Chetan Puttagunta and Jeremiah Lowin Open Source Crash Course - [Invest Like the Best, EP.188]

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If you're a professional equity investor in having talked to catalyst, recently, you should give them a shout learn more and try for yourself a catalyst dot com slash Patrick that C. A. N. A. L. Y. S. T. dot com slash Patrick. O. Hello and welcome everyone. I'm Patrick o'shaughnessy and this is invest like the best. This show is an open ended exploration of markets, ideas, methods, stories, end of strategies that will help you better invest both your time and your money. You can learn more and stay up-to-date an investor field guide. Dot. com. Patrick o'shaughnessy the CEO of a Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of o'shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon basis for investment decisions clients of Shaughnessy asset management may maintain positions, the securities discussed in this podcast. Own. This week or Jeremiah loan and cheating. Jeremiah is the founder of prefect dot. An open software company where my family and I are investors and Jason is a partner at benchmark capital. Both are past guests and good friends. I asked them on to help the audience understand the open source software business model. I've been fascinated with this model in which companies give a huge chunk, their work and value away for free to a community of developers, and then make money by building additional tools, functionality and services on top of their free and open platform while this may strike you as A. Walkie discussion on a niche software topic I think it is valuable for everyone because the ideas can be applied to more than just code. I view much of my own activity as open sourcing investment research and knowledge. It's also important because much of the world technologies built on top of open source projects. I hope you learn something new about this emerging category. Please enjoy. Jason, and Jeremiah thanks so much for doing this with me today, our topic is going to be a single topic, deep dive open source software in the businesses that surround open source software, which is become a category that I'm personally fascinated in I know obviously chafe and you've invested in some of the biggest companies in this space in Jeremiah you're building one. So I thought this would be a neat group to get together as a jump off point Chafe and I'd love you to describe sort of the originator business in this space, which was red hat as a way for the audience to understand sort of what's distinct about this sort of business model. I think one of the things that's pretty interesting in the history of the firm that I work for benchmark that benchmark was an investor in red hat in the very first benchmark fund. So benchmark one was an investor in red hat in the story of Red Hat. Itself is particularly fascinating, and as we look at what has happened twenty five years later, frankly in terms of the evolution of open source which will get into here. It's pretty interesting. How far sort of open source has come in how sophisticated it's become from where red had started in redhead is particularly interesting. Story because of ninety three redhead was actually two different companies that came together. One was a catalog business that sold links in UNIX software accessories, and then a second business, which was actually red hat lennox, which was its own Lennox distribution that Mark Ewing had started. The two companies actually came together in nineteen, ninety five, and that was how red hat software company came together. Red Hat became public in nineteen, ninety nine and lost in sort of the history. But redhead had I think like the eighth biggest or the tenth biggest first day gain in the history of Wall Street. It's sort of broad this open source business into the limelight in such a dramatic way, and also pretty interesting about the first benchmark fund is that the group had also invested my sequel which had also been pioneering the open source business, which of course, then son bought I think that red had. Starting in ninety five and then four years later becoming a public company in having this huge spike on wall. Street. It being categorized as unbelievably disruptive force where you had this open source operating system and you had a corporation that was behind it that had the wherewithal on the balance sheet to support the efforts to push the open source community forward, and you had all this developer excitement around what Lennox was and what red hat links was. And then of course, red hat went through its own evolution as a business and over a period of twenty five years pretty dramatically transform, and then ultimately, of course, IBM acquired it for thirty, four, billion in two, thousand eighteen. But I think that announcement to the world if you will wear it formed and very quickly become a public company and got so much public attention I think was. A real fire starter for thinking about open source as a an incredible commercial business model in Software Jer. My sincere actively building a business that has served open source at its base. Maybe you could describe why you think it's valuable thing within a business versus version of prefect that's not open source. It's just a software product. Talk US through a little bit how you think about it. philosophically. So. Open source is a very complicated thing especially, if you haven't encountered it before because it can be something that's critically important to you that you can look at the source code of software that you're working with or you actually might not care, and you might only benefit sort of implicitly from say network Becker other benefits that come from it. Think the critical thing about open source software is actually not. That the source code is available. It's rather what that represents. So by making your source