues there.

But recently, in the past several years, we've seen companies like Neuralink from Elon Musk, whose goal is not to just use it for rehabilitation purposes and quality of life for those that are suffering from these diseases sometimes, but more for improving human performance for various different reasons: being more connected to the internet, being able to control things with your mind—stuff that was science fiction just 50 years ago—is now at the very early curve of reality and prototype. So tell us more about that. It's super interesting to me personally; I'm sure others as well.

Lee: Yeah, I'm glad that you asked about it. I think that you basically gave the definition I would. The one other way of thinking about it that you could, is passive versus active BCI, right? So there's many different components, right? So when we talk about—like you said—brain-computer interface is another modality of interaction with a computer itself, any computing device, robot, or whatever it may be. There's many versions of these types of interfaces in existence today, just taking a step back, right? Today, we have a mouse and touch to be able to do different things on. At one point, touchscreens were obscure, right? I remember the internal debate I had about getting rid of my Blackberry for an iPhone; like, what is this touch thing, and does it even work well? Or voice as another input into computing, right? I remember having to train my car—call Mom, call Mom. No, no, call Mom. And it took forever to train it and it was bad. Now you just say, "Hey Cortana," or "Hey Alexa, do this; do that," and natural language processing and much better analytics are able to route you to do exactly what you want to do.

I think what's really interesting is using the brain as another one of those inputs, right? A mouse, you only have a couple different commands: you have left-click, right-click, move it around, scroll the thing, whatever else your functionality has, but it's mainly clicks.

Think about how many different commands your brain could send to a device. It could be, "I'm in distress"; it could be, "I want to speak", "I want to move something in a virtual environment", "I want it to reflect my facial features in an environment." There's so many different, high-rich signals that you can just extract from the brain, but doing so requires many different things. Doing so requires great sensors; how do you actually put the sensors in the right place or in your skull—or brain—to be able to get close enough without enough noise so that the signal-to-noise ratio is high enough? How do you do that with the right level of latency? So there's two different measures: spatial or temporal?

And then next is for your use case: does it need to be passive BCI or does it need to be active BCI? And the reason I bring that up is passive BCI—I think—is what we're going to see first, which is passive monitoring of brain signals that give you analytics or automated solutions to whatever that targeted use case is. So think about sports performance, right? Monitoring your brain during physical gameplay in order to tell you when to drain a putt when you're finally calmed down enough? Or what is my affect when I am in a meeting with Jake? Am I happy? Am I sad? Is 9 am the right time for this kind of meeting? When I hook it up with Exchange Data, should I have somebody automatically reschedule this meeting to a later time because I'm in a better state in my brain to do that?

Gaming is a perfect example of this, right? Like, how can my mood actually be reflected on my avatar in a game itself? Or change the gameplay? Or calm things down in a game of I'm getting a little bit overwhelmed, say? And I think those are some interesting things.

What that'll do is give us a better and better understanding of the brain. It'll tell us where should the sensors be? What does this signal mean for this? And over time, you build up these algorithms that are better and better at predicting things. That's when I think we can start to get some of these more high-fidelity use cases and in healthcare, in robotics, or in manufacturing, where you can actually think something and the machine does it for you in real-time—active command and control. I think that we will see that happen a little sooner in high capital intensive and high R&D areas like medical, as you were describing. We're seeing today, prosthetic limbs are actually a form of that today, or cochlear implants are a form of that today.

But the commercial applications obviously aren't quite there yet. And I think there's a lot of risks associated with it that perhaps healthier individuals may not take at this time. But I am hopeful with investments from Microsoft, from Neuralink, from Brian Johnson's Kernel, from all these different areas that we're getting closer to a place where this is going to be.

Jake: Well, I know nobody likes to answer this, but if you had to put a timeline on the first non-essential use of—essential being for health purposes—just to enhance performance or, passively collecting analytics or something. Where would you put that in the time horizon?

Lee: Yeah, I mean, there's a couple different ways I would answer that. I would say, first of all, in some ways, we're here and now; that's happening today. There are companies that are doing this in medical. We're also seeing this done in research labs on neuromarketing; it's actually a pretty big industry today, where they'll strap you up with an EEG and watch a movie or listen to sounds and see what your brain is cooking up.

