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Episode 25: Totara Learning – Learning Management System with Richard Wyles

Richard Wyles is the Co-founder and CEO of Totara Learning, an open source learning management system. In this episode, Richard discusses how Totara monetizes access to its open source software.

For further reading on Richard’s perspective regarding open source business, we highly suggest checking out his article: We don’t make software for free, we make it for freedom.

Transcript

Intro

Michael Schwartz: Welcome back to Open Source Underdogs, the podcast where we train you how to build a successful business around an open source software project.

This week we have a slightly longer interview than usual, with Richard Wyles, Founder and CEO of Totara Learning.

Richard is from Wellington, the capital of New Zealand. And, as if you didn’t know this, Wellington is a pretty far away place to start a global software company.

But in some ways, I think being far away was the catalyst for innovation. I don’t think a company like Totara could have been started in Silicon Valley, for example.

Richard has some interesting thoughts about open source. Just when I thought I heard every open source business model, he lays out something completely new and in some ways incredibly simple.

So, I encourage you to hang in there and give this one a listen. Here we go.

Richard, thank you so much for joining us today.

Richard Wyles: It’s a pleasure to be here, Mike.

Who is Totara?

Michael Schwartz: Just to provide some context, can you give an overview of the Totara learning platform?

Richard Wyles: Sure. Our flagship product is Totara Learn, which is a corporate learning management system, originally based off Moodle, which is a very popular open source learning management system in education.

And the corporate environment, there’s quite a lot different in feature set that corporates need, particularly around the strength of the reporting, and management visibility on the performance of their team members, giving them learning plans, content management is very important in that context. Particularly in high compliance industries, like healthcare, finance and various other security.

There was quite a lot more functionality that we had to build into Totara Learn, and we have some other products as well, but this is our main product.

Origin Story

Michael Schwartz: Totara was founded in Wellington, New Zealand. How did that come about?

Richard Wyles: I grew up in New Zealand, and I like living here, and so that is why it is headquartered here, fundamentally.

It is possibly not the smartest place to headquarter a global company, but it is a digital good. We have been able to do it with a partner network.

The back-story really is, back in the early 2000, 2003, I secured some New Zealand government funding. There’s a contestable fund there for innovation around eLearning.

The New Zealand government at that time felt that the New Zealand education sector was getting behind. And that’s because New Zealand is very isolated, it’s got a small population base, and so, education sector is spread across.

It’s a small country, but geographically, it’s around about the same size as Britain, Italy, or Japan – all of which have much larger population concentrations. So, further education and higher education sectors get spread quite thin. They’re smaller institutions, but they need to be regionally-based.

My concept back then was that going open source, with learning technologies, would be the basic strategic direction for the New Zealand education system. And partly because it would mean that the smaller institutions would be enabled. There would be input substitution, but there would also be a lot of economy of scale around the support and maintenance of open source if we were able to enable it domestically.

So at that time I had secured some funding, and to cut a long story short, after around six months of research and analysis of various options, we selected what was back then a recently an early-stage project called Moodle; I sighted that they had 350 installations.

At that time, there was some other options too, ILIAS out in Germany, ATutor out in Canada. So we were looking for open source projects in the education space, which we would contribute to and make production-ready, if you like, for New Zealand education organizations.

So, we selected Moodle, we’ve invested a lot into that, particularly initially around scalability and security. In November 2004, we launched the first Moodle globally set of a significant scale. That was the Open Polytechnic of New Zealand, and that’s for 35,000 students.

That caught a lot of interest internationally Athabasca, out in Canada, contacted me, the Open University in the UK.

There was this snowball effect globally, and before we knew it, we really had the target by the tail, and we were working closely with the Moodle project, and really accelerating for a period of its adoption.

At that time, if we had a modest impact in New Zealand, then that would be a good return on investment for the funding. But it turned into much bigger than that and took hold significantly in New Zealand, and then internationally, and it was a lot of fun. Guys like Tim Berners-Lee spoke at various events around the world, and it was a lot of fun in education.

At that time though, when I first started thinking of it, in 2006, that getting grant money is not a business model. Getting grant money is good while it lasts, and you want to make an impact with it, and I was very proud of the fact that we did make such a big impact.

And the return on that investment continues to accrue year-over-year, and it still does. So, that was a great project – but it’s not a business.

Around 2006, I started thinking, well, how do you make a business out of this, and what we’ve done in education, would that transplant into corporate training?

And corporate was where my background was, I’ve been involved in creating, putting newspapers online in the early stages of the internet, and that sort of thing. So, I understood the corporate space.

That’s really the back-story, the context of why we started Totara. I thought we made such a huge impact in education, let’s do it all over again in the corporate space, and corporate Learning Management Systems and then in technologies.

Like I said before, it’s a very different base to education, and a different feature set, it took quite a lot of investment to do that, and get the ball rolling there. But I knew the same dynamics should work, and the same reasons why open source was being so successful in the education space that would similarly be successful in a business environment, if we got it right. And we’re pleased to say that we’ve had some good momentum.

Funding

Michael Schwartz: Is Totara still bootstrapped?

Richard Wyles: We have never taken on any venture capital, or private equity, or any of that. So yes, it did just start with me and three developers. And we now have 70 staff, so we’ve grown organically.

There were three shareholding parties originally, all of them services businesses, so they were really cash hungry and really couldn’t give us any money, and I seconded myself out of one of them. So, in the first year or two, we were hanging on by a fingernails – that’s for sure. It wasn’t for the faint-hearted. From month to month, we would make payroll, that sort of thing.

But that’s not unusual for startup folk. There’s a couple of ways of going about it, trying to get early stage investment. We didn’t do that, we arguably did that the hard way, but it really keeps you focused, and it also proves your business model pretty quickly.

Although to qualify that statement, you could have a fantastic idea that just didn’t work because you didn’t have the resources to execute.

So, there’s no right or wrong, but that’s how we did it.

Timing

Michael Schwartz: Obviously you need a little bit of luck, too.

Richard Wyles: Oh, yeah.

The timing is, I think – I look back and we got the timing right. If we’d been a couple of years earlier, then people would have not resonated with it so much, or if we had been a couple of years late, then somebody else probably would have been there.

So, we got first-move advantage, it was at the right time, and we got momentum reasonably quickly.

Arc of Adoption

Michael Schwartz: Totara is used by thousands of organizations in more than 50 countries. Can you talk about the arc of adoption over time?

Richard Wyles: It sounds like it’s the great hockey stick, but it’s actually been
a sort of steep and steady linear curve.

I think what’s happened over time, though, is the much bigger organizations certainly have the confidence. So we’ve got some really big banking groups; or we’ve got a lot of US federal agencies and some really big ones in there, like the US Department of Agriculture, which is huge; financial institutions like Western Union; really big retail – Safeway, Dollar General, Levi’s, The Gap, Tesco’s, etc, in the UK.

I think that act has been very steady, but over time then some really big organizations have come. I mean, this is great, it’s stable, the quality assurance is there, the feature set is there, this is a no-brainer – it’s been very exciting to see that momentum.

Partner Network

Michael Schwartz: You also have a very strong partner network, 85 partners in 35 countries, at the time I read it.

How did that come about? Was there a deliberate effort to recruit partners to do focus on that? Or did it just sort of organically happen?

Richard Wyles: As it’s an intrinsic pattern, the model is actually around a hundred now. That’s a critical part. I think there’s a major advantage of open source in combination with a global partner channel strategy, because each of those resellers – reseller is probably the wrong term because they are true strategic partners, and they can have a deeper relationship with the stack. It enables the inter-selectively target, different verticals or different groups of prospective customers in a really meaningful way, because they can use a series of plugins or they can configure them, because they can really get under the bonnet and do a lot with it.

The term I use for that is map specialization, and that dynamism is incredibly difficult for proprietary competitors to compete with.

Fundamentally, in the space that we are in, it says “fragmented market,” and there are a lot of vendors out there and most of them are going down a SaaS cloud business model, but there’s a lot of intense competition in that market.

But, now, the open source business model is highly defensible, and it gives us a lot of competitive advantages, like I just described, because in that cloud SaaS model, the unique ideas, unique innovation that those competitors have, only last so long as those competitors battle it out. That continuously stealing each other’s killer features is where their competitive advantage is.

So, competitive advantage, based on feature set, hits the road today at an incredible pace amongst those proprietary classes. Because they’ve got a typical one-size-fits-all, surely enough they may have a really good configuration options, but fundamentally, they are working on a single code base, which means that they’re not very agile and moving to the true needs of the customer.

And as soon as they come out with a new feature, then another competitor takes that and builds it themselves. So, that’s a big sort of commoditization engine, it’s an increasingly commoditized market as all software markets end up being.

With open source, absolutely, part of that commoditization process is at the base level of the stack. And then around the edges of it there’s an incredible process of innovation. And that’s because the customer and the maintainer, and obviously the core maintainer is us, are all part of that innovation value chain.

And a proprietary model, it is only the vendor that is really controlling the innovation. And it’s such a waste of people’s thinking potential. And that is why we’ve got a winning business model, but it does rely on those partners.

I’m glad to put it up, Mike, because we can innovate as much as we like. But if we didn’t do it with a partner channel network, and we were trying to achieve what we have achieved just from New Zealand, it would have taken an enormous amount of capital investment, which we simply didn’t have, and we wouldn’t have the global scale that we enjoy now.

What Goes Into Core

Michael Schwartz: You managed to create a strong plugin ecosystem for the Totara platform – how do you make the decision as to what to bring into the core product?

Richard Wyles: We have quite a vibrant community, and so there’s a lot of dear feedback through that community.

We also, over the years, have used multiple advisory boards with platinum partners. So they’re really close in that they’re major stakeholders, of course, and so, we engaged with them closely.

These days, instead of the PIB type model, we actually just get really close, we obviously know our partners well. There’s a lot of feature requests through our ticketing system, backlog, then we have a team of business analysts and product managers, which we call a customer experience team. And that customer experience team is working with those partners, and directly with customers on occasion as well, to work out what the priorities are within the roadmap and their continuous improvement process.

Revenue Model

Michael Schwartz: So, every open source company struggles to find the balance between giving the product away for free, and monetizing sufficiently each fund R&D. Can you talk about how you found that balance?

Richard Wyles: Yes, so, I’m getting back to the partners, and that experience. I run that Mahara project which is ePortfolio project, which is still going very well and is very popular. As I said, I was involved in the Moodle community for a number of years. So, I saw that different business models, and with Mahara, and I think it’s probably very common and true now, it was a real roller coaster ride, and sometimes the project would really slow down because of that.

And then if a customer wanted, a user I should say at Mahara, wanted something done, then they would come and ask for it, and we would build that into the core product because we’ve got a funded piece of work.

But it was really stop/start, and I’ve always thought that, in any technology, again, if you’re not moving quickly, then your chance of success is really constrained – and you will ultimately fail. You need to keep accelerating with the R&D.

We so needed stability on our revenue. So our model is subscriptions for supported open source.

And what does “supported open source” mean? It means we’ve got full, automated testing script, the quality assurance around the product is paramount, and what corporate’s expecting, government agencies, and all of our customer base.

We have annual subscriptions for that. Now what we do, and everything’s 100% licensed
under the GPL vision3 – but we do not put that latest and greatest on GitHub in the public domain in real time.

A lot of that finds their way out there in these code contributions, back into the middle community from time to time, and vice versa, and everybody’s got all the full freedoms – they can redistribute to whatever they like.

But that was the big risk, that was the big “ah-hah” type moment for me. When I was thinking about the business model, I was thinking well really our customers’ are not in our business. What we do see is, here in Wellington government departments, they have a really vibrant local user community, and they do share code snippets of extensions and stuff like that, but fundamentally, they’re not in the business of going into competition against you.

So, the model seems to me – as long as we are really good at what we do, then it’s really defendable, and as defendable as any proprietary model.

Our subscriptions are for support, and service; and the risk we take is there is leakage around that. But what we have seen over the last eight or so years is it’s not really a factor.

Fundamentally, we put out a maintenance release every month, and that’s what people pay for.

People that don’t want to pay for that and want to get a free ride on that, then I’m sure it’s absolutely really easy for them to find a way of doing that. But our customers are corporates, or government departments, or health authorities, or hospitals, whatever – all of those types of clients – they want supported software. They are very happy to pay modest fees, which our model relies on volume really, it is quite a modest fee structure – they are more than happy to pay those fees to have their peace of mind, and the insurance that they’ve got quality software from the source.

License Model

Michael Schwartz: To make sure I understand this correctly, you’re saying that you have a subscription, which includes support, plus the GPL version of the software that you released, and Q/A and tested, but that GPL software release is not available, let’s say, on GitHub or via community packages. Is that right?

Richard Wyles: That’s correct.

What we did for a while is have seedlings. We put out a community model that was untested, and didn’t have the same level of testing, and it was actually at the forefront, it was our new staff, and it was before it had gone through the full Q/A cycle.

We used to do that, and the problem with that was that it would ultimately damage the brand for having buggy software out there in the ether. So we decided not to do that.

And I’ve been working with open source for a very long time – it is a myth under the GPL that you are obliged to put everything into the public domain.

What the freedom of the GPL enshrines is that the recipient has the full freedom to redistribute, extend, do whatever; the full freedoms of extending it, hacking it, changing it, renaming it, turning it into something else.

With Totara, they’ve got all of those freedoms. But the only difference for us is that we are just not putting it out onto the public domain from the get-go.

Now, I’ve been questioned on that a number of times as to “is that in the spirit of open source?” Or is it – which I find a rather nebulous concept because it can mean whatever the questioner wants it to mean – but, if you boil away the business models that are out there around open source, a lot of companies they’ll either use a bait-and-switch model, so they’ll have an open source product – but then they’ll have the Enterprise licensing.

So they’ll use the open source product, people start using that, but it may end up being a little bit crippleware, or may not have all the features set that the real deal does. And we’ve seen this play out a number of times.

I think SugarCRM is a really good example of this, where there was a vibrant open source project, would you even call it open source now? It looks and behaves exactly like a proprietary software these days.

The bait-and-switch model is a common one, which I don’t like. And open core is another one.

Fundamentally quite similar in some respects. Open core is a core product, but if you want stuff that you really want, then you need these proprietary plugins to get what you really want.

So, again, it’s sort of a proprietary model, making itself look like it’s open source.

With us, I’m very proud of our business model because we don’t do any of that. This is 100% open source. Always has been, always will be.

The way we make it work is – if you want our time, married out to all of our costs and the staff, that we have here on making stable, scalable, secure software with our Enterprise feature set that these big organizations want around the world. Then here is a transparent and standardized price levels for subscriptions, and you pay for that.

Now, you get all of the freedoms you can, it still looks that you’re 100% open. You can still turn it into whatever you want to, and we’ve sent some amazing customizations with client projects. And if you want to go down the line, or if you want to turn off your subscription and go, “okay, we don’t need your support anymore” – and that happens from time to time, but thankfully very rarely – then, all of those freedoms are there. And that is what the GPL insurance provides.

No apology for not putting all of our effort upon to GitHub as soon as we do it. Because if we did, the corporates aren’t going to thank us for that. It’s just simply, we wouldn’t have a partner network, we wouldn’t have a business.

Does Freemium Make Sense?

Michael Schwartz: One of the advantages some people talk about is the distribution marketing advantage to having the open source out there. Are you benefiting from that?

Richard Wyles: Well not, we are under R&D, but I’m skeptical about that benefit. That’s like a freemium type of model, and I think it works to an extent, but what you’ve got to get is enormous. I think your conversion rate, if you did research on that, the conversion rate is typically extremely large.

Marketing

Michael Schwartz: Yes, that is a core question. As a bootstrap company, I’m sure your investment in marketing and marketing support is very tactical. Can you talk about how you manage out and how you prioritize marketing investments?

Richard Wyles: Sure. I mean, that’s an isometric battle when our main competitors can be companies like Oracle and SIP, Cornerstone’s enlisted for $3 billion. So, absolutely we need to be very tactical.

We’ve invested a lot in community and providing a lot of free value-added services to our user base, and we have user group meetings around the world. But also online, we’ve got an academy.

The academy is not just around how to use Totara products, the academy is also focused on good learning and development practices, which is our community of users.

We provided a lot of marketing material and content marketing through the channel, if you like, so providing co-branded materials for our partner network to use.

I think even though some of our competitors have much deeper pockets when it comes to their marketing budgets. We’ve got an agile sales and marketing force, by having a hundred partners out there, and partnerships in a whole lot of markets, some of those bigger suppliers have never looked into it. And frankly, their price points would preclude them from opening up some of those markets as well.

Also, technically, sometimes, depending on these days, at least not in the early days, we hardly had any major marketing investment. But these days some of the bigger tradeshows – I’ve just got back from Washington D.C. a couple of weeks ago, where there was the HD show, and that has around 10,000 delegates, and it shows that we invest heavily and we sponsor the registration area. We run a booth with five partners, we did the same in London, we did the same on various shows in Australia.

Now, we choose those specifically and look as big and as powerful as any of the other proprietary companies that we’re trying to disrupt. And we do that, and I guess it’s a bad analogy, but if you’ve got asymmetrical battle – then we’d be like the guerrilla fighters that go in with a lot of fire power to win a particular battle, and then we run for the hills and they don’t see us again for another six months or something.

We just prioritize a limited marketing spins as strategically as we can.

Segmentation

Michael Schwartz: Yeah, this show is called Open Source Underdogs, so I guess that’s fair!

The market for organizations that need training is extremely horizontal. And I saw one of your presentations, you segmented customers based on number of employees – are there other ways to think about how to segment the market?

Richard Wyles: The particular verticals- you’re quite right that training is a very horizontal market. And then all organizations of size need to manage the professional development of their employees or their community.

We support a lot of not-for-profits as well. Like UNICEF, and American Cancer Society, Médecins Sans Frontières. They’ll have many similar needs, but then they’ll have some nuances.

And this goes back to an earlier comment, what we are enabling is that mass specialization. So, that last 10% of making a system do exactly what you want it to do, that can be a big difference between having a big smile on your customer’s face, or a lot of annoyance.

You are here, and if you go on to review sites and stuff, and you look at competitors, and you’ll do that from time to time, just to see where we are. It’s often the little things that they can’t change terminology, or they understand, they want their button moved from right to left on the counter.

These are just the simple freedoms that we enable with an open source model.

So, it’s that last piece where’s that mass specialization, term that I used before, that really enables that segmentation to work really well. It’s one of the huge benefits of open source view.

Other Revenue Opportunities

Michael Schwartz: You mentioned that subscription is the primary revenue stream. But are there any other opportunities – like maybe cloud or data analytics – that you think might contribute to, or be faster growing in the future?

Richard Wyles: I do think there’s an opportunity around data analytics and some of the machine learning around the patterns of – we’ve got user base of around 15 million learners there, so they should need some scope for that. And it is on our strategics or roadmap to be looking at that in the next 12 to 24 months or so.

More so, at the moment, we have a very robust report builder, and we can pull a lot of data, but then, that’s within each platform. I think there are some interesting things around optimal benchmarking potential there.

Now, one of my mentions has always been, “does it scale?”

And that’s because I’ve run services businesses in the past, and that’s really challenging, because when you’re going really well, and you are starting to find staff, and then when you’re not going well, you have people sitting on the bench costing you money, it seems to be a bit of a roller coaster there.

With a product business and subscriptions, and you buy subscriptions, then we can forecast really well, and it’s been a good model.

When you mentioned cloud, we do have a cloud service; most of Totara is hosted on cloud environments, whether it’s AWS, or Rackspace, or whatever, core private clouds. Or through your partner network, there’s multiple clouds there. We have a direct cloud as well, which we have positioned really as a fee to enter our partner network for initial pilots, and that’s New Zealand Postal Service is an example of that just recently.

But we have a lot of that, where they start on our cloud, and then we just off-ramp them, so they’re not on a single-code base, we can just spin up an instance, and get them going. And when they once had specific requirements, value-added services, then we introduce them to an appropriate partner.

In the future, there are some plans around getting more economies of scale like this for our partner network. There’s a number of different monetization trends which just sort of shores up some of the weaker points in a model where not all partners are applying patches as fast as they should be, that sort of thing. So, there’s various ways of doing that.

There’s other ideas around, we’ve got a growing ecosystem around Totara, a lot of third parties want to plug into our platform. In most instances, it’s through the partner network, they are free to do that. In other instances, there’s strategic partnership, and then might be some financial aspects through that. In particular, content library, so if you think of big training libraries, then there’s potential there as well.

Collaboration At the Core

Michael Schwartz: You previously have said that open source networks put collaboration at the core – what exactly did you mean by that?

Richard Wyles: Collaboration is the fundamental foundation of our business model. First of all, our R&D center is located here in Wellington, New Zealand.

I was just mentioning that the other day to some folks that – out of 70 staff, we have 29 nationalities that have come from all over the world.

So we’ve got a really interesting work environment, lots of nationalities here, but the point is that they are here in Wellington, New Zealand, and so, we are miles away. 95% of our client base is thousands of miles away from us.

So if we didn’t have a collaborative model, some close relationships with the partner network, then we’re really not going to have that innovation flow, we were going to miss the mark too much.

So, collaboration is key on that, collaboration isn’t always easy. But I think there’s a lot of self-interest in the model, we leave a lot of the economic benefits on the table for those partners, and it is in their interest to ensure that the core product is delivering what they needed to, so that they can thrive as well.

So, collaboration is essential for us, and we get a lot of collaboration through the community as well.

Next 20 Years

Michael Schwartz: Where do you see Totara in the next 10 to 20 years, or do you even plan out that far?

Richard Wyles: Well, personally, I don’t. We’re not even 10 years old yet, and it still feels very fresh in many ways that, you know, the market goes through waves of innovation, and it feels like we’re going through one of those stages now.