code available, you can affirm some degree of trust with the community you can, of course, invite contributions into the source code. You can make it very easy for people to deploy that source code to customize it to their needs with an environment without the sort of corporate sponsor. Being involved but more than anything I think it's about reach for a young company especially when like ours and as we've open source more stack, we certainly experienced that and I think you think about a marketing budget versus the fact that we've engaged open source community ones a compounding activity and one is just the pursuit of our allies sort of blindly just dollars. See it maybe my software and so one of the motivating things. Where if one person the community likes it, they can tell another person there's no Barrett entry can maybe that's the person who's going to contribute to the software. Maybe that's the person who's GonNa. Extend the software maybe that's just a person who will. Attract the next person. But that idea of almost I don't WanNa say free because an awful lot of effort goes into maintaining a healthy community, but it's a very qualitatively. Expanding the reach that the software can have been. I, guess some more traditional model. I'd love Jeremiah's just very briefly for you to make this a little less abstract for those listening and just give actual example using your company. So obviously, people use something because it's useful as you guys have both said, something has hired to do a job especially in software. This isn't really for entertainment purposes. So in the case of the open or free product, what job are they hiring say prefect to do, and then on the paid layer, just give the example that slots and everything you just said, which is you're not competing with compute and storage you're providing an ancillary service, but that nonetheless needs to be a paid service. Sure. So prefixed open source project is a workflow engine. It's a workflow management system. You use it to achieve a goal that you have, which is to make sure that code is run at a certain time and place Minnesotan way. That's what it does and we give that away we open sourcing anyone can run it. Are Proprietary Services we described as an insurance product. We actually divorce it from the idea of running the workflow. It's actual job is to deliver as fast as possible the knowledge that something's wrong to put it bluntly like an insurance product and to protect from it. Now we deliver a version of that in an open source form but specifically because it's a risk management product, Patrick has spent my whole. Career looking at risk management stuff. The Devil's in the details on making sure that this stood up in a very specific way to make sure it's robust highly available scales at any time secure. These are all things that can be done, but they're very hard to deliver in an open source way that's infrastructure agnostic, which is one of the things that we try very hard to do in open source. And it's very hard to teach people in sort of read me how to do this. Instead, we hire people who have expertise in doing these things and we employ them in order to deliver this insurance product to our customers. When we go out and we ask people what value do the are paying customers what value getting from using prefect we hear nice things about the workflow engine is easy to use and save some time and stuff like that. But ultimately, the story is always revolve around Oh. And then there was this one time when something went wrong and woken up by slack and whatever, and it's this very real moment where without the software in place and being governed by US monitored by us, there would have been a real consequence all of a sudden we are delivering real value which a funny way has actually nothing to do with the open source except for the fact that the open source allowed this person to very easily describe what it was that they wanted us to do. So are open. That's actually. The open sources away for people to inform us what they want us to do. We. Re deliver that proprietary platform in an open source way. But our challenge is to make sure that we deliver it to are paying our enterprise customers in a way that scales across their entire organization plugs right in. This little configurations possible. Truth and I'm curious in all the companies that you've back that have pursued this model. If you have an opinion about what tends to produce the best business outcomes there've been four companies that have invested in that have had an art sort of like venture capital world we think of his unquote exit. So Mongo DB meal soft elastic, the company behind elastic search. All have become public companies salesforce ended a buying meal soft. In early two, thousand, eighteen for about six and a half million dollars, and then I was also involved in Aqua, which is the company behind droop will not company was acquired by Vista Equity for a little over a billion. So I would say that if you looked at those open source companies and how they went about creating an open community in an open adoption mechanism, I think what was available to these companies call it. In. The late two, thousand in the early two, thousand, Ten's is likely unavailable today in the late two thousands, it was a totally viable business model to say that I'm going to have a completely open software and the way that I'm going to monetize is offer services and quote Unquote Enterprise tooling for enterprises that they can run on their own data centers or their own servers and and has startups trying to build up their. Own Data Centers I'M GONNA help them get up to speed with US Open source project, and then that's a potential way for the commercial entity to support the open source project and as we have all become very aware of the cloud is become. It's huge powerful force in the price market, and if you just look at