The Difficult Decision For Heptio To Sell to VMware

We are thrilled for Heptio’s acquisition by VMware! This transaction is another resounding reinforcement that Kubernetes has become the de facto standard for infrastructure across clouds. It is also a tremendous validation of Heptio’s team, vision and execution.

Deciding “when to sell” is one of the toughest decisions faced by founders, boards and investors in growing companies. When presented with an attractive alternative to continuing to build the company independently, boards have a “high class problem” — but one they must consider with utmost thoughtfulness. Heptio was presented a very difficult challenge in this regard.

Heptio was founded by Kubernetes co-creators, Joe Beda and Craig McLuckie, less than two years ago. Madrona had the privilege of investing with Accel in the $8.5M Series A round at the company’s formation, and I joined the board as an Observer. Since this Day One, I’ve never been associated with a company that has accomplished more in as short a period of time. Craig and Joe had an original vision that the Kubernetes’ community would continue to strengthen and its rapid adoption would continue to increase; however, it needed to become easier and enterprises needed help with adoption. From this starting point, they saw an opportunity to lead a cloud native transformation in the enterprise and redefine the deployment and operations of modern applications across clouds.

This vision has exactly played out, and Heptio backed it up with great execution landing a blue-chip array of Fortune 500 customers for their Heptio Kubernetes Service (HKS) including 3 of the 4 largest retailers in the world, 4 of the 5 largest telcos in the US, and 2 of the 6 largest financial services companies in the US. They also made significant impact on the Kubernetes community by contributing 5 OSS projects (ksonnet, sonobuoy, contour, gimbal, ark) and collecting over 5000 Github stars. With this great execution, more funding followed. Nine months in, Madrona led the $25M Series B and the company invited me to join the Board and my colleague Maria Karaivanova joined as an Observer.

Through it all, Craig and Joe were the consummate founders. They approached building their business with laser-focus and a driving ambition to genuinely help customers and create a large, lasting business in the process. They were rock stars in the Kubernetes community, but approached all interactions with humility and pragmatism. They were extremely strategic in thinking through potential moves on the industry chessboard in what is a very dynamic market; but they always realized that none of it would matter if not paired with week-in-week-out blocking and tackling. Perhaps most importantly, they were relentless recruiters and built a world-class team of over 100 employees in less than 2 years, attracting other great leaders like Shanis Windland, Marcus Holm and Scott Buchanan. In doing so, they walked the talk that culture and diversity matter deeply in building a successful business, often passing on a good hire in favor of the right hire who was an even stronger fit for the business.

So, why in the world did we decide to sell? In short, sometimes you receive an offer too good to refuse. Heptio had the team, momentum and plenty of funding to continue; but in VMware, they saw a partner who not only recognized Heptio’s unique insights, assets and market position, but also had the resources and reach to execute more quickly on their vision and deliver an enterprise Kubernetes service to any cloud. The excitement over this potential – and a great financial offer – drove this deal. Market consolidation was always anticipated, and this decision was certainly not a reaction to IBM acquiring Red Hat or other market externalities.

In this decision process, the role of the investor is to ensure the founders and management team have the broad perspective of “what might be possible,” provide an objective view on the market (both opportunities and risks), and ensure the company has the necessary resources. At the end of the day, we support the founders and management team. In this case, while this acquisition came sooner than anyone anticipated, we all agreed that the strategic fit and economics made joining forces the right decision. Through it all, Craig and Joe balanced the interests of shareholders and employees along with other strategic considerations in exactly the way you hope any founders would. Ping Li from Accel was also an incredible thought partner from before company formation through this decision, and overall was one of the best board directors I’ve ever had a chance to work with.

Congratulations again to the Heptio team! We wish you all the best in furthering your mission and vision via the leadership roles you are taking inside VMware. We are excited the whole team is staying intact in Seattle and will continue to grow here. This acquisition is also a great validation of our broader investment theme around the enterprise move to cloud native and open source, and we continue to be very excited about our related investments in companies like Tigera, Shippable, and Pulumi.

Now my and Madrona’s fortunate job is to go find the next great Day One company … but I know it will be difficult to find another quite like Heptio.

Heptio – a Day One Cloud Native Company Raises Series B

Today, Madrona is very pleased to announce that we are leading the new $25M Series B round in Heptio, partnering with existing investor Accel Partners and new investor Lightspeed Venture Partners. Heptio is another example of a “Day One” investment for Madrona. In November of 2016, we participated in the Heptio Series A led by Accel. In doing so, we partnered with Heptio founders and Kubernetes co-creators Craig McLuckie and Joe Beda at the very formation of their company whose mission is to (initially) make Kubernetes more accessible for all enterprises and (longer term) provide the standard framework for delivering enterprise apps in a multi-cloud world.

Our thesis with the Series A was pretty simple: (1) one of the largest trends in enterprise computing was the move to cloud native technology (container-based distributed microservices) and operations, (2) Kubernetes had become the leading way to orchestrate and manage container-based applications, (3) customers were beginning to demand better ease of use, accessibility, and an independent provider of support, services and training, and (4) the best team in the world to build this company began with Craig and Joe, two of the Kubernetes co-creators.

