Satya strikes again. After being installed in 2014 as Microsoft’s new CEO, Nadella has turned around the Seattle ocean liner on a new course after the Ballmer regime. With Microsoft’s stock price (and technology brand) soaring of late, Nadella and his team have not been shy, with blockbuster platform acquisitions like Minecraft and LinkedIn, innovative product scoops like Accompli for email and Sunrise for calendar, and rebranding its very active, SF-based venture arm as “M12” to further its future technology agenda.
And yesterday, another feather in the cap — GitHub. Not yet profitable but invaluable to developers worldwide, the decade-old company bootstrapped, differentiated from formidable competitors GitLab and Atlassian’s BitBucket, weathered leadership upheavals, and eventually ingested lots of venture capital which helped them weather the challenges they faced. Buying that time and capital paid off, as Microsoft recently announced it would purchase GitHub for $7.5B.
Let’s quickly unpack what makes the deal interesting:
2/ “Alphabet Soup For You” Once Google reorganized as a holding company in an attempt to have better lines of sight into different business units (and attract new acquisitions to the roost), big tech has watched — Facebook brought in the likes of Instagram and WhatsApp and, for the most part, allowed them to operate as somewhat independent teams. Word here is that GitHub will be afforded a similar situation within Microsoft, operating as a wholly-owned company yet still retaining its structure. Stepping back, it’s interesting to see this cultural shift among larger companies who are comfortable with these co-branding scenarios, which actually may provide better PR and future opportunities to add to their portfolios.
3/ “Value Is In The Eye Of The Network” Bean-counters may scoff at acquisitions like GitHub as poorly run businesses that aren’t (yet) profitable, but in the world of 10-figure M&A, the exits seem to be largely a function of network defensibility and uniqueness. Microsoft will offer its tools in the GitHub marketplace and integrate GitHub’s enterprise services (such mapping developer attribution to LinkedIn or with Azure for cloud services) with its own sales channels. Microsoft can seek to better integrate with its new prize and monetize different parts of the network over time (if it chooses to do so). As Garry Tan observes, the GitHub outcome demonstrates the true power of building relevant products for developers.
4/ “Readjust Your Comps” With GitHub price at $7.5B and with major cash-rich buyers in the ecosystem, one has to wonder what this does to the value of Atlassian, which manages BitBucket. And, the good folks at GitLab are probably drinking some premium coffee this morning. Atlassian is up a few points this morning, and the GitLab leadership mused that “half a billion was added to their valuation” almost overnight. They’re probably not far off from the truth.
5/ “Decentralized Everything?” As expected, many developers didn’t love the news that some of their work would be concentrated in the hands of a tech incumbent. Whether they pointed to post-acquisition woes with Skype or Nokia, Microsoft’s troubled history with Linux and the open source community, the news triggered a bit of a backlash ranging from outrage at the fact Microsoft would own this valuable asset to calls for decentralized options. However, Fred Wilson blogs and Jackson Palmer smartly tweets that Git is already a decentralized system with GitHub built on top of it.
6/ “Gitting Liquid” Back in 2012, right around when I first moved here and was figuring out what VC was, I knew many of the larger firms were figuring out a way to invest in GitHub. Many tried and couldn’t get in. But after penning the “Software Is Eating The World” opus, Andreessen Horowitz, to their credit, figured out a way to lead a $100M Series A in the company for what would be 13%+ ownership at the time of the deal. I’ve heard all major investors (including later VCs Sequoia and Thrive) bulked up their positions too through private secondaries. The prize and the credit here goes to the Series A picker and winner — now, I am not 100% sure on this, so please correct me — GitHub appears to be in a16z Fund III, which is a $1.5B vehicle listed on January 2012 in Crunchbase. If I have the vintage right, the fund with GitHub also likely includes investment in Slack, Lyft, and Instagram @ seed. And assuming a16z owned at least 10% of GitHub at exit (and note Microsoft has structured the deal such that the deal price won’t fluctuate at closing), that’s $750M of cash (and likely more) coming back to the fund, alongside $80-100 from Instagram, and who knows yet from Lyft and Slack plus others. A16Z has been bold and controversial in its style and size (still not even 10 years old), no doubt, but with results so far from Nicera, Okta, Oculus, now GitHub, and many others and private unicorns like Airbnb, Lyft, Coinbase, and Slack in the stable, we may be at the beginning of friendly wave toward the a16z offices.