Monetizing Open Source (Or, All Enterprise Software)

Here’s what we know about open source: Developers are the new buyers. Community matters. And there will never be another Red Hat (i.e., a successful “open core” business model … nor do we necessarily think there should be).

Yet open source is real, and it’s here to stay. So how then do companies build a viable business model on top of open source? And not only make money, but become a huge business, like the IBMs, Microsofts, Oracles, and SAPs of the world? The answer, argues James Watters, has more to do with good software strategy and smart enterprise sales/procurement tactics (including design and a service-like experience) than with open source per se — from riding a huge trend or architectural shift, to being less transactional and more an extension of your customer’s team.

Watters, who is the SVP of Product at Pivotal (part of VMWare and therefore also Dell-EMC), is a veteran of monetizing open source — from OpenSolaris (at Sun Microsystems) to Springsource (acquired by VMWare) to Pivotal Cloud Foundry — with plenty of failures, and successes, along the way. He shares those lessons learned in this episode of the a16z Podcast with Sonal Chokshi and general partner Martin Casado (who was co-founder and CTO of Nicira, later part of VMWare before joining Andreessen Horowitz). These lessons matter, especially as open source has become more of a requirement — and how large enterprises bet on big new trends.

Show Notes

• General strategies for open source companies [0:44] and differentiating in the marketplace [9:26]
• Dealing with competition from large firms [13:34]
• Why open source is growing [18:20] and a discussion of Red Hat, OpenSolaris, and other case studies [21:26]
• Advice for entrepreneurs on open vs. closed source [26:48]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. We’ve talked quite a bit about open source in the podcast already, from the topics of open versus closed, to managing community and identity, to selling to developers. And a few years ago, partner Peter Levine put out a piece arguing why there would never be another Red Hat, which is one of the only open core business models to survive. But given the current and coming wave of companies built on top of open source, the tricky question left to discuss is, how do they make money? And joining us to have that conversation, we have James Watters, who’s the SVP of product at Pivotal, a cloud platform company that runs software in multiple clouds, and they’re part of VMware. And then also moderating this podcast, we have general partner Martin Casado, who himself came out of VMware, which had acquired the company he co-founded and was CTO at previously, Nicira. And he is the first voice you’ll hear.

Open source strategies

Martin: One of the paradoxes in this entire space is, there’s been a ton of money that’s been invested in open source, but almost no examples of successful companies built around it. Silicon Valley had a spidey sense that there was an opportunity there, like, nobody pulled it off. Yet now, there’s a number of examples of open source companies doing very well. James is one of the few people on the planet that’s cracked that, where they’ve figured out how to monetize and build a big business out of open source. And just to give a sense of how real this is, Pivotal Cloud Foundry went from 0 to $270 million in license, not support.

Sonal: I mean, what’s that mean, in license?

Martin: In license and in software sales.

Sonal: Oh, so it’s not professional services…

Martin: It’s not professional services, exactly.

Sonal: …because that’s the stuff that has like — that’s the thing we talk about all the time, in terms of building businesses, is that you don’t necessarily wanna rely on professional services because it doesn’t give you a lot of margin on your business.

Martin: Exactly. So this is, like, legitimate software sales.

Sonal: So, James, tell us how you went from 0 to 270 — million, we’re talking about, not seconds. How did you do it?

James: Yeah. And I think it’s fair to describe, kind of, my maturation and my thinking about this through failures, too. I worked on OpenSolaris at Sun, and then, for a while, at VMware, we were looking at how do you monetize SpringSource in and of itself. SpringSource is, like, the most popular Java programming framework in the world, by VMware 4, pretty famous, money over $400 million as an open source project. I had worked on that, you know, both of those projects, and had gotten my bumps and bruises along the way. And so I had some very particular opinions coming into doing the third round of PCF, Pivotal Cloud Foundry. I think there’s, kind of, two dimensions. One is the basics, which is, if you look at IBM and Oracle, Microsoft, SAP, etc., what they get right in this very basic thing is they understand how to cater to enterprises.

Sonal: Yeah.

James: And I think the number one temptation that most open source companies fall into is the first thing they do is they cater to their users.

Sonal: And by users, you mean the developers?

