Benchmark Capital is one of the major VC in Silicon Valley, with a solid track record of successful investments, including giants such as eBay, MySQL and Second Life. A few days ago, Benchmark announced the financing of the Californian company Engine Yard, with an initial investment of 3.5 million dollars. In a climate of hype and easy financing (as long as one is buzz compliant and located in a startup hub in the States) this event could be seen as irrelevant or just the n-th investment, like all the others we’ve seen so far. Here’s why that’s not the case.
Those who hypothesize about the imminent collapse of the web economy are really worried about millions of dollars going towards web sites and small startups that haven’t, to be fair, a snowball’s chance in hell of succeeding. The main problem with some of these startups is that they lack both a solid business plan and the ability to attract users en masse, despite being covered with Benjamins from VC and angel investors. They are lottery tickets and nothing more.
A perfect example of this phenomenon is Edgeio, a website that didn’t have anything revolutionary to offer, but which was still able to gather a great deal of cash from Intel Capital. One has to wonder though, how did Michael Arrington and his crew manage to burn $5 Million in only 12 months on a website that could have easily been handled by a few kids in their garage. Just to put this into perspective, if you were to cut a one dollar bill into small pieces with scissors, and were able to do so in 10 seconds, and did nothing else but this for a whole year, you’d just barely be able to destroy 3 million dollars (and that would be working around the clock non-stop). There is nothing wrong with trying (I don’t mean destroying money) and Micheal openly admitted his defeat, which was the right thing to do. I just don’t think you need to spend millions of bucks in the span of a few months, when you can clearly see already that your site is not making any money or serious progress, in return.
When we see this type of hopeless venture obtaining such large funds, a small doubt naturally arises that perhaps someone was in a bit of a rush to participate in the great circus which is Web 2.0, and attempt to get their piece of the pie without the proper understanding of what’s really going on.
Benchmark’s financing for Engine Yard doesn’t belong in the same category of rushed and shortsighted choices. Engine Yard can easily be considered the best Ruby on Rails managed hosting provider available today. They came along in 2006 to fill the need for extreme reliability and scalability when deploying and hosting Rails applications. If you think that they are pricey, it’s just because you are looking at it from the wrong angle. Any company with a mission critical application simply can’t afford to go live without a company like EY backing them up.
In a time when there are plenty of discussions about the deployability of Rails applications, Engine Yard puts business-owner’s minds at ease with a proven, technologically excellent solution that won’t introduce problems of any sort. Try to put a price tag on that and you’ll realize that the cost of a slice from Engine Yard is rather affordable. It’s also a welcome addition that can be used to promote the Ruby on Rails story within the enterprise world. They didn’t bet on being the cheapest, they bet on being the best, and that approach is now paying off. In fact, Engine Yard already had hundreds of customers before Benchmark’s announcement.
The company was doing great even without the help of external funds. They demonstrated their worth by having a very respectable volume of work and had shown, once again, the earning potential of providing business services based on open source technologies. They started small and grew organically without any substantial economic help from VC.
Engine Yard is a geek’s dream, one of those companies where the people who have the skills and do the work, get the money. It’s a hacker company all around. They provided a solution for Rails’ biggest weakness and rightfully so, used this to their economical advantage, while offering a great service. But they have never been shy when it comes to giving back to the community. One of the founders is Ezra Zygmuntowicz, who is very popular in the Ruby/Rails community and the author of the web framework Merb, which is receiving a lot of attention as a possible “lighter and faster” alternative to Rails. A while ago they also hired Evan Phoenix to work full-time on Rubinius, a promising alternative Ruby implementation and a rigorous spec for the language.
What then will they use those millions for? It will enable Engine Yard to expand their worldwide infrastructure and support at a faster pace and at the same time guarantee the future of a rock solid stack for Ruby on the web. In fact, Engine Yard has announced that 5 hackers will be dedicated full-time to the development of Rubinius, while one person plus several part-timers will take care of Merb.
Benchmark Capital’s A series investment is not simply the financing of a Rails related company, it’s an investment in the Ruby community. It will be a big boost for two projects that may very well change the face of web development in Ruby land over the coming years. I always thought that Rubinius and Merb mattered, but with this announcement I really think that they’ve a shot at writing the history of Ruby in indelible ink.
What many people who reported about this news story failed to mention is that it isn’t just a VC financing a hosting company. They are literally financing the research and development of Ruby’s future like, to a certain extent, Sun has been trying to do with JRuby on the Java stack.
Not only that, but Benchmark Capital already invests in many Rails based ventures. Having Engine Yard in their portfolio also means protecting some of their other investments, by facilitating the creation of an ever-stable, reliable and standard deployment stack for Ruby and for Rails applications, which other startups can benefit from.