Jay Kreps and Neha Narkhede, three LinkedIn employees, created a technical tool that would help the professional network manage its large number of messages, requests from members, and profile views. The trio realized that data streams could be a problem for other companies than LinkedIn and open-sourced it. They then started Confluent in 2014, a company based on the software.
Ten years later, Confluent shares have jumped by more than 20% on their first day of trading. Kreps Rao and Rao are now billionaires. Narkhede is expected to join them if Confluent’s stock continues to rise.
Confluent, a Mountain View, Calif. company, was listed on Nasdaq at $36, raising $828m and valued at $9.1billion. Confluent shares closed at $45.02 on their first day. This was a 25% increase, and Confluent’s market capitalization has risen to $11.4 billion.
Kreps stated that Confluent has benefited from the shift in corporate resources and data to cloud computing. These trends have helped Snowflake, which was listed last fall at a market capitalization of more than $74billion, reach a valuation of $28billion in private markets. In addition, data bricks, another company that helps businesses make large amounts of data, also reached a private market value of $28billion, making its founders billionaires.
Kreps said in an interview that there is a lot of excitement around the larger data ecosystem. “The cloud makes it much easier to harness these data technologies,” Kreps said.
Confluent is positioned as the “central nervous system” for all data. It helps with large data streams that large companies process in real-time. Beyond their LinkedIn application, Confluent can provide diagnostics to drivers or Netflix to filter out recommendations. Kreps claims that this data is not the same as what you will find in data lakes, data warehouses or any other infrastructure designed to replace on-site server racks. Instead, he says it’s actually “data in motion.”
You’re not the only one who finds this confusing. One 2015 Forbes magazine profile compared Confluent’s data streams with the chocolate river that runs through Willy Wonka’s fictional chocolate factory. The technical vision of the IT infrastructure of tomorrow, which Kreps calls “event streaming,” and another concept called “open-source as-a-service,” is not much better. Kreps acknowledges that Confluent has been difficult initially because if something is truly new, you don’t have a vocabulary to talk about.
Many businesses have purchased the same. For example, confluent reported that it ended its fiscal year 2020 with revenues of $236.6 Million, increasing 58%. For its most recent quarter, these sales were $77 million, 51% more than its previous reported quarter.
Confluent claims it operates in a $50B market opportunity. However, Confluent’s growth rate is slowing. Venture capital Matt Turck noted that revenue rose 130% between 2018 and 2019. However, the company’s cash reserves at $280 million as of March 31, 2019, look small compared to its losses of $44.5 million in the most recent quarter and $229 million for fiscal 2020.
Confluent was not motivated to remain private given this trajectory. Confluent could no longer be considered a high-growth company a year from now. The company raises more than $800million in capital to keep spending on what Kreps calls a “land grab.”
Confluent chose a traditional IPO over a direct listing. This is despite Benchmark, the venture capital company partner Bill Gurley has been a leading advocate of the IPO alternative, being a major shareholder. Kreps claims Gurley did not call Confluent directly to encourage a direct listing. However, Confluent was unwilling to risk being the first company to seek a private capital raise in addition to a direct list and getting burned.
Kreps claims that this combination is as inefficient as private fundraising. Kreps argues that “that combination has all the inefficiency of a private fundraising.” Confluent CEO John Creps says he believes the option will become more common, but not yet.
Kreps and his cofounders have seen a positive outcome from the IPO so far. According to Confluent’s S-1 regulatory filing, Kreps held approximately 24 million shares. There were another 1.2million shares invested options, and almost 4.6 million shares still to vest. Kreps owns a combined share of Confluent worth more than $1.1 billion, excluding the unvested shares. Rao, who resigned from the day-to-day operations at Confluent, isn’t far behind. Rao still owned 24.4million shares at IPO for a net worth just below $1.1 billion.
Narkhede (Confluent’s third founder) is still a director on the company’s board. He could eventually be granted such status. According to Confluent, the three founders sold more than than two million shares in July 2020, for total values of around $40 million for Kreps, Narkhede and $30 million respectively for Rao. Narkhede sold another 5.3 million shares in September for a total value of $78 million. She and her related family trusts owned 19.2 million shares either outright or through vested option, but not more than 1.5 million shares of unvested options. This gave them a combined net worth exceeding $900 million.
Kreps wasn’t impressed by his new status as a billionaire, but he didn’t seem surprised. He said, “It has been so hard work the past six years that it hasn’t been possible to think about anything.” “I want to do good in the world with the money. There are no deep thoughts about the meaning of this.