James: The developers that, you know, fork it on GitHub, start on GitHub. And the misassociation, as a first thing between the people that use it and then the people they need to cater the selling to, is kind of what you might call the first false horizon of open source monetization.

Sonal: Interesting.

James: What I mean by cater to is, like — I think this is the number one thing that I see open source companies maybe get wrong — is those are the people that show up and talk to you, those are the people that you’re interacting with. When you’re creating an open source community, you have to, first, get these unpaid users excited. But ultimately, IBM and Oracle are not out there mining their mailing lists of end users to go do deals.

Sonal: Yeah. How do you sort of straddle this? Because theoretically, you should be able to do both. But isn’t sort of the mantra, I should say it the Indian way, of open source, that you have to take care of your open source community and then also figure out how to become a business? Like, how does a company that’s trying to become a real big company straddle that?

James: It’s super important, right? I’m not saying that that’s not. What I’m saying is that your commercial strategy and your community strategy are not the same thing.

Sonal: That’s a great point.

James: It’s tempting when you put so much heart and soul effort into building that proof of validation around the community first, to say, “Oh, well, then, I’ll go upsell them.” And I remember meeting MongoDB when they were early in their rise, and they were selling, you know, a $4,000 support contract to thousands of users with a lot of expense. And when we built PCF, I was like, “I don’t think that’s the right way for us to go be big.” Just because you’re open source doesn’t mean you only sell to your open source users.

Sonal: So what did you do in getting across this first horizon?

James: The next thing you have to get right is you’ve got to get a major trend that affects enterprise buyers. So if you go back to enterprise as being the source of the money, you know, Oracle didn’t magically just exist one day. They caught the relational database market at the right time and built a franchise. And that relational database market really changed how enterprises were building applications, what they could do on applications. And in the same way, we’ve tried to catch the microservices trend as the major enterprise change that’s happening. That’s the kind of change that you need on your, you know, commercial strategy to generate CIO interest and enterprise purchases. It can’t just be a tool that someone’s potentially using [at] lower levels.

Martin: There’s been, [for a] long time, this thought that open source is primarily a commoditizing force. There’s an existing market, say, Unix. It’s an existing market with an existing buyer. Then you create an open-source version, which is differentiated by being open on open source, and then you go commoditizing that existing market. And you’re saying something quite a bit different. You’re actually saying that you can enter a new market using a shift and sell into that. So, I guess two questions. One, do you believe in the commoditization? Is that still a business plan? And then the second one is, like, is there any difference in open source to identifying these shifts, or is it just like if you’re doing a closed-source product?

James: Let’s look at history a little bit. I think Zen and OpenStack both felt like they could go commoditize VMware, right? They both said, “We’re gonna go commoditize VMware.” The last time I checked, Oracle and IBM did not get to be the size they are by having commoditized a previous generation of suppliers. So if you just look at the record — and this is what I call, like, the false horizon of open source strategy — you might be tempted that your only play is to be a commoditization play. But history tells us that the largest software companies in the world that get into the hundreds of billion in valuation, that’s not what they did. They caught megatrends.

Sonal: They built something new. They didn’t just commoditize something old.

James: They did. And I know that that sounds, like, obvious…

Sonal: I’m glad you’re pushing on it.

James: I’ve learned, over the years, that open source is now both a necessary part of almost any major software company strategy, because it’s a buy-in criteria that, you know, enterprises have for major new initiatives. But — that I think the open source got a little bit of a false start by only being a low-cost commoditization as a business model.

Martin: From my conversations, it’s almost somewhat of a contrarian view. Because traditionally, you’re like, “Open source projects chase after, basically, the sales dollars that have matured to market,” like MySQL, you know, like Android, like Linux, like JBoss. Every one of these you can point to a closed source incumbent that they were chasing after. So it’s nice to hear that you believe that open source is not somehow relegated to this commoditization. Because I agree with you, that basically limits the upsides you’re gonna get.

