Season 2, Episode 9: GitHub

In the latest episode of "Acquired," hosts Ben Gilbert and David Rosenthal analyze Microsoft's acquisition of GitHub, a pivotal move for the tech giant historically known for its resistance to open-source software. The deal, valued at $7.5 billion, signifies Microsoft's strategic shift under CEO Satya Nadella's leadership, aiming to secure a stronghold within the developer ecosystem. GitHub, the leading platform for software development version control using Git, has become the de facto resume for developers, making it a lucrative asset for Microsoft as it strives to attract top engineering talent and potentially bolster its Azure cloud services. Despite the hefty price tag and GitHub's lack of profitability, the acquisition is seen as a high-variance bet on the future of software development and Microsoft's ability to integrate and monetize the platform effectively.

• The podcast episode is from Acquired, focusing on technology acquisitions and IPOs.
• The episode was recorded on June 5, following Microsoft's acquisition of GitHub.
• The hosts are Ben Gilbert and David Rosenthal.
• The episode includes a discussion of software configuration management (SCM) and the open-source software ecosystem.

"Welcome to season two, episode nine of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts today. We are coming at you on Tuesday, June 5, the day following the big announcement that Microsoft is buying GitHub."

• This quote sets the stage for the episode, introducing the hosts and the topic of Microsoft's acquisition of GitHub.

• Statsig is a series B stage startup that processes a significant volume of live product experiments and events per day.
• Statsig has added notable AI companies to its customer base, including Microsoft and Atlassian.
• The platform offers various products for data-driven product decisions, such as feature flagging and product analytics.
• There is a special onboarding offer for Acquired listeners.

"Statsig now processes about 130 billion events per day. So the infrastructure that Statsig now has to support these data volumes is pretty wild."

• This quote highlights the scale of Statsig's operations and their capability to handle large data volumes.

• SCM is essential for managing software projects, especially when multiple contributors are involved.
• SCM helps organize and track changes to a codebase, which can range from small personal projects to large-scale open-source software.
• The centralized model of SCM, using a shared repository, had limitations with distributed software development.

"When you're building and managing a software project... it's really hard once more than one person starts working on the project to kind of manage all the changes and contributions and different pieces of development that all the different engineers on the project are making."

• This quote explains the complexity of SCM and the need for effective tools to manage collaborative software development.

• The open-source movement grew alongside the internet, with distributed software development becoming more common.
• Bitkeeper was an early distributed SCM tool used for Linux, but its free license was revoked, leading to the development of alternatives like Mercurial and Git.
• Git, created by Linus Torvalds, quickly gained popularity in the open-source community.

"Bitkeeper, the company actually pulls the free license that they had been providing to the open source community... This leads to two separate projects that are pioneered and undertaken... to replace Bitkeeper. And those two projects are... Mercurial... and... Git."

• This quote discusses the catalyst for creating new SCM tools after Bitkeeper revoked its free license, leading to the development of Git.

• GitHub was founded as a response to the need for a social coding platform that integrated SCM with community features.
• Tom Preston-Warner and Chris Wanstrath conceived the idea at a Ruby on Rails developer meetup.
• GitHub began as a side project, with an MVP quickly proving useful for managing code in a startup environment.

"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."

• This quote describes the early stages of GitHub's development and how it was initially conceived to improve access to git repositories.

• In January 2008, GitHub was launched with a web interface for git users, offering features like project interaction, wikis, and management tools.
• The product-market fit for GitHub was immediately evident, as it quickly became popular among users.
• GitHub's growth led to concerns about hosting costs as more companies and open-source projects began using the service.
• GitHub centralized the decentralized version control system, which paralleled the historical shifts between centralized and decentralized computing models.

"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."

• This quote describes the launch of GitHub and the initial features that attracted users.

"It's one of these things. It's a lot like sort of uber when it launched, or Twitter when it launched, where as soon, as soon as you turn the lights on, there's perfect product market fit."

