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Who will Microsoft buy next?

A panel of venture capitalists and a Microsoft dealmaker chatted Tuesday about how Microsoft picks the two dozen or so companies it buys each year.

Menlo Park, Calif.--What does Microsoft look for in its ideal match?

Sparkly eyes and a nice smile don't hurt, but Microsoft is really looking for two other qualities in its acquisition targets: key intellectual property and smart technical leaders who plan to stay with Microsoft.

"At end of day we are buying a company for (its) people and IP," said Mark Wolfram, a managing director in the Microsoft unit that handles acquisitions. Wolfram was part of a breakfast panel Tuesday sponsored by the VC Taskforce.

Mike McCue's sparkly eyes and nice smile aside, it was Tellme's business and people that Microsoft found attractive. Microsoft

Asked what is the smallest acquisition he'd consider, Wolfram insisted that there is no minimum revenue, provided its two prior conditions are met. Some of Microsoft's acquisitions have been companies with just a few people and no revenue. The company has also spent as much as $6 billion, with its recent acquisition of Aquantive, though $50 million and 50 to 100 employees tends to be the company's sweet spot, Wolfram said.

It's the people who are often the driving force behind whether a deal does or doesn't get done, Wolfram said.

"Someone asked Bill (Gates) what the best deal was," Wolfram said. "He said 'Groove--I got Ray Ozzie.'"

Henry Wong, a venture capitalist and start-up CEO who helped sell AdECN to Microsoft earlier this year, said it took a while to get started with Microsoft with discussions largely dormant for about six months. But Wong said that when things finally came together, they did so in a matter of just a few months.

"Once they make a decision, it's like a stampede," he said.

Wolfram generally agreed with that assessment. "Sometimes it takes us a little while to move," he said, noting that the company likes to do its homework. But he said, once the company is convinced it wants to make a move, "we can be very, very agile."

One recent mobile deal, he said, came together in just three weeks, although he said that is the rare exception, with most deals taking nine months to a year from first contact.

The Tellme deal also came together quickly, Wolfram said. One thing that helped speed things along, he noted, was that Steve Ballmer was the executive sponsor of the deal. "That's a good sponsor to have," he said. But even if Ballmer is not the one behind the deal, it's important to have a key business leader who sees the way your company can fit into Microsoft's strategy.

As for what the hot areas for acquisition might be, certainly advertising and mobile have been big, but Wolfram also mentioned two other areas. One is health care, where Microsoft has basically used the acquisitions of enterprise health care firm Azyxxi and consumer health search firm Medstory to get in business.

Another area he mentioned was entertainment and devices. Microsoft has had a few acquisitions here, such as in-game advertising firm Massive. But given his comments and the fact we haven't seen many purchases in this space, I'd say it's one to keep an eye on, particularly as Microsoft continues to play catch-up with Zune.

Some of the key decisions of who might acquire a start-up are made in its earliest days, noted Mark Lazar, an executive-in-residence for Redpoint Ventures. He noted that companies tend to have a love or hate relationship, with start-ups either using Microsoft heavily or running away from Redmond's technology entirely.

But those decisions, often made for cultural reasons, can also have a big impact on a company's exit strategy, he said. "It's awfully hard to approach Microsoft when you are built on 'Everything but Microsoft' technology," Lazar said.

Also important on the technology front is the issues of whether a start-up owns the intellectual property behind its products. In some cases, a lack of control has scuttled deals that might otherwise have gone through, he said.