Jake: I meant implants. Sorry, let me be specific.

Lee: Again, we're I think we're starting to see a little bit of that today. I think we're gonna see it in healthcare. I think we're hearing now today, I think that there's a big hurdle to get through with any medical device being used for commercial purposes. So I'm not sure exactly; I cannot put a timeline on it, but I think we're getting there. And there's a lot of companies doing some really interesting things. I would say, again, I'm more excited personally about the non-invasive space.

I think that this is also a huge opportunity—tying it back to this audience—within the government. I've spoken with quite a few different research labs and government kinds of subs that are working on human augmentation and performance. One of the projects that I worked on, actually, before moving over to my new job was helping broker the deal between Microsoft and AFRL to develop what's called iNeuraLS, which is basically a training system for pilots using brain-computer interface. So I think we're trying to see that today.

Jake: Awesome, great. And AFRL—Air Force Research Lab for those who aren't familiar. Before we move on to dual-use—because we definitely want to get there—M12 is an interesting name for a venture fund. Can you elaborate on the brand story and how that came to be?

Lee: So Microsoft has invested in startups in various different ways for years and years and years, but we didn't necessarily have a formal venture fund like some others do. But we really became this formal venture fund, we were called Microsoft Ventures at this time, back in 2016. Since then, we have renamed ourselves to M12. And Microsoft 12—12 letters in entrepreneur.

I would say part of the reason for that rebranding is we consider ourselves to be financial-oriented and financial return-based investors as opposed to strategic investors, which is a different model than you see a lot of corporates doing out there. So we have our own investment teams, we have our own investment mandates, and processes to get deals. We, of course, want to build on the Microsoft ecosystem, and we want to bring startups and innovative companies into it. But our primary Northstar is those financial returns.

Since we started, we've made about 113 investments, which is quite a few; 19 exits, 15 unicorns—which is pretty exciting—a lot over the last year. We typically do series A, B, some C. More and more, I think we're doing C deals, even though we don't do as many of them and we don't have as many formal processes in place for them; we tend to lead a lot of our deals.

I would say that one of the key things that we look at when we're looking at companies is we're not investing in you because it's necessarily strategic for the company, but we're investing in you—partly because we do see a synergy though, right? We have a platform team, which has the sole responsibility to hook you up internally with our teams, into the product development roadmaps, into the customer go-to-market motions, hook you up with technology support and innovative solutions and discounts. So we want to look for an adjacency or some strong synergy with Microsoft that we can help unlock for you and add that incremental value beyond just giving you money? In addition, I guess the last thing I'll say here is the way we talk about our focus areas—even though I think they're constantly evolving—business applications, cloud infrastructure, cybersecurity and identity, data and AI, developer tools. And healthcare and life sciences is starting to become a much bigger area for us. And lastly, we have this catch-all called Bandar Bets, which has anything from quantum computing to deep AI to other deep tech type areas.

Jake: Great. On that, if companies are on here watching the recording, how would you recommend that they make themselves known, make M12 interested in them, or other corporate venture arms if they're trying to seek investment or partnership? What's their strategy for getting in touch? Or just getting on your radar, I should say?

Lee: Yeah, it's a good question. And I think that the reality is, first of all, every firm is different. And every person within every firm is different in the way that you engage them. I think—some are not necessarily a good or bad thing—some people may be more responsive on LinkedIn, some people may be responsive over email. But first and foremost, I think the most important thing is who is going to be the right fit. I think it's really important. There's a lot of capital out there, whether it's from a formal VC, strategic—a CVC, smart money, tier-one investor, grant programs, the government itself. Whatever it may be, capital should not be your number one priority, but rather think about it as a partnership, think about it as a relationship; somebody who's going to help you, who's going to add this incremental value beyond just cutting you a check on somebody who you want on your board for a long time.

So I think the way that you discover that is, first of all, look at other companies that are doing things similar to you. Who's investing in them, who's excited about them, that may be excited about you, but isn't directly competitive? Within there, who's the investor who's taken a strong interest in that? Some venture funds have specialties; some are segmented by NGOs, but I would say each investor—if you look at their track record—you can see a pattern right of what they invest in or what they like. And I think making sure that you're aligning to that person that you want to speak to, I think that's an important part of it.

