GitLab is now value twice what Microsoft paid for GitHub
People celebrate Gitlab’s initial public offering on Nasdaq, October 14, 2021.
On October 9, 2017, GitLab announced a $ 20 million funding round led by Alphabet’s GV, formerly known as Google Ventures. The news hit just as bigger rival GitHub was about to start its annual developer conference.
It was just one example of the smaller upstart trying to get the attention of his more established rival.
Just over a year earlier, on September 13, 2016, GitLab announced it had raised $ 20 million in a round led by August Capital. The GitHub developer event called Universe started the next morning.
In the code collaboration market, GitLab grew up in the shadow of GitHub. Both companies were built on the open source software Git, which was founded by Linux inventor Linus Torvalds to give software developers the opportunity to share code and work together from different locations.
GitHub was founded in 2008. Four years later, it raised $ 100 million from Andreessen Horowitz, a mammoth round at the time. GitLab was launched around the time of this funding.
In early 2015, after GitLab completed its three-month stint in the Y Combinator Accelerator program, CEO Sid Sijbrandij reviewed GitHub three times in his two-minute presentation at YC Demo Day.
“Our competitor GitHub has 270 employees. GitLab has 800 contributors,” he said, promoting his company’s open source bona fides. “That’s why GitHub Enterprise has made up for our range of functions.”
GitHub had little reason to sweat back then. GitLab only had $ 1 million in annual revenue, and GitHub was not only backed by Andreessen, but would soon raise another $ 250 million in a sequoia-led round.
However, GitHub’s cultural flaws had been exposed by an engineer named Julie Ann Horvath, who tweeted extensively about sexism in the upper echelons in 2014. Although the company continued to expand after a few C-suite tweaks, GitLab suddenly had the opportunity to use its signature culture to its advantage.
GitLab was founded as a completely remote company with no headquarters and no single property. All employees around the world should have equal access to information. GitLab has an extensive online manual, now comprised of over 2,000 web pages, detailing how the company works, from finance, engineering, and marketing to recruitment, stock options, compensation, and remote work.
Board meetings were held at Sijbrandij’s apartment in San Francisco’s South of Market neighborhood.
“We were all around his kitchen table and he had a cat in his bedroom that meowed to hang out,” said Dave Munichiello, a partner at GV who became a board observer after leading his company’s 2017 investment.
Eventually the board adapted to the rest of the GitLab operations and went completely remotely.
“It was the last aspect of the company to take over the remote phase, and our board meetings are better for it,” said Sijbrandij in an interview with Nasdaq on Thursday.
“Set money on fire”
Munichiello said the cultural differences were huge when evaluating the two Git-based rivals. So was the fact that GitLab had raised a lot less money and had low operating costs.
“We were just past this time when GitHub set money on fire,” said Munichiello. In GitLab, “we saw a company with a fantastic culture and understood that developers are the new kingmakers,” he added.
GitHub didn’t respond to a request for comment.
Then, in June 2018, Microsoft said it was buying GitHub for a whopping $ 7.5 billion. At roughly 25 times its revenue, GitHub was high-priced for that period, and the deal seemed to crown the market winner. GitLab’s most recent valuation from last year was just $ 200 million.
In fact, the game was just beginning.
GitLab outdid itself against its bigger rival, despite Microsoft’s massive sales machine. It is also thriving against BitBucket, its other major competitor, which is owned by Atlassian. In its September 2019 fundraising announcement, GitLab said annual sales had increased 143%. For the year ended January 31, sales grew 87%.
Public investors are now rewarding this dynamic.
GitLab debuted on the Nasdaq on Thursday in one of the most anticipated software IPOs of the year. After rising 49% in its stock in its first few days, GitLab is valued at nearly $ 16.5 billion, more than double the GitHub purchase price in 2018. Its revenue multiplier of 71 is one of the highest in the entire software industry and is lower well above that of Atlassian 45.
“The market loves rapid growth,” says Tomasz Tunguz, Managing Director at Redpoint Ventures, who invests in software and infrastructure companies. His company is not involved in GitLab.
Tunguz said GitLab showed that the world of DevOps – the word refers to a combination of development and IT operations – doesn’t work by the same rules as traditional software, even if GitHub is swallowed.
