startup

Episode 39: Rancher — A support-based business model that scales, with co-founder Shannon Williams

Shannon Williams, Co-Founder and VP Sales of Rancher lays out how a great team with deep domain knowledge can actively identify a product market fit in a crowded space, and emerge a winner. It’s an inspiring story of a plan perfectly executed. This is a MUST LISTEN episode of Underdogs!

Intro


Michael Schwartz: Hello, and welcome to the Open Source Underdogs podcast. I’m your host Mike Schwartz, and this is episode 39, with Shannon Williams, Co-Founder and VP Sales of Rancher.

Let’s go for a minute into the land of hypothetical. If I can ask all 38 previous podcast guests a question, “Is monetizing support a good idea?”, I think there would have been virtual consensus that support doesn’t scale. Except, Rancher is perfectly executing a business plan to do just that.

I hope you’ll enjoy this episode. Tweet your comments at @fosspodcast, and we will asynchronously discuss in the Twitter sphere, but for now, here we go with the interview. Shannon, thank you so much for joining us today.

Shannon Williams: Thanks for having me, Mike. It’s exciting to be here. Looking forward to our conversation.

Origins

Michael Schwartz:  Can you just fill us in a little bit about how Rancher got started and what was the mission?

Shannon Williams: We’ve been going now since 2014. In a lot of ways, it feels like we started before that, because my co-founder Sheng Liang, Will Chan and I, the three of us started another company called Cloud.com back in 2008. And, for all intents and purposes, we’ve been working together every day for 11 years now. That company was an early developer of open-source infrastructure-as-a-service software.

We built a product called CloudStack with the founding members of the OpenStack foundation. I had a really fun run there for about three years before being acquired by Citrix, and spending another three years at Citrix.

In our work on CloudStack, we learned a lot about, as you can imagine, managing infrastructure at scale, building out private clouds, helping a lot of large companies build public clouds. At the time, everything we were focused on was how do we deliver virtual machines to developers quickly from anywhere.

But over the course of working on a lot of private clouds, we noticed that we had a lot of conversations with people trying to figure out how to blend their on-premise infrastructure with this growing amount of cloud infrastructure.

One of our early customers was GoDaddy actually. They were looking at building a public cloud, and Darren Shepherd, our fourth co-founder of Rancher, was a Chief Architect there. We got to know Darren really well.

We started talking in 2014 about what could be done to bring together the on-premise infrastructure, the cloud infrastructure, into something that overlaid it all, and to really allow people to treat infrastructure like Cattle, like a disposable commodity. And Docker was just getting started, the concept of Containers was emerging, and we thought there was a really cool opportunity to look at leveraging that, to build out management tooling, infrastructure services, and kind of imagine the next generation of infrastructure management, which would hopefully enable people to do computing anywhere, with really consistent deployment experience, management experience, monitoring experience, all these types of things.

And so, Rancher was born. For almost 5 years now, we’ve been working on continuing that journey, how to build open-source products that are available to anyone, and really allow them to run workloads anywhere. So, that’s really where we came from.

Value Prop

Michael Schwartz: This market, it’s really diverse. There’s a lot of tools and tooling in this area. I’m wondering, what’s the exact value proposition for Rancher service?

Shannon Williams: Rancher is open-source software, we have a number of open-source projects but our most famous is called Rancher, and it really sits at the management playing around Kubernetes. Organizations use Rancher because they are deploying and managing more and more Kubernetes clusters.

Rancher provides distros of Kubernetes. We have one called RKE, which is a pretty typical, upstream distro, it’s really good for deployment, automation. Then, we have one that’s optimized for the Edge or other low-resource utilization called K3s.

We provide distros of Kubernetes to people that need to run Kubernetes, but Rancher itself actually sits above those distros, it’s the management client. What’s cool about it it’s really distro agnostic. It actually manages any Kubernetes. And by managing, what that means is an organization implements Rancher so that they can deploy and control, and then grant access to dozens or hundreds of Kubernetes clusters – some running in the clouds, some running as hosted services like GKE, and EKS, some running on premise, maybe on the Edge.

By bringing all those clusters together, what Rancher allows them to do is, dictate policy, control access, monitor availability, manage deployment of applications, manage catalogs, attach additional open-source services, like Prometheus for monitoring, or Fluentd for logging, or Istio for service match, and so, Rancher sits at that next. So, how do I manage Kubernetes everywhere according to my organization’s policies.

By doing that, it enables them to then really deliver their service reliably. For organizations, they think of Rancher as the Kubernetes platform, it’s Kubernetes as a service, it’s how they deploy apps and run anywhere.

Monetization

Michael Schwartz: The Rancher GitHub repository has 14,000 forks, which is really a lot. But there’s only around 60 something developers, which I could see is probably primarily being the people in your organization – can you talk about the relationship between the open-source project and the activity there, and the SaaS service?

Shannon Williams: Just to be clear, we don’t offer a SaaS service. Rancher is open-source software only. We only provide open-source software that people use, but what we sell is support for those open-source projects.

On any given day, there’s about 30,000 teams around the world running Rancher. Those teams, they may be a smaller group that’s deploying it for one application. There’s maybe somebody doing a Dev lab, or test lab, but of those about 1%, about 300 enterprise customers, these are companies that deploy Rancher, and whatever they are running on it, it’s critical to their business.

They contract with us to provide enterprise-grade support for Rancher, RKE, K3s, and really their whole Kubernetes stack up and down. By providing that Enterprise-grade support, what they get from us is the confidence to run really important workloads on the open-source Rancher, but what they like is that we don’t have your classic open-core only model, we don’t sell version that’s different to them. They just pay an annual support subscription, and they use it.

A year later, if they are no longer using it, they are not paying an annual support subscription. They can keep using the software, but they would be using it again without support.

Our model is geared around helping organizations that need support, get the best possible support in the world for Rancher, Kubernetes, Prometheus, and Istio, and all the pieces of technology that we deliver to them.

Why Open Source?

Michael Schwartz:  Has open-sourcing the code really made a meaningful contribution to the company?

Shannon Williams: It’s at the root of our success. By open-sourcing the code, we enabled a startup with relatively no name recognition obviously, to come into, in a lot of ways, it’s a very crowded market.

Think about the companies that are dealing with application management platform as-a-service. When we started, you can imagine Docker, Mesosphere, Red Hat, Pivotal, these companies were already out there. You know, Docker, in their sense with having released the Docker project, orchestration and building different types of management tools, and with enormously more funding than us, much, much, much bigger brand recognition teams.

We had to find a route to market with limited funds, we needed to let our product be our best piece of marketing, and so we took that approach. We believed in this for a long time. In our last company, we had a very similar approach. We made Rancher fully open source and free because we felt that it was the best way to get adoption, to plant seeds in organizations that would need this technology.

By putting it out there, we really bet on two things. We bet that people would like it, and that they would want to use it, but we also bet that this technology was crucial. And that at least a good chunk of people who use it would find value in getting support for it and find value in having SLAs that they can rely on for that application. And we’ve been thrilled. I mean, our company’s now almost 200 people, we’re more than doubling this year. In terms of revenue, it’s really worked out really well.

People really do love Rancher. It’s something that makes me really confident with the model as you have to believe in your engineers, you have to believe that products can be great. We also spend an enormous amount of investment of time working with our open-source community. We have a huge Slack community of thousands of users who come in with suggestions and ideas on how to make the product better. We get thousands of issues, and feature requests, and bugs filed by the community.

I don’t think we have more of a user community then of a contributor community. I love it because they come to us with real problems that need to be solved, and I identify them. Often, their use cases sometimes are pushing the boundaries that we may not see out of a Fortune 500 company that’s using Rancher. So, it all sort of pushes forward with the hopefully creating a great product for everyone.

More On Why Open Source…

Michael Schwartz: So, just to sort of dive a little deeper on that. If you made the software commercial tomorrow, do you think the 300 or so Enterprise customers, who are using the software, do they really care about it being open source? Or is it just a non-sequitur, or they just want the best software? So, if you made it commercial tomorrow, do you think that that would be bad from where you are today?

Shannon Williams: Yeah, I do. When I talk to organizations about our business model, they get really excited because there isn’t one of them which hasn’t been in a position of really limited leverage against their current vendors. Everybody has been staring at just massive renewal orders.

We closed, just this quarter, today is the end of our third quarter, and we closed three deals with organizations that are spending a lot with us, half a million a year in recurring revenue, for example, to support environments. And their frustration in some cases was platforms that they had built, PaaS platforms, where the cost had grown exponentially. And they just had no ability – even though these were all based on open-source, they weren’t themselves open source. I mean almost everything is based on something, open source at this point.

What people really like is, they like an open-source product, because they always have the option to leave it there, let it run, support it themselves, hire some engineers and figure it out. In the end, if you are running a proprietary tool, and you don’t pay, you have to yank it out of production. And that is impossible for most companies.

I think our business model, yes, some people would still buy a Rancher, and be fine with it, but I think a lot of the smartest CIO’s I talked to are really excited to see a company like us, that embraces open source for commercial purposes, provides really good support, and is committed to building open-source products. For us, it’s allowed us to grow faster than any other approach I’ve been able to come up with.

Pivot To K8S

Michael Schwartz: Seems like Rancher made an epic pivot towards Kubernetes at some point, I guess, fairly recently – what did you learn from that process?

Shannon Williams: Well, the hardest part about getting into any market is making bets, and then figuring out where they come down. Rancher started about the same time as Kubernetes. Right around 2014, Kubernetes was starting at the same time we started our company.

At the time, we really thought Docker and their Swarm and stuff were probably more likely to win out. They had so much momentum. But it only took a year to realize that Kubernetes was actually really well-built piece of code.

So, when we first started working with them, we were kind of thinking we would be managing Swarm clusters and Mesos clusters, and then, even before we launched our 1.0, we decided to support Kubernetes, because it was a really good piece of software.

So, we released our 1.0, our first product to the market in 2016, Rancher 1.0, at the time, if I was talking to them, I would have said something like, “You know, it seems like different companies are choosing different orchestration approaches to containers because they need different things from them.”

Some people want to scale really big, like Twitter. So, they’re using Mesos, other people really focused on the developer experience, and they’re choosing Swarm. And it wasn’t really clear yet that one standard was going to emerge, but what we started to see was some stability issues with some of the other orchestrators that we saw as a manager. It was like, “Ah, these things aren’t stable as I would have expected them to be.” What we found is that Kubernetes is really reliable.

So, as we imagined our business, and trying to support these technologies and helping companies implement them, we felt like it was safe to bet on something reliable, and that did require pivot that moved away from messaging, and product development had gone into supporting, we built our own thing, we had Swarm, we had Mesos, we weren’t really sure what orchestration was going to take off. But as we got more comfortable with Kubernetes, and luckily, we started working on it early, it made it really easy for us to honestly commit to something we liked.

