Podcast

Episode 27: Alfresco – Digital Business Platform with John Newton

John Newton is the Founder and CTO of Alfresco Software, an open source digital business platform specializing in ECM and BPM software. In this episode, John discusses community building, the “open core” business model, and his perspective on the atmosphere surrounding pure play open source businesses in the market today.

Transcript

Intro

Michael Schwartz: Welcome back, Underdogs! You’re listening to the podcast where we document the business models of successful open source companies.

It’s episode 27, and we’re lucky to have John Newton, one of the founders of Alfresco.

Alfresco was one of the first vendors to perfect the commercial open source business model.

It’s one of the leaders in document management, a segment that’s undergone massive change in the 15 years or so since it started.

John has a deep perspective on open source and entrepreneurship – he also founded Documentum, a commercial software platform in the same segment.

So, enough of me blabbering, let’s just cut to the tape.

John, thank you so much for joining us today.

John Newton: Yeah, it’s nice to be here.

Origin

Michael Schwartz: You founded Alfresco 14 years ago with John Powell. What was the original idea, and why do you think the timing was right?

John Newton: Both he and I were looking at new businesses to start, and my background was in enterprise content management, which I have been in since 1990.

I was the Co-Founder of Documentum, and in that time the industry went from nothing to about 4 – 5 billion dollars at that point.

And what we had seen was that there were a lot of business models, and some were working, some were not. We both lived in Europe, and we’re trying to figure out what would work from Europe – and it looked like open source would work.

We saw a lot of successful open source projects get started like Linux, and JBoss, and MySQL, that all came out of Europe by Europeans.

And so my background, being in enterprise content management, seemed like, “Hey there’s nothing like Documentum, FileNet, and OpenText, or even a SharePoint in open source – and someone’s going to do it, might as well be us.”

So, that got it started probably at a really good time. The first wave of open source applications coming out, I think our timing was actually pretty good.

Business Segments

Michael Schwartz: Alfresco has a few products and services – what are the most important business units from a revenue perspective, and which units do you expect to grow the most in the future?

John Newton: Traditionally, most of our revenue has come from what is now known as content services. As content is created and used in many different areas, the market that was Enterprise content management has now become content services. We added process services as well, and that grew very rapidly.

But I think it’s all the bits coming together – the content services, the process services, the search services, the governance services – all coming together to solve a lot of digital transformation challenges.

Companies are looking to serve their customers more effectively in the digital world, and all those things working together will actually become the most important. So, I think selling them all together in what we call the Digital Business Platform will be the fastest-growing and ultimately become the biggest.

But we still sell content services, and also process services, governance services, sometimes stand alone, and they do well. But I think that’s where the growth is going to be.

Cloud V. On-Prem

Michael Schwartz: How about in cloud-delivered vs. on-premise?

John Newton: When you look at the industries that we’re involved in, they tend to be highly regulated.

This is an area that has been slower to adopt the cloud, but there’s been a real sea-change in how regulated industries are starting to look at the cloud, and the benefits of the cloud.

So, still the majority of our customers are on-premise, but increasingly, a lot of them are playing on AWS and Microsoft Azure, some on Google Cloud as well. And I’m sure ultimately those will become the dominant platforms upon which people will deploy these digital services.

But it’s a real mix right now.

And actually that helps with open source, because when people try open source, they tend to do it on their own local systems, or perhaps they’ll deploy it on something like an AWS instance, or something like that.

So, it’s good to be flexible and how it gets deployed, and how it gets used.

As-A-Service

Michael Schwartz: Maybe I misspoke. I said cloud but I think what I meant was as-a-service. Does Alfresco offer a hosted version? How has that been, and how’s that growing?

John Newton: Yes – we have offered a content services as-a-service, and it’s something that we are expanding on this coming year.

Taking some of the benefits of on-premise, and isolated instances, and providing the level of security and control that people expect from on-premise, but making it available as-a-service. So, you get to keep all the keys, you keep control of where the content is stored, no one else can see how your indexes are created, you can control all aspects of security – which is important in the industries I mentioned, the regulated industries that we’re dealing with.

So it’s a smaller portion of our business, but one that we expect to grow pretty rapidly in the next couple of years.

Market Segmentation

Michael Schwartz: Alfresco must appeal to a wide array of organizations. Do you segment the market in any way?

John Newton: Yeah, we tend to segment the market, primarily along vertical lines.

You see how Alfresco got adopted over time. Very rapidly, the industries that liked open source and started to pick it up pretty quickly were governments, particularly over here in Europe. Also financial services – banks love technology, they like to tinker with technology and just enjoy open source, in terms of building solutions on top of it.

And then the third that really grew rapidly early on was the high-tech manufacturing, where there tends to be more of an engineering mindset. So, being able to see the source code, having the openness and control over your destiny with this product, were very important.

We have taken and grown that verticalization – starting to look at more specific use cases in each of those and providing those use cases. And so we’re doing more with government than ever before. Especially when we started to build in some of the records management capabilities that were expected of the US government – that really opened up the doors for us to sell it to federal, as well as some state, local, and European organizations.

Over time, the interest in financial services, and open source, and also the freedom it gives, not being locked into any particular vendor, also became more important in areas such as insurance, that were pretty conservative when we first got started, but are actually doing some of the most interesting digital transformations that are going on at the moment.

You see more insurances as an extension of that financial services. And then also business services – anything from payroll services, to marketing services. Logistics, event services, things like that have also brought on open source as well.

Those industries, along with high-tech manufacturing, account for probably more than half, maybe more than 60% of our revenue.

And then there’s a long tail after that, but verticalization is the main way that we segment it.

We do some segmentation along the size of companies in terms of how we sell this in our sales organization. But we were sort of surprised. We were thinking that early on, when we had brought out an open source model, it’ll be small and medium-sized businesses that would adopt Alfresco. And it turned out to be actually the largest companies started adopting open source and adopting Alfresco.

So, it was a pleasant surprise because it tended to bring along bigger deals as well. But that isn’t the primary way that we look at it, we want to look at it in terms of the use cases and solving specific problems.

And looking at it from a vertical perspective, it ends up being the best way to do that.

Value Proposition

Michael Schwartz: Has the value proposition of Alfresco changed over time?

John Newton: In some ways, not that much, but in some ways, considerably.

Early on it was basic document management that brought people to Alfresco.

I think experimentation with open source actually widened out the number of different types of use cases. You saw a wide variety of things being done.

And also the industry – I’ve been in it since 1990 – in some ways, it is a lot of the same types of industries that need this level of control of their most important content, and most important information. And you’ll see some of the same types of services.

But we were seeing ourselves injected in a lot of digital processes that when we started simply did not exist.

In that time frame, we’ve seen massive globalization. So things like logistics and coordination across multiple geographies become a new value proposition that probably wasn’t quite as important in 2005 as it is today.

To see the digital value chain and the digital supply chain being just as important as the physical supply chain in terms of distributing information for things like financial services.

But even in manufacturing as well, the digital artifacts will be sent ahead – in terms of specifications, digital assets, and coordination information, logistics – well ahead of the actual physical goods. And so it’s becoming part of the supply chain as well.

I think in a lot of ways it has changed quite a bit, but some of those standard use cases of: Let’s get control of our contracts; let’s get control of our web content; let’s get control of some of the records and specifications, and things like that, is still very important, still very valuable for companies.

It’s often some of the most important intellectual property, and most important information that the company has, and needs to safekeep.

Community Building

Michael Schwartz: So, as I understand it, you started the company and the open source project roughly at the same time.

John Newton: Yes.

Michael Schwartz: How long did it take for the community to achieve critical mass?

John Newton: Actually a lot faster than we had expected.

How we got started was, it started as a hypothesis. I have a team here in the UK, I knew what we could build. And the question was could we build and distribute it faster using an open source model?

We tested it out on people who might know, so people who were prominent in open source at the time. Whether it’s, I think it was Bob Bickel at JBoss, and Mark Fleury, David Axmark, and Martin Micko at MySQL. Many people, as well as some leading CIOs I knew from previous roles that I had. Talking to some of the CIO’s of some of the banks, it seemed like, yeah, there’s an opportunity.

I asked one of those guys, “If we got, say a hundred thousand downloads by the end of this year, would that be good?” They said, “Yeah, that’d be pretty good.”

So, we went out, and we just built this thing. We just, hell for leather, to build out a demo and get it out.

And we tried to time it around a major industry event, which was JavaOne at the time. You know, it was just good confluence of interest in open source, an event where we could launch this thing. And also my background as well, being from traditional Enterprise software, being the Co-Founder of Documentum, meant that I had kind of instant credibility in the space.

So I got on the cover of InformationWeek, and that just launched everything.

We hit a hundred thousand in like a week, or something like that. We did well over a million, I don’t remember exactly how many we had by the end of the year.

We started in January 2015, well, more or less around the beginning of the year. And by the end of the year had about a million downloads.

So, from the launch of the first beta to critical mass on the community, from the release of a product was probably about six months, we got critical mass, if not sooner.

And then in terms of actual sales, starting to sell an Enterprise version, there was some experimentation on that – what works, what doesn’t work. We were starting to get our first sales early in the first year, and we were doing pretty well in the next full year of existence of Alfresco.

So, getting that first sale at the beginning of the new year, and then by the end of the year, I think we had about a million and a half, and it was just a hockey stick from there.

Community Contribution

Michael Schwartz: How would you say that the open source community has materially contributed to Alfresco, the company?

John Newton: Very early on, we learned a lot from existing commercial, open source companies in terms of what to expect, in terms of contributions.

I think coming in where there had been no open source alternative at that point, opened up just a flurry of innovation from people who like the area. Again, it was like a four or five billion dollar industry with people building solutions around it, and just wanting certain features and just adding and contributing to it.

Still, by far, most of the contributions were from our company.

But over time, we started getting some from some of our partners as key participants in the open source community. We got some important extensions, important new core capabilities as well, in terms of adding new intelligence into the system, or transforms, or various components like that.

Over time, the community itself started to organize some of its own events, and we’ve been quite happy to participate in those events, with a bit of a more independent feel, in terms of what we do, and to protect the integrity of the open source community. So, it’s called the Alfresco Order of the Bee.

They’ll have events around the world, and in some really interesting places sometimes. But they’re very important core part of who Alfresco is, and the Alfresco community.

Open Core

Michael Schwartz: Alfresco is probably one of the first companies to define an open core business model. Did you have to tweak or adjust that strategy?

John Newton:Yeah, I think we experimented with the license, that’s been an important part of how you build and deliver an open core model.

We experimented with LGPL. Then went to a modified Mozilla license. Then went to GPL, and then finally settled on LGPL as well.