And they need to acknowledge that, you’ve got to be on your toes, and looking 10 to 20 years, or particularly putting in plans, and I think that’s inherently difficult. So, bringing that horizon forward, what we’ve got is a really exciting roadmap, ideas for launching two new products over the next six to twelve months.

One is a continuous performance management tool, the other one is an employee engagement tool, and these are all on the same platform. It’s very easy to configure and deploy, and if you’ve got the synergy of it all, sitting on one big enterprise code base.

You mentioned analytics before, and we have a horizon for that as well. We’ve got a lot happening in our mobile team at the moment, so we’re already busy. I can just imagine continuing to hire for the foreseeable future, and then, as we start getting those products established in the market, then it’ll become very clear how much further we go in various software categories, really.

We’re pushing out from learning into performance, and we can go further out into the talent-based and HR systems, if we choose to.

But that same model applies really, it’s incredibly disruptive to the bigger players, because we’re operating, you know, it’s a mass of paradigm shift, that they will really struggle to compete with us.

Fair enough, the revenue per customer is a huge degree, higher than us, however, over the longer-term – Cornerstone is valued at 3 billion US dollars and yet, we’ve got 40% more customers from them in Europe.

Fair enough, they’re a US company, but they’ve been around for 20 years. So, in less than half the time, we’ve got more than half of their customers, very similar profile size customers.

So, if I didn’t believe that open source is an unstoppable force, I wouldn’t be doing this. I truly believe that open source is the strategic future of technology.

Challenges For Open Source Startups

Michael Schwartz: What do you think are the biggest challenges facing pure-play open source startups today?

Richard Wyles: Critical mass I think. And it probably goes back to that framing model that we were talking about before.

I think once you start doing that, then it’s really hard to move away from it. It’s an appealing way to go, but I just have question marks over the conversion rate of that. So, you’re playing a different game, and it’s a completely different business model to the proprietary guys.

I think the whole sales and marketing side of it, you’re not going to be wining and dining, or taking a client down for golf, or any of that, which proprietary companies are doing, because they are locking the customers in, they are signing the map for five years, and charging them large sums of money.

From an open source side of, arguably, you should be charging a premium because you’re giving so much value, because you are giving all the freedoms to them.

But that’s not the reality, the reality is, price points tend to be much lower because you’re charging for a service, and because it’s open source, somebody can compete with you at your own business, by taking your code and competing with you if you would be charging too highly.

So, I think it’s a very honest business model. It’s a business model which has a lot of transparency to it. When your competitors are inherently opaque at how they’re coming up with their price points, then that’s just fundamentally challenging, and it takes a certain amount of determination to break through that.

But, once you do have a momentum, a bit of momentum, then you didn’t need the best product, but you need the best value proposition. And, fundamentally, you’ve got a great start with open source.

You’ve just got to make sure that, you know, some of the mistakes we made in the early days we were a little bit buggy in the first couple of versions, but we really tightened up on these days.

Back in those days, we were arguably shipping a software development. But these days it’s a robust system out of the box, so it’s always a journey.

Advice For Entrepreneurs

Michael Schwartz: Do you have any personal advice for entrepreneurs who are starting a business using open source, I guess more for the people than for the company?

Richard Wyles: Look, it can be all consuming, so just make sure your loved ones also know what you are for here.

If you’ve got a big ambition to drive an open source project or a company to great heights, then like any business, it will swallow you up. Make sure you have some time for yourself as well. I’ve just been doing huge hours for years, and I don’t think that’s for everybody.

Michael Schwartz: Richard, thank you so much for your time today.

Richard Wyles: Thank you, Mike. It’s been interesting, and I look forward to listening to you other podcasts – it’s fantastic.

Michael Schwartz: Okay, thank you, Richard.

And thanks to the Totara team for reaching out to us.

Transcription and episode audio can be found on opensourceunderdogs.com.

Music from Broke For Free and Chris Zabriskie.

Big thanks to our audio editor Ines Cetenji.

Production assistance and transcription by Natalie Lowe.

Operational support from William Lowe.

Follow us on Twitter, our handle is @fosspodcast.

Tune in next week for an interview with Sid from GitLab.

Until then, thanks for listening.

Episode 24: Neo4j – Graph Database Platform with Emil Eifrem

Emil Eifrem is the Co-founder and CEO of Neo4j, a category-defining graph database platform powering applications for artificial intelligence, fraud detection, real-time recommendations, and master data. In this episode, Emil identifies key questions entrepreneurs must ask in the emerging era of public cloud software.

Transcript

Intro

Michael Schwartz: Welcome back, Underdogs. This week, we’re lucky to have with us Emil Eifrem, one of the co-founders and the CEO of Neo4j.

Everything about Neo4j’s journey was difficult. Let me just list some of the challenges.

It’s hard to start a business.
It’s hard to write a graph database.
It’s hard to invent a totally new market segment.
It’s hard to build a new business model in your totally new market segment.
It’s hard to raise capital if you are based in Sweden.
It’s hard to build an open source community from scratch.
It’s hard to build a business around open source.

The list goes on, and pretty much every challenge in the book was faced by Neo4j.

Not surprisingly, Emil has learned a few things along the way, so for this reason, it was a lot of fun chatting with him. He has some fantastic insights.

I think I only scratched the surface, so enough of my blabbering, here it goes.

What is a Graph Database?

Emil, thank you for joining us today.

Emil Eifrem: Thanks, Mike. Great to be here.

Michael Schwartz: So, primarily this is a business podcast. But just to provide some context, what is a graph database and what is it good at?

Emil Eifrem: That is a great question. One that I’ve spent most of my career actually answering and broadcasting.

At the highest level, we’re a database, so we store data. That’s pretty simple. But unlike the databases that most people are familiar with relational databases, which shape that data in rows and columns – our building blocks, or abstractions, are nodes and then relationships between those nodes. So, through that, you can build up a graph.

When I say graph, you should think social graph, which is a synonym with network. It’s a way of modeling data that is highly connected.

It turns out that a lot of data, in the modern day and age, is very connected. And if you have that kind of data, we can typically query it and be a thousand times faster, even a million times faster than a traditional relational database.

Origin of Neo4j

Michael Schwartz: You and your co-founders identified the need for a graph database around 2000, and you spent a couple of years trying to tackle the super hard problem.

At what point did you decide it was the right time to start the company behind this database?

Emil Efreim: That’s a good question. When we first solved the problem, or at least started solving the problem, it was, like you mentioned, early 2000, and that was just a fully internal use.

We were working at an Enterprise content management company at the time, and we had a lot of data that was very connected, so we solved it for our own use. But when we looked at the industry, at the time there was really no discussions around alternative databases.

The industry was just coming off this big hangover, if you will, from the object databases in the mid-to-late ‘90s, which kind of flamed out very quickly.

At that point, everyone’s kind of talking – yeah, the Ruby innovations in data, it’s just going to build on top of the relational database.

We disagreed with that perspective but felt like it was impossible to change the entire discourse in this industry.

So then, fast forward a bunch of years towards the end of the 2000s, so 2007, 2008, 2009. At that point, big data was starting to get a hold. NoSQL started happening, and that’s when we said all right, let’s spin out this into a separate company.

That was in late ‘07 I believe. We started a first round of seed funding in 2009 at the back of NoSQL happening.

Founding Community Size

Michael Schwartz: Was there a community at that time for Neo4j?

Emil Efreim: No, we were always like a single-vendor, vendor-lead open source, so we created the software internally. We open sourced it when we were at the company.

It was not one of those projects where we first open sourced, maybe we worked at a separate company, and we Apache licensed that, and we maybe put it then in the Apache Software Foundation – that’s a very traditional open source path. Then, once you reach escape velocity on the community, you wrap a company around it.

We did it the other way around.

When Did Community Start to Contribute Value?

Michael Schwartz: How long did it take before the community got to critical mass, where it was contributing in a way that was valuable?

Emil Efreim: Yeah. I’m going to guess that’s never as binary of an assessment as you would like.

We always had a very, I think, continuous growth of our community. Probably, I would say, a couple years after we got founded in ‘09 and ’10, is when I started seeing people giving a lot of talks about Neo4j, and writing blog posts about Neo4j that I’d never even heard of.

They were multiple hops away from me in the network, in the graph. Where they had heard someone who had talked to someone who talked to one of us, and that is probably a couple years after we got started.

Who Are the Customers?

Michael Schwartz: Who are the customers for Neo4j today?

Emil Efreim: So, today, we are used completely horizontally in all verticals, I would say at this point that use software and data, in terms of being deployment it’s primarily the big Enterprises.

So, 20 of the 25 biggest banks in the world use Neo4j. Four of the five biggest Telcos, seven of the top 10 retailers, 76% of the Fortune 50 are using Neo4j today in production. We are used very, very heavily inside of the Enterprise.

Market Segmentation

Michael Schwartz: In the horizontal market, it can be hard to figure out who to sell to – do you segment the market in any way?

Emil Efreim: Yes, in multiple ways. I mean, with the broadest brush, if you will, we’ll look at it in terms of company size, so that’s in what we call the Enterprise as a billion and above in revenue. So that’s our most important segment from a monetization perspective.

And then we have the mid-market, which is, let’s say, maybe a hundred million to a billion in revenue, and then we have the small below that.

When it comes to monetization, the revenue is the most important one for us at this point. But we do offer, we have a product for the small and the mid-market too.

It’s a completely, generic database, so it’s not like it’s a sole problem specifically to the Enterprise. In terms of an offering for them, we have like a startup program, so that you can use our enterprise edition for free, and things like that.

Is Segmentation Purely Revenue Based?

Michael Schwartz: Do you just base that purely on revenues, say “oh, you’re this amount of revenues, therefore you get this price?”

Emil Efreim: Yeah, I mean, it’s never as easy as that.

At some point, you want to, I think broadly speaking in open source, you want to segment out the people who have more time than money from the people who have more money than time.

And for the segment of people that have more money than time, you want to sell them your commercial offering.

For the segment of people who have more time than money, even if you try to sell them, like they can always work their way around it. I think that’s true generically speaking in software, but in particular in open source.

How Has Value Proposition Changed Over Time?

Michael Schwartz: How would you say that the value proposition has evolved over time?

Emil Efreim: Well, I think the core fundamental one is still the same.

The original premise behind the database is very simple – the world is becoming increasingly connected because data ultimately models the real world, data is becoming increasingly connected. And we are the database that can manage and connect the data really, really well.

That was true ten years ago, it is true today, I believe it’s going to be true ten years from now.

When it comes to specifics of course, the product’s evolved significantly.

When we first got started, we were basically embedded Java library. You embedded the database inside your own application, so that the product surface was basically a Java API or JVM API.

Today, of course, it behaves like any normal database. It’s a server you connect to if there’s a query language. Very much feels like SQL but is optimized for connect to data operations. So, that’s a very, very different type of product surface.

And when it comes to things on the periphery that maybe aren’t as fundamental but are really important, we have all kinds of value-add features – in particular for the Enterprise, where we make it really easy to integrate for the entire Enterprise ecosystem of tooling in technology.
Think Kerberos, or LDAP integration, think security, think encryption at rest.

Those kinds of things that end up being really important in big enterprises, in heavily regulated and compliance-oriented industries.

Partnerships

Michael Schwartz: Are the channel or distribution partners important for you developing the business?

Emil Efreim: We have a direct go-to-market strategy primarily.

So we have an Enterprise sales force. The price points for the enterprise are such that we can actually afford going direct to those customers, and that’s the fundamental of how we go to market.

Then we have channel partners, in particular the GSIs, the Global Systems Integrators, the Ernst & Young’s, the Accenture’s, and so on and so forth of the world. And they help us both with delivery, but also with getting us into customers.

And then thirdly, of course, we have the big cloud platforms. And in particular, when it comes to the SMB side of the market, a lot of them do deploy on the public clouds, and making sure that you’re easily available on any of the public cloud platforms is really important.

How To Differentiate From Cloud Providers?

Michael Schwartz: I’m sure you’ve noticed that Amazon launched the service with the same API as MongoDB, and also a Redis-like service, let’s say. Are you concerned about perhaps the cloud providers moving up the stack and offering something like Neo4j?

Emil Efreim: If you’re at a startup today, particular maybe in the infrastructure space – but probably any startup to be honest – if you are not concerned about Amazon, you’re not doing your job right.

I think every single management team off-site has some kind of an Amazon strategy topic these days.

So, of course, I spend a lot of time thinking about that. And I think that, just broadly speaking, we’re entering this public cloud era software. Where I think that any infrastructure company needs to look at themselves and say, hey, are we just a feature checkbox in Amazon’s feature list? Or is there something really like a sustainable competitive differentiator in what we do?

We’ve looked at that, and I’ve concluded that, yes, we believe that there’s room for an independent graph database company. I don’t think that everyone will consume graph databases just through these public cloud platforms.

I think in particular, when it comes to Enterprises, when I talk to Enterprise CIOs today, and I tell them that, sure, at some point you can buy a graph database service from Amazon, or Azure, GCP, or maybe Alibaba Cloud. But with Neo4j you can run as a service on any of the top public cloud platforms, you run in your own data centers, you run in your hybrid cloud environments, you run on your developers’ laptops.

That is something that Amazon, or Microsoft, or choose your favorite public cloud platform vendor – that’s something that they will never do, or at least would never do as well.

Balance Between Cloud and Innovation?

Michael Schwartz: Maybe to drill down on that a little bit. It seems like
the Amazons and other cloud providers in the world really need innovation from smaller companies. Where do you think we are, maybe as a society, in finding that balance?

Emil Efreim: That’s a great question. Well, obviously, this is something that broadly speaking, the software industry’s thinking through right now.

I mean, obviously, Amazon did quite a few interesting moves last year and earlier this year, 2018 and 2019, when it comes to its relationship with open source vendors.

So they took a number of high-profile open source products, which also had companies wrapped around them, and took that source code and ended up offering it up as an Amazon service, without contributing anything back to the upstream project.

And there’s a lot of discussion around that. I actually don’t think that it is anything ethically or morally wrong in that. A lot of people end up taking that perspective on it. I do think that at some point, that is not how you build the best product.

I believe that just investing time in operating this project – which is ultimately what these cloud providers do when they take an existing open source project and run it as a service – they invest time in operating it, and they become really good at that.

But they don’t invest time in moving that product forward. I don’t think that’s a sustainable place to be.

Then of course, in parallel, we have other cloud platforms. GCP in particular, Google’s Cloud Platform, which chose a different strategy and more partner-oriented strategy. Where they say, hey, we’re going to be the “best-of-breed” cloud.

Where they are going to integrate deeply with Neo4j – and we just announced a big strategic partnership with GCP a couple months ago – where they offer up a really deep product integration to a few key-select open source vendors, us being one of them. And go to the market saying, hey, dear customers, we’re going to be the best cloud platform for running these best-of-breed integrated workloads.

I personally think that is a really powerful value proposition.

Value Of Open Source

Michael Schwartz: Can you talk a little bit about how you think the open source development methodology has been beneficial to the business, and has that been material?

Emil Efreim: Yeah, I don’t think it was material at all when we got started.

So, just as a way of background, I have a long history in open source, dating back to the early mid-90s, when I exclusively used Linux. I worked in a bunch of open source projects in the early days of the internet, including some online gaming and things like that.

So when we started Neo4j, it was very natural for me to be open source, in particular when you have a technology that is adopted through developers, because the value of open source for developers, at least a perceived value, is so high that we can argue whether that’s real or not – but I do think it’s important when you have a developer go-to-market strategy.

So, it was always very clear to me that, at least, I would strongly consider being open source. But I never looked at open source as a means of production.

I never believed that, hey, I’m just going to open source my software, and then there’s going to be crowds of hackers from all over the world starting to build my product for me.

We build a database software, there’s probably about a thousand people in the world who can actually meaningfully contribute to a database kernel. And I believe that if I do my job right, I can hire all of them. So, I never looked at open source as a way of building my product for me, I looked at open source as a distribution model. This was my way of getting my software into the hands of developers everywhere.

We’ve also chosen the category creation approach, where we were the first team that put the word “graph” and “database” next to each other and said, “hey – this is a graph database concept.” And educate, you know – “dear world, here is what a graph database is, and when you should use it. Oh, by the way, Neo4j is a graph database.”

That is our approach, and that’s generally speaking, a very expensive way to go to market, because you have to educate so many people. Not just about the value of your product, which is the value of the entire concept – of the entire category – and I thought I don’t have a hundred million dollar marketing budget here. If I go open source, if I build a fantastic product that people love, then through word-of-mouth, I’ll be able to get the word out, if you will, about the category.

So, there is always that much more of the distribution play than a means of production for me.

Having said that, while we don’t have a lot of contributions, and by deciding on the core kernel, we do have a lot of contributions in the periphery.

So, pick any programming language, however esoteric, there’s going to be a driver for Neo4j. Pick any framework out there, there’s very likely to be some kind of an adapter to Neo4j. We’ve had a lot of contributions in the periphery of the product, just not at the core part of it.

Does Open Source Compete With the Product?

Michael Schwartz: When you use open source, it is a distribution model, it creates a sort of challenge for you because in a way you have to compete with your own free product. How did you sort of adjust to that?

Emil Efreim: That’s a great question. I think, fundamentally, that comes down to some of your earlier questions, which is around customer segmentation and kind of my perspective on identifying the people who have more money than time, and from the people who have more time than money.

And I think that in some senses, if you do things in the clumsy way, you can create a strong competitor to yourself. But I think that if you just think things through carefully, and you do a kind of proper product management on your editions.

Typically you have a free edition, we have a Neo4j community, and you have a commercial edition. We have Neo4j Enterprise, and if you just think through what are the use cases, what are the situations in which you are okay with us as a company, that people use it for free, and you are very clear on that, then you can typically design a feature set that match to that use case. Put that in your Community Edition.

Then, you need to be very clear and crisp inside of the company, so that you don’t try to come into those situations and try to sell them your Enterprise Edition. Because, generally speaking, maybe sometimes with fantastic salesmanship, you are going to be able to win a deal in that use case, but generally speaking, you won’t.

And that is by deciding you’ve chosen a strategy that gives that away for free, and if you want to look at it, purely from this other perspective, you give it away for free so that you get free marketing.

You get that free distribution, and you need to be okay with that, and be very clear internally.

Challenges Of Product Development

Michael Schwartz: One of the challenges I think of starting a technology business is that entrepreneurs tend to be somewhat overly optimistic about how long it takes to write good software and good products.

Can you talk a little bit about your experience in building the core products and additional products as you matured as a company?

Emil Efreim: Yeah. As you point out, that’s true generally of software and probably even more so in databases.

A VC once told me – he’s the investor in several database companies – and he said that, “hey, these database wars, if you will, or competing in the database market, is like watching boxing in slow motion.”

“I’m going to hit you with a high availability feature!”

And then 18 months later “I’m going to counter with cross-datacenter replication!”

And it does sometimes feel a little bit like that.

Having said that, I think the upside specifically of a database is that once you get embedded into these customers, like you’re there forever.

We regularly replace databases that have been inside of these Fortune 500 companies for 20, 30, 40, sometimes 40 years. And we know that, unless we mess up, we’re going to be there decades from now.

If you combine that with a recurring revenue business model, which wasn’t really “invented”, if you will, for software – 30, 40 years ago, everyone went to market with a perpetual model. So, if you combine that amazing stickiness, I think database is the mother of all sticky product categories, with recurring revenue, with that subscription model, that’s a really potent combination.

How To Balance Investor Short-Term Goals

Michael Schwartz: It sounds like you’ve had a really long-term vision for the company. How do you balance that with sort of the contract with venture capitalist to monetize them within, let’s say, a decade?

Emil Efreim: That’s always a tricky part.

I think what’s worked for me, I don’t know if I have any like amazing words of wisdom here, but what’s worked for me is just very similar to our discussion around monetization of open source: Just be very clear and upfront, both internally and externally, and just say “hey, here’s how I look at this.”

For me, personally, I’m not in love with startups like I’m in love with this startup.

When we first got started, it wasn’t even clear that we’re going to start a company around it. It was clear that we’re going to go open source in some way, shape, and form. But for the longest time we interchanged it, licensing it under an Apache license and submitting it to the ASF incubator, the Apache incubator, and maybe become a top little Apache project, and fund it just as a consultant.

We would be out and we would consult this and that, and evenings and weekends, we would actually hack on the database, we’d move the database forward. That was our original idea. And after a while, we realized, hey, no, we want to actually wrap a company around this because we believe that’s a smarter way of actually fund development of the actual product.

On the inside, I always looked at this as a multi-decade journey for me myself, personally. So, I thought that, hey, if 20, 30 years from now, I’m still the CEO of this company, that’s going to be amazing. And being very upfront and clear with that, with investors, was just very valuable and helpful for me.

Team

Michael Schwartz: Can you talk a little bit about some of the challenges around building the team, or what your philosophy is in terms of who to bring on to the teams in terms of location and what types of people you look for?

Emil Efreim: What we decided very early on, on the engineering side, was that we’re going to hire the best and the brightest wherever they are.

We get started in Malmo, Sweden and moved our headquarters after a few years to the Valley, and I moved to the Valley, and that’s still our headquarters. But our engineering team was always located in Europe.

We got started in Malmo, Sweden, and we said, hey, we’re going to hire the best and the brightest wherever they are, but we’re going to try to keep within the same time zone, in a plus/minus, you know, a few hours.

Today, we have engineers spread across Europe, we have two hubs – in Malmo and in London, and we do try to be biased towards hiring there, but we don’t exclude ourselves to hiring in those locations. If we find a Ph.D. in graph databases in Munich, we’re going to hire them there.

Sales/Marketing

Michael Schwartz: Just switching gears a little bit back to marketing. So, you’ve built sounds like a fairly traditional Enterprise sales, marketing sales type of organization. Do you have any thoughts about what you’ve learned over the years?