By that point, by 2017, we were all in on Kubernetes building on that. And since then, we already had a lot of people using it in our 1.0 product, we also had a really nice base installed, we didn’t just lose.

So, a lot of times, you have a pivot, and it means almost starting from scratch. But actually, we didn’t really lose hardly anyone because it was very much in line with the direction that most of our customers wanted to go as well. Even if they maybe chose a different orchestrator, they also saw the market going this way, so they were really, really appreciative that we gave them a path to get to Kubernetes off of maybe something else they had chosen when the market was still a lot less clear.

We found that that wasn’t nearly as big a problem. Now, what is hard in pivoting, especially, one of the things we built was our own orchestrator called Cattle, and one of the hardest things was actually convincing our own engineers that the Kubernetes was actually superior to what we had developed ourselves.

That’s a hard thing to do because no matter what, if you built something, you’d always love it. And at the same time, in an early market like we were in, lots of people loved the thing we built, a lot of people telling us, “Hey, we really like this Cattle. It’s really good and you should just keep improving that.”

But as an entrepreneur trying to build a business, you have to be really, really honest with yourself, and you have to really look at all the signals, not just the ones that maybe are giving you the positives you want to see.

All the signals told Sheng, and I, and Will, and Darren, that we needed to really focus our business on solving the problem that we thought most organizations were going to have. And that was, how to take Kubernetes to scale, how to bring together a really complex ecosystem around it, how to build a platform that would work.

That meant really having long conversations with our engineers, convincing them if they weren’t excited about this, that maybe there are other things they could work on in our team and finding the team focused on doing this.

It worked out great, but it was not trivial. We have a small team, I can only imagine when you see big companies today trying to pivot to Kubernetes, you’ve got years and years of customers install base, and how difficult that might be for them.

Pricing

Michael Schwartz: Great. It takes a lot of leadership. Most sizable organizations are using Containers today, so if you can sell to anyone, it becomes sort of challenging, so who do you sell to? I’m wondering, do you segment the market at all?

Shannon Williams: One of the nice things about open source is, it has allowed us to, give an idea most, I would say the 300 Enterprise customers, like every quarter now we’re closing about 50 new customers. Every quarter we are closing, we look at what the source of those are. I would say 30 of the 50 came from open-source Rancher users.

They started with open source, they used it at a business-unit level, or line-of-business level, and it became important to them, and they needed support. Those deals, they are not very competitive, they’ve already kind of looked at Rancher, they have a relatively short sale cycle, they’ve done the proof-of-concept – we don’t have to go in and prove that Rancher is the right solution for them.

What we found is that we don’t really need to segment that. The product pricing was probably the most important thing to segment. We did find that with such a huge install base, one of the mistakes we couldn’t do is, we couldn’t support everyone for free, for a small amount of money. We needed to kind of keep a relatively medium-sized bar, to ensure that people who needed support had to make an investment to get it.

For example, we could have gone with a lot of SaaS models, $10 a month or something like that, but the reality is, infrastructure and Containers, Kubernetes – these are all really complex. The support is quite real. We provide a lot of advice, a lot of architectural help with these organizations doing it. So, there was a real risk that we would price the product so low, and that we would then be trying to do this for lots of companies with very different levels of technical skills.

I’d say, the closest thing we came to segmenting the market was providing a lot of free open-source support for people who are trying to figure it out themselves, but then, charging a reasonably significant fee to come in and get support. Our customers had to invest tens of thousands of dollars on an annual basis to get support with us.

By doing that, it allowed us to work with companies that really valued this. We’re investing their time and the money into making it successful. That was really the best qualifier. It allowed us to focus on teams that really could help us grow the business at the same time.

We’ve seen some industries become really big with Rancher, but it’s more just a sign of who uses Containers. It’s companies, and certainly the internet, and the technology industry, but there’s a lot of financial services, companies, fintech companies, biotech companies, universities, research organizations, we’re seeing adoption in government and military use cases. It’s really broad now.

Retail, Edge’s driving, all sorts of interesting use cases, oil and gas, all sorts of interesting use cases in manufacturing, automotive – just lots of cool things that people start to imagine, a model where Kubernetes becomes this grand unifying theory for computer, where it runs everywhere. It runs in their single node, base station, it runs out in the windmill farms, it runs in Chick-fil-A shops, it runs in factories, it runs on cruise ships, it runs in data centers, it runs in the cloud. It’s a really exciting time to be working on tech, I would definitely say that.

Pricing To Value Ratio

Michael Schwartz: Normally, it’s really hard to get pricing right. Did you have to pivot your pricing model a couple of times? Or how was your experience like, figuring out what are the right price points?

Shannon Williams: Oh, man, that is a good one. We learned a lot from our last company. I made every mistake you can make last time. This time, we definitely had to pivot a little bit to be quite sure what the right element was to scale on with the number of clusters, or containers, or nodes, or CPUs, or things like that, but we decided pretty early on that the size of the implementation was probably a good way to judge how the cost should change from a small deployment to a large deployment, the number of hosts and servers, things like that.

Actually, I would say we learned a lot, we’re fortunate, that were a lot of indicators from the market, as people talked to us I would say. Your first 10 – 20 customers give you a lot of feedback on pricing, whether you want it or not.

Usually, I think most people price to low, just by nature. We all want to just make it both amazing and cheap prices. Like, who wouldn’t love this thing? It’s the best and it’s the cheapest. But you have to be realistic about what it takes to fund a business, what it’s going to take to build a profit, and what you can do with those engineers you can hire, and then you have to convince people of the value. It can be tough.

I remember I walked away from a lot of deals in open source. I just said, “I’m sorry. I totally appreciate that you’re telling me you could use the software for free, so you couldn’t possibly pay me more than $10,000 or $20,000. But if I did that, I wouldn’t be able to build a business, I wouldn’t be able to write open-source software, and I wouldn’t be able to give you the level of support you demand from your other enterprise software vendors. So, I’m sorry, we can’t do business with you.”

And sometimes they come back, sometimes they don’t, but being willing to walk away from deals – for our business model, it is absolutely critical to have to be able to do it. Otherwise, again, the car I’m selling you is available for free. You can take the same car with the exact same features, you’re not paying for a special version, it doesn’t have a better horn or better tires –it’s the exact same car. What I’m offering you is the confidence of working with me on it, and the world’s best support for that technology. If you don’t value those things, then, we can’t come to any business relationship between us.

Technology Partners

Michael Schwartz:  Have you used partners to help you deliver to customers, especially globally? Or are there any other business partners that have been important for you to build a business?

Shannon Williams: Yes, yes, yes, yes. Over and over again – yes. The critical partners for us have been really two big buckets. We have found that the other companies who are building critical technology for teams adopting containers. It’s a company that’s called Portworx that builds a really nice storage, and a company Aqua that builds great security, Sysdig who creates monitoring, Gitlab who does really cool tools for CI and Git deployment – all really commonly chosen by our customers.

But partnering with those companies, companies that fit into the same solution stack, we have been able to do two things: we’ve been able to build a much more credible solution for our Enterprise customers. And we’ve been able to align messaging and go-to-market together, and take maybe a couple of other organizations who are our size, venture-funded startups, and take our stories, and show them to larger organizations together.

And we would’ve done this through, we’d run online meetups, where our partners come and present to our users about their technology, and how they work with Rancher, and how they work with Kubernetes. That gives us a lot more credibility, and helps those company succeed, which helps the market grow because the market is vibrant. So, we invest a lot in partnering. We’ve also partnered really closely with the cloud providers.

We work really closely with Amazon, Google, and Microsoft in the U.S., and large providers around the world, to ensure that their implementation of Kubernetes works really well with Rancher. And that’s been fundamentally critical, especially because what we see is we see a market where, if you are in the cloud, you are probably going to use the cloud providers Kubernetes.

So, we want to make sure that we’re not trying to convince you to use Rancher’s Kubernetes on Google, take Google’s Kubernetes engine, which is great. Let us provide you with the common frameworks, whether using Google’s in Google, and Amazon’s in Amazon, on premise and Edge, or different types, everything is consistent, everything is managed the same way, everything is deployed, monitored, upgraded consistently. And you have a platform that really is this UberCloud we set out to build in the beginning anyways.

Integration Partners

Michael Schwartz: If a customer says that services aren’t enough, they want on-site engineers, they want sort of higher-level design consulting – do you do that as expert services, or do you work with delivery partners to do that?

Shannon Williams: We tend to work with delivery partners. We work really closely with both big and small delivery partners who had built expertise. In Rancher, we have a platinum partner program, which is made up of some amazing companies that have implemented Rancher for others multiple times, and really have deeper understanding often not just of our ecosystem.

So, companies like RoundTower, CloudOps, Readapt, Accenture. We work with quite a lot of the large multinational services companies. We work with different regions around the world. These companies, BoxBoat and other really good ones, these guys, they’re really staffed to provide ongoing services for organizations in a way that we’re not.

Like, we are great at coming in and giving you a ton of information about Rancher and helping your architect your Rancher deployment, but a lot of times, technology is only a chunk of the solution. The solution needs to include some transformation of how you do things, how you do DevOps, how to train all your developers around microservices, how they start thinking of some of these new service matches, and how they might get into solving business problems for your company.

We can point you in the right direction and help you with those things, but we’re very laser-focused on the Kubernetes platform. And these companies are much better than we are at providing the transformational experience around there. So, yeah, we very much partner, especially in those longer-term things.

What we have found as really critical is the actual investment of our own on customer success. I would say, one of the things that’s got a lot better as we’ve grown is, we’ve invested more and more in — I think it was like the first 90 days when an organization becomes a Rancher customer.

I think this is really important for open-source companies because if you are a SaaS provider and somebody’s using your product, you have a pretty good idea what they’re doing with it. But as an open-source software companies, especially ones that support that open-source software, organizations can have very different processes, they may have more or less mature implementations, they may or may not have built-in an HA deployment. And they’re coming to you to provide support. You really need to make sure they understand best practices, that you reviewed their deployments, you helped them understand how we recommend doing things.

We invest a lot more now in customer success than we did in the early days. When a customer comes on board, we really spend a lot of time going through their architecture, helping them make improvements that they will achieve their goals, whether it’s stability, multi-cloud implementations, or they might try to do something, there’s a lot of scale. And then, there might be something we’ve learned already that can help them. I would say customer success has been a big learning for us.

Net Retention

Michael Schwartz: Has that investment in customer success also translated into increased revenues per customer year-over-year, so they’re buying more, or other products, or other divisions?

Shannon Williams: Well, it’s still new enough that I wouldn’t say if I know how correlated those two things are, but we certainly believe they are. We are investing in it because our bet is helping a customer be successful, with even a departmental implementation or a single app deployment is going to pay dividends for both retention of that customer and that workload.