As part of that, we had to carefully choose what elements we were going to be Enterprise.

So, yeah, it’s an open core, but it’s a pretty big core as well. It was really important for us for the people who download the product to have something useful, to have something successful that they can work with. And that, on its own, should be able to do something of good value.

And just putting out a demoware, and open source as demoware, is not really going to get you what you want in terms of a thriving successful community. So, what we ended up doing after a few experiments of what would work, what wouldn’t work.

We experimented with just pure security being an Enterprise feature – that didn’t really cut it. So, we made that community, but maybe degrees of security, degrees of deployment, degrees of configurability, are some of those things that you could do.

And so, what we ended up doing is coming up with a set of principles as to what we felt was fair to be able to monetize as opposed to making that line arbitrary.

It’s almost like a social contract between us in the community. Like – you’re getting software, in fact, more than 90% of what’s being delivered is being delivered for free as part of the community. But it’s that other 5 – 10% that’s really important for us to be able to have a sustainable business model to continue feeding into the development of Alfresco.

That open core model did evolve, and I think it’s been pretty successful in terms of how we’ve approached it.

Some of the capabilities – particularly when you get into the Cloud, how you deploy in the Cloud, how you look at Cloud native capabilities – things are changing.

Also, some of the business models of the components that we use have changed as well in terms of search, and databases, and things like that. So we need to be able to adapt to those more effectively.

And if you do it from a principled point of view, to say, “Here are the principles by which we are living,” then I think people tend to buy into that, and it makes for a more successful open core model.

Updates to Old Versions

Michael Schwartz: I read that Alfresco only releases bug fixes for the current Community Edition. I thought that was a really interesting nuance.

Has that been an effective incentive to get customers to upgrade to an Enterprise subscription?

John Newton: Yeah. I think for a lot of professional, commercial open source companies – my understanding is that it’s a pretty common model.

Customers tend to want to be able to live on a stable version for, sometimes for years. So that’s part of the incentive, yes, to be able to move over.

As far as up-keeping older versions of open source, I think that tends to be the way most open source projects work as well. We’re not going to go back and fix that in the older version, move onto the new version.

And it’s ever onward, ever forward for most open source projects.

That stability that large Enterprises in particular want, that is part of the incentive, is to buy into that. Also things like indemnity on the software, and warranties on the software. So that is probably that the majority of what people buy into. Perhaps even more so than some of the Enterprise features.

Sales and Marketing

Michael Schwartz: Can you talk a little bit about sales and marketing – was it initially mostly inbound? And have you evolved to a more traditional Enterprise sales organization?

John Newton: When we started, it was almost entirely all inbound, so your open source community is your sales force.

They’re going out, they are trying it, and they’re proving for themselves that it can solve their problem. And then you just create a low-friction sales process that – if you like it, and you want to buy into it – you just call up, sometimes you just email in, and you’re negotiating, and you get the contract done.

We were doing anything up to six figures with an entirely inbound process, and sales people who were not heavy-duty enterprise sales people as part of it. But when you start getting top-tier banks and also major government agencies, and you’re getting on the radar of the major software vendors, non-open source software vendors, then the process can become longer but also much bigger.

You know, the whole concept of land and expand. The inbound model is just land, and if you’re lucky, it’s land, land, land inside of an organization. But if you really want to get these things joined up and start to move up as part of the CIO agenda, then you have to have a proper enterprise sales force.

Trained Enterprise sales people as well are new to open source. They may be very familiar with your software and how things are done, but the whole idea of giving software away is kind of new to them, and something they have to get their head around. And generally, they do get their head around it. Sometimes, there’s a little bit of friction between Enterprise sales and the ommunity.

In the end, it’s the community that’s feeding a lot of those Enterprise sales, whether directly or indirectly, because it could have been a project earlier on using the open source model that may have gotten the whole ball rolling – even if the economic buyer was not even aware that their technical people had downloaded it at some point. But those are the people who will be involved in those sorts of conversations.

So, a lot of the time, at that scale, the Enterprise sales end up being very different than your typical open source engagement, even still fact that it is open source is important for those customers in banking, insurance, and government.

When you ask them why did you buy Alfresco, often the number one thing that they say is because it was open source.

Partner Channel

Michael Schwartz: It seems like Alfresco has a really strong partner network, and I’m wondering if you can talk about what percentage of, let’s say, business comes through the partner channel, and how you see the partner channel growing?

John Newton: The difference between the partner channel and the direct channel is sometimes regional.

Even in a non-open source model, I’ve seen it, where the European sales process can often be more partner-lead than the US, which might be more direct.

I think it’s the behavior of everybody involved – the customer, the sales organization, and the partners – just different mindsets and different ways of looking at problems; different ways of being solution-oriented – who initiates it: Is it the partner is it the customer?

Traditionally, it’s been sort of a 50/50 mix between the two, a bit more direct in the US, and a bit more partner-oriented in Europe. And regardless, partners will probably still be important as part of the sale overall.

Sometimes it’s just a matter of who takes the paper as opposed to who’s leading the sale.

Demand is sometimes created by the partners. They have a solution, they take the solution in, and they can bring it in sometimes as a cookie-cutter into different parts of a similar industry. And that’s great, that works for us quite well.

Sometimes, we are the ones doing the demand generation, and then we do the direct sale, and we’ll bring a partner in for implementation if the customer isn’t capable of doing that.

It’s all part of the ecosystem and all part of the sales process.

We try to treat our partner channel just like our sales channel – they’re involved in our sales kickoffs, they get the same information, and the same rah-rah events. And they’re sort of part of the family as well, just as much as our employees are sometimes.

Impact of PE Buyout

Michael Schwartz: So, last year, Alfresco was acquired by a private equity fund. I’m wondering if that’s resulted in any pressure to tweak the open source strategy?

John Newton: Not at all. It’s really sort of a substitution of investors more than anything else.

We were funded using the traditional venture capital model. We had four rounds of funding. There’s just the time limit on the venture capital funds in terms of putting their funds to work.

We got a new set of investors, and the lead investor from T.H. Lee happens to have a very strong software background, what has been a customer of Alfresco in the past, and just understands exactly the importance of both the open source model as well as what our objectives are.

So, this is still very much a growth opportunity.

We’ve grown very nicely in the first year that we’ve been owned by T.H. Lee. And I would say it’s a good combination of helpfulness and sometimes hands-off, sometimes hands-on control of some of the things that were going on, but very supportive as well.

So, it’s not like trying to squeeze blood out of a stone, quite the opposite. We are growing, we are profitable, very profitable. We are having a nice combination between those two factors that are important for us to sustain our business.

Challenges For open source Companies

Michael Schwartz: In general, just to go off-topic of Alfresco for a moment: What do you think are the biggest challenges facing pure-play open source startups today?

John Newton: Well, I’m a little bit concerned about the economic environment right now.

If you’re starting up right now, I hope you are well-funded. There are venture capitalists here in London who are saying get a hold of 18 months worth of runway.

I think economic headwinds, if we still have trade friction around the world, are going to take their toll.

There’s always going to be an opportunity for open source startups that will help cut costs. In fact, they will absolutely thrive in a tough economic environment. However, when a recession first hits, which it’s got to at some point – I’m not saying it is right now or that’s going to in the next year or even two years, but at some point it will hit – and any young company is likely to hit economic headwinds in the medium-term.

So, just be prepared for that.

But if you are in a position that your value proposition is really clear, you can help cut costs, then that always does well in tough economic times. Especially if you are a cost-effective technology replacement for something that exists that’s very expensive. That’s probably the biggest one.

Also, established players are far more familiar with open source now. They have their arguments lined up, but then also customers are more savvy, in terms of what open source is, and more understanding in what it is – in fact, actually really want open source.

But there’s an interesting sales playbook that they use against open source, they’re just not quite as effective as it was before.

And then, also, just really look out for crowded marketplaces. Don’t go where there’s lots of people already.

One thing about open source right now, it’s been such a successful model. You just see a lot of people in the same space, don’t go in the same space, go where there’s an opportunity to differentiate and create real value that no one else is creating overall.

That would be my recommendation right now.

Advice For Entrepreneurs

Michael Schwartz: You started two companies. And I’m wondering, do you have any closing advice for entrepreneurs – the people versus the companies – about entrepreneurship specifically with open source, or just in general, even?

John Newton: Well, what I’ve learned is life-work balance is important.

My first company, I just overdid it on the work side, and I don’t necessarily recommend it. In fact, my very first company was Ingress, and I definitely overdid it there too. Take time for your family, take time to step back and reflect, and it’ll be a much more enjoyable ride.

It is a marathon, it’s not a sprint. So in order to have the staying power, work-life balance has to come into that overall.

In terms of open source, I would say what’s really important is to have a passion for the technology that you’re working with. You can have a passion for open source, but if you don’t have a passion for the technology you are working with, it’s going to get old pretty soon.

Just do what you feel interested in, and what gets you really interested. There’s going to be lots of times where you just can’t wait to get up in the morning to work on that thing or solve that problem and just get going.

When you have that passion, it just gives you the energy to get stuff done. You will need the energy to get that stuff done.

Those are probably the two most important bits that I could probably give right now.

Closing

Michael Schwartz: That was really fantastic. Thanks so much, John, for sharing your insights.

John Newton: Thank you very much, it’s been fun.

Michael Schwartz:Thanks to the Alfresco team for helping to organize the interview.

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

Music from Broke For Free and Chris Zabriskie.

Audio editing by Ines Cetenji.

Production assistance and transcription by Natalie Lowe.

Operational support from William Lowe.

Follow us on Twitter, our handle is @fosspodcast.

Next week, we interview Paul Dix, the Founder of InfluxDB.

Until then, thanks for listening.

Episode 26: GitLab – DevOps Lifecycle Tool with Sytse Sijbrandij

Syste “Sid” Sijbrandij is the Co-founder and CEO of GitLab, a DevOps lifecycle tool. In this episode, Syste discusses product pricing and their approach to hiring a globally-dispersed team.

Transcript

Introduction

Michael Schwartz: Welcome back, and thanks for checking into Open Source Underdogs.

We have an epic interview this week with Sid Sijbrandij, Co-Founder of GitLab.

GitLab provides an on-premise platform for code management and continuous integration. In some ways, their story proves you don’t always need to be first. GitLab didn’t invent Git, Linus Torvalds did that in 2005. GitLab was started well after GitHub.

Sid has some great advice for open source startups. I don’t want to give it away, so let’s just jump in.

Origin Story

Michael Schwartz: Sid, thank you so much for joining our podcast today.