the three large cloud vendors of aws azure and Google cloud public cloud is becoming such a big market. Opens companies have had to evolve in how they think about not only licensing, but also how they think about going to market and I know this is something Jeremiah thinks about on a daily basis and if you look at somebody like a Mongo DB, the way they thought about it is that there is an enterprise product that you can run if you choose to operate your data centers but they have another product called Atlas, which is Manga DB's cloud, which essentially allows you to run. A managed Mongo DB where Mongo DB the company takes care of all the sort of administrative things that come along with an operational database like replication security, auditing, scaling provisioning, etc, and through outlets, your company or customers able to provision and run in manage Mongo DB clusters across Google Cloud Azure, and it'll be us, and so they can run it in multiple regions it can run. Across multiple clouds and they provide that service and if you look at Manga DB's business, today outlets is by far the fastest growing segment of the company, the introduction of cloud and how fast cloud has come on the scene has introduced not only more opportunity, but it's also forced and abolition in how we think about open source and how we think about the business of open-source. How you react to that Jeremiah, I'm just curious if that lands for how you think about prefects pricing and business strategy. Yet absolutely does I mean I don't think I just think about that daily I think about hourly minutely to I was talking with someone yesterday whom I respect incredibly as a businessman, but to whom open source is a new. Idea, and he said to me said may be old fashioned, but it seems to me you make a lot more money if you charge for your software than if you give it away and I think the extension of that from which was just saying is you have to actually know what you're selling and the answer is you're not selling the same source code that you put up your selling some extension of that. So in the case of Atlas, what you are selling is the convenience of the managed infrastructure or put differently the opportunity costs or the pain. Of figuring that out on one's own. So essentially as an open source business, you're looking to profit from where you can deploy expertise in form of convenience that someone would otherwise have to incur cost. Anyway, how you do that now you do in a genuine way I think is one of the challenges because if you think about it, there's a bit of perverse incentive there and I think we can all think of open source projects where it certainly seems like they went out of their way to make it hard and of course so that you can be sold. The easy version and I think at the end of the day especially with the explosion of open source and best him point out the explosion of readily available compute resources just in these things up people aren't dumb. They don't fall for this. We talk about dark patterns and websites all times they're dark patterns and open source software as well. Avoiding that is I don't even want to suggest that we like think about this something we need to avoid. It's something that we're committed to making sure that we avoid because you never wanNA customer to feel like they're. Held hostage for any business, not just open source customers will pay for something that alleviates some pain. You just need to make sure genuine way that you're not delivering that pain in the state moment with the other hand, you take money to alleviate it, and so this is one of those weird dynamics of the open source world where I think going back to some of those ideas from earlier about just building trust building a welcoming community making it clear that you have your users interests in mind even as you build a business is really important. So I firmly everything from saying I think that this is sort of a great. Conundrum of building open source companies and then the pivot that a little bit. If you think about other perverse incentives or something analogous to it, starting an open source project is less than free by which I mean anyone can put up any code but does anything and just say this is my open source project. We'll figure out the business model later. So it's not just that the barrier of entry is low for a software company. The barrier of entry is negative for young open source projects because I love shining offer I love to play with it, but you'd have to be out of your mind to do something that just. Put up by somebody, even look at the code. These same things I was talking about earlier having to cut available creates trust creates environment where you can demonstrate goodwill. It can also be abused many times. When we talk about open source companies, we look at the ones that were successful at work where Cherry picking a small number of outliers. From probably a much larger denominated and we would even see in a more traditional. Environment because we can actually wait and see the cost of doing this. So win. This is gaining traction of that's not where we can investments for users we can begin to adopt it. It's just a very different dynamic than even what we'd see in a more traditional software world. I'm curious how you guys think about Jason especially defensibility of these companies. So it seems like in the early days that could be really useful tools have powerful and loyal communities solve very specific developer facing problems but once they start to grow I would think that some of these bigger players literally the source codes available like it would be especially easy to fast follow or coop or just replicate some of these services and stash them on aws or something like this. So how do you think about the defense ability of course businesses as they scale? Jason. We have now gotten the most uncomfortable topic. I think the business