Microsoft’s $25.6 Million Bet on Neon Could Transform AI and Postgres Integration

Neon, a San Francisco, CA-based provider of a serverless Postgres database built for developers, has raised $25.6 million in funding. The round, which brought the total amount to $130.6 million, was led by M12, Microsoft’s Venture Fund, with participation from Abstract Ventures, General Catalyst, Menlo Ventures, and Notable Capital.

According to Neon’s CEO, Nikita Shamgunov, the company intends to use the funds to expand its development efforts and business reach, accelerating the next generation of AI applications built on Azure. Neon helps developers and teams ship faster with Postgres by delivering it as a serverless cloud platform. By separating the compute and storage components without breaking away from core Postgres, it brings the database into the modern developer workflow, making it more automated, easier to manage, and AI-ready.

“Today, more than 3000 projects are created on Neon daily, empowering everything from startups building the next wave of AI tools, to large platforms like Vercel, Replit and Retool,” Shamgunov said.

The strategic investment from Microsoft’s venture arm, M12, is a sign that big tech companies are ready and willing to shell out cash for database technology. “Postgres is quickly becoming the database of choice for developers, and we are investing heavily in that ecosystem,” said M12 managing partner Andrew Smyth. “Neon is a leading Postgres platform, and this strategic investment emphasizes our commitment to deeply integrate Neon into Azure.”

Shamgunov, who previously founded MemSQL (now SingleStore), where he was CTO and then CEO, started Neon in 2021 alongside software engineers Heikki Linnakangas and Stas Kelvich. He noticed the growing popularity of Postgres and saw an opportunity to build an alternative to AWS Aurora.

“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.”

The generative AI boom has also fueled the demand for databases to power AI apps, and Neon has benefited from this trend. Shamgunov says that hundreds of thousands of developers are using the company’s free tier, and 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.