Sid Sijbrandij: Thanks for having me.

Michael Schwartz: So, how did GitLab get started?

Sid Sijbrandij: Yes, so GitLab got started by my Co-Founder Dmitriy.

Two things he wanted to improve in life: He didn’t have running water and he didn’t have great collaboration software at work.

He didn’t have budget to pay for either of them, so he did what he could do, without spending any money, and he built better collaboration software.

300 people joined him in contributing to that, and I saw it when GitLab was one year old, and there were 300 people contributing. I thought, this is great. All the software I use is open source, so if anything should be open source, it should be the software I collaborate with, that should be open to contributions.

I started GitLab.com – I thought a SaaS model made a lot of sense. I sent Dmitriy an email saying “Hey Dmitriy, I’m going to work on this, if you’re not going to be part of it. I hope you don’t mind.

And he sent back, “No, it’s fine. It’s open source, just go for it. I hope you make GitLab more popular.” I thought that was pretty open-minded of him.

A year later, I learned a few things. First of all, most big Enterprises are self-hosting GitLab, and they had a big need for more features.

Another thing that happened was, Dimitry tweeted out “I want to work on GitLab full time.”

So I sent him an email like, “Hey – can I hire you to pay you to make those features that customers want?”

We agreed on a price, I went to the local Western Union money station in the Netherlands, and I said I wanted to wire some money to Ukraine. They asked me, “Do you know this person, or is this someone you met over the internet?” because there were a lot of scams going on.

I took the risk, made that wire, and we were in business. We started making those features that people asked for. Dmitriy also got around a couple years ago.

Why ADD CI

Michael Schwartz: GitLab is more than a version control tool – it’s a single application for the entire DevOps lifecycle. Why did you evolve the product in this direction?

Sid Sijbrandij: Dmitriy never wanted to upgrade another Jenkins server again, so he built his own CI system.

That was kind of a side project, it wasn’t official GitLab project. We published source, and we had to improve it a bit for our own needs, and then people started contributing to that too.

And at a certain point, we got an amazing contribution from Camille in Poland, and we said, “This is amazing, we’ll make your version the official version from now on. And by the way, do you want to work at GitLab?”

And we hired him, and after a couple of months, he said to Dmitriy “Look, I think we should integrate the two projects. I think we should make it a single application.”

Dmitriy pointed out how it was wrong because everything in the marketplace, it’s separate, like there was not a single version control tool that also had CI. He disagreed, said it would be better, and he convinced Dmitriy who came to me, I also pointed out that we should have many sharp tools that you could compose together.

He said, “Well, if you don’t believe it’s better for the user, at least believe it’s less work.” Efficiency is one of our values, so we did it, and it turns out he was totally right – it was a much better user experience, which was kind of intuitive to us.

We integrated the two applications, to get it really tightly, we had like custom APIs to make them work together. But it was still so much better if you didn’t have to switch to another user interface, if you had a single-data model and could service all the relevant information. We realized that we discovered something, a secret, not in the sense that we wouldn’t tell people but in the sense that it wouldn’t be intuitive to them.

We started adding more and more features, and today, GitLab goes all the way from planning what you want to do to the point that monitoring that, securing and defending that, and managing that entire life cycle.

And it’s one of the top reasons that people like to use GitLab over stringing together 10 different DevOps tools, and then having to maintain all the integrations.

What is Open V. Commercial?

Michael Schwartz: As I understand it, GitLab is open core. How do you decide which features to make commercial?

Sid Sijbrandij: It is very hard for us to figure that out. We first tried to kind of charge for features that we thought were used by bigger companies, but that’s not a really clear distinction.

So, we settled on something we called buyer-based open core, where we have four different roles in companies that care about features, they are the individual contributors. And if they care about a feature most, we make it open source. That makes it very easy to contribute back.

Then, if it’s managers, directors, or executives, we place it in one of our price plans, going from the lower tier to the higher tier.

If an executive wants a feature, for example something compliance-based, it’s the most expensive price per seed. If a manager wants it, for example, to increase the performance of the GitLab instance, it’s the lowest price per seed.

How To Distribute the Bits

Michael Schwartz: GitLab Community Edition is MIT licensed – how do you actually publish and distribute the commercial version? And what’s the upgrade path to go from the Community version to a paid version?

Sid Sijbrandij: We distribute two variants of GitLab, Community Edition and Enterprise Edition – both are very similar, both are available, and both got like all the security updates. By default, we have people download the Enterprise Edition, and you can use that without a license key or anything else.

And then, you just get all the open source features. The advantage of that is that if people want to upgrade, they don’t have to do a reinstall, but they can just give it a license key and unlock all those additional features.

Customers

Michael Schwartz: Who are the customers of GitLab?

Sid Sijbrandij: It is a very wide variety of users of GitLab. There’s over 100,000 organizations that use GitLab.

The majority use the open source version, so they are users but not customers. Many customers range from people that buy a single seed all the way to Fortune 500 companies that use it with tens of thousands of people.

Market Segmentation

Michael Schwartz: Do you segment the market at all? It’s such a broad horizontal market, I’m just wondering if there’s any way that you break up the customers?

Sid Sijbrandij: Yeah, for sure.

For the open source, we have a developer marketing team that focuses on serving the needs of our users and to make it more popular. At the bottom of the pyramid, we got self-serve, where we do a lot of automated programs. We have people mostly help themselves by our website, or our pricing is public.

For the middle of the market, we are a bit more active. We do reach out to people, we have kind of inside sales representatives that help the customer.

At the top of that market, it’s a classic Enterprise sales motion, where you have strategic account leaders that visit the customer together with a solution architect; we have technical account managers to ensure that they are successful with the implementation.

Evolution of Value Proposition

Michael Schwartz: I imagine the initial value proposition was something like GitHub but deployed on your… or self-hosted, let’s say. Has the value proposition for GitLab evolved over time?

Sid Sijbrandij: We started making features that people really needed. For example, things like protected branches, and now protected environments, were first introduced in GitLab.

We also try to cater to the organizational complexity. For example, GitLab has subgroups, so that you can make kind of a hierarchy of projects, and have better communication and control throughout the company.

Apart from the open source, or apart from the version control, we also started doing other things, the CI, but also planning tools. We now have like portfolio management, packaging, for example. We have container registry as part of GitLab, but also configuration, continuous deployment, and monitoring. We expanded the scope of the product as well.

It’s always important to, in any case, you can also add to do that. What’s helping is that not only are we thinking of stuff ourselves, we also got open issue tracker, so people can contribute ideas, and we also get a lot of code from the wider community.

Last release, last month – more than 200 features came from the wider community that was shipped.

Evolution of Pricing

Michael Schwartz: One of the biggest challenges for any open source company is pricing. If you price wrong, you end up giving away too much value. If you price too much, you might price out an important segment of the market. What process did you use to figure out how to find the right price points?

Sid Sijbrandij: I did the classic thing that a technical founder does, and I priced too low.

So, our first Enterprise customer was using GitLab with thousands of users, they were prepared to pay tens and tens of thousands of dollars reserved for that. I priced it at $1500 for all the users of a Fortune 1 company. And so that was a big mistake.

Over time, we got better at it.

Our pricing was so off that in the beginning, we doubled the pricing, and all of our customers said, “This is fine – you were really too low, but just don’t do this again.”

So then we started thinking what to do next. And first we tried kind of price features – so we had 15 different features that were all priced separately. That tended to be very cumbersome to sell and to buy for the customer.

Then we switched to a pretty classic “good-better-best model,” and there’s a pretty steep change between the different plans: So our lowest plan is $4 per user per month, and our highest plan is $99 per user per month.

First we had the, kind of, the “good plan.” We introduced a better plan at a five times higher price. And in the beginning it was like, “Well, this is too expensive,” but over time we were able to add more features to it. And then we did the same thing again while we introduced a new tier, at five times higher price.

In the beginning it was too expensive, and we had to discount. But over time, we were able to add more features, and add more value to it. And over time, we were able to do it with less discounting. We have already started seeing that, where we’re now selling that at full price.

More On Pricing

Michael Schwartz: How many times per year do you tweak your pricing?

Sid Sijbrandij: So far, we haven’t done that. It’s a good business practice, I think, to adjust your prices, for at least inflation, once a year.

For us, because there’s a 25x difference between our lowest and the highest tier, the focus has been to move people up to higher-price tiers.

Michael Schwartz: I see. So, your pricing has sort of stabilized. Once you figured it out, you were able to sort of stabilize pricing, and you haven’t had to tweak it that much.

Sid Sijbrandij: Yeah, we tweaked it by introducing new tiers. And what’s really important to our customers is we didn’t take any features away from the existing tiers.

So if they paid for something, we didn’t change the pricing on them, apart from that one-time doubling of the pricing. But after that, we kept that stable, and we focused on convincing customers that there was value in moving to a higher-price tier, with more features, and functionality, and support.

Partnerships

Michael Schwartz: So, changing gears a little bit, I’m wondering about partnerships – were there any partners to GitLab that were materially helpful for building the business?

Sid Sijbrandij: I think in the beginning, it is very, very hard to partner because you’re so small. It can lead to a lot of wasted time.

For us, that changed after GitHub got acquired by Microsoft. And now other kind of platform partners, people that have Cloud or Kubernetes distributions, see the risk that if people stay on GitHub, that Microsoft and Azure are going to be very, very close to that customer.

So now we’re partnering with partners like AWS, GCP, VMware, and RedHat, to make sure that if people have a Kubernetes cluster, that we recommend the GitLab to them in order to deploy their applications there.

Community Cheerleading

Michael Schwartz: How have you energized the community to such an extent that you’re able to generate such a great amount of contribution?

Sid Sijbrandij: In the first place we’re really lucky, because we make a product that is used by developers, by security people, by operations people – and those people tend to be proficient at coding, so for us, it’s easier to get those contributions.

But as GitLab grows as a product, it’s harder and harder for people to see where they can contribute. So we label certain issues with accepting merge requests to say, “Hey, consider contributing here.”

People are free to contribute anywhere they want, and then when they do so, we have merge request coaches that help them get over the finish line.

Because sometimes the code is there, but it’s not according to the coding guidelines; or they have the code, but they haven’t written tests; or they have code and tests, but they haven’t written the documentation. And those merge requests coaches help with doing that.

We also make sure to kind of flag the contributions, especially first-time contributions that make sure our product managers are aware, and that we kind of take action on them in a
response, in an appropriate amount of time to the contribution. And then when it gets merged, we send them a thank you gift, just a small token of our appreciation for the contributions.

We also do regular hackathons.

