Why IBM Bought a Money-Losing Software Company

Today, I’m digging into HashiCorp (HCP).

They make software that helps companies set up, change, and secure their cloud systems.

I found this one interesting because HashiCorp sold for north of $6B (to IBM in early-2025) even though it was still losing a ton of money. The main reason was their customer retention.

Talked about this before, but let's take a closer look at net revenue retention:

• HashiCorp had net revenue retention north of 120%.

• That means existing customers spent ~20% more every year, even if no new customers showed up.

• Once a company adopted HashiCorp, it tended to keep paying more over time.

Looking at their operating margins, this company was hemorrhaging money. Their largest expense line item was sales and marketing expenses.

One of my downfalls is I tend to be overly conservative when it comes to investing in growth. I've never had a business with 100%+ NRR, so I'm a like a fish out of water with companies like this.

The other obvious reason that a company like IBM would make this acquisition is that it opens the door for cross-selling opportunities, both selling HashiCorp services to their current customers and vice versa.

Tomorrow, I'm going to do something a little bit different and try to put the pencil to paper and try to rationalize the level of sales and marketing expense that they were investing. I'm going to start on that now, and I'll see you tomorrow!

-Nick

The 30,000-Foot View

HashiCorp sells infrastructure lifecycle management and security lifecycle management software. Its tools help teams define infrastructure as code, manage secrets and identities, and safely operate distributed systems across multiple clouds and on-prem environments. The business is built around a community-first distribution strategy, where free tools drive widespread adoption and enterprise customers pay for subscriptions, support, and hosted services.

The company’s economic engine is straightforward. Developers adopt free tools like Terraform and Vault, these tools become embedded in production workflows, and enterprises later upgrade to paid offerings to gain governance, compliance, auditability, and enterprise-grade support. This bottom-up adoption model allows HashiCorp to scale reach without traditional enterprise sales friction, then layer in sales-led expansion once usage is mission-critical.

Key Stats

• Enterprise value at acquisition: $6.4B

• TTM Revenue: $654.9M

• TTM Gross Margin: 82.1%

• TTM net income: -$122.2M

• Industry: Infrastructure software and DevOps tooling

Revenue mix is dominated by subscriptions and support, with support representing ~72% of FY-2024 revenue, followed by cloud-hosted services at ~13%, license revenue at ~12%, and professional services at ~3%. This mix reflects a mature enterprise software business, even though profitability lagged revenue growth.

Company History

• 2012: HashiCorp founded with a focus on infrastructure automation for developers.

• 2014–2016: Terraform, Vault, and other core products gain traction and establish HashiCorp as a default infrastructure tooling provider.

• 2017–2020: Enterprise adoption accelerates as cloud complexity increases.

• Dec 2021: IPO on Nasdaq under ticker HCP.

• Aug 2023: Company announces a license change for future versions of community software, moving to Business Source License terms.

• FY 2022–FY 2024: Revenue growth remains strong, gross margins stay above 80%, operating losses narrow but remain significant.

• Apr 2024: IBM announces agreement to acquire HashiCorp for $35.00 per share in cash.

• Feb 2025: Acquisition closes, HashiCorp becomes a wholly owned subsidiary of IBM.

Show Me the Money

Standout financial features

• Subscription-heavy revenue model with ~96–97% recurring revenue.

• Software-level gross margins consistently above 80%.

• Even with high gross margins, their operating margins were quite terrible.

• Management often stated that their net revenue retention was north of 120%.

Financial Data

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3.1/5 - They had real strategic strengths, especially switching costs and distribution, without an unbreakable moat.

Memorable Marketing

HashiCorp markets like a developer platform rather than a traditional enterprise software vendor. Its positioning emphasizes trust, reliability, and infrastructure safety, while its channels prioritize community, documentation, and events over mass advertising.

Key Campaigns and Tactics

• Open-core distribution strategy

  • Core idea: Give away best-in-class tools and monetize enterprise needs.

  • Channels: GitHub, documentation, integrations, community content.

  • Why it worked: Developers standardize on what works, not what is sold.

• User groups and community events

  • Core idea: Let practitioners educate peers.

  • Channels: Meetups, advocacy programs, conferences.

  • Why it worked: Peer trust outperforms vendor messaging.

• HashiDays roadshows

  • Core idea: Small, high-signal events focused on real operators.

  • Channels: In-person experiential marketing.

  • Why it worked: Tight feedback loops and high-intent leads.

Tactical Takeaways

1. Build a free wedge that solves a real pain, then charge for risk reduction.

2. Treat documentation as a growth channel, not an afterthought.

3. Use community as both distribution and product feedback.

4. Favor smaller, practitioner-focused events over large conferences.

AI Uses & Opportunities

Current Uses

• AI is primarily positioned as a demand driver, increasing infrastructure complexity and security needs.

Future Opportunities

• AI-assisted Terraform plan explanations and risk scoring.

• Natural-language policy-as-code generation.

• Automated secrets hygiene and remediation suggestions.

• Cost and drift intelligence tied to infrastructure changes.

• AI-driven support deflection and customer education.

Bumps in the Road

• License changes created friction and trust concerns within the open-source community.

• Persistent operating losses raised questions about long-term independence.

• Competition from hyperscalers and open-source forks remained constant.

• Post-acquisition integration risk under a large enterprise owner.

Your Swipe File

• Become the workflow standard, not just a feature.

• Gross margin alone does not guarantee profitability.

• Governance and reliability are differentiators when it comes to enterprises.

• 120%+ net revenue retention is why they were able to sell for $6+ billion.