And then there's the question of how do you engage with that? And first and foremost, far beyond any other way is a warm intro is always helpful. Whether it's from a startup founder that you've worked with who knows that person because they invested in them, one of your previous investors who's coming in on the next round, and they're really excited and want to diversify and bring somebody else in. I think really figuring out who can get me in the door. If you don't have that natural in, and you know this is the one—this is the person that I want to bring on board and to have a seat at the table with me—I think try cold reaching out, try LinkedIn, try email. I can't guarantee that you're going to get a response; I try my best to respond to every single person that does send me a message. I think there's a balance there, of course. Don't have your expectations too high that it's going to be immediate, or that just because you reach out, something will happen. But it can't hurt to try, whether it's an email or a LinkedIn post.

Lastly, this is always an option, but there's a lot of applications that come in. Most ones have a place on their website where you can submit some sort of application. That's an option as well. And then the last thing I would say, especially in the earlier stages, there's a lot of great competitions and stuff that investors will take part in. You guys host startup showcases and I've partaken in those and gotten inspiration and I've seen some interesting companies through that. It never hurts to just keep getting your name out there. Going back to what we were talking about earlier, market yourself and your company, not as an oil salesman, but as a technologist and we're here—are you interested? Here's my number.


Jake: Yep, that's all great points. So we see a lot of times I get reached out to about like, "Dear to whom it may concern...". We are some random industry that I don't have any experience in or know anybody in—would you invest in our series A or something like that on LinkedIn. It's like they didn't get to know who's interested or who's the right person for it and what the background is of that person and what appeals to them. So being specific is really good, knowing their track record of investing, and looking at the competition—all really good points. And then just being entrepreneurial, and just being persistent and trying different mechanisms if you can reach out to that person, right? So all solid, solid points there.


Audience Questions

Jake: So I also want to know, to which I forgot to mention the beginning, but we do have a Q&A available. So if you hit on that Q&A at the bottom, you can type in a question, and we'll try to answer it during this as well.

So let's talk a little bit about dual-use technology. This is a space that we operate in very frequently. We want to just give a primer to everyone on what is dual-use, and what are you excited about in the dual-use space from an investor perspective at M12?

Lee: Yeah, so dual-use can be anything, right? It can be doing business with state and local government, and commercial or whatever. I think—most commonly, when you hear dual-use, though—it's referred to in the context of doing business with the DoD, and with the commercial sector, at least in my experiences. And I think that we have seen waves here. I think if you look back into history, many of the biggest technological innovations and paradigm shifts have come out of collaboration between Silicon Valley and the Pentagon. In fact, Silicon Valley was essentially funded and built by defense contracts at one point in the earlier days.

I think over time, as those technologies became commercially available and democratized, people saw the monetization and the profit opportunity by selling the same technologies or working more closely with the commercial sector and the efficiencies that came with that. And the relationships between the Procurement Offices and the DoD itself in Silicon Valley frayed and it became separated over time. I think over the last couple years, there's been a realization that that relationship needs to be strengthened again. I think that we're seeing that with all these new syndicate programs that are popping up, access to funding, incubation programs—whether that's DIU, or AFWERKS; there's all these labs that are popping up, they're doing work. We were talking about AFRL earlier, where they have people whose sole role is to find what are the commercial technologies that can enable our missions internally because we can't develop those, we can't necessarily move fast enough, or our priorities have been somewhere else in the past and every four years they seem to change or whatever it may be. And I think that there's also been a realization that the barriers to doing business with the DoD have just become so untenable for fast-moving startups that the incentive is starting to get lost a little bit. I'm hopeful that with how much attention these problems are getting, that these barriers are going to keep coming down and that we're going to be in a future state where it is much easier to transfer technology back and forth, which ultimately leads to some of these synergy effects. So that's kind of how I'm thinking about it right now.