So, a year later, when they decide they want to renew that support they bought last year, they have a really good feeling that, “Yeah, that was a great investment. Partnering with these guys has been useful.”

But certainly that also works internally. As they use it, they seem to spread the word. I mean, we have seen over and over and over again the power of the success of a Rancher deployment spreading within a company.

Users love Rancher. It’s a user-oriented product. What’s so cool about a product that has 30,000 open-source users is, it says something about how usable it is. It’s like terraform, you use it, it’s pretty straightforward, you like it and you go, “Cool. This is easy. I can get this.” You tell your friend, “You should use terraform. It would help you do something.” It’s kind of same with Rancher.

If all those users are using it, they are clearly getting some value from it. When somebody in your company says, “Hey, use this.”, and you’ll probably benefit from it. And there’s no barrier. I don’t have to start by going and getting a license to try it. I can just use it. It tends to spread the same way. It’s just the word of mouth and the power of it kind of spreads.

So, we found that making them successful and making sure those early champions are well-armed to explain why they chose Rancher, and they got a really good implementation, they don’t get bitten by a bad config, or maybe not knowing the best practices, it helps us in the long run for sure.

Cloud Strip-Mining

Michael Schwartz: I’m sure you’ve been hearing about open-source strip-mining from large cloud vendors, but what I’m wondering is, do you think it would be good or bad if some mega cloud company offered a Rancher-based service?

Shannon Williams: I think it would be great personally. From our perspective, the value of these mega cloud providers is always tied into a big ecosystem that they’re trying to build around. What we find is that organizations want to live in those ecosystems, and leverage those ecosystems, but they know they’re not going to live in just one of them. So, they want lots of them. And the more that those ecosystems interact or work together, or do things that help them work together, the better off they are.

In so many ways, I think the strip-mining analogy is that it’s a rough analogy because, well, it’s true that some of these providers don’t put a lot back, and there’s definitely been some ugly competition between open source and commercial. For the most part, I think their relationship has actually been pretty beneficial, mutually beneficial between the cloud providers and the open-source software developers.

It’s often where it’s really struggling, where you‘ve seen it’s struggling is when organizations haven’t had a great business plan our route to market, or they haven’t been able to commercialize their own products. And then, all of a sudden, it gets embedded into something larger. And then, the only monetization of it happens in the cloud.

I think that’s where we see most of the problems. I think that’s going to continue. I think that that was happening before as well. You know, ideas are developed, but are never really taken to market fully or are not pushed into the market aggressively. Organizations build upon those something new, or something tangential, or something that accelerates them. And that is what ends up being the big success.

To me, that’s business. That’s something that’s going to happen in any space, whether it is open source or not. And, yes, in our world, people can take and build on it very easily, but that’s what you know you’re getting into when you’re starting an open-source software business. And if you don’t, you really should research a little bit more.

This is a knife that cuts in many ways, from a business perspective. And I certainly would look at the world, and I certainly wouldn’t call foul if that happened to an open-source project. I’ll give you a feel, in China, Rancher is incredibly popular.

From early days, my co-founder Chan grew up in China, and so, you have someone who can speak Chinese and talks about it in China – Rancher became really famous. We’ve had multiple times where startups have kind of emerged competing with us in the market, selling Rancher and providing support around it.

Our experience has been that that, as long as we continue to push forward the innovation and organizations really value what we do, they’re going to want to work with us. They are going to benefit from working with us.

As long as we keep pushing it forward and building the product better, that will continue to be the case. But you have to know what you’re getting into. I don’t feel like there should be a huge shock if you build an open-source product, and someone forks it, and does something cool with it, that’s kind of the idea.

When To Use Open Source

Michael Schwartz: Moving to slightly higher level, do you have any thoughts about when entrepreneurs should use the open-source development methodology to develop a commercial product?

Shannon Williams: For me, I think it’s about the product you’re trying to build, and what you think your route to market needs to be. If you’re entering a market that you think is pretty competitive, and has a lot of different products, and you know you’re going up against much more well-funded organizations than you, then, I think open source is a really, really important one to consider and to look at. Because it allows you to get adoption in what would otherwise be a really hard market.

If your only feedback is going to come from a handful of companies you can convince to POC you or pay for it early on, you are going to have a hard time building momentum. And you’re going to have a hard time having good conversations with users who either like or don’t like what you’re building.

To me, I don’t know, I’ve been building nothing but open source for 11 years, so it kind of feels to me like everyone should just build open source. I don’t find that it’s ever slowed down our monetization. It’s always been a benefit. But I certainly would say that if you’re building something that you think is transformational, that actually has a broad audience that will adopt it, open source should very much be what you’re considering.

If you’re building something that’s probably a service, and it’s going to be hosted, I think open source can be enabling capability, but I wouldn’t worry too much about the open-source side, I would just focus on building the SaaS platform product tool that you are building a cloud service.

Because I think in those cases, open source is less important than it is an on-premise software or fundamental software. You’ve seen with Docker, open-sourcing, and having an open source success is not by any means enough to guarantee a commercial business success, but it puts you in a position where you have a great chance to engage with users, listen to what they think is necessary. Next steps, what they’re excited about your platform for, your product for, and what they’re willing to pay for, and build on that.

Advice For Entrepreneurs

Michael Schwartz: Last question, any advice for new entrepreneurs starting a business around an open-source platform?

Shannon Williams: Of the four of us who started Rancher and started Cloud.com and everything, I’m the non-engineer. My role in the early time of building a company, I was considering my role then to be how to connect with users, like how to connect to people even before you have a product.

When we were in our first 6 months, our first year, I spent all day, every day, thinking about who are potential users could be, based on the direction we think we were heading, and reaching out to people, introducing myself and introducing the idea we’re building, and getting feedback.

You always have to be thinking about the next milestone of users, “My gosh, how do we possibly get to 10 companies using our product?”

And the only way I can ever found that works to get to 10 is to find them by hand. To think, “You know, I think this makes sense for somebody in that space.” I really believe that if you as a founder can’t explain your value proposition enough to get someone to sit down on the phone and talk to you about it, and maybe watch a demo.

Especially when you can tell them, “Hi, I’m Shannon. I’m one of the founders of this new startup called Rancher. We’re trying to solve this problem, and I thought it might apply to you guys. I really love your feedback. We are not trying to sell you anything, we just want your feedback on what we’re doing.”

If someone doesn’t want to talk to you with that pitch, you might be barking up the wrong tree with your idea. That initial response, if you can’t just explain what you’re trying to build to someone right away, and if you can’t get a meeting, it’s probably worth reflecting on what you’re doing, and maybe tweaking, and then trying some different approaches, trying some different messages.

Because if you can’t get a meeting, it’s going to be really hard to get a sell. It’s going to be really hard to get a user, it’s going to be really hard to convert them into a paying customer.

But if you explain to someone, most people love to talk to entrepreneurs starting companies, especially if they can really clearly communicate what it is they’re trying to solve. And that validation early on goes enormously towards then calling that person back in three months, and saying, “Hey, we got a first beta ready, would you like to take a look at it?” And getting those first 10 is hand-to-hand combat.

Really the first hundred is hand-to-hand connecting to people, showing them the product, showing them the value, and getting to use it. Every once in a while, you have these runaway crazy successes, where everyone’s like, “Oh, my gosh, I can’t believe – how did we live before this existed?” But most of the time, it doesn’t work like that. Most of the time, you have to connect, talk, demo, listen to the feedback, and go back and consider how far on or off your strategy you are.

Closing

Michael Schwartz: I said it was my last question, but now you just raised another question, and I can’t resist. Previously you mentioned that a lot of the leads for customers were from inbound, from customers who use the software, liked it, and then called you to purchase a support subscription. But 50 deals a quarter – that’s a lot of business. That’s really pretty stellar. And I’m wondering, what’s the right mix of inbound and outbound marketing sales to push for, or how do you balance that?

Shannon Williams: First step for all of this is find a real market. When you find a real market, things get a lot easier. Because you have to have something going on that’s causing people to look for a solution, they have to have a problem.

So, to your question, if I had my druthers, I’d have a 100% coming inbound, so everything coming inbound means that the market is actively looking for solutions. My brand is well enough known, we are the company they should at least talk to about this to get a demo. Ideally, it’s open-source, just download it, and install it, and try it, and see what you think.

I, from day one, believed in inbound as our goal. So, that meant, instead of spending a lot of our early dollars on advertising, for example, I spent almost everything we did, online communication to users. And that meant, oh, my goodness, we wrote dozens and dozens of pieces of content explaining how to use Containers, and Kubernetes, and Docker, to help people find us.

They may not be looking for Rancher, but they were looking to solve a problem. And so, we really tried to build a list of the lots of the problems they were trying to solve.

We hosted an online meet-up every month that grew to have thousands and thousands of people register every month. It was crazy. We just run them today – I just did one last week.

And what we said was, “Hey, come, it’ll be our smartest technical people. We will stay as long as you need. We’ll demo whatever it is we say we’re going to do. I won’t just show you a bunch of slides, we’re actually getting this code, we will teach you how to do it. And we will stay until every Kubernetes questions are answered.”

So, these things would run two hours, three hours, but they allowed people to cross hurdles, to learn how to build the CI/CD Stack on Kubernetes, or how to do monitoring on it, or how to deal with logging, or how to use containers and the cloud – whatever it was we were trying to solve that month, we really focused on it. It was really that. It was education, community, content that, coupled with early references that we built by hand, in that hand-to-hand phase, got the word out.

By continuing to invest in that, we were able to kind of sow so many seeds of open-source users that as they matured, and liked what they usd, they contacted us. The right mix for me is a 100% inbound from the open-source community. But what we did find was, as we grew, we started to run into bigger organizations. They have entrenched vendors.

All of a sudden, we might have won a line of business users, and then they just said, “Hey, we love this Rancher. We are going to use it for application A, B, and C.” But 80% of the company was using something else that they’ve maybe built themselves, or maybe they bought something, some other product a couple years ago to do PaaS, or something.

And so, because those organizations started to look and say, “Why aren’t you using this? Why are you using Rancher?”, we had to support them and show other people in the organization, “Well, actually, this isn’t the same. It’s different, and here’s why it’s different.” What we did find was there was longer Enterprise sales cycles, so we needed good high-quality sales people to work with bigger companies.

But the positive was, we found that those companies actually really appreciated that it was open source. And the fact that you already had one over, a group of people who really loved it internally, meant that you kind of solved, in a lot of cases, the biggest problems these IT teams were facing, which was, they were building stuff and no one was using it anyway because they were just going to the cloud, they were building something themselves.

