Reductive Labs, Moving to Portland, Raises $2M for Open Source IT Automation

Portland, OR, is gaining an interesting new software company—and this one comes with its own venture funding. Reductive Labs, an open-source startup that helps companies automate their IT management, announced today it has raised $2 million in Series A financing led by True Ventures in Palo Alto, CA. True Ventures put in $1.75 million, and private investors pitched in the remaining $250,000. The deal closed earlier this month, according to Reductive Labs co-founder Andrew Shafer.

Reductive Labs is in the process of relocating to Portland. Its founders are currently spread out across the country—Shafer in Salt Lake City, chief executive Luke Kanies in Nashville, and Teyo Tyree in Portland by way of Nashville. Meanwhile, True Ventures is no stranger to the Northwest tech scene. It is an investor in two other Northwest startups—1000 Markets and RescueTime, both in the Seattle area. (Shafer says he’s an avid user of RescueTime’s Web-based time management software.)

To some extent, you need to be a system administrator or IT geek to fully appreciate what Reductive has developed. Its main product, called Puppet, helps businesses automate how they manage their computers and servers in a way that’s cheaper and more efficient than other commercial offerings or ad-hoc, homemade programs. The software lets engineers encode why each computer system is configured in a particular way, and creates a trail to show exactly which systems are running and what has been done to them. This is especially important as the explosion of cloud computing and virtual machines (obtained through Amazon Web Services, say) means a company can now spin up hundreds or thousands of machines at a time—which amounts to a lot of added complexity that can quickly overwhelm IT staff.

Kanies was previously a system administrator, and back in 2003 he formed Reductive as an LLC after having a deep technical conversation with Shafer. “He felt the pain of managing systems and configuring machines,” Shafer says. “Luke wanted to change how people manage machines.” In 2005, they released the first version of Puppet as an open source project, and it was a hit. By the following year, they were profitable. Earlier this year, they incorporated the company and made plans to move its headquarters to Portland.

The reason for the move goes back to 1994, when Shafer and Kanies were roommates at Reed College in Portland. “We just love that city,” Shafer says. “It has a burgeoning technical undercurrent, a strong open source community. We feel we’re well positioned to take advantage of the ecosystem.”

Puppet is free to use, and Reductive Labs sells support for customers if they want it. “We tend to do business with people with very large operations. They’re the ones who really feel a need for this kind of automation,” says Shafer. “We are classic open source—we have service, training, and support contracts.” And they have some very prominent customers: Google (for more than two years), Twitter, Digg, Barclays Capital, Oracle, Sun Microsystems, Red Hat, Harvard Law School, Stanford University, and the New York Stock Exchange, to name a few.

So why take venture capital now? “There’s a chance to grow that we can’t take advantage of if we do it organically,” Shafer says. “We want to leverage the work up to this point.” That means growing the team, which so far consists of the three founders, plus a dozen people working in various capacities. Roughly 50 people have contributed code to the project. “We will invest some in marketing, but the majority [of the funding] is to ramp up development and provide more value to the ecosystem,” he says.

As for the company’s fundraising exploits, Shafer says, “We’re an anomalous experience. We had some interest from VCs a year ago. We had these conversations, and we saw term sheets, but we didn’t like them. Nobody knew how to value what we were doing.” So the team focused on their product and customers. When it was time to look for capital again, Shafer says, “We didn’t go on the circuit. We didn’t do 30 meetings on Sand Hill Road. Through a mutual ally, we talked to True. We liked them, we liked their background.” The deal moved quickly, taking just a couple of months to finalize.

Reached by e-mail, True Ventures co-founder Phil Black writes, “Puppet is the fastest growing open source project that addresses the [system administrator] market and solves the pain associated with managing these networks of computers and devices.” But is it a true game-changer? “Puppet has the same ability to disrupt its market like WordPress has done for Content Management Systems or like RedHat did for Linux,” he replies. Asked about his firm’s recent investments in the Northwest, Black says, “The Pacific NW region is strong and getting better each year. This investment will be our third new investment in the Pacific NW in the past 10 months (versus none the prior three years).”

Shafer thinks the sky’s the limit for growing companies in all regions of the country. “None of us are in Silicon Valley, but we got funding from Silicon Valley,” he says. “You’re going to see less and less concentration. There’s opportunity for people with good ideas and demonstrated ability to execute, to build relationships, and get an influx of capital you couldn’t even think about 10 years ago.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and Editor of Xconomy Boston. E-mail him at gthuang [at] Follow @gthuang

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