SEATTLE – VMware paid $550 million for its recently closed acquisition of 2-year-old Kubernetes-focused startup Heptio. That amount was a substantial premium over what Heptio had raised from investors and other similar deals in the Kubernetes space.
According to filings with the Securities and Exchange Commission (SEC), VMware’s purchase price of Heptio included both cash and the assumption of unvested equity awards. Seattle-based Heptio was founded in late 2016, and had raised $33.5 million in total funding. Heptio’s investors included Madrona Venture Group, Accel Partners, and Lightspeed Venture Partners.
Edwin Yuen, senior analyst for cloud services and orchestration at Enterprise Strategy Group, said he was not surprised by Heptio’s price tag due to recent valuations in the space.
“I think that Heptio’s strong enterprise portfolio and customer penetration makes it a very good fit for VMware’s Cloud Native team and certainly worthy of the price paid,” Yuen noted in an email.
Heptio launched under the guise of making Kubernetes more accessible to developers running apps on-premises or in the public cloud. The company’s founders – Joe Beda and Craig McLuckie – formed Heptio having both been involved at Google on its Compute Engine and the platform that eventually became the open source Kubernetes project. Both remain active in the Kubernetes community.
(Brendan Burns, currently a distinguished engineer at Microsoft, was also part of developing the platform.)
Wendy Cartee, senior director of cloud native advocacy at VMware, told SDxCentral at this week’s KubeCon + CloudNativeCon North America 2018 event in Seattle that Heptio would play an important role in VMware’s cloud native future.
“Kubernetes is really strategic for our customers, and we think the future will see a combination of Kubernetes running on VMs and containers,” Cartee added. “The cloud native movement is a key part of that, and a key part of that is Heptio.”
Analysts had been concerned about VMware’s positioning in terms of container adoption. However, some have noted that many enterprises are likely to run their initial container deployments on VMs due to convenience and familiarity.
“We believe VMware continues to underplay the container movement,” said Gregg Moskowitz, managing director and senior research analyst at Cowen & Company in a recent report. “The good news for VMware is that we think most organizations will initially deploy containers within a vSphere environment. That should enable them to navigate the container threat over the medium term. Nevertheless, there is some long-term risk for vSphere in our view.”
For Heptio, the deal provides scale and resources it was lacking as an independent company.
“The biggest benefit is that it lets us execute on the bigger opportunities in the space,” Beda said. “We can look at a wider set of technologies and problems as enterprises look to adopt more cloud native ways of working.”
As a possible frame of reference, Red Hat earlier this year acquired container platform provider CoreOS for $250 million. CoreOS’ flagship product was its Kubernetes-based Tectonic platform that has since been integrated into Red Hat’s OpenShift platform. CoreOS has raised just under $50 million in funding prior to being acquired.
Red Hat, in turn, was acquired last month by IBM for $34 billion.