Since that time, the team has executed extremely well and, if anything, the market for Kubernetes has continued to explode even beyond expectations. Today, 50 of the Fortune 100 are using Kubernetes across industry verticals from retail to banking to manufacturing. Kubernetes continues to be the most active open source project in the world, and all the major cloud platforms are adopting it. Craig and Joe have begun to build a world class team at Heptio, launched three initial products, landed a number of high-profile (although still confidential) customers, and laid the groundwork for key partnerships.

Given all this progress, and our conviction that Heptio can be one of the next billion-dollar cloud companies in Seattle, we were honored to partner with great open source and infrastructure investors like Ping Li from Accel and John Vrionis from Lightspeed to lead the Series B. We are looking forward to continuing to partner closely with the Craig, Joe, and team to build Heptio through this next phase and beyond.

Why We Invested in Heptio

We could not be more excited to be investing in Heptio. Heptio is aiming to become the Kubernetes company and is founded by two of the creators of Kubernetes at Google, Craig McLuckie and Joe Beda. Specifically, Kubernetes is the leading open source cluster manager for containers; but, broadly, we feel Kubernetes is a core technology that is changing how IT in enterprises works. Joe and Craig are two world class entrepreneurs who have the technological expertise, the industry and customer relationships, and the leadership and respect of the Kubernetes community necessary to build a massively successful business in this field. Heptio also represents an investment in one of the biggest themes Madrona has been tracking over the past several years: the move to “Cloud Native.”

Over the past decade plus, we have seen enterprises steadily evolve towards a cloud native world.

Over the past decade plus, we have seen enterprises steadily evolve towards a cloud native world. This movement began with application workloads moving from operating systems running on bare metal servers to virtual machines running on hypervisors, primarily to reduce cost by consolidating hardware. Then we saw the move of these virtual machines into the cloud to greatly increase operational agility and further reduce cost. This enormous move (of which we are still in the relatively early innings), led first by Amazon Web Services as well as Microsoft Azure, turned Seattle into the Cloud Capital of the world. While much of this move to the cloud has meant migrating from on-premise to a public cloud infrastructure, enterprises have also altered their approach to internal infrastructure and created private clouds to capture many of the same advantages of the public cloud. This brings us to cloud native – the current wave of the cloud evolution that is really a combination of technologies, practices and culture.

The cloud native technological shifts that are occurring are accelerating adoption of containers (usually replacing VM’s but also running inside them) and application architectures moving to distributed microservices. All of this requires a different approach to working and managing resources, often referred to as DevOps, but perhaps better described as “cloud native ops.” The advantages of this approach are many: further reduced cost and complexity, greater developer productivity, easier to manage and scale applications, and better performance – all without sacrificing security. Now, as containers and microservices proliferate, managing them and the server clusters they run on at scale has created new challenges. Thus, Madrona and many VC investors have been hunting for and investing in companies that make it easier to orchestrate, network, secure, monitor, and attach storage to container-based, microservice architectures.

However, orchestration and management are the most strategic capabilities needed by enterprises for these container-based, cloud native environments. Docker is a company that has become one of the better known names in IT because of their container technology and its widespread popularity with developers. Now Docker is also offering and attempting to monetize their orchestration software. Google has been the leader in developing and managing container-based applications and infrastructure far longer than Docker. In February 2015, Google released Kubernetes as an enterprise-friendly open source project that encapsulated a decade of experience building their internal container-based cluster management system called Borg, which is the core of how Google manages their datacenters. Then in July 2015 when Kubernetes hit version 1.0, Google donated control of the project to the Cloud Native Computing Foundation. While everyone in this industry knows Docker and has heard of Kubernetes, what you might not know is that Kubernetes is now the most active project on Github.

Further, the most popular way to manage and orchestrate Docker containers is not actually Docker. It’s Kubernetes. While many chapters in this story certainly remain to be written, we feel that Kubernetes is the key platform technology for this continuing evolution to cloud native and is on a path to be the default management system for this new way of computing. This is a hugely valuable opportunity, and Heptio can be the go-to partner for cloud native enterprise IT transformation.

We feel that Kubernetes is the key platform technology for this continuing evolution to cloud native and is on a path to be the default management system for this new way of computing.

In the world of start-ups, it’s not enough to just have a great idea and a big market. You have to have the right team. And Craig and Joe are literally the best team in the world to go after this opportunity. As Kubernetes co-creators here in Google’s Seattle offices, they understand the space inside and out, know and are known by the Kubernetes open source community, and have a deep appreciation for the users of Kubernetes and the challenges faced by enterprise customers in adopting this technology. You could say that the founders of Kubernetes are carrying on the mission as a stand-alone company.

While Kubernetes has become very popular, it is still too difficult to get up and running. Companies also have nowhere to turn to get enterprise-level support, which is a necessity for broad corporate IT adoption. Heptio will provide this commercial support, while also building on the open source base to improve usability, installation, and eventually adding and extending Kubernetes features and functionality. They will do this in a way that supports the existing ecosystem, not competes with it. Over time, we think Heptio can become a centerpiece for how companies develop and operate software.

We are also pleased to be partnering with Ping Li from Accel, who led the investment round, in our support of Heptio.

At Madrona, we aim to invest in the best entrepreneurs attacking the biggest markets in the Pacific NW, who have the opportunity and ambition to build long-term, standalone businesses. We feel that Heptio can be the next iconic cloud company based here in Seattle, and we are excited to help Craig and Joe along this journey.