I would be surprised if Heptio made more than $5M in revenue. As far as I can tell, their business model was to first spend a lot of money upfront building a high-profile team of upstream contributors, and developing lots of cool open-source projects; then leverage the upstream brand recognition into service contracts, in the hope of becoming the “Red Hat of Kubernetes”. They certainly were very efficient at the “spending money on great upstream engineers” part. I doubt they got very far along in the “generate revenue” part.
I think they spent roughly half of their series B money on this brilliant plan, with headcount increasing at a steady clip. Meanwhile they probably realized building an enterprise sales and support organization is no fun, and growing it fast enough to justify ballooning R&D costs is not as easy as it looks. Given the profile of the founders - former Google and Microsoft employees with no enterprise sales experience to speak of - they were either deeply bored by the prospect of scaling this part of the company, or the board started pressuring them to bring a more sales-savvy CEO, or possibly both. It’s also possible that there was founder conflict brewing - those guys had zero experience outside of giant corporations, so they jumped straight into the deep end of the pool with a high-profile launch, rapid team growth, etc. For inexperienced founders who haven’t had time to gel as a team, it can be a jarring experience. Given that they still had reasonable runway (let’s say 12 months), they were not desperate to sell. My guess is that their number was $250M: plenty of money for the founders, and it matches the recent CoreOS acquisition. In early stage acquisitions it’s often important to stroke the ego of the founders, so that they can experience the acquisition as a victory rather than a defeat. A lot of times that boils down to a pissing contest on valuation. $250M is a steep price for a $5M business, but it’s still a great deal for Vmware. They need a credible Kubernetes story, and as much open-source DNA as they can.
EDIT: others are pointing out that the acquisition price might be below $84M. It’s likely that VMware structured the deal into a modest a acquisition price for shareholders, augmented by a somptuous retention package for key employees (basically the founders and engineers). I think they pitched the resulting deal as a $250M “acquisition” from the founder’s perspective. This is very common for acqui-hires, especially when the risk is high that the team will be unhappy and be tempted to leave.
I've had a chance to interact with Craig and Joe on multiple occasions and got an impression that they are rock solid both in their business strategy, team building, technical execution and vision, so not sure where do your assumptions are coming from?
Yes this is of course all speculation. I’m just pattern-matching based on my experience and superficial observation of the facts. If you’ve met them a few times, it looks like you are too, no?
Objectively, this is a pretty great outcome. So you could say they had a good strategy and executed well on it. And their engineering team looks great, no argument there.
"On June 12, 2015 Cisco acquired Piston Cloud Computing, a privately held San Francisco based Openstack product company. Piston provides software that enables streamlined operational deployment of large scale distributed systems. Piston's enterprise grade software helps customers automate orchestration and deployment of underlying distributed systems for running applications on OpenStack."
I think they spent roughly half of their series B money on this brilliant plan, with headcount increasing at a steady clip. Meanwhile they probably realized building an enterprise sales and support organization is no fun, and growing it fast enough to justify ballooning R&D costs is not as easy as it looks. Given the profile of the founders - former Google and Microsoft employees with no enterprise sales experience to speak of - they were either deeply bored by the prospect of scaling this part of the company, or the board started pressuring them to bring a more sales-savvy CEO, or possibly both. It’s also possible that there was founder conflict brewing - those guys had zero experience outside of giant corporations, so they jumped straight into the deep end of the pool with a high-profile launch, rapid team growth, etc. For inexperienced founders who haven’t had time to gel as a team, it can be a jarring experience. Given that they still had reasonable runway (let’s say 12 months), they were not desperate to sell. My guess is that their number was $250M: plenty of money for the founders, and it matches the recent CoreOS acquisition. In early stage acquisitions it’s often important to stroke the ego of the founders, so that they can experience the acquisition as a victory rather than a defeat. A lot of times that boils down to a pissing contest on valuation. $250M is a steep price for a $5M business, but it’s still a great deal for Vmware. They need a credible Kubernetes story, and as much open-source DNA as they can.
EDIT: others are pointing out that the acquisition price might be below $84M. It’s likely that VMware structured the deal into a modest a acquisition price for shareholders, augmented by a somptuous retention package for key employees (basically the founders and engineers). I think they pitched the resulting deal as a $250M “acquisition” from the founder’s perspective. This is very common for acqui-hires, especially when the risk is high that the team will be unhappy and be tempted to leave.