Database startup Neon nabs a Microsoft investment

In a sign that big tech companies are ready and willing to shell out cash for database tech, Neon, a startup building an open source alternative to AWS Aurora Postgres, on Wednesday announced that Microsoft's venture arm M12 led a $25 million strategic investment in its business.

The capital will go toward R&D, Neon co-founder and CEO Nikita Shamgunov says, fueling Neon's expansion into Microsoft Azure and the development of new database capabilities to support both existing and new customers.

"We’re not looking to raise -- this is not a new round," Shamgunov told TechCrunch. "We are well-capitalized with more than $100 million in funding. But this is Microsoft. We couldn’t pass up the opportunity to strengthen Neon’s relationship with Microsoft and Azure, their role in the future of developer tools is only growing."

Added M12 managing partner Andrew Smyth: "Postgres is quickly becoming the database of choice for developers and we are investing heavily in that ecosystem. Neon is a leading Postgres platform and this strategic investment emphasizes our commitment to deeply integrate Neon into Azure."

Shamgunov started Neon in 2021 alongside software engineers Heikki Linnakangas and Stas Kelvich. Prior to Neon, Shamgunov founded MemSQL, now SingleStore, where he was CTO and then became CEO.

While at SingleStore, Shamgunov says that he noticed just how much Postgres, the relational database management system, was out there in the world, and sensed an opportunity to build an alternative to Aurora (if only to counter an AWS monopoly).

Postgres has grown massively in popularity over the past few years. According to a 2023 Stack Overflow survey, just over 45% of developers said they use Postgres — ahead of MySQL and SQLite, the previous top choices.

"Neon is a Postgres database company," Shamgunov said. "We take Postgres and tease apart the internal components into a platform designed to help everyone from individual developers to large enterprises build applications."

Neon's managed cloud-based database platform, which offers a free tier as well as paid plans with usage-based pricing, allows developers to clone databases for development environments and preview changes before they go to production. The platform scales up processor, memory and storage with usage automatically, minimizing the need for customers to do so themselves.

"Engineering teams at scale-ups and enterprise typically adopt Neon for one of two reasons: Using Neon to manage fleets of Postgres without overhead and increasing development velocity," Shamgunov said. "Migrating a production database is risky, so scale-ups that want to ship faster will move only non-production work to Neon to take advantage of the developer productivity increases that come from Neon’s database branching workflow."

Neon has benefited from the generative AI boom, which is fueling the demand for databases to power AI apps. Shamgunov says that hundreds of thousands of developers are using the company's free tier and that thousands of startups and small- and medium-sized businesses are paying for Neon's premium services.

"Today, more than 3,000 projects are created on Neon daily," Shamgunov said. "Technology spending is constantly evolving, but every business, every software-as-a-service product, every application, every mobile app and every AI tool needs a database. Neon sees an acceleration in growth as software -- and now AI -- continues to eat the world."

With $130.6 million total in the bank, Neon now has "many years" of runway, Shamgunov says. The San Francisco-based company plans to grow its 100-person workforce to 120 by the end of the year, investing predominantly in engineering.

Abstract Ventures, General Catalyst, Menlo Ventures and Notable Capital also invested in the strategic round announced today.