of open source, which is, how do you coexist as an open source company in this new world where you basically have three extraordinarily dominant public clouds, the open source theme of what does it mean in terms of Ip and what does that mean in terms of defensibility from an IT perspective? What does it mean from a technology perspective and what does it mean from customer retention perspective? I think we have to take a step back and really think about that sort of like huge tailwinds that are happening in enterprise software and then aligning those tailwinds with core strategy. Ultimately what is the point of an enterprise software company is this to provide a utility to a customer when a customer engages in Enterprise Software Company they are in essence hiring that enterprise software company to do a job insult alternately whether you're an open source company or close source company, you have to fulfill a task for a customer and helped the customer accomplish something. Now, that is if you want to create an open source business now, if you would just want to create an open source project, that's his knee and you wanted to put out in the world, you have completely different considerations. Let's just talk about a bucket of. Just. Thinking about open source as a business itself versus open source as a community project. So opens a business you have to think about the tailwinds that are happening in the enterprise software world that you can then align yourself with to ultimately deliver a service that is extraordinarily much better than the closed source alternatives and I do think that the open source companies that have broken out. And Jerem just said is absolutely correct which is the the number of open source companies that have become very successful businesses as a percentage of total open source projects is very, very small. So it's actually very rare for an open source project to lead to a great open source business. So how do we think about this tale win? Using the cloud sort of a macro example is actually is the right one because we can. Talk about all the issues in the moats and all that stuff. So we just think and then we can just go back to. Mongo. So if you look at how Mongo thought about its club product. Mongo DB. Launched at less which was it's racist service that runs in the cloud in June two thousand sixteen. And Alice in terms of revenue run rate. Has Grown from zero to one hundred and forty seven million dollars of annual run-rate revenue within three years after launching based on their Q. One results that they launched. They announced a few days ago. The outlets product is now at a two, hundred, ten, million, dollar revenue run rate. And so that's with less than four years time. The Atlas Product has gone from zero to well over two hundred, million dollars of. Run Rate Revenue, and the number of customers atlas now has astonishing. So within four years, it's gone from obviously zero customers at launch to now the announced that at the end of Q. One, Atlas had sixteen thousand, eight, hundred customers on the service. So that is actually a huge macro trend that we can all think about that open source can certainly take advantage of which is that. There is huge amounts of interest in thinking about rewriting infrastructure in the cloud world and using new components in this cloud world. And if you can provide a service or an offering to customers that is a dramatic improvement to the alternatives that are available, it will lead to becoming a great business and that service itself does have value does have defensibility and all of that, and now I think the part where I'd love to Jeremiah's perspective from an entrepreneur's perspective is the three public clouds have taken dramatically different positions and postures, but how they think about? Running their own services on top of open projects, look at what Google and Microsoft have done versus what aws have done. They've sort of like different approaches in how they think about open source open source partnerships and how open source is monetize across the three clouds. It's a fascinating dynamic, and one of the interesting things is that we're still in the very early evolution of what that means thing ultimately as long as you align with. This massive macro trend of cloud in continue to keep in mind that just because it's an open software. You can never forget the fact that an enterprise customer will hire you to do a job and it has to deliver that job in a delightful an amazing way. I totally agree I think this is going to be my trump to beat here but the job you're being hired for his ultimately not the lines of code, what the lines of code due or extension of that, and just to go back to the public concerts certainly do spend a lot of time with this concern me test the idea that they have all adopted very different approaches on some range of antagonistic too friendly towards open source companies. My idea here is the public cloud's ultimately sell two things. They ultimately sell compute and they sell storage and everything else is to facilitate that every tool that they host. Every product launch is a convenience layer to basically entrenched. One of those two things. Those are the flagship products at these clouds have when you think about an open core company, which is a company that has an open source product and potentially builds closed source or proprietary product on top of it. If the version of the proprietary product that a company offers is nothing more than managing their open source software and their chief competition is actually the public cloud. Because the thing that they are selling over their software is. Views it's just the management of it, and this is where we go back into that sort of perverse incentive unless it turns out, it's really hard to get it onto a CPU in which case they're also selling the convenience factor but I think as I said earlier