And from early on until today, I’m sure you’ve learned a ton – but do you have any quick advice on how you did it, and what you could have done better had you known starting out what you knew today?

Emil Efreim: There’s always a bunch of small learning along the way, which maybe aren’t that small when you look at them. I think for me the biggest learning has been my favorite way to look at open source these days is through the lens of self-service.

I think self-service, this notion that I think is gaining a lot more prominence of popularity now due to the rise of SaaS. So, all of a sudden, we can have these freemium SaaS offerings, even in the most traditional Enterprise software, be it towards marketing technology stack, or be it towards HR, or sales, or CRM, or whatever.

We can all of a sudden have this freemium model, where we can onboard customers at scale,
without any marginal cost on the vendor side, without having to engage the sales rep, without having to engage customer success, and so on and so forth.

And I really looked at open source in the same way. It is really getting self-serve up and running, primarily towards developers and primarily on-prem.

I think that ends up something really valuable to me because it really crystallizes the fact that before you start monetizing open source, you should get that self-serve motion done right. And that self-serve motion is primarily product features, and product developer experience, or user experience combined with documentation. And if you get those two pieces right, you get escape velocity on your community.

That’s where the community starts really taking off, and if you afterwards want to choose to monetize that community, that ends up working really well.

But if you try to do it the other way around, where you go open source, and then you start monetize with kind of classic Enterprise, marketing and sales motion, I think that ends up creating just a traditional Enterprise software company, with none of the benefits of being open source.

Advice For Entrepreneurs

Michael Schwartz: You’ve been a really successful technical founder, and what I’m wondering is the last question – if you have any advice for entrepreneurs, not necessarily the companies but the people who are starting new open source companies today?

Emil Efreim: My one piece of advice when I talk to technical founders, in particular on the open source side, I guess that’s the lens through which we look at the world on this podcast – I feel like a lot of people make very fundamental early decisions that later on have very significant business impact.

Think what open source license you want to do, which features you put into the Community Edition versus the Enterprise Edition, things like that.

They make those decisions in a not very thoughtful way. People are typically extremely thoughtful about how they build their software and what features to include, and they spend 99.9% of their cycles on that, and then they spend very little time thinking about, hey, I’m just going to take clustering, and I’m going to put that in the free edition. And I’m going to choose, let’s say the GPL, because it’s the most popular open source license.

And those decisions are actually extremely fundamental, and can really affect the company’s start, once you get to scale.

So, I think my advice would be: Take a little bit of a step back and realize that those are not technical decisions, they are business decisions. And you need to look at them through a business strategy lens, not through a licensing or open source religion, or a technical lens.

Michael Schwartz: Emil, super interesting! Thank you so much for your time.

Emil Efreim: Awesome! Thanks, Mike.

Michael Schwartz: Thanks again to Emil and the Neo4j team for scheduling the time.

As usual, transcription and episode audio can be found on opensourceunderdogs.com.

Music from Broke For Free and Chris Zabriskie.

Our amazing audio editor is Ines Cetenji.

Production assistance and transcription by Natalie Lowe.

Operational Support from William Lowe.

Follow us on Twitter, our handle is @fosspodcast.

We have many episodes scheduled for the next few months: in the QR, Gitlab, to Totara Learning, Kong, Alfresco, Pivotal, Chef, Amaranth, but we’re still missing a few. So, please, tweet to us if you have any more ideas about who we should reach out to.

Episode 24 checking out – thanks for listening!

Episode 23: pHpList – Open Source Email Marketing with Sam Tuke

Sam Tuke is the CEO of pHpList, an email marketing system powered by open source software. In this episode, Sam discusses the merits of a SaaS business model versus open core.

Transcript

Intro

Michael Schwartz: Howdy, Underdogs. Welcome to episode 23.

Finding all the successful open source software companies is hard work.

You can’t Google it, there’s no master list on Wikipedia, so we read articles, we search the web, and we go to conferences.

In May, I attended a small open source software conference in Tirana, Albania, called OSCAL.

It was a pretty small venue, so I wasn’t expecting to find the next amazing Open Source Underdogs guest.

The morning was progressing as one might expect at an open source conference: Some guy was telling me about a new decentralized messaging protocol; I heard some pretty deep technical content coming out of a government project in Italy.

And then Sam Tuke gave a talk about the role of project managers.

It was pretty obvious that this dude has some serious insights into the business of software development. It sent me digging into his company pHpList. I read some of his old blogs, watched some old videos on YouTube. Sam has had quite the open source journey, so pretty much on the spot, I asked him to be on the podcast.

As I wasn’t expecting to record a podcast on this trip, I was a little unprepared – all I had was my phone, so the audio quality is a little subpar. I think you can understand him, but there’s some weird background sounds I couldn’t filter out – sorry about that.

But I’m glad I had the chance to chat with Sam, and to get some of it on tape. So, let’s cut to it.

OSCAL 2019, downtown Tirana. Here we go!

pHpList Origin

Michael Schwartz: Thank you so much for joining us today.

Sam Tuke: My pleasure.

Michael Schwartz: Tell me a little bit about pHpList, and how you got involved?

Sam Tuke: pHpList is a long-running open source project. It was established as a community project before a company was registered to provide services around it.

Actually, the very first release of the software was nineteen years ago now, so it’s got quite a history.

It came out of a web development agency that was doing consulting with clients, specifically the National Theater in the UK, and nineteen years ago there weren’t so many newsletter solutions available.

pHpList was written and released as open source by the original developer and founder of the project, Michiel Dethmers. Some years later, due to demand, a hosted service was set up and provided. The company was registered, pHpList Limited, it was incorporated in the UK.

For the last ten years, we’ve been offering hosted pHpList services, or as you would describe now email marketing services, like turnkey Software-as-a-Service, email marketing services much like Mailchimp, and Constant Contact, and others that you are familiar in the industry.

We have actually released the first version of pHpList the same year as Mailchimp was founded. So, we have a similar longevity there.

My personal involvement began in 2008 as a user.

So, I’m a long-term open source advocate user. Started out as an open source fan boy, if you’d like. I founded another company when I was 17, called Data Limited, building custom computers, and quickly realized that benefit of open source got more into the political benefits of free software in terms of its relationship to additional rights and empowerment. Taught myself to code as a teenager, and was using pHpList because I was looking for an open source solution for email marketing at the companies I worked at as a marketing manager, later in my career.

Three and a half years ago, in 2015, I’ve been in contact by this time with the company pHpList, and I made some contributions to the software. I was looking for the next opportunity, and I took over management of the company and a lot of stake in the firm.

Since then I’ve been chief executive, responsible for all aspects, both on the community side and the commercial side.

So, the pHpList Community is enabled, supported and sponsored by the pHpList Company.

Challenges of Bootstrapping

Michael Schwartz: So, hosting service normally requires established operating practices and procedures and capital. What are some of the challenges around bootstrapping, and how did you scale the business?

Sam Tuke: Yeah, that’s a good question. We have bootstrapped, we take that approach for a few reasons. Partly to remain independent and stay true to our very strong and relatively inflexible open source approach.

We’ve never accepted outside venture capital investment, so all growth in the business has been from profit, so we continue to just rely on accrued profit basically to reinvest in the firm. And that has meant that we grow up slowly, and we would grow more slowly than some of our competitors would take on capital at a much faster rate.

That brings, obviously, benefits and advantages.

It means we are very stable as a company and as a project, as we’ve been around a long time. We’ve got a small team and a very committed staff, we’ve got pretty low turnover. But we have to be very careful about where we make our marketing investments, and be very smart about it.

We don’t have much margin for error as far as where we put our money. And also, because the company has a technical history, and I have a technical background as well, having been a developer in the past, we are basically more comfortable making big investments in infrastructure, scalability and improving the operations and the service, so it does make for some difficult decisions, how we invest in sales and marketing. We are quite conservative about how we approach that.

We also tend to prioritize technical marketing solutions over interpersonal ones. So the primary driver of growth in pHpList as a company has been this firewall marketing engine, where by our open source users and also most of our hosted-service users, they send their email campaigns, their transactional mail, etc., which includes a little advert for our hosted service at the bottom of every message.

Recently, 25 billion messages were sent using pHpList, a combination of hosted and self-hosted, in one year. And the vast majority of those messages included these little links, which gives us a lot of traffic, promoting our hosted service.

So, that’s the primary engine of growth. As a strategy, we certainly prioritize those kind of “setup once and run.” So, the better, from our perspective, return on investment, and that’s also where our expertise tends to lie in creating these technical solutions, which scale quite well and run themselves.

We have self-service plans, of course. The majority of our customers are the hosted-service, are self- service, as is the case for many Software-as-a-Service platforms. But we also have larger accounts that scale up to around 30 million messages per server.

For those, obviously, the clients tend to have more requirements and require more of our one-to-one consultative sales process. Yeah, we do have a sales team that handles those clients and manages the accounts once they’re established.

Customer Segments

Michael Schwartz: Can you maybe go a little bit into detail who are the customers, and do they break into any segments, or buckets, or types, or do you see any common themes among the customers?

Sam Tuke: There are certainly a lot of common themes. There’s also a huge amount of diversity.

It’s partly having been around a long time, and having been relying on this sort of viral or word of mouth type approach, where you send your campaigns and then people see the links to our service and hear about us frequently in that way. It’s very diverse.

We have quite a few email marketing agencies or more digital marketing agencies, which use our services and resell them.

We don’t offer white-label solutions, but there are various options for companies which want to manage their own clients and provide services through pHpList that way.

And that works quite well. We have a single contact that way, we have a shared interest with those clients, in them using the service well and sustainably.

Beyond that, we have mostly SME’s, as a sort of core customer base, especially for the smaller plans. Primarily in the United States, but we have strongholds of users in a particular regions, so Latin America, Brazil, and Argentina in particular.

pHpList has been translated into over twenty languages for many years, so the localization effort is very helpful for us. We have localization sprints – so we sponsor events to improve the amount of translations that we have in a region, which is interesting or potentially lucrative for us.

But just on the community side, we have translations contributed from really all over the place. We’ve got three varieties of Spanish with 100% translation for the pHpList interface. So, we are really widely spread in that sense, and there’s a great variety of users.

There’s quite a few government users as well. So particularly, government bodies for which data usage sovereignty is very important.

Sometimes they want to self-host the solution on their own service, in which case we provide some consultation, and there’s an opportunity for us to provide services there. Recently, we had two German Federal Ministries sponsoring development of particular functionality for pHpList. It was at the end of last year.

We love to work that way, it’s great. It provides benefits obviously for open source communities,
as other open source companies will be familiar with.

But, there’s a limit to how much consulting I want to do because it’s also quite risky from my perspective. The margins can be lower because of those risks, and obviously, it doesn’t scale in the same way as our Software-as-a-Service business does. So, we have somewhat of a mix there.

And then we have some government bodies who use our hosted service, and we provide them with the flexibility to choose which country their data is hosted in.

We use a variety of hosting providers, and we have a lot of flexibility in the way we’ve organized our infrastructure, so that we can set up all the infrastructure for a hosted client, in a variety of different legal jurisdictions, depending on their requirements. We invested some time and money over the years in making that a very smooth process.

So, certainly those organizations that care a lot about privacy and their sovereignty, that’s a good niche for us.

Partnerships

Michael Schwartz: Are there any partnerships that have helped you develop the business?

Sam Tuke: On the open source side, there are a lot of hosting companies who package pHpList and distribute it for us, and make it very easy to take a lot of the work away from us in packaging, distributing, and really reaching different audiences.

So, every time we have a pHpList release, there are usually four or five different packaging systems that update within a few hours, and announce that they have made releases of pHpList, which helps to get into the hands of our users quickly, and advertise it basically within those hosting systems like Softaculous, for example. We are the only open source email marketing solution that is generally available through those channels.

So, I consider those organizations partners because they are helping to spread the word about our software and making it easy for people to use it and then set it up. Again, that’s been a direct benefit to us because that fits into our viral marketing engine, whereby every self-hosted user ends up advertising our service through the messages that they send.

Beyond that, we clearly have strong partnerships in the open source community. That’s more to do with associating our brand with quality.

Let’s say, when we have users like Raspberry Pi or Wikimedia, particularly in German organizations which care a lot about their sovereignty and privacy, like some larger music festivals, and a few celebrities – they help associate pHpList with their quality content.

We’re always looking for really high-quality senders, people who have a very high engagement rate. And it’s interesting, because open source users and the open source community tend to be very intolerant of low-relevance marketing communications – which is good for us – as much as when we have these projects using pHpList on a large scale for their own communications, they help associate our brand with quality, basically.

And if they are using our hosted service, then it’s great for us because our most desirable kind of clients are obviously the ones with the highest customer engagement, the highest open rates, of the highest conversion rates from their email. Those are exactly the kind of users that we want, and it’s easy to find them, when we look at the open source scene.

By this point, there are some quite large organizations open source, in terms of NGOs, and also commercial organizations, which send mass email communications, and relying on transactional marketing email to communicate with those community. And pHpList is a natural choice for them, and we’re very happy to be associated with them.

Open Source Benefits

Michael Schwartz: How has open sourcing pHpList software been beneficial to the business?

Sam Tuke: When pHpList was first released, it was the only solution for open source email marketing, and it remains to this day the leading solution.

There have been a few other open source projects that have propped up over the intervening years, but we got a huge boost initially as being basically first to market, as the only open source solution available for email marketing and newsletters. So, that provided quite some boost in the early years.

Going forward, like any open source project, we’ve benefited from the expertise of the open source community over time. We have some community members who have contributed plugins, a couple of contributors who have contributed enormously over the last ten years – one individual has extended the functionality of the application in so many ways.

We invested deliberately in a very flexible plugin architecture to allow community members to create their own extensions to pHpList, and also given the freedom to license those extensions differently, and distribute and maintain them how they want.

And for our hosted service, that’s being great in the long-term because we ended up using several of those plugins as part of our hosted service, and it’s seamless.

So, customers of our hosted service don’t know whether the functionality that they’re using originates from company developers or from community developers. But, for example, the segmentation engine that pHpList Hosted uses, which is really called a set of functionality and is quite sophisticated. That is actually our plugin, which is still independently maintained by community members, which is brilliant from our perspective.

Also, the campaign that we have for pHpList Hosted is still maintained by community contributor. So, we’ve got enormous value there.

Of course, it’s a great opportunity for hiring talent.

People who start out as contributors, and we can see the expertise they have, all the commitment they have, we hire them. We’ve done that many times over. It’s kind of a great screening process for getting talent on board, wherever they may be situated in the world.

But beyond that, the primary advantages is the firing marketing engine, which is that we have tens of thousands of open source pHpList servers out there, which are advertising our product in numerous ways, and reporting small amounts of data to us directly. But they’re also referring us a lot of traffic, which gives us a good indication of where these people are – where the largest users of pHpList self-hosted are in the world, which also acts as a good pointer for us as the company to look at, where to expand next, where to improve our localization, where to invest more in support, and a different payment gateways, and really demonstrates a demand.

The use of email worldwide is still growing. Email marketing as a marketing system is still returning best value versus other forms of digital marketing, according to reports by various consulting companies. There’s a lot of potential to grow still, even though we’re in an intensely competitive business, with over 150 different competitors that I am currently aware of, internally.

So, there’s still opportunity for growth, and we still have the unique opportunity as an open source product that gets distributed, gets set up, and starts advertising our hosted service using this viral engine before we are even aware of some of these jurisdictions, or that we’re aware that email marketing is growing in those regions.

So that is tremendously useful for us, and certainly a competitive advantage.

Open Core

Michael Schwartz: In the past, you’ve taken sort of a hard line on the open core business model. I’m wondering if your thinking has evolved over the last couple of years?

Sam Tuke: My thinking has certainly evolved.

Nevertheless, I developed my technical skills and I became a software engineer. I became later a marketer, and I became the CEO that I am now – all because of my belief in open source and its power to harness cooperation, to foster cooperation between human beings.

And still, I’m not a fan of open core. I would not want to take open core as an approach myself.

I appreciate that open core is a very good business model for many companies out there today, and it’s been proven to be successful at a large-scale in recent years. But personally, I don’t want to compromise on the licensing of the code.

I fear the slippery slope that we’ve seen some organizations follow once they’ve taken the open core approach, not all by any means, but it can be very tempting I think, once you take the open core approach to introduce that conflict between the interests of different community members and the company’s commercial goals. And I would never want to be in a position where I felt that there was any strategy that I needed to conceal, or any conflict, in terms of the core userbase and the commercial decisions that we as a company would need to take.

I think that trust in our community is paramount, and I think that’s true of all healthy open source communities, and I think it’s difficult to foster that trust if you have a two-tier system, with different parts of the application, different aspects of its functionality, basically being exclusive to different groups of people. So I still take the hard-line on open core myself.

And when I look at ways to innovate or change our business model, I’m always looking for ways to do that while staying totally aligned with the open source license that we’ve adopted, which is the strongest one that we can find. We use the AGPL3 license for all the code that we produce, and find smart ways to avoid any conflicts that is keeping software open. That’s difficult.

It requires a lot of innovation but I think if you get those models right, and if you get that strategy right, then you have really a sustainable competitive advantage, which is a rarity in the business world.

AGPL

Michael Schwartz: You mentioned that you are using the AGPL, and that license is what I would consider a license that creates user freedom more than developer freedom.

What do you think is the right approach for companies in balancing user freedom and developer freedom in the license?

Sam Tuke: Yeah – it’s a very interesting way to describe the difference between the licenses.

There are a variety of ways to capture the differences. Some people also refer to the non-GPL, like the MIT and BSD-style licenses, which you described as being more pro-developer freedom.

Some people describe them as being more permissive, because they have less constraints on what you can do. I don’t see them that way, and I never did.

I see the recursive of the copyleft, of the viral licenses, the AGPLs and the GPLs, as preserving more freedom overall, both for developers and for users.

Ultimately, it’s about getting more software into the world, which is freely usable and freely reusable.

It’s not so much developers that get the freedom from my perspective, when you are using a simpler or shorter, a non-recursive license, a non-copyleft license – but it’s managers and it’s business leaders who get the freedom.

Because developers, they are usually paid to write code, and they usually want people to use their code.

I mean, my experience, they are frequently happy the more that other developers can see and use what they’ve made, and from my perspective, the best way to achieve that is to ensure that code remains free.

And if you don’t have the copyleft freedoms built into the licensing of that code, then that’s not guaranteed. And there is a good chance that the software they’ve written, and extensions that are added to that software in the future by other people and companies, will not remain free.

And that is the original purpose of the GPL.

That was Richard Stallman’s idea behind writing it with his legal friends in the eighties. And I think that is still a good motivation, and we certainly still stick to the AGPL.

Going forward, I expect to continue to use AGPL license, or at least other copyleft licenses for future projects that I’d be involved with. Of course, once investors are involved, and once you need cooperation from other stakeholders, you don’t always have the freedom to take that, perhaps, more idealistic approach.

But my personal preference is strong copyleft and AGPL3.

Ethics of Open Source

Michael Schwartz: So, I read that you were a philosophy major, or you studied philosophy at university.

So I’m going to ask you somewhat philosophical question: Why is open source software more ethical than commercial software? Are those orthogonal ethics in license?

Sam Tuke: Ethics is a very complex concept, and I wouldn’t want to say that non-copyleft software is unethical, necessarily. However they are certainly in relationship there.

Again, for me, it comes down to a simple concept of corporation, really. And I’m frustrated when I see human beings working against each other when they don’t need to be. And duplicating effort. And basically not working together when they could be, to produce the best product, the best solution, and the best system – the safest systems that they can.

For me, copyleft licensing and open source, it’s really about providing a very safe harbor, a very strong framework to protect that safe harbor for cooperation. For guaranteeing the rights of people who come later to participate in that cooperation, to take the software that was made and to use it themselves for whatever purpose that they want.

My father was a doctor, he is in the medical profession. He worked for the National Health Service in the UK for 60 years, as a public servant in public health. And I feel I inherited some medical perspective on this in that, ultimately, we want to produce the best things that we can, and we want to do the best that we can for patients, if we are in the medical profession. We want to do the best we can for users, again providing the most efficient, the most powerful, the most innovative services that we can, and products that we can.

Now, this becomes a big problem when we try to monetize open source, because what we end up with, with open source software, is software which provides enormous value to the user and to the customer; economic value – value that you can measure. But it’s very difficult to capture that value as a business, or as the organization which is producing that software, in many cases.

I’ve spent a lot of time thinking about how we can do a good job of capturing the value that we create in open source. Because if we don’t, then we starve ourselves the resources that we need to improve our software for others to distribute it to market and to advertise it.

Maybe the Linux desktop is an example of this. Which, I use Fedora on my Linux desktop, and many people use Ubuntu on their Linux desktop – I think it’s a great product. Single-digit percentage of computer users use it, even though for many, it would be a great solution. And that’s partially because I think Linux desktop as a whole, and the developers that make it, have a really hard time capturing the value that it provides.

So, how can we devise value appropriation regimes as open source businesses and business leaders that allow us to scale and compete?

Because we need to put this money into marketing, into these competitive places, in order to get the exposure and compete on a level playing field. But when we’re giving what we produce away for free, it’s hard to capture that value.

There are ways to do it, and they are harder than the other road, but I think it’s absolutely worth it, and from my perspective, it is necessary to find a way to achieve both. To provide the best value for our society, the most freedom for our users, and also to do it in a sustainable way, from the commercial side, and to pay our developers well, and scale the company in a competitive way.

pHpList in Five Years?

Michael Schwartz: Where do you see pHpList in five years?

Sam Tuke: Large-scale email communication should be something that is as easy to drop into your application as single sign-on or a marketing page.

And as an open source application, pHpList is becoming more portable and is more easy to integrate, and we want it to be the no-brainer solution for people who want to add those capabilities to their application, whether it be on a self-hosted bases or using our hosted services.

