This article by MOI Global instructor Scott Miller is excerpted from a letter of Greenhaven Road Capital, based in Greenwich, Connecticut.

We live in a time when data is exploding. It is estimated that 80% of the world’s data was created in the last two years. Making sense and use of the data is both an enormous challenge and an enormous opportunity. The simplest form of search is a search box on a website like where users go to search the library of recipes. However, with thousands of recipes indexed on the site, how should search results be ordered? What should be included? Do you allow for misspellings? Synonyms? How do you factor in user reviews in results you show? How much weight do you apply to a term appearing in the title vs. the body of the recipe? Do words have to appear next to each other? How much does frequency of a term matter? If you are in charge of optimizing search results on, you can build your own search tool or integrate with the extensive built-in functionality of Elasticsearch. Since the company’s founding in 2012, Elastic’s (ESTC) flagship product, Elasticsearch, has become the default search tool to be integrated into one’s website or to search one’s data. While Google is used to search the internet, Elastic is for the rest of the data. Over time, they have expanded the use cases for their search technology to include security and observability.

I first became interested in Elastic at the time of its October 2018 IPO. Intuitively, because search is so mission-critical, there should be monetization opportunities. The company’s growth had been explosive, and the metrics were, dare I say, mouth-watering (link). I attended Elastic{ON}, the annual user conference, where the enthusiasm of the user base and the software developer community was very apparent. However, I could not get comfortable with the valuation at >20X sales: it was just a bridge too far. Fast forward a year, revenue had continued to grow, and suddenly ESTC’s share price was down 20% in a single day. My interest was piqued.

Elastic is not the easiest company to analyze; there is no investor presentation. The most detailed metrics given by the company date to the S-1 filed back when they went public (link to summary). Being built on open source software does present its own sets of challenges and competitive dynamics, which gave me and many other investors pause. We will go into those concerns shortly.

Elastic is also a very young company. The current CEO, Shay Bannon, set out to create a tool to help his wife search her personal trove of recipes. He built the original Elasticsearch as an open source project, which was released in 2010 as version 0.4. Bannon incorporated Elastic in the Netherlands in 2012 and he and his team introduced version 1.0 in 2014. In a mere five years after the release of version 1.0, Elastic has grown into a $400M+ annual revenue company. To accomplish this growth, Elastic had been growing its employee base by 5% a month, customer base by 3% per month, and adding new products (security and observability) and features at a frenetic pace. As such a young company that has grown so quickly, there is undoubtedly a lot of low hanging fruit in terms of improving how the sales teams are organized, how the messaging to customers is delivered, and how the product is priced. This is not Microsoft in Year 30.

Elastic’s biggest asset does not appear on its balance sheet; the user community that it has built does not fit within the confines of GAAP. By being open source and effectively offering a “freemium” version, Elastic has encouraged product trials. By the time they went public in 2018, Elasticsearch had been downloaded more than 350M times and has likely been downloaded over 500M times by now. Yet, the company has fewer than 10,000 paying customers. Now, not all downloads are active, and the same user may download multiple times to incorporate upgrades, but no matter how you slice it, a very, very small fraction of users are currently paying Elastic, and they will still generate almost half a billion dollars in revenue this year.

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Disclaimer: This document, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified offeree receives a confidential private placement memorandum (“PPM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the PPM, the PPM shall control. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. While all the information prepared in this document is believed to be accurate, MVM Funds LLC and Greenhaven Road Capital Partners Fund GP LLC make no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors, appearing in the document. An investment in the fund/partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio is under the sole investment authority of the general partner/investment manager. A portion of the underlying trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. There is no guarantee that the investment objective will be achieved. Moreover, the past performance of the investment team should not be construed as an indicator of future performance. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund/partnership. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of MVM Funds LLC and Greenhaven Road Capital Partners Fund GP LLC. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of MVM Funds LLC and Greenhaven Road Capital Partners Fund GP LLC, which are subject to change and which MVM Funds LLC and Greenhaven Road Capital Partners Fund GP LLC do not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment. The fund/partnership is not registered under the Investment Company Act of 1940, as amended, in reliance on an exemption thereunder. Interests in the fund/partnership have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws.