APRIL 8 2022

Published in the Australian Financial Review

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Local open-source data technology company Instaclustr has been acquired by multibillion-dollar, NASDAQ-listed, cloud tech player NetApp, in a deal industry sources expected to be worth more than $500 million.

Instaclustr, which was started in Canberra in 2013 and is one of the first notable success stories to emerge from the capital, gives businesses a platform that helps them host and manage applications that require mass amounts of data and run multiple, open-source tools such as Facebook’s Cassandra, Kafka and Elasticsearch.

It is an all-in-one platform for IT teams to manage the deployment, ongoing management, and monitoring of all components of their data infrastructure.

A hybrid cloud and data management company, the $23.4 billion NetApp is buying the Aussie start-up as part of its push to ensure it can efficiently manage the growing complexity and operational requirements of modern cloud applications.

The deal results in a major payday for co-founders Benjamin Bromhead, Adam Zegelin, Doug Stuart and Peter Lilley, who is the CEO. It is also a significant win for local investors such as OIF Ventures (formerly called Our Innovation Fund), Bailador, Artesian, ANUConnect Ventures and Spirit Super (formerly MTAA Super). Sydney Angels and Capital Angels also participated in its early seed round.

Instaclustr was advised by AGC Partners, Blackpeak Capital and Morgan Stanley.

The acquisition was the result of 18 months of background due diligence by NetApp, with NetApp executive vice president and general manager of public cloud services Anthony Lye saying the company had trialled Instaclustr’s services before engaging in M&A talks.

“We were pretty stealthy and didn’t tell Peter what we were doing,” he told The Australian Financial Review.‍

“We had continuous feedback from our customers that they wanted more from us, they loved our infrastructure, and they loved the tooling to run it, but they kept saying ‘can’t you just do it? Don’t give me the tools, you just do it’.”

“We built two platform services ... [but] we started wondering is there a company that does it all? A company that platforms open source, and can be a database service without being a database company ... Through a tonne of conversations and customer interviews, we came across Instaclustr.”

As Instaclustr’s chief executive, Mr Lilley ensures every new customer win, of which there have been 500, crosses his desk.

He was excited to see NetApp sign up as a new customer, but at the time had no idea they were considering making a bid for the business.

“When they signed up, I thought great, that’s an amazing company and logo ... how can we make them successful? It wasn’t until around Christmas, that we had a more direct reach out,” Mr Lilley said.

“It was immediately apparent in our discussions with them the great cultural fit within the two organisations. And then it naturally extended to what a great opportunity it was.”‍

OPPORTUNITIES

Instaclustr’s growth had been driven by companies wanting to leverage open source databases and workflow applications, without overwhelming themselves with the complexity and cost of managing and operating them.

Its customers include Atlassian, Doordash, Dream11 (an Indian fantasy sports platform) Clear Capital and Lendi.

While NetApp will offer Instaclustr to its customers and expects at least 7000 of them (who run the Cassandra open source database) will be interested in taking it up, the business will continue to be run by Mr Lilley.

“You’re buying a living thing. You want to do everything you can to let that continue,” Mr Lye said.

“We’re buying people. These guys know how to run their business and run it well. Too many people think they know better.”

The Instaclustr deal (one still subject to regulatory approvals) is the latest in a series of acquisitions for the George Kurian-led NetApp, which was founded in 1992 and listed on the NASDAQ in 1995. While it is yet to return to its dot-com boom highs, it has been relatively resilient to the tech stock sell-off, trading down only 13 per cent in the last 16 months at $US78.81 per share.

In the last two years it has also acquired Spot, CloudCheckr, Data Mechanics and Fylamyn, adding to six others it has done in the last five years.

Mr Lye said there would be cost synergies that would improve Instaclustr’s margins from day one of its integration with NetApp.

“Peter has a whole team of people who run the platform, and map the platform onto all the infrastructures. We have APIs that can do that automatically though artificial intelligence and machine learning. From day one we can optimise it and save him money, and either have a higher margin product, or pass on savings,” Mr Lye said.

“Think of us as the plumbing to save money, increase margins and free up development resources in Peter’s team.”‍

INVESTOR RETURNS

For OIF Ventures, which first backed the business in its seed round in 2016 and then co-led its Series A raise, the deal results in a 20 times return on investment, and it returns two times its entire $50 million first fund.

OIF founding partner Jerry Stesel said with the fund’s three other exits in the last year – XM Cyber, Eftsure and Assignar – it had now returned, in cash, 3.5 times the $50 million raised for fund one.

“Our first fund, because of the ESVCLP (early stage venture capital) regime it’s tax-free, and it has a 43 per cent net internal rate of return, which is in the top decile globally, just on the current markings,” he said.

“Ultimately, we back founders, and they saw a huge opportunity with this acquirer to supercharge the business, so we backed the decision, and we think there’s a lot of synergy and growth potential with the acquirer.”

There are eight other portfolio companies in OIF’s including unicorn Go1, Advanced Navigation and cybersecurity start-up Kasada.‍

WHAT"S NEXT

It is the second-largest holding in listed technology investment company Bailador’s portfolio, behind ASX listed travel tech company SiteMinder.

In Bailador’s March update to shareholders, the valuation of its stake was $63.4 million, representing a 659 per cent gain on its investment. On the back of the deal, it notified shareholders on Friday morning that the value of its position had jumped to $118 million.

For Mr Lilley, he intends to stay on with NetApp for the foreseeable future, alongside the company’s 300 staff.

Unlike many founders, being part of a corporation does not worry him.

“In some ways, there’s an element of relief around some of it,” he said. “When you’re a founder, and you run a business, not only do you have the product you’re building, but all the complexity that comes with that of leading HR, commercial teams etc, while also building and scaling globally,” he said.

“One of the things for me as a founder of the business is focusing on the forward vision. This is an opportunity to deliver the full vision, while taking away some of the distractions of running some of those other functions.”