Salesforce Buys Heroku (YC W08) For $212 Million In Cash
techcrunch.com
techcrunch.com
I'm not sure how it's going to be good for Heroku customers (like me) in the long-term. There will be the inevitable brain drain over the course of 1-2years when key staff move away as their contract clauses run out and then we'll be left with Heroku being run by SalesForce :(
I've found deployment to Heroku whilst tinkering with side projects fantastic, whilst Salesforce is the bane of my life in the day job. And whilst they have the in-house infrastructure to actually reduce Heroku prices, the Salesforce focus on the enterprise market hints that they're more likely to raise them.
Congratulations to the Heroku team though. Is it DropBox's turn next?
Shut up before you jinx us all.
I wonder if I should start building Heroku 2 now...
Yes, but make it good
explaining Cisco - Cisco seems to be trying to break into the "Digital Home" market with things like FlipVideo and some other video services. Dropbox would make a great cloud storage play for media services.
Interesting case about Cisco. I would've also thrown in Apple because of their huge war chest and select big acquisitions. Dropbox could easily outdo MobileMe. Then again, I'm sure Google wouldn't mind getting a GDrive finally.
But then, there's facebook!(Sure, they got Drop.io, but facebook loves grabbing startups away before Google get to them)
Disclaimer: I'm a co-founder of DjangoZoom.
Eventually all the "startups that you love" will either close their door or be acquired and I think people should expect that since day 1.
We hear a lot that being a good programmer/designer/etc. isn't language-specific but that it is a skill-set that transcends technical knowledge. Why isn't this the same for companies and products?
But the likelihood of independent growth for a platform of any type is incredibly low. For each Google how many Herokus and Friendfeeds are there?
The driving force behind very few independent companies is a lack of an IPO market. Without a payoff for VCs you have to grow organically through customer funding or sell to a big acquirer, or in rare cases pay off investors with debt.
With 20,000 employees, it's just not the same.
Either way, you can't expect a founder to stick around for 30 years with the same company and product. It takes a Steve Jobs to keep things interesting over decades.
100 years ago you put your name on the company and treated it's performance as your personal reputation (for better or for worse). Today the most common "strategy" is to build something just good enough that you can attract enough customers to generate a revenue stream that is interesting to someone else, and then wash your hands of it.
This punishes everyone who was willing to suffer with you while you worked out the kinks.
I'm sorry but the whole thing just seems too "deadbeat dad" to me.
1:xyz
Salesforce.com (you know? That company that just bought Heroku?) was founded in 1999, went public in 2004 and is currently worth ~$20B.
VMWare were founded in 1998, and is worth ~$37B now.
http://www.renaissancecapital.com/IPOHome/Press/IPOIndustry.... shows there have been 37 tech IPOs in 2010, worth ~$5B
http://www.renaissancecapital.com/IPOHome/Press/IPOPricings.... shows IPOs/year. Obviously not all are tech, but a large number are.
Additionally, we all know that there are many companies which are very successful but are deliberately not going public.
Big congrats to them!
"This is Salesforce’s fifth acquisition this year. Earlier purchases include Activa Live, Sitemasher and Jigsaw. Salesforce.com also spent $170 million to fully acquire its Japanese subsidiary, Salesforce Japan."
Anyone see a pattern? I don't, but then I am not that business savvy.
http://swombat.com/2010/12/8/salesforce-buys-heroku
(in short, Salesforce is looking to make a credible entry into the "public IT cloud provider" sector - much like they signalled with database.com yesterday)
"So you bought Java, eh? Who cares? I don't need to rely on Java, I've got all the cool kids and their RoR apps!"
(212M is an expensive stick though...)
In the non-startup enterprises (I work with those), the work is usually to glue things together. Call a legacy web-service here, run a worker there, put things back into a legacy CRM etc. Ruby is perfect for that.
JRuby is even better, actually, and I wouldn't be surprised to see Heroku support it later on.