So, when we could tie together, the IT organization, which is like doing everything they can to support forward-looking development while still being secure and still being cost-conscious. And teams that have usage and feel like they’ve got found something cool, it was just like made it for a much easier sales motion than your traditional either selling top-down or kind of getting some executive buy-in, and then hoping people use your product once it was brought in.

I don’t know, does that answer to your question, Mike? I kind of feel like I ramp up there.

Michael Schwartz: Yeah, that’s lots of great info. Shannon, thank you so much for joining us today, and being so honest with your answers.

Shannon Williams: Mike, it was my pleasure. Thanks for doing this. I love your idea of open source entrepreneurs just sharing and talking about what we do. I think it’s a phenomenal business model. It is a real transformation of the relationship between the developer of a really powerful software and the consumer of that software. So, it’s something I have enormous passion for.
Michael Schwartz: Best of luck with Rancher, and congratulations on all the success.

Shannon Williams: Thank you so much, Mike. You too. Have a great one.

Michael Schwartz: Thanks to the Rancher team for making this happen. 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 by Natalie Lowe. Operational support from William Lowe. Transcription by Marina Andjelkovic.

The Twitter handle is @fosspodcast. Rate us on iTunes if you like this episode.

Next week, we have James Waters, SVP of Product at Pivotal. Until then, thanks for listening.

Episode 38: npm Inc.– From Software Registry to Software Business, with Isaac Schlueter, Chief Open Technology Officer

Isaac Schlueter emerged as one of the most important leaders from the Javascript community. As Chief Open Technology Officer of npm Inc, the company behind the essential software registry, he has a bird’s eye view of what makes Javascript such a unique ecosystem. And his mission was also unique: to transform a free public utility into a viable enterprise software business. This episode was recorded in person at the Open Core Summit.

Transcript

Intro



Michael Schwartz: Welcome back to Open Source Underdogs. I’m your host, Mike Schwartz, and this is episode 38, the last in-person interview recorded at the Open Core Summit. Our guest is Isaac Schlueter, CEO of npm Inc.

Many programming languages have a central software registry, but the JavaScript npm Registry is unique. It’s the biggest and the busiest by far. For example, it has around four times the number of modules as a number two registry, which is Maven for Java.

If you want to learn more about npm, Isaac was a guest on Founders Talk Episode 61. And for an interesting perspective on the npm ecosystem, you might want to listen to Changelog Episode 355 – it’s an interview with C.J. Silverio, as a former CTO of npm Inc. She provides an interesting perspective on the economics and the technical challenges of running the world’s largest package registry.

I hope you enjoy this episode. And if you like it or you’d like to start a discussion, tweet at us. Our Twitter handle is @fosspodcast.

So, without further delay, onward with the interview. Isaac, thank you so much for joining us today.

Isaac Schlueter: Hey, happy to be here.

What Is Npm?

Michael Schwartz: Some business people listening to this podcast might not know what npm is or what it does – can you give a really quick explanation?

Isaac Schlueter: Sure, this is my very fast 50-cent tour. Basically, npm is a way for JavaScript developers to share modules of JavaScript code. So, if you have some reusable function, something that you’re using in a bunch of different places, they can publish that up to the npm Registry. Other developers in other projects can use npm to install that dependency and also keep up-to-date when there are updates to it.

If you’re depending on a platform, or a module, or a library, or something, you can automatically pull in all of those updates and keep your app up-to-date.

Why Inc. Not Foundation?

Michael Schwartz: Most other package ecosystems are supported by a foundation, for example Ruby, or maybe Python – why didn’t that work for JavaScript and npm?

Isaac Schlueter: There is a couple of reasons for this. The first one is, if we go back to the kind of the history of npm, when I decided to start a company around it, it was my side project for about four years.

And it grew in popularity. It was running on donated infrastructure from this company, Iris Couch. We just grew to a point where the scale was too massive for them to be able to afford to keep doing that.

I looked at my options, and starting the foundation was definitely on the list of things that I could do. Another option was, find a home for it in some big company, try to get hired by Google or Microsoft, or somebody.

The reason why I decided to start an independent company was simply owing to the scale and the rate of growth that we were seeing. So, the typical way that a foundation operates, you raise a bunch of money from a bunch of companies who have some vested interest in whatever the thing is, whether that’s an open-source project or some other thing. And then, you spend that money on keeping the thing going, so that might be, having developers work on the project, your managing governance, or marketing, whatever.

Within npm, we had this exponential growth curve that we are still at the very beginning of, in terms of the number of users on the npm platform. We’d grown to about a million users. Our rate of downloads and package growth was just astronomical.

The JavaScript language is used in pretty much every application out there. There are Ruby developers, there are .Net developers, there are Python developers, but the front-ends are all running in JavaScript, and everybody was increasingly putting more and more stuff into npm and using it very widely.

So, we kind of did some back-of-the-envelope math and realized like, “Okay, well, we could go, raise a couple million bucks to start a foundation and be able to put some resources behind this thing. But what are we going to do next year? We’re going to need 10X as much. And then, the year after that, and the year after that.

The task of just kind of continually being in fundraising mode was pretty daunting. Especially because it’d be hard to justify that the benefits to each of those member companies would also keep increasing enough to justify them, increasing their investment.

On the other hand, if you have an exponential growth curve of almost anything, even rising costs, you can take that to an investor and say, “Here’s the thing: it’s a thing that’s growing, it is a thing that’s exciting.” You can tell a story about how you’re going to go about monetizing that in the future, and that’s something that is sort of a good fit for a venture-back startup.

Npm Products

Michael Schwartz: Most people use npm for free – what do you actually sell?

Isaac Schlueter: We sell two main things right now. The first is npm Orgs product, which is a multi-tenant SaaS thing that you can use to store your private code within your organization. That’s used primarily by smaller companies or front-end development teams within larger companies.

The price point there is $7 per user per month. It grows depending on the size of the Org, you can have multiple packages all underneath that same Org.

The other thing that we sell is our product called npm Enterprise, which is a single-tenant instance of the npm Registry and website. It has some additional features, like single sign-on, or security policy enforcement, that kind of thing, which is more of a need at bigger companies.

Market Segments

Michael Schwartz: What kinds of companies use the Enterprise products – do you segment the market at all?

Isaac Schlueter: The sweet spot for us is about development team of 50 or more. We do some market segmentation to go after different sectors. There are some sectors that we focus on, but obviously, we will sell it to anybody who wants it. There’s a fair amount of inbound that comes in as well.

We’re seeing the most traction in sectors that have really high compliance, policy and security compliance needs, so financial industry is a really big one. And there’s also a ton of customers with money to spend on their development practices, and they get a lot of benefits by having their developers able to build things in a more frictionless way.

The other sort of category of markets that we go after, where we’ve seen some good results, are companies where there is sort of an internal agency model, where you have a web development team that has multiple different website properties.

There might be hopping between different websites that are all kind of under one big corporate brand. And in that case, there’s a lot of benefits to being able to reuse those modules.

Also, frequently, in both types of companies, once a company gets to a certain size, there’s often like a tools team or kind of a platform team that’s in charge of all of the reusable JavaScript code that’s used across all of the different properties. And in those cases, they also benefit a lot by having something like npm in-house.

Marketing / Sales

Michael Schwartz: In terms of marketing, you were sort of starting from a nice position because everyone knows npm – how do you organize sort of the marketing effort so that people know what the commercial offering is? And how do you organize the sales – do you just wait for inbound or you do any outbound marketing?

Isaac Schlueter: We do a fair bit of outbound marketing, and it’s a little bit of a double-edged sword. Everybody knows npm, but not everybody knows npm Inc. or npm Enterprise.

One of the challenges that we ran into, which I think is common among a lot of companies that are operating in open-source communities, is that people have heard of the thing but they haven’t really heard of the product.

One of the things we heard is, “Oh, npm? That’s a company??” I just thought packages came out of the ether. I didn’t realize it was downloading from somewhere.”

So, when it comes to our marketing efforts, a fair amount of the work there is in continually beating the drum of like, “Yeah, we have things for you.” “If you need policy compliance, if you need security, if you need proprietary code, and you want to manage it, using the things that your developers already know and love, then we have a solution for you.”

When we go through the sales process, typically we have an internal champion, which is usually engineering architect, or engineering manager, or something like that, who sort of intuitively understands the benefits of npm.

Then, the sale process tends to be one of making the case to folks who are not already deep in this ecosystem. That tends to be people in kind of like internal development tools, purchasing team, the CIO’s office – it can take a couple of different shapes, but, you know, the folks within a large Enterprise who managed to spend on development tooling.

Free V. Commercial

Michael Schwartz: Diverting a little bit from marketing, one of my guests said to me that it’s almost better to start a company around a product that you don’t write, an open-source product that you don’t write, because all those engineers who are working on the open-source thing, they’re not billable, or they’re not contributing to their commercial product – do you feel that friction at all, where maybe part of the team is really committed to the community mission but maybe other parts of the organization are more interested in the product than actually generate revenue? How do you reconcile that?

Isaac Schlueter: It can be a tough needle to thread. I mean, not to dispute the past guest who said that, there’s some sense in what they’re saying, but obviously, I do disagree because of what I’ve done.

I think that the challenge, or at least the puzzle, is to figure out how do we continue to make good on our community mission in such a way that it serves our product interest, and how do we design our product interest in such a way that they’re served by the success of the open-source community.


We have certainly made some missteps in the past. One of the biggest things that makes good intuitive sense. You have an engineering team, you have a web team, you have a backing team. Of course, you’re going to have an open- source team, but the minute that you start doing that, you create this unhealthy dichotomy.

Even if it’s just in your own thinking as a founder, and as a manager, as an entrepreneur, where it can be very easy to get into these dysfunctional patterns of being resentful about, “Well, these five engineers are spending all their time on the open-source stuff, and we’re just giving that away, and how is that helping the company?” “And here I am, busting my hump every day, trying to make our website better, and trying to sell products and trying to get new log-ins and new sign-ups.”

And every time you want to build some new thing, it’s like, when we run into this case of like, “Should we give this thing away or should we charge for it?” And the thing that I’ve come to after five and a half years of doing this is – if I was smarter, maybe I would have come to it sooner –
is just that that’s the wrong question.

The minute you find yourself asking, “Should this be free or should it be paid?”, you’ve already kind of committed the fundamental thinking error of putting those two things at odds.

The better way to think about it is, “What is the free thing that will get someone to pay for this?”

So, what can we give away in such a way that it will open the door for an upgrade path, and that will open the door for a paid product that is a very clear enhancement to the thing that they’re getting for free.

Some of the best companies in the space that I’ve seen tend to have an approach of, like, their explicit goal is that individual developer should never have to pay for our product. But, a company should almost always have to pay for it.

And that really clarifies the thinking, and it clarifies a puzzle in a really interesting way. Because anything that involves a team of ten people, writing a proprietary application, like, they got to pay for that. That’s a company, that’s a for-profit company.

