Start-ups look to Microsoft for venture capital

Microsoft Corp. may not have the best reputation on patent issues, but in one area it appears to be friendlier and more progressive than other IT vendors.
Microsoft’s IP Ventures program has just completed its third year of licensing patents and technology developed by Microsoft’s research labs to outside entrepreneurs.

Part of the larger Intellectual Property Licensing Group that has asserted Microsoft’s claim that Linux and open-source software violates 235 Microsoft patents, IP Ventures can also help startups get Microsoft software and technical expertise for little or no charge, as well as VC funding, in return for a 10 per cent to 30 per cent equity stake, according to David Harnett, a senior director in Microsoft’s startup business accelerator group.

Not all of the companies licensing Microsoft’s IP opt for the deluxe-service-for-equity treatment, Harnett says, though seven firms have.

The latest is an Irish financial services startup called Zignals. The Dublin-based firm is building a high-end stock information and tools service — think Bloomberg terminal, not Yahoo! Finance — aimed at rich individual investors.

For instance, the still-in-beta free service will let investors input complex risk portfolios and set alerts based on factors such as when directors or insiders are trading a stock, or when the 5-day moving average changes by a certain percentage, Harnett said. Zignals plans to be paid by stockbrokers, not by the investors using the service.

Zignals’ core engine is based on a technology called Microsoft Solver Foundation. Redmond engineers have been helping Zignals customize the technology for the past year. Zignals has exclusive use of Solver Foundation for the next 12 months. Afterward, Microsoft plans to market it to other financial services firms.

Zignals just raised US$2.5 million Euros from European investors. Microsoft retains a 15% stake of the company and has a seat on the board, which is filled by Harnett.
Its founder and CEO, Pat Brazel, was referred to Microsoft through personal contacts at the Irish trade development body, Enterprise Ireland. But interested entrepreneurs can simply browse Microsoft’s online catalog of IP for ideas.

One reason IP Ventures exists is the wealth of patents and technology created in-house by Microsoft researchers. Many of those patents, however clever, may never see daylight as part of Microsoft-developed projects.

Microsoft was granted 1,637 U.S. patents last year, according to IFI Patent Intelligence, ranking it sixth worldwide, far behind longtime leader, IBM.

On the other hand, Microsoft ranks ahead of IBM in terms of international patent applications, according to the World Intellectual Property Organization (WIPO). Microsoft was 8th overall last year, with Matsushita of Japan on top.

To produce its IP, Microsoft invests $7 billion a year on R&D. Most of it is actually spent outside its Microsoft Research (MSR) division, which still boasts 800 researchers worldwide — more than many major universities.

Microsoft’s internal product groups still have first dibs to anything produced by MSR, according to Horacio Gutierrez, vice-president of intellectual property and licensing. That doesn’t mean that the IP picks available for startups to license are merely second-rate technologies, saying there are many reasons why a given technology “may not fit within the product roadmap at Microsoft.”

Zignals is using wall-to-wall Microsoft technology, with its interface built on top of the Silverlight media player. Using some or all Microsoft technology is “not a prerequisite” to getting Microsoft’s help, Harnett said. He pointed to another IP Ventures licensee, communications software maker Skinkers, that is using Java and Flash for its product.

“We’ve licensed technology into companies that are running open-source, others that are on a full Java stack,” Harnett said.
Unlike tech transfer groups at large research universities, IP Ventures has no hard financial goals, Gutierrez said.

“We’re clearly saying that immediate monetization is not the objective,” he said.

But might that not take the urgency out of IP Ventures to license IP before it passes its sell-by date? For instance, one IP Ventures spinoff in which Microsoft has a stake is a social-networking site, Wallop.com.

Microsoft created the technology behind Wallop in 2003 but let it sit for several years before licensing it in 2006. That would appear to have given top dogs such as MySpace and Facebook several years of a head start.

Gutierrez said Microsoft has sped up its licensing process since then. While Harnett characterized Wallop as more of a party-invitation site, a space in which the leader, Evite.com, is considered vulnerable by some for not keeping up with current technology.