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M12’s new head on OpenAI, its new strategic focus and secondary sales

M12 announced a significant strategy shift to prioritize strategic investments earlier this year.

Michelle Gonzalez (Drew Sanders/PitchBook News)

At the beginning of this year, Microsoft‘s venture capital arm M12 announced a significant strategy shift. The CVC, which was founded in 2016, decided that it would prioritize investments that are strategically aligned with its tech giant parent.

M12 was previously run as an independent, financially focused VC firm. The change took place under the direction of Chris Young, who joined Microsoft as head of business development in 2020, and Michelle Gonzalez, who came over from Google‘s internal incubator Area 120 in 2021 to become M12’s new global head. The shift didn’t sit well with four key investors in the organization, according to Fortune, which reported that all four have left the CVC, and three have since launched their own firm, Touring Capital.

M12’s new leaders are forging ahead with investments in generative AI—an area where its parent has excelled in part thanks to its partnership with OpenAI—as well as cloud infrastructure and cybersecurity.

The corporate VC has continued to stay busy: It hired two new managing directors, Todd Graham and Peter Berg, and announced a GitHub fund dedicated to pre-seed and seed companies. It has also backed companies like generative AI startups such as Typeface, which raised a $140 million Series B at a $1 billion valuation in June, and Inworld, an AI-based AR/VR specialist that a couple of months ago closed a $50 million Series A at a value of $515 million.

PitchBook caught up with Gonzalez to discuss M12’s reasons for changing their strategy, the CVC’s relationship with OpenAI and why one-off secondary sales are a part of the organization’s routine fund management. The interview has been condensed and edited for clarity.

PitchBook: You recently went from a more independent corporate venture capital fund to one that’s closer aligned with Microsoft.

Being thesis-driven and aligned with Microsoft’s business priorities helps us create greater value for our portfolio companies. Capital is everywhere, but true value comes from our platform. Founders are beginning to recognize the importance of having a more strategic partner. We help them with access to technical expertise, products and customers.

What is your investment and deployment pace now that you are closer aligned with Microsoft?

We’re not going to hold ourselves to a strict number. The GitHub fund is ideally about 10 investments a year. Those companies are seed and pre-seed, and many are open source-focused on gen AI and its enablement. The checks [start at] $500,000 and they go up to a million.

For the main M12 fund, we’re looking at about 20 investments [per year]. The sweet spot check sizes are in the $5 million to $10 million range for Series A and B companies, although we’ve done quite a few investments recently that were seed stage.

We invest off Microsoft’s balance sheet, but we still make autonomous decisions.

Can you talk about M12’s relationship with OpenAI? Are your generative AI portfolio companies required to build on top of its LLM?

There are no requirements for our startups to work with any Microsoft technology, including Azure. But often companies want to work with Microsoft, and I think there’s a lot more that we can be doing for them if there’s interest. Helping navigate Microsoft technology is a big part of M12’s value-add.

As for OpenAI, we’ve created a nice connection with them. For example, we hosted an event where about 30 of our portfolio companies spent a whole day with Open AI talking about their latest models.

Do you think valuations and general momentum for generative AI are beginning to temper?

I think generative AI is still pretty hot, but it’s maybe not as white-hot as it was six months ago. We’re still seeing great companies with great founders being started, and there’s a lot of competition to invest in them. Valuations for some nascent companies in the early stages are still high.

When ChatGPT came out last year, there was just an explosion of new AI startups. Investors were in a frenzy to meet these companies. Now, that people have had more time to think about and understand the areas of generative AI that will be durable, there are opportunities to take more time to get to know founders before investing.

It’s been reported that you are selling a part of M12’s portfolio in the secondary market. Can you tell me more about that effort?

Some of the reporting on secondaries is not correct. What we are doing is routine one-off sales typically tied to another raise for the company. If a growth-stage investor comes to us and says they want to own a bigger percentage of that company, we may be interested in selling our stake.

Almost every VC is doing these types of strategic secondaries. That’s what I call fund management.

What gen AI areas are you most interested in now?

I think there’s brightness in many areas. It’s very typical of a new technology cycle. There are interesting companies at the infrastructure layer and at the developer tooling layer. I think the application space is also really interesting, particularly around empowering workers in legal, finance and medical fields. Gen AI can help them with mundane tasks such as research or redlining contracts.

While we typically don’t invest in consumer B2C companies, we are watching what people are doing in those areas because it’s very easy for customers to sign up by swiping a credit card. [The goal of these companies] is to expand to SMBs and help customers use video for advertisement in a very economical way. Also, Microsoft has a big gaming business, and with the acquisition of Activision, an even bigger one, so B2C could [be a fit.]

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