Now, okay, it could also be like a school or it could be a nonprofit org – you can always give those folks a coupon, that’s not actually a problem. But with our Enterprise product and with our Orgs product, I think we’ve done okay. Orgs are free if they’re open source.

If you have five people collaborating on an open-source project, and they want to keep a bunch of modules under a namespace, they don’t have to pay for that if it’s all open source. And we really see that as part of the nice, easy transition from like an individual working on open-source, a group working on it, and then up to a group working on some kind of paid product.

One of the things that we did not anticipate when we made Orgs free was actually it increased our paid Orgs signups.

We’d always intended to do some kind of, like, first month free, type of trial type of thing, and just kind of didn’t get to it because it takes time and attention, and there’s only so many people and only so much code you can write in a day.

And we decided that we want to make Orgs free for open-source projects. Because there was a handful of different open-source projects, and we gave them an Orgs, one of our database markets just went free. And we were kind of like, “We should just make this a thing.”

When we did that, what was surprising was, people at companies would sign up for a free Org, add their whole team, try it out for like an hour, go, “Okay, this is going to work, and then, they’d flip the switch to be a paid org.

That’s for me when kind of the light bulb went off. Like, “We should not be thinking about what is paid and what is free, we should be thinking about what is free, so that it makes it easier to buy the paid thing, if you need it.

Pricing

Michael Schwartz: So, it was all on the honor system? You could sign up as an Org?

Isaac Schlueter: You couldn’t publish anything private. You couldn’t have a package in your organization that had access control attached to it. Anything you published in a free Org would be open to the entire world.

Michael Schwartz: You really almost had to invent a business around this because I can’t say there was like any direct model you could choose. And one of the hardest parts of that is figuring out what to charge for that, especially because you didn’t have a lot of data. I’m wondering since you started the last five years, have you had to pivot on the pricing model a couple of times? Or has it been relatively stable, and did you get it right?

Isaac Schlueter: Yeah, we just stuck the landing – it’s been perfect. No problems at all. I wouldn’t say that we’ve pivoted on the pricing model. We have made some changes that I think are somewhat subtle. And most of those I’ve been owing to user experience.

Around in 2016, or beginning 2017 I think – I forget the exact dates now, it’s all lost in the mists of time – when we originally released our Orgs product, our paid Orgs product, basically an organization, again, you build things in the simplest way possible with the stuff you have because you’ve got to ship something, and if at one point it was perfect, you waited too long. And just the easiest way to do it was to say, “An organization is a subscription that belongs to a particular npm user.”

That gets us into some real interesting subtlety I think that not a lot of Org users, then or now, really fully appreciate it. But the idea was, your Org would have an owner – that was an npm account.

The real big problem that came up, and it came up fast, was, well, what happens when that user goes away, what happens if they leave the company and now what. It’s still billing to their account and their account has this credit card attached, it is a corporate credit card, and like, the only way to resolve it was actually to go through our support team, which, I love our support team, I think that they’re great, they do great work, and I’m really happy that they’re there, and supporting our community, and our customers, but every time somebody has to contact support – that’s a mistake we made, that’s something that we needed to fix.

So, we kind of went back to the drawing board and said, “How do people think this works? How do users think this Orgs thing works?” They think that they create an Org, and they think that they just pay for the Org, and the Org has some user who is administering it, but they can change that user.

So, what that said to me and what we kind of landed on was, the organization itself should be the primary first-class kind of billing entity. And then, the user account of the subscription, and everything else, is attached to that organization, not to some individual user.

Then, that shift, due to some other sort of subtleties, and how it was implemented, we realized that if we made this transition, a bunch of Orgs, who are currently not paying for users who have access to their packages, would suddenly have to start paying for those user accounts.

And the way that we addressed it was, we just collected all of those cases where that would happen, and we applied a coupon to all of those accounts to give them a discount and said, “All right. Like, your bill isn’t going to go up.”

Yeah, we probably could have just said, “Well, bad news. I know you’re paying $7 a month now, but it’s now going to be 21 because you got these other two users that technically are part of this other Org, even though they’re in your Org also.” And it got really hairy, but we figured that the user experience hit just wasn’t worth it like, “Thank you for being an early subscriber, an early adopter.”, but moving forward, it really vastly simplified it.”

The organization is a top-level thing, it’s like a first-class entity in our system. Every user account costs 7 bucks a month – that’s it. There’s no like discounts if you’re in multiple Orgs or anything like that.

Nobody complained, some folks got an email that said, “Hey, you know, we’re changing our pricing model. This would make your bill go up, but here’s a discount, so it won’t.” There was basically no reaction, which is what we’re hoping for.

Now, our Enterprise product, regarding pricing, yeah, we’ve been all over the map there. You talked about there not being data, well, with a self-serve product, you have quite a bit of data. It’s really easy to just throw a survey out there, and like, yeah, it’s going to be noisy, and you’re going to get a dozen people were like, “Oh, I wouldn’t pay more than a penny.” But you can wipe out the outliers, and get some kind of at least directional data.

One of the things we found was, there’s already some services out there, like GitHub costed 7 bucks a month for Orgs at that time. I think they’ve since changed their pricing model for their Orgs products, so it’s like $25 for the first 5 users and then $9 after. We thought about doing something like that in our sales, mainly in the future. Just to kind of help people get over that initial hump.

But once you had your first 5 users, it’s very, very sticky. The easier we can make that seem, it’s like 25 bucks and you get 5 users – that seems cheap. But if it’s $7 a user, and you only had two users, there’s a pretty good chance you might not like stick with the product. If you get those 5 users in, now you’ve got five people all collaborating on code, and they’re not going to abandon that for anything because now it’s kind of in their process.

So, with the Enterprise product on the other hand, there really is almost no data, and it’s very difficult to get that data. A lot of Enterprise products, even if you go to like companies, providers, websites, and you look at their Enterprise products, it says, “Call us.” You are kind of in this like arm wrestling match with the procurement department, where your price is, like, you give us ‘whatever we can get out of you’ basically is the price.

I think with our Enterprise product now we start at $50 a seat, and the product has quite a bit more features in it than our previous generation of our Enterprise product which was quite a bit cheaper. And we also have a minimum number of seats in order to qualify for an Enterprise product. We don’t offer it for less than 20 seats.

The nice thing about that is that it immediately selects out everybody who’s not actually going to need the benefits of this product, who is not going to need the policy enforcement and security features of it.

They are not going to be as well served by that product like they should really be buying Orgs. So, it’s tempting to look at pricing as like the way that you make money, but really, another way to think of it is like, how does a pricing act as a filter for who should be using this thing, and how does it work as a signal.

If you have a product, and you have your product break down your pricing page, or whatever, there are companies that are going to just look, and they’re going to say, “I don’t want the cheapest one, I don’t want the most expensive one – give me the one in the middle. I don’t want to look at all these words.” And they’re just going to buy it.

You need to think of, like, who is that user, who’s that persona and kind of focus your research there, and then, work backwards, like, “What is their budget? What can they pay?” And then from there, you’ve got pretty good answer about your price.

Every Enterprise is going to try and make some argument for why they should be paying less. So, start high and let them push you down. And also, like, if you don’t start high enough, then they’re not going to think that it’s legit.

More On Pricing

Michael Schwartz: Was that one of the hardest parts of migrating from I guess open-source repository or open repository to business? Just getting that right?

Isaac Schlueter: On the list of hard things, that doesn’t even make it top 10, there is quite a bit that’s much more challenging. I mean, the other thing about product is, I think it’s really much more art than science, and certainly, there’s product managers out there who are like pounding the table as they listen to this, and sure that I’m super, super wrong about it.

But, so much of it is, you need to figure out a price that you won’t go bankrupt. And then, you need to figure out how to sell that at that price. And the specific number, is it 8, or is it 9, or is it 20, or is it 25.

I think at the end of the day, that probably matters a lot less than have you built a product that people want to use, and have you priced it in such a way that it sends a signal that those people actually are the ones who should be using it.

If you look at the pricing of wine, great example of this — I don’t know, I’m going to offend some wine snobs in your audience, I apologize – a lot of the pricing of wine is like completely arbitrary.

It’s like, are you somebody who likes the expensive wine or who doesn’t care, or you’re like somebody who kind of wants, “I want it to be good, but like I don’t want to spend a lot.” I mean, all wine, it’s all fermented grape juice. It’s not that different, it’s essentially just overstock of wine, that’s why they’re able to sell it so cheap.

But that price signals a particular kind of buyer who is likely to benefit from that product. And on the other end of the spectrum, it’s the same kind of thing. You’re buying this $500 bottle of wine because you want to show off how rich you are, and in order to show off how rich you are, it has to cost $500. And so, that’s why people buy that.

In the world of software product management, we like to pretend that we’re a little bit more rational because we’re all like tech people and we are very cerebral and logical. We do math, and it still largely just kind of comes down to like, what are the products that your product is like, how much do they cost. If you just copy them, it’s probably you could do a lot worse.

Lessons Learned

Michael Schwartz:  So, now I have to ask a question – what were some of the hardest challenges? Please, take top, one or two.

Isaac Schlueter: I set myself up to that one, didn’t I? I mentioned a kind of the split brain that can happen within an organization when you separate out your free, or open-source, or community offerings from your paid offerings, and think of them as different things. That’s a very, very easy error to make, but it’s a very pernicious one that really gets in everywhere.

And I think it, in order to avoid that error, you have to think about that design, not just in your product design but actually in your organization design, in your strategy, in your go-to-market, in where you get your investment from, and who you have on your board. Like it has to really, really inform everything about your company in order to steer yourself away from that kind of problem.

Another big and easy mistake to make is having an on-prem and a SaaS product at the same time early in companies like them. Eventually, you’re going to need to have an on-prem product. And if you’re positioned well to do a bottoms-up sale, that has to be a SaaS.

Because no development team — if it’s five people on a Dev team and you’re trying to convince them to use this tool, they’re not going to spin up a server and install it and operate it themselves – they’re just not set up for that. If there’s a SaaS offering, they’re going to take that one.

And as an early stage company, when you’re talking about like 10, 20 people, if you are building products, like you’re going to take every single shortcut you possibly can. And the biggest shortcut you can take, if you have an on-prem product and a SaaS product, is to start putting big ‘if blocks’ in your code base. And you can tell yourself like, “Oh, they’re the same code base, were totally keeping them in sync.” It’s all one big Dev team.

What’s going to happen is, even the same developer working on both things is just going to put a big ‘If Block’ and say, if process dot, end of dot enterprise equals true, and then basically fork in place, which is even worse than actually forking two code bases. Because now you have this kind of like convoluted ball of mud.

