Cisco and IBM each bought a startup in this strange but really important cloud computing market

Ginni Rometty IBMIBMIBM CEO Ginni Rometty

Two more IT giants have bought two more startups in a hot but strange market called OpenStack.

Cisco bought a company called Piston Computing, whose roots go back to the very creation of OpenStack, when it was born as a project inside of NASA.

IBM bought a Seattle startup called Blue Box.
Neither Cisco nor IBM disclosed terms, and it’s not clear yet whether all these acquisitions in this market are good-news exits for the startups, or more like fire sales.

Insiders tell us it’s a bit of both.

Why OpenStack matters to the big guys

OpenStack is a free and open source cloud operating system jointly created by a who’s who of vendors in the IT industry. It was their way to compete with cloud giant Amazon, and with cloud software front runner VMware.

With OpenStack, users aren’t locked in to one vendor (such as Amazon). They can use OpenStack in their own data centres, and easily move apps and data from their own data centres to any other OpenStack cloud computing service provider.

Red Hat’s CEO recently told us he expects OpenStack to help generate Red Hat’s “next billion dollars.”

So naturally, OpenStack launched a lot of startups. But, strangely, it’s been a mixed bag for them because they are competing with some of the largest companies in tech: HP, IBM, Red Hat, and so on.

This juxtaposition became clearer recently when an OpenStack startup called Nebula closed its doors. Its co-founder was one of the creators of OpenStack when it was born as project inside NASA. The Nebula team was then hired by Oracle, who swept in after Nebula shut down. We understand that Oracle wasn’t cheap about it, and offered employees annual salaries ranging from $US200,000 to as high as $US1,000,000.

That’s one of the weird things about this market. The startups are floundering as VC money dries up for them. But the big companies are getting into it with gusto, and there’s a huge talent shortage.

About today’s acquisitions, one person told us, “Neither had a chance to make it as a standalone player long term. OpenStack is a market with no intellectual property involved. That means you compete on process and scale … small guys simply don’t have the scale to compete anymore.”

Good for Blue Box

A person in the OpenStack industry told us that “Blue Box did well” with its exit to IBM, though we haven’t been able to confirm a dollar figure.

Blue Box offered OpenStack as a cloud service and that seemed to be a hit. It had at least 600 customers, its CEO Matthew Schiltz said in his LinkedIn profile. It had raised 26.6 million in 6 rounds including $US4 million in January and $US3.3 million in debt.

Still, it hired Schiltz as CEO about a year ago, a few months after it closed the $US18 million round.

He’s a startup CEO-for-hire with a history of selling his companies. He previously ran Symform (bought by Quantum), Tier3 (bought by CenturyLink). He also ran DocuSign back in the day.

Piston seems to be an acqui-hire

Piston definitely seemed to be an acqui-hire for Cisco.

According to one person who is close to that company, “Being an independent startup in a market of multiple 800-lb gorillas is an extremely tough position; regardless of almost anything (customer traction, product capability and maturity, etc) joining forces with a larger entity is the simplest way to ‘Level Up’ to this challenge.”

Piston was loosely related to the now-gone Nebula. The two guys who worked on that cloud project at NASA, Chris Kemp and Joshua McKenty, each went off to found separate startups: Chris Kemp co-founded Nebula and stayed with it until it ran out of money and sold itself to Oracle last month.

Pivotal Field CTO Joshua McKentyJoshua McKentyPivotal Field CTO Joshua McKenty

Joshua McKenty co-founded Piston, stepped down from the CEO role after two years, spent another two-ish years as CTO before leaving his company to join Pivotal Computing, the EMC cloud company being run by former VMware CEO Paul Maritz.

We understand this had to do with Pivotal making him an offer he couldn’t refuse, instead of being pushed out at Piston.

Piston raised $US22.4 million total, including taking on $US3.5 million in debt. Its last funding round was for $US6.4 million in April, that coincided with $US2 million in debt. And now Cisco has bought it.

Eyes on Mirantis

The industry will now be watching one of the more successful OpenStack startups in the industry: Mirantis.

Mirantis makes it living doing OpenStack consulting and offers its own OpenStack software, too. It’s like the Cloudera of OpenStack. It’s raised $US120 million in 3 rounds, including a $US100 million round in early 2014. So if Mirantis is ever sold, we would expect it to be a big exit.

We hear from people in the industry that Mirantis is routinely fending off acquisition offers but wants to stay independent and become a huge software company.

NOW WATCH: Here’s what ‘Game of Thrones’ stars look like in real life

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.