James: It does, because it limits your business model. It doesn’t let you invest. We have a $100 million a year R&D budget. When you’re chasing a new big strategic trend, and you’re getting the kind of checks that we are and the trust we are, you can build a big R&D team. If you’re chasing commoditization… 

Martin: Well, I mean, you are trapped to a fraction of the market you’re chasing after, by definition, right? Like, if it wasn’t a fraction of it, you wouldn’t be commoditizing it, and it’s very unlikely you’re gonna get it 100%. And so you necessarily, you know, have a ceiling over you. Well, it sounds to me that your recommendation is a lot like closed-source software sale. However, is it more than just, kind of, software sales, or is it just that, like, the industry is ready for open source now when it wasn’t before? Like, what has happened in the last two years to make this viable? Or is there more to the puzzle that you haven’t talked about?

James: And so the basics are strategy and segments. If your strategy and segment looks wildly different than every other big software company that’s existed before, that’s probably a pause. And then the second thing is, I think that cloud has started to affect open source, and we’ve taken a model of continuous delivery of our software, inclusive of cloud API. We don’t do what I call shipping you the tarball and the support contract and say, “Good luck.” We actually automate the continuous deployment and update of our software. And so we have an additional point of leverage other than just support, which is that, if anything doesn’t work in that large-scale update of thousands of nodes, you just blame us and call us. And that’s a different vector. That’s almost like a cloud vector in terms of value-add of software packaging.

Martin: That’s exactly right. We hear this all the time, which is, more and more, the customer wants to consume things as a service.

James: Right.

Martin: And this is often conflated with whether it’s deployed off-prem or on-prem. Like, to me, this is a total conflation, right? Like, whether or not it’s a service does not mean it’s necessarily deployed off-prem, right? These are two things. So one decision, off-prem or on-prem. Like, that’s actually a decision often, like, bound by regulatory compliance and security, etc. But there’s an entirely different decision, is — my consumption model as a service. That could be, I pay for it as a service, but also could be, somebody else basically manages it, does the update, manages the lifecycle, I don’t deal with the tarballs. That’s very much in line with what we’re seeing across the industry too. And what makes this discussion particularly relevant to open source is that it seems that once you’re talking about something as a service, questions around open source kinda diminish, because they’re not actually dealing with the code itself, they’re dealing with the service.

James: Big success stories sometimes have contrarian bets in them. And I would distil our two contrarian bets to, we did not go for the commoditization play, we went for the sea change and app design play.

Martin: That’s right.

James: And then we also tried [our] best to deliver a service-like experience even with software.

Differentiating in the marketplace

Sonal: Are there any challenges, though, in sort of bringing a polish to open source work? Because when I think of traditional software companies, they have baked in design for user — like, really client-facing versus developer-facing. So how do you sort of navigate that part of that, as building a real business on top of open source, if you don’t have that experience natively?

James: One of the decisions we made is we made our UIs closed source. So everything about the infrastructure of the platform is completely open source. And we chose to make the UI in that last mile of experience built off the APIs closed source.

Sonal: Yep. Okay.

James: So I do think there is some room to differentiate there, and you know, when you go to monetize, you’re going to need some small checkboxes. I’ve learned a lot, you know, growing this, about the importance of packaging for procurement. And one of the things I’ve observed is that procurement is exceptionally good at pricing a certain kind of thing, which is labor per hour. So, I’ve seen very large software contract orders, and procurement will actually pick on the labor per hour, because that has a nearer comparable. And so when you start to think about procurements looking to compare things to exact replicas to price it, having a little bit of, you know, closed-source UI or things that are maybe even immaterial to the product but are still there to say, “Oh, well, this is different,” is somewhat important.

Sonal: Interesting.

Martin: That’s really interesting.

James: And thinking about dynamics of navigating the politics of procurement are important.

Sonal: What are some of the other dynamics of navigating the policy of procurement, your lessons learned that you can share with us here?

James: I mean, you guys are asking for the goods now.

Sonal: Yeah, we are. We want the secret sauce. Give it to us for free. Share it with our listeners.

James: I mean, I think that is — generally, in an enterprise, when you get to procurement, somebody wants you to win, and you’re actually, then, in a political process to get through the last mile. Like, they’re kinda, like, the guardians there.

Sonal: You mean the internal champion type of person?

