Image: Christopher T. Fong/Protocol
November 15, 2021
By this point in late 2021, most large enterprise companies have realized they need at least a semblance of a cloud computing strategy. But getting up and running on any of the major cloud vendors is not easy, especially for companies that have been managing their own data centers for a long time.
That task is especially difficult if you want to keep your options open, whether that's using multiple cloud providers or managing apps across cloud providers and self-managed data centers. Each cloud provider has a slightly different method for accomplishing the same goals, and learning those skills takes time.
With open-source tools like Terraform, Vault, Nomad and others, HashiCorp became one of the most valuable cloud infrastructure startups in recent years because its tools help big businesses build, deploy and manage applications across multiple operating environments. It sells enterprise-class versions of those projects and will also manage those services for clients, which include some of the biggest companies on the planet.
HashiCorp filed its S-1 statement on Nov. 4, 2021, with plans to trade on the NYSE under the symbol "HCP." The company has not revealed how many shares it plans to list or a target price, but reports indicate it's hoping for a valuation north of $10 billion, nearly double its current private valuation of $5.1 billion.
Like most enterprise tech companies at this stage, HashiCorp is not profitable, but it narrowed its loss during the first six months of 2021 compared to the same period last year. One of its biggest challenges will be holding onto customers as nearly everyone in enterprise infrastructure tech chases the same goal, which is why HashiCorp took great pains to emphasize its customer net-retention rate.
What does Hashicorp do?
In an interview in 2019, HashiCorp co-founder Mitchell Hashimoto described the company's ambition to provide "the iPhone of infrastructure," a set of connected tools that work better together to deliver a unique experience.
While nobody buys enterprise infrastructure tools like they do iPhones, HashiCorp's strategy is to provide an opinionated take — internally referred to as "the Tao of HashiCorp" — on how modern enterprise applications should flow from ideas to production on cloud servers. It has developed eight core open-source projects that help companies manage application deployment, security, networking and infrastructure management across multicloud environments.
The company generates revenue by selling premium versions of some of those projects with features larger teams require, and last year it began offering these capabilities as a managed service, which generally is more expensive and profitable.
- The company had 2,101 total customers as of July 31, 2021, including over 300 ranked on the Forbes Global 2000 list.
- HashiCorp has 1,650 employees, up from around 600 just two years ago.
- The company was an early believer in a remote, distributed workforce: HashiCorp is technically headquartered in San Francisco, but only 10% of employees work there.
- Co-founders Armon Dadgar (also the CTO) and Hashimoto met while studying at the University of Washington's computer science school and founded the company in 2012.
HashiCorp's revenue has grown steadily since it introduced commercial products for the enterprise in 2016 to $212 million in revenue during its 2021 fiscal year.
- Revenue from licensing was around $36 million for the year ending Jan. 31, 2021, almost double the previous period. For the six months ending July 31, 2021, licensing revenue totaled $22 million.
- Customers also pay for support on a subscription basis, which is HashiCorp's most lucrative business. The company recorded $166 million in support revenue in its last fiscal year (a 71% increase) and $111 million in revenue through the first six months of its current fiscal year.
- HashiCorp's managed service business is relatively new and still a small part of its business, generating $4 million in revenue during its last fiscal year. However, managed services are popular among enterprise companies that don't have enough in-house talent to manage these complicated projects themselves, and that business is expected to grow.
- A key metric for enterprise startups is net dollar retention rate, or the amount of revenue generated by existing customers in the following period. HashiCorp's rate compares favorably to other recent enterprise IPOs: As of July 31, that rate over the last four quarters was 124%, compared to 128% at the end of July 2020.
Profits, however, have yet to materialize.
- HashiCorp lost over $83 million in fiscal 2021, compared to a loss of $53 million in 2020.
- Much of that increase can be traced to an increase in stock-based compensation from 2020 to 2021, as the company hired hundreds of sales, marketing and administrative people.
- It's not uncommon for enterprise software companies to be losing money at the time they go public, thanks to investments in sales and marketing that will theoretically increase revenue at a faster rate down the road.
- HashiCorp had $244 million in cash at the time as of July 2021.
What could go wrong?
Big Cloud has been delighted with HashiCorp over the last several years because the company helps enterprise companies move their operations to cloud servers. As it grows, however, those partnerships will become more complicated.
- "We face competition that we expect to become more intense over time," the company wrote in the list of risk factors that accompanies every S-1, and that is an understatement.
- While AWS has been slow to embrace the idea of multicloud computing, Microsoft and Google have not, and the two smaller cloud providers have well-established tools for helping their customers achieve many of the same goals as HashiCorp.
- And the cloud providers offer something HashiCorp can't: the table-stakes compute and storage services that all cloud customers require. "Our actual or potential customers may prefer to bundle their cloud services with one of our potential competitors even if such competitors' individual products have more limited functionality compared to our software," it wrote in the S-1.
HashiCorp's strategy also relies heavily on the "open core" business model that many open-source enterprise companies have used over the past decade. That business model can start to get tricky if cloud providers decide they want to offer similar services, because there's nothing stopping them from taking the basic open-source code and adding their own higher-level features around it.
- "… there are limited technological barriers to entry into the markets in which we compete and it is, and may continue to be, relatively easy for competitors, including public cloud operators, to enter our markets and compete with us," it wrote in the S-1.
- This has been an existential crisis for many open-source companies in recent years, and some of those companies have chosen to rewrite the terms of the licenses that govern their open-source projects to prevent cloud providers from using them to offer managed services.
- However, those moves run the risk of alienating the open-source community that helps such projects gain visibility and stability.
HashiCorp noted that it has "limited experience with respect to determining the optimal prices for our products." Did it undervalue its software?And in a rare move, co-founder Hashimoto stepped down from his co-CTO leadership team position and seat on the board of directors just a few months before the company filed its S-1. The company said his decision to return to an individual contributor role was in the works for a long time, but founders (and major shareholders) carry a serious amount of soft moral power across their companies, which could complicate the decision-making process down the road.
Who gets rich
HashiCorp has yet to release its target IPO price as well as the number of shares outstanding, so it's a little hard to know exactly how much the following organizations and individuals stand to gain. But here are the company's major holders, all of which hold more than 5% of the company:
- Mayfield: 29,888,156 shares
- GGV: 29,734,288 shares
- Armon Dadgar: 18,877,150 shares
- Redpoint Omega: 17,829,354 shares
- Mitchell Hashimoto: 15,153,412 shares
- True Ventures: 13,815,070 shares
What people are saying
"Practitioners, rather than executives, have become the decision makers for adopting modern enterprise products, making it imperative that we focus on these end users. At HashiCorp, we've always built tools we want to use ourselves." —Dadgar and Hashimoto in their founders' letter.
"HashiCorp is a well-positioned company providing tools for the cloud software world. They will undoubtedly get intense interest from investors and have a monster IPO." —Marten Mickos, CEO of HackerOne.