Season 2, Episode 9 GitHub

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, alongside guest speaker Chase Lockmiller, CEO of Crusoe, discuss Microsoft's acquisition of GitHub for $7.5 billion in stock. The acquisition marks a significant shift in Microsoft's stance on open source development, a field historically at odds with the tech giant's business model. GitHub, a platform central to the developer ecosystem, has transformed software development and recruitment, effectively becoming the resume for engineers. With over 100,000 repositories and a freemium model that perfectly balances growth and monetization, GitHub has achieved high penetration among developers worldwide. Despite its success, GitHub was not profitable at the time of acquisition, raising questions about Microsoft's strategy and the deal's valuation. The hosts speculate on potential integrations with Microsoft's existing services, such as Azure and LinkedIn, and the strategic importance of owning a developer-focused platform amidst shifting leverage in the tech industry.

• David Rosenthal and Ben Gilbert are the hosts of the episode.
• The episode was recorded on Tuesday, June 5, following Microsoft's announcement of acquiring GitHub.
• They mention that this is the second in-person episode in a row.
• Ben and David invite new listeners to join their Slack and check out the podcast on Apple Podcasts.

"I'm David Rosenthal, and we are your hosts today."

This quote introduces David Rosenthal as one of the hosts, establishing the context for the episode.

"We are coming at you on Tuesday, June 5, the day following the big announcement that Microsoft is buying GitHub."

Ben Gilbert mentions the timing of the episode, which is significant due to the recent Microsoft-GitHub acquisition announcement.

• Pilot is a sponsor and partner of the Acquired podcast.
• Pilot provides accounting, tax, and bookkeeping services for startups and growth companies.
• They are now the largest startup-focused accounting firm in the U.S.
• Pilot is backed by Sequoia, Index, Stripe, and Jeff Bezos.
• The concept of focusing on what makes a company's "beer taste better" is highlighted, emphasizing the importance of outsourcing non-core activities like accounting.
• Pilot offers finance, accounting, tax, and CFO services, including investor reporting and financial sections of board decks.
• Pilot has experience across thousands of startups, including OpenAI, Airtable, and Scale.
• A promotional offer for Acquired listeners is mentioned, providing a discount on Pilot's services.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds."

This quote introduces Pilot as a sponsor, emphasizing its role in supporting startups and growth companies.

"Pilot both sets up and operates your company's entire financial stack."

David Rosenthal explains the comprehensive nature of Pilot's services, highlighting how they manage the entire financial operations for companies.

• SCM is crucial for managing software projects, especially when multiple developers are involved.
• SCM helps to manage changes, contributions, and development from various engineers.
• SCM has evolved from a simple, single-machine model to a client-server (centralized) model and eventually to a distributed model.
• Bitkeeper was an early distributed SCM used for Linux development but later pulled its free license, leading to the development of alternatives like Mercurial and Git.
• Git was developed by Linus Torvalds and quickly gained popularity in the open source community.
• The idea of combining software with social networks led to the concept of a community hub for developers.

"When you're building and managing a software project, a software project could be a small thing that you're building yourself or with a few friends, could be an open source project like Linux, or it could be your company's code base."

David Rosenthal outlines the various scales at which SCM can be applied, from personal projects to large open source initiatives.

"Fortunately, in the late 90s, just as the Internet and distributed software development and in particular the open source movement is becoming a thing, a new model emerges for managing the code base for a project, and that is the distributed model."

Ben Gilbert discusses the emergence of distributed SCM as a response to the growth of the Internet and open source development.

• Tom Preston-Warner, a Ruby developer, conceived the idea for GitHub at a sports bar during a Ruby meetup.
• Chris Wanstrath, another developer, joined Tom in developing the project.
• They aimed to create a social coding platform that would integrate with Git repositories.
• GitHub was initially used within Chris's startup and received positive feedback.
• The platform was designed to be a community hub for developers, moving away from disjointed mailing lists and forums.

"Tom says about a week earlier he had started on this project that he was calling grit at the time to basically access these distributed git repositories and do so via a bunch of code that he'd written in Ruby."

David Rosenthal narrates the early development of GitHub, focusing on Tom Preston-Warner's initial work and the project's original name, "grit."