So, in five years, pHpList will be the most convenient, the lowest friction, and certainly the best value way to communicate transactional or marketing messages with your audience, whoever they may be and wherever they may be.

And you’ll have more choices as far as where that system is running, on which server it’s running, and exactly the details and the nature of how it runs, and how it serves your needs than any other solution.

Business Challenges of Open Source

Michael Schwartz: What do you think are the biggest challenges facing companies, especially startups today, who want to use open source software development to develop their product?

Sam Tuke: You mean, who want to make open source products themselves?

Michael Schwartz: Yes, vendors, let’s say pure-play open source companies who want to actually monetize the open source software that they’re developing in some way.

Sam Tuke: It’s hard to appropriate the value. It’s relatively easy to create enormous value for your users, for society even, through new open source products – the difficulty is capturing the value. And that’s really hard.

Again, what we typically see is high economic value from the most successful open source products and low willingness to pay from the target market from their audience. And that is the kernel of the issue that open source startup will face.

It’s getting easier from my perception to achieve venture capital investment in open source startups, partly because the talent requires the expertise – it’s increasingly part of the strategic advantage of one organization versus another. It’s also a good reason to acquire an open source company.

And somehow that does provide a barrier to new market entrants, that you’ve got great efficient systems set up, you’ve got your teams set up, and so on. But still, how to appropriate value in a way which is compatible with all this value that you’re giving away is really hard.

One way to do that is through data. We’ve seen that data companies wanted a better term, like companies for which data is the real product, which creates services around the data, which empowers them to provide services to consumers for free. They’ve done phenomenally well, they’ve scaled incredibly, and they’ve inspired a generation of entrepreneurs to follow in their footsteps, basically.

Open source products are in quite a good position to compete on that level, because when you have a good open source product; you have a wide-scale adoption; it’s hard to compete with free, we still have big advantages in terms of distribution, in terms of buy-in from technical decision makers.

If you’re first to market, and you’re open source – then you really knocked the bottom of the market out for competitors that want to follow. It’s pretty hard to follow a successful open source app which has become the de facto standard. We can look at a lot of examples of open source products over history that have done exactly that.

But once you’re in that position of having very strong market position with your open source product, you are in a great place to collect data ethically, collect data and use that data to fuel your growth as your primary revenue source.

Because that doesn’t require you to charge for the product. It doesn’t require you to put up barriers around functionality, or paywalls around particular levels of the service for the product. You’re fully aligned with your users in that you want the product to be as good as it can be so that it has maximum adoption that it can have.

And the more adoption your product has, the more data will be flowing to you, ethically again of course, with the understanding of the users of your product. But that really gives you a great advantage because why would users want to turn to a proprietary competitor with less likeability, less freedom and that is less established.

Once you’ve achieved that lead, once you’re there in that position, I think you’re in a very strong position once you’re there. And increasingly, data will be a great business model for these open source companies to avoid conflicts with the interest of their users.

Advice For Entrepreneurs

Michael Schwartz: So, the goal of this podcast is to help entrepreneurs, the people more than the companies. So, as a final question, I’m wondering if you have any advice for those entrepreneurs. When you were just getting started – what was the advice that you wish you had heard maybe a couple years earlier?

Sam Tuke: That’s a great question. I love that question.

Again, this is not necessarily specific to open source, but I once read that entrepreneurs don’t choose the right ventures, the right ventures choose them – I think that’s very true.

I think you need to keep throwing against the wall until you find something that sticks.

I think you need to have the courage to pivot over and over again until you find something that feels right and is sustainable.

I think wearing your core values on your sleeve is something I wish I had done earlier on. Because, as I mentioned, I’ve always been personally committed to open source, and I don’t talk about it nearly enough.

It’s proven to be a great motivator for staff in our company. It’s become something explicit over time in the companies I’ve worked in, and I could have been more explicit about that right from the start.

So when you know very clearly what your personal values are associated with open source software, I think it gives you an advantage to shout that from the rooftop, make it really clear, and don’t be shy about inspiring your workforce with those values, too.

It’s something that’s specific to what we do in the world of open source software, and it’s an advantage all of its own.

Enjoyment is critical. Enjoyment is a really important part of making successful products.

If you as a manager aren’t enjoying what you’re doing, if you haven’t been able to solve the enjoyment aspects of some of the work that you’re doing. For example, I’ve spent a lot of late nights on sales calls, which made me kind of miserable, speaking to Americans in California time zone. It can be quite isolating early on when you’re trying to get those first week sales, and you’re not sure what the person on the other end of the phone wants to hear.

That can spread, it becomes clear, it’s good to ask for support from your staff, to trust your senior staff, and to recognize that your own enjoyment of the work that you’re doing is very important, not only to you, but to all the people affected by your venture.

Obviously, your staff who see it reflected in the way that you talk, in the way you relate to them, also your family, and everybody who’s in your support network that you need in order to do what you do.

It’s not something that should be left as an afterthought, to think enjoyment of your work, even as an entrepreneur, even when you’re working 70-hour weeks, is really important. And if you leave it out, you will regret it.

Michael Schwartz: Sam, thank you so much for sharing your insights today.

Sam Tuke: Thank you.

Michael Schwartz: Apologies again for the acoustics in the room.

Transcription and episode audio can be found on opensourceunderdogs.com.

Music from Broke For Free and Chris Zabriskie,

Our audio editor is Ines Cetenji.

Production assistance and transcription by Natalie Lowe.

Operational Support from William Lowe.

Follow us on Twitter. Our podcast is @fosspodcast.

In the next interview, we hear from Emil Eifrem, CEO, and one of the founders of Neo4j, the company that defined the graph database segments.

Until then, thanks for listening.

Episode 22: Puppet – DevOps, Security, and Cloud Automation with Luke Kanies

Luke Kanies is the Founder of Puppet, an open source tool for software configuration management. In this episode, Luke discusses the fundamental challenges of starting, building and running an open source software business.

Transcript

Michael Schwartz: Welcome back to Open Source Underdogs, the podcast where we interview the founders of pure play open source software companies, and hopefully illuminate the business models that power their success.

If you’re not familiar with the Puppet platform, it helped define the market for configuration management as code. They’re also one of the pioneers of the second generation of open source companies, i.e., the company was founded after Red Hat.

Luke Kanies is the founder of Puppet. After serving as CEO for many years, he was elected to lead the board of directors as chairman. He’s working on a new startup, which he talks about in this podcast, and he’s helping entrepreneurs in an advisory capacity.

It was a great honor to interview, Luke. So without further ado, let’s cut to the tape.

Luke, thank you so much for joining us today.

Luke Kanies: Thank you for having me, Mike.

Origin

Michael Schwartz: Can you tell us a little bit about how Puppet got started?

Luke Kanies: Yeah. I think there is only the long version of the story.

I started Puppet around 2005, but I had begun doing the arguing, and research, and community discussions as early as 2002/3. But it was by 2005 that I kind of run out of other options.

I spent some time doing consulting and working at another company, trying to convince other people who had already had the technology that they should build a company. And by 2005, I both had run out of other options for myself to do as a means of making money, and it also concluded that none of the other more obvious people to start a business in the space we were going to.

So, the person who was running the CFEngine was going to start a company, and the person running the config wasn’t going to start the company. So, I basically said “well, if no one else is going to do it.”

There’s this old saying about “if you look around a poker table and you don’t know who the sucker is – it’s you.”

One time I was at the event, I looked around the table, and I couldn’t figure out who the entrepreneur was, so I said “well, I guess it’s me.”

So, I just quit a job making six figures, and didn’t know what else I was going to do. I sat down and I took the prototype that I built last summer, and started building a product around it.

Within about ten months, I had our first paying customer, and bootstrap for four and a half years, so we are run and profitable from about year on, and went from there.

Founders

Michael Schwartz: How many initial partners were there in Puppet Inc.?

Luke Kanies: Just me.

There are two other people who I gave the title of Co-Founder when they joined the company three and a half years later. But by then, we already had a complete product, we had a customer base, we were making multiple hundreds of thousands of large revenue.

I was able to pay them their previous salary when they joined the company, whereas I went without salary for ten months, and I went for two more years, paying myself less than half of what I had been paid previously.

By the time they joined the company, I was desperate, I was expecting twins any day now, so I was in a really, really tough shape. I think they both did good work for the company, but I would say that they were much more employees number 1 and 2, and I just called them founders because I was not making high-quality decisions about titles and things at the time.

Existing Community

Michael Schwartz: The point you started Puppet, there was actually no existing community around Puppet, you started it from scratch.

Luke Kanies: Yeah, that’s one of those rare cases where I started the company and the product about at the same time.

And I, from day one with Puppet, knew that I wanted a company around it.

At the time, we had this community at LISA. So, LISA is this system administration conference, it’s been there for a long time, and there was this smaller config management community within LISA. And I remember at the conference, we did these all-day workshops, and they’ve got maybe about 20 people.

I did a poll, “how many people here have written their own product, their own piece of technology, their own config management tool?” And nearly everyone in the room raised their hands. And then I said, “of all those tools, keep your hand up – is anybody outside of your organization still using it?” And Mark Burgess, who started CFEngine, he was the only one who kept to stand up.

There were already a bunch of other projects out there that existed, were in use, but really weren’t in use by anybody else.

And so, the challenge wasn’t can I build a piece of technology? The challenge was – can I build a piece of technology, specifically with the goal for other people to use it?

And from my perspective, the only way to do that was to say “my ability to eat is depending on your liking my product.” And if I can’t sell something to you, if I can’t build a business around this, then the product is not good enough.

That’s essentially what I focused on, and that’s why it slides in my presentation from 2006. I said, look, if it’s not good enough, I don’t deserve to eat. And that kept me focused on building something people would love, not just building something that I liked.

Initial Revenue Streams

Michael Schwartz: How did you initially monetize? Because that’s a lot of pressure to put on yourself, especially with an open source product. What was the initial monetization strategy?

Luke Kanies: Services. And, thankfully, in a lot of ways it was straightforward, because I had spent almost two years as a consultant before I started Puppet. Well, six months I spent in BladeLogin in-between. I spent almost two years as a consultant, and I mostly focused on doing CFEngine work.

I did two kinds of work with CFEngine. One was, I did training.

So, I would design a CFEngine training class, and had 20 people meet me somewhere – I don’t remember where it was – oh, I know. I flew out to Los Alamos National Labs and taught a class there. I remember I got paid $19,000 in a week for that. Of course, I did a ton of work in prep for that, so it wasn’t a week of work but it was a week on site.

I’ve also done a couple of essentially implementation projects, where I go in, and it’s about 50/50. At the end of the week, you’re going to have a running functional implementation and also at least one person who is highly trained in implementation.

When I started Puppet, I took that same basic model. We’re going to do training classes that cost about $2,000 per person, and we’re going to do like group trainings, and then we’re going to do on-site trainings, where you can pay for the entire company. You can pay for some people, it’s a fixed price for that group. And then, we are going to do implementations. The business model was already in place, built around the project.

When I started Puppet, I basically said, “I don’t know how this works.” I didn’t know how to negotiate pricing, I didn’t know how to think about value. I would just roll those same basic concepts, and do what we do at Puppet.

Ironically, if you look at our average sale price, ten years after I started those services, our average sale price for a downloadable installable software was within a couple of grand of my week-long services engagement that I started in 2005-2006.

So, I did a pretty good job of landing on a reasonable price point and getting to the point where I knew what I was doing, and how I was doing it, why I was doing it, and how much I could charge for it.

And then just for the next ten years, figuring out what else do I need to add to make it work, and how can I provide a better product, and then overtime, how to go from the first installation as $20,000, to a million-dollar installation, and then a ten-million dollar installation.

Initial Bootstrap Phase

Michael Schwartz: We’ll drill down a little bit more on the revenue stream business model stuff later, but I’m still interested in the startup phase. So, did you say it was four years until you actually raised the first round of money for Puppet?

Luke Kanies: Yeah, we were running profitable from 2006 to 2009.

I brought Andrew Shaffer in, Teo in 2008. We got offered a round of funding that year, but it was contingent on me stepping down as CEO, and there were some other things that we didn’t love about the round, so we turned down that term sheet.

I pitched to a few other investors before, not officially pitched but had conversations with. I had found investors who I would have taken money from, and I found investors who probably would have given me money, but I never found investors who were both of those things, who wanted to give me money and whom I would have taken it from.

In 2009, Puneet Agarwal from True Ventures tracked me down at an event, he said, “hey, we’ve been following you, we would like to give you money.” And I said, “well, that doesn’t sound right.”

Most investors, when they say, “we are interested in you,” say, “we should talk again.” And Puneet said – “we should talk again… On Monday.”

On one hand, I was interested in the things that come with raising money, but I’d been at a startup that had gone bankrupt because it raised too much money, and the investors brought in the wrong managers and all kinds of stuff – that was a more complicated picture because of market timing and stuff.

I had seen plenty of the bad examples, and so I was very skeptical. True Ventures was able to convince me that they were going to be a really good partner, and that they weren’t going to make a lot of the short-sighted anti-founder decisions that investors were famous for.

Overall, they’ve been a great partner. We got our first round in 2009, almost four years after Puppet started.

Startup Leadership Challenges

Michael Schwartz: Can you talk about some of the leadership challenges during those initial four years?

Luke Kanies: I mean, there weren’t any because I was the only employer, so essentially, I was the one out there doing all the work.

I was the only person there. I was trying to build a community, I was trying to build a product, and I was trying to build a business – all at the same time.

It’s worth noting, like, I wasn’t the developer when I started Puppet. I had written some small scripts before that, probably 2000-line Perl script before Puppet.

I have never written a line of Ruby until I wrote the prototype for Puppet. And I had never shipped software that anybody else has ever used, when I started Puppet.

So, in addition to trying to figure out how to be an entrepreneur, how to deliver services, and how to sell, I was also trying to figure out how to become a programmer, and how to ship software that doesn’t break, and stuff like that. So that was pretty much just me the whole time.

I did bring in Teo and Andy towards the end of that bootstrapping period, but in the end, by then, most of the questions you needed to ask in business, to figure out that we have a real business here, those questions were already answered.

And the rest of the questions to figure out, essentially, “how do we take what we have and scale it up, how to get the most out of it? How do we turn this from a one-person operation into a functional organization?”

Those kind of traditional scaling questions that I think are super, super important but are really, really different from “what problem are we trying to solve, how do we solve it, how we deliver it.”

Those questions were pretty much solved before I had my first employee.

When to Use Open Source?

Michael Schwartz: When do you think it’s appropriate to use open source as a development methodology, and when do you think you should patent and license your software?

Luke Kanies: That’s an impossible question to answer in the abstract.

It’s worth saying something. It’s not that I don’t believe in patents. For me, I would say patenting and licensing are orthogonal. I could totally see you licensing software that you don’t patent.

I will personally probably never bother to patent software – I’m not saying I absolutely won’t – but in software, I think patenting is primarily an anti-competitive mechanism for suing smaller players into oblivion, rather than the actual mechanism for publishing innovations.

I think it’s mostly the fault of the courts, that have just allowed pretty bad patent behaviors. Maybe someday software patents will be useful, I just don’t see that right now.

In terms of licensing versus open source, I don’t think you can answer that in the abstract. I think that you need to have a very good reason to go open source.

I think that you can name some companies today that have built really good solid businesses on open source software. But for every single one of those you can name, I can name a hundred companies that have built really solid businesses on commercial software.

And it doesn’t mean you should never do open source, but it does mean that the barrier for it being the right answer is much higher than it is for commercial software.

And there’s a trend right now where people say, “oh, well, in this industry, in this part of industry, infrastructure, you have to be open source.”

I would say to every one of those circumstances like, that’s just not the case – Amazon is not open source, AWS is not open source. The vast majority of what we use in our infrastructure is not open source. Cisco is not open source. Right.

There’s a story that you have to be open source, but the reality when we look at the stacks that we have to rely on, there is a lot of open source – but there is a lot of proprietary software. I think you just start with getting rid of the excuses for, “oh, I have to be open source.”

And then, you need to say, “Well, what are some really good reasons to be open source?”

To me, this is the interesting part of the conversation. The first thing is to answer the question “what are great reasons to open source my software?” And then, the next question you have to ask almost immediately is, “can I sustain a business in that case?”

I know there is a ton of really great open source software that has no business around it. And I think a lot of that is really important.

For me, personally, I’m primarily interested in open source entrepreneurship.

So, my fundamental interest is about the business side of any of this stuff. I’m much more of an entrepreneur than I am an open source person. If you had to get rid of one of those, I’d far rather never do open source again than never do entrepreneurship again, if that makes sense.

I do think you have to protect space to build your business as you think about what you are going to open source.

And I know this is going to sound cynical to some people, but I think of open source as primarily a marketing strategy: This is a mechanism for people to become committed to your product, without having to make buying decisions.

Sometimes, that commitment is a technical commitment. I’ve built this piece of your technology into my infrastructure, into my development workflow, into some portion of my life, and I love it so much that I want these other things that go with it.

Sometimes, it’s honestly just – I’ve got brand awareness because everyone knows about Docker, and so I’m going to go figure out whether I can get from Docker some money or not.

But I think that’s the right way to think about, not all, but most open source is, top-of-funnel, getting broad usage everywhere.

It is a fantastic freemium model with the one caveat – that the thing that makes people love your product is the thing that’s also available for free. Which means that building a business on it isn’t impossible, but, in most cases – you look at Splunk.

Splunk has an amazing, fantastic freemium business. But at a certain point, Splunk says, “you’ve got to pay me or you can’t use my software anymore.” And no one goes to Splunk and says, “how dare you ask me to start paying after 500MB?”

But if you had open sourced that, and said the same thing – “by the way, you have 500MB you should pay me.” Then, all the people would say “how dare you ask me to start paying after a certain point?” So, there is this challenge of messaging that a lot of people hear this as a permanent promise that everything will always be free.

That dynamic, and I wrote this article a couple of years ago, about the fundamental challenge of open source is that thing you offer for free has to be sufficiently great that people can succeed with it, but has to leave room for there to be some other thing you charge for.

In many cases, you rely on lightning to strike twice. The thing that’s free is great, AND the thing that’s paid for it is also great. And, as we know, lightning doesn’t usually strike twice.

So, it’s a kind of a pretty challenging conundrum, in my opinion.

Puppet Sans Foss?

Michael Schwartz: Do you think Puppet would have been successful if it wasn’t open source?

Luke Kanies: I think it’s a fantastic question, and it’s one I thoroughly enjoy speculating on.

I think – obviously this is a pure speculation – I’ve no idea. I would guess, that would be far less used, and it would have made far more money. That’s my guess. So, when you say successful, it depends on what you mean, right?

Downsides of Open Source

Michael Schwartz: What are some of the other downsides to open sourcing your software?

Luke Kanies: Honestly, I think one of the hardest ones is the messaging side. Because I recommend founders think about open source as a liability, in a financial sense.

What you’re saying your community is, I’m making the brand promise to you that this software will always be free and always be high-quality.

And that brand promise is expensive.

So, when you open source your software, you’re not just thinking about what can’t I do in the future, and things like that. Google shuts off products all the time. Google has a thousand products, and the average users do not care when Google kills Google Reader or kills Google Glasses.

But if your core product is something, and you go in and say, ahh, you know what – turns out we aren’t able to pay our developers with the business that we built. And so we’re going to have to fundamentally change our developer, or shut our whole project down. Because 99% of developers in this project are paid by my company. So we’re either we’re going to completely reframe our business and start charging basically everybody, or shut the whole thing down.

You’re breaking your brand promise.

And the brand promise was, “we won’t do this.” The brand promise was, “it always will be great and it will always be free.”

At least, it leaves not a lot of wiggle room to help people see, well, “*free” with an asterisk, and “yes, except…” And that conversation is really complicated.

So I think we got lost in the weeds of that conversation all the time. One of the things that happens is, there’s one person in the room that’s screaming all the time about licensing or something.

There’s some part of the open source ecosystem that demands a certain kind of fidelity, or a certain kind of allegiance, or a certain kind of zealotry. And if you refuse to commit to that kind of allegiance, then that person’s going to scream as loudly as they can all the time. And it’s really easy to confuse yourself into thinking, “that person represents the wider community.”

And sometimes they absolutely do. But in a lot of cases, they absolutely don’t.

So, you have to figure out how to have that conversation with your community. By that I mean, people who use your project, the people who contribute to it – and by contribute, I mean people who are on your IRC channels, or helping to ask and answer user questions, or responding to email questions – these are all super important contributions.

You have to be able to have a conversation with those people about, ok, where is this balance between survivability of the company that funds the vast majority of development on this project, and what the community needs to be happy, and things like that.

I think it’s a little bit like the relationship between unions and big companies. If you look at the relationship in Germany. Germany’s had unions for long-time, but Germany unions recognize that if they get too powerful, they can destroy the business. And the business has recognized that if they get too powerful then workers began suffering, and they recognized like this is the dynamic that we have to play with here.

It seems like, at some point in the 20th century in the US, the unions kind of stopped caring about whether the business they were working for was viable, and the dynamic got off. And the businesses stop caring whether the employees that they hired, what situation they were in.

And so, that dynamic is critical to the success of an ecosystem.

And if you were starting an open source business, or even just a project, you’ve got to be willing to sign up to manage that dynamic for the lifetime of your project, because it’s a really, really important part of people being happy.

And so much of it is: Are we meeting your expectations, what did you expect, and are we succeeding in those expectations? It’s not really about what you did, it’s about what you did relative to what they expect.

I think you have to think about that upfront. And you have to be willing to sign up for that work.

Training

Michael Schwartz: You answered one of my questions that I had written. I remember Puppet doing a lot of trainings, and I was going to ask you why, but I think you kind of just explained it.

Luke Kanies: Well, I think training is great for two reasons.

One is, it’s a fantastic revenue source. If there’s a demand for it, it’s an amazing revenue source.