James: Internal champion wants you to win. Like, if you’re in procurement, they want you to win, and they wanna work with you. And this is why one of my other rules about open-source monetization is, try to avoid dogpiles. So a dogpile is a little bit, like, everyone’s doing X project, we’ve got to distro of X project. Think about the dynamics when you go into procurement then, and 20 people show up with an offer for X project. Like, no matter how much your champion loves you, the procurement officer is gonna have 10 comparables to compare you against. If you look at MongoDB, for instance, one of the things that protected them was that they are the only supplier of Mongo. So while they might not have had the high-end strategy right when they started, they at least were the sole supplier. So they could still somewhat dictate prices. If you look at OpenStack distros, I don’t know that anyone made it out alive [out] of that gunfight. 

Martin: This is such an important point. And I think it’s actually worth restating, which is, if you’ve originated a project and you’re bringing that to market, you should retain the ability to be the sole supplier, if only to set pricing and brand awareness in the market. Companies live or die by this type of thing. Another thing that I like to hear, if this is true for you, having spent a lot of time dealing with procurement — that more than anything else dictates the life of enterprise sales. Before going into procurement, I always expect procurement to need their pound of flesh. Like, this is how these guys are comped often. It’s like, “Okay, you know, whatever the discounting is.” And so, you know, we expect that going to procurement, you go — a bit of a Kabuki show, and then, you know, you end up with some pricing. And that pricing is actually for the vertical has been set in the market somehow. So it’s pretty well understood for forecasting by the business, pretty understood by the customer, and it’s, kind of, motions you have to go through. Do you find in open source that that discussion is different because you are open source? Like, do you have more pricing pressure because it’s open source? Do you have more of a push-forward service component? Or can I think about it the same way I think about closed source?

James: I think you can think about it the same way as closed source, if your model is, you’ve sold someone on a big new trend, you’ve helped train their organization to get there, and then you’re working on a fresh demand forecast of the transaction together. If you’re coming in and upselling support only, and they’re already installed, and all you’re upselling is a support model, that’s gonna be a lot more difficult. Because they already have it running, they already have it working at their scale, and all they want is, essentially, professional services by phone.

Competition with larger players

Sonal: What happens when a big company comes in and competes with you as a smaller, growing open source-based company?

James: This is something that open source companies have to navigate, which is that sometimes larger companies will adopt the same software by name, if you’re not careful about how you position yourself.

Sonal: Wait, what do you mean, like, they can literally just take your name even though you…

James: It’s very popular for large companies, say, IBM or somebody else, to say, “We support X.”

Sonal: Oh, I see what you mean. Okay, got it.

James: Larry Ellison famously did it with Larry Linux. He tried to do it to Red Hat. They often don’t have that much capability behind it, but they can, at least, push a little go-to-market on it.

Sonal: But wouldn’t your internal champion in the procurement office be able to tell the difference? Like, why would they even pick something else when they can get your product, which is what they want?

James: This is why having a unique market position is important regardless if you’re open source or not, because I’ve seen cases where very large orders were suddenly stopped because another large company just quoted something that sounded similar for the same amount. Now, that can happen open or closed, but if you’re in an open-source dogpile, as I mentioned, word of caution, it’s especially rampant. That can actually drive your entire upside of ever being a half-billion-dollar a year software company — like, your probabilities go down really hard.

Sonal: So how do you get out of it?

James: The key is keeping a unique offer in the market, right. You don’t wanna be yet another distro of, you know, a certain famous technology that provides support. I think you wanna have a fully packaged differentiated approach.

Martin: So here’s probably the most basic question in this space. If you have an open source project, it’s probably available online. So if you’re walking to somebody and you’re about to sign a $10-million ELA for license, what’s stopping them from just downloading and running it themselves?

Sonal: Yes, I have that same question. I’m glad you asked that. I wanna know the answer to that too, James.

James: You know, some of the origin of this discussion was, we were speaking on Twitter around this $100,000 or $200,000 contract value, and even some sub that, as sort of a valley of death. I think, if you go back to why the big software companies are, like, successful, they’re an extended part of those companies’ teams. So, I don’t really like the $100,000 a year relationship, because it’s very transactional. When you’re part of a big change like microservices in the enterprise, they’re gonna want advisory. They’re gonna want you there. They’re gonna want a team of two to three people that just live there. A key thing is when that $10-million transaction comes, they’re as much voting with, you know — they want you to be part of their extended team, part of their strategy, part of their relationship with you.

Sonal: Yeah. 

James: Because you have an expertise that’s been hard-won that they do not have.