"So people are thinking like maybe there's some sort of community where all this can come together off of mailing lists, maybe some sort of hub, you might think."

Ben Gilbert reflects on the motivations behind creating GitHub as a centralized community for developers to collaborate more effectively.

• In January 2008, GitHub was launched with a web interface for users of git.
• The platform quickly gained popularity, offering features like project interaction, wikis, and management tools.
• GitHub's user base expanded rapidly due to its perfect product-market fit.
• The founders became concerned about hosting costs as GitHub became the central forge for code hosting.

"So they work on it for a few more months, January 2008, a couple more months go by, they launch it and they open up, they tell all their friends about, hey now there's this way if you're using git that we have this cool web interface on top of it, and you can basically interact with the project and understand, see a wiki of everything is going on, talk to other people who are working on the project, manage it all from there it starts spreading like wildfire."

The quote explains the initial launch and rapid adoption of GitHub, emphasizing the platform's features and appeal to developers.

• GitHub centralized the decentralized version control system git, which was ironic given the nature of git.
• The platform represents the engineering counterpart to the business concepts of bundling and unbundling.
• Cloud computing and the shift from local to remote processing and storage are discussed as examples of centralization and decentralization cycles.

"But this is the engineering counterpart to the business axiom that there are two ways to make money of bundling and unbundling. It's like centralizing and decentralizing."

This quote draws a parallel between business strategies and engineering trends, particularly the centralization of decentralized systems like git by GitHub.

• GitHub decided to keep the platform free for open source projects while charging companies for private code bases.
• This model fueled growth by keeping public repositories accessible and monetizing private repositories.
• The approach was seen as the perfect way to draw the freemium line, balancing growth and monetization.

"But what if we charge companies who are using this for their own private code bases? We'll just charge them, and we'll make it free for open source."

The quote outlines GitHub's strategic decision to adopt a freemium model, charging for private repositories while keeping open source projects free.

• The growth of open source projects coincided with GitHub's rise, changing the perception of open source from value destructive to a viable business.
• GitHub became a platform for showcasing developer contributions to open source projects, serving as a resume and impacting software development recruiting.
• The visibility provided by GitHub was unprecedented, changing the landscape of how developers were evaluated and hired.

"People want to know not where have you worked or what have you worked on there. They want to know what open source projects have you worked on and can I see your code, can I see which contributions you have made that have actually become part of the accepted by the community as core part of the project?"

This quote highlights the shift in developer recruitment, where contributions to open source projects on GitHub became as important as traditional resumes.

• GitHub introduced paid private repositories in April 2008, which again saw rapid adoption.
• The founders then focused on bootstrapping, creating a formula to determine their salaries based on the company's earnings.
• GitHub's growth continued, reaching 50,000 public repositories by early 2009 and 100,000 registered users by July 2009.

"They quickly hack on the site. April 2008, they launch paid private repositories."

The quote describes the implementation of GitHub's paid private repository feature, which contributed to the company's financial growth and sustainability.

• The GitHub logo, Octocat, was purchased from iStockphoto and became an iconic symbol for the platform.
• The choice of the Octocat logo was influenced by the success of Twitter's logo, also sourced from iStockphoto.
• The adoption of the Octocat logo is humorously credited with contributing to GitHub's continued growth.

"So they buy the octopus, rename it the octocat, and that is how the octocat became the logo."

This quote explains the origin of GitHub's Octocat logo, which became a recognizable brand mascot for the platform.

• By mid-2011, GitHub surpassed SourceForge and Google Code as the leading code hosting service.
• In July 2012, Andreessen Horowitz invested $100 million in GitHub, the largest Series A funding at the time.
• GitHub's valuation reached $750 million, with the company being profitable and having a significant market penetration.

"By the middle of 2011, GitHub has now surpassed SourceForge and Google code as the number one place where projects were open source, and any personal public projects are hosted on the Internet."

This quote marks a milestone for GitHub, establishing it as the premier code hosting service on the Internet.

