Confluent Shares Jump 25% In IPO, Making Cofounders New Cloud Computing Billionaires

In 2011, three LinkedIn employees — Jay Kreps, Neha Narkhede and Jun Rao — developed a technical tool to help the professional network handle its vast amounts of messages, network requests and profile views. Realizing data streams might be a problem for other companies, not just LinkedIn, the trio open-sourced the software, then set out to build a company around it in 2014 called Confluent.

A decade later, as shares of Confluent have jumped in their first day of trading by more than 20%, Kreps and Rao are billionaires, with Narkhede set to join them should Confluent’s stock continue to rise.

Mountain View, Calif.-based Confluent listed on Nasdaq on Thursday at a price of $36, raising $828 million and valuing the company at about $9.1 billion. Shares of Confluent closed at $45.02 after their first day, up 25% and raising Confluent’s market capitalization to $11.4 billion.

In an interview, Kreps said Confluent has benefitted from the continued shift of corporate resources and data to the cloud. Those trends have pushed Snowflake, which went public last fall, to a market cap of more than $74 billion; Databricks, another player looking to help businesses make use of their vast amounts of data, recently reached a private market valuation of $28 billion, making several of its founders billionaires, too.

“There’s a ton of excitement about the larger data ecosystem,” Kreps told Forbes in an interview. “the move to the cloud makes it a lot easier to harness these new data technologies.”

Confluent looks to fit in as the “central nervous system” for all that data, specifically helping with the large streams of data that large businesses process in real-time. (Beyond their original LinkedIn use case, think the likes of Netflix responding to user inputs and filtering up recommendations, or Audi providing diagnostics to a driver. This data, Kreps says, isn’t quite like what you’ll find in data warehouses, data lakes or other infrastructure built to replace on-site server racks. Instead, it’s “data in motion,” he says.

If that sounds confusing, you’re not alone. A 2015 Forbes magazine profile compared Confluent’s data streams to the chocolate river at the core of Willy Wonka’s fictional chocolate factory. “Event streaming,” or another concept at the core of Kreps’ technical view of the IT infrastructure of the future, “open-source-as-a service,” aren’t much better. “One of the things that’s been challenging about Confluent from the very beginning is that, if you have something that’s genuinely new, then almost by definition you don’t have the vocabulary to talk about it,” Kreps admits.

Plenty of businesses have bought in all the same: Confluent reported it closed its fiscal year 2020 with revenue of $236.6 million, up 58%; for its most recent reported quarter, those sales stood at $77 million, up 51%.

But while Confluent claims to operate in a $50 billion market opportunity, its pace of growth is slowing. Revenues were up 130% year-to-year between 2018 and 2019, as venture capital Matt Turck pointed out in a breakdown of the company’s S-1, while the company’s cash reserves of $280 million as of March 31 look relatively meager compared to the company’s losses, $44.5 million in its most recently reported quarter and $229 million for fiscal 2020.

Given that trajectory, there was little incentive for Confluent to stay private much longer and risk no longer being seen as a high-growth business a year or two down the road. Raising more than $800 million in capital, meanwhile, shores up the company’s coffers to continue spending against what Kreps says is a “land grab” in his neck of the IT woods.

The desire to raise such proceeds is a big reason that Confluent chose a traditional IPO instead of a direct listing, despite having Benchmark, the venture capital firm at which partner Bill Gurley has emerged as a leading advocate for the IPO altnerative, as a major shareholder. According to Kreps, Gurley didn’t call directly to push a direct listing, but Confluent wasn’t willing to chance being one of the first companies to pursue a private capital raise alongside a direct listing and get burned.

“That combination has all the inefficiency of a private fundraising,” Kreps argues. “Even in the six-month period between where companies are raising and where they’re going public, there’s often a big difference.” Confluent’s CEO says he expects the option will eventually become more commonplace, just not starting with him.

The IPO has paid off so far for Kreps and his cofounders. Kreps owned about 24 million shares, per Confluent’s S-1 regulatory filing, with another 1.2 million shares in vested options and nearly 4.6 million shares yet to vest. Not counting the unvested shares, Kreps’ combined stake in Confluent is worth just over $1.1 billion. Rao, who left day-to-day operations of Confluent, isn’t far behind. He still owned 24.4 million shares at IPO, for a net worth of just under $1.1 billion.

And Confluent’s third cofounder, Narkhede, still a board director at the company, could reach such status eventually. Per Confluent’s filing, all three founders sold more than two million shares in July 2020 for total values of about $40 million each for Kreps and Narkhede, and $30 million for Rao. Narkhede went further, selling another 5.3 million shares in September for a combined value of about $78 million. At IPO, she and related family trusts still owned about 19.2 million shares outright or through vested options, not including more than 1.5 million shares in unvested options, giving her a combined net worth of more than $900 million.

Kreps didn’t sound impressed when asked about his new billionaire status (though he didn’t sound surprised, either). “It’s been such hard work the last six years that I haven’t had any time to think about it,” he said. “I hope to do something good for the world with the money. But no deep thoughts on the meaning of all that.”