Martin: So I spent, you know, quite a while doing enterprise sales, and I’ve got this view, it caused this conversation that you and I had on Twitter, which I had claimed that, you know, in enterprise software sales, there seems to be this valley of death between, like, say, 30k and 150k. If you’re 20k or below, you know, you can call somebody up, and they can pay for it. And let’s say if you’re 200k and above, then you have hopes of supporting a direct salesforce and still have good margins. And then, in between that, you’ve got this valley of death, where you can’t really support a direct sale because you can’t pay the people. But, you know, if you’re trying to do something new and innovative, you don’t have account control and it becomes very transactional. So, do the dynamics of that change with open source sales?

James: I think what’s happened is that open sources become how large enterprises wanna bet on big new trends. And then that opens the capability for the first time of open source companies — I’ll use the word — being high end. Meaning that IBM and Oracle are parking a bunch of good platform architects, as we call them, technical architects, at the account that explain the new things to that account. If you wanna get a $10-million relationship going, you’ve got to become that extended part of their team. That is why I jumped in on our original Twitter discussion around the $100,000 a year deal, and I was like, “Hey, actually, I think 100 is too low. Like, I would try to get to 400 to 1.5.” And the critical thing that happens at that [amount] is not that you extract more money. It’s actually that you can be a better advisor. Like, you can actually put talent on the ground, and you’ll find that these large enterprises, during times of big change, really value that talent on the ground.

Martin: Interesting. So, this is a nuance, a new way of looking at the discussion. So, how much does your ACV have to be to support a salesforce and say, “It has to be at least 150, 200k?” You would say that it actually should be higher than that, because the goal isn’t just the margins on a direct salesforce. The goal is really strategic account control.

James: Correct.

Martin: And to get that, you need a deeper engagement. That’s very interesting.

James: Yeah. And I think so many open source companies have died because they’d transact around the edges with, like, director level or technician level for support, and they never got to the CTO or the CIO and true strategic account control like the big players had.

Why open source is expanding

Martin: So, I’d love to get back to this question of, like, why now? Like, I’m just so curious. Which is, like, is it, like, have you figured out something that nobody else has, or is it that the enterprises now realize that they need to pay for this software, or is it something else going on? Like, why are we starting to see the Elasticsearches? Why are we starting to see the Mesospheres? Why are we starting to see these companies be successful?

James: Well, if you look at the clock cycle of how often big new software companies get built, it’s not every day. Enterprise architectures only change so often, right? Like, if you were to try to sell a middleware offer in 2008, I don’t think you could have raised money. You would have had a really hard time, because none of the design patterns were changing. I think what’s happening now is that cloud is disrupting a lot of people’s approach to software infrastructure, to how they build applications. And so, this crop of open source companies is getting a chance to be the leader of a new thought, versus purely being a commoditization play.

Martin: And so, you’re saying that it’s not inherent in open source, as I see inherent in the trend that’s going on, and open source is just becoming, basically, a requirement because of customer expectations in community.

Sonal: But I have to push back on this one. Isn’t that inherent in open source, because that has to do with the nature of a community, the speed of development, the fact that you don’t have to necessarily go through a waterfall type of development process? I mean, isn’t there something here that’s inherent to open source, by definition?

Martin: Fixing problems is fixing problems, whether you do it in open source or a closed source. And the reason that we’re seeing this rise in open source companies is not endemic to open source. It’s the fact that we’re seeing, actually, a transformation around developers and their aesthetic and the technologies.

Sonal: Totally. I totally buy all of that.

Martin: And then the question is, well, where does open source come into the play with it? It seems like there are intrinsic benefits to it, and there’s a level of expectation from the customer.

James: Yeah. And I think that the commodifying open source companies did a really good job of normalizing open source as something that people did, and even creating an expectation that that’s the right way of going. And then, this wave of what you might call, like, the microservices generation, or the cloud generation open source companies, are actually catching enterprises with a new need, and a new, you might call it, hundreds of billions of dollar need. And suddenly, IBM and Oracle’s earnings are missing every time, and suddenly, these new companies are getting green shoots.

Sonal: Okay, that’s fair. Just wanted to make sure that there wasn’t some inherent experimentation baked into an open source-based project that then leads to this more innovative type of…

James: You’ll keep getting me to talk open source strategy, I’ll keep talking software strategy.