I think in terms of startups themselves, let's say they start in the commercial space. I think it's a really exciting opportunity to think about how can we also land some big government contracts to keep fueling our innovation? I think the challenge there is how do we not get distracted by that though? How do we realize that this is going to be hard? There are no guarantees here. Even if we win our first SBIR contract, there's no guarantee we're going to move to phase two; we can't put all our eggs in this basket. So how do we maintain our commercial business while also trying these big bet pursuits? I think on the other side, the model from if you got your business stood up with government contracts, the fundamental business is different than in the commercial sector. You're probably doing bookings-based businesses, you're doing big multi-year projects, versus selling maybe that same solution on the commercial side: you're doing monthly subscriptions, you're worried about churn, you're worried about customer satisfaction. It's a fundamentally different model. So I think finding—again, you could come at it from either angle—and finding that middle ground is absolutely critical. And I think that's where having—again, great partners and relationships, who can help you navigate whether it's on the defense side or the commercial side—is absolutely critical.

Jake: Great points. And we actually support the applied SBIR program for the Army and do a bunch of other things with similar companies or SBIR Companies, Small Business Innovation Research. Do you take a look at those when they come out and see the award winners? Or do you have any experience with them? Just curious to get your thoughts on that?

Lee: So, no is the short answer; we do not. I think that a lot of this is something that, frankly, needs to be modernized over time. Like there's a central repository where you can go see any contract that comes out, but the whole process of constantly scanning that and figuring out, is this one that's basically designed for another company already that I have no shot at? Unfortunately, that happens a lot. I think also, it's hard to decide, especially in the early stages, where do I spend my time? Is this one worth it? Or is this one worth it? So I think that kind of responsibility, frankly, falls on the startup a little bit.

In our case, one thing that makes us seem like an attractive place for dual-use companies, we do have folks on our sales teams, Microsoft sales side, that are scanning these pursuits. And one of the things I strive to do is to get familiar with our portfolio companies that want to serve the government and make sure that our sales pursuits know about these companies. So if there's a gap in one of Microsoft offerings that one of our startups can provide, they're front of mind, they're right there, they can fill that gap; let's bring them in as a partner on this much larger deal. So that's one of our mechanisms that we would deploy. Again, though, that's also where I see a big opportunity in making sure that you have the relationships in all these different syndicate programs as well. I think being part of FedTech is another example even outside the government, groups that are doing this more proactively and can support you through that journey.

Jake: Great. And we have a question in here, about DevSecOps. It's a little bit of a general question, but let's see where you take it—if you have any thoughts. So what are your thoughts on the DevSecOps industry, in the direction it's heading? And then if you can also give a little bit of primer on DevSecOps, for those who are not familiar?

Lee: Yeah, I'm really glad that this came up because one of the companies that I think is a pretty good model for starting off commercial and then moving to do what used to look like is one of our portfolio companies Contrast Security. Contrast Security is a DevSecOps company. And what they've been able to do is become the choice DevSecOps platform for Platform One. Again, a great way to get your company out there for folks to know about you, they form those relationships. And now they're known to be a provider there.

Taking a step back for a second, some of the biggest, most profound capital-intensive innovations have happened in collaboration between the DoD and Silicon Valley, whether it's in space, the internet, 5G connectivity, whatever it may be.

But there's a lot of things that are bread and butter today that just enterprises aren't spending as much on for whatever reason, that the government has an opportunity to really move the needle in the space. Cybersecurity, in my opinion, is one of those. I think that the Biden administration has come out pretty strong in their support of and advocacy of investing more into cyber solutions. I think that there's a lot of work to do, but I'm glad that they are prioritizing this like they are. My hope is that we're going to have more clear recommendations, regulations, frameworks around zero-trust networking for securing privacy for data for enterprise IP for whatever it may be. So I'm hopeful that the government is actually going to step in here and really move the needle. It's still moving; cybersecurity spend is at an all-time high. It's going to continue to go up as breaches continue and become more and more expensive, but I'm hoping that the government lights a little bit of a fire under that and speeds things up. On the other hand, though, there's a huge cybersecurity talent shortage. So you can only do so much. That said, though, with great lower code solutions, or more manageable tools—maybe in the DevSecOps space, for example—that'll help democratize it a little bit.

