DivvyCloud: Key Factors for a Successful Investment
Last week, MissionOG portfolio company DivvyCloud was acquired by Rapid7 (NASDAQ: RPD) for $145 million. The transaction united a leader in cybersecurity with a fast-growing company that provides cloud infrastructure compliance and security. The deal was a very good one for Rapid7, DivvyCloud, and its investors. MissionOG originally invested in DivvyCloud in October 2017 and then again in April 2019. While no investment is a straight ride up, throughout our time as investors and partners with the DivvyCloud team, the company continually exceeded expectations and emerged as a leader within a critical new market segment.
Investing in early and growth stage companies is difficult. Variables such as a limited financial track records, early customer adoption metrics, short cycles with teams, and the sporadic nature of an emerging market mean that investment decisions need to be made with only limited information and certainty. To overcome these challenges, MissionOG considers the convergence of several factors when assessing a possible investment including:
- Pursuit of a compelling investment thesis
- Ensure a prospective company has a high potential ceiling
- Find a team with a demonstrated drive to create great customer outcomes
All three factors were present when we invested in DivvyCloud. Below is an account of how the investment originated and evolved.
Pursuit of a compelling investment thesis
In 2017, Cloudamize, a portfolio company of MissionOG, was acquired by CloudReach, a Blackstone company. At the time, Cloudamize provided an analytics platform that helped enterprises measure their workloads on premise or in data centers to understand exactly how they would function and need to be provisioned as part of one of the Big 3 public clouds: AWS, Azure, or Google Compute Platform. To an organization considering a migration to the cloud, Cloudamize was essential. Founded in 2012, their visionary founders understood enterprises wanted to move workloads to Infrastructure-as-a-service, but lacked the tools to properly diagnose, correctly provision, and prioritize a migration plan.
Our experience with Cloudamize and a strong network within the rapidly expanding cloud ecosystem provided key insights regarding the challenges that enterprises would experience in their cloud lifecycle. While large corporations’ ambition to utilize public cloud infrastructure was high, once they migrated, the companies constantly ran into a wall. In order to successfully leverage the flexibility and speed of building in the cloud, companies needed to decentralize their existing control processes, specifically around compliance and security. We observed that after migration, an enterprise’s usage of the cloud would stall, as they struggled with the limited tools available to replace existing processes. From that challenge, we began to pursue the following theses:
- Enterprises possessed the ambition to adopt the cloud in mass, but required tools to properly manage their environments, specifically around security and compliance
- The best models for value-add solutions in cloud infrastructure are ones whose top line growth expanded with their clients’ increased usage
- To manage scale, enterprises would become increasingly comfortable with tools for automation and remediation
After deciding upon the above themes, we pressure tested them with our advisors and professional network. Based on their feedback, we further tuned these themes and began to pursue companies that matched up.
Ensure a prospective company has a high potential ceiling
In 2017, we met DivvyCloud at PACT, a technology conference in Philadelphia. Brian Johnson, CEO and co-founder, was one of the team members manning their exhibition booth. After about 10 minutes of conversation, it was clear that Brian and team were already well ahead of others in addressing the pain points that we sought. At the time, DivvyCloud had a few lighthouse accounts. Annual recurring revenue from licenses was still emerging, but had recently started to scale. Based on those proof points, DivvyCloud was actively raising a Series A to accelerate their growth.
Over the next few months, we built a relationship with the DivvyCloud team. During that time, they demonstrated several important components that MissionOG considers essential to unlock meaningful growth within a business.
1. A strong team that has been informed by relevant market experience
- Prior to co-founding DivvyCloud, co-founders Brian Johnson and Chris DeRamus managed the infrastructure for on-demand games at Electronic Arts. They learned first-hand the challenges of standing up cloud infrastructure, which informed their vision for DivvyCloud. For the prior five years to our investment, Brian and Chris had validated the pain points they experienced first-hand and had built a compelling solution
- Before DivvyCloud, COO Peter Scott was a GM and executive at Compuware and Exostar that required him to understand how to manage large accounts in a SaaS business model including contracting, onboarding large deployments, and account expansion. This type of “glue” work is essential to early-stage software companies
- Chris Hertz, CRO, had just joined DivvyCloud when we began talking with the company. I knew Chris from his prior company, New Signature, and he had a strong reputation in the market. New Signature was a two-time Microsoft partner of the year. From that experience, Chris understood how to navigate the complex ecosystems of AWS, Azure, and Google Cloud
2. Large total addressable market
- When we evaluated DivvyCloud, we found that the total addressable market was significant. Even with conservative estimates of low single digits percentage of public cloud spend, the market size for cloud security and compliance supported the theory of a very large company at scale. At the time of the investment, we estimated the market size for cloud security to be $4 billion in 2017 and growing to $12 billion a year by 2022
3. Focused on where the puck is going
- When assessing an opportunity, we try to validate if the vision for the company is forward-looking versus too mired in the present. The Wayne Gretzky principal about “don’t skate to where the puck is, but go to where the puck is going” applies well to investing in high potential organizations. DivvyCloud’s vision of multi-cloud in the enterprise was thinking forward. In 2017, while most of the industry was still thinking about how to move to the cloud, DivvyCloud was thinking about how the enterprise would utilize multiple cloud infrastructure providers. With a multi-cloud environment, corporations could optimize for a specific need and avoid vendor lock-in. Also, Infrastructure-as-a-Service providers were unlikely to offer a security solution that spanned their competitors. With an early focus on multi-cloud versus just AWS, the leader in the space, DivvyCloud was able to differentiate themselves and present a forward-looking value proposition
Find a team with a demonstrated drive to create great customer outcomes
When backing a team, MissionOG also looks for a demonstrated bias towards execution and a passion for the customer. Those traits were core contributors to the great outcome for the company.
1. Relentless focus upon the customer
- Many companies talk about focus on the customer. For DivvyCloud, it was part of their DNA. Whether it was Slack channels with customers for direct support or an efficient way to incorporate customer feedback into future releases, DivvyCloud‘s active engagement with customers was impressive. When we engaged their clients during reference calls, their focus on the customer shone through
2. Purpose built solution
- DivvyCloud’s first customer was General Electric. For DivvyCloud, onboarding and servicing GE did more than provide them with an early foundational account. By beginning with a Fortune 20 company that was forward thinking with Infrastructure-as-a-service, DivvyCloud received key insights early that informed their product development. After success with GE, the platform was well positioned to handle the needs and scale of other enterprises
3. Transformational solution, not features
- Brian articulated a vision where the company supported innovation within enterprises, and not simply provided compliance and security features. That vision resonated with our group. To succeed in enterprise sales, technology companies need a compelling vision of how they can help their customers transform. For DivvyCloud, it meant helping their clients understand how their solution supported greater freedom in development operations. By establishing guardrails for their infrastructure through DivvyCloud’s software, developers could not only efficiently build, but also do so in a way where the organization remained secure and in compliance. The DivvyCloud software became a change agent for enterprises
Eight years later for Brian and Chris, and two and a half years later for us, DivvyCloud is an overnight success.
A bittersweet element of backing great companies is having to eventually part with them when the opportunity arises for further acceleration through a different path. We look forward to seeing the DivvyCloud team prosper as part of Rapid7.
On the heels of the sale of DivvyCloud, we are looking for another great company in this segment that is seeking an investment partner to help them scale. We are in the early innings of IaaS opportunities and the now myriad of cloud services that support these platforms. No doubt, cloud will continue to replace aging infrastructure and enterprises’ needs will evolve for greater adoption.
We have tuned our theses and begun the process all over.