Podcast

Episode 31: Percona – Open Source Database Solutions with Peter Zaitsev

Peter Zaitsev is the Co-founder and CEO of Percona, an open source database software and solutions provider. In this episode, Peter discusses how Percona has successfully built a multi-million dollar business around services and support without VC funding.

Here’s a link to Peter’s 2016 article How Percona Has Built a Successful Open Source Business Based on Support and Services Revenues if you’d like to learn more.

Transcript

Intro

Michael Schwartz: Hello and welcome to Open Source Underdogs, the podcast about successful open source business models.

I’m your host, Mike Schwartz, and this is episode 31 with Peter Zaitsev, Founder and CEO of Percona.

Peter was one of the early MySQL team members. He’s also renowned for co-authoring the canonical O’Reilly book, High Performance MySQL.

This episode is a fascinating story about how you can build a fantastic business by curating some complex open source components while, at the same time, founding the availability of more open source features for the community.

Here we go. Peter, thank you for joining us today.

Peter Zaitsev: Thank you.

Origin

Michael Schwartz: Percona has a very different business model than many that we’ve interviewed – can you shed some light on the origin in the mission of Percona?

Peter Zaitsev: Sure. A while back, now it looks like in a different galaxy far, far away, I was an early employee of MySQL AB. That’s before Sun, before Oracle, long time ago.

And I really joined the company because we were on this very romantic mission to revolutionize the database, open source database, yet, as time went, I think MySQL AB pivoted from the company which would be really putting the customers first to this, I would say Venture Capital potential IPO track, where you can say, “Hey, you know what, we need to really hit the growth numbers at all cost.”

In this case, I think our romantic ideas and ethics in some cases would suffer. Or, at least, I saw it.

I decided to leave MySQL at the time and start Percona. The idea was we wanted to be a very much customer-focused company, put customers first, to do consultancy, which was our first focus, really doing what’s right for a customer, not having any other baggage or commitments that we would have.

That is pretty much how Percona got started.

Products

Michael Schwartz: Percona has a number of open source projects. Could you just give a quick overview of some of the more successful ones?

Peter Zaitsev: Sure. First let me mention how our first open source project really originated. Really we went into this business as a professional services consultancy business, we didn’t really think about building our products.

But what we found is to help customers to solve their problems, in many cases, consulting is not enough. You really need the code, software products in many cases.

For example, we found there was no good open source backup solution for MySQL, and that is how we created Percona XtraBackup.

Also, this was the time when Oracle would own InnoDB, and MySQL would own the rest of MySQL, and all that MySQL engineering was very dysfunctional at the time. And that is how XtraDB and later Percona server was born.

So, it was very much, I would say, born out of a customer need, first and foremost.

If you look at, right now, we have a software, such as Percona server for MySQL, which is very popular MySQL, which offers a lot of additional enterprise features. In open source package, we also have Percona server for MongoDB with similar proposition. We have Percona Monitoring and Management purpose-built open source, monitoring platform for databases.

We also have Percona Xtra DB Cluster, which is our clustering solution for MySQL, which is really adopted by a lot of large enterprises with very high availability requirements, sometimes as a replacement for Oracle RAC.

Customers

Michael Schwartz: And who are the customers of Percona today?

Peter Zaitsev: If you think about open source database, we have a very broad applicability.

Customers come to us from all the countries, industries, in all shapes and sizes. From our focus, I think we are most successful with the customers which are running database at scale, or for business-critical applications. Because that is when they really want to invest money into having their database to run well and perform well.

We have many Enterprise companies though we have a fair amount of smaller companies and startups as well.

We serve a substantial number of companies in the finance industry, in healthcare, in retail, so all of those are obviously the companies which work with a lot of business-critical sensitive data.

Sales and Marketing

Michael Schwartz: Do you have any outbound marketing campaigns or do companies just find Percona through the open source and through the tools and contact you inbound?

Peter Zaitsev: Well, it is both. We do have our sales team, which is both supported by our marketing team and inbound leads, as well as is looking for the companies who would potentially benefit from Percona, and contact with them.

What we found is, a lot of especially larger companies, they are kind of lazy in this regard, where we say, “Hey, you know what, if you are somebody who matters, you will contact me.”, more than actually doing a lot of research to find the company they want to engage with, as with some of the smaller startups. So, we use a combination of that.

I think one of the things that we have been doing from very early days is we really focus on the thought leadership and educating our customers and community at large.

For example, our blog has about 300,000 attendees every month which is, of course, not Facebook, but if you think about a professional database industry, that is quite significant.

We do more of Percona conference talks. Every year worldwide, we run our own two conferences, so really rely on thought leadership right to get Percona message out.

Value Prop

Michael Schwartz: How has the value proposition for Percona evolved over time?

Peter Zaitsev: If you look at where we started, we started with especially consultant-focused on the high performance applications for MySQL and MySQL alone.

And this gradually extended both in terms of the services, the offer. So, right now, we have a support management services, and professional services such as consulting and training, and in terms of the technologies they cover; right now, we also cover MySQL, PostgreSQL, MongoDB and MariaDB.

Really the value proposition changes from essentially, “Hey, you know what, we can optimize your MySQL performance” to “What Percona helps you to run MySQL PostgreSQL, MongoDB best?”

Now, I think what is important for our customers is what we provide the fully open source solution, open source platform, if you like. It should help you to avoid vendor lock-in, and really save costs invent.

What our customers recognize after they have been customers for some time is the quality of our support and other help they are trying to get from Percona. But that is obviously something every vendor would say that, that doesn’t drive their buying decision, but that is a value they recognize later.

Support Other Products

Michael Schwartz: One of our previous guests said that if you’re going to sell support, it’s almost better if you don’t write the software because if you write the software, then those people who are writing it are not billable.”, and it is actually better to just support somebody else’s software – do you think that’s true? Is it better not to write the software?

Peter Zaitsev: Well, I don’t quite agree with that, because if you think about support, it can mean a couple of different things.

You can provide the operational support, and this would be something like your help desk. “Oh, you know what, I am having a problem with my Windows or Mac, I don’t know how to do that. And I go to somebody, and he gives me that support to use it for.” This is one kind of support.

Now, in this case, you are also relying on somebody to provide you bug fixes, the security fixes and so on, which is absolutely critical in the enterprise. And either you are going to provide it or some other vendors will. In this case, you obviously wouldn’t have provided a complete solution.

And I think what makes Percona unique is that we do both. So, when we support MySQL, we actually have engineering team on staff, so, when our customer is, let’s say experiencing some crashes or some other software-related bugs, we have people on staff who can actually fix those issues and deliver bug fixes right.

If you have no experience in writing software, then, of course, you cannot do that. The same happens with security issues. Of course, you need to have some software engineering to provide that. But that doesn’t mean you need to write all software.

For example, if you think about the Red Hat, and especially in the early days of the Red Hat, they would not write entirely of Linux Kernel, but they would have enough engineering experience to support their customers on the code basics when they have to.

And you can think about Percona, of course, we are much smaller one, as the Red Hat of open source databases.

Support Business Model

Michael Schwartz: I was reading an article you wrote in 2016, titled, “How Percona Has Built a Successful open source Business Based on Support and Services Revenues”.

In the last 28 podcasts I’ve recorded, the sentiment has been almost unanimous that it’s hard to scale this approach. In an early episode with MariaDB, Michael Howard was very dismissive of the support business model.

I’m wondering, how did you manage to scale this business, and how do you get enterprise customers to renew?

Peter Zaitsev: Okay. Well, I think that is a very good question. And I think this is very interesting in the open source community, what has been happening right now is, currently a lot of so-called open source communities, they don’t really have an open source business model.

They have an open source marketing model. They market something that is open source, but they sell you something which is actually commercial.

Think about MySQL, which markets itself as the most popular open source database. But if you come to Oracle, they’ll sell you MySQL Enterprise, which is of course proprietary.

The same happens to many other companies, and the reality of that is this, if you go ahead and erase their Venture Capital, then typically the growth curve and the revenue expectations you will have to provide will be much higher than the natural, organic open source community growth support.

You will have to turbocharge that by pretty much introducing the open core, source available or similar model, to force your customers to pay it – but that is not open source.

In our case, we are not venture-funded company. We have been bootstrapped, and in this case, we have been saying, “Hey, they’re going to accept the revenue growth, which the market is going to tolerate while they’re sticking to our values.” Of putting the customers first, they can take care of our stuff, and sticking to the open source.

Is that giving us larger growth – I don’t know, somebody likes it like MongoDB or Elastic. No, but we have been able to build a successful business for that. That is, I think, a very core difference.

Now, something else I would want to add here, which we recognize as very important: If you are really looking for an Enterprise, we’re not looking to do it alone, we’re not going to go with this kind of insurance. We are not trained to say, “Oh, we’re going to grab open source software and self-support it in-house.”

The Enterprise companies, in the end, if they are going to be adopting open source software, they are going to buy support services from somebody. If you provide a good value, that somebody is going to be you.

Give Open Core a Break

Michael Schwartz: Sounds like you haven’t really changed your opinion about open core. But given that, how hard it is to start open source businesses, or let’s say businesses that lead the development of an open source project? Do you cut them a little bit more slack today, or do you still think that you should either be open core or open source?

Peter Zaitsev: Oh, no, no. I mean, let’s be clear. In this case, my approach or my thinking is, open core has the right to exist. And that is a very reasonable business model to pursue. That is not a business model we have chosen.

We at Percona have been able to choose that business model. We are doing the fully open source at large extent because those larger vendors exist.

For example, they are not tricking anybody, so we could be able to do all their engineering for example which goes into Percona server just by ourselves. We are relying in this case on the Oracle pushing for the open source edition, and then, they’re doing that better.

