Microsoft’s venture capital arm, M12, has been offloading its portfolio on secondary exchanges at discounts, sources say

• M12, Microsoft’s venture firm, is offloading some of its portfolio on secondary exchanges, sources say.
• The fund’s shares in startups are taking haircuts of between 30% and 70%, three people said.
• M12 recently changed its strategy to become less like a VC and more like a business development team.

M12, Microsoft’s corporate venture capital fund, has been offloading some of its $1 billion portfolio on secondary exchanges, according to five people familiar with the matter. They asked to remain anonymous in order to discuss internal corporate matters.

According to four of the sources, M12 has been selling shares at a 30% to 70% discount to most recent valuations. This does not necessarily imply that M12 suffered any losses on these sales, as they could have invested at lower valuations. It’s unclear how much of M12’s portfolio M12 has sold or plans to sell, but three of the people said they expected it to be a sizable portion of the fund’s holdings.

According to a Microsoft spokesperson, M12 sold less than ten of its more than 100 portfolio companies as secondary in its fiscal year 2023, which ended June 30. According to one source familiar with the sales, M12 sold one large position at a 50% discount this month.

According to a spokesperson, M12 has not suffered significant losses on secondary sales. “M12 sold its position for significantly more than it invested.” “While company valuations are not trading at their 2021 levels, M12 profited,” the spokesperson added.

M12, which was founded in 2016, has invested in over 100 companies, including the aerospace company Vertical Aerospace, which went public, and the cloud company CloudSimple, which it sold to Microsoft’s competitor Google. As previously reported by Insider, M12 previously invested around $200 million per year in startups and has deployed more than $1 billion. On secondary markets, it is unclear which startup shares M12 is selling.

M12 changed its model earlier this year from one that resembled a VC firm focused on maximizing return on investment to one that resembled a more traditional corporate venture fund focused on making investments that help boost Microsoft’s ecosystem.

The change sparked debate within M12, partly because it altered the fund’s “carried interest” compensation, which gives employees a percentage of the profits on returns, and resulted in an exodus of fund leaders.

A secondary sales boom

In general, secondary sales are becoming more common in the market. Shocking discounts are also available.

Over the last decade, there has been an increase in the number of secondary funds and exchanges that assist founders, employees, and even investors and venture capital funds in selling their startup shares prior to an exit or IPO.

Limited partners in venture funds typically have to wait until a company goes public or is acquired before seeing tangible returns, a process that is taking longer as IPOs and mergers become scarce. Investors can sell shares in secondary transactions to liquidate positions sooner than they would otherwise.

With the proliferation of startups over the last decade, more corporations began investing in these early stage companies. This strategy has backfired in the face of a global tech slowdown in 2022 and a decrease in VC funding for startups.

Traditional VCs have also been looking to sell off large portions of their portfolios as investors come to terms with the fact that the boom-era valuations are unlikely to return anytime soon, if at all.

Tiger Global has told some secondary buyers that they are welcome to bid on any private company in its portfolio after failing to find a lead buyer for its portfolio of assets packaged in a strip sale, according to PitchBook.