I want to shout out to Ray – Ray is kind of like coordinating this effort. In the last six months, we’ve seen the number of contributions double from about 100 to about 200 every month.

So just being receptive and having a program around it has been a major improvement for increasing the number of contributions.

When to Open Source Software

Michael Schwartz: Do you have any thoughts about what type of software should be open source, and what type of software should be commercially licensed?

Sid Sijbrandij: Well, first of all, GitLab is open core, so we’re doing both.

But I think open source makes sense if you’re making something that is foundational to a lot of other things. If almost everyone in the world needs that, it makes a lot of sense.

Almost everyone in the world needs a database. Almost everyone in the world needs great DevOp software, like GitLab. So I think projects that are going to be used by so many people, then open source works.

I think when you make something that’s going to be very much aimed at a specific vertical, let’s say biotech, and the users of the software are unlikely to contribute back – it sometimes makes more sense to make something proprietary.

What you get with open source is that you create a ton more value because you get a ton more usage – but you can charge less relative than proprietary variance.

So you’ve got to make sure that increase in distribution that open source gets you will be so big that it compensates for, kind of, a lower take-rate or capture-rate in the form of pricing for your software.

Breadth of Depth

Michael Schwartz: I was reading the GitLab company handbook, which is quite extensive, and quite transparent. And in your strategy section, you mentioned that your competitor started before you got more capital, and that you needed to focus on breadth over depth. I was wondering what exactly does that mean?

Sid Sijbrandij: Thanks for asking that question. We have an amazing community that contributes back a lot of improvements to GitLab; and those tend to be things that are features that are missing within a specific stage.

So, we introduced a new monitoring stage, and hopefully at some point it becomes like interesting enough for people to start using it, and then they miss a certain thing, and they’ll add to it. What we haven’t seen from the wider community is biting off more scope.

When we had version control, the community contributed to that, but they didn’t add CI, we had to add CI. Once we had CI, the community contributed to that, but they didn’t add packaging. And the same story again for all of those at different stages.

That’s because, if you create a new stage, it takes a lot of coordination. It takes, like, working the user interface; it takes kind of fundamental architectural changes; it takes a deeper understanding of the product.

And to do that, it’s a full-time job. To make such big changes, you have to be well-versed, and it takes a team of people to do that. And someone making a contribution is unlikely to have that much time and that big of a team to make that change.

So, we as a company, want to focus on increasing the breadth of the product, biting off new scope, going into things that haven’t been there before. Then, the wider community helps us to add depth to it.

We want to till the land and then make sure it’s fertile, so that the wider community can grow things on it

Remote Workforce

Michael Schwartz: GitLab is sort of well known for being having a remote-only workforce. And I’m curious if you could share some of the lessons learned about pursuing that strategy for building the team?

Sid Sijbrandij: We’re an all-remote team, we have now 650 people across more than 50 countries. It’s been amazing that we’ve been able to hire people, in like 90% of the cases. Normally, you’re constrained to the places where your offices are. And at GitLab, we hire people irrespective of where they are.

Today, we got someone who moved from our Support team to our People Ops team. She lives in Kenya, and she mentioned that she’s regularly late for airplanes, which was a fun fact. We see people from all kinds of places all over the world, and because we don’t have a headquarters, nobody is, like, in a satellite office. Everyone is on an equal playing field. And we did that from the beginning to be on the same level as the wider community.

We work in our open issue tracker, so you can see the real work going on, all kinds of things, but also like a marketing and finance issue trackers – how we run the company. Not everything can be public but a lot of things are public, and you mentioned the handbook is over 3,000 pages with all of our processes.

Regarding hiring, it’s a pretty conventional part of our process. There’s different interviews, it’s all done over video – unless you are local to someone, you can meet up if you want – but most of the time, it happens over video. We make sure that people can get a good feel of the company before they join, so you kind of know what you’re getting into.

We recently hired Mike Pyle, our new VP of Enterprise Sales, and we said afterwards “Zero surprises, like I was completely aware of what I was getting into.”

We like to do it that way, and that way we can retain people longer.

What If GitLab Changed License To Commercial

Michael Schwartz: Here’s sort of a question from left field… If you made GitLab commercial tomorrow, do you think that it would negatively affect the business?

Sid Sijbrandij: I assume you mean that from tomorrow on, all of our code would be completely proprietary? Of course, we cannot take back the code that’s already there, so what would happen is that someone would fork the project almost immediately. There’s over a hundred thousand organizations using it, and a lot of them would like to see it open source.

I do think that short-term, we’d probably make more money. There would be more people willing to pay for the support and updates that would, from then on, only be available if people pay us.

But the flow of contributions would stop.

There would be a fork. I think the fork would not attract as many contributions as before. There’s confusion, there’s no merge request coaches anymore, there’s no people helping to get stuff over the finish line.

Both projects would peter out.

Our commercial variant would see almost no contributions, and the open source fork would have troubles kind of keeping up with the rate of contributions, and bugs that get released there – we pay full-time people to handle that, and they won’t have that.

I think our numbers would look better after a year, but if you look at a 10-year outlook, it wouldn’t end well for us, and it won’t end well for the community. We have stewardship promises, which you could Google by typing in “GitLab stewardship,” and we intend to keep those, and that includes always keeping this open core model.

SaaS GitLab

Michael Schwartz: You initially launched a cloud-hosted version of GitLab.
And we’ve heard from other open source entrepreneurs, particularly Eliot Horowitz from MongoDB, strongly advocate for a cloud model. But in your case, there’s another very well-known company called GitHub that is in a similar business – so you’re sort of in a unique position.

I’m curious about your thoughts about how you see the cloud-hosted version of GitLab progressing, and where you think that fits in the market?

Sid Sijbrandij: GitLab.com is our SaaS version. We tend to not call it “cloud” because most of our self-hosted instances, self-managed instances, are also hosted in the cloud on AWS, or GCP, or Azure.

But our SaaS business is growing at a very rapid pace, people are embracing that. We invested a lot of time and money to make sure it’s a great experience.

In the beginning of GitLab, I think we had an edge in that GitHub was paying more attention to their SaaS version than their self-managed version, and that was a way for GitLab to enter the market.

Although we’re still strongly self-managed, by now the product is so complete, that people that want an end-to-end DevOps experience don’t want to be maintaining all their tools, and they’re flocking to GitLab.com. So we’re seeing strong growth there.

Open Source Challenges

Michael Schwartz: What do you think are some of the biggest challenges facing open source startups today?

Sid Sijbrandij: One of the most obvious ones is how you monetize a product, and the threat of the hyperclouds commoditizing your product.

I did a talk about this on the Linux Open Source Leadership Conference. And I talked about like, how big is that threat?

I think it’s differs a bit from company to company. But if your product is kind of a service that other things are built upon, like a database for example, that has a limited API, and it’s already offered as a service by hyperclouds like AWS – there is a risk that they will kind of take the project over, or what they did in case of Elasticsearch – they forked and commoditized the project.

And that is within their rights, but that makes it harder to kind of start-up around open source. So people are exploring different licenses.

At GitLab, although that risk is there, it’s reduced. Although we have APIs, it’s also a user-facing application, with a user interface. And currently it’s not offered as a service by any of the hyperclouds.

So for us, the problem is less acute. Also, for us, it would not be possible to change our licenses as others did, because we switched to DCO, a Developer Certificate of Origin. So if you contribute to GitLab, you retain the copyright on the code you contributed.

Hypercloud a Victimless Crime?

Michael Schwartz: So, to play devil’s advocate a little bit. The companies – for example, MongoDB or Redis or Elastic – they haven’t exactly lost a lot of value. Is it really a victimless crime because they seem to be doing better than ever?

Sid Sijbrandij: It’s great to see open source doing great. I think we’re able to build companies on open source projects – that didn’t used to be the case, and now that’s possible. So, that’s a great benefit.

I think the whole industry is watching what’s happening with open distro for ElasticSearch, and whether that will bite into the monetization that Elastic, the company, is able to do.

Advice For Entrepreneurs

Michael Schwartz: The last question is more about the people than the company.

You’ve had quite an amazing entrepreneurial journey, and I’m wondering if you have any advice for the people who are starting these companies. What advice would you have given yourself if you could go back in time?

Sid Sijbrandij: I think one of the things I did that I thought was kind of a bad thing but turn out to be a good thing, is I optimized for interestingness. And if I find something interesting, I dive into that, and I follow that.

And it’s served me really well. And I thought that was a very selfish thing – I did it because I liked it – but it also tended to lead to great business outcomes.

So if you follow your own interests, it’s more okay than you might think.

Credits

Michael Schwartz: Sid, thank you so much for joining us today.

Sid Sijbrandij: Thanks for having me.

Michael Schwartz: Thanks to the GitLab team for helping to organize the interview.

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.

Tune in next week for an interview with John Newton from Alfresco, one of the first pure-play open source companies. I’m sure John will be super interesting.

Until then, thanks for listening!

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 19: WSO2 – API Management Platform with Tyler Jewell

Tyler Jewell is the CEO of WSO2, maintainers of a popular open source API Management Platform. In this episode, Tyler discusses WSO2’s subscription-based business model and the future of cloud versus on-prem services.

Transcript

Intro

Michael Schwartz: Welcome back to Open Source Underdogs, the podcast where we get you into the middle of open source business models.

Our guest today is Tyler Jewell, CEO of WSO2, and a partner in Toba Capital, a Bay Area VC fund.

Tyler does a pretty good job of explaining what WSO2 is about, so let’s just dive right into it.

Tyler, welcome to the podcast.

Tyler Jewell: Hey, thank you for having me.

Michael Schwartz: I’d love to hear a little bit more about your background. You worked for Oracle, Quest, Veritas, PA – how did you get here? And what did you find so exciting about the opportunity to lead WSO2?

Tyler Jewell: Well, I’ve started off my career with a degree in Computer Science, I had a very short-lived career as an engineer. I wasn’t all that good with that, but I got this amazing exposure to enterprise software, spending six years of BEA in various product-related roles.

And that really led to a career in product management. Got exposure to different companies and different products, usually related to developers, middleware integration, DevOps, and successively worked on projects of different complexity and scale. And that really helped build a global view of markets, products, and how you move those products to those markets.

And, through accident more than anything, while I was at Quest Software, and doing product management, they had a view of markets, which were combination of mergers and acquisitions, investment, and product management in the classic sense. And I got invited to work on a variety of corporate development activities, a few acquisitions, some divestitures, and for a while, leading their investment portfolio.

Once you start wandering in the corporate development, you really develop a broader view of markets, and you start to look at things about, “how do I help develop the market?” And there’s lots of ways to do that besides just building products.