I would say, if you’re doing the green hill development, trying to build up a completely new database from scratch, it can be very hard to succeed in the current market without some sort of an investment.

That is my take, but my point of thinking here is this: Businesses should come in all shapes and sizes, there is room for proprietary software, for open core, and so on and so forth. But if you look at the customers, everything being equal, the open source, the true open source gives you the best value, and we happen to be able to do a business by providing the best value to you.

Margins

Michael Schwartz: I think it’s kind of ironic that you’re saying that open source is the best value, but I noticed, in that same article that you mentioned that you think margins should be lower for open source software.

And if it’s the best value, shouldn’t the opposite be true, that you get better margins for giving customers more freedom?

Peter Zaitsev:Well, what I am speaking about here is a value for customers in this case. And I would say the value from customers, that desk responds to somewhat lower margins to you, if you will. Especially on the per-unit basis.

If you look for example some retail evolution, ranging from somebody like Costco or even Amazon, they are able to lower prices in many cases because their margins are lower but their costs are lower as well.

If you think about how much Costco marks their stuff compared to somebody like Nordstrom, then, that’s going to be night and day. And yes, we are much closer to Costco in this regard, and we are proud of it.

Volume

Michael Schwartz: That analysis assumes that you’re getting volume. If you use open source as part of your business model, must you then get volume?

Peter Zaitsev: I think in this case, of course in terms of my analogy, to think it is not super correct in this case is what stores like Costco sell relating to inexpensive products.
In the Enterprise space, you often have a dollar volume, which does not have to have the same customer volume. For example, I have looked, now probably like a year or so, as a fan of a pivotal event, and they listed just about 300 customers. But they would have more than a million dollars of average revenue per customer. They have a very high-end Enterprise focus.

So, I think you can get the volume driven this way. And what also happens in the open source case, and I think what is important here is, really in a successful open source project, you are able to save on the marketing costs because your community is going to be doing some marketing for you, to much more sense than property companies typically can enjoy.

Licenses

Michael Schwartz: You have a lot of experience in licensing, I’m sure. Have your thoughts on licensing about let’s say within open source licenses?

Peter Zaitsev: Oh, yes. I think it is a very interesting time for open source licenses.

I think classically if you look at that, there have been two camps in open source software licensing – and again I am speaking about the open source only in this case – there have been one camp which would be the permissive licenses.

Think about Apache, BSD, MIT saying, “Hey, take our software, do whatever you want, if you want to integrate or modify it and ship it as a commercial version – it is fine.”

And then, there’s been this GPL license, which is led by ideas of Richard Stallman saying, “Hey you know what, to really promote open source software, we need to force companies which are modifying that software to open source that.”

And I think in the ‘90s, early 2000s, it looked like the GPL approach was winning. There is of course Linux, MySQL, and so on and so forth, but more recently, things have been changing with what we have interesting polarization going on.

Because from one standpoint, we see where technology features are more open, getting more traction, for example, PostegreSQL has the larger momentum than MySQL in those days, in part because of the underlying license.

From our side, we are seeing also people polarizing and evolving towards not completely open source business models. You can see business source license, which MariaDB uses, you can see the shared source licenses, which companies like MongoDB, Elastic, or Redis, has been adopting recently.

We can say this really polarization of the open source, some of the ideas are driven by “Hey, you know what, we want our adoption of software to be as widely used as possible, and kind of really focused on adoption.”

There is another thing in the open source, which is focused on protection and monetization, saying, “Oh, you know what, we kind of want to give something like open source, but we want to make sure cloud providers can just take our stuff and run with them.”

I think there is a space above, and I think it’s very interesting to see what this competition of ideas and business model is happening right now. And it’s very interesting where it is going to take us.

Ecosystem

Michael Schwartz: Do you think that by introducing these more restrictive licenses that the companies are trying to gather a larger percentage of the monetization of the ecosystem? And they are basically making a call that they’d rather have more of the pie than, let’s say, have a slice of a bigger pie?

Peter Zaitsev:That’s right, that’s right. I think it’s interesting to use this analogy. That’s exactly something I use in one of the keynotes I gave recently. From a pie analogy, companies are focused on a bigger pie or getting a bigger slice.

And that is exactly that. And some companies and communities are exactly focused on the growth, on the project first and foremost. And in this case, we typically choose as permissive licenses as feasible, and of course if you want to have a control and really ensure what only you can monetize in your environment, then, that is a different choice.

For example, I would say, if you think about PostgreSQL community, that is extremely fragmented. And there is no large player that has a very large portion of that market.

And, generally, that community is very much focused on adoption. For example, if they say, “Amazon now has a PostgreSQL or a PostgreSQL Aurora.” That is fantastic, that means more Postgres, that means Postgres is more accessible for some developers which wouldn’t use it otherwise. They were excited about that.

Now, if you look at the opposite side of the spectrum, we have MongoDB. MongoDB is obsessed about having all the MongoDB revenue there is. And they’re doing good at this point in time.

You can see there is only one MongoDB Atlas. In this case, we’re not being kind of undermined by Amazon’s or Google’s Office old drive. But that also is just about now. We can see with those changes to not open source approach, for example it has even been dropped from some Linux distributions, or some projects that are moving away from using MongoDB because of that open source changes.

And we also see some alternatives popping up. Amazon says, “Hey guys, you don’t allow us to run MongoDB on Amazon? – That’s fine, we’ll create protocol compatible alternative, Amazon’s DocumentDB.”

I think if we look at 5 years from now, we’ll see what that strategy, to be kind of very greedy and selfish, has backfired from MongoDB.

Next 20 Years

Michael Schwartz: Switching gears a little bit, where do you see Percona in 20 years?

Peter Zaitsev: As a code someone writes, it’s hard to make predictions, especially about the future in this case.

The honest answer would be, I think how technology is evolving, it is really hard to tell.

What we are focusing on, if you look at the next 3-5 years, is we are continuing to build and improve our open source platform to run open source databases successfully. And we are investing a lot in Cloud offerings, especially in Cloud Native, which I think is fantastic open source response to that seductive convenience, which database-as-a-service offers.

And also, a lot of focus on really automation. I could call it Artificial Intelligence for databases, but really only some of the algorithms, which underpin automation, are artificial intelligence-based. So, that is going to be a good direction where we are going to.

If you think about reality, my approach has been growing successful, profitable, and what’s most important is a good company that I can be proud of, and our staff can be proud of. And because I didn’t raise any Venture Capital, I don’t necessarily need to provide an exit to anyone.

Even 20 years from now, we’re still growing, we’re still a private company – that is fantastic! I don’t see any problem with that. And there are some very successful companies like IKEA, which are very large but they are still private.

Of course, it is possible that somebody will come and make an offer I can’t refuse. Well, I’m a businessman, and I wouldn’t be telling you, “Oh, I never will sell it for any money.” Because I know when those words are said it is typically bullshit.

Avoiding Not-Invented-Here

Michael Schwartz: And the way that you position the business, in a way, because you write some software, but you’re also willing to look to what other people are doing, almost like it’s a better long-term strategy for you because you don’t have to be right on your software.

You’re willing to sort of jump ship and say, “There’s something better out there. We’re just going to use that because it’s open source.”

Peter Zaitsev: That’s right. If you look at our approach to innovation, we are looking, for example, at MySQL like a system or Postgres system, or whatever. We are really looking at the tools which already exist in an open source ecosystem, we are covering the gaps which we need to. But in some cases, we will have to write something from scratch, and in others, we will have to adopt some open source projects, and kind of integrate and test and so on and so forth.

But I think it’s very important in our business to be low on ego. Because if you let the engineering team to get that “not-invented-here” mentality, and you really started implementing too much stuff in-house, even if it doesn’t provide substantial value to customers and communion, you will raise your costs way too high and run into trouble.

Challenges For open source Companies

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

Peter Zaitsev: That is an interesting question. I think many open source startups are different. We are really looking at the different target audience, if you will, and different business models. Now, if you look at the open source database infrastructure, I think getting known is very tough.

Because if you look, compared to years ago, maybe 20 years ago, the open source ecosystem was small and everybody kind of knew everybody and lent you a hand.

Now, it is dominated by the semi-open source, venture-funded or either public companies in terms of voice share, in terms of how much marketing they do, it is very hard to become known, I would guess. That is a challenge.

Another hump of course is, if you are targeting Enterprise, those folks are very risk-averse.

If you, say, you are a two-people company, you have created some fantastic technology which can help a lot, then a question for enterprise is, “Can I trust you to be here in the next 10 years?” Because that is a planned horizon for many.

And on Fortune statistics, about how many startups go under – of course, they don’t. I think even for Percona, it took a lot of time for us to get that confidence of Enterprise customers.

I didn’t mention this in the start, but we have been in business for 13 years now, and our customer base has been evolving. Early on, I could not imagine the customers I have now taking us seriously.

We had to really provide services to much more startupish organizations which don’t quite care what’s going to happen in 10 years. They are just looking for somebody who is best to help them with their needs today, right now.

Advice For Entrepreneurs

Michael Schwartz: Maybe you could just talk about – forgetting the company and open source maybe – but just in general, you’ve got quite an entrepreneurial experience, any advice, just for entrepreneurs?

Peter Zaitsev: I think what is very important in this case is to understand who you are and what your goals are. Because I myself have a relatively unusual path. I came from a technical background, from engineering background to becoming a CEO, and I also chose to stay fairly technical.

I’m still going with the customers, and we discuss the technical problems with them because that is something I like. That really defined how the company management will have to be structured. I needed to hire a lot of people I could trust, to really focus a lot of business aspects.