We originally did have an on-prem Enterprise product, we still have some customers who are using it, even though we’re still trying to kind of like nudge them to our Enterprise SaaS product. We reached a point as a company, where we sort of realized we can’t keep running this Enterprise product, we’re actually losing money on every sale, because the cost to support and operate and get a customer up and running is just too high.

So, we pivoted somewhat, we kind of instead said, “How do we take what we do with the registry and with the website, with the Orgs and everything else?” “How do we make a SaaS offering there?” And what do the Enterprise customers actually need for that?”

We’re still figuring out kind of how to play in that space, and how to best have that integrated and connected with our self-serve products, but it’s still a huge step in the right direction. I think hindsight being 20-20, going out the door really in our first year with an on-prem Enterprise product and a SaaS team’s product at the same time, seemed fine. It seemed like a good idea at the time.

A bunch of people told me, “Well, you need to really make sure that the code bases don’t diverge if you do that.” I heard that from a bunch of folks at GitHub, who made the same kind of error, and I was like, “Okay, noted. Don’t let the code bases diverge.” Got it. What they didn’t tell me was, “You’re going to let the code bases diverge. That is absolutely going to happen – it’s inescapable.” You can either be a SaaS company or an on-prem product company, and those two companies are very different shapes.

If you’re going to be an on-prem product company, that means there’s a lot more of a top-down sale most likely. Or it just has to be so easy to install and start running like on a laptop. It’s almost certain that you’re going to need some really good professional services skills within your company, because making a customer successful with that product is going to require that you have somebody who knows how to stand it up, and how to operate, and kind of which buttons to push, and which knobs not to push, how to tell if there’s a problem – all of that stuff.

That means training, that means customer success, that means like really building in good metrics into the product itself, but in such a way that they’re not going to offend people who don’t necessarily want data collected about them, or if it’s behind the firewall, like, how that all works.

On the other hand, the way that you go to market with a SaaS product is completely different. It’s more about adding hooks and adding limits and adding these pay walls within your free product. So, when you go to your settings page, or you go to like view some metadata, or you go to view a report, or you go to add a new package, they can say, “Hey, you need to pay to use this feature. And those are two completely different mindsets.

At a certain point of maturity, you could reach a point where you have enough, maybe you fall of the bottoms up path, the bottom up path eventually gets to the top, and the top down path eventually gets to the bottom. But if you try to approach it from both sides at the same time, I just feel like that almost never can work out well. Now, there are companies that end up doing both, but if you really look carefully at the companies that are successful doing both, most of them started on one end, and then made it to the other.

Either they started as a top-down company, and they did well enough with like evangelizing, and marketing, and getting adoption, and gaining traction within these large companies that it became sort of a de facto standard. And then open-source parts started to kind of become the way that developers expected to do things.

Or they started as a bottoms up strategy, where every developer just eventually started to expect that this is how things work. And when they came to a big company they said like, “We need to sign up for these.” And then, eventually, they built out features that built up to that enterprise-level. And obviously npm loses position to do the bottoms up thing, and so, approaching both the same time was — I would not do that again.

Team

Michael Schwartz: What’s your approach to building the team?

Isaac Schlueter: Before there was a company, there was me and there was one guy who was in Thailand. Another couple of folks, one was in Eastern Europe – again, this was a whole donated infrastructure stuff, so whatever that other company was doing. I didn’t really recruit them, it was kind of just like who I ended up with. And luckily, some of them were really good. A lot of npm’s success really owes to that.

When we founded the company, you know, it’s easy to forget now, because it doesn’t feel like it was that long ago, but video conferencing was not as good as it is now. Chat apps were not as good as they are now. Slack didn’t exist, Zoom didn’t exist. I think Zoom might have existed, but it wasn’t what it is now. It wasn’t back then easy-to-use.

So, initially, we would focus our hiring on the Bay area, which seemed reasonable. It’s what you do, it was a Bay area startup. We opened an office in Oakland, mostly because that’s where I live. We went from there, so that the initial team was almost all coming from Oakland. There’s one person we got doing op stuff, who is in South Africa. And part of the challenge was like adding remote people was really hard, because the whole team is there in Oakland.

Like, we’re talking about strategy, and tactic, and products, and technical direction, and stuff over lunch, out everyday, like, it’s really, really hard to keep people in the loop if they were not colocated with us.

We eventually moved from IRC to Slack, and we started doing more and more stuff on Slack. We found that we actually needed to have a little bit more time zone coverage. So, we added some other developers, we hired somebody who was in Europe, and that really pushed us to operate in a more distributor friendly way. So, doing more of our discussions on Slack, having our meetings with Zoom.


We kind of just kept adding remote people. It was like, “Well, there’s those two developers we want to add, we want to hire.” And like, can they do remote, and one of them is remote, and you do that again, again, again, and after a while, it got to a point where like, our CEO is in Halifax, our CTO is in Toronto, I’m here in Oakland. We have this big beautiful office, and I’m one of like four people in it.

When we rented that office, we had this plan to like eventually grow to 50 people. And we were looking at the office we were in. We were 13 people, and we did not fit. We had a single conference room, a single room with a door that closed, and we grew to about 13 people, and we were just like, “This is ridiculous, we got to get out of here.”

We found a bigger space, we knew that we would end up growing to between 30 and 50 people over the next couple years, so we’ve rented the space that could house that many. I think it was just a few weeks or a month ago actually, or maybe a couple months ago, where we had this interesting situation where our landlord wanted to move us to a different spot within the building.

You know, we’ve been thinking for like a year how stupid it was that we had this big Oakland office, and like, we’d really like to get rid of it, but we’ve got another year on the lease. And they’re like, “Hey, we want to move you from the 11th to the 5th floor.” And we’re like, “How about we just leave?” They are like, “Yeah, cool. We get to rent the space out at 2019 prices instead of keeping your lease? Yeah, go.”

So, it actually worked out great. It was a little bit sudden, the way that sort of fell on our lap. But yeah, now we’re just 100% remote, everybody works from home, and that freed up a lot of capital for us to actually offer like a monthly work from home allowance, to cover things like internet, and the desk light, or whatever work expenses you might have, whereas previously, it was like we really can’t afford to do that because we’re spending our whole office budget on an office.

If you want to work in the office, like, we got this great office, but most of our staff was not in the Bay Area. So, in terms of like, where do we recruit people or how do we find talent, we do get a lot of resumes, we do get a lot of interest especially in technical roles.

When it comes to other roles, when it comes to non-technical roles, things like sales or marketing – I hate that term ‘non-technical’, like, the profoundly technical jobs, but if I want to hire a product manager who doesn’t write JavaScript, if I want to hire a VP of finance, it’s kind of the same thing every other company does.

We use a combination of just our networks, which has some pros and cons. The obvious pro, hiring somebody you know is you know them, so there’s a good chance that there’s a little bit more of like a connection, they may be a little bit more motivated to make it work, etc.

The downside is, you probably know people who are like you, and so you can very quickly and easily get into a bad cycle, where your kind of diversity just goes off a cliff. Or even worse, we’re like people who are kind of in the crowd, or like included in decisions, or have a little bit more power or authority within the company, then they probably sort of can get very like toxic and weird that way. I think that we’ve avoided that for the most part.

The other thing we’ve done in, especially tough to find rolls, we’ve had some success with executive search firms, we’ve done that a couple of times. And then, also posting stuff on LinkedIn, on Lever, on our other social media channels. We have our own npmjs.com/jobs that shows what roles we have open, and people apply for them.

Advice For Entrepreneurs

Michael Schwartz: The last question. Any advice for new entrepreneurs who are starting a business where open-source is a part of their business model?

Isaac Schlueter: I talked about this a little bit, but I’m going to go ahead and just repeat myself, because I feel like this is really important and really easy to miss and really easy to not understand the importance of it.

You have to craft your plan such that doing the free thing actually serves your strategy. And there’s a lot of subtlety to that. I don’t have like one weird trick that will fix everything. But you definitely need to think of, like, “If we give this thing away for free, what happens?”

Part of the thinking there is, imagine that you have like ants roaming around on a dirt floor or on the ground, if you pour some honey in one spot, that’s going to change the whole ecosystem. And that’s kind of what happens when you start giving away something for free, whether it’s an open-source product, whether it’s a service that you say, like, “This is free for open-source packages or for open-source projects, or for open-source users whatever.”

You’re creating a pile of honey in the middle of all these ants that are currently just kind of roaming around in their own different ways, like, they’re all going to find it, and they’re all going to come to it. It’s like, “Okay, now what?” What I mean by that is, when you get something away for free, you are fundamentally kind of like disrupting an ecosystem.

It’s important none of the ants are complaining about the honey, but you’ve now changed the shape of the scenario. And that can be really, really good, or that can be really, really hazardous.

It’s tempting to be like, “Oh, I’m charging for this thing and I’m giving this thing away.” And how do I convince the free people to buy the paid thing? Like, you’d really need to back several steps up and think, “What do these people need? What’s the thing that I can sell them that will address that need? And what’s the free thing that’s going to drag them over?” Instead of saying, “What do I give away for free?”, and then separately from that, “What do I pay for it? How do I balance these two?” They have to be one thing in your mind.

Closing

Michael Schwartz: Isaac, that was super interesting. Thank you so much for joining us today.

Isaac Schlueter: Thanks for having me.


Michael Schwartz: Huge thanks to the Open Core Summit for connecting us to Isaac and for volunteering their only sales office to provide a quiet place to record. Don’t miss the next Open Core Summit. It was one of the best conferences I attended in 2019. Where else can you get a critical mass of open-source founders in one place?

It’s essential that we foster an event like this so we can share experiences about what’s working in open-source business.

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 by Natalie Lowe. Operational support from William Lowe.

Have comments? Tweet at us. The Twitter handle is @fosspodcast.

Please, subscribe to the podcast on your favorite podcast platform. Every subscription helps. Next week we have Shannon Williams, one of the founders of Rancher. He was fantastic, so don’t miss this one.

Until then, thanks for listening.

Episode 37: Storj – AirBnb for Your Disk with CEO Ben Golub

Ben Golub has lead several open source software ventures, including Gluster and Docker. Storj monetizes open source by creating a distributed file storage network. Using the network, people can securely store files. And owners of Internet connected computers can put their unused disk capacity to work. To lower transactions costs, Storj launched a true utility token, which has intrinsic value. It simplifies transactions of an alternate 150+ fiat currencies. This episode was recorded in person at the Open Core Summit.

Transcript

Intro

Michael Schwartz: Hello, and welcome to Open Source Underdogs. I’m your host, Mike Schwartz, and this is episode 37, with Ben Golub, CEO of Storj.

I was really excited to schedule this episode because for a few years I’ve been wondering if there’s some cryptocoin business model that might work in the open-source world.