• In 2014, GitHub faced internal challenges, leading to the departure of co-founder Tom Preston-Werner.
• The company adopted a flat organizational structure, which may have contributed to management issues.
• Despite these challenges, GitHub continued to grow, with Google Code shutting down and directing users to GitHub.

"Tom Preston Warner, who we had talked about, who originally had the idea for GitHub and was the first CEO in a sort of bizarre series of events that it's still unclear exactly what happened."

This quote refers to the departure of GitHub's co-founder and first CEO, Tom Preston-Werner, amid internal company issues.

• The company is not currently profitable despite generating significant revenues.
• The company's adoption rates and customer stickiness are high.
• Additional capital is necessary for continued operation.

We are not running a profitable business. We're generating nice revenues and the adoption is crazy and the stickiness is huge, but we need this capital in order to continue to operate the business.

This quote emphasizes that despite the company's strong market adoption and customer retention, it is not yet profitable and requires further investment to sustain its operations.

• Market size estimates for software developers in 2011-2012 were significantly lower than the actual growth.
• The definition of who qualifies as a software developer is ambiguous.
• David Rosenthal has a GitHub account and has contributed to projects, but does not consider himself a software developer.

Certainly any market size estimate of the number of software developers in the US or in the world in 2011 2012 would have massively underestimated the growth.

David Rosenthal acknowledges the rapid and unexpected growth of the software developer market size, which surpassed earlier projections.

• GitHub announced surpassing a $200 million annual revenue run rate.
• The valuation is considered low relative to the $2 billion valuation two years prior.
• $110 million of the revenue came from the enterprise division, which outpaced consumer adoption.

They announce that they have passed the 200 million dollar annual revenue run rate, which is impressive, but relative to being valued two years before at $2 billion, it is lower than you would expect.

The announcement highlighted GitHub's revenue achievement, which was lower than expected based on the company's previous valuation, indicating a slower growth rate.

• Chris Wanstrath, GitHub's CEO, announced he would step down.
• A search for a new, more experienced CEO was initiated.
• Nat Friedman, founder of Xamarin and a Microsoft division leader, was appointed as the new CEO.

Chris is going to be stepping down as CEO and they're going to be running a CEO search in the company to bring in a new, experienced, not that Chris has an experience at this point, but a new, more experienced CEO to run and lead the company.

This quote explains the decision to find a new CEO for GitHub, aiming to bring in someone with more experience to lead the company through its next growth phase.

• Microsoft announced the acquisition of GitHub for $7.5 billion.
• The acquisition was preceded by a strategic CEO search.
• GitHub's investors and board actively pursued the sale, engaging Morgan Stanley for assistance.

Microsoft is buying the company.

The quote succinctly states that Microsoft acquired GitHub, a significant event in the technology industry.

• Microsoft has historically been seen as the enemy of open source.
• Internal policies at Microsoft discouraged engagement with GPLV3 licensed code.
• Microsoft's culture and policies have shifted towards embracing open source.

GitHub is really the outcome of the rise of the open source community and everything that that's done to transform software development and huge swaths of the enterprise over the last decade plus.

David Rosenthal comments on the transformative impact of the open source community on software development, noting the irony in Microsoft's acquisition of GitHub given their past stance on open source.

• Microsoft has historically had products competing with GitHub.
• Team Foundation Server and Visual Studio Team Services are examples of Microsoft's developer tools.
• The future of Microsoft's existing tools in light of the GitHub acquisition is uncertain.

It's not like Microsoft hasn't thought about this.

Ben Gilbert acknowledges Microsoft's history of developing tools for software developers, implying that the acquisition of GitHub was a strategic decision informed by this background.

• Statsig is a feature management and experimentation platform.
• It is used by companies like Notion, Brex, and Microsoft for product development.
• The platform allows for data-driven decision-making and testing of AI product features.

Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing and see the impact every feature is having on the core business metrics.

The quote describes the functionality of Statsig, emphasizing its role in helping product teams improve their development processes and measure the impact of their features.

• The acquisition of GitHub by Microsoft is categorized as an ecosystem play.
• Microsoft aims to leverage GitHub's customer base and network effects.
• The acquisition is likened to buying a customer base that is highly loyal to the product.

They bought a customer base and obviously they're going to sell this product to additional customer base. But this customer base is super sticky to this product and there's tremendous network effects within this product.