That is not a road which is right for everyone, and that is not the road probably even possible for everyone. I would say it would not quite fit in the role of the traditional CEO in many cases.

Michael Schwartz: Peter, thank you so much for sharing your thoughts and being so candorous today.

Peter Zaitsev: Of course, thank you! That has been a pleasure.

Michael Schwartz: Thanks to the Percona 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.

If you want to comment on this episode, tweet at us. Our handle is @fosspodcast.

If you really like this episode, don’t forget to leave us five stars on iTunes. That really helps us get the word out.

Next week, we interview Boris Renski, the Founder of Mirantis.

Until then, thanks for listening.

Episode 30: Open Core Summit – The Conference for COSS with Joseph Jacks

Joseph Jacks is the Founder and Organizer of the Open Core Summit (OCS), the world’s first commercial open source software (COSS) event. Joseph is also the Founder and GP of OSS Capital, a venture fund that invests exclusively in early-stage Commercial Open-Source Software (COSS) companies. In this episode, Joseph discusses the exciting origins of the summit, and why today’s investors still grapple with funding open source software businesses.

Transcript

Intro

Michael Schwartz: Hello and welcome to the Open Source Underdogs podcast. I’m your host, Mike Schwartz, and for this episode, we’re breaking format.

Today’s episode is about the Open Core Summit in San Francisco from September 18th to 19th.

That’s September 2019, in case you’re listening to this podcast after it’s too late. That’s really soon, so if you don’t have your tickets, get them now.

With me today is Joseph Jacks, Founder of OSS Capital and founder of the Open Core Summit. He’s going to help fill in some of the blanks about what this conference is about.

Origin

Joseph, thank you so much for joining us today.

Joseph Jacks: Thank you for having me.

Michael Schwartz: So, what’s the origin story of the Open Core Summit?

Joseph Jacks: The Open Core Summit really was an idea of a friend of mine, Marco Palladino, he’s the Co-founder and CTO of a really great COSS, Commercial open source Software company called Kong.

The company behind the Kong API Gateway Management Platform, and Marco and I were actually at re:Invent, I believe, late last year in 2018, talking about commercial open source business models.

Kong uses one of the most widely implemented and sort of successful business models for commercial open source companies, which is the sort of open core approach to have the open source permissibly licensed core project. And then they add value around that with differentiated experiences for enterprises that materialized as hosted cloud services, and packaged offerings, and security, machine learning, monitoring, and logging, and packaging, and, overall, sort of robust performance and security SLAs, and so on. They are a really interesting company.

Marco is a really smart and brilliant friend, and I sort of took that idea and sat on it for several months. We wanted to actually do conference in May, but the last nine months have been pretty insane.

So, Open Core Summit is really about galvanizing and celebrating the category of commercial open source software, which really represents the companies that exist to commercialize core open source software projects that are the fundamental basis for a given company.

For example, like RedHat wouldn’t exist without Linux, Elastic wouldn’t exist without Elasticsearch, Hortonworks Cloudera wouldn’t exist without Hadoop. Redis wouldn’t exist without Redis the project, Alfresco Acquia without Drupal, Databricks without Spark, DataStax without Cassandra, and so on.

We sort of classify Commercial open source Software companies, or COSS companies, as companies that fundamentally wouldn’t exist if the core open source project didn’t exist. And sort of thinking pretty deeply about this, tracking the fundamentals of the ecosystem plus activity, particularly over 2018, the timing for a community ecosystem conference on a global basis that really serves to kind of bring together a wide range of ideas, and perspectives, and opinions across, in particular, founders and open source maintainers and contributors, but also executives, enterprises, enterprise customers, cloud providers, investors, analysts and so on. Really in a sort of format of a conference that could sort of scale geographically, and serve to kind of be the basis for knowledge sharing and networking and best practices and collaborations, and sort of like a common meeting place for ideas and evolution.

That was really the core inspiration for Open Core Summit. We are obviously really excited to have a first one coming up in a few weeks here in San Francisco, September 19th and 20th. I’m really honored to have a phenomenal lineup of founders of companies like Fastly, Elastic, Confluent, Kong, Alfresco, RedHat, Amazon, Google, and many other companies.

Who Is Attending?

Michael Schwartz: Awesome! What types of people are registering for this event?

Joseph Jacks: It’s a combination of all the folks I mentioned, kind of all those different constituents, open source maintainers, founders, executives that work at kind of commercial open source ecosystem landscape.

So folks in product marketing and engineering, hiring, strategy, finance, licensing, go-to-market, and lots of cloud provider kind of community is attending and supporting. We’re seeing a good amount of infrastructure, IT, enterprise end-user community.

We actually have a track dedicated to the enterprise voice and perspective, so, enterprise is consumed and purchased commercial open source technology from the vendor ecosystem. If you look at a bank or insurance media, Telco, Fortune 2000, Fortune 500 company, they are on a sort of buy-side, kind of a consumer procurement side of a commercial open source.

So, increasingly two big shifts and things are happening there. Obviously there’s a move to the cloud, move to managed services, Amazon, Azure or Google, but also a simultaneous and sort of in tandem move to commercial open source, which is sort of relying and leaning on the vendor ecosystem there, as every enterprise is adopting open source from the bottom up through developers, into a corporate IT.

And they really need to work with vendors to kind of pardon and build trusted solutions and kind of lean on those vendors for production insurances, so vendors like Elastic, Confluent and obviously RedHat, and many other companies that provide a variety of business models and services around the open source projects they maintain are very appealing to CIOs and CTOs at Fortune 2000 companies. We hope to see overtime lots of participation from that user community as well.

I think the biggest concentration we’ll probably see at the first conference is a lot of interest, at least from what we are seeing so far, in registrations over the next few weeks – I think that will further materialize – is open source containers and founders, sort of aspiring founders as well, along the spectrum.

So, from sort of idea stage to folks working on a company, or interested in building and scaling a company, looking at potential options for funding, looking at potential options for hiring, and strategy, go-to-market, various things like that.

And really kind of selfishly, people want to pay most attention to that constituency, mostly because I think part of the sustainability conversation is really going to concentrate around how we can support, and enable, and provide tools and learning frameworks and access into folks who have built and scaled projects and repositories, from sort of like first commit to through to an IPO, for the next generation of open source founders, open source creators and maintainers.

Biggest Challenges of open source Startups

Michael Schwartz: What do you think are the biggest challenges today for companies using open source as part of their business?

Joseph Jacks: I think some of the biggest challenges kind of revolve around contribution and sort of expectations and dynamic around security, the vendor ecosystem and really what open source means fundamentally.

At the end of the day, a lot of those issues and challenges don’t really look like challenges and issues if you dig hard enough.

Basically, every company on earth uses open source, and they use it very heavily. The sort of converse is not true, in terms of contributing back and giving back to those projects when it comes on to co-commits and actual engineering investment, a very small fraction of enterprises would actually go and have dedicated explicit mandates to contribute backup stream.

Having said that, even if those mandates and explicit initiatives and open source program offices don’t exist, even if they don’t exist, what does happen, which is great, is a pretty significant fraction of developers, who are actually using consumed open source, will file a bug report, or potentially fix something really minor, if potentially, something really jumps out to them, and then, touches and inspires them, while actually maybe spending time and maintaining and contributing engineering time to a project.

I think it’s sort of a high entropy, very hard to measure, and make universal statements about kind of dynamic. Mostly because we don’t really know and we don’t have a way to determine the extent of contribution back at open source, from the consumer side, from what as enterprise or cloud providers, what have you.

It’s quite a lot of important and interesting things there, but I don’t believe we can make categorically sort of universal statements about what is or isn’t happening. Obviously, there are instances where most companies consume and take more than they give. But, I guess, having said all that, whenever this question comes up – because this is a very common question – what are the biggest challenges, sort of contribution getting back topic always comes up.

I always think of a quote by Doug Cutting – who was the engineer creator behind Apache Lucene, Apache Hadoop, and a few other things – and what he said is sort of insane, to expect proportional contribution back to open source, relative to value received from it, or benefits received from it – I’m paraphrasing slightly. I tend to agree with Doug, and I think that that’s sort of correct way to think about open source in terms of the give and take dynamic. There’s lots of interesting evolution here, lots of really cool projects and initiatives happening these days, so, it’s a cool time to be in a community.

Do Investors Care About Open Source?

Michael Schwartz: Putting on your investor hat for a second, I was recently reading an S-1, and the only mention of open source was as a risk that there could be some liability around this company’s use of open source. Is this view changing? And the company’s use of open source to investors, just sort of like a non sequitur.

Joseph Jacks: I think probably more the latter, and I hope it changes. We’ve seen, one, commercial open source IP of the Sierra is Fastly. So, Fastly fundamentally wouldn’t be where they are today and arguably, wouldn’t exist without, Varnish, the Edge Cache proxy technology, they build a wide range of products on top of CDN, among other things.

And Fastly calls out open source quite extendible. It has a pre-promised position. I think it depends on the company. If you look at WeWork or CloudFlare, and other companies, maybe Peloton, I think Ben Thompson, from Stratechery, actually wrote a post earlier today about what constitutes a tech company, what’s a sort of definition of a tech company.

If we sort of like follow logical reasoning of, are all companies becoming tech companies – or, maybe let’s just say yes, and they are all tech companies, software companies – most tech companies use software pretty heavily. And further, all software companies rely heavily on open source – that’s a definite yes.

You need to sort of like make the recursive loop back to all companies are becoming tech companies ultimately are all companies heavily relied on open source. So, that’s kind of like massive, global macro dependency.

I’d say that in that light over time, I think we’ll see more prominence and understanding in the public markets, the retail/investor landscape, and whether it’s IPOs, or increasingly direct listings that are potentially more appealing and interesting than IPOs.