In DevOps, developers decide which tools to use. With so many free and affordable products available through a simple cloud delivery model, the software giants and their huge sales and marketing budgets don’t have too much influence on their decisions.
Hence, GitLab created a set of tools that developers want, in one package that businesses can buy.
“GitLab had a sense of the importance of selling the company much earlier in the company’s life,” said Tunguz.
Microsoft’s acquisition of GitHub opened up two great opportunities for GitLab. First, GitLab was able to replace developers who had an innate distrust of Microsoft and its anti-open source past. Although the current CEO Satya Nadella has made a point of using open source offerings where it makes sense for customers, Microsoft has distanced itself from open source in the past, with former CEO Steve Ballmer once calling Linux “a cancerous tumor.” “designated.
More importantly, GitLab could apply as a neutral service available from all public cloud providers, while GitHub would be owned by the same company that controls Azure, the second largest cloud service after Amazon Web Services.
In a blog post entitled “Congratulations GitHub on the takeover by Microsoft”, GitLab addressed exactly this point.
“The long-term strategic implication seems to be that Microsoft wants to use GitHub to drive the rollout of Azure,” says the post.
Scott Guthrie, Executive Vice President of Cloud and Enterprise at Microsoft Corp., speaks during the Microsoft Developers Build Conference in Seattle, Washington, USA on Monday, May 7, 2018.
Grant Hindsley | Bloomberg | Getty Images
Sijbrandij said the market has performed as expected since the deal. At the beginning of the year, for example, GitHub launched a product called Codespaces as a cloud-based developer environment in Azure.
As for client migration, Sijbrandij said UBS signed last year and went from “zero to 11,000 people on GitLab” despite the fact that the bank, like most major financial institutions, uses many Microsoft products.
“Our customers attach great importance to the fact that we are cloud-independent,” said Sijbrandij. “Every company becomes a multi-cloud.”
Sijbrandij added that Amazon and Google are selling GitLab’s tools and that these efforts “have been intensified in recent years”.
Still, GitLab has financial challenges. Even with no real estate bills and an extensive universe of unpaid developers to help build features, it spends a huge amount of sales and marketing on turning free users into paid customers who are $ 19 a month or $ 99 a month for features like spending improved security and faster code reviews.
Revenue for the second quarter rose 69% year over year to $ 58.1 million, but the company’s net loss increased from $ 9.4 million to $ 40.2 million for the period. Selling and marketing costs accounted for three quarters of sales in the second quarter.
The cumulative losses for the past four quarters exceeded $ 200 million. Prior to going public, GitLab only had $ 276.3 million in cash and equivalents on its balance sheet.
Unlike GitHub, which now operates within the cozy confines of cash-rich Microsoft, GitLab needs outside funding to keep its growth going. New Constructs, a research firm that is particularly skeptical of tech IPO valuations, wrote in a report this week that GitLab should be valued at just $ 770 million, or 95% below its current price.
“As a cash-generating machine, Microsoft can easily afford to offer GitHub services at or below cost to gain market share and bring users to the Microsoft platform,” the company wrote. “GitLab’s reliance on a single source of income, subscriptions, and licenses for its DevOps platform is a huge competitive disadvantage as it seeks to compete with profitable companies that have many other sources of income to support loss leaders.”
GitLab confirms in its prospectus that “our main competitor is Microsoft Corporation after the acquisition of GitHub”.
Sijbrandij is certainly not expressing concern now that his company has hundreds of millions of additional capital to drive expansion and, for the first time, liquid stocks that can be used to buy smaller businesses.
GitLab CEO Sid Sijbrandij at a company event in London
He touts the benefits of GitLab’s full DevOps platform and the ability for developers to use it as a central repository during a project.
“We have been able to build something that you can do everything with from planning what you will do to deploying to monitoring,” said Sijbrandij.
He says the contrast with GitLab isn’t much different than it was six years ago when he just came from Y Combinator. GitHub hosts a lot of open source projects, but the products on its ships are closed and proprietary, Sijbrandij said, while GitLab uses what’s called an open core model that markets open source software.
Looking back at GitLab’s early funding rounds, Sijbrandij would not specifically acknowledge that it was his intention to be in the spotlight during GitHub’s developer conferences. But he didn’t deny it either.
“When you start out as a company,” he said, “it’s really important that you find a way to be part of the news cycle.”
SEE: GitLab goes on the Nasdaq