• The speaker compares GitHub's immediate success to that of Uber and Twitter, highlighting the strong product-market fit.

• GitHub implemented a freemium business model, keeping the service free for open-source projects but charging private companies for private code bases.
• This model fueled growth by making public repositories accessible while monetizing private repositories.
• The decision to charge for private repositories was influenced by the history of Bitkeeper and its impact on the development of git and mercurial.
• The freemium model was particularly effective at the time when the open-source community was expanding rapidly.

"What if we just keep it free for open source? ...But what if we charge companies who are using this for their own private code bases?"

• This quote explains GitHub's strategy to offer free services for open-source projects while charging for private company use.

"It's really brilliant. Like, it is the thing that's keeping us growing, the ability for public repos that have no permission set on them, that people are doing open source projects being free to access and thus continue to fuel growth."

• The speaker praises the freemium model for its role in GitHub's continued growth and the strategic placement of the freemium line.

• The proliferation of open-source tools led to more projects and users on GitHub.
• GitHub became an essential part of a software developer's resume, showcasing their contributions to open-source projects.
• The visibility of developers' work on GitHub changed the software development and recruiting landscape.
• GitHub's role as a platform for displaying developers' work paralleled LinkedIn's role in the business and social worlds.

"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."

• This quote highlights the shift in software developer recruitment, emphasizing the importance of open-source contributions over traditional work history.

"But totally changed the way that software development and recruiting was done completely."

• The speaker notes the transformative effect GitHub had on software development practices and the hiring process.

• GitHub founders chose a stock photo of an octopus-cat hybrid as their logo, which was renamed Octocat and became the official mascot.
• The Octocat logo contributed to GitHub's branding and was quickly adopted by the GitHub community.
• The story of the Octocat parallels Twitter's use of a stock photo for its original logo.

"They're scrolling through. Oh, how about an unholy marriage of a cat and an octopus? ... They buy the octopus, rename it the Octocat, and that is how the octocat became the logo."

• The quote describes the process by which GitHub selected and named its now-famous mascot, Octocat.

• By early 2009, GitHub had over 50,000 public repositories and continued to see exponential growth in users and repositories.
• GitHub surpassed SourceForge and Google Code, becoming the number one hosting service for open-source projects.
• In July 2012, Andreessen Horowitz invested $100 million in GitHub, which was the largest series A funding at the time.
• GitHub's valuation at the time of the investment was $750 million.

"By the middle of 2011, GitHub is now surpassed. So we're three years into the company. It 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 significant milestone for GitHub, becoming the leading service for hosting open-source and public projects.

"July 2012, Andreessen Horowitz comes in and invests $100 million in the company. The largest check that they've ever written..."

• The quote details the significant investment made by Andreessen Horowitz, highlighting GitHub's value and potential for growth.

• 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 challenges.
• Chris Wanstrath became CEO following Preston-Werner's departure.
• Despite 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 of her GitHub and was the first CEO in a sort of bizarre series of events that it's still unclear exactly what happened."

• This quote acknowledges the unclear circumstances surrounding the departure of GitHub's co-founder and first CEO.

"They adopted the valve management style of a completely flat organization. Nobody reported to anyone else. Anyone could work on whatever they wanted."

• The speaker explains GitHub's management style, which was unconventional and may have affected the company's operations during its rapid growth.

• The company experienced significant growth and raised an additional $250 million.
• The funding round was led by Sequoia Capital, and the company was valued at $2 billion.
• They also announced reaching 10 million users.

"The company raises another $250 million, led by Sequoia at a $2 billion valuation."

• This quote highlights the company's successful fundraising and the high valuation it achieved, indicating investor confidence and significant growth potential.

• The company is not profitable but generates substantial revenues.
• It has a high user adoption rate and product stickiness.
• The additional capital is necessary to continue operating the business.

"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 explains that despite strong revenue and user engagement, the company requires more capital to sustain operations, indicating it is in a growth phase prioritizing expansion over immediate profitability.