Recognition and acknowledgement of open source is sort of a fundamental driver for innovation. I hope we see that shift. One of the passing things that we have on our plate with OSS Capital is to dig into the recent flurry of S1s that really are software company S1s, and determine how extensively they call out open source as part of their company positioning and product strategy, differentiation, and so on.

As you point out, most of the references of open source are listed in the risks section due to trademark, IP protection, and risks around that. So, it’s kind of like a common land out there in the risk section that lawyers kind of put down. In fact, if you look at every five or ten S1s, the wording is almost identical, it is kind of boilerplate.

But companies like Elastic, or Pivotal, or Fastly, Hortonworks, a handful of others, that are commercial open source companies, having IPO over the last 18 months, you’ll see much more extensive acknowledgement and sort of elaboration on open source as part of their strategies.

But I think even in those cases, it’s not quite articulated enough as a sort of fundamental driver in building block for why those companies are different, and why they sort of like have the ability to create more value than, say, companies that are fundamentally closed and proprietary at the core.

Common Themes

Michael Schwartz: Do you see any emerging themes in the sessions?

Joseph Jacks: I think the biggest common theme that the speakers are looking to talk about is how business models are evolving, and the topic of what defines open source, and what does open source licensing look like in the era of core license innovation.

We’ve seen lots of “source available” licenses that actually are not open source licenses in the sense of adhering to permissiveness, definitions laid out by the OSI, or, for that matter, free software foundation, or the copyleft evolutions of the last couple few decades.

I’d say that more interest in business models and licensing will probably be the case for this first conference. And over time, I think what we hope will happen is the sort of elaboration and content focus on why product development is different in a commercial open source context, why go-to-market is different, why engineering is different, why hiring is different, because all those functions, quite differently – from a behavioral and implementation perspective – inside of these commercial open source companies as compared to previous generation fundamentally closed-source proprietary software technology companies.

Closing

Michael Schwartz: I’ll just say that sounds like it’s going to be quite an event. And I wanted to say thank you for joining us today, and we’ll see you in about two weeks.

Joseph Jacks: My pleasure. Thanks so much for having me, Mike.

Michael Schwartz: Joseph has just done a fantastic job putting together an Action Packed 2-Day Agenda.

Many of the guests that you heard on this podcast will be at the Summit, like Ofer Bengal of Redis, Martin Dougiamas of Moodle, Tom Hatch of SaltStack, Emil Eifrem of Neo4j, John Newton of Alfresco, Jay Kreps of Confluent, Michael Howard of MariaDB, Paul Dix of InfluxData, Sid Sijbrandij from GitLab, and several others you’ll hear in future episodes.

In fact, we’ll be recording two episodes in person at the Summit. So, if you’re a founder, developer, investor, analyst, or just a person excited to learn, meet and collaborate, and all things, at the intersection of open source software and business, this conference is definitely for you.

Thanks to Melissa Park for helping to schedule the podcast amidst all the chaos of planning a conference.

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.

If you have any comments or thoughts, tweet at us. Our handle is @fosspodcast.

As promised, the next podcast will feature Peter Zaitsev from Percona. We’ll push up one next week. Until then thanks for listening.

Episode 29: Chef – Rapid Configuration Automation with Corey Scobie

Corey Scobie is the Senior Vice President of Product and Engineering at Chef, maintainers of the popular open source configuration management tool. In this episode, Corey discusses the “4 freedoms of open source software,” and various challenges associated with building a business around open source software.

Interested in learning more about Chef? We encourage you to check out The Changelog‘s podcast episode featuring Chef Co-founder Adam Jacob!

Transcript

Intro

Michael Schwartz: Welcome back, Underdogs. This week, we have Corey Scobie, VP of Product and Engineering at Chef.

If you want to hear even more about Chef, you should check out Episode 353 of The Changelog, where Adam Jacobs, one of the co-founders, gives his perspective on “The war for the soul of open source” – it’s a really interesting contrast with this podcast.

Like WSO2, Cloudera, and you could say Red Hat, Chef has moved to an all open source code base. They are licensing what Corey calls “The post-production binary.”

I don’t want to spoil much more, so let’s just cut to the tape.

Corey’s Background

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

Corey Scobie: Thanks, Mike, it’s great to be here.

Michael Schwartz: Can you just tell us a little bit about when you joined Chef and how your role has evolved since you’ve been there?

Corey Scobie: Sure, absolutely. I joined Chef in March of 2018, so a little shy of 18 months ago.

At the time, Chef had been through some really interesting expansion of the product portfolio. And so, I was brought in to lead the product and engineering team and vision overall around bringing together the parts of the product portfolio that we put on the table at that point, which included the traditional original Chef project, InSpec, which is our open source project around security and compliance, and then Habitat, which is our open source project around application, orchestration and deployment.

Revenue Model

Michael Schwartz: Recently, Chef announced that it was open sourcing 100% of its offer under the Apache 2 license, and at the same time, announced the Chef Enterprise Automation Stack. I’m wondering what’s in the Enterprise Automation Stack, and how do you get people to pay for it if it’s provided under Apache2?

Corey Scobie: Sure, that’s a great question. In order to answer that, I need to sort of take you back a little bit in time.

Chef was founded in 2008 and started an open source project shortly after under an Apache 2 license, the original Chef project, and went through years of development.

Overtime, as the product portfolio evolved, Chef had become essentially what we described as a loose open core company, which meant that there was a core product which provided value to customers in the Chef Engine, the Chef infrastructure automation suite of tools.

And then, we had created some proprietary software on top of that to help fuel the monetization value of using the underlying open source project. For us, that was a product called Chef Automate, which was our enterprise access control plane.

Ultimately, at the end of the day, we went through sort of an existential discovery of our own last year to figure out how we would take the parts of the product portfolio.

We continued to take the parts of the product portfolio forward, honoring the open source nature of the way that Chef was started, and that most of the other projects, InSpec and Habitat were started, and yet, being able to effectively deliver value and monetize commercial customers in that realm.

We announced in the beginning of April that we were going to do exactly what you just said, Mike. We were going to open source the entirety of our kit, so for us, what that meant was, we were going to take any of the additional on top of the open source project software development that we were doing.

For us, that was Chef Automate, and about 50% of the company was of the engineering team anyway, was primarily focused on delivering Chef Automate, as a proprietary piece of commercial software on top of Chef and InSpec.

We decided to take all of the remainder of the product work that we were doing and open source it, to attach it to the Apache2 license, because we believe in the alignment and the permissiveness of Apache2, as a license vehicle for open source software development.

Today, if you look at today’s Chef, a 100% of the work that we do in product engineering, so a 100% of the work that we do that results in software distributions that customers use first order in their environments, is done in open source. It’s done with the Apache2 License, it’s done in an open and collaborative way that you would expect well-run, open source project, or multiple well-run, open source projects to be.

And for what it’s worth, we have somewhere around a thousand repos today in Github. So, that gives you some sense of the expansiveness of the product portfolio. Now, a lot of those repos are around specific components that we built for Habitat, but nonetheless, there’s still hundreds of sort of core repos that are the tools that make up the Chef ecosystem.

We open source everything, and in the belief that being transparent and having that software development process be accessible to our customers with value to everybody, we can build better software if we collaborate with the people that use the software.

The flip side of that is that we’re still venture-backed commercial entity, and of course, our goal is to get people to pay for the value that they get in Chef, and InSpec, and Habitat, and Automate, and all the rest of our product portfolio.

So, along with the announcement and the move to move all of our software development to open source, we also decided to make a change about how we distributed the software that we built and maintained on a regular basis.

The coupling of that was that, moving forward, we decided that all new builds or new releases of Chef software, of InSpec, of Habitat, and ultimately of Automate, would come with a commercial EULA attached to them.

The EULA basically sensed if you are a commercial customer, a commercial user of the software, and you’re using it for commercial gains. You’re obligated to license that distribution from Chef.

And so, the combination of those two things means that, essentially, we were able to resolve two core questions that were really hampering us in our relationship with customers, and with users and open source.

One of them was, “Explain to me what’s free and what’s proprietary.”, or “What’s open source and what’s proprietary?” Let’s call it that.

That was a very difficult question to answer, and we would have to draw across the various different projects, a very wavy line, that differed by project, on how much of it was proprietary, how much of it was open source, where did the features go, etc.

So, by moving to a 100% open source, the answer is very simple, 100% of it is open source and 0% of it is proprietary. And we’ve got a very simple way to answer that question to anybody in the Chef community, or ecosystem, or customer base.

The other question that customers often asked us was, what was free and what was commercial. That of course also had a very wavy line. It was very difficult to explain to anybody the difference between the free or the commercial parts of our offering.

And, of course, as an open source company that it’s trying to commercialize on it open core model, you’re motivated to try and put more of the feature functionality into commercial or proprietary software, to try and ensure a value proposition, by going to a 100% open source and going to a commercial distribution of the software that we use. So, distribution being the software that we produce after we go through our release engineering and testing cycles and everything.

The actual binary packages that we distribute to the world, those come with the commercial license attached to them. And so, the answer is 100% of the intellectual property is free, and you can do with it what you like, but if you want our post-production version of how to easily install turn-key software into your environment, that comes up with a commercial license, and we expect customers to honor that with a relationship with Chef.

Does No Binary Distribution Hamper Adoption?

Michael Schwartz: Do you think that not providing a binary for the community hampers adoption?

Corey Scobie: Well, interestingly, I think if you were starting out as an open source company, you really want to ask yourself, like, what are your goals, and why are you choosing open source as a software development methodology.

In many cases, if you’re starting out and you don’t have an established community, established user base, established brand, etc., one of the things that you can do is you can offer yourself for free to the world, free as in beer as opposed to free as an available intellectual property. That can definitely help you with adoption.