And that just gives you a completely different perspective on the ecosystem, how businesses are built, and that opened up all kinds of other opportunities for me. I started doing board work, I had done angel investments, the corporate investments.

Over the years, I put about a hundred million dollars of venture capital and money to work in various companies, all related to DevOps. That got me opportunities in Oracle, and eventually allowed me to form the hypothesis on why I started coding.

And it was never a goal for me to become a CEO, but just the opportunity was so exciting, and people were asking me to lead it and go forward with it. Next thing you know, you’re the CEO of a company. Codenvy, the investments were just a wonderful experience over 6 years.

And when Codenvy was sold to Red Hat last year, the founders of WSO2 – which I’ve been on the board for almost eight years – were ready to focus on being technical founders, like, the relationship that we had, and asked me to come on board here.

So, it’s just been really one thing after the other, there’s been no particular vision in mind other than good technology, good people, and kind of developing markets.

How Does Open Source Enhance The Business Model?

Michael Schwartz: WSO2 has created a number of successful enterprise integration software platforms. How do you think that making these platforms open source enhances the business?

Tyler Jewell: I feel like that open source is this important trade-off that you make. By opening your source code, you are creating an environment of visibility and transparency that should lead to a community in all sorts of ways that you can’t even anticipate in the beginning.

So, if you can put value on some definition of the community through that transparency, then it’s a good trade-off to make. When you’re dealing with investors, I tell investors, “look, open source really is supposed to bring investors to key attributes.”

The first thing is that if the investors are paying for the intellectual property to be developed, and then the company gives up some of these rights by putting an open source license on it, then in exchange for that, they should get a significantly higher rate of distribution on their software products.

If it’s available, and there’s limited restrictions on access, they better be paired with some sort of mechanism, by which you get a hundred, or a thousand, or ten thousand extra distribution. And that’s meaningful because it should generate a lot more opportunities for you to sell your value than it would have otherwise.

The second thing is that there is this unwritten, implied contract between the open source vendor and its community. And the community, whether they realize it or not, because they have access and rights to the software, they do take on some implied obligation of evaluating the software a little bit more thoroughly, without depending upon the vendors resources.

So, there should be, overall, a much lower cost of sale because more of this evaluation process can be done without the vendor having to commit resources to do it. So, from an investment point of view, those two qualities really should materialize, and obviously that should leave to a good rate of return.

Value Prop

Michael Schwartz: WSO2 has several products, and I guess each product has its own specific value proposition. Do you think that there is an uber value proposition that is common among WSO2 products?

Tyler Jewell: The perception is, as WSO2 does have a number of different products, but we play in a single market, which is the integration market. And the integration market is really defined itself to be API-driven over the past few years.

So, you don’t do integration unless you’re going to package it up into some sort of API. And so, every product that the company has is really tailored around this narrative on what an integration platform needs to take in order to deliver on this API-driven vision.

You start with APIs, you then need API management. In order to build the APIs, you need to have an integration backbone, so that’s an ESB and message broker. And then, you need to secure all that, and that’s how we get to the identity space.

The company, for a long time, was very technically-oriented, it positioned a lot of these things as separate, individual components, but all the components were really designed around this common integration narrative. Over time, I think the company has gotten better about how to communicate that.

What Does Open Source Mean To WSO2

Michael Schwartz: What does open source mean to you? Is it just licensing the code under an open source license, or does it mean something more?

Tyler Jewell: Open source to me is a commitment to openness more than anything.

I think that the phrase “open source,” it too easily implies a licensing model associated with that. But if you’re really going to call yourself an open source business, you need to have a commitment to openness. And when you commit to openness, this creates a level of transparency that allows you to get a level of trust with your potential customers, and when you have a higher degree of trust, your interest becomes more aligned along the way.

I think that most companies start off by just looking at this as a licensing mechanism, they can put it out there, and you get this kind of distribution exchange. If you start to see that the whole business process and the workflow around the intellectual property can be equally opened up, it just really changes the dynamic of how your prospects, and your partners, and your employees engage with each other, and with the rest of the world.

That creates these aligned interests, which, then, fuel growth in profits, which are the things that businesses look for.

What Types Of Software Should Be Open?

Michael Schwartz: Not all software necessarily should be open source. What types of software do you think lend themselves to being open source?

Tyler Jewell: I’ve certainly seen it, the case where it’s an enterprise software, where if, there is a wide spectrum of opinions on the direction that the software can go, opening that up to community is a very effective way to try to rationalize and deal with all those different perspectives.

If there are lots of concerns about the configurability, or the security of the software, having it be open and transparent gives almost kind of outside credibility, and mitigates the risks that could come from very complicated software.

So, we’ve seen time and time again that that tends to work very well, when you have a consolidation of the commons of reconciliation of wide-viewpoints – open source attempts to do very well there.

I’m not all that well-informed about the consumer market or the pre-packaged software market, but it strikes me that we’ve seen less success, at least commercially, with technologies that take highly shrink-wrapped products, and then open source them, where consumers just expect them to work. It either works or it doesn’t, it’s a very binary sort of thing, and there’s not a lot of engagement.

I think we’ve seen from overtime that when products fall into that very tight sort of packaging, the community doesn’t give as much respect for the nature of the open source, and I don’t think there’s a fair equilibrium that shows up on that, so that my sense is that they’ve done less success in that regard.

Community Projects

Michael Schwartz: You announced that WSO2 will be launching more community-driven, open source initiatives in 2019 – how are these different from WSO2-driven initiatives?

Tyler Jewell: Yeah. What’s interesting is, WSO2 is 14 years old now, and when the company started a long time ago, their vision was certainly working in the integration demand, but they were building out kind of this big platform, singular platform that was an alternative to websphere and weblogic at the time.

It was really the WSO2 product, and obviously, they called it a lot of things, but the platform essentially was the product, and it was this big thing how to solve big problems.

Since then, all the products that we ship are based upon this Core Kernel that we’ve got, and it’s all WSO2 branded products that’s there. And there’s no concept of an upstream with us.

The WSO2 repository builds the WSO2 product, there’s no forking, there’s no branching, it’s a very tight linear relationship that’s there.

People who tend to adopt our open source, first have to become familiar with our brand, build some reference ability, and see that we’re a quality brand, and then they’re willing to adopt the WSO2 product line in whatever configuration they think is fit there. So, it’s a kind of a very direct, linear relationship.

What we’ve seen as very successful over the past seven years is that the nature of marketing and how products are evaluated have shifted, and that you can take any number of critical and essential components to enterprise architecture, put them out as open source technologies and build community and transparency around those, and under a different brand.

It doesn’t have to be your corporate brand, it can be under some project brand, or whatever it may be, but the important impetus there is used by your peer group.

Can you get other developers and technologists to adopt it, can you collaborate together on those things, and through that, you gain adoption and interest. For us, we’re going to be committing to more of those types of projects, and then using those components along with components from other third-party, open source providers, rolled into our products, if you will, the WSO2-branded products that we can provide support and commercial capabilities around.

I think that good companies today have a blend of these products and projects. And WSO2 has predominantly been almost only products, we’ve had some projects along the way, like, Ballerina and City, but we’re moving towards having bigger commitment to these projects along the way, whether there are projects or third-party ones.

Revenue Streams

Michael Schwartz: You don’t charge for the right to use this software, and I guess you probably get this question a lot… So how does WSO2 make money?

Tyler Jewell: We don’t charge for the right to use the software, we sell subscriptions. Subscriptions are the mechanism by how we deliver most of our value to our customers.

And subscriptions come with a couple of things. One, it gives you the right to ask us questions in development or production, it gives you an SLA , and when you’re dealing with very complicated software that’s powering trillions of transactions, now you need a response SLA on this particular issue.

It also includes updates. The updates are really what make us unique.

I think that we have an approach here that is unlike any other open source software company.

With the updates, the updates are where you expect patches, fixes, security issues, things that were unexpected when we had released software. But what makes this particularly unique is that when we need to do a patch or a bug fix, we still release that as open source, it is still Apache licensed.

And we put that into master, and it’s in the unreleased version of the repository, and it’s available for anyone to get.

So, someone can compile that, and they can put that into their environment. But the service that we provide to our customers, who are on a subscription, is, we take that patch, we backport it specifically to your version, we convert it into a binary so that you can install it, just that binary and nothing else. Then, we also test that binary pretty exhaustively, so that we have the highest confidence level that what we’re giving to you is going into that environment.

What we do for the customer is, we take the patch, we backport it to the specific version for that customer, we convert it into a binary, we test that binary on environments that largely mimic that customers environment, and so we have every level of confidence and risk mitigation that the patch that we give to the customer is going to be meeting the needs and expectations they got, without disruption to them.

And those binaries that we ship, those binaries are only available for those people on subscription.

And that’s how a big way of how we communicate that value, we get to hold to our premise, our open source principles because everything is still technically open source in the code basis, but the value that we provide is in the work that we do with the binaries and patches and the risk mitigation of that. And our customers look at that and say, “Oh, you know, well, that seems like an equitable exchange of value here. We’re happy to pay the subscription.”

Customer Retention

Michael Schwartz: I was reading in your annual report that you have an excellent track record with customer retention, so that subscription and providing the binary updates provides an incentive for customers to renew. Any challenges around getting renewals?

Tyler Jewell: If you look at our dollar-based retention rate, it’s equal to Mulesoft, which is a mostly proprietary platform on that, so we’re doing well in our particular peer group.

When customers turn on us – we do have some customers who just downgrade to a peer open source, for whatever reason, maybe they had budget cuts or whatnot – but we look at those not as negatives.

I mean, I think that on a dollar basis, you can look at it and look at it as a kind of a loss, but when we go into those counts, we say, “look, you know, if you’re going to do this, you still want to be active in the community, you can still act as a reference to us, you’re still happy with the technology, you can still give us feedback.”

So, they’re still strong contributors to the community overall, and there’s an immense value that comes with that, even if they’re choosing not to get the updates in the SLA associated with it.

And when we look at all of our turn, and every company has it, about two-thirds of our churn are companies who are sticking with us, and so it’s hard for us to look at those as losses.

Liability

Michael Schwartz: So, one question I have is about – and I don’t want to get too deep into licensing because it’s a really deep topic – but sometimes customers, I get the comment that customers know how to purchase a commercial license because it comes with reps and warranties and acceptance of liability.

But the open source licenses normally try to minimize liability and minimize reps and warranties – does a subscription address some of those issues too?

Tyler Jewell: Yeah, we, with our subscriptions, can offer different types of identities and warranties for customers. We do it both, for the patches in the binary form that we issue and for the open source code.