Jake: Yeah, great. Excellent. We have a lot more questions that are rolling in here. So let's see what I guess you can ask this one pretty briefly. I think you hit on some of it, but what is the typical stage of a company M12 invests in? Pre-revenue, seed early, etc? I think you said A to C. What is your typical deal size and do you syndicate?

Lee: Yeah, so the market is so wild right now, frankly. I think if I were to go look at our company overview slide, it would say one to 20 million. I think it's a very broad range; I guess somewhere in that range. We tend to lead the deals. That said, we will participate in some of them if there's a strong lead. Maybe it's a specialist investor who sees the value in bringing us and we may partake in it for minimum ownership that's predefined. We do help syndicate as well, although we like to hope that the company itself has made an impression and has investors lined up at the door, they'll want to get involved so that we don't necessarily need to. On that, we know a lot of great investors, and we're happy to help with that if we're leading the deal.

Jake: Right, that's great. And we talked a little bit more about this before, but I think it's worth diving into a little bit deeper because we have a lot of dual-use companies in attendance and will be watching the recording as well. So the balance between the commercial and government pursues, just to sum it up of basically what I heard you say, and then let's elaborate on this a little bit more: if you're starting commercial, make sure you have a good foundation for commercial; if there's opportunity to go into government, you can do so strategically. Similarly, for government, the same kind of vice versa approach for that. I think what would probably not be the best approach is to pursue both with equal intensity and focus and splitting your time, where it takes very different strategies, and product development, and critical path, and all the things that are necessary to getting a product to market to do both at the same time. You probably could do that at a very early stage or some things that are lightweight, like applying for an SBIR grant or something like that. But curious to get your perspective more on that balance; what you've seen work, what hasn't worked in the past?

Lee: Yeah, that's exactly right. I mean, it's just like any other startup in any one space; focus is absolutely key, you can't just build tech, and hope that it'll find a customer. I mean, you can, and sometimes you'll hit gold and get lucky there. But more often than not, I would say you should know who your customer is and what's the use case that you're developing this technology for, especially in the early days. How do you test it, how do you make sure you're getting product-market fit? And if you're starting off in the commercial space, focus on your commercial customers.

The government is an enterprise in a certain sense, right? They have back-office operations, they have employee engagement, they have HR, Finance, and all the other functions that typical enterprises have. There's a good chance that they're going to need your work as well, at one point. If that's your business, focus on the commercial customer, get good at that, develop the product, develop a great so that you know what the customer needs are, you're getting that feedback, you've gotten product-market fit. Then, let's think about, "Can we bring somebody on who's going to focus on building out our government business?" Maybe it's a product lead, maybe it's an account executive; who's this person who's going to start mapping out what this product for the government is going to look like? And then, if we get that traction, let's build out that business. Let's figure out how we get FedRAMP approved. Let's figure out what the contracts are. And maybe my investors can help with that or maybe some partners can help with that.

If you're on the federal side or if you're on the government side and that's your first customer, I think you need to make a conscious decision early on, which is, "Do I want to be a contractor? Do I want to only serve the government? If so, how do I really start betting these routes? The people I hire; I want people who know the acquisitions and procurement people. I want people who navigate this space very, very well, who understand the long sales cycles; I want investors who are comfortable with the long sales cycles and the bookings revenue, instead of traditional SaaS metrics. Does that align with their fun?" Really, the foundation should be built for that. Then, I think you can pivot. I think that's really difficult to do, though—perhaps more difficult than going the other way, from commercial over to defense.

I think that, again, it's the same investment, but on the commercial side. How do I find somebody who's very strong on the commercial side, somebody who worked at big tech or at startups doing enterprise sales? Who can help me get in the door? Can I build a commercial product without necessarily getting new financing to do it? I think that's one thing that I see a lot is, companies get excited that, oh, you love dual-use, right? Like, you'll invest in my company? But there's no commercial product yet. They're still a defense company who wants funding to go build out the commercial side. That's great, but I want to see a roadmap on how you think you're going to be successful and get product-market fit there. Especially if you're in the later stages, and you're trying to make a late-stage pivot.