And the second is, people are paying you to become experts in your product.

In my opinion, you should sell as much training as the market can possibly support, because it’s super high profit from a service’s perspective, it’s amazing business! And, again, everyone is now skilled in your product.

To me, there’s no downside and a lot of upside.

Michael Schwartz: Yeah, it’s challenging to build a good training program. We’ve been trying it with Gluu for a long time. And we want to, but it’s actually pretty hard to do it.

Luke Kanies: And especially – it’s one thing to have the intro training class, it’s another thing to have three tiers, and your product for this specific vertical, or for this specific type of user, so yeah, I totally agree.

Scaling Revenues

Michael Schwartz: So, training – it is a great business and it helped you get started. But you alluded to this earlier, to really scaled the business, you needed, maybe, some other way to generate revenue streams. How did you make that transition?

Luke Kanies: In 2010, we launched our first, what I would call commercial product, which was our first attempt at building a licensed product, rather than everything being free, and the only thing we offered were services.

I think as of maybe two years ago, or three years ago, we finally have some idea of how that might work in practice.

So, six years of trying from first released to, “oh, I think I know how to make this work in the long term.”

We were super early when we started, but then I thought “you know, I don’t know exactly how to make money, but I’ll copy one of those great open source businesses that are out there.” Or, at some point, after a few years, I looked up and went, “let’s count the open source businesses.”

And it was like, well, there’s Red Hat. Red Hat went public as a T-shirt and mug company – that’s never going to happen again.” Okay, well, that’s not a good example.

What about MySQL? Well, MySQL is now owned by Oracle. Now, therefore, no one else can ever build that same GPL-based relicensing business again. So that one’s out.

Well, who else was left? There weren’t that many other businesses left that I could use as an example. And so we were breaking far more new ground than I would have liked.

I always recommend founders do as little innovation as possible.

There’s like, part of your business that’s really innovative and risky? Well, don’t, like, invent other risks to other parts to your business.

Like, if you know your software is super risky, don’t be risky in how you think about your hiring practices. Don’t be risky in how you think about whether you are going to have managers or not. There’s just no reason to add more risk to your business.

We didn’t have a business model that we could copy very effectively. And you would probably recall we tried open core, but we tried a ton of different iterations of like, we’re going to have this complete feature be commercial, or we’re going to have the infrastructure components be open source, and the graphical components be commercial.

We were trying a bunch of those different things, and it all kind of ran into this cliff of – because the primary reason to do open source in most cases is: “I want you to become addicted to my product. I want to build the thing that you love.” And some portion of you are going to have a set of problems where my commercial product is a better fit, or you are going to decide for some reason, hopefully for a functional reason, but also for other reasons, to upgrade to my commercial product.

And the challenge becomes – you need to build something that is great enough for the free users that they become successful and happy, but that isn’t a complete solution, such that, at some point, they decide, “oh, we need to start paying them because we’ve hit some sort of barrier.”

That balance is basically where we spent 7, 8 years, trying to find that balance.

And we built a great business – so I don’t mean to say that we failed, or that we didn’t get a lot done, and make a lot of happy customers in the meantime – but from the business strategy perspective, this is something that we were kind of always messing with the throttle. Where do we put this line, how do we think about it.

And to be clear, I am on the board of Puppet, and I’m not directly involved in product strategy or building products, so this is all stuff you can learn from reading our website.

So if you look at our website right now, and you look at the open source projects that we are releasing today, you’ll see that they don’t follow quite the same model of – let’s build an open source engine with a commercial graphical interface on top of it, or a commercial packaging for it. And, in a lot of cases, it’s a different story.

And I think right now, the story will vary depending on the project. If you look at Lyra versus Bolt, the commercial strategy for those are different from each other, I’m pretty sure.

I think the whole industry is learning about how to do this right now, and we certainly have been part of that learning this whole time. Some of it has been quite fun, and enjoyable and educational, and some of it has been really uncomfortable, and at times miserable.

How To Get Customers To Pay?

Michael Schwartz: How did you actually make that balance, or more simply, what did you actually end up charging for?

Luke Kanies: I kind of reject the idea that we have a clear answer to that, or that we can have a clear answer.

I really wanted people to be buying software that made a big difference to them. But then, plenty of cases, people buy software because they thought it was the right thing to do, or people buy software because they really wanted a support contract, but we didn’t offer that separately.

It’s surprisingly hard to figure out what a customer’s motivations are, and obviously, you can figure out per customer, but you can’t go across all of your customer base and say, “I know what all of them are thinking, and I know why all of them are buying,” especially, as you get to a thousand, two thousand, three thousand customers. It becomes fantastically hard to figure out exactly why someone did something.

So, we sold a license to downloadable product that the vast majority of the software inside that product was open source software. But there were key portions of it that were commercial, and there were portions of the commercial that changed over the years, depending on what we built and what we found. This makes a big difference, this doesn’t make a big difference, this needs to be open, and this doesn’t need to be open.

We listen really closely to the market year after year, and change our behavior based on what people said.

In essence, we had quite a few separate open source projects, the biggest one, which was Puppet, and then a commercial downloadable product that combine all that together in one download.

Tools

Michael Schwartz: So, it wasn’t just Puppet, the license, but some of the tools in adjacent markets, let’s say, that you included in this Enterprise subscription?

Luke Kanies: Exactly.

As one simple example, Puppet has always worked for the small utility called Factor. And you can of course download the RPMs to each of those, but we would say, well, in our commercial product, we are going to have Puppet in Factor, and over time, we had to include our own separate Ruby because we couldn’t rely on system installations to Ruby for lots of reasons.

We found especially the way we use certain things competing with the way Rails uses certain things, and so we would have really significant incompatibilities between our Ruby and system Ruby. So, that was one of the things where we found that it was much better experience, from our customers’ perspective, if we distributed the entire stack that we were reliant on.

Over time, Puppet became much more reliant on the JVM. A lot of our core tech, like PuppetDB, which is this whole separate store engine that we built, that’s already in closure but runs on a JVM. That’s another example of, we’re going to deliver a lot more tech as part of that stack, to make sure that we can ensure that you have a positive experience.

That reduced the operating cost of not having to worry about package installation, of not having to worry about software upgrades or compatibility, or, “hey, does this installation of Puppet kind of compete with my production application?”

Those are examples of things that you get with the commercial products that are not technically commercial software, but they’re part of the operating runtime value of the commercial product.

Customers Who Want Commercial License?

Michael Schwartz: Did you find that some customers just didn’t know how to buy open source license, and that they preferred some of the liability, and protection and indemnification that came with a commercial license?

Luke Kanies: I mean, honestly, whatever you might be looking for, we definitely found people with those things.

We found people who were offended that any of our software wasn’t free. We found people that were still scared of open source. We found people that wanted to buy our product and would prefer we’d just never talked about open source. We found people that would buy our product, but then only use the open source versions, and not actually even use the commercial versions.

We found every kind of iteration. And over the years, those different iterations made support costs much, much higher.

You’d say “I’m going to do it my way instead of your way,” but then you call us for support, and it would take us three days to resolve your problem instead of five minutes.

So that’s one of the things that shifted our practices around what we’re delivering and what we expect over time. Because in order for us to make your experience better, and to reduce your problems, and if you have a problem that we can resolve quickly, we had to get a much narrower set of valid installations out there.

Why Transition out of CEO?

Michael Schwartz: So, initially, you rejected some venture capital offers because they came with strings of you not being CEO. But then after eleven years or so, you decided maybe you didn’t want to be CEO. Can you talk a little bit about why the reasoning behind that transition?

Luke Kanies: Yeah, it’s certainly complicated. As of 2014, by the end of that year, it became clear that I was no longer happy in my job.

And I’d say I was unhappy for a few reasons. And, I don’t think I’ll get it all in here, but I might get a little bit. There’s more I could say, but I will tell the high-level version.

Mostly I was burned out, I had been running in the red forever, I had rebuilt my executive team twice. It was clear at that point that some of my key executives were not going to be in the company much longer, either because I didn’t want them to be there, or they didn’t want to be there. And managing people is incredibly, incredibly hard. And success is critical.

I had put everything I could into helping these people be successful, and I didn’t have anything left. The thought of going out, trying to hire replacements was too steep a hill to climb a third time.

So, I said “look, I’ve done it as long as I can, I don’t have anything left to give.” At the same time, it was very clear. I founded Puppet to prove to the world that you can build a general-purpose automation system, that is of real value both to the companies but especially to the employees, the people doing the work, and actually building one and adopting one.

That you can build one where the mechanism for automation is text. Which means you can version control it, you can share it. Things that came before Puppet – this might not be super obvious, and CFEngine had this problem, but like all the previous like, widespread solutions did – if I had something that was great, I couldn’t email it to you. I couldn’t ever put it on GitHub.

In fact, in a lot of cases, I couldn’t even use it from one version to the next. I’d have to recreate all of my installations because they didn’t have this text-based configuration. And I wanted to prove that we could do that. I wanted to prove that it worked, that it was a good idea, and all these things. And we did.

But, when you look at my strategy for the first ten years of Puppet, it was all about getting a beachhead and organization, it was about getting the first 10% of every company in the world automated.

But I also realized the next challenge, the next ten years, it’s about getting the next 90% automated.

Not just the challenge, like, the technical challenges of that, but like the people challenges, and especially the contract management challenges of that, are really, really different from that first ten years, and those first challenges. And more importantly, they are really, really different from what’s near and dear to my heart.

I really respect the job of Enterprise sales, I respect the work of navigating an organization and figuring out how do I get a deal in place that the entire organization buys into enthusiastically; they don’t just write a check, but they actually use the software.

How do we get team after team after team, and exec after exec after exec to buy into this, in a way that they’re successful. And, you know, the company gets paid, the product gets used, the users are happy, the company is happy – that is incredibly, incredibly hard, and it’s not my skill set.

I am really honestly over-focused on the individual human, on the individual user, and I’m not great at thinking about the teams, and especially thinking about teams of teams – and that’s what the company needed.

The company needed somebody who was excited to have a complex, multi-team, multi-organization conversation about how the entire organization can use this product.

I think Puppet has actually scaled organizationally better than anything out there. If you look at, we’ve had companies where 70% of the company is using Puppet. We have companies where hundreds and hundreds of people are using Puppet. And there are a lot of other ways in which it scales organizationally just really, really well.

But from a deal-mechanics perspective, from what it takes for Puppet the organization to scale, I wasn’t the right person to navigate those. And when you find yourself in meetings where, I’m either having the same conversation I’ve had for a long time, because now we’re selling to more conservative systems instead of leading-edge early adopters. But also, I don’t ever want to sell to CIO. I just don’t ever want to do it.

And it’s not that I don’t respect them, it’s because they don’t use the software directly. I am personally interested in users, not buyers, not project managers. And you’ve got to be great at understanding and working with all of them to be great at Enterprise sales.

And I could tell what Puppet needed in the next 10 years was something else. I couldn’t get motivated to do that.

Now, the actual mechanics of how the transition happened were a little more messy than that, and I like to say it was my plan and the board’s execution of the transition. So, it’s been an interesting time.

But with Yvonne Wassenaar over there now, I’m super excited.

I think she’s perfectly positioned, she’s got a ton of strategy experience that every company needs. She was at New Relic when they went through that transition from entirely inside to this mix inside/outside sales. And that’s the stage that Puppet’s at.

So, having somebody who respects the fast initial adoption sale, but also knows how to build out that big large Enterprise sales – that’s the mix of business that we’re going to have in the long-term. And somebody who is excited about that and experienced about that is the right CEO of the Puppet. And that’s not me.

Luke’s New Business Idea!

Michael Schwartz: Do you think you’re going to start another company?

Luke Kanies: I already have.

Just super fast – I’m starting a new relationship management software company, focused on helping you ensure your most important relationships are healthy.

I think contact management is one of those, it’s like, one of the most important problems with the worst tools available today. So I’m hoping there will be some aspects that we’ll release that will be open source, but the core product, in this case, will be commercial.

Michael Schwartz: Will it be a SaaS product?

Luke Kanies: I don’t think it will. Man, this is so complicated. I’m doing like, six things at once, and the largest envelope with all those things is, my next 10-year mission is trying to convince the market that power tools are important, and that they have been under invested in.

And also trying to teach the market where a power tool is. And I think, I don’t know this, but I think it’s much easier to build a power tool when it’s local operations against local data.

So, you can have SaaS components, you can have backend headless services and things like that. But I think in general, a power tool – it’s hard to believe Photoshop could be as great if it was a SaaS product. It is hard to believe that AutoCAD could be as great as if it was a SaaS product – No.

Is it great if you have SaaS components? – Yes. But is the core experience ever going to be as good as if it’s a fat-client app, operating on a powerful computer in front of you? I don’t think it is.

That’s my operating like thesis right now – that we need to build power tools with local operations against local data, and we’re not trying to build it for everybody. I think too many companies are targeting products to be used by everybody – there’s two billion people online! That these should be used by everybody? I don’t want that.

Those two billion people, they’re not all going to pay for the same software, and I want to build a software that makes people more powerful. That means that I will need to build the software that you will need to pay for.

If you are not willing to pay what it costs for a cup of coffee a week on my contact management software, then we are not building anything for you. And that means that for most people, this is not the right tool for you. It’s only for people whose networks matter so much that they’re willing to invest time.

I’m not saying it should be as hard to use, but if your contact management isn’t at least as powerful as your text editor, like you made a mistake somewhere. Content management matters a lot to some people. Relationships matters a lot to some people. And the tools I have for doing it are nowhere near as complex as my compiler, my text editor, my project management software. All my developer tools are way more powerful than I had as a manager, or that I had as a leader, or hirerer, or as a CEO – all those tools were really simplistic. Why?

I think as a CEO, I deserve as complicated and powerful tools as the developer, or the sys admin, but they are not available. So, I want to try to convince the world that everybody deserves powerful tools. That your hotel cleaner deserves powerful tools, that your construction workers deserve powerful software tools, and it’s not just sys admin developers.

Challenges Of Open Source Business?

Michael Schwartz: Wow! Good luck with that. I think that, just as a data point, you’re recording on Audacity did not crash, and my SaaS recording tool did.

Two last questions. One’s about companies and the second one is about people.

The first question is: What do you think are the biggest challenges facing pure play, open source startups today?

Luke Kanies: It’s super easy. You are giving your product for free, why would anyone pay you?

That seems really obvious. There’s no other business where you give away your product for free, and then try to find some other way to pay it, that I know of. I think it’s super hard.

There are models that work, there are proven models. Red Hot got rid of their source RPMs, they made it harder to build a completely new, from-scratch copy of Red Hat.

There are some of those, but all those starting on a presumption that I’m going to get broad enough adoption that a 2% conversion rate, or a 5% conversion rate allows me to build a viable business. I think it’s conceivable, but it’s super hard.

Michael Schwartz: The last question is do you have any advice for the entrepreneur, the person starting the business – and it could be about not just necessarily the business challenges, but some of the personal challenges of starting a business, around open source software?

Luke Kanies: There’s a ton of advice out there, or really a ton of people who are trying to say “this is what entrepreneurship is,” and almost all that framing is “and if you don’t do this, then you’re doing something wrong.”

You know, there is this thread about the most successful people get up at six in the morning. Okay, well what if you are a night owl? Well, I guess you’ll never be successful. Suck it.

I’ve never gotten up at six in the morning, I can’t really speak coherently until at least 9 AM.

So I’d say, for any entrepreneur, it’s really easy to find advice that you will never be able to follow, and become dispirited, and feel like you’ll never be able to succeed as a result. I would focus much more on finding success cases and ignore the failure cases.

The things that you’ll never be like – if you can’t be like, then just ignore them. There are lots and lots of ways to succeed in general, so focus less on whether somebody else’s successes is replicable by you.

There’s a great thread on Twitter today about all these different amazing people who built great business, and how Jeff Bezos’ parents were able to give him $250,000 to start Amazon.

Ok – on one hand, Bezos is a great entrepreneur, but on the other hand, if he didn’t have rich parents, then we wouldn’t know if he could be a great entrepreneur.

It’s really easy to tell yourself a version of reality that makes it so it seems harder for you, but it might actually be literally harder because you don’t have rich parents, or rich friends, or a rich uncle, or whatever that is. And that is just being an entrepreneur. Full stop.

And for me, I would say, be really, really clear about why you’re doing open source. And then make sure that’s the actual thing you do with it.

If you’re doing it entirely for top-of-funnel for usability, for getting broad usage, and then you want to convert people to paying, then that’s a very different business than this small engine needs to be open source because it needs to be distributed everywhere, but the viable broader product doesn’t. That engine, being open source, may not have much implications in terms of your product. That’s what will be different.

Or, my partners really require this to be open source. Each of these point to a different business model, and a different set of constraints on you. And so just saying it all needs to be open source, or I have to be open source, is not really very instructive.

Be really crisp, and be clear, and put walls around it. Then ask yourself “can I build a viable business outside of those walls? Can I build the business that I want to build?” Because I guarantee, whatever it is – you could build a services business making half a million, a million, maybe five, or even ten million dollars a year – but that might not be the business you want.

And if your goal is to go out and raise ten million dollars in venture capital, or a hundred million dollars in venture capital, I know that that’s not the kind of business they want. So, you’ve got to be clear enough about why, and then what’s left, and then what’s left is enough to build the business that you want to build.

Michael Schwartz: Awesome! Luke, thank you so much for your time today and sharing all that with us.

Luke Kanies: Thank you for having me on the show, Mike.

Michael Schwartz: Transcription and episode audio can be found on opensourceunderdogs.com.

Music from Broke For Free and Chris Zabriskie. Our audio editor is Ines Cetenji.

Production assistance and transcription by Natalie Lowe. Operational support from William Lowe.

Follow us on Twitter, our handle is @fosspodcast.

In the next interview, we have Sam Tuke, the CEO of pHplist, an open source platform for email communication management.

Until then, thanks for listening.

Episode 21: Couchbase – NoSQL Engagement Database with Ravi Mayuram

Ravi Mayuram is the CTO and SVP of Engineering at Couchbase, a NoSQL vendor responsible for the Couchbase Server, an open source, NoSQL, document-oriented database. In this episode, Ravi discusses how an entrepreneur may successfully orient themselves around the problem they’re solving.

Couchbase
Transcript

Intro

Michael Schwartz: Welcome back to Open Source Underdogs, the podcast where we talk to the leaders of successful open source companies about the business model that powers their growth.

This week, we’re excited to have Ravi Mayuram, CTO of Couchbase. In the interest of full disclosure, Couchbase is the latest database supported by the Gluu server.

We’ve been super impressed with the technology, their level of engagement with customers, and their flexibility to find ways to work with us.

Ravi gives a pretty good technical and business overview, so let’s just dive into it.

Ravi, thank you so much for joining us.

Ravi Mayuram: Thank you for inviting me.

Michael Schwartz: So, how’d you get involved with Couchbase?

Ravi Mayuram: That was a good number of years ago.

In the early stages of the Couchbase, there was a lot of exciting stuff going on here. And my own experience with some databases had led me to thinking – with all this innovation that is going on, with the new way of development paradigms and the new way of the data being more flexible, what should be the answer?

Some of us were thinking in terms of how to get going on that, and Couchbase was doing some of the stuff, so I started to talk to some of the people here, and that excited me to sort of jump in and get the journey going to where we are right now.

What Is Couchbase?

Michael Schwartz: This isn’t a tech talk, but maybe just to help our listeners, could you explain a little bit about what makes Couchbase different than other databases?

Ravi Mayuram: The fundamental question we were sort of asking ourselves when we began this journey was – many of the assumptions that we had to make when the relational databases were built are no longer true, memory is a way cheaper, network is a way faster.

And the entire application development paradigm had completely changed. There was no object-oriented programming, back in the day when the relational systems were built.

So, every paradigm around the database has changed. But the databases that we were still using, the relational ones, which were predominantly the ones that used technology that was developed some 40 years ago, in the late ‘70s and early ‘80s, whereas every other piece that we talked about has completely changed since then.

So, in this new landscape – what assumptions would you make, and how would you build a new database? So, that is the fundamental premise.

And what are those pieces that are worth keeping? One of the lessons that we had learned – from the relational work – what would you like to keep, and what would you really like to change or design differently?

If we look at it from that perspective, we would like the databases to be a little bit more memory-friendly, and network-friendly. These were the two assumptions you could make earlier, so it was very disc-oriented.

Also, a single system, if you will, a single-node system is where relational systems work, because you could never rely on the network back then.

So a distributed database, which is memory and network-centric, would be one element of it, from the standpoint of how infrastructure and how the bottom-half of the database need to look at the problem. And on the top-half was all this change to the object-oriented programming paradigm.

So, in this paradigm, there is already this object-relational impedance, as we call it. And how do we basically solve that, how do we make databases that much more natively plug into the application development paradigm now, which is object-oriented, and the World Wide Web is here, JSON has become this lingua franca of the web.

In this circumstance, where any endpoint that you talk to is describing and consuming JSON, in this object-oriented world, what would be the database’s role? How can it become easier and a help to the application developers, as opposed to being the friction point between an application, developer, and finally, when you want to roll something out, to production.

How do we solve these problems?

In a manner, which takes databases forward, it’s not worrying about whether it is SQL or NoSQL, but how do databases need to move forward. And what would be those foundational changes that we have to make, and what are those good lessons that we’ve learned from databases that we must keep.

And so evolved the journey at Couchbase, in building the new data platform, which is based on the NoSQL technologies, and the lessons learned from there as well.

Why Open Source?

Michael Schwartz: So, where does open source fit in the strategy?

Ravi Mayuram: A very good question. One of the lessons in the last 40 years of software has been to move from what we used to call monolithic stacks to open systems, open source.

And that movement has been basically lead because of this reason that, no matter how friendly, or how much APIs that you have there to integrate into systems, you always needed to make that little tweak or a change.

