Ford, Microsoft and Dell EMC-backed start-up Pivotal could IPO by mid-2018, sources say

Key Points
  • Pivotal Software could go public by mid-2018, sources say
  • Pivotal's cloud business grew 130% on-year in 2016
  • Pivotal counts over a third of Fortune 100 companies as clients

Enterprise software company Pivotal Software, which was spun out of EMC and its subsidiary, VMware, a few years ago, is looking at an initial public offering by the middle of next year, according to sources familiar with the matter. They did not give details on the size of the estimated float.

Rob Mee, CEO, Pivotal Software
Brendan Moran | Sportsfile | Getty Images

The San Francisco-based company is an offshoot of software development consulting firm Pivotal Labs, which was previously acquired by EMC. Pivotal Software started with cloud technology from VMware, big data capabilities provided by EMC and a $105 million investment from General Electric.

It is also backed by major names like Ford, which led a funding round along with Microsoft and others that valued Pivotal at $2.8 billion.

When asked about the IPO, Pivotal CEO, Rob Mee, told CNBC, "We'll definitely do it when the market conditions and the business conditions are just right."

Last year, VMware, EMC and Pivotal became subsidiaries of Dell Technologies.

Pivotal helps companies build, test, deploy and update software applications that can run either on public cloud such as Amazon Web Services and Microsoft Azure or on private cloud.

Mee said there is an emphasis on doing knowledge transfer at the firm that allows developers to continuously learn and that Pivotal does not hold anything back as competitive advantage.

"Everything that we do is open-source ... in that mode of openness, now that we provide cloud technology as well, which we have built over the last four years, (the cloud business) has become a big growth engine for us," said Mee.

Last year, the cloud business saw a 130 percent on-year increase, with its flagship software — Pivotal Cloud Foundry — selling over $270 million in annual bookings.

Mee said he expects the business to grow again in 2017 because there is a realization among well-heeled legacy companies that they need to develop agile, cloud-based software to remain on par with their industry disruptors.

For years, established companies have been on the defensive as they tackled threats from venture-backed start-ups, many of which created new markets for e-commerce, ride sharing, social networks and others, and reaped the commercial benefits.

Industry experts say that cloud computing has become a crucial part of the business for most companies. Earlier this year, Gartner said the global public cloud services market is expected to grow 18 percent in 2017 to $246.8 billion, up from $209.2 billion in 2016, but may taper off over the next few years. Cloud application services are predicted to grow 20.1 percent to $46.3 billion this year.

"The future for cloud is bright ... adoption will increase within the majority of organizations," Michael Warrilow, research vice president at Gartner, told CNBC. "There is definitely a place for smaller companies to use big public cloud providers for their advantage."

Businesses are now thinking in terms of what Mee called a "DevOps" (Development Ops) mindset, where there's greater collaboration between software developers and information technology professionals to create cloud-focused solutions that can be modified quickly to change business needs.

"Companies want a multi-cloud strategy," he said.

Pivotal counts over a third of the Fortune 100 companies as clients, including six of the top automakers, seven of the largest banks and five major insurers in the world.

Indeed, the firm addresses a pain point that consultants at PwC previously called the "Goldilocks syndrome", where changing regulations, productivity pressures and complex customer engagement models left businesses unsure how much to customize their software. Too much leaves a system expensive to maintain, while generic versions force firms to cram their business model into the software's function.

"Software development is optimized for continuous change is essentially what it is," said Mee. "Prior to that, software development had tried to limit change because it was seen as risky. It turns out that in order to move safely, you have to move much more quickly."

Pivotal has also expanded its presence Asia, and picked up key customers including Singapore's largest lender DBS Bank and Australian telco giant Telstra.

Though legacy companies in the region have yet to face the same kind of disruption their counterparts in the U.S. have experienced, Lionel Lim, managing director for Asia Pacific and Japan at Pivotal, told CNBC that Pivotal's strategy in Asia is to go after the large customers first. "Because they will be the ones that'll be hit first," he said.

Mee added, "The timing is really good for us to step up investment in Asia in a big way."

CNBC's Anita Balakrishnan contributed to this report.