Jake: Absolutely. Because it may be too much risk for you to just go on, "Trust us, we're gonna succeed in the government. Therefore, we'll be able to succeed in the commercial markets." You need more data, you need more evidence, pilot data, customer data, or revenue is obviously the prime indicator. But that's really good.

I also want to just kind of pivot back to something we talked a little bit about earlier, which is the thesis creation that you have. So super interesting job, it sounds like a traditional researcher-type role of finding, going to different sources, collecting information, and then coming out with a thesis for where you think Microsoft should be investing more heavily in, and then going out and finding those companies to make that a reality. So I thought that was really interesting. And I would love to hear a little bit more about the process for coming up with a thesis. Is it talking to experts? Is it looking at data? Is it a combination? Where do you find that, because at a certain point, the further you get into the future, the more speculative the nature becomes and the less hard and much more soft it is. So just thoughts on how you balance that and your process at a high level there?

Lee: Yeah, first of all, there's no one way to do it, right? And I think it completely depends on what it is that you are looking for signal. And it could be as narrow as, "I'm looking for the next great mechanism for federated learning," or it can be so much more broad to what are the next big, huge thematic areas like, you know, Web3, or space tech, or whatever it may be.

And in my case, I think one of the most important things is to consciously think about where you are getting your signal. Make sure that bias isn't too ingrained in your process, to make sure you have diverse perspectives from not only people, but also publications and that you're leaving politics out of it to a certain extent, but that you're also incorporating geopolitics and societal shifts, and all these different things. So it's really thinking about the people, the technology, and the processes, again. Experts, reaching out to people, going to conferences, becoming part of ecosystems is critical. For example, I'm part of Defense Investor Network, where we're seeing who's exciting all the time; we're having government officials come in and actually present to us and let us know about what they need and what their priorities are. I'm speaking in my research labs and to scientists and finding out what are the next breakthroughs? I'm reading academic papers. I'm also doing macro analysis on that; is there a trend?

So, in BCI, for example, one of the things I looked at was which specific sensor types are being used the most in academic papers which seem to have the most technological advancements in that particular space, as a signal. Another thing that I'm working on—I can't speak too much about it yet, I don't even know if I'm supposed to mention it—is building, it's an ongoing process—an AI application or machine learning application that uses basically hundreds and hundreds of different data points and features to predict a startup's success in the future. So based on what I can find about them today, what's their valuation going to be three rounds from now? Or if I were to go look at that in a macro perspective, what are the trends that are finding the most successful predicted startups within them? But that's a purpose-built application for me, and for my methodology, and for our methodology. I think everybody needs to come up with their own and build those connections.

Jake: Yeah, I mean that's really interesting. I mean, that could be extremely valuable to every venture investor on the planet if you can tweak the variables so that it's relevant for them specifically or their thesis. So that's really interesting. That's kind of the Holy Grail—confidence intervals when deciding whether to invest in companies. So that's great.

So we only have a few minutes left, so I don't want to go over. I want to give you the last chance; what kind of takeaways? Do you want to plug anything? Can people reach out to you? What should they do here?

Lee: Yeah, I think if you have some exciting technology, product, the business itself, and you see opportunity with either the Microsoft platform or for your startup from a pure financial perspective, please do reach out to me. I think that it's great that you're involved already in a program like you are. I think these are exactly—as I mentioned earlier—the right steps to get on people's radar. Keep doing that, keep floating your deck out there. Don't do it in a doc send; do it in a PDF. But tell them not to send it out everywhere, or specify who you want it to go to. Doc sends are kind of annoying.

And just market yourself; get yourself out there. But again, I think the most important thing I said earlier is really make sure that you're partnering with the right people. Don't just spray it out and float it everywhere. Find somebody you have a connection with; find a warm lead. In my case, you can find me on LinkedIn. Shoot me a message—I hope I didn't shoot myself in the foot. I do respond to most, I will try my best to get to yours. And yeah, good luck.

Jake: Great. Thank you so much for taking the time to talk with me and sharing your thoughts with the audience. Really appreciate it, Lee. And best of luck in your future endeavors and looking forward to having you back at some point in the future.

Lee: Thanks so much. All right. Take care, buddy, take care.


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