This is the second of three episodes that we recorded at the Open Core Summit in San Francisco in 2019. It was a fantastic event for open-source teams and founders, and I highly recommend attending the next one.

Ben was previously the CEO of Docker, he was also the founder of Gluster, which was sold to RedHat. He has a pretty deep understanding of the trials and tribulations of building a business around open-source.

After finishing the interview, I wasn’t 100% sure this was really an open-source business model after all, but Storj is definitely one of the most unique companies I’ve ever learned about. So, with that said, let’s roll the proverbial tape.

Origin

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

Ben Golub: My pleasure.

Michael Schwartz: Ben, before Storj, you helped found a company that launched a little product called Docker – can you tell us a little bit about your journey? How did Storj come about, and why did you move on from Docker?

Ben Golub: Yeah. I’ve now been at 8 startups, four CEOs, so I’m a glutton for punishment. I actually started my career doing international development, so my first failed startup was a business school in Uzbekistan that had a business model, which was I think, “Teach people how to read a balance sheet and then democracy will flourish.” And that didn’t quite work.

But from then on, I’ve been involved in sort of the first version of the web, ran a number of businesses at VeriSign, was the CEO of Plaxo, was the CEO of Gluster, which we sold to Red Hat, and then ended up at what was dot.Cloud, and it eventually became Docker.

Right at the time, Docker had this crazy notion of taking a container that we used to run a PaaS and said, “Hey, can we make this available to the world?” And Solomon Hykes, the founder, and I introduced this notion of a container. And I think in sort of excellent open-source fashion embraced the community, embraced something that was disruptive.

We saw it grow, and it became tremendous. I think it helped change the industry and became a driving business. I’m an early-stage startup guy, I’m not a late-stage startup guy, and I think that once you want to get to a certain size, where it’s 500, 600 people, and you’re closing in on a hundred million revenue, there are people that are better at scaling PaaS than I am.

So, I moved on. I still obviously love the company. And then, I got approached by Shawn Wilkinson, who had this crazy notion as a student at Morehouse College that you could build Airbnb for disk drives, and that’s what I’m doing now.

Is Storj Distributed S3?

Michael Schwartz: I think of Storj as decentralized S3.

Ben Golub: That’s absolutely accurate. Deliver something that’s S3, its cloud storage, but it’s delivered across a huge network of disk drives that we don’t own, that are run by individuals and data centers.

How Does Storj Make Money?

Michael Schwartz: So, for every dollar raised, 60% goes to the person with the hard drive? The other $0.40 I guess goes to storage, the company – how do you use that $0.40 to help build the ecosystem?

Ben Golub: It’s a really good question. One of the most important things that we do is, we sort of build equivalent of really large self-storage data centers, without spending any capital, and we just compensate the people who run the nodes.

We are onto the same thing on demand side as well, so rather than hiring hundreds of salespeople and giving away open-source software for free, we’ve come up with the notion that open-source drives 2/3 of the cloud, so we give a portion of our $0.40 to any open-source software company.

Usually, our way is, we also have partners in the Storj space, we are partners like Mongo, FreeNAS, FileZilla and Influx, and it’s really a great win-win.

Who Are The Users Of Storj?

Michael Schwartz:  Who are the users of Storj? What type of applications is it good for?

Ben Golub: Its really general object storage, which means that anybody who’s generating a large file that is going to be read a lot, it’s an excellent use case for us. That’s good for backup, it’s good for serving videos. It’s good for distributing software.

 The world of course creates lots and lots of data every year, and about 90% of it that’s being created is sort of large files, which is a perfect use case for us.

Why Use Storj Over S3?

Michael Schwartz: Some would say that you have to be ten times better than a previous existing solution to motivate people to move – why would someone use Storj over Amazon S3?

Ben Golub: That’s a good question. And they almost have generalized it to the centralized cloud storage offerings. One interesting note is that while the price of disk drives has come down roughly 50% over the past five years, the price of cloud storage has come down maybe 10%, during a period in which the amount of data of course has exploded.

We are significantly cheaper, we are also profitable. We are also significantly, we think, a much better security model. And we can’t read your data. It is almost impossible for a hacker to get your data, or get a treasure trove data – it’s like sort of encrypted sand on an encrypted beach.

We also happen to be faster. We happen to be 100% durable, and at a significantly lower price. What we’ve found is, there’s almost insatiable demand for people to try us out. Now, it’s early, so people are dipping their toes in the water, using test data first, or you know, low value use cases, but we think when they see what we’re doing, they’ll be here.

How Does The CryptoCurrency Work?

Michael Schwartz:  Google tells me that Storj as a cryptocurrency issued on the Ethereum platform. The price they told me is $0.1514 cents, and a 24-hour trading volume of three million, prices up 3% in the last 24 hours.

Ben Golub: Oh, it must have been my speech.

Michael Schwartz:  It is a circulating supply of $144M coins, of max coin supply of 425M coins. So, my question is, how does a cryptocurrency relate to the monetization strategy of the company?

Ben Golub: Our basic economic model is that we quote prices for Storj, and we quote them in dollars. And as a consumer of our service, you can either pay for storage with us in dollars or in our cryptocurrency.

If you are a provider to us, if you are renting out your disk drive, we pay you a dollar rate, we pay you using our cryptocurrency.

And you can either hold onto that, you can use it to buy storage on your own, or you can trade it on one of the 11 + exchanges that are using us.

Unlike a lot of other crypto companies, we’re primarily a decentralized storage company. And the crypto is a great accelerant, it lets us have hundreds of thousands of people get paid in 180 countries and build things like smart contracts. But we’re not a mining company, we are a company that is first and foremost about delivering a much better approach to storage.

Why Use A CryptoCurrency?

Michael Schwartz:  Why was the cryptocurrency a better way than just settling in cash?

Ben Golub: Well, it turned out to be very difficult to settle in cash in small amounts. It’s very difficult to do things like smart contracts using cash money. We are in 180 countries, so what we found is that having the cryptocurrency made it much better for us to build a large network.

Now, we could certainly be entirely fiat-based, but then, there would be additional fees, but this seems to align well with our interests.

What Is The Disconnect With Value And Economic Empowerment?

Michael Schwartz: You’ve said in the past that there’s a disconnect between the value created by open-source software and the amount of economic empowerment – what did you mean by that?

Ben Golub: If you look at for example the cloud market, which is now a 180-billion-dollar market, over 2/3 of all of the workloads are open-source based. In fact, if you were to include Linux in that, it’s about 90% of the workloads.

It is very clear statement to make that open source built the cloud. If you look at the total revenue generated by pure-play public open-source companies, like the Red Hat’s, and the Hortonwork’s, and Cloudera’s of the world, their total revenue is about 5 billion. So, 5 billion out of 180 billion.

If you talk to any open-source company that’s doing things in infrastructure, what you’ll find is that the primary way in which they are being monetized now is by Cloud companies, who, for rational reasons, basically give away the software for free, in order to drive consumption of additional compute cycles, or additional storage cycles.

And unfortunately, cloud computing is the biggest trend and monetization by giving away for free is the biggest way that open source is getting monetized. And there are really only four companies on the planet that are capable of running large public clouds. That to me is a huge disconnect.

Is Cloud Strip-Mining A Victimless Crime?

Michael Schwartz: On this podcast, we’ve had several guests who are worried about what we called Cloud strip-mining of open-source software, and they see it as really an existential threat to the open-source ecosystem.

And yet, Elastic, Redis and MongoDB are doing pretty well. Is this a victimless crime? And is it desirable for the companies that develop the open-source companies to capture all, or even a majority of the revenues, in the ecosystem?

Ben Golub: I agree that there are a handful of successful commercial open-source companies, I happen to have been at a couple of them, but these are just a handful of them. And almost all of the ones that you mentioned have essentially gotten to their state by spending hundreds of millions of dollars to go directly to the on-premise businesses.

And while I think it is wonderful, and it’s great that there are success stories that there are, I don’t think we would be happy if we said, “Hey, there are only five successful farmers in the world out of millions of farmers.” We wouldn’t be happy if we said, “Hey, there are only five or ten, successful companies in general.”

There is so much potential, and so much of these trillion-dollar IT industry, and 180 billion-dollar Cloud industry is being driven by open source, but if it isn’t flowing back in, then, we’re really not going to see the potential that open-source could really bring to us. In much the same way that I don’t think telecommunications was delivering on its full potential until we went to the internet.

Does Decentralized Cloud Offer An Alternative Business Model?

Michael Schwartz:  So, selling to these large enterprise customers, as you mentioned it, an on-premise software product is really expensive to scale support in sales. And it could be tens of millions or even hundreds of millions of dollars actually build that kind of infrastructure – but does decentralized cloud approach change that for these companies?

Ben Golub: Yes. For an open-source company that partners with us, if they have an open source project, whether through paid users or free users, generates lots and lots of storage. My guess is that they are generating lots and lots of money for one of the big four cloud providers, but are not seeing any of that.

Instead of trying to come up with a new kind of license, we come up with a new kind of cloud, a centralized cloud, like Storj, it’s entirely in our rational benefit to say, “Hey, if you have an open-source company that drive storage to us, we will give you a healthy chunk of the revenue that we get. And so that’s what we do.

All of a sudden, they’re able to build up a sustainable revenue source that doesn’t require hiring lots of salespeople, it doesn’t require trying to solve the multi-cloud problem for the 500 large companies in the world that they can do that.

Now, we may not be-all and end-all, we may give them the first two years of additional runway, so that they can build a sustainable base, and then go after the enterprise – and that’s fine. But getting from big community to successful enterprise sales is a really hard gap to close without the cloud.

Does The Market Value Open Source?

Michael Schwartz:  Recently I was reading an S,  and I did a search for open source, and the only place I found it, was in the risk section that, you know, somehow using open-source might come back and bite us, and we might have a liability. Do you think that the public is really aligned with this view that open source is a good thing?

Ben Golub: I think there’s no question to me that open source itself is the dominant way that software is getting written and consumed. Go to any enterprise, and it’s far more likely to find that they are open-source first rather than proprietary.

If you look, all these same things are happening, whether it’s Containers, or Docker, Kubernetes, or Mongo, or databases, or in operating systems, or in machine learning – it’s all happening in open source.

But the monetization of that is broken. It’s not that anybody questions that open source is a right way to build great software, it’s that the monetization model that used to be fairly clear has now gotten disrupted by the public cloud.

Michael Schwartz: Because one of the best monetization strategies of offering and as-a-service is now not available?

Ben Golub: It’s not available. If you are a small company, it is almost always a much better idea to say, “Hey, let me service lots of small and medium-sized customers first with something that looks like a service, rather than trying to do on-premise.”

You might eventually get to on-promise, but unfortunately, that model, which used to work pretty well for open source, is really difficult now. And it’s not only that you sort of have this gap between large community and getting to on-premise, but increasingly, even the on-premise market is now becoming dominated by public cloud.