We have a little bit of an advantage there, we hold copyright to everything that we write ourselves on that. Even in the situation where we get outside contributions, we take copyright. And when we hold clear fork so that we can maintain that, and do all of our legal checked.

That sounds like a control provision, and it’s not so much of control provision, it’s more of you want to have complete and total visibility to the entire code stack so that you can patch any portion of it all the way down, even if necessary you need to get into the JVM, or to the OS as well.

Once you can demonstrate that, on the legal basis and the business basis, you can start getting more flexible with the legal terms that you negotiate, and on top of that, you can make higher commitments on the SLA basis. And we’ve even offered truly abnormal response time SLAs, for customers who feel that they need that.

Transparency

Michael Schwartz: One of the WSO2’s priorities that you documented was to build a culture of transparency. I have to say you’re living up to that. WSO2 is really transparent. I think we’re private business – why do you think transparency is important?

Tyler Jewell: Transparency is really essential to our business, we practice it in number ways. I think it’s fundamental.

I think transparency is the most effective way to get diverse groups of people with different points of view to be aligned. And it does that because when you’re transparent, there is independently verifiable information.

And when outsiders start to absorb that information and can verify that, it allows them to build trust much more quickly. And when two different parties have trust with one another, they are able to align their interests much more quickly, and then collaborate.

This works well, not just with meritocracy, with the Apache way in software products, but we found that it works well with our internal culture – with how we prepare our marketing and sales,
how we treat our financials, we are actually pretty transparent about our financials outside and online, our hiring practices, our partnering practices.

I’ve just found that as the larger that you get, growth really comes from the momentum that you can establish. And when you’re dealing with large populations of people, and product, and partners, and customers, you can build a lot more momentum by getting everybody’s interest aligned and transparency is the fastest way to do that.

Team

Michael Schwartz: WSO2 is hiring a lot of people. The goal said 175 people in 2019. That’s almost one person per business day. What are some of the challenges that come along with this velocity of growth?

Tyler Jewell: Well, the biggest challenge is, you need to have a source of talent that you can work with. And we found that there are really two great ways that you can find the source of talent.

First our largest office is located in Asia, and it’s in a region that has very high-quality graduates in computer science, and computer engineering and business. It’s very important for us to be able to be credible and well-respected, so that we can work within that community and do a big portion of our talent through that.

The second is that you have to really look to everybody, all your employees.

Your employees become your recruiters because it’s an environment that has a certain set of ideals and principles, and they’re working out in other communities that have people who reflect similar sorts of ideals, and so it becomes really essential that everybody is recruiting other people that they really respect along way. The source of talent is one really important thing.

The second that’s really challenging is culture and onboarding. In an open source company, so many of the people are mission-oriented. They work for the company because they have a high degree of aspiration to the outcome. They work on it for the love of the technology, they work on it for the brotherhood with the people that they get to work with. There’s a lot of that that goes on, and less so on a compensation or a financial incentive basis. I think we all work for money, but this mission orientation, this mission theme is a big part of that.

When you hire larger and larger groups of people, it becomes more challenging to get everybody aligned on that mission, and for everybody that you have an equal share of the commitment to the principles, and so you really have to start investing almost exponential higher rates, in terms of culture, as you get bigger.

Otherwise, you’re really going to start to fray at the edges, and the talent that you get isn’t going to stick around, you can have a high degree of attrition, and long-term people are going to start to lose sense of the mission as well. So, these are the two big things we face.

How To Build Culture

Michael Schwartz: When do you say invest in the culture – how do you invest in a culture exactly?

Tyler Jewell: First, you need a really clear and concise definition of your principles and ideals, and it can’t be marketing fluff. It’s got to source itself from the founder’s beliefs and the founder’s behavior.

Then, you need to have a commitment that everybody’s going to live up to those principles and ideals. You have to be willing to tell people that it’s okay if they don’t believe in this particular approach, or it’s not comfortable for them, that that’s okay, that this is maybe not the environment for them.

So, how do you go about doing that? Well, you got to have a lot of materials to explain it, there’s a lot of collaboration that you need to do with your tech leaders and your middle management across the company, so that they can embody this and practice it. We actually incorporate our principles and philosophies into our performance review system, and that’s all part of everything that we do day-to-day.

And since we’re so community-driven, and it needs to be focused on the mission and the theme, you have to invest a significant amount in people and things that allow people to participate in that community, whether it’s games, company all hands sessions, big office spaces that allow people the flexibility of their work schedule, whatever that is, everybody participates in the community in their own way, and you have to not make that equippable budget item.

That has to be kind of first on the budget. You have to put all those things in place, so that those people, who want to be a big part of our community, whether it’s our internal/external community, have every tool and resources available to them to do that, and they can’t point anything that’s holding them back on that.

That’s a big part of it as well, as steering increasingly larger numbers of resources, and time, and focus, into those activities.

Cloud

Michael Schwartz: Switching gears just a little bit, WSO2 recently announced some new cloud offering. I’m wondering if you think cloud will come to contribute more revenue than software subscription in the future.

Tyler Jewell: You know, I think that Cloud is a delivery mechanism for sure. Is it going to overtake on prem versus not on prem, I’m not sure that I’ve got a particular bias on that.

What I do see happening is that Cloud is definitely changing the velocity at which new services can be brought online. I see the services cropping up on prem in the cloud hybrid everywhere, and so I think we’re looking at a truly hybrid world.

And that services are going to be able to reside anywhere, they’re going to be able to live anywhere. From our point of view, we think that that creates a wonderful integration opportunity, a lot more things that need to be brought together into a common view.

Which one of those things wins it’s hard for us to say because each and every environment has such unique and different needs. But it’s hard not to ignore the pure scale and size of Azure, and AWS, and Google – pretty impressive revenues across the board.

Experience From Cloud

Michael Schwartz: Has moving to cloud services created a friction in the type of business that you were? Because it seems, like, in the cloud business it’s about operations, whereas in the software vendor business, it’s more about customer relationships and product innovation. Has there been any growing pains of moving into this cloud business?

Tyler Jewell: We definitely had a lot of growing pains there.

Right now, our public cloud is really just a public cloud variation of our on prem products. So, it’s not much of a hybrid situation, the value propositions are largely the same in that regard.

I think that what we’ve really figured out is that in order to run a public cloud, we had to operate our products in ways that we never operated them before. And that, in turn, caused this to redesign a lot of basic primitives in our products, related to update, configuration management, operations, and whatnot.

And that, in turn, is actually one of the big reasons why we’ve had the kind of growth over the past couple years, because 35% of our customers are running our products. Even though it’s an on prem version of our product, they’re running it in a cloud style.

So, we basically ate our own dog food, and going through that process actually caused us to rethink all sorts of things at the end of the day. That was probably the biggest benefit we got.

Sales Cycle

Michael Schwartz: What’s the typical sale cycle? Do people find the open source, and then call you? Or is WSO2 more active in generating business?

Tyler Jewell: We are more of an inbound business, believe it or not, because we put our technology out there, we evangelize it pretty aggressively. So, customers tend to approach us, and they’ve already got a project in mind for that.

They approach us in one or two ways. About a third of our customers approach us through a partner, so, a system integrator or reseller that they’re already working with, and a lot of those partners are equally committed to open source, and we are their open source vendor of choice in that regard.

Then, other customers have architects and VPs of engineering, who have been designing systems, and they see that we could fill portion of their architecture, and they contact us.
It’s almost always the case when, by the time they contact us, there’s done a lot more evaluation than you might be surprised.

And they’re contacting us because they’re looking for advanced system design, to hear the total story maybe they’re ready to engage on a subscription. It can go any number of different ways, and that process takes about 3 to 9 months. With most customers, sometimes it’s up to 2 years, sometimes it shorter than that.

Customers come with us, they come to kind of really two starting points.

One starting point, which is obvious, we have a lot of different components, is they’ve already got an architecture, the architect is very confident that they’ve got the right design, and they’re just shopping for certain components. “I just need an API Gateway.”, or, “oh, you know, I really need a message broker.” and they’re not shopping for anything else.

And so, their comparison-shopping, us against the other open source components that they’ve come across, and it’s kind of a best-of-breed sale, and that sort of sales process and a sale cycle is very well-structured. The requests are pretty standard, and we have lots of ways to service that with our sales, and our solution architects, and our partners.

The other type of customers that come to us are customers that have broad business problems.

They know that they want to build all kinds of services in the future, they know they need a broad integration backbone, they don’t necessarily know what the best architecture is yet. And they’re looking for us on a consultative basis.

In that situation, we spend a lot of time, with either our partners, or that account, doing solution design, putting hypotheses together, and it’s almost like an advertising agency, where you have to say, “Here are five or six different ways you could approach these broad class of problems, and here’s all the different configuration of, either our technologies, or other technologies out there that would let you deliver on that.

In that situation, it’s a longer-term sale, it’s highly consultative. And if you do a good job on the consultative side, then they’re usually more willing to pick our technology stack, get into a subscription with us, and sometimes even turns into a strategic relationship.

Partnerships

Michael Schwartz: It seems, like, for anybody in the enterprise integration business that channel partners are going to be important, but I’m wondering, are there other types of partnerships that have also been important for WSO2 to grow the business?

Tyler Jewell: There are really essential partnerships that happen in the open source realm in the ecosystem itself. Everybody’s competitive to each other, and everybody is complementary to each other now, and so it’s really important to build key technology relationships with other vendors, as a way to demonstrate confidence in the software that you’re building there.

I think that WSO2, historically, had kind of a very vertical stack technology that it has built from the ground up. It hadn’t done as much of that as some other companies had, but over the past couple years, we’ve been shifting towards more of that. And there are important relationships that we’ve got budding with vendors like Red Hat and Pivotal, which are, on one hand, both complementary to us, and competitive at the same time.

Those are pretty essential when we call those technology partnerships to go along side of the channel partnerships that we got.

WSO2 In The Next 20 Years?

Michael Schwartz:You have a 10-year product patch lifecycle, which is really long. How far ahead do you look? Do you look 20 years ahead in the future? Or, another way I could ask a question is, where do you see WSO2 in the next 20 years?

Tyler Jewell: Oh, well, you know, what I will say to that is, the company’s raised $45 million over these years, and for the first 12 years of its life, it was not profitable and cash flow positive.

So, I think that when a company is going through that sort of phase, it’s searching out for product-market fit, and when you’re looking for product market fit, and you’ve got a cash runway, you’re kind of forced into a horizon, which is somewhat tailored to your cash position along the way, although really good founders will look way beyond that.

