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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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Next week, we interview Paul Dix, the Founder of InfluxDB.
Until then, thanks for listening.