I think people look through that. So it becomes even more important due to the explosion in just the popularity of public clouds it becomes even more important to differentiate software not just by managing it but by offering some degree of functionality that is reflective of the expertise that the. Software. Manufacturer has by virtue of servicing many use cases are working with many customers or just knowing how the Code Works and Best Practices. They're all these other ways to layer these other jobs to be hired for on top of just the fact that at the end of the day, you have this raw CPU delivery at prefect we went. So the other way on that, we designed this whole system where we don't run code for our customers. We asked them to provide the CPU's wherever they like to advantage for US gives us privacy and security benefits. And speaking of defensibility we hadn't this business model I. strongly believe that if you want to build a defensible business here, you need to find a way to work with these clouds. We says a startup. Not Put yourself in A. Where fundamentally your business model is a directly competitive with their desire to sell CPU's and more specifically provide software that runs on this ups so that alignment can be hard and I think we love Google. Google cloud, we're closely with folks and it's just been a very pleasant experience how they've decided to approach this speak to that. Chafe and one interesting way of kind of framing. This whole thing would be if you meet, let's say a young entrepreneur and they want to build software and maybe they're sort of agnostic as to whether they take a open or closed source approach. How'd you talk a would be entrepreneur through the trade offs of that decision? Are there certain types of software that you think lend themselves more to the open approach versus the closed approach? Yeah absolutely. I think it all comes down to ultimately what? Scribe, which is what? Do, you ultimately envision a customer doing with this piece of software and is there value for a customer? Experience the software in components or modules. If you think about the standard application, they're very few call it SAS applications where you can say, Oh, if I had just this part, it's pretty valuable and I'd like to build sort of custom tooling around it, and that is actually valuable application whereas most applications deliver value when you get sort of the end to end experience, I think that's part of the reason why there have been at least to date a number of commercial open source applications that have turned into big business certainly that can change in the future and where open source businesses. have been successful is infrastructure in the sort of idea there is, is that the open source infrastructure that you put out there is actually differentiated than existing solutions people can pick up that open source project, get a ton of value out of it build custom applications in house applications, whatever on the open source project itself, and then contribute back learnings whether it's through talks, user conferences content back into the community or code back into the community. Often it's more the first two than the vast majority of people that are in the open source community will not contribute Tenneco back. Into the opens for project, but they will contribute a lot of knowledge and Jeremiah describe. The open source community will sort of guide the company in terms of what the community actually needs with the community desires, and then you can also glean a subset of customers have very specific needs that is perhaps expensive to build, but also delivers a lot of value to the customer, and that's sort of the commercial pieces that you can build around and opens for project. But primarily, that's the way that I personally think about it, which is that if you think about a project. Is there value from the core itself that can be delivered dramatically than what's available if so then it makes sense to have an open source project with sort of commercial bindings that's either through cloud or enterprise or through services or whatever that you can build over time. But without that distinction, it's really hard to make the case of putting yourself through building and open source business because building open source business is actually very very difficult. All the data over the last twenty five years indicates that the vast majority of open source projects don't end up being good businesses they end up being great projects. If you think about it in that Lens, you have to really make that case that. This open source project deliver significant value, and from that significant value, you can then derive additional value with fried terry features a proprietary features or modules that you can then offer that creates even more value than monetize and ends up becoming a good business I was just going to jump in and actually be more emphatic unshaven billing and open opuses really really hard billion open source project is really really aren't forget the business I. Think it's As much as we've talked today about open source as driving certain values and whatever the truth is, it's open source that means it is open source that means if somebody doesn't like it. There's a record of that means if people don't contribute to it, there's a record of that. The absence of engagement is visible as everything else that we've been talking about, and that can be very frightening that can be very intimidating. There's not really a place to hide I can't pretend that perfect has any different adoption than it actually has because it's open source you can see engagement of it starting at the day we launched we launched a slack channel twenty people a year ago. It's going across a thousand next week. That's amazing. We love to see that but. If, it hadn't done that that would be very visible as well. I think that that level of