• The growth of the number of software developers was underestimated in 2011-2012.
• There is a distinction between casual GitHub users and professional software developers.

"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."

• This quote suggests that the actual growth of the software developer market outpaced predictions, reflecting a larger potential user base for developer-focused products.

• The company's $200 million annual revenue run rate was announced.
• The revenue figure was lower than expected based on the previous $2 billion valuation.
• The enterprise division's revenue outpaced consumer adoption.

"They announce that they have passed the $200 million 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."

• This quote indicates that while the company's revenue is significant, it does not align with the high valuation from two years prior, suggesting either a slower growth rate or a shift in market expectations.

• Chris, the CEO, announced he would step down.
• A CEO search was initiated to find a more experienced leader.
• Nat Friedman, founder of Xamarin, was named 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 CEO to run and lead the company."

• This quote signifies a strategic move to bring in leadership with more experience, potentially to steer the company through its next growth phase or prepare for future corporate events.

• Microsoft announced the acquisition of the company.
• Nat Friedman was set to leave Xamarin within Microsoft to run GitHub.
• The acquisition was valued at $7.5 billion.

"Concurrently Microsoft is buying the company."

• This quote marks a major corporate development, with Microsoft acquiring the company and indicating a strategic move within the tech industry.

• GitHub represents the success of the open source community.
• Microsoft was historically seen as an enemy of open source.
• The acquisition reflects the change in Microsoft's stance towards 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."

• This quote contextualizes the acquisition as part of a broader industry trend where open source has become a transformative force in software development, with Microsoft adapting its strategy to align with this movement.

• Microsoft had policies against using certain open source licenses.
• The GPL (GNU Public License) was seen as a legal risk for Microsoft's proprietary software.
• Microsoft's culture shifted towards embracing open source with initiatives like Ms Opentech and Linux on Azure.

"I was specifically warned not to look at anything... GPL V3 license... if we used a bit of code that was GPL V3 licensed in our software, then we could be forced to open source the whole thing."

• This quote reflects the historical caution within Microsoft regarding open source software, which has since evolved to a more inclusive approach towards open source initiatives.

• Microsoft has historically sold products for source control management.
• There was speculation about how Microsoft would integrate GitHub with its existing products.
• The acquisition could influence Microsoft's developer tools and services.

"The company has this incredible developer division or group of people that produce software to enable developers throughout the world. And a big part of that is things that looked like GitHub in different ways over the years."

• This quote suggests that Microsoft's acquisition of GitHub could have significant implications for its developer services and potentially consolidate its offerings to strengthen its position in the developer ecosystem.

• There was discussion about Microsoft's plans for GitHub and its other developer services.
• Microsoft's approach to GitHub might mirror its handling of LinkedIn.
• The acquisition's success could depend on Microsoft's strategic choices regarding product integration and ecosystem management.

"It's kind of only a matter of time until some executive gets upset and looks and says, how come we have two of these things and then you have another Skype link merger?"

• This quote raises questions about the future of Microsoft's product strategy post-acquisition, speculating on potential consolidation or integration of developer tools within the company's portfolio.

(Note: The transcript contained an advertisement for Vanta, which was identified and excluded from the study notes as per the instructions.)

• Microsoft's acquisition was an all-stock deal, which is unique given their financial position.
• They have a large amount of net cash and an ongoing share buyback program.
• The acquisition strategy seems counterintuitive to their buyback program, suggesting they may believe their stock is overvalued.
• Speculation exists about Microsoft's future cash requirements, hinting at potential further acquisitions.

"Microsoft has 43 billion in net cash right now. And so there's a really strange thing that's going on."

• Microsoft's strong cash position is unusual for a company making an all-stock acquisition.

"They have authorization to do 30 billion in buybacks and they're in the middle of a buyback program."

• Microsoft is actively buying back shares, typically a sign they believe the stock is undervalued.