Does Open Source Materially Contribute To The Business?

Michael Schwartz: Do you think that using the open-source development methodology materially contributes to the business?

Ben Golub: It really depends. I’d say open source is not a strategy, it’s a tool. And you have to find the right approach to open source that matches with your business strategy. But, if your strategy — Docker certainly could not have happened had we been proprietary.

We could not build a huge ecosystem and get so much usage and integration if we were proprietary. And then, the challenge becomes okay.

Now, we’ve got millions of users and billions of downloads, and lots of enterprises are interested in how we turned that into monetization. But, honestly, that’s a much better problem for me to try and solve than, “Gosh, I’ve got some proprietary. I can’t take anybody even take a look at it, and it doesn’t work with anybody else’s stuff.”

When To Open Source

Michael Schwartz:  What do you think are some of the indicators as to when the project should be — where open-sourcing it might be helpful?

Ben Golub: I think that there are a few different things to look at. I think, first of all, you want to, in any project, do that 10x thing that you said. If you’re just coming up with an open-source version of salesforce, and the only difference is, it could be slightly cheaper, that is not going to happen.

The disruption was being SaaS, the disruption isn’t on the code side. But I think that, to the extent, what you are building requires a strategy that wants to build a large top of the funnel. You know, if it’s something that’s developer-centric, if you have a strategy that depends on having lots of integration, if you have a strategy that depends on being disruptive, then those cases, I think, you want to look at open source. If you’re just an end-user application – probably not.

Storj Virtuous Cycle

Michael Schwartz: You mentioned that with Storj, there’s a virtual cycle of investment, growth monetization, and innovation – can you unpack that a little bit because that’s very concise?

Ben Golub: Sure, again, we are a different kind of cloud, and since 2/3 of cloud workload is given by open-source, we’ve sort of elected to try and make the open-source community part of our go-to-market, but in a mutually beneficial way.

In the model that we have, if you’re an open-source company, and your product generates lots of data whether by your free users, by your page users, it doesn’t matter, backups, if you build a connector that gives your user the option to send that data to us, versus another form of object storage, will give you a chunk.

What does that set up? It sets up a nice virtuous cycle, in which open-source innovates, open source generates revenue for us, like in similar decentralized networks. We, in turn, send revenue back to open source, which allows them to innovate further and build their own business models, and it continues.

Other Decentralized Opportunities?

Michael Schwartz: You mentioned that decentralized cloud is potentially a new business model for open source. And I understand how you’re saying, if you write an open-source piece of software that uses Storj for file persistence, that you could generate revenues from that. Can somebody build a company like Storj that uses a decentralized approach to something else?

Ben Golub: Yeah. There are companies – we are sort of decentralized S3, as you said. There are other companies out there, like Xiamen and others, who are trying to do decentralized DC2.

Of course, there are a lot of interesting decentralized payment companies, there are interesting decentralized CDN companies. Each of these has basically been taking a fairly horizontal use case that the cloud companies deliver, but deliver it in a decentralized way. And I think, in all cases, we would all be well-served by embracing this notion of mutually beneficial relationship with open source.

Other FOSS Cryptocurrency?

Michael Schwartz: The only company that we’ve interviewed, who has issued a cryptocurrency, do you think that there’s opportunities to use cryptocurrencies for other purposes? Maybe to help either fund or reduce transactions cost for developing or monetizing?

Ben Golub: Absolutely. I’ve seen lots and lots of interesting crypto companies, and there are lots of not so interesting ones that are just ‘fly by night’ operations. But, among the interesting ones, with blockchain and cryptocurrency, what we needed to do is sort of create these large decentralized networks, where trust is sort of built into the network, rather than residing in a particular individual.

And you can make payment algorithmic. There are a lot of interesting experiments, for example, to say, ”Hey, let’s reward people for contributions to open source based off of using crypto currency, and doing it in an algorithmic manner.” And it gets really an interesting idea.

But ultimately, for anything like that to work, somebody has to be able to drive economic value for the open-source to begin with.

And my guess is that’s not the people who today are generating the value, which is the public cloud companies.

Challenges Of Launching A CryptoCurrency

Michael Schwartz: From a legal business perspective, it’s fairly technically challenging launching a cryptocurrency.

Ben Golub: Yeah, we were sort of fortunate that we did it right. And we also, in 2017, we had a network built and launched before we did a token sale. The token sale had utility from day one, and we’ve tried really hard not only to be enterprise-grade in terms of our product, but to be in a serious enterprise-grade in terms of our governance and management of the token and our treasury policies, inside our trading and governance, all those good things.

Treasury / Governance Of Currency

Michael Schwartz: Storj actually holds cash or an amount of cryptocurrency that’s let’s say unissued – is that how it works?

Ben Golub: Yes. We generated in our token sale 425 million tokens, and then in essence, we broke the mold. So, there will be no more ever created. We sold 75 million in our initial token sale. Since that time, of course, review tokens to compensate people who are running nodes, some people have paid us back in tokens.

Right now, there’s about a 125 million storage tokens in circulation, and then, the remainder we have, the biggest chunk of that, is in time lock, so that it won’t be entering the market in an undisciplined way.

View On Red Hat Acquisition

Michael Schwartz: I could probably keep asking you questions about cryptocurrencies for the next half an hour.

Ben Golub: Oh, that’s okay. Happy to answer that, but now, I’ll be honest, I find cryptocurrency far more interesting than decentralization. Because, ultimately, I think that if that’s a tool, and cryptocurrency is a small part of blockchain, and blockchain is a small part of decentralization. Decentralization is in some way even bigger than Internet, because Internet in itself is decentralized.

Michael Schwartz: Slightly off topic question, but is the acquisition of Red Hat by IBM a good thing for the open-source software segment?

Ben Golub: I think it really depends on how IBM manages it. Some companies do a great job at acquisitions and some don’t do a good job. I have to say that I actually sold a company to Red Hat Gluster, which, of course, Red Hat has now become part of IBM.

I think to the extent that IBM enables, or allows, Red Hat sort of to open-source roots, but helps it sort of continue to flourish as a shining example of commercially successful open source, I think it’s great.

Personally, last year, I was able to say, “Hey, it’s fantastic, we now have more than Red Hat.”, as an example of a public open-source company, and Red Hat, and Hortonworks, and Cloudera and RealSoft and, and now Mulesoft has been acquired. Cloudera and Hortonworks have combined, and Red Hat is now part of IBM. Elasticsearch entered, but there’s fewer public open-source companies.

Michael Schwartz: Now, we have less.

Ben Golub: Yeah. And, of course, the largest one is now no longer independent.

Move To Open Source License

Michael Schwartz: Recently, several prominent companies in our industry, like Cloudera and Chef, moved to an all open-source strategy, then moved away from open core. Do you think open core has peaked and will move back towards a more truly open-source model?

Ben Golub: Well, it’s interesting, because on the one hand, you’ve seen some people become more permissive with their licensing, and then you’ve also seen other companies become more restrictive, and come up with a sort of new licenses to deal with the Cloudera.

I don’t have a dog in that fight, except I think that the answer to monetizing the cloud isn’t a new kind of license, I think it’s a new kind of cloud. And that’s where we come from. Because, ultimately, yes, you can add value to open source by making it better for large enterprises, whether it’s through proprietary modules, or services support, or subscriptions, or packaging.

I think there’s all kinds of variations on a theme. What we need to do is find a way that you can make open source monetizable for large numbers of small and mid-sized companies, or even larger companies that are running in the cloud.

Biggest Challenges For Open Source Businesses?

Michael Schwartz: Putting storage solution aside for one second, what do you think are the biggest challenges today facing entrepreneurs who want to build a business around an open-source software project?

Ben Golub: I think that the first challenge most have to do is, like any great open-source project, build something compelling and build an exciting community around it – that’s a hard thing to do.

I think that what they then need to figure out is how do they build a sustainable business model that can carry them from the time they have a really big community to the time that they have a sustainable economics.

Along the way, it gets really difficult. Even if your community is successful, how do you manage your community, how do you monetize, how do you make it possible for people that participate in your community, without undermining it, and how do you avoid going down to the point where all that you get from a large company is just charity.

I’m not saying charity in a bad way, but I’m saying, when I was running large open-source communities, what I wanted from the cloud companies wasn’t some cloud credits. I didn’t want them to say, “Hey, I’ll put two people on your thousand-person projects.”

It’s nice, but what we really needed to do was have a mutually beneficial business relationship, so that we could invest and grow.

Advice For Entrepreneurs

Michael Schwartz: What advice do you have for the entrepreneur who needs to lead this open-source effort? You’ve been through the entrepreneurial journey many times, and I’m just wondering if you have any advice for the person who is actually going through that journey?

Ben Golub: Well, of course, it is a journey. As they say, it’s a marathon, not a sprint. I think, personally, what you have to do is, you have to love what you’re doing. And I think especially for an open-source, you have to believe that the journey will be worth it even if you can’t feel the successful business.

Because, what you are doing, it’s interesting enough for you, and it’s going to be hard to build something interesting enough for the community. But having done that, I think you need to think really clearly about where you want to be each year over the next five years. I think you need to think really clearly, from my point of view, over what your monetization strategy is going to be, and who are your users, and what is your use case.

I think far more startups fail because they don’t pick a direction than because they choose the wrong direction. I think if you articulate internally a really clear direction, and then, you’re consistent in saying that’s your model, whether it’s open core, or service and support, or access, or whatever it is, and then you are relying on everybody in your company – I hope choice of strategies is right.

But even if it’s slightly wrong, at least you’ll all be running in the same direction, and you can change course. The worst thing that I’ve seen in startup after startup after startup is, they don’t pick a direction.

Everybody runs at five different directions, and they know they are failing and they don’t know whether it’s because one of those is wrong or because all of them are wrong.

Closing

Michael Schwartz: Ben, thank you so much for taking the time out of the conference today to record the podcast.

Ben Golub:  Great questions, thank you.

Michael Schwartz: Huge thanks to the Open Core Summit for connecting us to Ben, and for making space to record at the 2019 Summit. Don’t miss the Open Core Summit next year. It’s a fantastic event for founders and open-source teams.

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.

Have comments? Tweet at us. The Twitter handle is @fosspodcast.

Please, subscribe to the podcast, or add it to your favorites on your platform. Every subscription counts.

Next week, we have Isaac Schlueter from npm, the last of the in-person interviews from the Summit.

Until then, thanks for listening.

lliam Lowe.

Have comments? Tweet at us. The Twitter handle is @fosspodcast.

Please, subscribe to the podcast, or add it to your favorites on your platform. Every subscription counts.

Next week, we have Isaac Schlueter from npm, the last of the in-person interviews from the Summit.

Until then, thanks for listening.