With the company now cash flow positive and profitable, it completely changes our horizon, and I think we really think of things, and probably we like to think of them as 10-year horizons, although the pace of technology is moving so fast that 10 years just really, you know, kind of shock the hell out of me.

But we certainly are making bets that I’d be surprised if we don’t see any revenue. It could take us three to five years before we see revenue on some of those bets.

And it’s really refreshing to be in a position, where you can take those sorts of risks on as a company, while still supporting your existing customers. And for us, I think the biggest shift is, all of integration over the past 14 years has been essentially done, center of excellence, a big, ION middleware. And that’s even our classic stack, but that’s shifting towards a completely distributed, decentralized mode, driven by containers and kubernetes.

So, we’re just kind of over the moon tickled because we get to take all this domain expertise that we’ve got, but we’re basically throwing a lot of stuff out the door, and say, “If we had to re-envision all this stuff from a developer first code, first decentralized, first point of view, how would you make it all work?” and you just approach things very differently.

We’ve got about a hundred employees, working on things that I would say related to this sort of thing, and I really don’t anticipate seeing revenues from any of those things before ‘20/21. It’s that sort of rising that you got to be playing with.

Final Advice

Michael Schwartz: My last question is, any advice for new entrepreneurs about launching a business around open source software?

Tyler Jewell: Well, if you’ve already made the decision to go open source, and now you’re creating a business around that, be reflective of what are the principles and values for why you did open source the first place.

You need to hold to that and find a business model that allows you to not compromise on those elements – I think that’s really important here.

The other thing is to recognize that, take it one step at a time. Businesses are not built overnight, they’re built over a very long horizon, and you just need to have a mindset of just keep taking one step forward. And as long as you keep doing that, things will work out.

Closing

Michael Schwartz: Tyler, thank you so much for sharing your thoughts and experiences today.

Tyler Jewell: This was a real pleasure for me, Mike, thank you for having me.

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

Music from Broke For Free and Chris Zabriskie.

Audio editing by Ines.

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 Ofer Bengal, CEO of Redis.

Until then, thanks for listening.

Episode 18: Moodle – Open Source Learning Platform with Martin Dougiamas

Martin Dougiamas is the Founder and CEO of Moodle, the leading open source learning platform. Moodle empowers educators to manage coursework, track class analytics, and communicate easily with students. In this episode, Martin discusses how Moodle leverages partners and revenue sharing to grow the business.

Transcript

Introduction/Background

Michael Schwartz: Welcome back to Open Source Underdogs, the podcast where we strive to teach the next generation of software entrepreneurs how to use open source software as part of their business model. Our guest today is Martin Dougiamas, Founder and CEO of Moodle.

If you aren’t familiar with the learning management system Moodle, here are some stats: There are around 100,000 Moodle sites out there, with around 150 million learners in 230 countries, who are taking 18 million classes.

Martin is one of open source software’s most passionate advocates.

After all the requisite trials and tribulations, he’s built a super successful global business that’s had an epic social impact.

Martin, thank you for joining us today.

Martin Dougiamas: Hey, Michael, it’s a real pleasure, thank you.

Michael Schwartz: So, how did Moodle get started?

Martin Dougiamas: My background is that I come from Central Australia, I grew up in the deserts out there, and my school necessarily was the school of the air, so over the radio.

There was no internet back then, shortwave radio bouncing off the atmosphere, and I was used to studying remotely and doing things that way.

When I got to the city at about age 12-13, I was a year ahead of other students. And fast forward back to university, I was helping the staff of the university I was working at, to engage with a new internet technologies, and I knew it could be a lot more interactive than it was.

As soon as the webcam came in, internet Skype came in, it became a very one-way transmission media. I was like, “no, no, it’s got to be more.” So, I started developing my own software for interactive learning and collaborative learning particularly. Then, I was doing a PhD in education on top of my background and computer science, and Moodle is right there in the middle of all that – it’s between the technology and education.

LMS V. CMS

Michael Schwartz: So, what’s the difference between a learning management system and a content management system – couldn’t one use a CMS for teaching?

Martin Dougiamas: Really, you could use email for teaching, if you’re good enough at teaching, you can use anything, you just use a whiteboard or a telephone.

What an LMS gives you is the affordances around the teaching processes and all the workflows.

The grading, we have tools in Moodle, for example, for peer assessment, so if you’re managing a thousand students, and you want them all grading each other, there’s a lot of management of that needs to happen, and that’s the kind of thing that Moodle’s good at.

Why Free

Michael Schwartz: The goal of the business is inherently to make money and return money to investors, and so, how do you align the social goal of doing this good to get the software into educator’s hands, the benefit of students, and making a return on equity?

Martin Dougiamas: I would disagree that that is the goal of a business. That is a model of business, a particular capitalistic model that has grown popular from the US.

Business is literally being busy. It’s an activity, so there are many ways to define business. The social good, and the social mission of a business defines the business. We aim to break even, we aim to pay for our activity, to pay all the people who are involved, that, essentially, are operating as a non-profit.

If there are excess funds at the end of the day, it goes back into the business for the next year.

It’s always operated like that ever since I bootstrapped Moodle, without any investors, 17, 19 years ago.

Investor Objectives

Michael Schwartz: You mentioned that, I think it was last year or the year before, that you managed to find investors who are aligned with this vision, but how do they feel about that? Because, at some point, they need to make a return on their investment.

Martin Dougiamas: The way that works is, as I said, we bootstrapped it for many years, so I was 100% owner of Moodle up until last year. What I found was that the motto we were operating under was growing, very consistently and very evenly, at a kind of a flat rate, not an exponential curve.

And it was starting to become urgent that we step up against some very large well-funded competitors in our industry, including Google’s, and Microsoft’s, and things like that.

So, to get that rapid acceleration, I did look for a financial partner who could help us out. I rejected 50 VCs. Really, around 50 that I talked to, because the conversations were always about, “How much profit will I make in so many years?” and they wanted all that kind of stuff.

I eventually met a family – actually that was in Tel Aviv, a conference I was at – a French family, who really understood the mission that we were aiming at, and supported what we were doing, and wanted to help.

From their point of view, it’s not about profits every year, if they want to return their investment, which they expect to be in decades rather than a couple of years. If it’s a growing business, and I own a percentage of it, in the future that percentage will be worth a lot more, and they can sell out and step off the elevator, if you like at that point, without any harm to the business because somebody else was stepping into the elevator at that point.

It really doesn’t have to be about profits to be a growing functional business that an investor can do.

Evolution Of Business

Michael Schwartz: Can you talk about how you generated revenues over the years, how did you generate revenues initially, and how that changed over time?

Martin Dougiamas: I had a computer science background first, I had the educator background, for the design and the content of the project second. And then, I was living on a scholarship actually, almost nothing, you know, a shoestring budget.

And then, I had to learn how to do business, so it was like this, the first stage was, people started asking me for help with the software, and I’d go, “Yeah, sure.” I was helping them for free as you do with a small project.

Eventually, I’d just start saying, “Look, I’d have to charge for this, you know.” And within a very small time, I had something like 70 clients, who were universities and businesses around the world. Silicon Valley Bank was one of them in the early days, in the early 2000.

And I was charging for services, and I got to the point with that 70 clients that I realized I was spending all of my time servicing them and not on the software, and I had to make a decision which way I was going to go. It was like, was I going to be the CEO of a big service company that made the software, or was I going to focus on the development, and I chose the second part.

What enabled me to do that was that some other people in the community were saying, “we’ve been doing this for a long time around education, technology, we’d love to do with Moodle – why don’t we become partners, and we’ll pay you a royalty?”

And with one or two of them, I developed a contract, which is a royalty contract, and they pay roughly 10% of the gross revenue on any Moodle-related services.

In return, they get to use the trademark that gets to be promoted around the community, they get to use the trademarks that we have all over the world, so that was such a real win-win situation, and that’s been the primary business model from, let’s say, 2004 until today.

We now have 80 Moodle partners around the world, but they range in size from very small companies with just a couple of people, up to large companies with thousands of people.

Royalty Collection

Michael Schwartz: And it’s basically on the owner system?

Martin Dougiamas: Yes, and that’s something that has been a slight problem enforcing the royalties. In the early days, it was much easier, the trust factor was very high, there were no problems. As we got more partners and things got larger, we started to feel the need to check up on these things, so just relying on royalties is not the only revenue stream in the future. We want to have a little bit more different control as we go forward.

Other Licensed Tool

Michael Schwartz: Are there any license components that you’ve developed, or are thinking about developing in the future?

Martin Dougiamas: There’s been none up till now, but there is something we have developed, which I can’t even tell you about, because it’s going to be launched next week in London. I’m going to be there.

Michael Schwartz: On February 27th, Moodle launched Moodle Workplace, a solution only available to a select group of premium Moodle partners.

Martin Dougiamas: But it’s a set of components that sits on top of Moodle for a very specific market, and markets include higher education, and K-12, and the workplace market. Workplace Learning is, in fact, where we get most of their revenue from.

So, it’s the workplace market where we were addressing with these extra products. And we feel okay about keeping those within our partner network, to give our partner added value. And it’s type of market that doesn’t mind paying for services like that.

Customer Segments

Michael Schwartz: You actually anticipated my next question, which was, how do you segment your customers?

Martin Dougiamas: I mean, it’s a lifelong learning, right from kindergarten right up through the workplace.

Moodle’s used in a lot of very interesting and diverse places. I was at the World Bank a couple of months ago, the World Bank was using Moodle in their development projects for 10 years. Every one of their development projects has an education component, and they usually use Moodle for that.

In the development space, in general, globally, there is a lot of use of Moodle. It’s also used by fire stations, in hospitals, everywhere you find learning and training, you find Moodle’s being used. We just focus on those three big sectors the most: K-12, higher education, and workplace, with the development side of things becoming rapidly rising one.

Moodle SaaS

Michael Schwartz: One of the previous podcast with MongoDB’s founder, Eliot Horowitz, he stressed how important it was for open source companies to launch cloud services.

I was reading a little bit about Moodle.net, which I guess is still in the development phase, but do you have any expectations around Moodle.net contribution to revenues in the future?

Martin Dougiamas: We already have a SaaS offering and have had for a couple of years, it’s called Moodle Cloud. And that’s, just press and go get a Moodle site very subscription-based, the traditional model of SaaS, which is very well understood, and that’s been growing continuously since we started, and we have something like 30,000 Moodle sites on that platform. It’s definitely the part of us going forward.

Moodle.net is actually the third step, it’s something I’ve been trying to build for many years. This is going to be the most successful because I’ve actually put a lot of resources fund at this time. And if you’d say it’s marketplace for content – pretty much – and a place for professional development of educators.