You didn’t want that to be hidden behind some proprietary wall, where you couldn’t see how the software is actually going to run. So, integrating multiple components into one place, that has always been a huge pain, because it’s not, you know, “I can take bridge at A and consume bridge at B.” It’s not that clean. You always have to do some last-mile programming, if you will, before two components will talk to each other.

And you need to understand how these components work. And so, having the facility to observe under the hood, and so the open source movement began. That also gives you the ability to help within a community around how we are building, which is very important for adoption of a technology.

These two elements of sort of having a community as well as an ability for that community to feel that they can own a piece and move that forward, which will both solve their problems as well as move the consumer software forward, is generally the motivations behind the open source.

And a platform, like a database, or a data platform like ours, requires the community to come together and consume this move, this forward, and benefit from that, as well as the company that’s doing this benefit.

The lesson learned is to start with an open source sort of a paradigm and ethos, and cultivate that community. That way you get to be closer to your users, you learn from them, you adapt to changes faster. Instead of doing the classic full-on cycle of focus groups and everything, you can basically go faster by interacting with this community.

It’s a win-win on both sides, and that is always one of the motivations for the open source-based companies like ours, which want the community, as well as monetize on the back side when the deployments are serious enough.

The Couchbase Community

Michael Schwartz: Can you just describe the community?

Ravi Mayuram: The community is a set of developers who are building applications on top of platform like Couchbase.

In this case, our community is those developers who take Couchbase, and build applications, the modern applications which are the ones that require flexible data model, performance, scale, what are all the other requirements that they have, which the older relational databases could not service those needs.

That generally becomes our community, the community of web and mobile developers, and perhaps even beyond, in terms of the types of applications that are getting built on Couchbase.

What Features Are Open Source?

Michael Schwartz: Couchbase has a very nuanced feature matrix, in terms of which features are community and which features are Enterprise. So I guess I’m wondering – is the functionality that’s in their community software enough to actually have a large community who actually uses this for production applications?

Ravi Mayuram: Actually, our general philosophy is to enable the developer and monetize deployments at scale.

So, from a feature functionality perspective, we do not sort anything back. What we basically have in the community edition, developers can go freely develop anything that an Enterprise can, actually.

But where the functional feature differentiation comes in, features like security, scale, performance, because we believe those are functions of large-scale deployments – which only major, successful Enterprises will need. And that’s where we would like to monetize that.

From a sort of API level, there is nothing that you will not be able to build on a community version, which you can only build on the Enterprise.

So, I hope I clarified that nuance. Yes, there are certain pieces which are Enterprise-only, but they fall mainly under the category of security, performance and scale, and manageability – a certain amount of manageability features, because you would need that only in large deployments.

Per Server Pricing

Michael Schwartz: On the licensing side, you license per core. Is that right?

Ravi Mayuram: We license per server, and there are three – small, medium, and large, if you will, in terms of the number of cores per server.

And that’s how we tier this thing. Per core pricing is not where we start. It’s basically built on the small box of 16 cores, from 16 – 64 and above. I think that’s how we tier our pricing model of – it’s per server licensing with a number of cores, as opposed to per core.

Michael Schwartz: Is that because, for most of the Couchbase Enterprise deployments, you’re seeing dedicated servers, for this database, and not containers, or VMs, etc?

Ravi Mayuram: Basically, it becomes easier from the standpoint of people who are procuring. Even about 40% of our customers have their stuff on the cloud, even they are provisioning, based on the quantities that they can buy, which is based on 3X large, or 4X large. So it comes with a certain number of cores per server kind of notion, as opposed to core pricing.

And so that was easy to start there, so it’s easy to describe and sell that, versus how many virtual versus real. We are a little bit more in the earlier stages of the company, so we are a little bit more lax, and we would rather have option than monetize every bit of it.

Challenges Of Containerization

Michael Schwartz: Do you see any challenges though with containers and some of the elasticity as pooling up and down servers and scaling? It’s hard to know, like, how many servers or even how many cores you have, and that’s a moving target overtime? How do you deal with that?

Ravi Mayuram: Yes, I think it is a little bit of the elasticity, the core thing that has really changed, if you will, in terms of consumption models.

So, it has become sort of utility computing, and in some cases you would call it, or shows on demand pricing, and there are more ways to get to the same problem. But cloud is all about elasticity, and capacity on demand is what it comes down to.

So, yes, you will not be able to squeeze the last drop out of it, but for the most part, you can get to it through a different proxy in terms of how much the API calls, how many are actually happening, how much throughput you are getting. So that’s another proxy for exactly how many cores one CPU is using.

But, the back end of the computation is always at the CPU core level, which is another way of sort of, may be more coarse-grain, as opposed to being too fine-grain, in terms of ops per second kind of monitoring. But we can get there as well, and we will get there.

At this point, we were just skeptic, like I said, simple and coarse-grain, so it’s an easier conversation in terms of pricing and adoption, and not worrying, in terms of – it’s a little bit more wholesale than retail, if you will, so that makes it easier.

License Enforcement

Michael Schwartz: License enforcement – are you actually enforcing the license, or is it just on the honor system?

Ravi Mayuram: It’s the honor system at this point. The licensing enforcement is not there, like it is one lesson learned from the ‘90s of not doing license managers. But, there is monitoring capability, so the rest of this commercial discussion happens based on that honor system of the usage. And most enterprises are very amenable to that, and that’s why we don’t see that to be any sort of an issue.

Michael Schwartz: It’s a lesson learned from the ‘90s that the licensing server could cause an outage, and you just don’t want that?

Ravi Mayuram: Exactly.

Michael Schwartz: The last moving parts that you need in a database, from a standpoint of anything is that it can limit your ops per second, I think that is the right way to go, and not impose more software on it.

Customers Of Couchbase

Michael Schwartz: Okay, can you describe who are the customers of Couchbase?

Ravi Mayuram: Our technology, being a horizontal one, is pretty wide.

It goes all the way from financial services to eCommerce, to gaming, to streaming media, the top 10 in any of these segments. I can go on and on, in terms of areas like travel.

Six or seven major segments, in which we have the top 10 using, there are about another six or seven verticals, if you will, where the top five use this. So, you can imagine our spread in the types of use cases, as well as performance, and the scale requirements, because these are the digital leaders in their segments, so they are the ones who are in the forefront of technology.

And their demands are something that has never been met in many cases because they never have the technology to go to this global scale. There are places where there are like 1.5 billion ID’s sitting in Couchbase, servicing any touchpoint. There are places where people are doing 8 and 9 million operations per second for travel reservations and the stuff.

There are places where people are doing customer 360, where they are managing hundreds of millions of documents, which is basically the information that is coming from multitude systems in one place.

Airline reservation systems are running on Couchbase, flights cannot take off unless that transaction in that sense goes through Couchbase.

Logistics companies uses any bit of information that you’ve actually seen in terms of packing their packages runs on Couchbase. So, high volume, high transactional stuff, which is globally scaling with geo-distributed data, and guaranteed performance, whether you’re the first user or the millionth user, you get the same low-latency.

These are some of the use cases where Couchbase shines, and many, many, many mission and business-critical applications are run on Couchbase. That’s what keeps us going here, that’s what gives us all the validation for all the hard work and the deep work we do in the architecture of the product.

Is Couchbase Only An Enterprise Model?

Michael Schwartz: You know, when I hear that requirement, I almost think that it’s only a requirement that large Enterprise has. So, there’s no small businesses that need this like super high throughput and multi-data center, let’s say, redundancy, and fast-response times. So, it’s not necessarily an open source type of problem, though.

Ravi Mayuram: Actually not, I would beg to disagree.

Simply because, what has really happened, if you look, is that, back in the day, most of the systems that were built for Enterprises, small, or medium, or large, is basically for those systems to be targeted to a set of agents – who are the middlemen between the end-user and the service – to which they were the agents: A travel agent, a call center agent, or any of these agents, you can keep looking at all these agents that you’ve had in the past.

The real movement that is happening now, this is the digital transformation, we call it “disintermediation of the intermediary.”

If you look at who is doing the travel reservation, there are no more agents. It’s you and me doing the travel reservation.

So, your world is your community right now, in terms of your user base, if you will. You have a billion users who are all on the internet, on the information highway, if you want to call it. They are the ones you’re servicing. Every small business that they put their first service up, that’s why going to the cloud is important to them, because it’s got the features – it can give you the performance at scale, it can give you the reach across the globe, across different geo-centers.

So, these have become table stakes now. It is not just a requirement, which is only for the 50 companies on the top.

Every gaming company that is coming up and wants to put up its first game, they should have a hundred million users, running on their software. And you need to show the leaderboard of the Five Guys who are actually on the top of that thing – how do you get to those Five Guys a hundred million users playing the game? That is a challenge that a platform like Couchbase solves for them.

And the same thing happens across the globe in any kind of service, if you want, to small, medium, or large. Your problems are the same.

The larger enterprise is, this problem is persistent and continuous throughout the year. And the smaller ones, the span of this, maybe, they use one or two applications, but the intensity remains the same. Does it make sense?

Develop But Scale

Michael Schwartz: Yes, I guess what you’re saying is that if you’re launching a game, you start with Couchbase, and you develop it on Couchbase, and then if you need to scale it to billions, you don’t have to re-architect your application?

Ravi Mayuram: It runs on my laptop, or it runs on three nodes. That is fine as far as a developer is concerned, but seamlessly, you’d be able to scale this to 1500 and more clusters, and across three geo-centers with redundancy, and geo-distribution of data, and manage your GDPR requirements of data privacy – all that stuff with a click of a button.

So, stuff that you can do on the glass, without you ever having to go back to redesign your applications. That’s what we really built here, so that it becomes easy. Our general mantra is “develop with agility, deploy it at any scale,” anywhere, whether it be bare metal, or virtualized, or containerized, or in the cloud – all orchestrated and managed through one common infrastructure.

And I think that is what you need in this stage, because there are a lot of unknowns that are thrown in your way.

Your application can change, your deployment can change, your usage patterns change. Your data needs change, so this is the database that is built for that change, and built for a failure. Because you should be basically taken into account that when you’re running such a large-scale system, it can fail.

Your act can fail, your data-center can fail, your cell tower near you can fail. Yet, your application should be running, and be able to recover, and go back, and get the job done for you.

That is what we have, and all this with as minimal manual intervention as possible. We have automated a lot of that stuff to make the problem appear simple to the end-users, where we do sort of heavy lifting to solve difficult problems underneath the hood.

Can The Community Contribute?

Michael Schwartz: This is probably an understatement, but what you’re doing is actually very difficult. And my question is, the open source development methodology has been good for innovation, but because what you’re doing is so hard – can the open source community actually contribute in a meaningful way?

Ravi Mayuram: It’s a good question. Yes, they can in certain areas. And in certain areas, perhaps best left to the professionals.

What I mean by the code innovation in distributed computing, our code innovation in some deep areas of transaction, or multidimensional scaling that we do, those are not the areas where community can actually get in and develop some new feature.

But there are a lot of consumption-oriented stuff on this platform that needs to be built, because a database doesn’t stand alone by itself. It’s got to be in the ecosystem. There are so many tools and integrations, and all those interactions that actually have to do with the database that needs to be built.

And our client API’s, there’s a lot of stuff to be built out there, because there are so many new frameworks and paradigms coming out there. So, that’s where we find the community involvement. And by doing that, they actually enhance the core of the product, with even some code in some areas, by suggesting, “hey, how about we do this for it to be more secure, or for it to be easier and more flexible?”

So, from that experience, we learn, and the community also contributes. In some code areas, there’s less contribution, but in some of our client, and integration, and tooling areas, there is a lot of excitement from the community.

Evolution Of Monetizing Strategy

Michael Schwartz: I realize you haven’t been there since the beginning, but you’ve been there for some time. I’m wondering if it’s really hard to get the monetization strategy right for open source companies? Has there been any evolution of how to charge, or what to charge for overtime since you’ve been there?

Ravi Mayuram: Yes.The evolution basically has been in terms of bringing more capabilities into the platform and charging from the standpoint of solving tougher issues in the platform.

So, the philosophy is, bring more logic to data as opposed to moving data to logic.

This is the fundamental problem, in one sense, this platform style thinking actually solves. Which is, earlier you would have a database. Then you’ll write a connector to move this data to a search. You’ll write a connector and move this data to a warehouse. You will move this to a faster performing cache.

So you are a sort of duplicating data all over the place. And the problem with the duplication of data of course is more usage of the resources, but the bigger problem is consistency. You don’t know which is the consistent representation of the data is because you have just copied them all across.

So, in this platform, what we’ve really done is bring a key-value, a standard second index with a coding capability, with a full-on coding language. And for this, we very deliberately chose a sequel because that’s the only coding language that has withstood the test of time in the last 40 years.

And then, we added the search, which is the inverted or excel analysis base search, not the classic database type search – this is the information that will be truly sitting next to a database.

And, finally, we added the analytics piece to this one, so you can do an analysis of the data that you have in the same platform. For the first time, you can do these four things in the same platform, and workload not impeding the other – that’s what the magic is.

And, now, by doing this, what we have really done is added different types of workload underneath our platform, and so, the way we monetize this platform is by different types of workload actually running on the same platform. So that has basically been the evolution.

When we started, it was a straight-up key-value store, so you could get set, update and delete. That’s all the workload we are monetizing.

Now, we can monetize beyond that, select start from workload along with all the subqueries and SQL-92 standard queries, so you can write a serious enterprise app on top of this. And then, you can do all your faceted navigation, and search, and textual analysis. That type of application, that workload can run on the same, so you always have had this problem of trying to do, or solving a search problem away from a database problem – you don’t have to do that now.

And, finally, for all this data that are sitting in this platform, you can run your analytical query, which is a pretty heavy workload as you can imagine. And we have a query engine in the back, which is chewing through that.

In the same platform, we have workloads, which are microseconds, which is our key-value get sets, millisecond response time, which is our query. It is the same millisecond response time for our search, and finally, tenths of seconds or even hundredths of seconds, for our analytical queries, all running into the same platform, one not impeding the other.

So, kind of what we call “Hybrid Transactional Analytical System” is what this platform is.

So, how has it evolved? Different workload has been added and serviced under the same server, and so, generally, the monetization workspace on the capabilities that we have added here.

Partners

Michael Schwartz: Switching gears just a little bit, I wanted to ask about partnerships. There is technology partnerships with other vendors, but I guess I’m more interested in sort of the channel partnerships.

Has Couchbase been working on developing channel partners? And how has that worked out for you? Has it lived up to your expectations, or just, how’s it going with the partnership side?

Ravi Mayuram: We have started to build those out the last year and a half or so.

We have channel partners, we also have ISVs, and also we have the GSIs, as Global Service Integrators. These are different channels through which we are pursuing the further adoption of this.

You can see some of our partners in our sort of channels and partners website. I wouldn’t want to pick any one of them out to highlight, but we work with technology partners, we work with channel partners, we work with GSI implementers of our technology, and that’s generally our strategy.

As a platform, we need to be where, so to say, where the conversation is, and in many cases, partners are in those conversations, and we work with them to be in those conversations.

Partner Support

Michael Schwartz: Have the partners been able to take over some of the support burden from you?

Ravi Mayuram: Yes, but it’s an evolving thing, where they have been able to take on some.

I would say they have made more progress in taking on the professional services or the servicing element of it now. Eventually, they’re also getting geared up for some of these support needs, which is an automatic organic evolution from there, so those are in the stages of infancy.

History Of Couchbase

Michael Schwartz: One historical question. Couchbase, when I mention it to people, sometimes there’s some confusion around CouchDB. Can you talk a little bit about sort of the evolution of, are those project-related, or how did the name come about? Just help people understand.

Ravi Mayuram: Actually, the genesis of Couchbase is the merger of two companies, a company Membase, which was the company behind the Memcached, the open source project, and CouchOne, which was a company behind the CouchDB project.

The people that were behind the CouchDB project came over to this merged company, and they brought their ideas. So, the CouchDB was what was built earlier, that’s a separate thing. Couchbase, the code base has indigenously evolved here, a combination of what was Memcached, and eventually, what we added to that, in terms of the persistency.

That is the evolution, and at that stage then, it was a merger of two equals, Membase and CouchOne. Obviously, the name had to have both parties represented, so it became Couchbase, and since then, CouchDB vs. Couchbase has been a question in many people’s minds, but we do not share any code between these two projects.

Couchbase, if anything, has the API compatibility with Memcached protocol, and so, it’s more of the Membase interfaces, plus all the stuff that are developed on top of it.

Couchbase As A SaaS Service

Michael Schwartz: Are you thinking about launching a SaaS service, or maybe you already have a SaaS database-as-a-service?

Ravi Mayuram: We have a Couchbase managed service available, which is offered since last June timeframe or so. Database-as-a-service is an area we are really actively thinking, and it will be the right time to talk about what we’re doing there.

Open Source Strip Mining

Michael Schwartz: You surely have been following all of the sort of controversy around open source strip mining and evolution of licenses to prevent large SaaS providers like Amazon, from monetizing your hard work.

Any thoughts about sort of what’s happening there right now? Is this a good thing for open source-first SaaS providers, or is it a natural evolution?

Ravi Mayuram: I think there are few classes of open source software, and so, whatever the behemoths do, it should be consistent and fair from that standpoint.

There are open source projects which are started by communities, so there is no single company behind them that was putting the resource and money behind it to develop that, it just came about because of a set of people who started to develop something.

If they are going to monetize on that, then there should be some way to share some of bounties from there, with that community. How that can actually happen has to evolve, but that’s one set.

A company like ours, or many others out there, I recently saw news about, yet another open source-oriented company, source being formed and offered as a service.

In all these situations, it’s a question of fairness, like you say. And, yes, it’s an open source thing, but it is an open source, you should think of it as, in one sense, as an escrow of the core, with the customers who want to actually buy.

Somebody else profiting from it, without actually contributing to it is where the unfairness of it actually comes about. If that is a really clear way of contributing first before monetizing from there, I think there will be a lot less heartache, in terms of how some of these bigger companies are approaching this problem.

I would rather they all become part of this community and contribute to it, and after that, them offering some of the stuff as a service would seem fair.

Advice For Entrepreneurs

Michael Schwartz: You’ve probably talked to a number of entrepreneurs who are starting companies around open source software. What is the advice, or do you have any advice for those entrepreneurs?

Ravi Mayuram: I think there are a couple of things that any entrepreneur first has to be very focused on.

First is the problem that they’re actually trying to solve.

You have to be very close to the problem first, you have to live it, you have to understand the problem. You really need to have your value proposition in solving the problem.

Whether it is open source, or not, is a decision that you can take eventually. Because the reason why I’m saying that is that, otherwise, you get into this popularity game, and monetizing has got nothing to do with the popularity game. It’s not based on eyeball revenues, those days are over.

You need to be really solving a difficult problem in the domain that you are entering, that there is value in that.

Even if you open source stuff over there, you will not lose value in what you are actually providing. So get close to the problem, talk to the people who are living the problem, and evolve your business plan around that.

If you solve the right problem, will they hire you to solve the problem is the question you need to ask. If I build this, will they come?

If that question is answered, open versus closed, and all these are fait accompli, which will take care of themselves, and even if someone actually profits from your open source, you will profit even more. I think that’s what market’s actually treating in that way.

So, licensing, open sourcing, somebody else running your stuff – these are all the secondary issues eventually, if you solve the real problem correctly.

And of course, you have to have defensible stuff in there, in terms of what is it that you’re going to have, which is your magic sauce versus what is it that is really available. That is what really will take you to your promised land.

Closing

Michael Schwartz: Good advice, Ravi. Thank you so much for joining us today.

Ravi Mayuram: Fantastic! Thank you for having me. It was a pleasure talking to you.

Michael Schwartz: Thanks for the Couchbase team for helping to schedule with Ravi.

Transcription and episode audio can be found on opensourceunderdogs.com.

Music from Broke For Free and Chris Zabriskie.

Our audio editor is Ines Cetenji.

Our production assistance and transcription by Natalie Lowe. Operational support from William Lowe.

Follow us on Twitter. Our handle is fosspodcast.

Tune in next week for the conclusion of Season 2.

Until then, thanks for listening.

Episode 20: Redis Labs – Database for the Instant Experience with Ofer Bengal

Ofer Bengal is the Co-founder and CEO of Redis Labs, home of Redis, one the world’s fastest instant experience databases. In this episode, Ofer discusses the evolution of open source software in the cloud-hosted market.

To note: This interview took place a few weeks prior to Redis Labs’ announcement of an updated license for modules created by the company. You can read more about the Redis Source Available License (RSAL). Open source Redis continues to be licensed under BSD.

Transcript

Intro

Michael Schwartz: Welcome back to Open Source Underdogs, the podcast where we cash the collective knowledge of founders, who use open source software as part of their business model.

No company has been more central to the discussion of open source business models than Redis. Just google Redis and Amazon, and you’ll get back pages of results.

When I was in Tel Aviv, it was a great honor to interview Ofer Bengal, CEO of Redis, in their awesome new office.

So, without further ado, let’s cut to the tape.

Thanks so much for joining us today.

Ofer Bengal: Thanks for having me.

Michael Schwartz: I’ve started four companies, which is more than anyone I know, but I think you’ve got me beat. How many companies have you started? And how did you come to get involved with Redis Labs?

Ofer Bengal: My story is a bit unusual because of my background, I’m an Aerospace Engineer. I got to the high-tech business by some sort of coincidence.

For years, I was designing airplane modifications and installations on war airplanes like F-16, F-15, etc. I did it for the Israeli Air Force, and then, I started my own sort of consulting company in the same area, doing work for American companies, Israeli companies, got bored with it, and started to invent toys. Sold some toy concepts to American companies like Coleco, the Time – I don’t know if you remember that company – the Cabbage Patch Kids, Hasbro, etc.

