VMware + Heptio — Win for PKS, Heptio Founders & Investors; Loss for Open Source & Cloud Foundry
TLDR: Heptio avoided being another Mirantis by taking up on this great offer
Congratulations Heptio on the news of acquisition! If the unofficial estimates that peg this to be a 250M+ deal are true (most likely they are), it’s a great success story. Heptio has built a strong team and great mindshare around Kubernetes — such an exit was only a matter of time. Here is my take.
Win for PKS
One may wonder how this acquisition might be a win for Pivotal Container Service (PKS). While many have already written about what VMware gets out of this acquisition, I haven’t seen anyone connecting the dots up to PKS.
It is an overkill to say that the Kubernetes ecosystem is rapidly consolidating. What appeared to be a crowded space of more than 40 distributions about a year ago is reduced to just a handful of leading distributions with Red Hat OpenShift, Rancher OS, Heptio HKS (‘The Undistribution’), Mesosphere DC/ OS, and PKS leading the mindshare and sales conversations. Heptio also other offerings that provide additional capabilities (such as cluster level disaster recovery (Ark), conformance testing (Sonobouy), traffic routing (Gimbal)), over vanilla Kubernetes.
Through this acquisition, it appears that Heptio’s technology and resources would go towards strengthening PKS. (though I sincerely hope the Heptio team continues to contribute to/ around Kubernetes) — Technology Win for PKS
More importantly, this brings a huge opportunity win for PKS by bringing down the number of Container Orchestration/ Kubernetes distribution choices during pre-sales conversations with enterprise customers. With Red Hat getting acquired by IBM creating a possibility of distraction, this acquisition cuts down the choices to just two — Huge Opportunity Win for PKS.
Win for Heptio Founders & Investors
Such an acquisition is the best possible outcome for the Heptio founders and investors. With such a great team that they have built and the credibility of the founders, this exit is not surprising at all. However, it is important to note that Heptio were running into the risk of becoming another Mirantis — with their open source business model, lack of well defined product, lack of clear monetization strategy, occasional pedantic debates, and possibly a super inflated valuation. Considering all of these, along with general enterprise purchase patterns, and general lack of large-scale user references, one can conservatively estimate their revenues to be at the high end of 7 figures (at the best). It would have been hard for them going to Series C and subsequently for a larger exit/ IPO.
Given all these reasons, timing, and the lucrativeness of the offer, it is the best possible exit Heptio founders and investors could have asked for. I also hope that this success is shared equitably with the employees (unlike some of the marquee Seattle tech exits, where early employees weren’t rewarded equitably for the risks they took joining at early stages).
Loss for Open Source
One sincerely hopes that this acquisition is a net positive outcome for the open source. However, it is important to acknowledge the market realities. There is only one way to make money through open source, however one may package it — Services. This lack of other viable business models is setting up artificial limits on how large an open source company can grow up to. For example, consider the unicorn Red Hat. They are at $3B this year. If they continue their current CAGR, how large they could be in 5 years from now (if they were not acquired)? And that is the best OSS companies can hope for.
Only a handful of open source companies could venture going public, if at all. Unicorns like HashiCorp continue marching towards that, but they are exceptions. It is still largely hard for open source startups to grow that large. Not pertaining to Heptio, this is the ground reality. When this reality continues to go unchallenged, it continues to be a loss for open source. This acquisition is yet another missed opportunity to challenge this reality. I hope that open source focused venture firms such as OSS Capital help change that.
Loss for Cloud Foundry
Pivotal is undoubtedly a strong contributor to open source projects/ software. Pivotal is still the largest code contributor to the open source Cloud Foundry project. PCF is also the most widely adopted distribution of Cloud Foundry, which is a risk in itself for the open source Cloud Foundry project.
PKS leverages BOSH for Kubernetes cluster management, providing the consistency and reliability across multiple environments. It is also built on top of Cloud Foundry Container Runtime. With PKS providing support for both stateful and modern workloads, I see PCF becoming less relevant.
With Heptio acquisition, I don’t anticipate PKS moving away from BOSH. However, I do expect PKS to standardize on Containerd container runtime. One can also expect it to leverage technologies closer to cloud-native eco-system than Cloud Foundry eco-system wherever applicable.
Due to these reasons, this acquisition doesn’t appear to be in the best interests of the Cloud Foundry open source project.
As I tweeted before, I am happy for Heptio, but see this as a reflection of the harsh reality that it is not easy to make money or gain large enterprise customer wins from open source software alone.
Updated on 11/16/2018 to reflect the appropriate capability of Sonobouy project.