We have a relatively, you know, Chef goes back a decade now, and we have a strong base of users, what we’ve decided to do in order to try and maintain the grassroots adoption of our software is, make it as accessible as it was before.

So, in other words, anybody can land on Chef.io and download our binary software in the exact same way as they could before. So, the availability of this offer is not different.

The license terms that come with it simply say: if you’re using it – it doesn’t matter what kind of organization you are – if you’re using it in an experimental way, or you’re trying to learn about it, for your own benefit, or to evaluate, fit in your organization – that is for use, and you’re not obligated to have a license relationship with Chef.

If you were using it in a commercial way, you are obligated to have a license relationship with Chef to use that package of that software, and so in that regard, I suspect that we probably will turn down our grassroots adoption a little bit.

For us, it is a mature open source company – that’s a trade-off that we’re willing to make.

But if you are a brand new company, and you’re trying to get adoption and validation of the technology in the field – that probably could be a major hamper for sure.

Customer Segments

Michael Schwartz: Enterprise Automation is a huge horizontal market, and I’m wondering if you segment the market in any way?

Corey Scobie: We don’t naturally. In other words, there’s not specific vertical industries that we try to focus on, although I will say that if you look at the demographics of our customer base, there are industries that naturally lend themselves to Enterprise Automation more than others. And those industries tend to be industries that are heavy in computes, environments, and transactionality, etc.

So, if you look at financial services, for example, financial services is a strong sector for us, it’s a strong sector for I think most companies in the Enterprise Automation space. We don’t specifically target financial services, but the characteristics of financial services is, they tend to have lots of compute resources in lots of hybrid environments, both on premise and in the Cloud, and the management of those environments is a material cost to them and also a material opportunity for efficiencies that get them to the next level of execution in their industry.

So, they tend to go together well. Other sectors that are strong for us are things like governments, where there’s a lot of computing in certain types of both civilian and DoD kinds of government environments, the hospitality industry, the logical places where you see companies, larger companies deploying larger fleets of computing resources.

Value Proposition

Michael Schwartz: So, when you changed – and I realize this change is very recent – but when you changed to, I guess, tweak the business model, did you think that that affected the value proposition for the commercial offering?

Corey Scobie: What’s interesting is that I actually don’t think it really affected the value proposition that much, because before we changed our commercial licensing on the binary distribution, the reality was that the customers that were paying us money for Chef were paying us money for Chef because they wanted to get their software from us, they wanted to have assurance and support that somebody was there to stand behind the software when they needed it.

They wanted all of the things that are basically the core value proposition. And today, if we describe the value proposition of having a commercial relationship with Chef, it’s that you get the best word-class distribution of the software that’s available.

Currently, there are no other alternative distributions of the software available. However, our community is working hard at building some community editions of that, and we have been welcomed with open arms, and we’ve been collaborating with them to do that in the most constructive way possible.

There’s no other distributions of the software broadly available today, but I suspect that that will be a true statement in the future. Red Hat and CentOS are probably the historical example of that kind of thing.

But the core value proposition is that they get software from the Originators of the software, who have more people working on the open source project than anybody else. They get the insurance and support of having Chef to be able to stand behind that in an Enterprise Plus way, 7/24 support availability, SLA is on things like bug fixes and security updates, etc.

They also get access to the people that we have at Chef, many of whom are very, very skilled field operators that help customers with complex Enterprise Automation needs. And then, we are also working on building content that really couples well with our commercial distribution of the software and is available to commercial customers, that is, you know, there’s a world of Chef content available out there, cookbooks and InSpec’s profiles, etc.
We’re trying to build a small set of the best curated version of that content, and then manage that in the same kind of software development loop that we manage our core software engines in.

Foss Principles

Michael Schwartz: I was just giving the press release, and one of the lines that stood out to me was, “Vendor-driven development and distribution models that closely align with FOSS principles,” and I’m wondering what are those FOSS principles that aligned with vendor-driven development and distribution?

Corey Scobie: When we talk about FOSS principles, we talk about the Four Freedoms of open source software. And it’s interesting because the Four Freedoms are age-old sort of documents around, you know, new project, and what are the essential freedoms that you need to really be able to claim that you’re an open source software project.

And the freedoms are really succinct, every time I read them, I read them like they are amendments to the constitution. They were written a long time ago by some people that really had a great vision of where it’s going. And I realize that today, this is super controversial because there’s a lot of conversation in the marketplace about what does actually conform to the Four Freedoms, or whether the Four Freedoms should really be the definition of open source going forward.

But the freedoms are, the freedom to run the program as you wish, for any purpose, to not have an assumption about what you step program might go to. The freedom to study how the program works and change it, so access to source code is a precondition for this, the freedom to redistribute copies, so that you can help others.

And for what it’s worth, we do have some restrictions in saying that the license is not transferable, but the binary distribution of our software is redistributable in many cases. And we use RubyGems and other distribution mechanisms in order to get broad distribution of the software out there.

And then, the freedom to distribute copies of modified versions of the software, which, for us, the example of that is that the community is actually building and modifying the software, to create a new open source and free as in beer version of the Chef client as an example.

They may not recreate the entirety of the ecosystem of the Chef client for companies that don’t want to use our commercial distribution, or for people that don’t want to use commercial distribution like ours. And there’s no problem with that.

The one rub that we have in our open source strategy is that Chef is unlike many other projects, which emanate from free software islands like an Apache project or something along those lines, we are Chef, we actually invented the project to begin with, Adam Jacobs is one of the founders, he founded the first open source project around Chef, and Chef, the company owns the trademark to that.

We are protective of our trademark in that other people shouldn’t be allowed to use our trademark, really just the same way that you can’t build running shoes and call them Nike.

But beyond that, beyond the trademark limitations that we have around the brand itself are open source projects that are available to anybody to use, and to modify, and to redistribute as they see fit.

Investing in Project

Michael Schwartz: The one and the best position to nurture the project are the ones who have invented and continued to drive innovation?

Corey Scobie: To continue to drive innovation and continue to invest. One of the great things about open source is that people show up and will invest their time and their effort, but there’s real capital required to make a lot of the open source projects that we really value broadly applicable and broadly valuable to the market at large.

And so, for us, one of the things that we bring to the table as vendors, we brought a hundred million dollars’ worth of VC money at the table to invest in the projects over time.

Where Does the Community Add Most Value?

Michael Schwartz: Where do you think the open source community makes its most valuable contributions?

Corey Scobie: To me, it’s really about the idea of identifying a problem. I’m going to take it to the existential line and say it’s really about the idea of identifying a problem or a gap in the market and building a collaboration around how to solve that.

And the reason I think that that’s really important is, because one of the ways that you build great products is by bringing multiple viewpoints into the picture, and then, collaborating with those viewpoints to come to sort of the most broadly commonly applicable aspect of the problem that you’re trying to solve.

And one of the great things about open source as opposed to proprietary software, particularly – you know, my history is largely with proprietary enterprise software – historically, is that those viewpoints, those different angles of the problem-solving often don’t come in in an open source software development life cycle until the very end, until you’ve done 95% of the solutioning and engineering problem solving.

The way that open source makes such a great contribution is, it usually takes the problem and sticks it right out on the table, right upfront, and then, people get to collaborate. And those opinions and the ideas of how to solve that problem are integrated right from the get-go. And I think that what results in that is just better quality solutions to the challenges that you’re trying to solve overall.

And so, it’s the super existential version of that question because there are many, many other versions of that answer that point at specific parts of the technology stack that are pervasive in the industry, etc., but for me, it’s really about trying to make the best of whatever problem you’re trying to solve, and that’s where open source shines.

Conversion Rate

Michael Schwartz: Do you have any numbers or thoughts about the percentage of open source deployments that convert into Enterprise subscriptions?

Corey Scobie: You know, I should. We’re definitely able to measure that better since our open source/license model changes this spring, but it’s very early days, and so we’ve seen some conversions and some returns on that front.

But what I would say is this, it is part of the challenge of being an open source company, particularly one that delivers enterprise software to proprietary computing environments in the enterprise – it’s hard to get real telemetry.

So, what I couldn’t tell you today is, how many companies, or how many versions of companies, or how many nodes of software I have deployed in the world, both are a combination of open source and proprietary.

I can certainly give you statistics on what I have in terms of commercial licensing on the one side, but the part of the equation that isn’t clear because we don’t have good product telemetry on that front is, how many nodes of software are actually deployed.

So, we don’t know what the conversion rate is, we don’t know how many people will come to a decision point, at a point in the future, where they have to decide whether they want to continue on the open source path or the commercial path and make an explicit decision there.

Unfortunately, Mike, today, I don’t have very good statistics about that. I can tell you that we suspect that we will see some uplift in companies deciding to follow the commercial path, now that we are driving that decision point at some point in the future, but it’s going to be difficult to calculate how that converts to the distribution of software in the past.

45 million downloads of Chef for over the last 10 plus years. So, there’s a lot of it out there.

Telemetry

Michael Schwartz: It could also become more challenging if there is another distribution that’s not distributed by you, so that the objectives of that other distribution may not be to include the telemetry or to do a deploy squeeze to get information on who’s deploying it – do you see any friction there?

Corey Scobie: Yes, it’s possible, for sure. I mean, one of the things that’s interesting, and I think somewhat unique about how things are shaping out in our community is that the alternative distributions are, as opposed to a group I’m coming along and hard forking the project.

What we’ve done with the community is that we’ve sort of collaborated on an additional distribution, or making it easier to create additional distributions of the software, by staying on the same core-source tree.