Then I wanted to start my own toy company, which would not just invent toys but also manufacture them. It was 1980 some, I prepared a very nice business plan to raise money for a toy company, can you believe it, so, no one wanted to invest in that company, except for one person that was from the high-tech business in Israel.

They were two brothers, who were the fathers of the pioneers of the high-tech business in Israel, their name is Zisapel. The guy told me, “give me the stuff to show my kids, if the kids like it, I’ll invest.” That’s the due diligence. He came back after the weekend, “the kids liked it, and I’m going to invest.”

A few days later, he said, “You know, I even have a better idea – why don’t we start a data communications company together? I’ll put the money and you will manage the company.” I said, “why are you even suggesting that because my mind is in toys now?” He said, “you look to me like an entrepreneur, pushy, etc, so I would like to bet on you.”

I said, “no, thank you, I’d like to carry on with toys.” But later on, once I couldn’t find more investors, I gave up, and I started a data communications company. That was back in 1991, or so.

And from then on, that company I took public at NASDAQ in ’97, and then later on, I started another company, which I sold, and then another company, so it became back door to the high-tech business.

Michael Schwartz: So, how many companies is that?

Ofer Bengal: Basically, in terms of starting companies, I started four companies in my career, and then managed another two on request of venture capital firms. One for Sequoia, one for Star Ventures. And these companies were a bit in distress, and I was called to try to save them.

Origin

Michael Schwartz: In 2015, Redis Labs hired Salvatore Sanfilippo, the original author of Redis, but before that, you were using the Redis name, you’d raised quite a bit of capital from Silicon Valley – did you learn anything from that process? And looking back, would you have done anything differently?

Ofer Bengal: Not really. Like many other companies, where you start is not where you end.

When we started in 2011, the database market was dominated by very large companies, like Oracle, and it didn’t make much sense to start a database company at that time.

We, me and my partner, who started the company, came from the application acceleration space, and we thought that we always knew that whatever you do in the front end of the application, the database is always the bottleneck. We thought that we should do something around it, and we started with cashing systems for accelerating databases.

At the same time, when we just started, we found a relatively new open source by the name of Redis, which was started by an Italian guy, Salvatore Sanfilippo. And we thought, hey, this is cool – let’s take it as the engine under the hood for what we were doing at that time. And so we did.

But after a year, we saw that this open source is becoming extremely popular, and we said, “maybe, we’re in the wrong business, and maybe we should turn the company and make it a Redis company.” So, we did that.

A couple of years later, Salvatore joined the company, and he is now leading all the activities around continued development of the open source.

Now, a word about Salvatore. This guy started Redis, and the first version, I believe, was out in ‘09. He did it initially as a part of the project he was doing for Telecom Italia. He was looking for a very fast database, he couldn’t find one, so he decided to develop one by himself. He didn’t have great expectations from that and just put it out as an open source.

That was ’09. Around 2011, Redis started to pick up and became extremely, extremely popular. Today, it’s one of the most popular databases in the world, and definitely one of the most popular open source projects in the world. So, that’s a little bit of history of Redis.

Customer Segments

Michael Schwartz: Most of our listeners probably know that Redis is used by a myriad of organizations, and Redis Lab has thousands of customers. But, when your potential market is so broad, how do you segment the customers?

Ofer Bengal: Redis is very horizontal in nature, so it covers many, many use cases for modern applications, and that’s why you find Redis today in almost any enterprise in the world, not to mention startup companies, developers, etc, etc.

We basically sell to all industry verticals, so just to give you some names.

In banking we sell to American Express, Wells Fargo, Credit Agricole.

Financial Services: MasterCard, Visa, Intuit, Fiserv.

eCommerce: Walmart, eBay, Starbucks. Social: Twitter, Twitch. Media: MSN, DreamWorks. Advertising: Havas, Rev Mobile, Outbrain. In technology: Apple, Cisco, Dell.

In communication, Comcast, AT&T, Verizon, Vodafone. And so on and so forth, in other industry verticals.

Michael Schwartz: I guess, my question was, because you can sell to anybody, do you break up the customers into different types and segment them in any way, when you look at them from a marketing perspective?

Ofer Bengal: We look at few dimensions.

First of all, we look at what are the capabilities of the database.

We map that into use cases of modern application. And then we map that into industries. We have all these matrices of mapping, and we have white papers and explanations for each of those. The idea is that, today, the world of databases has changed a lot from like 10 years before.

Originally, you had one database type that fits all. So, if, I don’t know, Citibank decided to use Oracle, they’ll adopt Oracle for everything. This has changed a lot because today it became more silo business.

Certain databases are good for certain type of use cases, and these use cases are very typical for certain industries. So, today, you find in a single Enterprise multiple databases not just that, with the single application, even a simple iPhone application, you can find five, six, seven different databases serving it.

Everything is changed, and that’s very good for us, because the market is a way more diverse now, and there is room for new entrance, and so on and so forth.

Value Prop

Michael Schwartz: What’s the value proposition of the Redis Labs’ commercial offering?

Ofer Bengal: What we did with Redis Enterprise is, we took it to the next level in terms of being suitable for Enterprise use.

There is a difference between an open source project, which can be very powerful but misses several elements, which every Enterprise requires.

In terms of scalability, we offer infinite scalability, various degrees of high availability with instant auto failover, better performance, more stable performance, and tons of other things, which make the product more robust and suitable for Enterprise use.

Revenue Streams

Michael Schwartz: What are the revenue streams for Redis Labs?

Ofer Bengal: Monetizing open source has always been a challenge, as you may know.

It all started with Red Hat providing support for the software. We never thought of this as a good business model, so from day one, we decided that we do not want to provide support to the open source. Until this very day, we do not.

Basically, the idea was, “let’s add value to the commercial software and sell it.” And that of course comes with support.

Today, we offer it in various delivery models. The first one is what we call database-as-a-service.

Database-as-a-service means that it’s a fully managed service, fully automated service, whereby the customer signs up in a zero-touch manner, and everything is done automatically by the system without human intervention.

He signs up, they create a subscription, and then they start to use the database with their application, without us being involved in the process. And they pay starting with on-demand, which means, as much space they consume in terms of gigabytes, terabytes, petabytes, etc.

And then we try to convert the large customers, the large on demand customers to annual subscription, where they commit for a year. That’s one part of the business. And then, the other part is the more conventional software selling part, whereby we sell annual subscription to our software.

Again, we quantify by what we call shards. Shard is a process of a database that has certain capabilities in terms of throughputs and amount of data that you can process, etc. But, anyway, all-in-all, we quantify what we sell according to the size of the database in general, and then you can get it, either as a fully managed service, or as a software that you install by yourself and operate by yourself.

Breakdown Of Revenues

Michael Schwartz: Can you share with us any percentages of like what percentage is database-as-a-service or versus software?

Ofer Bengal: When the company started, we only offered database-as-a-service, we didn’t have fans at the beginning to create, build a large field operation. So, we decided to go for the zero-touch model, which is not very costly. We started there.

A few years back, that accounted for like 80% of ourselves. Today, it’s changed. There we have a significant sales force. Today, we have around 60 to 65% of our business is driven by field operations, direct sales, and only the rest is database-as-a-service.

R&D: Open Source V. Commercial

Michael Schwartz: With regard to R&D, how do you prioritize how much you should invest in the open source core part of Redis, and how much to invest in the commercial offering?

Ofer Bengal: With the open source, there is Salvatore, with a group of developers. He still leads the development of the open source. And then, we have a way larger team, working on what we call Redis Enterprise, which is our commercial offering.

The way to decide what to put here and what to put there is kind of very sensitive. Basically, our decision was that this fine line is drawn, so whatever it has to do with new functionalities, in terms of commands, data types of the database – that will go to the open source.

When it has to do with the deployment of the database in a large-scale, and all the ongoing operations of the database – that will go to Redis Enterprise. I think it works well for us because the database is continuing to be very popular, whereas we are doing good with selling the commercial offering.

Licensing

Michael Schwartz: Redis is the poster child for what some call open source strip mining. Amazon, Google, Microsoft offer hosted Redis platform, and despite huge revenue, they haven’t contributed a fair amount to fund innovation of the platform.

If I understand the situation correctly, Redis changed some previously BSD-licensed software to a non open source approved license to prevent this opportunistic behavior.

My first question is, why not just change to the AGPL?

Ofer Bengal: Although AGPL provides a little better protection than BSD, because you need to contribute back basically any enhancement that you do to the software, we didn’t feel that this is a showstopper for a cloud providers to adopt a successful open source projects, and I’ll explain.

What happened in recent years is, as the cloud business grew, cloud providers such as AWS are adopting any successful open source project, making it a fully managed service and selling it for tens of millions, in the case of Redis, hundreds of millions of dollars per year.

Now, they did not contribute anything to the development of those open source projects, so it becomes some sort of unfair competition because they use their monopoly power, and the fact that people come to those clouds for the infrastructure, and eventually, they see all those data services that AWS offer.

To me, it’s exactly the same situation as the antitrust thing that we had in the past with Windows and Explorer, if you recall that. Microsoft was basically giving you Explorer for free, and by this, trying to capture the browser business. And there’s nothing we can do about that at the moment.

What we thought was that we didn’t want to change the license of open source Redis all together. First of all, you can’t change history, and secondly, we didn’t think it’s good, in terms of adoption perspective, etc.

So, what we decided to do was to leave the core of the open source BSD as it was. But certain new enhancements that we are adding over time, will be under a different type of license, which is still source available.

So anyone can take the source code, change it, do whatever they want with it, except one thing – they cannot sell it as a product. Because we think it’s not fair.

So, this is what we’ve done, the initial concept was called Commons Clause, it was done together with a few other companies. We are now looking at ways to make it even better for various reasons. I will not get into that today, but the concept is the same.

We think that we need to protect our rights as developers of certain software products, and avoid cloud providers for just taking that, without investing anything and monetizing it big time.

Community Reaction To License Change

Michael Schwartz: Redis Labs has Enterprise software that they release, there’s this Enterprise platform, and there’s Redis Core – do you think that the open source community is overreacting here? Isn’t this a common practice?

Ofer Bengal: With all due respect to the open source institute, I think that they are a bit detached from today’s reality, and for them, open source is like a religion.

I think that the environment has changed a lot since the ‘70s, or ‘80s, when open source started, with the emergence of cloud providers and what they do with open source.

I think that the market has its own dynamics, and that’s why you see all these different initiatives, not just by us, but other companies have started similar initiatives of trying to bypass the open source with something which is a little bit better.

AGPL-MongoDB

Michael Schwartz: In fact, MongoDB, who’s had AGPL in the first place, for some reason, felt that AGPL wasn’t providing enough protection.

Ofer Bengal: As I said before, we always thought that AGPL does not provide protection, because the proof of that, by the way, is that recently AWS announced what they call DocumentDB, which is basically MongoDB product. I guess they took some of what Mongo had under AGPL in the past, before they changed to SPPL.

And, practically, if you read the AGPL license, it does not prevent companies like AWS from taking the product and selling it.

Progress In Harmonization

Michael Schwartz: In the previous Open Source Underdogs podcast, Mark Shuttleworth, Founder of Ubuntu and Canonical, implied that both sides need to work together, that it’s normal for this type of evolution of license and business relationships to evolve.

But do you see any progress that this may actually be happening?

Ofer Bengal: Well, I hope so.

To be honest, I have a company to run, and we need to grow the business, so this is not our main goal in life. We will be happy to participate in any such effort obviously. I’m not sure that we have any interest to lead, any efforts like this, because we have other things in mind, but I definitely think that this is required.

How To Compete With Amazon

Michael Schwartz: Redis Labs has its own cloud-hosted database-as-a-service, and although Redis Labs is pretty sizable, no one has economies of scale like Amazon, Google, and Microsoft. How do you compete in that hosted market?

Ofer Bengal: The only way to compete is with technology, and what we are doing now is taking Redis to the next level.

Redis started as a cashing system. Later on, it became a data structure engine, and later on became a database.

What we’re doing now is taking it to the next level, which means, making Redis what is called a multi-model database, whereby you can model the data in many different ways, starting with key value, data structures, graph, time series, streaming data, search functionalities, AI functionalities, and some more.

The idea is that with that, which is, by the way, the new trend in the database technology, we will be able to cover many more use cases, and by that, capture a larger market share, so that’s our strategy.

All these new enhancements are licensed differently, with this new different license, which prevents the likes of AWS to adopt it.

So, that’s our strategy in terms of competing with these companies, because, obviously, in terms of visibility, etc, you can’t compare.

Sales and Marketing

Michael Schwartz: You mentioned previously that you have built up the sales force overtime. Can you talk a little bit about sales and marketing? I would imagine you originally started with a lot of inbound, but how have sales and marketing sort of evolved since you got started?

Ofer Bengal: As I said, in the first years, everything was inbound.

We started zero-touch, which means, we drive people to our website, where they can sign up, create subscriptions, etc. Those were the first years.

After we completed building the software product, this is very hard to sell online, just by putting it on the website, so we started to build field operations – that was around 2015.

Today, it’s pretty sizable organization, we have people on the ground in all parts of the US. We have a team in India, we have teams across Europe, we have a team in Israel. And when I say a team, they comprise sales rep, they comprise solution architect, so any sale is very technical in our case.

It’s not just a sales person knocking on the door and saying, “hey, I’d like to sell you a refrigerator or something.” You need to work with the tech people of the customer, analyzing their environment, their architecture, etc, and finding the best fit. So, this is done by our solution architects, and they work in teams with the reps.

Then, we have all the marketing organization, which basically drives demand, so they work with all advertising, with a CEO, we do tons of events. This year, we’re going to do 90 different events across the world – all of that drives demand, in terms of leads.

Then, we nurture the leads to become what we call MQLs, Marketing Qualified Leads. And then we have a team of what we call SDR, Sales Development Reps, which basically pick up the phone, call these MQLs, and try to see if there is substance there, if there is a project going on that we can tie in, etc. If so, they convert them to become what we call QSLs, Qualified Sales Lead, and those are handed over to the salespeople, to start doing the actual sales work. That’s the way we work.

We also rely heavily on partnerships, we have a few very strong partners, and those partnerships are very intimate. We really go to market together, both on the marketing side, and also sales teams work together. We work like this with Pivotal, with Red Hat, now with Microsoft, and some others. So, that’s very powerful for us.

Partnerships

Michael Schwartz: Can you just maybe elaborate a little bit more on the partnerships? You have sort of technology partners, like you mentioned Pivotal, Microsoft, etc. What about integration partners, or other types of partners – how do you work with those?

Ofer Bengal: We work with some of the large system integrators in the world.

I can’t say that so far we found the sweet spot of how to do that, in terms of, it seems that when you get to the larger and larger companies, and as I mentioned before, we sold and worked with the largest companies in the world. We have approximately 40% of Fortune 100 companies as customers, you need really to be in direct contact with their technical teams.

So, it’s very hard to do it second-hand, that you educate someone, and they do it. So far, we weren’t too successful with that, although we very much like to leverage that, obviously because that gives you much larger coverage, but so far, our successes in partnerships were more with IT companies, who basically try to sell the entire IT suite to those large Enterprises, companies like Pivotal, Red Hat, etc.

Challenges of Being an Israeli Company

Michael Schwartz: Has being an Israeli company presented any special challenges?

Ofer Bengal: The major challenge is me spending half of my life on planes, that’s the thing. Because I split my time between the Mountain View, where we have our headquarters, and Tel Aviv, which is R&D Center.

The flight time direct between Tel Aviv and SFO is 13 and a half hours, direct. And if it’s not direct, it can easily take like 20 hours or so. Anyway, I spend a lot of my time on planes and fighting jet lag fiercely, but that’s what I have to do.

Michael Schwartz: So, you get time to listen to podcasts.

Ofer Bengal: Exactly.

Redis In 20 Years?

Michael Schwartz: Where do you see Redis Labs in 20 years?

Ofer Bengal: I think that we have a very unique opportunity, which, in my eyes, and I’ve been around, is a once-in-a-lifetime opportunity.

We have a very rare combination of a huge market, which is being disrupted, and open source, which is extremely popular, strong value proposition, with the commercial product on top of the open source. And then, apart from that, Redis is the fastest database in the world. I don’t know if I mentioned that before.

I don’t know if you remember the first time you did a Google search, to me, it was like magic: You clicked and you got it immediately. Now, today, this type of performance is expected from any modern application, especially with Millennials, Generation Z, etc, they don’t have the patience to wait, they would like to click and get it.

Now, when you look at what happens under the hood, when you click, a request goes over the internet to a remote server, a database is involved, it has to get back to you, etc. If all that happens in more than 100 ms, which is 0.1 second, you start to feel uneasy, as if something is not operating properly.

Now, the database was always the bottleneck when it comes to end-to-end application performance. And Redis is the only database that can process tens of millions of transactions per second, and all that, it’s sub-ms latency.

And with that, we see ourselves today as the enablers for modern applications to provide what we call instant experience. By the way, this was always the selling point for Redis, and I’ll claim to fame, and we push very hard on it.

Today, we offer graph functionality, much faster than any other graph database, we offer document functionality way, way faster than any document database, time series, the same, streaming, we do so much faster than Kafka, etc.

So, whatever we do, we do way faster than anyone else, and this is basically our main setting point. So, today, people in the industry know that whenever you need something fast, there is only one solution, and that is Redis.

Going back to your initial question about where do I see Redis Labs in 20 years, I’ll start from the beginning.

I think that we have a very unique opportunity, which in my eyes, and I’ve been around, is a once-in-a-lifetime opportunity, and this is because we have the very rare combination of a very large market.

The database market is going to be $60 billion market this year, which is being disrupted for the first time in its history with the entrance of new type of databases, which some people call NoSQL, etc, and many other changes in this market.

Secondly, we are based on a very, very popular open source project, which is available and being used in almost any organization in the world. That’s very unique.

On top of that, we have a commercial product, which is robust and stable now, which provides many value adds to large Enterprises on top of the open source.

Add to that the growing demand for instant experience, today, people would like everything to be instant, we provide that capability.

And add to that the fact that Redis runs originally on RAM. RAM is relatively more expensive than other media such as SSD, or obviously disk. So, in the early days, it was like a little bit of a hindering factor for wider adoption of Redis because of the costs associated with the underlined resources. But, today, there is another trend, which works for us, and this is the trend of new memory technologies, persistent memory technologies by companies like Intel, Samsung, etc.

If you compile all this together, it seems that we are on the verge of a huge opportunity, and
it’s basically for us to do it, or not to do it. And this is what I always tell the people in the company, “guys, it’s in your hands.

If we don’t make it a very big multibillion-dollar company, this means we did something wrong.” That’s it.

Advice For Startups

Michael Schwartz: The goal of this podcast is to help entrepreneurs who are starting businesses around open source. Do you have any advice for entrepreneurs who are just getting started about how to use open source software as part of the business model?

Ofer Bengal: Do not neglect the business model. Think about your business model from day one. Because when it comes to open source, that’s the most challenging issue. You know, you can build a great product, great technology, which everyone likes, you want to make a penny out of it, so think what is your strategy, in terms of what do I sell, how does this compare with what’s available in the open source for free, and basically how do I make money.

Credits

Michael Schwartz: Ofer, thank you so much for sharing your wisdom.

Ofer Bengal: You’re welcome.

Michael Schwartz: Transcription and episode audio can be found on opensourceunderdogs.com.

Music from Broke For Free and Chris Zabriskie. Our audio editor is Ines Cetenji.

Production assistance and transcription by Natalie Lowe. Operational support from William Lowe.

Follow us on Twitter, our handle is @fosspodcast.

Tune in next week for interview with Ravi Mayuram, CTO of Couchbase.

Until then, thanks for listening.

Episode 4: Mattermost – Private Cloud Messaging Platform with Ian Tien

Ian Tien is Co-founder and CEO of Mattermost, an open source, private cloud alternative to proprietary SaaS messaging solutions. Mattermost is used for secure team communication at organizations like Intel, Samsung, and the United States Department of Energy. In this episode, Ian describes their Open Core business model, which seeks to monetize enterprise customers who need advanced deployment and security features.

Mattermost Transcript

Introduction

Mike Schwartz: Welcome to Open Source Underdogs, the podcast where we interview leaders from successful open source software companies and bring their stories to you.

Today my guest is Ian Tien, Founder and CEO of Mattermost.

Mattermost is a highly-scalable chat platform for privacy-conscious organizations that want out of cloud-hosted platforms like Slack or Skype.

Ian, thanks for joining us today.

Ian Tien: Thanks for having me.

Mike Schwartz: Ian, why don’t you just start a little by telling your listeners your background and a little bit of the founding story of Mattermost.

Ian Tien: Sure. So I actually began my career at Microsoft, up in Redmond.

And I was working on the Microsoft Office Team and Engineering with my friend, Corey Hulen. And we worked on number SharePoint products that had business intelligence built-in, dashboarding, data warehousing, SQL Server. And, you know, had to really good time doing that.

I moved over to the product management side with Outlook.com and OneDrive. Had a pretty good time there. So you know this is early days, and from there I ended up going to to business school for a little bit.

And while in business school I started a video game company. So I was doing online games, it was a lot of fun. And I ran that for a few years after business school.

And what happened is while we were, you know running this very sort of fun game company, we were using a messaging service online, and it was it was running our entire company: All of our data was in it, all our analytics, all the conversations, all our analysis, our designs.

And one day, this platform that were using got bought by a large company. It was a small company, got bought by large company. And the quality of the application started going down.

It would crash it, would lose data, and you know, we were just really frustrated by it, and we tried to export. We tried to export and they wouldn’t let us leave; we couldn’t get our data out.

And when we stop paying the subscription, they would paywall us from our own information.

When this happen, there were people are team saying like, this is, this is sort of not okay. This is not the way that the world should work. Where you’ve got these SaaS services that

can really keep you all contained.