Sonal: That’s great.

Martin: I love it.

Sonal: That’s great. That’s, like, what we need to hear.

James: Sometimes people say, “Oh, well, why is enterprise software so expensive?” It’s expensive because, you know, the trust model of enterprise buyers is, you’re really gonna take care of them, advise them, ensure outcomes. You’re not just providing support. So what you’re really fighting for is the chance to be one of those new trusted architectural advisors, I believe.

Sonal: Red Hat lived on the x86 shift.

James: Red Hat kinda got lucky and found a commoditizing change, which was Unix to Linux. That’s a rare event to have a major, you know, chip system re-platforming sea change.

Martin: So, let’s talk about Red Hat, because Red Hat seems to not follow — there’s a big transformation. Open source is a great way to do it because it gives you the edge with community, all the things, you know, all the bromides that we normally talk about. So, you take advantage of the transformation, you become a strategic advisor, etc. But if you look in the back, that’s kind of, like, the one success case doesn’t really follow that.

James: For all of the time it’s been in market, Red Hat is still a $2-billion a year software company, right? If you compare it to what IBM, or Oracle, or SAP, or Microsoft, or any of the megas, they still haven’t caught that size of a trend, even though their prices, frankly, are similar to Microsoft’s now, like $2,500 an OS. So it’s not that they’re just down-market, it’s [that] they just didn’t catch a trend big enough to become a company that big.

Sonal: Yeah.

Martin: I see.

James: Like, I don’t think they — you know, in the same way that the mainframe captured all of the world’s transactional processing, or Oracle captured all relational database apps and enterprises.

Sonal: I mean, you’ve described this now a few times in this podcast, catching this trend, this wave, this need. That’s just product-market fit. Like, there’s a real market need for this.

James: Yeah. My thesis is that, just saying “We’re an open source company” can distract you from software strategy.

Sonal: Yeah, exactly. That’s great.

Martin: So, what did OpenSolaris get wrong? I mean, like, you’ve seen this from many angles. Oh, there’s a pained look on his face. I’m not sure if I’ve kicked a wound.

James: You know, it was a great learning experience for me because I think Jonathan Schwartz had a fairly early and simplistic open source strategy. And he was one of the first CEOs of a mega enterprise company to do this. So I watched this firsthand. And he was like, “We’re an open source company.” The problem was that Sun was still on the wrong side of all the trends. Like, it was actually late to x86. It was late to everything that was happening around Webscale. And so, open source actually only hurt us, in a sense, because, you know, working on monetizing OpenSolaris, one day, Jonathan said, “It’s all free. It’s no longer licensed. Go sell support contracts. Everyone will buy support.” But what happened was that, overnight, like hundreds of millions of dollars of revenue evaporated, and then it was a tactical challenge to go get people to sign up for it again. We didn’t have some strategic initiative to go talk to them about.

Sonal: Which goes right to building a strong, good software company, to your original thesis.

James: So we worked on that. And then the next thing I saw was, within the Spring group, there was something called tc Server, which is just cheaper middleware. And it only got to, say, tens of millions of dollars in sales and an average selling price of, say, 80,000, somewhere in that range, and it never caught a strategic new design point either. So when we had PCF, I really said, “Hey, this microservices refractory is actually a once-in-a-generation change. We could take a different tactic.”

Martin: What I really like about your view on this conversation is, you’re basically saying, open source or not open source, you have to build a solution that solves a real problem, take advantage of a trend. It’s like a traditional software company and software sales, and then open source provides uplift, and etc. And often, open source has been viewed very differently, like, it’s got something magic that will save you. And so what you would see, is you’d see these incumbents that are desperate, and, like, in an act of desperation, the swan song is to release something open source, because they think that, somehow, that’s gonna magically save them.

James: Community development is really important, but if you just develop a little community and it doesn’t change CIO, CTO — anyone that’s writing <inaudible> checks priorities, like, by definition, you didn’t build a software company that had an opportunity to be the big new strategic advisor and…

Martin: That’s a critical piece

James: …new architecture.

Sonal: Right.