Just as an example, if we decided to put telemetry into the product, and that went into the core-source tree, a downstream distribution might choose to exclude that, or they might choose to stay compatible, in which case, they would have the opportunity to collect, and maybe show that telemetry as well.

So, I guess the answer is it could go either way. There, from a technology perspective, the path of least resistance is for us all to stay on the same source space. And that way, we can try and guarantee for the backward compatibility across the different distributions of the software, which is something that we, as a community, have to decide if it is important for our users, but it could go different ways too.

Sales and Marketing

Michael Schwartz: Switching tracks a little bit towards sales, are most of the leads inbound? And I’m wondering if – you haven’t been there that long – but do you have any visibility of how the sales teams evolved over time?

Corey Scobie: One of the things that we decided to do when we made our sort of our licensing changes, and what-not, is to really focus on the fact that we are a company that largely delivers to enterprise-class customers. So it’s the global 5000 industry players.

On that front, it’s a good mix. I mean, we still have lots of inbound interest, it comes at different levels, and it’s sort of more curated now than it’s been in the past, I think.

If you would have talked to Chef of 2015, the answer would have been, “Everybody and anybody is our target market.” With that, leads or inbounds, we do a lot of prospecting ourselves as a sales force. But where there’s no real opinion about whether we should be tracking down a lead, based on the potential size of a commercial opportunity, or what-have-you.

I think the Chef of 2019 is a lot more focused on really being outbound-driven on the enterprise-class customers. And then, inbound-driven on right-sizing the inbound leads into the appropriate bucket.

So, for us, we have partner offerings that are focused on sort of smaller scale, small footprint customers, often in a hosted environment, so we have a relationship with Amazon web services that has our product offering, a certain Chef product offering called OpsWorks for Chef Automate.

That’s often a place where small and medium customers gravitate to because it’s more of a consumption-based model. And then, the larger enterprise customers tend to want to have a relationship directly with Chef. Ourselves and those customers tend to be larger contract values in a longer-term commitment.

Pricing

Michael Schwartz: The pricing is one of the hardest parts of tech entrepreneurship, and I think it’s really hard for infrastructure software when you say, “Well, what’s the value of this infrastructure? – Well, your company maybe couldn’t run without it.”
I’m wondering if you struggled with pricing, or change pricing, and sort of how you’ve approached, like how do you figure out what’s the right value?

Corey Scobie: So, what we didn’t do is, we didn’t change the market, the established market value of our suite of infrastructure automation security compliance. So, overall, the net value of that in the marketplace is exactly the same before and after the business model.

What’s interesting about what we did with licensing is that prior to changing the commercial terms on our distribution, customers really bought a license to Chef automate which was our proprietary management console. But they paid by the number of systems that they were connecting up to that management console.

It was sort of a proxy value to the real value that they were getting, which is, they put Chef on a server, and it does configuration management for them. But then, they paid us, by paying us, to foresee and manage the visibility of that in an Enterprise console on top.

That was a side effect of the open core proprietary open source software of the relationship that we had, all of those products. What we did host the license and packaging change as we said, “Chef itself has a value, and that value is the thing that customers experience the most value in.” So, we’re going to put a specific price point on Chef.

Same for InSpec, which is around security and compliance, and continued security and compliance there. And the aggregate of those two was the same value as they were paying us before on a per note basis for Automate.

We basically did unbundle the pricing to create distinct, unbundled pricing, as well as creating some easy-to-consume Enterprise skews on top of that. Because often, Enterprises don’t want to buy a bunch of part pieces but what they want to buy is the solution that does infrastructure automation, or security compliance, or for us, the ES bundle is all of the pieces of the puzzle together, into one pricing bucket, into one easy-to-consume skew.

So, the short answer is, we didn’t change the market value, but what we changed is how you count the pieces, the components that go into that market value, to make it easier to understand and see the real value of what you were licensing in our commercial relationship with Chef.

Partnerships

Michael Schwartz: I’m wondering about, if you have any channels, or have you built partner networks, and does that account for a meaningful amount of sales?

Corey Scobie: We definitely do have partner networks, and often, they take different forms. Like, most commercial software companies, some of our partner channel is about fulfilment, like how people actually create a contract vehicle and purchase things. And it’s easier for them to do that with – if it’s a new customer, for instance – it’s easier for them to do that with a partner who may have an established business relationship with them. And it might then bring on a new vendor.

We also have channels that are about, both software and services delivery, and building solutions channel is on top of that. Enterprise Automation, as you said, it’s a complex, horizontal landscape.

We have a number of partners, where they are sort of value-added partners on top of the software core. So, what they’ll do, they’ll bundle on services or other kinds of consulting engagements on top of that.

Overall, our partner channel does account for a meaningful, not a huge, but a meaningful part of our annual recurring revenue footprint as an example. And then, the last thing is, of course, we are strategic partners.

I mentioned Amazon and the relationship that we have with Amazon and OpsWorks for Chef Automate. We also have a relationship with Microsoft, relationship with Google, and of course, these platforms are the dominant platforms of the next generation of Enterprise computing, are important, have strategic relationships with as well.

So, yeah, we continued to build and invest in our integration there from a software and a valued perspective, and we also are building our commercial relationships with them over time as well.

Challenges of Open Source Software Startups

Michael Schwartz: What do you think are the biggest challenges facing new open source software vendors today?

Corey Scobie: The attractiveness of open source is that you get this great collaboration with the community of users that you’re trying to solve problems for. You probably get them uplift in terms of the community coming along and adding value to the amount of investment that you as a new open source company are able to put into that code base.

So, those are both positives. And plus, you get, depending on what you choose from a licensing perspective, so choosing to be an open source company and choosing a licensing path are sort of two different things, and they should be thought of as two separate decisions that come together to help reinforce your business strategy overall.
But if you look at it from a licensing perspective, whether you go on a freemium, or a truly free distribution to try and amp up acceptance and distribution of your technology, you can definitely get more eyes and more interest and more potential users to your door that way.

I think the real tricky part is to understand clearly the dynamics of the relationship between the value that you provide as a software company, and how you expect customers to realize and pay for that value in the long term.

I think that is a really tricky thing. And it’s not static for the lifetime. At least, in my opinion, it is not static for the lifetime of an open source company.

You may choose open source as a business strategy and a software development strategy early in your life cycle for one set of reasons, and then, choose to continue, or expand, or refactor that open source capability later in a lifecycle of your company, depending on where you’re at in that evolution. And it’s something that you should revisit on a regular basis.

I think the other thing that’s really hard for open source companies today is to choose – there’s a lot of political and other thoughts going on in the industry around open source, and the existential threat of Cloud vendors, and whatnot – that’s a whole sort of political hotbed of topics that I think has spawned a huge derivative of interpretations of sort of open source licensing and open source licensing strategy, etc.to try and protect the intellectual property based from something.

And gosh, I think, you got to go into it with the idea that you’re going to be the best at solving the problem that you’re starting right now, and let the market play out.

Closing

Michael Schwartz: Corey, that was really fantastic. Thank you so much for your sharing all your thoughts today.

Corey Scobie: Thanks for having me, Mike. It was great, and obviously something I’m passionate about is the evolution of open source, and how we can all be better open source stewards.

Michael Schwartz: And best of luck with Chef.

Special thanks to the Chef team for volunteering Corey.

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

For this episode, we also added a link to The Changelog #353, if you want to hear the interview with Adam.

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

Production assistance from Natalie Lowe.

Operational support from William Lowe.

Please leave a review or add Open Source Underdogs to your podcast favorites list. That helps us get the word out.

Our Twitter handle is @fosspodcast.

Next week, another bootstrapper, Peter Zaitsev, Founder and CEO of Percona, he’s one of the early engineers at MySQL. He’s had a ringside view of the open source database landscape, and he’s super interesting – don’t miss it.

Until next time, thanks for listening.

Episode 28: InfluxData – Purpose-Built Time Series Database with Paul Dix

Paul Dix is the Founder and CTO of InfluxData, creator of the popular open source time series database, InfluxDB. In this episode, Paul discusses finding balance between commercial and open source offerings.

Transcript

Intro

Michael Schwartz: Welcome back! You’re listening to Open Source Underdogs.

I’m your host, Mike Schwartz, and this week, we’re honored to be joined by Paul Dix, Co-founder and CTO of InfluxDB.

The goal of this podcast is to gather first-hand accounts from the founders who helped build successful open source software companies.

Started around seven years ago, InfluxDB is a time-series data platform that’s achieved significant market adoption, including deployments and more than 450 Enterprise customers, like Cisco, IBM, eBay, and Siemens.

The company has raised around $120 million dollars, which its using to expand operations around the world.

As both the founder and longtime developer, Paul has some deep insights about open source business. So without further ado, let’s cut to the tape.

Paul, thank you so much for joining us today.

Paul Dix: Thanks for having me.

Origin

Michael Schwartz: I guess you were a developer before you started InfluxDB. I’m wondering about how did the company come about?

Paul Dix: Yeah. As you mentioned, I’m a developer. I guess I should probably start – I’ve been in developing software for a long time, since I got in the computer industry in the late nineties.

And the experience that I have that is most direct relevance to Influx is, in 2010, I was working at a fintech startup in New York City, and we had to build essentially a time series solution for tracking market data in real-time. We were building a pricing engine that would update prices, price predictions once every 10 seconds for the hundreds of thousands of different financial instruments.

Building a solution around that was my first foray into time series. And for that, I used web services written in Scala, with Cassandra as the long-term data store, and Redis as like a real-time indexing engine.

From a developing background, that was kind of my background. But from an entrepreneurship perspective, I always knew that I wanted to start a company, and it was basically just a matter of building up enough experience along the way – like working at other startups, working at large companies – and getting to a point where I felt comfortable venturing out on my own and trying to start something.