Ben Gilbert explains that Microsoft's acquisition of GitHub is strategic, focusing on the strong and enduring customer base and the network effects within the GitHub community.

• Microsoft's acquisition of GitHub was an all-stock transaction, which is notable given Microsoft's financial position.
• Microsoft has a substantial amount of net cash and an ongoing stock buyback program, indicating they believe their stock is undervalued.
• The decision to use stock instead of cash for the acquisition could suggest Microsoft views their stock as overvalued, or they may have other plans for their cash reserves.
• The GitHub founders became some of the largest shareholders in Microsoft, owning more of Microsoft than its CEO Satya Nadella and President Brad Smith.

"Very interesting that this was an all stock acquisition." "Microsoft has 43 billion in net cash right now." "They anti dilution." "Each of the three co-founders would have zero point 16% of Microsoft from this because the acquisition was about 1% of their market cap." "Late capital raises after bootstrapping plus few capital raises plus an all stock acquisition equals you're one of the biggest shareholders of one of the biggest publicly traded companies in the world."

The quotes discuss the financial strategy behind Microsoft's acquisition of GitHub, the company's cash position, stock buyback program, and the significant ownership stakes acquired by GitHub's founders as a result of the transaction.

• GitHub's future as an independent entity or going public was uncertain, with leadership changes and company-building work still needed.
• GitHub's CEO departure and management turnover indicated a need for stabilization.
• Comparisons were made to Atlassian's successful IPO and the need for a clear narrative for GitHub to follow suit.
• There is speculation about GitHub's integration with Microsoft, possibly more so than LinkedIn's integration following its acquisition.

"Can this company go public? Do they end up doing like a Dara situation and bringing in a great CEO?" "There clearly was a lot of company building work left to be done here at the company to get it to a point where it could go public."

The quotes reflect the challenges GitHub faced in terms of leadership and readiness for an IPO or continued independent operation, as well as the potential for deeper integration with Microsoft's ecosystem.

• Microsoft's shift in open-source philosophy and integration points for developers were key themes.
• The discussion highlighted the importance of freemium models and getting the balance right between free and paid services.
• GitHub's freemium model is considered one of the best, successfully converting users to paying customers.
• The challenge for Microsoft is to monetize the developer community effectively, especially when traditional revenue streams like Windows licenses are not involved.

"Microsoft's monumental reversal of philosophy on open source was a big one." "If developers are a core element of your ecosystem, you have to take great measures to get those developers." "GitHub just nailed it out of the gate. Might be... certainly top three, if not best freemium model ever devised."

These quotes discuss Microsoft's strategic shift towards embracing open source, the challenges of attracting developers to their platform, and the effectiveness of GitHub's freemium model in driving revenue.

• There is uncertainty about how Microsoft will use GitHub to recoup the acquisition cost.
• Potential strategies include leveraging GitHub to promote Microsoft Azure and integrating it with Microsoft's sales channels.
• GitHub could also play a role in Microsoft's recruitment efforts, given its position as a primary resume for software developers.
• The cost of recruiting an engineer is significantly higher than the cost of a GitHub enterprise seat, suggesting potential for value in the recruitment market.

"I think they will use it to leverage people onto Azure." "It costs $30,000 to recruit an engineer." "The market for recruiting engineers is at least as big."

These quotes consider the strategic use of GitHub by Microsoft, from bolstering Azure adoption to utilizing GitHub as a recruitment tool, given the high cost and importance of hiring engineers.

• The acquisition's success is uncertain, with a range of potential outcomes.
• The integration of GitHub with Microsoft's other services, such as LinkedIn, is considered a possibility but also a risk.
• The acquisition is seen as a strategic move rather than a direct revenue generator, with long-term implications that are hard to predict.

"What would you grade this acquisition?" "It's super high variance, but I'm going to go c plus and hope Satya makes me look like an idiot in a couple of years." "I'm going to give it a B. Muddy middle."

These quotes express the speakers' hesitancy to firmly judge the acquisition's potential, acknowledging the high variance in possible outcomes and the strategic nature of the move rather than its immediate financial impact.