Kafka
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Confluent’s IPO brings a high-growth, high-burn SaaS model to the public markets
Confluent became the latest company to announce its intent to take the IPO route, officially filing its S-1 paperwork with the U.S. Securities and Exchange Commission this week. The company, which has raised over $455 million since it launched in 2014, was most recently valued at just over $4.5 billion when it raised $250 million last April.
What we can see in Confluent is nearly an old-school, high-burn SaaS business. It has taken on oodles of capital and used it in an increasingly expensive sales model.
What does Confluent do? It built a streaming data platform on top of the open-source Apache Kafka project. In addition to its open-source roots, Confluent has a free tier of its commercial cloud offering to complement its paid products, helping generate top-of-funnel inflows that it converts to sales.
Kafka itself emerged from a LinkedIn internal project in 2011. As we wrote at the time of Confluent’s $50 million Series C in 2017, the open-source project was designed to move massive amounts of data at the professional social network:
At its core, Kafka is simply a messaging system, created originally at LinkedIn, that’s been designed from the ground up to move massive amounts of data smoothly around the enterprise from application to application, system to system or on-prem to cloud — and deal with extremely high message volume.
Confluent CEO and co-founder Jay Kreps wrote at the time of the funding that events streaming is at the core of every business, reaching sales and other core business activities that occur in real time that go beyond storing data in a database after the fact.
“[D]atabases have long helped to store the current state of the world, but we think this is only half of the story. What is missing are the continually flowing stream of events that represents everything happening in a company, and that can act as the lifeblood of its operation,” he wrote.
That’s where Confluent comes in.
But enough about the technology. Is Confluent’s work with Kafka a good business? Let’s find out.
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Confluent adds free tier to Kafka real-time streaming data cloud service
When Confluent launched a cloud service in 2017, it was trying to reduce some of the complexity related to running a Kafka streaming data application. Today, it introduced a free tier to that cloud service. The company hopes to expand its market beyond large technology company customers, and the free tier should make it easier for smaller companies to get started.
The new tier provides up to $50 of service a month for up to three months. Company CEO Jay Kreps says that while $50 might not sound like much, it’s actually hundreds of gigabytes of throughput and makes it easy to get started with the tool.
“We felt like we can make this technology really accessible. We can make it as easy as we can. We want to make it something where you can just get going in seconds, and not have to pay anything to start building an application that uses real-time streams of data,” Kreps said.
Kafka has been available as an open-source product since 2011, so it’s been free to download, install and build applications, but still required a ton of compute and engineering resources to pull off. The cloud service was designed to simplify that, and the free tier lets developers get comfortable building a small application without making a large financial investment.
Once they get used to working with Kafka on the free version, users can then buy in whatever increments make sense for them, and only pay for what they use. It can be pennies’ worth of Kafka or hundreds of dollars, depending on a customer’s individual requirements. “After free, you can buy 11 cents’ worth of Kafka or you can buy it $10 worth, all the way up to these massive users like Lyft that use Confluent Cloud at huge scale as part of their ridesharing service,” he said.
While a free SaaS trial might feel like a common kind of marketing approach, Kreps says for a service like Kafka, it’s actually much more difficult to pull off. “With something like a distributed system where you get a whole chunk of infrastructure, it’s actually technically an extraordinarily difficult thing to provide zero to elastic scale up capabilities. And a huge amount of engineering goes into making that possible,” Kreps explained.
Kafka processes massive streams of data in real time. It was originally developed inside LinkedIn and open-sourced in 2011. Confluent launched as a commercial entity on top of the open-source project in 2014. In January the company raised $125 million on a $2.5 billion valuation. It has raised than $205 million, according to Crunchbase data.
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