Is Cloud Best Monetization Strategy

Michael Schwartz: In one of your talks, you mentioned that open core and cloud are two viable revenue streams for pure play open source companies – I’m wondering if you think that that’s still true?

Paul Dix: I guess, depending on your viewpoint, open core is not a pure play open source strategy, strictly speaking. If you’re thinking pure play open source, like, everything you do is open source, and basically you just charge for services, whether those services are professional services, or cloud hosting, right.

Realistically, I think successful businesses that are built around open source have to be open core in some way. And I definitely count SaaS platforms in that vein.

Basically, I think the key is, you have to have something in open source that’s interesting enough that people can solve enough of their problems with, where a large community of users can build on top of that, or use your software without becoming customers. That just has to be the case where it can be a successful open source project.

And then the core part, that’s the open core. It has to offer some value that’s interesting enough, that some small percentage of that community will pay you for it. I think, if you’re looking at infrastructure software, the best method for building a business on top of that now is basically as a cloud-hosted service.

Now, obviously, not all infrastructure is in the cloud, and there’s obviously still a very large component of on-premise enterprise software. But I think, as a software delivery mechanism, like a SaaS hosted service is just so much better because you have the ability to fully instrument it, to fix bugs quickly, and to really do a bunch of things that just are basically impossible if you’re delivering on-premises software.

As from the business perspective, if you look at other open source companies, that’s largely played out over the last few years, where the companies that are most successful has essentially SaaS products that use their open source core but have a bunch of closed source software around them: MongoDB’s Atlas, Databricks is basically a SaaS product of Spark, Redis Labs obviously hosting Redis, Elastic has their own hosting stuff.

Support As Revenue Stream

Michael Schwartz: Your original monetization strategy was around support, and I’m wondering why you think that didn’t work?

Paul Dix: I think part of it has to do with our project maturity at the time. I think support works well if you have a piece of software that has become what I call ‘critical path’ for larger customers who are willing to pay for support.

Critical path generally, in the database world, means an LLP database, that is used directly in an application.

Influx frequently is used in monitoring cases, where the data is important for monitoring system, but it’s not what, as a user, your customer sees.

Particularly at the time, when we first offered support, which was in the summer of 2015, there weren’t as many people yet using Influx in production, in a setting where they just needed support, and that they would pay for.

Ultimately I think, support as a business model for open source, it kind of pits you almost against your community. Because the thing is, if your software is too easy to use – or too good – people won’t need support.

The only thing they’ll purchase support for basically is an insurance policy, to make sure you’re still around and pushing the software forward, which is a limited audience that you can sell to.

The other thing is – as an open source project becomes more and more successful, other people will come in and offer support around it.

In my talk a couple years ago about open source business models I said, “If support is going to be your plan, as an entrepreneur, you’d be better served by picking an open source project that’s already popular, and offering support around it.” Because, if you’re building the open source project yourself, like, all that engineering time that you’re putting into it, are basically billable hours that you have consultants not billing. If you are consulting shop, you need your people billing.

This is why Percona offers support for MySQL, and other databases, because it’s better to build a consulting organization around existing projects.

Market Segmentation

Michael Schwartz: Right, I think that’s true.

Time series databases are used by a wide array of companies – practically any organization could be your customer. I’m wondering if you segment the market at all, to figure out who do you sell to?

Paul Dix: There are definitely different market segments, but normally what we do is we segment on use case.

We have what we call a “DevOps monitoring,” which can be server monitoring or network monitoring, or monitoring services, application performance monitoring, real-time analytics – which could be business intelligence, it could be all sorts of things.

Sensor data is a big use case, particularly in the industrial sphere; think like oil and gas wells, power generation, power plants, solar, wind, all that kind of stuff.

And then, finally, financial market data is an obvious choice for time series. That’s kind of how we segmented it.

In terms of what industry verticals we’re playing, like I said, in IoT alone, you can track a bunch of different verticals: Oil and gas, renewable energy, factories, different stuff like that. And then server monitoring, again you could have different verticals, like we have eCommerce retailers, we have other software startups that use our stuff as a platform. We have people in finance, research. All that kind of stuff.

Project Or Company First?

Michael Schwartz: Did you start the company and the project at the same time?

Paul Dix: The company actually predates the projects, which is not very common for most open source businesses. Usually there’s an open source project that you then try to commercialize later.

The company was started essentially as SaaS products were doing real-time metrics in monitoring, kind of in the same vein as like Datadog or Stackdriver, or some pieces of New Relic. And when we were building that company initially, what we found was: One, our product wasn’t really taking off, we didn’t have a good clear differentiator on the product; but the other thing was, we had to build all this infrastructure to actually build that product. We essentially had to build a time series platform.

I started the company with my co-founder in 2012, halfway through 2012. We did a Y Combinator until 2013. And by September of 2013, I realized that that wasn’t going to take off, and I thought, “Well, let’s just take this infrastructure stuff that we’ve been building for this application,” it’s called the Errplane – “Let’s take that code, let’s take that package, like start fresh, add a couple of things that we learned building it, and start as a fresh, new, open source project.”

Myself, my co-founder, and one other guy, iterated on this for about five or six weeks. First commit was September 26th of 2013. We put together basic documentation website, and I arranged to give a couple of talks at meetups in New York City. One was the Ruby programming meetup, and the other was the open statistical programming meetup.

I gave those talks in early November of 2013. And the project just immediately took off.

People were very interested in it. The docs site got posted to Hacker News and was on the front page all day. And I basically just kept giving more and more talks about it. It was obvious that we kind of struck a nerve and found a real need that wasn’t being addressed, at first in the database space, because we were just focused on the database.

But, over the course of 2014, I built out this bigger vision of creating a platform, essentially for solving problems for which time series is a good abstraction, and these are those use cases I mentioned earlier: Monitoring, server monitoring, real-time analytics, sensor data, and fintech data.

Over the course of 2014, gave more talks. I raised the Series A round of funding, which closed in November of 2014. It was an eight million dollar round led by Mayfield Fund and Trinity Ventures, and then we just kept going from there.

But, like I said, I think most other open source companies are actually created after the formation of the open source projects.

Although I guess Docker, for example, there was a company called dotCloud that existed for well over a year before Docker came to be. And actually, Dan Scholnick, the partner of Trinity Ventures who co-led our Series A, was the first money into dotCloud, which is the company that became Docker.

Has Open Source Been Materially Beneficial?

Michael Schwartz: Would you say that the open source community contributions have been materially valuable to the company?

Paul Dix: I would. But it depends on what parts of the project you look at.

Over the years we’ve had over a thousand people, at least, contribute to code to different parts of the stack. But the thing is a database is not a very welcoming thing to contribute to. It’s pretty esoteric. Even though it’s written in Go – which makes it a lot more accessible than let’s say something written in Erlang, or C++.

So we’ve got contributions there, but I think where we’ve had the best community engagement contribution is actually in our data collector, Telegraf.

Telegraf has 200 plugins that allows it to collect data from various network services and stuff like that, and then ship it to other places – InfluxDB happens to be one, but you can also ship it to other databases, and even other SaaS vendors who are competitors with what we do.

Because of the fact that Telegraf is liberally licensed, it’s MIT with no restrictions, just MIT license, and we haven’t put a limit on what it integrates with, namely it can integrate with competitors, and that’s okay – it means that most of those 200 plugins have actually been developed by the community.

So Telegraf, from an open source perspective, and a community perspective, is actually our most successful project.

Telegraf Distribution

Michael Schwartz: Do you facilitate Telegraf through a marketplace or some other way to help it grow?

Paul Dix: No. It’s just all just bottom-up. As I said, it’s a data collector, so people deploy it widely to their infrastructure. We have no visibility into where it’s running or who’s running it, other than community members who raise their hands and tell us they are. Obviously, the pull requests that come in on the repo, and our customers who use it.

Now, we have relationships with like Microsoft, for example, who has Telegraf as an agent that you can deploy across all of your Azure infrastructure, to send system metrics and things like that to their metric service. So, we know it’s running there.

There’s obviously their Docker images for it, and there are Telegraf images, and pretty much every cloud provider at this point. But the same is true for InfluxDB.

Commercial V. Open

Michael Schwartz: Going back to InfluxDB a little bit. I’m wondering about how you find the balance between what to make commercial and what to make open source?

Paul Dix: This is a really tricky one. It’s something we talk about all the time internally. And it’s not something that I got right out of the gate.

In late 2013, when we were first building the project, it was me and two other people, with a seed round of funding. We had enough money in the bank to last us, like, a year. And my only goal at that time was to get as much visibility for the project as possible – everything we did was out in the open.

And then 2014 we raised the A. 2015 comes by. And then in 2016, I knew that we were going to have to go out and raise a Series B round of funding for the company, to continue to work on things. And we still didn’t have the real clear delineation of how we would actually turn this into a business, beyond it just being a popular open source project.

And as I mentioned, in the summer of 2015, we offered support contracts as something that we hoped would materialize into actual revenue. But up until early 2016, I think we signed up maybe like one or two people to a support contract. Not enough to build a real business on.

So, basically in early 2016, I started talking to other open source founders, and everybody in the company at that time. And where I landed was, basically what we would do is, for future versions of InfluxDB, we would make high availability and scale-out clustering commercial, and closed source. And basically anything on a single server would be open source and licensed under the MIT license.

We kept that same line, that same delineation since I announced that in early March of 2016. But it’s definitely something we revisit periodically, just like say “okay, should we change where this line is drawn?” Generally, what we want to find out is how can we put more of our code into the open? How can we put more of our code into an MIT license codebase?