"But then they go and they buy a company in all stock, which if you have the option to buy in cash and you think your stock is going to appreciate... it's the opposite."

• The choice to use stock instead of cash could indicate Microsoft believes its stock price may not rise as expected.

"Maybe they're going to do something else with the cash. And that maybe there's another acquisition coming that is going to require more cash."

• There is speculation that Microsoft is conserving cash for other significant investments or acquisitions.

• Post-acquisition, GitHub founders became significant shareholders in Microsoft.
• The founders' stakes in Microsoft are substantial compared to other executives, including CEO Satya Nadella.
• The deal's structure favored the GitHub founders due to low dilution from capital raises and the all-stock nature of the acquisition.

"The founders of GitHub are now the largest shareholders in Microsoft other than Bill Gates."

• GitHub founders hold a large portion of Microsoft shares following the acquisition.

"Each of the three co-founders would have 0.16% of Microsoft from this because the acquisition was about 1% of their market cap."

• The acquisition size relative to Microsoft's market cap resulted in significant ownership stakes for GitHub's founders.

"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 GitHub founders' strategy of minimal fundraising and bootstrapping led to their substantial ownership in Microsoft post-acquisition.

• There is uncertainty about GitHub's future and whether it could have pursued an IPO.
• Microsoft's acquisition might lead to deeper integration with Microsoft's core services than LinkedIn experienced.
• The acquisition raises questions about Microsoft's ability to monetize GitHub effectively and integrate it strategically.

"Can this company go public? Do they end up doing like, a Dara situation and bringing in a great state CEO?"

• The discussion revolves around GitHub's potential paths, including going public or leadership changes.

"Maybe there is going to be a lot more integration with core Microsoft than LinkedIn had."

• There is speculation about the level of integration GitHub will have within Microsoft's ecosystem.

• Microsoft's shift in open-source philosophy and integration points are major tech themes.
• The monetization of developers and the leveraging of user bases to attract developers are critical strategic concerns.
• Freemium models and their alignment with growth and monetization are discussed, with GitHub's model highlighted as particularly successful.

"Microsoft's monumental reversal of philosophy and open source was a big one."

• Microsoft's changing stance on open-source is a key theme in their strategic direction.

"How do you monetize that developer? Why is it important to get that developer if they're not going to build software that will go to 2 billion people?"

• The challenge of monetizing developer platforms when the software reach is not as extensive as traditional models.

"If it requires network effects, it should be freemium."

• The freemium model is recommended for services that benefit from network effects, as seen in GitHub's case.

• Microsoft's acquisition could be leveraged to recruit engineers or to push GitHub into the enterprise market.
• The discussion includes the potential for using GitHub to enhance Microsoft's Azure platform.
• The acquisition's value is questioned, with no clear answer on how Microsoft will recoup the investment.

"I think they will use it to leverage people onto Azure."

• There is a prediction that GitHub will be used to attract users to Microsoft's Azure cloud service.

"GitHub is the main resume for software developers now."

• GitHub's role as a key platform for developer recruitment is highlighted.

"It costs $30,000 to recruit an engineer... the market for recruiting engineers is at least as big."

• The significant cost of recruiting engineers is compared to the potential market size for GitHub's services.

• The acquisition is graded with varying degrees of confidence, reflecting the high uncertainty of the deal's success.
• There is a struggle to determine the acquisition's value, given the strategic nature and the lack of clarity on future returns.

"I don't feel good about it... it's so much cash for a money losing thing that doesn't actually have that much revenue."

• The acquisition is viewed skeptically due to GitHub's financials and uncertain strategic fit.

"What would you grade this acquisition?"

• The acquisition is graded, with a 'C' and a 'B' given, reflecting uncertainty and the potential for a middling outcome.

• An advertisement for Crusoe, a clean compute cloud provider, is present in the transcript.
• Crusoe's partnership with Nvidia and its environmental benefits are highlighted.
• The advertisement is not included in the study notes as per the instructions.