The $15 Billion IaC Gorilla in the Room — Will HashiCorp Succeed?

“Today’s IPO represents a huge milestone for the company. We are now over 1,650 employees, with nearly 2,400 customers,” say Mitchell Hashimoto and Armon Dadgar, the founders of HashiCorp in a joint blog post on the day after the IPO that raised $1,25 Billion and valued the company at approximately $15 Billion. The fact that the company moved 97% of its $212 Million in annual revenue to a subscription model and the company’s wild YoY growth of 75% were the key financial targets on the way to this blockbuster IPO.

https://exploratory.io/viz/PQd2wHB2BZ/HashiCorp-Stock-nSb9JpU4Td

Estimated Annual Run Rate: $350 Million

Let’s do a wildly naive but still interesting calculation. The company currently has 2,400 paying customers, out of a potential 11,400 companies that have downloaded a free version of its software. 87% (2088) customers spend in excess of $100k/year. Even if each one of these customers only spent exactly $100k/year, this would add up to a current run rate of $208M in annual revenue, excluding the 312 customers spending less than $100,000/year. A more realistic spread of customer revenue puts HashiCorp at a current annual run rate of approximately $350 Million.

The Product Portfolio

Terraform Is the 1000 Pound Gorilla in the Room

Terraform has been HashiCorp’s fastest growing product from 2015. This is reflected in the corresponding GitHub repository’s rapid growth (red line in the chart below). Today, open source Terraform is considered the standard for infrastructure as code (IaC). Hardware and software vendors alike, often stick to the Terraform HCL format when defining their own product offerings in the form of code in order to make them easily consumable by customers.

Terraform is the Central Hub between Docker, Azure, GCP, AWS, and Kubernetes (data: Serverfault.com)

Customers use Terraform to enable their DevOps teams to send infrastructure code alongside application code through their DevOps pipeline. This code becomes part of the build process, the testing, and ultimately the production deployment of an application. While cloud and data center infrastructure significantly differ in their configuration options and requirements, Terraform can still offer a simplified and universally manageable process to translate infrastructure code between clouds in order to move applications between clouds.

Consul and Vault

Consul (blue) and Vault (brown) fill in critical gaps in modern cloud native applications, typically running on Kubernetes. Consul simplifies cloud native networking, including service mesh, service discovery, and health checks, while Vault provides secrets management, encryption, and access management. It will be crucial for Hashi to boost both products into a leadership position, similar to Terraform.

Growth Opportunities

Part 1: Capturing More Customers

I will leave the TAM calculations to the financial guys, but if HashiCorp’s number of 11,400 enterprises having downloaded a free version of their software is correct, and of these 11,400, 2,400 currently are paying customers, the company can still convert 8,600 users of the free edition. Assuming the same revenue spread as used for my very basic example above, we can take $350 Million x 3.6 and get to a maximum run rate of $1.26 Billion.

Part 2: Deepening the Footprint Within Current Customers

Currently only 7% of customers are subscribers of HashiCorp’s hosted cloud offering. Assuming that the company manages to significantly increase this number to widen its footprint within each customer and at the same time further enhance revenue by including hosting charges into its offerings, we can probably add another $500 Million to our estimated $1.26 Billion, arriving at a total of $1.76 Billion.

Great, But What Are the Risks?

To evaluate the risk, we need to first look at how HashiCorp managed to achieve its currently dominating position in the infrastructure-as-code marketplace. Docker, Chef, Puppet, and many more open source vendors have failed where HashiCorp has succeeded. Transforming a company with open source in its DNA into one where customers pay money for software subscriptions and support is about as difficult as it gets. HashiCorp made it happen by trusting in the fact that customers are not afraid to pay for software that is critical to their own success. The rapid rise of the adoption of AWS, Azure, and Google Cloud services, the significant differences between each one of these platforms, and the decentralized adoption patterns of these public cloud offerings, enabled HashiCorp to come to the aid of its customers by offering a unified way of defining, securing and operating distributed application stacks. HashiCorp was able to complement Kubernetes, the ever-present elephant in every room today, by showing its value in areas where Kubernetes has and had gaps: 1) infrastructure automation, 2) persistent storage, 3) zero trust authentication, 4) multi-cluster policies, 5) application-centric operations management, 6) app-centric networking and 7) service mesh. Offering solutions to these issues through a cloud neutral approach convinced existing users of HashiCorp software, mostly Terraform, to try out the commercial edition.

But Will It Last?

The key pain points addressed by HashiCorp software, the difference between public cloud services, the constant change of these services, and Kubernetes not closing all of the above described gaps are not likely to go away in the near future.

Three Critical Threats

1. Direct Competition: Pulumi is growing at a fast clip, while Red Hat Ansible Automation Platform receives significant tailwind from the success of Red Hat’s Linux and cloud offering.
2. Enterprise Cloud Competition: VMware vRealize with SaltStack Config, Red Hat OpenShift with Ansible Automation Platform, and IBM Cloud with support for open source Terraform all are vendors that would prefer their clients focus their funds on their own offerings.
3. Public Cloud Competition: AWS Cloud Development Kit, Azure Resource Manager Templates, and Google Cloud Deployment Manager. These are all cloud-specific offerings that focus on making it easy for product teams to spend the largest possible amount of funds on their own respective cloud.

While each one of these treats is substantial, HashiCorp is the only one of these vendors, other than Pulumi, that is entirely cloud independent and fully able to focus on enabling customers squeeze the most value out of their cloud resources and application stacks. Therefore, the $15 Billion valuation could well be justified, but success is not a “done deal”.