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Comment by mmaunder | Hacker News Reader

The risk of a snake eating it's own tail i.e. company invests in another who has to become a customer as part of the deal. Microsoft just did this recently IIRC with Azure - I forget which company. If the biz fails you lose your investment and your customer. So it's a high risk move.

In general I'd say for growth businesses that this is a red flag because it signals how much effort they're prepared to go to to increase revenue, and how much risk they're prepared to take on. It's worth asking why they can't get customers the traditional way, and why they have bandwidth internally to go to this amount of effort - bandwidth that should be applied to regular customers who want to buy.

From an optics perspective it looks good because the press loves transactions. So you get the press around the investment, and the knock-on press around gaining a new customer. But the fundamentals around this have that not-so-fresh smell.

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I'm on the fence on this. From one angle it looks like a conflict of interests, from another one looks like the opposite of a conflict.

1. Conflict: Microsoft becomes a large shareholder in company X, then uses their seat to steer that company into using Azure rather than AWS, despite AWS offering a better deal. Bad.

2. Alignment: Company X wants to get Azure cloud services. It tells Microsoft if their offering is so great, are they willing to get paid in stock rather than cash? If Azure lowers the company's compute costs by tens of millions per year, then the company will show an improved income statement, analysts will love that, the stock will skyrocket, and Microsoft ends up better with the stock than with cash. Microsoft is incentivized to provide the best user experience. Good.

> Microsoft is incentivized to provide the best user experience. Good.

I don't see how this follows. If they own the company, or using Azure is imposed by C-Suite, what incentive is there to improve their product at all?

They don't own the company. They own shares in a publicly traded company. Those shares go up and down in price. If they provide an outstanding service, the shares appreciate in price, and this shows as profit on Microsoft's balance sheet. And Microsoft, like all companies, are incentivized to show profits rather than losses.

I think this is probably going to be subject to the principal-agent problem. The bits of Microsoft that would make Azure better might be quite a long way from the bits that would like this intangible asset to appreciate. And they'll report them separately anyway, so as long as Azure is getting the revenue, low-performing assets won't drag down Azure's numbers.

I think you're thinking of

> Microsoft buys near 4% stake in London Stock Exchange https://news.ycombinator.com/item?id=33952824

Call me old fashioned but I kinda hope that buying a stake in the London Stock Exchange doesn’t count as a high risk investment these days…

Edit: ( though obviously it’s not as clear cut as it used to be :/ )

LSEG recently used leverage to buy market data firm Refinitiv which was somewhere around 5x the size of LSEG itself. They are risk averse, but clearly not as much as they used to be. That acquisition came with a large amount of hardware in DCs around the world which MS has been gunning to get into Azure.

Thanks.

Afaict openai too, basically paying themselves for massive GPU bills

>> It's worth asking why they can't get customers the traditional way, and why they have bandwidth internally to go to this amount of effort

Those seem like rhetorical questions designed to call them on the B.S. My new philosophy is not to ask those kind of questions, but instead (optionally) say why it's dumb, and (definitely) just don't bother with them.

When you ask those questions it lends legitimacy to what they're doing by offering thr chance to justify it. By shooting it down directly they would first have to address the dumb part.

I've witnessed the reverse happen very successfully: Fortune-500 company signs a multi-million-$$, multi-year contract with a vendor while at the same time investing in them.

Illumina often does this with spinoffs and startups. They provide a good chunk of the funding for startups which primarily use Illumina hardware.

I suspect it’s because they have a near monopoly in high-quality, next-gen sequencing. They’re trying to grow the market for their machines rather than take business from a competitor.

> I suspect it’s because they have a near monopoly in high-quality, next-gen sequencing

That is changing[0].

[0] https://twitter.com/Bernard_Y_Kim/status/1605372507418021889

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