They are smart people, but any software that you put in the hands of people, it’s not going to be used until you are trained in it, and you have some support. So, just putting Moodle with all its many, many, many features in the hands of educators isn’t enough. We are really focused now on the professional development side.

Moodle.net is a social network that enables our community to help each other, in a very specific, direct way, so that, for example, a teacher who’s teaching Portuguese to German speakers can find another teacher, teaching Portuguese to German speakers, and then they can work together, share content, and share things they find on the internet with each other, as well as thinks they’ve developed with each other.

Now, in there, we have a whole plan to have a backup place of more advanced services, so that will bring revenue in the future. But for now, we’re just really focused on making it a really powerful, social network.

Moodle App

Michael Schwartz: You mentioned that most of the largest contributor to revenues was the service partner network is cloud number 2 – and is there a number 3?

Martin Dougiamas: The third one would be, we have branded apps, so we have a free app that students use to connect to the Moodle side. If they want, they can also use the web, but the app has added the advantage of working offline, and, of course, it’s better on touch screen. Students can do there courses on their mobile devices.

We sell a branded app, and that enables the institution to make their app with their name and their logo in the app stores, and it’s something that we create and maintain for them. So, that’s another upcoming revenue source that’s growing too.

Team

Michael Schwartz: Switching modes a little bit, can you describe your approach to building the team – how does location get its way into the higher equation, and what else goes into you figuring out, like, who do you want to bring onto the Moodle team?

Martin Dougiamas: I started in Perth, Western Australia, we never made a big deal out of that, so I know a lot of people don’t know it, but the bulk of the team is here in Perth.

Over the years, people have been coming through the community activities, and got really interested in being part of it, and seeing more of a way. It’s a lot of the people we hire we already know they have some experience that prove themselves, by taking part in various things around the projects.

It’s not just development, we also have a lot of conferences, we do about 20 conferences a year around the world. There is a lot of training, and all the partners, and all that is activity support stuff.

People come from my network. Perth is not a good place to run a business from, it’s really the end of the internet. So, you go right to the end, and you turn left, and that’s Perth.

I’m traveling a lot up in the north hemisphere to be closer to where all the people are, up in Asia, and Europe, and North America, and South America, for that matter. And more, more Africa.

Second headquarters is now in Barcelona, and we have 20 people there already, and that’s growing rapidly. That’s a lot closer to where the action is. It helps if people are near one of the big offices, but probably, I think a quarter of the company work from home remotely.

Moodle In 20 Years

Michael Schwartz: Where do you see Moodle in the next 20 years?

Martin Dougiamas: For me, it’s nothing less than building the infrastructure of the future. I mean, what do we want our infrastructures to look like? It’s basic as road, water, and electricity.

Education is so important for us as a species that it underlies everything. You look at people voting at elections, it’s all based on education and information that they have, and giving people context.

I’m a strong believer that the more wisdom you can accumulate, the more compassion you have, the better human you’re going to be.

So, for us, empowering educators is really about improving the world and to making open source a really good, high-quality, free software be a part of the infrastructure, as easy as finding a power point in the wall and sticking your device in it, and it just works, and everything charges up.

Moodle is already the mainstream product being used in education everywhere in the world, and it’s a step from there. When I go to countries now, I find them able to open doors, talk to very high-level people about their infrastructure that’s underneath all of their schools and universities, and talk to them about how can we move forward together to build that infrastructure to a higher, more efficient level, so that they are not wasting money, purchasing licenses from some software that they’ll never own – but that they own and control their own infrastructure, and contribute to the development of that infrastructure. So that it’s simply the best choice.

That’s basically what most of my work is now, and there’s so many opportunities in that area that I feel very confident that open source really is the future, and it’s not just my industry, it’s all the industries.

Look at Linux, how, of course, based on previous flavors of Unix, and so on, but if you look at all of these .coms, and all the infrastructure that’s driving all the websites and, you know, this tool we are using now to record this, underneath it all is Linux, just silently sitting there, quietly doing its work and making stuff happen, and that’s terrific.

You know, no one really thinks about it, talks about it very much anymore, but that’s how the world should be.

Open Source V. Cloud

Michael Schwartz: Do you think that we’re fighting an uphill battle against the cloud though, where there’s sort of this move to centralization and not operating your own infrastructure?

Martin Dougiamas: I think actually that is a phase, and that the idea of distributed and federated systems was kind of ahead of its time at various points in the last decade or two.

But I really think it’s making a comeback. Things like the GDPR, and it’s public starting to realize the control that very large profit-focused companies can wield over us.

If it was easy to be part of an alternative, I think people would more and more. And so, as the technology improves, and as we improve, I think – I don’t want to sound like a zealous idealist because I really don’t think I am, I’m quite a practical person – I think as technology gets easier, and you can make a decision based on knowledge and wisdom then, why wouldn’t you?

For example, if you could be a vegetarian, and eat food that tasted like meat and had all the advantages of meat, but you were a vegetarian, I think a lot of people would switch because there would be no downside. So that’s what we have to get to.

Saasquatting

Michael Schwartz: You’ve probably been following some of the discussion in the community about licensing, and the move away from the GPL, and also the introduction by certain open source companies of new licenses, to prevent large SaaS providers from using their software, without contributing back in any way. Do you have any thoughts on that trend?

Martin Dougiamas: I’m mixed, because I’m still a bit old school, where open means open, and freedom means freedom, and you’ve got to give people a freedom.

But I’ve also experienced the case, where a lot of people take advantage of us, without giving back, I can put the gilts on them that goes only so far.

Really, it’s going to be about them finding the right leverage for people to be part of your project, and to bring them in somehow. And, again, you’ve got to make it so that it’s just as easy to do so. You’ve got to make it in their interest to do so.
And it’s not easy, but I think there is always a way if you’re creative and you look at it. And we have a lot of companies who didn’t have to be Moodle partners, but have become Moodle partners because their benefit’s there for them.

And we don’t have to go around strong-arming everybody for that to happen. We hopefully use more carrot and less stick. It will depend on every project, of course.

Moodle Users Group/Foundation

Michael Schwartz: Moodle did a great job partnering with external organizations, not just your system integrators, but, for example, there’s a Moodle Users Association. Did the foundation ever get started? And could you also talk about the Users Association?

Martin Dougiamas: Sure. The Users Association was actually launched by myself, I started it, and we handed it over, so we have no control anymore. We just created it as a structure and let it go. And it’s going well!

That’s an organization of users who pay membership to be part of a decision-making process that decides how to spend all that money from the membership. They are restricted to only paying for core improvements of Moodle.

We regularly get hired by the association to develop things. That’s what the users want. So, this is working out really well.

It also gave a lot of people a way to contribute to Moodle that was compatible with their organizations. Universities don’t just sign checks and give them away, they have to subscribe to things, they have to have types of structures to be part of.

The Moodle Foundation is for a different purpose, it’s for being part of certain research-based proposals and projects that happened, primarily in the EU, but also elsewhere.

In Europe, there’s millions and millions of Euros being applied to educational-related projects. And very often, people use Moodle to satisfy those projects. So, they’re like, “free is like funding.” They use Moodle, they build something. After 3 years, nobody cares. It just kind of has no major plan, and their project dies. It’s a complete waste of public money.

The Moodle Foundation is designed to be an actor in those situations, where it can bring in the value proposition that we will make sure that the money goes into this project, if there’s any development that occurs, that it gets done well, that we make sure it gets into the main code base, that it is supported by the main Moodle enterprise, for years and years to come.

That helps those projects be more successful, get starting in the first place. And it also means that public money goes toward open source software that everybody benefits. And sometimes a nonprofit organization needs to be doing this thing – it can’t be a company. So, that’s why the Moodle Foundation is a non-profit, and it’s based in Brussels.

Protecting IP/Brand

Michael Schwartz: Sometimes, the foundation is used to hold the trademark – have you ever thought about safeguarding the code base in any way, for using a foundation for that purpose?

Martin Dougiamas: I have, and I know that’s a bit more common to do it around that way, but there’s no downside with the way we’re running now.

The code base is actually under my own name at the moment. The Moodle Company is involved there, although we are the stewards of it.

I think if the Moodle Company disappeared, it wouldn’t have particular control over the software that the people couldn’t get around. So, yeah, we thought about it, it’s probably too much trouble to go to changing at all like that without any real benefits, so it’s probably not going to happen.

Closing Advice

Michael Schwartz: My last question is, do you have any advice for entrepreneurs who are starting a business around open source?

Martin Dougiamas: Yes. I would say, get a vision and mission, strike early, like, take some weeks when you’re doing nothing else and really, really, really think about what you’re trying to do if you want to have a very clear, social mission, in my opinion.

We are literally all living on a little pinprick of dust floating in space. So, keep that context in mind.

If you are creating your project, what are you trying to do with it? What problem is it really solving? How is it helping the planet? How is it helping the rest of us? And make it really meaningful for yourself, because if you don’t have some meaning like that driving you, you might not have the energy to keep going for years, years, and years when things seem grim, when things seem difficult. You’re going to need that clarity of vision.

I’ve refined our mission and vision a couple times over the years. The one we have now I feel very happy with, I’m happy to stand behind it, communicate it to anybody. We have very strong values as well, we have five values of education, innovation, respect, integrity, and of course, openness.

And having those in your mind, in your pocket, it helps you structure your organization, helps you plan your activities, helps you choose what to work on and what not to work on. I’d say that that would be the most important advice I would have given myself at the beginning. It is I knew the stuff intuitively, but I couldn’t express it all, I couldn’t lay it out, it wasn’t on that website. And it would have helped.

The second thing I would think of, I wouldn’t worry too much about monetization at an early stage. I would make something that people really want because if it’s wanted, if it’s needed, opportunities will come up. You would work it out later on. And you just have to find some way to stay alive. That may involve doing another job for a while, just, I don’t know, moving out into the countryside or something for a bit.

If you got a strong mission behind you, it’s not going to be a problem. The money will sort itself out once you have something that’s of value. So, it’s probably the two main things I think I’d suggest.

Michael Schwartz: That’s great. Martin, thank you so much for your time today.

Martin Dougiamas: Absolute pleasure, Mike. Thanks for the chat and the opportunity, and I’ll see you around the world somewhere, I hope.

Michael Schwartz: Okay, and best of luck with Moodle.

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

Music from Broke For Free and Chris Zabriskie and Lee Rosevere.

Introducing our new editor, Ines.

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

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Tune in next week for one of the biggest open source companies you might not have heard of WSO2. The CEO, Tyler Jewell, has a ton of interesting observations about the industry and entrepreneurship.

Until then, thanks for listening.