transparency can be deeply uncomfortable to people even if they think they want the benefits of it because you have to deal with this potential downside as well I believe that there are steps you can take to do a better job here by the way I. Think it's no coincidence that many open source communities have a reputation for being toxic to be blunt I. think that's because many open source maintainers end up running popular products not because they set out to run A. Fractious because he just happened to be useful but managing and working with an open source community is hard. I remember when our first employees in our CTO Chris, white joined the company yeah. We talked all about like he wanted to build but we agreed on one rule immediately and number. One rule is we're going to be nice and that's it. Today we can trace a line back to that we've customers who are our customers specifically. Because they know that if they go and ask the question slack, they get a full answer in about ten minutes. Can that scale like forever at prefect I don't know we do our best to put processes in place to deliver that kind of experience I don't know I hope. So at the nascent point of an open source community, you have to commit to building this community as much as you commit to building software because the moment. It lags won't you don't see that and tigers out, and this is not something that you want exposed if you don't have to and you have to be willing to embrace that transparency or it will fail. I'm curious. Then point taken this is hard to do is sort of begs the question both from an investing in a building standpoint. So same question for each of you, which is why bother why not start prefect as just a traditional software business that solves the same problem why not investigate than only in companies that do it the standard way and don't have to face all of the scrutiny given the failure rate in the uncomfortable nature of that Chafe and I'll start with you. One of the great things that I'm sure Jeremiah would agree with is that if you ever developed applications on your own and especially in the early two thousands or Mid-2000s, if you were trying to develop applications on your own as an independent developer, one of the truly frustrating things at the time was how little was available in the open source community that enabled you to get going quickly and it was pretty clear that the. Large. Software companies especially on the consumer side that had built a whole bunch of proprietary tooling and a proprietary infrastructure had real distinct advantages from the independent developer in terms of just how fast they could build things up and how quickly they could build things up and it was pretty obvious that developers inside companies like Google or facebook or any of the large consumer Internet companies had a distinct advantage in building a net new. Product because they just had these gigantic software internal software projects that were unbelievably enabling of the development internally what really I think changed all of that is you saw an incredible explosion of opens projects in the late two thousands and early two, thousand, ten's and that really changed the landscape of how productive developers could become and how fast you could build applications and how fast you could build technologies and fast forward to today to. Twenty twenty with the last fifteen years of this amazing exclusion of really great opens for projects. Building. An application today of extraordinarily high quality. You can do it actually much faster than some of the large consumer Internet companies primarily because of the number of open source tools that are available and the advent of public clouds which makes running these applications at scale pretty easy. So that movement has been I think frankly as someone with. Limited Development Capabilities. It's this incredible to watch and the amount of creativity that you unleash behind that and the amount of sort of economic and innovation opportunity you unleash behind that is really remarkable and I think it says up for what we're really watching in the enterprise, which is basically a trillion dollars a year that spent on the entire enterprise market. Now sort of unlocking itself as more people. Starting to see that you can reinvent whole parts of the infrastructure stack in the application stack and part of that movement is going to be driven by open source. There is a large economic opportunity if you can get it right and I talked about the Mongo DB numbers earlier, and then if you look at the financial figures of all the really successful open source projects, you quickly realized that. When it works and when you do get it right it works in an extraordinary way in delivers value to not only in the open source users but also this users of the cloud service, the oppressed product or whatever, and that pushes the Innovation Economy Ford and I think the economic opportunity when done right is pretty terrific to. Yet I echo that but I guess in an attempt to be still relevant on this podcast it's hard to volume them. I'll talk about the more pragmatic decision like at the moment of starting the business should open source of closer. It's very permanent decision point and without the luxury of knowing how things will play out I think a big piece of it is sort of knowing your user knowing your customer knowing what they expect and what they'll be excited to us. So I come from the Python data world in struggling thought my head to think of. Python package that's delivered in a closed source form. There's an expectation that people have users have that will lead to their adoption in an open source way because they're familiar with it feels familiar to them, and then there's also a growing just ethos within again within that same community this is a good thing but they want this that they'll choose this I don't think it's enough though I