LinkedIn's early investment in start-up Confluent has become a 50-fold gain for Microsoft

  • Confluent, which commercializes the Apache Kafka open-source software, spun out of LinkedIn in 2014.
  • The start-up was LinkedIn's first corporate investment.
  • Microsoft, which now owns LinkedIn, is benefiting from Confluent's rapid growth.
Linkedin CEO Jeff Weiner, Microsoft CEO Satya Nadella and Linkedin Executive Chairman and co-founder Reid Hoffman.
Source: Linkedin
Linkedin CEO Jeff Weiner, Microsoft CEO Satya Nadella and Linkedin Executive Chairman and co-founder Reid Hoffman.

When Microsoft bought LinkedIn for $27 billion in 2016, the deal brought with it a small equity investment that's turned into a surprising windfall.

Two years before the acquisition, LinkedIn invested about $500,000 as part of a $6.9 million venture round in a fledgling spin-out called Confluent, which was setting out to commercialize the Apache Kafka open-source software. It was LinkedIn's first such investment, and valued Confluent at about $24 million.

On Wednesday, Confluent said its valuation has swelled to $2.5 billion, based on a fresh $125 million investment led by Sequoia. That means the company is worth over 100 times more today than it was when LinkedIn wrote its check in 2014. LinkedIn's stake is now valued at about $25 million (a 50-fold increase), because its investment was diluted in future fundraising rounds, said a person with knowledge of the deal who asked not to be named because the size of LinkedIn's ownership was never disclosed.

Confluent co-founder and CEO Jay Kreps, who started working at LinkedIn in 2007, declined to comment on the size of its stake. As a principal staff engineer at LinkedIn, Kreps led internal development of Apache Kafka, a data management tool that helps companies process and make sense of tons of information flooding into their systems in real time.

The arrangement between LinkedIn and Confluent is similar to Yahoo's investment in data software company Hortonworks, which spun out of Yahoo in 2011. Hortonworks later went public and then merged with rival Cloudera in a deal that closed at the beginning of January. The combined company has a stock market value of $3.4 billion.

Confluent and Hortonworks have even more in common. Benchmark and Index Ventures were early investors and major shareholders in each. Partners at both firms have said that Confluent is one of the fastest-growing enterprise companies they've ever seen. Confluent has exceeded $100 million in annual bookings, Forbes reported.

For Microsoft, the Confluent stake remains such a tiny drop in the bucket, even after multiplying by many times, that the company has never discussed it publicly. At the end of the third quarter Microsoft had almost $136 billion in cash, cash equivalents and short-term investments, including $2 billion in equity investments. And as of Thursday, Microsoft is the most valuable publicly-traded company in the world.

But the profitable Confluent investment is yet another potential reason for Microsoft to tout the success of LinkedIn. The professional networking site's revenue more than doubled in Microsoft's latest fiscal year, growing faster than any other major product or service category. LinkedIn is contributing to the Commercial Cloud category that investors carefully monitor.

LinkedIn's most notable equity investment since Confluent came in 2017, when it participated in a $300 million investment in Cornerstone OnDemand, which is publicly traded. The stock has since risen more than 40 percent.

Microsoft has been a more active investor, including through its M12 corporate venture arm. Perhaps Microsoft's most famous investment came in 2007 in a company that, like LinkedIn, became known for digitally connecting people —Facebook.

-- CNBC's Ari Levy contributed to this report.

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