What I learned from that experience of writing that blog post and seeing the reaction in the community about it was – once you put something out in the open, it is incredibly hard to pull it back. People get really upset, deservedly so.

But the thing I tell people then, and still now, is that – if we hadn’t made that decision in 2016, all of the code that we developed in the open since then would not exist. Because we wouldn’t have a company. There’s no way that the company would still exist if we hadn’t done that.

Basically, as we do stuff now, essentially we still have the same drawing line – if it’s multi-server, then it’s closed. But, we periodically think, “Okay, is this something we can actually release in the open source area?” We still revisit that all the time.

Pricing

Michael Schwartz: Pricing is one of the hardest things for tech entrepreneurship. I’m wondering if you struggled with pricing; how often you have to change your pricing over, let’s say, since you went to the open core model?

Paul Dix: We basically have two products.

We have the Enterprise product, which is on-premise software. And that’s always been licensed on a per-core, or per-server basis, which is very similar to like whole other database vendors license their software. That price, I think it’s changed once or twice since we released it. The first release of that product was in early September of 2016.

The other product is our cloud offering, which right now is only in AWS. You can actually spin it up in JCP as well – but that’s actually our on-premise version that you are spinning up.

With the cloud offering, we price based on the amount of storage you want and essentially the size of the servers that you’re going to be running, in the cluster that we run for you. Essentially what that is, it’s a single-tenant service, we spin up a new cluster for each person that comes in and signs up, and that’s on-prem Enterprise software but run as a service for people.

We repriced that once we launched it, we launched that mid April 2016. But what we’re doing right now is, we are actually in the process of creating InfluxDB 2.0.

InfluxDB 2.0 is almost like re-envisioning the platform, not just the database.

So the idea is the platform as a whole offers an API and a user interface for collecting data, defining collection rules, storing data, querying data, visualizing it in dashboards and that sort of stuff; also processing it, be it for ETL, or monitoring alerting, and that kind of stuff.

We deliver that in three different form-factors. Open source, which is a single server, and that’s MIT licensed. A cloud product, which for version 2, we are going to price it as a usage-based model: Bytes written into the API, bytes out of the API, number of API calls, compute time for queries like ad hoc queries, or for background processing, and storage hours.

It’s basically like 5 different pricing vectors. They’ll be familiar to anybody whose a customer of AWS, or JCP, or Azure. It’s basically a multi-tenant platform – you pay for usage, and you don’t have to worry ahead of time of like, “Oh, I need two VMs with this much memory, and this much CPU, and all this other stuff.”

The 2.0 offering is something, from an engineering perspective, we’ve had in process for a year and a half at this point, but the vision for the 2.0 cloud offering of being able to offer usage-based pricing is something that we’ve known we wanted to do for over two years.

Business Built Around Pricing?

Michael Schwartz: Sounds almost like you built the product around the business model.

Paul Dix: Because I’m an engineer, it’s hard for me to decouple the things, and also, like I said, the experienced early on, of trying to create the open source project, to make it popular – and then suddenly trying to figure out how to make a business out of it – made me very sensitive to the 2.0. version of thinking about everything as a whole.

Ultimately, like I said, all open source software development is subsidized. And the subsidy has to come from somewhere.

Either, it’s going to be a foundation, which pays for developers to work on things. Or it’s going to be other companies that fund it, they have their own successful business models and they have developers working on it. Or, it’s going to be a single business that creates a successful business around that project.

I think it’s useful in the open source software to think about the business at the same time as you’re thinking about what this software is going to be, how it’s going to be designed, and how you’re going to ship it to your users and then also to your customers.

Sales Process

Michael Schwartz: Talking little bit about sales: Are most of the sales leads inbound? I’m wondering about your experience, growing the sales team in the traditional sales process?

Paul Dix: Yes, most of the sales leads are inbound.

Most people who come to us, say they want to become a customer, started with the open source code, probably actually got it in production in some way, and they had been using it for a while by the time they come and talk to us.

But even within that, I would say there are two kinds of important distinctions between how software is sold, and we kind of have both in our environment, which, I think it’s becoming more common with open source vendors, but which 10 years ago it wasn’t.

Usually, you have what’s called an Enterprise sales model which is, you have expensive sales people, who are doing outbound sales motion, or even inbound sales motion, where you line up contracts, annual contracts, or whatever.

Or you have, what I call, like a self-serve business model, which is: Anybody can come to your website, they can sign up with a credit card, they can become a customer, and they can buy as they go and actually increase their usage over time. We actually have both.

The thing that has been shocking to me over the course of building this company is just how much friction there is in the Enterprise sales model. But it continues to be something that exists because many companies actually want to do business this way.

Partnerships

Michael Schwartz: Do you have any channels other than direct that account for a meaningful amount of sales?

Paul Dix: We are just now ramping up partnerships.

We do have a partnership with PTC ThingWorx for their IoT platform, where Influx is a key component of that. We’re having some customers come to us for that.

In April, we announced a big partnership with Google Cloud. Google Cloud is making a move to a big push to support open source technologies, and InfluxDB is one of their best in class solutions that GCPL offers as a full service.

They have this whole video with other open source vendors that they picked to partner with. We’ll have that launching later this year for our 2.0 products.

Cloud Strip Mining

Michael Schwartz: In the past, you expressed concern about the large cloud companies potentially being at odds with open source companies. I’m wondering if your concern is somewhat abated?

Paul Dix: No. It’s still a concern for me.

Some people will say MongoDB is no longer an open source company. They relicensed their code under the SSPL, which is not recognized by the OSI, so in theory MongoDB looks more like, what I call a “Freemium” software company. There’s a free product that you can use, which is the MongoDB community, and there’s a premium product.

The same goes for Elastic, for the parts of Elastic that they don’t have license under standard Apache 2 License. They’ve made a number of moves over the last couple of years to carve out pieces of their platform that are either not open source at all, or source available, but under licenses that essentially make it a non-open source thing.

Yes, those companies are thriving, absolutely, but the moves that they have made, with regards to their licensing, are basically direct responses to the threats that they see from cloud vendors.

By all back channel things I’ve heard, AWS makes more money off Elastic than Elastic does.

I think the tricky thing is when it comes to if you’re going to make a business out of open source software, and what you want to provide is a hosted service, your cloud vendors have a competitive advantage that you cannot possibly hope to get, which is economies of scale.

You cannot buy hosting cheaper than they can. You can’t buy hardware cheaper than they can. You can’t buy network bandwidth cheaper than they can.

So, they’re more than happy to essentially commoditize the software – commoditize the platform – so they can sell more and more hosting, which basically, like, if you want to get in the hosting business in a meaningful way, requires billions of dollars of upfront capital expense.

I think that continues to be a problem, and honestly, I think open core is still the best solution for that, which is: Keep some of your software closed-source, develop a service around it or develop it as on-premise Enterprise offering. And just make sure that what you have closed continues to be a big enough investment and competitively differentiated, so that even if one of those vendors decides to go after it, you still have some meaningful way to differentiate from that.

The truth is like, if Amazon, or Google, or whoever wants to come for you, there’s nothing you can do about it – they can outspend you. Guaranteed.

It’s just a matter of doing the best you can with the software you are delivering, and hopefully, the fact that you are the creator and the steward of the open source project gives you a little bit of an advantage in terms of creating service around it that is better, or at least preferable.

Innovation To Battle Cloud Giants

Michael Schwartz: Right. And I would hope innovation, also. That as a creator, you have an advantage of releasing new features, and keeping ahead of them.

Paul Dix: Right, absolutely.

Again, this is another question, I think it raises another question essentially, which is: Once infrastructure software gets really mature, how much innovation is there in it? How much people just wanting it to be stable in terms of API and stuff like that?

As you get more and more mature, maybe the innovation curve, or at least a feature delivery curve, it becomes less important, so it becomes easier for a larger vendor to keep up with what you’re doing.

Pay For Old Versions?

Michael Schwartz: You want to run by one business model that I heard of last week in an interview – which I’m embarrassed to say I have never thought of it, but it’s pretty obvious when somebody said it to me.

But the idea was basically that older versions would not be updated unless you had a commercial license. So if you want to update the open source, you have to go to the latest version.

So Java, for example, if you want to use Java 1.4, you need a license; or you need to pay Oracle. I’m wondering what you think about that idea?

Paul Dix: On some level, this is what Red Hat does. It’s kind of their thing. Even though they don’t have closed software, if it’s all about supporting older versions.

I think, as a developer, it’s painful to support those older versions. That’s why there’s maybe a business for it, but again, it’s still fairly limiting.

I think, also, if your software is being delivered as a service, there is less value in that, because you kind of punt on that concern to whoever it is you’re paying to deliver that service. Honestly, to me, that doesn’t seem like a very good model.

Advice For Startups

Michael Schwartz: Last question. I’m sure you’ve had a couple of really interesting years starting the company, and I’m wondering if you have any advice for entrepreneurs who are about to embark on a similar adventure?

Paul Dix: I think it is pretty important to come up with a bigger vision in terms of what you want to do fairly early on.

I know I’m saying this even though when I first started this company, we ended up changing that.

I’ll stick with open source because it’s easier there, which is, if you’re going to start a business around open source software, I think it’s important in the very beginning to actually develop a point of view behind what is commercial and what is open.

And basically, I would say, it’s worth thinking about that as part of your product design. Making sure that the product design actually matches well with how you plan to actually turn it into a business.

Michael Schwartz: Okay. That was fantastic. Paul, thank you so much for your time today.

Paul Dix: Sure, no problem. Thank you for having me.

Michael Schwartz: And thanks to the InfluxDB team for helping to organize this 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’ll chat with Corey Scobee, Senior VP of Product and Engineering at Chef.

Until then, thanks for listening!

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.