Martin: Another thing that I like about your view on all this — it seems like it’s a very, kind of, planned, top-down view. Which, often, discussions around open source, to me, are very organic, which is, you know, you get a community, and that community will grow. And like, this is kind of very, kind of, like, organic progressive thing, and then you have some…

Sonal: Well, this goes to my question about product vision, like, having someone to direct it top-down. But what I’m hearing is, the next Steve Jobs will be the Steve Jobs of an open source company, because he’s a great CEO, great product guy, great business. It doesn’t have to be open source or closed source. To your point, it’s building a great software company.

Martin: Exactly right, which is like, listen, there’s an industry trend, you’re gonna build real value-add in that trend, and you’re gonna go from the top-down, make it a direct salesforce. And this is really about kind of top-down, like, strategy and planning, and not just, kind of, progressive community…

James: A great thing that’s happened is because buying open source has become a normative behavior.

Martin: Yeah, exactly.

James: Which means that you don’t have to be shy about doing something audacious and asking for money.

Martin: Push that even further, do you think open source has become a requirement, or is becoming a requirement?

James: It’s close to a requirement, I think, for major new bets. Like, if you look at our biggest buyers, they don’t wanna get into what Oracle’s doing to them right now. Like, every year, they’re using less Oracle, and every year, they’re paying as much. That’s a very negative feedback loop.

Sonal: Wait, explain why.

James: ELA structuring, enterprise license agreements.

Sonal: And what is that? Like, just kind of talk us through it.

James: So what buyers are trying to escape from, and one reason they want open source as a protective measure, even if they don’t use it, is the right to keep using their software without paying more and more for it every year. Companies like Oracle have been out there charging more and more for the same usage over the last few years. So, they basically trap you into that and say, “Well, we can increase your unit cost even if you’re decreasing your unit consumption.”

Advice for entrepreneurs

Martin: Yep, that’s great. To get back this original question, which is, a lot of the constituents that listen to this podcast are entrepreneurs or aspiring entrepreneurs or existing entrepreneurs. So let’s say one of these entrepreneurs wants to create a company, Acme, Inc., and they have…

Sonal: Acme, Inc., great naming there.

Martin: Acme, Inc., that’s right, because I’m creative. So they’re creating Acme, Inc., they’ve got a software project they think is gonna change the world, and they have a decision to do open source or closed source. Is there a difference, or is it the exact same thing?

James: I think we got incredible lift off of open source. For instance, IBM showed up and standardized, then, what we were doing, HP, SAP, other people. We got huge lift off of open source. Now, that doesn’t mean that you have to accept the usual low-end tarball and support contract business model. So I would probably not start a closed-source software company today, unless I had a very niche, novel idea that I felt no one else would try to do. Because quickly, there’ll be an open source alternative to what you’re trying to do if you do not open source it.

Sonal: Okay. Last question then, you started off describing how you’ve been through, like, two, sort of, failures before you kind of struck the right model for building a great software company, not necessarily a great open source company. What advice would you give to entrepreneurs today who are trying to do the same thing or the next thing? 

James: I think the tradeoff that you’re gonna make as an entrepreneur is to come out into an existing trend with a lot of people having already validated that. That was easy to get into that trend. It wasn’t a big risk. So, I think the challenge for entrepreneurs is trading off, like, a vision of change that will happen over the next couple of years that you’re gonna grow into, versus just joining an existing parade around a standard open-source community.

Martin: Yeah. And I would add to that, things that you could tangentially apply to previous architectures don’t necessarily carry forward, right? I mean, like, often, we’re like, “Oh, this worked for VMs, therefore, it works for containers.” And so I do think that…

Sonal: Oh, interesting.

Martin: …you really need to be piped in the nervous system of the evolution of the market, and you really need to be bold about, kind of, going after new solutions that are part of the evolving landscape.

Sonal: I mean, it’s a first principles way of thinking.

Martin: Exactly.

Sonal: It’s sort of like saying, “Don’t derive it from what happened before. Like, think about it from scratch.”

James: Martin said one of the most brilliant things, which I was sitting at home, listening to the podcast, cheering on, which he said, there’s so much metadata and microservice now that you can change the way you think about networks. That is the fundamental shift, that if you catch something like that, then you have a game-changer.

Sonal: That’s wonderful. Thank you for joining the “a16z Podcast,” James.

Martin: That was great.

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