One thing that can be gleaned from the history of languages and computing platforms is that once computing performance started skyrocketing, it has been the easiest languages and platforms that have been winning. And RoR is very easy and Heroku is a very easy way to deploy and host RoR.
If Heroku becomes the place to be for commercial web apps, if it becomes the visual studio for web apps, those 200 mill will look like a steal.
Don't get me wrong, I understand the value proposition of a highly tuned blackbox Rails stack, and there is certainly no faster way to get up and running. So it may become the place to be for early stage startups and prototypes. But the particular model that Heroku has is sort of like the Drupal of infrastructure: it's an amazing platform that has everything you need out of the box, but which also comes with a lot of baggage that can easily become an albatross when you are really trying to dial in a growing app.
It's more like "VC funded companies throw money at hosting at the moment".
I worked out a while back what it'd cost to run Mibbit on EC2 (Let alone any intermediary), and it was crazy money. But we use a fair bit of bandwidth and not too much CPU so it all depends.
Salesforce has been pushing heavily into the cloud to compete with AWS and Azure (see their recent Database.com announcement), these acquisitions give them a strong position in the market.
Heroku in the past has said they plan to offer multiple cloud backends, so it wouldn't surprise me if that's how they got talking to Salesforce.
Just five years too late. They should have built AWS way before anybody else (esp Amazon) did. They were sitting on the opportunity for so long, had a customer base that was already sold on the cloud.
They are now playing catch-up, with acquisitions and the release of Database.com etc.
Huge opportunity missed, the company could have been 4-5x the size it is today.
Salesforce five years wasn't anywhere near enough in the position that they could afford to throw tens of millions of dollars into a non-core product (which Amazon could easily do).
It easy to point out opportunities missed without looking at the cost of those opportunities.
They started promoting PaaS (term they coined) ~4 years ago and the marketing dropped CRM to focus on Salesforce being a 'cloud expert' (or leader). All of what Benioff has been saying around that time and up to today was Salesforce moving beyond CRM and into being 'cloud' and 'platform'.
I remember him having a slide in one presentation where it showed "CRM ==> Platform ==> PaaS", or something similar, showing Salesforce development and roadmap.
Problem was, for them it meant providing more apps and the app platform and building it themselves, rather than providing the tools to allow developers to build out their platform for them. A bit like Microsoft not having Visual Studio and MSDN.
Salesforce take a small cut of app sales, they could have made a lot more hosting all of these apps and providing the remainder of the dev toolchain/platform.
It also meant that they could have captured part of the market for intranet apps. The app might not be related to salesforce at all, other than using it for auth, but salesforce could have hosted the app and charged crazy enterprise rates (ie. not cents per hour like EC2, more database.com type rates).
On a semi-related note, I think Facebook will eventually get into this. Bret Taylor who is the CTO now was on the AppEngine team. I wouldn't be surprised if Facebook do PHP and Python app hosting soon.
I think this is one of the reasons why Salesforce has agreed to let Heroku "run themselves" instead of taking over and ruining the party. It's also a good sign for Heroku customers since it's unlikely that Salesforce will make a ton of changes to Heroku's service until they can figure out how best to integrate the two services.
Congratulations to everybody, especially to the people that brokered the deal on Herokus side, very impressive.
In other news, registrars the world over report a large uptick in domain registrations around the twin themes of rails hosting and sushi...
Not saying that's what I think, but that's my interpretation of the comment.
https://spreadsheets.google.com/ccc?key=0AkkhSN3vaY4jdF90b1l...
Probably both.
And yes, the GroupOn valuation is bubble.
I didn't get the job. Probably a good thing.
The office in the area I was looking at was SMALL. That wasn't so much an issue but the vibe of the place was almost like a library.
There is a time for that, sure, but getting peace and quiet to get in the hacking mindset is more important to me.
I was sufficiently spooked by their environment that I choked on a little practical exam they had set up as part of the interview process.
