Snowflake Offshoot, Observe, Tracks App Failures in the Cloud

(Bloomberg) -- While Sutter Hill Ventures was backing Snowflake Inc., it also began work on a few related startups meant to build on the expected success of what has now become this year's biggest U.S. initial public offering. Next week, the first of them, Observe Inc. will come out from behind the curtain.

Observe's software helps companies find failures in distributed apps. It's backed by $35 million of equity and debt funding from Sutter Hill, as well as angel investments from Michael Dell, Snowflake Chief Executive Officer Frank Slootman and Pure Storage's former CEO Scott Dietzen. Snowflake board member and founding CEO Mike Speiser of Sutter Hill is a board member, and another Snowflake board member, former Dell and EMC executive, Jeremy Burton, serves as Observe's CEO.

The company uses Snowflake as a cloud warehouse for vast amounts of data about the way corporate apps are running in order to quickly track and trace failures. The goal is ultimately to build one product that can replace programs from companies like Splunk Inc., New Relic Inc. and Datadog Inc., though Speiser said in an interview that the Observe technology isn't ready to do that just yet. In fact, Observe is still trying it out with about 15 customers, only one of whom is paying. The San Mateo, California-based company will hold a virtual launch on Oct. 7.

Companies are now rapidly developing and deploying applications, often putting new code into production daily or several times a day. That's created a large market for software that detects and traces whatever doesn't work.

“What's clear is when these applications go wrong, it's a clownshow,” Burton said. “A lot of these changes have been good to help developers go faster, but from an operations standpoint, it's a nightmare. When something goes bump in the night, you're trying to figure out what the hell happened and how do you get things back together again.”

Sutter Hill is committed to supplying as much as $100 million in debt financing to Observe and doesn't want the startup to have to raise money from other investors yet. “Our view is that having the CEO and the management distracted by doing silly financings with people who don't really understand what you are doing and then join the board and tell you how to run the company didn't make a lot of sense,” said Speiser.

Observe was founded in 2017 inside of Sutter Hill and initially the venture capital firm offered the business to Snowflake, which decided it wanted to become a neutral platform for many different programs rather than owning Observe. In the meantime, Sutter Hill, betting that Snowflake's technology would become widespread, began building other “mini-Snowflakes,” related startups that take advantage of that company's product. Speiser declined to detail the others but said to expect more like Observe.

California-based Snowflake made a name for itself earlier this month with the biggest U.S. IPO of the year and the largest ever for a software maker. Observe plans to use the Snowflake database to enable its software to analyze log files, track application performance and monitor a customer's infrastructure.  The idea is to connect disparate data sources to find issues and to share the data with whichever employee needs it. It's focused on a market called machine analytics that's worth “many, many tens of billions,” according to Speiser.

The market is “super-hot,” said Stephen Elliot, an analyst at IDC. “Enterprise customers want to connect logs, traces, metrics, in a single unified model. On top of that the idea of applying analytics and real-time capabilities, it's all where things are headed.” It's also crowded. Cloud providers like market leader Amazon Web Services are working on their own products in this space. And Splunk, New Relic and others that track parts of this data are actively making acquisitions or expanding their products to better address more types of data. 

Observe has “backers that are going to back this company no matter what happens on the planet because we know we're right,” Speiser said. “If we're wrong, we're going to lose a lot of money. But we're not wrong.”

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