So what we did is we had over 10 million hours of messaging done in our video games. So we took some of the software that we use for messaging, we rewrote it little bit, and, you know we’re engineers, so we rewrote it a couple times.

And pretty soon we were using our own software to do collaboration and to sort of replace their the platform we were using. It was pretty basic.

But what happened is, in June 2015 we decided open source it. And it just really took off. We end up winning some open source awards, and it became pretty clear that this was a business.

So we pivoted the company, we got rid of the games, and we said, you know we’re going to build this new world of open source messaging, and that was the Mattermost open source project.

By March of 2016 we’d figure it out a way to sell a Enterprise Edition of the product on top of the open source platform. And it’s really worked.

So now we’re all over the world and we have a lot of customers. Two of the top three aerospace companies, two of the top three mobile phone companies, two of the top three US federal agencies. These are all our customers, and what happens is, they use our open source Mattermost Team Edition, which is available MIT-licensed, really easy to install, single Linux binary, works with MySQL or PostgreS[QL].

People get going right away, they see immediate value. They’re messaging each other. Their collaborating, they’re adding lots of integrations, all you need to curl command and a webhook, and you can build these sort of like mini systems.

So you got immediate value, whether it’s devops teams, or information security, or IT teams, or broader users. They really enjoy the product and prove that there’s value.

And as the deployment grows, they decide, you know what, we shouldn’t as a team host this ourselves, we should have central IT do it. And when they give it to Central IT, Central IT says well you want these compliance features: We want high availability, we want data retention, we want compliance, can you plug into our [backend], our global relay, and can you do e-discovery.

And the answer is all yes – but those features are in our commercial version. So that’s when the procurement cycle starts.

After they’ve proven the value, we’ve given it all away for free. When it’s time to scale, that’s where you have the sales discussion.

So that seems to be a really nice model and that’s why we’ve grown so fast in just a couple years.

Customer Segments

Mike Schwartz: Do you segment the customers all, in terms of marketing? Or are you really just waiting for customers to find the open source and then contact you?

Ian Tien: Our growth so far is really around the open source version being used, and adopted, and expanded. And there’s going to be customers sort of all across the board.

You know, our focus is largely on Enterprise, because can we sell high-availability and retention, it’s really those large organizations that find the most value out of it.

Then there’s also more security-conscious, sort of smaller companies and they’ll buy some the Enterprise features for one or two things that they like. But it’s really, we’re really focused on the Enterprise segment.

Control Of Data / Privacy?

Mike Schwartz: And do you find maybe that some of the Enterprise customers don’t feel comfortable putting their data on a cloud server especially, you know, confidential conversations between people?

Ian Tien: Our customers are privacy-conscious Enterprises, who are looking for a team collaboration solution that can increase the productivity while meeting their custom security and sovereignty needs.

So large Enterprises, financial services, in public sector, in government, in manufacturing. In what we think of as high-trust organizations, they’re really looking for solutions that they can control a hundred percent.

They know that there’s no third party monitoring, they know that all the custom security and compliance infrastructure that they bought they can integrate with our collaboration solution. And they know that, you know, they don’t have any external dependencies, right. If this has to be available all the time, they have total control.

And I would say a lot of customers actually are going to public cloud. They’re on Azure, they’re on AWS. A lot of the public sector are on the govcloud versions of those. Customers are very comfortable with cloud and Kubernetes, and Docker, and all these sort of cloud-friendly technologies.

What they prefer is that they control the system and not a vendor. So when it comes to privacy and control of the data, they have it a hundred percent.

Customer Interactions?

Mike Schwartz: How do you work with customers? What’s your experience was supporting customers? Do you work a lot one-on-one with customers? Or do you rely more on automated online systems to work with customers?

Ian Tien: The business model we’ve chosen is open core. So there’s going to be an open source version that’s free, and everyone has it, and they can enjoy it, MIT-licensed, really easy to use. And then there’s a commercial version that’s an add-on that gives you sort of Enterprise features.

So what we don’t do is we we don’t try to monetize services right. Services is a cost center for us. What we want to do is put out all the information about how to have a great Mattermost instance, how to scale it, how to do really well.

We want to put that in the community for absolutely free, we want to make it web-discoverable. We’ve got these large forms, you have any Q&A, any problem you have with Mattermost just web search it and we want you to find the answer.

So that’s the investment cycle it’s: If you have a question coming from a customer, that’s fantastic. Go to the forums, or go to the documentation, add the answer in and send a link so that the answer becomes web-discoverable and the whole world gets that benefit.

So that’s the cycle we have, where we have a customer, we do answer their questions, we try to put that information out as quickly as we can onto the world so that Mattermost becomes easier and easier to install, easier easier to extend, easier and easier to customize.

So what we’re focused on is selling the commercial version of our Enterprise product to many many very large companies that can benefit the most from it. And then we want to give away the rest, to the rest of the world. That Enterprise business funds the innovation, and the support, and the growth of the open source project.

Community Support?

Mike Schwartz: Do you actually answer community support questions?

Ian Tien: Yeah, we’re absolutely on the forums, all the time.

And what we try to do is we want to encourage the community to answer and what we’ll try to do is wait at least 24 hours to allow the community go in, you know, have their two cents in and take the first crack, and then we’ll come in with sort of more experts.

But we really want to enable the community to grow and to build. And not only, you know, not only parts of the open source committee but also our partners who are experts at implementing and delivering the Mattermost and helping customers; we want to empower them to answer more questions, and so to get known in the community, and to participate and to enjoy.

And then behind them we want, we have our core contributors that will also support and answer.

Levels Of Support

Mike Schwartz: For commercial customers is there an SLA, or do they get quicker support?

Ian Tien: So on the forums no one really knows that you’re a commercial customer. People just ask questions and we try to treat everyone sort of the same.

What the commercial customers get is support through other channels that they can contact directly and we can be much tighter with them, depending on the support level.

So for very large Enterprises we’ll have our own Mattermost channels where we can go back and forth, and it’s very quick, and easy to share information. And it’s really embedded with us.

Mike Schwartz: So you’re using Mattermost to support your customers.

Ian Tien: Oh, absolutely. So our desktop app can actually connect to Mattermost, multiple Mattermost servers.

And we have customers that, you know, they’ve got their Mattermost instance in one tab and they have us in another tab. They can just switch back and forth and talk to us and go to instance and it’s great because they can share feedback you’re like – oh check this out, we built this thing and it’s amazing, and you know, we can pass it on we can share it, share the ideas.

Or there’s something they want to tweak in that user interface or there’s, there’s something we need to change, and we get that feedback right away.

And we have a monthly release cycle, so every month on the 16th of the month, we release a new version. You know, it’s a single Linux binary so very straightforward upgrade, and that’s how quickly we can react to feedback in the community every month.

Challenge Of Real Time Support.

Mike Schwartz: Is that hard, having customers be able to sort of ask you questions in real time, and sort of expect immediate feedback?

Ian Tien: It’s a mix, yeah.

So what we find is most of our customers when they’re onboarding, there, you know, our support is really around configuration right, so that they’re like okay, I can do high availability, I need to install this, and install this. It’s a lot less break-fix. So when Mattermost runs you know it’s sort of coming and going. So what we find it’s a lot more configuration.

So, yeah you’re right, like sometimes expectations of certain instant response. That said, a lot of our organizations are actually using messaging because they’re asynchronous.

Because they don’t want to use like a Skype for Business or something that’s ephemeral, where people come in a different time zone, they log in, there’s no history, they don’t know what happened between the whole day. With Mattermost it can be both synchronous and asynchronous, and people sort of do them in different ways.

I think working with our customers they kind of get a sense of the rhythm in the pattern. And it’s really, this is a very, very top tier support; these are strategic customers that even like co-develop with us. So they’ll be contributing code, they’ll be giving us really insightful advice.

So they’re really a part of the community, they almost feel like part of our extended team, because we’re all working together to make a fantastic product and to really develop it. It’s not very common and it’s not a huge number of customers we have at this top-tier support, but when it works, it works really well.

Mike Schwartz: Using open source as a distribution channel people, search probably for “open source Slack” or “open source Skype,”

Distribution Channels

Mike Schwartz: Using open source as a distribution channel people, search probably for “open source Slack” or “open source Skype,” and they find you, so I’m sure that’s an important distribution channel. But are there other distribution channels?

Ian Tien: Open sources of is a wonderful channel, and what we think about it, is sort of a, a growing series of channels that sort of escalate upwards.

So the open source is one piece, it makes it really easy to find, web searches from Mattermost keep going up, we get a lot of organic traffic.

The next tier is really around resellers. So if you’re look on our website under partners, you’ll find a listing of resellers around the world that can bring Mattermost and explain the product to more Enterprises.

So they might not be familiar with open source, they will understand the benefits of having a collaboration tool that’s completely under IT control that’s easy use, easy to install, so a reseller can go in and they can discuss the product in French, in Korean, in German and really

help explain to these prospects and customers our value proposition. And because we have this commercial product, it’s much more familiar as a commercial partnership, how to distribute.

So we get the benefit of open source and we get the benefit of traditional resellers and channel.

More Channel Details.

Mike Schwartz: Just curious – have you looked at the percentage of sales from channels, or how’s it sort of stacked up to your expectations?

Ian Tien: We’re really excited about channel. And it’s about, sort of how the story begins.

And how the story begins is there’s a lot of interest from Enterprises and the challenges procurement. And when you have a channel partner like SHI or Dimension Data, they’re plugged into a huge number to Enterprises, so we can do procurement through them.

It’s a win-win because those resale partners give the Enterprise the benefit of consolidated billing right, and really easy procurement.

We get the benefit of be able to fulfill the order; and when you have an ecosystem where everyone’s winning that’s very scalable. So it starts with just the authorized resellers and it’s like hey help us pass the paper, that’s what they do, and we have that partnership.

Then we’re getting into sort of value-added resellers. So companies like AdPhineas over in Europe, where they’ll provide local language support in local time zone. And we have a partnership to take the lead that we get in their region and work together to expand the business.

So again it’s win-win with value-added resellers. And then we have distributors like a FedResults, which is part of Carahsoft, in the federal government, and they’ll do even more.

So they’ll have a marketing organization that we can partner with to find opportunities in their existing customer base and really tell them about the benefits of Mattermost. In addition of that, they hold our GSA schedule, so when we sell Southwest Federal Government, we have a partner that really understands how to procure, how to work with these organizations, and navigate the system. So again it’s win-win.

So it’s all about creating community where your economics and your success is aligned.

Revenues

Mike Schwartz: You mentioned that Mattermost is open core. So you have a free Community Edition and then you have other versions I guess of the software with additional features.

I’m just curious is the main revenue streams from the business license of the non-open core, or are there any other revenue streams, training, support, or is it just all hundred percent license?

Ian Tien: The commercial part of the business is focused on selling commercial licenses of our add-on’s that are built on top of the open source project.

So if we’re selling Premier Support, that’s only available to customers who are buying the commercial version. Because that’s our focus.

Now if someone wants to start a business supporting the open source version, that’s wonderful we’re not going to compete with them. We’re only going to provide services and training to the people who are using a commercial version.

Mike Schwartz: In terms of like percentage of revenue is there an 80/20 rule, where 80% of the revenue would you say is licensed? Or do some of the other like support contracts on license, do any of them make up more than 20% of revenues?

Ian Tien: So everything we do is subscription. There’s a portion for licensing and there’s sort of an add-on for that support.

We try to make our customer success organizations sort of cost neutral, right. So you buy the support add-on and what you get is that the extra layer support and you know, that revenue covers the costs of, supporting these Enterprise customers. Where we grow the company is really from the subscription revenue of the commercial add-on’s we do.

License And Renewals

Mike Schwartz: By using the software they’re required to keep renewing their subscriptions. How have you found getting renewals and making sure you retain the customers?

Ian Tien: Yes, it’s a great question. There’s a couple of things to talk about there.

Number one, just because how we started the product, and started the company, and started the open source project, we really didn’t like being locked into a vendor-hosted solution that had all of our data, that we didn’t have any choice.

So purposely because of that, when you use Mattermost, you have a hundred percent access to your data to MySQL or PostgreS[QL] database, and if use the commercial version and you decide, you know what, I want to use the open source version, all you have to do is take out the license key, and you got the same functionality as the open source version without the commercial add-on’s.

We make it that simple so no one ever feels like they’re locked in.

That said, renewals are really strong because people have validated that this product already brings value, they’ve used the open source version of for a while typically before they go to the Enterprise version. So they know it works, they get the Enterprise version for the compliance features.

So the renewal question is do I still need those compliance features. And for large Enterprises who are running these in the data center, it’s a pretty straightforward decision.

Mike Schwartz: But you have to chase them down, they, you know, didn’t sign your subscription, or we didn’t see that check, or – how is that process going? Because that can be tricky.

Ian Tien: Yes, so we have a back-office person that does that, so they’ll send out the emails, and you can renew using credit card, you can you use a bank, or wire in different currencies; so we support all that the back end.

Mike Schwartz: But does the license shut them down if they have it renewed? So is there license enforcement?

Ian Tien: So before a license fee expires, there’s a series of warnings that the system administration will get sort of in the interface, like hey, you have this many days before it expires. We’re very open with the sort of notifications you get in the grace period afterwards, and there’s sort of some slight changes in behavior afterwards.

What we do want is everyone to feel safe and comfortable running the software, and the license renewal is more about the procurement system then sort of like IT issues with backend.

Typically if you’re Enterprise you want to renew properly, get everything buttoned up properly, so it’s been pretty smooth.

Value Proposition

Mike Schwartz: To switch tracks a little bit and talk about the value proposition for Mattermost?

Ian Tien: So one thing we really think about is privacy-conscious Enterprises. And for privacy-conscious Enterprises Mattermost is the team collaboration solution that let’s them increase productivity and have this modern world of collaboration while meeting their custom security and sovereignty needs.

So there’s going to be requirements that these large Enterprises have to be able to be in complete control of their collaboration system. To have no third-party monitoring. To have many security options because it works with their private network, because they can do intrusion detection, because they can analyze every line of the source code, and their information security team can go over everything with a fine-tooth comb. And on top of that there’s custom security, custom compliance, custom auditing.

For those Enterprises that really value privacy, autonomy, control, and extensibility. And be able to go further than they could with any vendor hosted solution, any vendor hosted multi-tenant solution – those are our customers.

And you can read about that sort of positioning in, 451 Research has a note on us, Gartner in their workstream collaboration space has covered us, we’re a vendor to watch in the latest market trends report. We’re actually being named a Cool Vendor by them.

And it’s really about differentiation. It’s really saying – hey there’s a lot of collaboration solutions out there for Enterprises that are really privacy-conscious, that really want control, that want that layered extensibility, who want to have the option to go further in there customization of the collaboration solution.

That’s our differentiation. That’s where we really live.

Partnerships

Mike Schwartz: We talked a little bit about channel partners and, those are important to every business, but are there other partnerships?

Ian Tien: Yes, absolutely. When you run an open source project you have community on your mind all the time.

So Mattermost has over a thousand people who contributed to the open source project. On top of that there’s over a thousand open source projects based on Mattermost. We’re in 15 different languages. There’s a huge community extensions around us.

So for the open source piece, that’s growing really well, and that’s part of the engine that drives awareness and discovery, and more customers.

In addition to that, we’ve got our experts community in our channel. So how do we help distribute, how do we help deliver this offer into Enterprises, through resale and through services.

One part of that new community that we’re really excited about is Atlassian channel partners.

So as HipChat has announced its retirement, for these high-security companies that really want to do collaboration, especially if they’re Atlassian users, they no longer have that option now that HipChat is retiring.

So Mattermost is really stepping in, we want to make users of the Atlassian server products, that need total control, that need high security, that need to stay in private clouds or data centers, we’re filling that gap. And we’re working with Atlassian partners like cPrime, the largest Atlassian channel partner in the United States, to go meet the needs of those Atlassian customers.

And we’re working on new partnerships all around the world with the Atlassian channel to make their customers successful.

In addition to that, there’s certain communities from our customers that have built up around the Mattermost product, around the open source version, and eventually the commercial version.

One of the best examples there is NH-ISAC, which is a global association of information security professionals from the healthcare industry. So they’ve been running Mattermost for their community as an open source solution for awhile. We’re about to announce a partnership with them.

Where they’ll be using the Enterprise version, and we’ll have an increasing presents working with NH-ISAC, attending their summits, getting to know their community, the challenges their communities have around how to collaborate as information security professionals on a platform that is vetted and is under their complete control.

Challenges Of Open Source

Mike Schwartz: One of the questions I had was – you know open source has a lot of great qualities – collaborative development, and certainly for marketing, but have you discovered any challenges? Has it, have there been any negatives or any, has it hindered you at all along the way?

Was there any unexpected surprises, where you thought open source would be great but it turns out it was actually maybe sort of more challenging than you thought?

Ian Tien: Absolutely. Coming from a design background, we thought really carefully about what is Mattermost Team Edition, which is our open source version, and was is our Enterprise Edition.

So our Team Edition is kind of like a small office: it’s going to be really easy to start, you just step in there, everything works.

You got emojis, emoji reactions, you can do channels, you got GIFs, you have mobile apps and desktop apps, and it just, it works. And if you’re coming from Slack, it’s really easy, the keyboard shortcuts from Slack are supported, webhook integration from Slack are supported, slash commands; it’s very familiar.

Now we have our own additions. Like the ability to use you know, spaces, and non-English letters, and channel names, and we’re able to use hashtags and some other things like that.

The open source Edition which is for teams, is really designed for for that world, right. I don’t have a lot of ask permission for anyone, I can kind of do whatever I want, I trust everyone to be good citizens in this Team Edition.

And then for Enterprise, you’ve got all the complex things. You’ve got roll-based permissions, very sophisticated high-availability, all the compliance stuff. And we thought that delineation would work really well.

What’s happen is, people using the open source Edition are too often unaware there’s an Enterprise Edition.

So they take the Team Edition, which is built for small teams, and we have Enterprises that have hundreds and thousands of people use the open source version. And when we talk to them, they’re like, you know what you should add, you should add a permission system. But we have a permission system in the Enterprise Edition that they never sort of discovered. So all the problems that they have, that they think they have, are actually solved in the commercial version.

We just haven’t provide the awareness. That’s something we think about all the time do we want to, in our open source Edition, make it more obvious that there are these features for Enterprises, and they are in the commercial version.

And that’s a line we have to be careful about because, like well, do we really want to market inside an open source project?

And the consequence of not doing that is you have a lot of people using open source version who would easily upgrade if they knew they could just phone procurement and say, I want these extra features, they’ll make my life so much more productive. And we got like three thousand people on this instance – yes like, just go make it a piece of our company infrastructure.

So that discoverability is a question for us, and the consequence of not making the commercial version more discoverable in the open source project is brand. It’s people feel like wow, Mattermost can’t do these things – when we can. But then how do we let people become aware of it.

Gauging Community Size

Mike Schwartz: Do you collect statistics back from the products that you know who’s using it? Or are there any type of opt-in’s to send back marketing data? Or how do you gauge the size of the community?

Ian Tien: So any sort of telemetry you put into a high security product is never going to tell you the accurate story.

We had a lot of metrics looking at what’s our search volume – how many people are coming to the website, and were they unique visitors, and how many people are downloading. And we try to gather a lot of sort of anonymous statistics around this to sort of see the velocity and the direction of the interest, to make sure it’s always growing.

In terms of our actual user and customer base we want to make it super easy for them to sort of discover us and learn about us and contact us. And that’s part of the customer journey.

So they’ll come, they’ll find us, they’ll download. Somewhere along the way they’ll re-engage. And then we can continue that journey as they contact us, as we understand how they’re using us, and how we can add value.

So yes, because we’re dealing with privacy conscious Enterprises there’s a little bit of a gap in our story. What really matters is the flow of the start to the middle, so we can not only convert them over to the commercial version that they’re looking for but make them super successful afterwards.

Funding

Mike Schwartz: What are your thoughts about funding and open source, and is that something that Mattermost is seeking? You know, you’re in the heart of VC Mecca here in Palo Alto.

Ian Tien: So if you look at our website you can actually see a number of our investors. My personal view is that you know, finding the right investors is an incredible benefit for any organization.

So being able to have more capital means you can do more. You can accomplish more. We can hire more people, we can pay more people to build the open source project, to help scale the commercial business and we can go faster.

All we have in this world this time and if we can bring in capital to move things more quickly, I think as an open source project the most important thing is you’re open, and you’re transparent.

You’re saying like, this is what we do, we’re open core, here’s a commercial version, here’s our open source version, this is, this is what we do. And if investors are aligned with that vision,

and we’re aligned with those investors and what their expectations are, then it goes back to that great ecosystem of line incentives.

Our investors make introductions for us, they give us great advice and we’re a lot further along because we had that collaboration and help.

Closing Advice

Mike Schwartz: So if you are an entrepreneur who wants to use open source as part of your business model, do you have any advice for that person?

Ian Tien: I think the most important thing is to focus on the value you want to create. You want to build something that people love.

So start with – I want to build something that people love, and think about roles that open source can play: in your vision for the product, your distribution model, the community you want to build, and the business you want to build.

Mike Schwartz: Well that was really fascinating. Thank you so much for making time Ian, and best of luck with Mattermost.

Ian Tien: This is fantastic.

Mike Schwartz: That’s it for episode 4. Special thanks to the Linux Journal for co-sponsoring this podcast.

To the All Things Open conference for helping us to publicize the launch.

Music from Broke for Free, Chris Zabriskie and Lee Rosevere.

Production assistance from Natalie Lowe. Operational support from William Lowe. Thanks for the staff of Mattermost for logistical support.

Next week we’ll talk to one of the visionaries who inspired this podcast, Mike Olson from Cloudera. Don’t miss it.

Transcription and episode audio can be found on opensourceunderdogs.com. Until then, thanks for listening.