Anyhow...I didn't get THAT job, but I did get a BETTER one. More money, more autonomy, more interesting work.
:)
I also have somewhat severe ADD; open office layouts are fairly negatively impacting to my productivity.
But that last 2% made us scratch our heads and say, "Really?"
Stuff like telling us that they cannot possibly break our apps when they push new code to the underlying platforms, that we have no need for backups because version control will suffice, etc.
These things are probably true for operational needs, but they seemed to not think deeply about DR or edge cases.
I'd like to think we have a good track record. not perfect, of course, but don't believe everything the sales dudes say. ;o)
I have no trouble believing that this is more of a perception issue than a technical issue.
Disclosure: I am an engineer at salesforce.com. That said, I'm thrilled about Heroku. It has been my favorite startup since I heard about it.
He's a smart guy though, and he's been there a while now, and he's still fully convinced they're "going to change the world".
Maybe they will - I can think of _worse_ companies "winning"...
pg 6% (early 2008)
---
$3M Series A (mid 2008) Assuming a $2M pre-money:
heroku 37.6%
pg 2.4%
series A 60%
---
$10M Series B (2010) Assuming a $5M pre-money:
heroku 12.5%
pg 0.8%
series A 20%
series B 66.6%
---
$212M Exit:
heroku $26.5M
pg $1.7M
series A $42.4
series B $141.3
---
result:
series A $3M -> $42.4M // 14X in 2.5 years
series B $10M -> $141M // 14X in 1 year
pg $17K -> $1.7M // 100X in 3 years
All the pre-money valuations are guesstimates/fiction.
From 94 > 37% series A is incredible, and ending up with 12.5%.
I wouldn't exactly be crying into my beer today if I was them, but I have to wonder if VC was worth it vs building organically for a few more years.
Especially when they are all Amazon based etc. Where did the money go?
Generally a venture round will be for between 33% and 20% of the company, trending lower as the company gets further along. 25% is a pretty typical number.
If you assume each of Heroku's two rounds were for 25% of the company, then 94% -> 70.5% after the A -> 52.9% after the B. (It seems counterintuitive to sell 25% of the company twice but end up with more than 50% of it, but this is because the Series B dilutes the Series A as well as the common.) The premoney valuations implied for the A & the B would be $9MM and $30MM respectively.
The reality would be lower, because this doesn't take into consideration things like option plans. If we assume they created a 10% option pool before the A and then used it all, the dilution looks more like this:
94% -> 84.6% (options) -> 63.4% (A) -> 47.5% (B)
Of course these things can still vary pretty widely. But no one's doing $10MM on $5MM premoney unless something has gone pretty wrong. In that case I'd expect the management team to get topped up with additional options to keep them motivated.
As an aside, the calculation of who made what also assumes that the investors have no pro-rata rights, which is wrong. When a company raises $10MM in a Series B, not all $10MM comes from the Series B investor.
Most VCs that invest in an A will set aside 3-4x that to invest in later rounds (Fred Wilson wrote a post about this recently)
(ps. your pre values are way too low (the 3 at A was probably on 10) but the point of dilution still applies. They also would have sliced out a 20-30% option pool at A)
> $10M Series B (2010) Assuming a $5M pre-money
I know this was just a thought exercise, but shouldn't their valuation have increased between 2008 and 2010?
http://www.techflash.com/seattle/2010/12/ignition-backed-her...
Another hidden variable is the presence of liquidation preferences for VCs. Some funding agreements allow VC's to "double-dip", ie take their liquidation preference and then also take their full percentage of the leftover amount. However, with YC advising them and with the Heroku founders having a reputation inside YC as being good fundraisers, I think there's no way Heroku's VC's got this.
If you assume no double-dipping, a 33% dilution per round, a YC-average 6% stake in Heroku, and an average amount per YC startup of $20K, YC's share of Heroku is enough to pay for their investment in every YC company ever up until this point, and also all the companies in the next two batches assuming they are the same size as the most recent (and largest ever) batch. Anything they eventually get from Dropbox, AirBnB, etc would be pure profit.
I doubt it was based on Heroku profits so there must be some other major factor, especially given that this is a cash deal.
It will be very interesting to see how they are going to make all that money back, it's not exactly pocket change.
Also: revenue, future growth, and intangibles (brand, goodwill, etc.)
It's still just cloud computing. 'Cloud 2' doesn't actually -mean- anything. It's not a standard. It's not like you can say something is or isn't Cloud 2 by any objective means.
It's marketing speak, and who exactly is he marketing it to? All developers see right through it and know it doesn't mean anything. All clients only care that their products work. What tech they're built on doesn't mean a thing.
http://www.theonion.com/articles/cokesponsored-rover-finds-e...
What would you call it?
I'm really happy for the Heroku guys, but I'm also kind of nervous because I can think of so many ways Salesforce can screw this up.
I don't think we have anything to worry about...
In my experience (>2 years of GAE consulting for paying clients) I think using GAE is probably the wrong choice for most new projects. If you're new, you need to be able to iterate ideas quickly and you will value tools that (1) give you flexibility, (2) offer a lot of useful reusable libraries, and (3) have a large and stable culture (good docs, stable APIs, people you can hire). And if you have a scalability challenge somewhere down the road, it would make perfect sense to rewrite most of your app on a platform like GAE -- after all, by that point you'll have the basics of design quite solid, so you don't need as much flexibility, and every other part of the effort gets easier when you have money to throw at it.
It is a common misconception, though, that AppEngine serves the same needs as Heroku, or is a Heroku equivalent for Django. I think that's the main reason we didn't see more Herokus-for-Django* earlier.
*Disclaimer: I am a founder of http://djangozoom.com/ .
Then Salesforce can just buy them.
Heroku will now be subject to all kinds of pressures and asinine ideas that may not relate to their core offering. As a Heroku user I am concerned and saddened.
Can anyone offer any perspective? I'm puzzled by the acquisition mindset.
Of course, day-to-day it has to be about much more than money otherwise it would be impossible to stay motivated. But the end goal is almost always about making a boatload of cash.
- Freedom to move on to the next project. I bet most entrepreneurs are more interested in creating than maintaining.
- Money/security. The trend toward payouts when raising major rounds is helping with this issue, but still the resources available change significantly with a big payout, plus you can diversify your income stream to hedge against contingencies.
That's like saying one doesn't understand why people play the lottery (besides the monetary gain from winning).
Playing or winning the lottery involves nothing but money. An acquisition involves major changes to an organization's structure, its products or services, and the lives of all its employees.
EDIT: Removed snarkiness.
And direct investment costs for 208 startups is <$500k. Even if you add in all the other costs of running the program, YC is pretty f-ing successful.
Then you start thinking about the other startups yet to exit (ie, Loopt, Dropbox) and you see the YC team is truly kicking ass.
Still, YC has still returned (and potentially as much as quadrupled) direct costs already, without a number of companies still to exit.
However, knowing Salesforce (and fact that they have many very very big enemies in this business) I'm concern about future of Heroku offering in the current form. As far as I know, Salesforce is not a hacker company - they remind me a little of Yahoo! (product managers are running the show). And, don't get me wrong, in this case, not being a "hacker company" is a good thing. But, I assume that Heroku will be transformed to be much profitable and target bigger margin businesses.
I hope these news will help boost projects like appengine-jruby.
For now, as they use only US EC2 regions, it's only possible for many EU-located users to have a prototype or a toy project on Heroku. Believe me, those few routers more and pings > 100ms do make a difference.
I hope Heroku's Node.JS beta does not suffer from this.
ffffuuuuuuuu
Granted, getting Heroku level reliability, ease of scaling, etc, but since you said 'cheap,' I'll assume you weren't using much of that anyway. ;)
It's also certainly possible the investors pressured the sale to get their money back out of the deal.
P.S: Now what happens to the free app quota?