don't think it's enough just to be open source close source competitors that are terrible open source competitors that are also terrible. It's not enough just to be open source but. going. Back to what you said a moment ago, it is a bit of a gamble if you can get it right there's an opportunity to have the massively compounding effect as it ripples out and we've seen this I said I was going to say tickets to the moment of deciding how to start the company, but we actually two months ago in the midst of course, we decided to open source even. More of our stack, make it more available to more people and our doctrine numbers took off again because fundamentally nothing was different we were actually delivering the same product that we made available for free through men service but the fact that it was open source sparked something sparked some interest. Even if these are people aren't gonNA use the code or on could contribute to it so you can tap into an ethos. In that way and you can find goodwill in that way I think at the end of the day, it's sort of like could you deliver an effective product in closer former foreman and different businesses? The answer will be yes or no for US I'm not sure how we would actually deliver a product that does what we do, which is says interfaces the customer code in the Python data world without being open source. So it's it was in all honesty was a fairly easy decision. I'm curious what you both have learned about digital community building. You both mentioned it as a key component of an open source project and therefore open source company and I think in the cove era. It's especially interesting question because community is such a popular word concept we all want it. We all crave for we're social creatures that's in large part been stripped away from us and for open source in particular community is really important at prefecture at the companies that you've been involved with, and I'm curious what you would say are the most effective ways of building a strong community in addition to just being Nice Jeremiah, which I think is sound simple but probably a powerful thing. I mean you just have to be nice I. Know it sounds ridiculous but I've probably poked around more open source communities than you guys have and not being nice is a real problem. It's a real problem in. Many software communities and I know it sounds fluffy and I'm not saying this in a fluffy way I mean in a very real way if someone takes the time to join in our case slack and ask a question which first of all takes a certain amount of bravery or humility if they're gonNA, take the time to do that and they're going to be met with silence or a brusque response or anything other than welcoming them and thanking them for taking the time to use that you wouldn't the world. I mean, it's just crazy to me but. Takes enormous effort and dedication and willingness to do that to provide the other end of connection. But a majority of our customers started that way that is in the beginning. That's how we convinced people. That's how we earn their trust that we were worth working with and so being nice I really do think it is so hard to do. It is so alien. So many open source communities where the maintainers have an attitude that they are volunteers. They are unthanked and by the way that's true. Most maintainers are unthanked. They get an unending series of people showing up to ask why they didn't do this or how come. This doesn't work this way or how dumb is it that you didn't think to do this that is true. There is an unending parade to that, but if you want to run. A community that is truly open. You have to run a community truly open have to make it welcoming for the people who choose to participate in the nets. self-reinforcing behavior I. Think it's a challenge to be completely frank about it in the case of elastic were I'm on the board, our products we disclose us in the ass one which we filed. A believe in two, thousand, eighteen coming up on two years ago we disclose that our products have been downloaded on the order of three hundred and fifty million times. The community that we had built up over the period we had something like one, hundred, thousand meet up numbers across nearly two hundred, meet up groups across forty six countries take a step back. And realized the enormous size of the developer community that actively engages with your projects, and that's not only sort of concentrated anyone geographic area but it's a global community that's engaging with you. That then creates quite a bit of responsibility on your shoulders to create avenues of engagement as Jeremiah said that are additive and positive, and so it takes a lot. Of Investment in developer communities and being very sort of purposeful about thinking about creating spaces and avenues for people to share how they're interacting with the open source project I. Think you see that also not just in the open source community right? You see that in the rise of like the developer advocacy role and movement really about access to even proprietary software. And Way of welcoming people in and using them in. Yes. It may have a business objective behind it in some cases but this idea that reaching out to these developers who had the ultimate users of the software has certainly taken on a wider scale. Since I thought I'd give something more concrete in this case, which is I'll tell you exactly how we. Measure all the things that we're talking about right now are these how do all of this idea of compounding and community and all the stuff for me? It's very simple. The metric is how many times to someone who doesn't work for our company who isn't paid to do this respond to someone who asks a question and if that number keeps going up. Than we are achieving this whatever you WanNa, call this flywheel this compounding effect whatever it is, and if that number stagnates and we are failing going down is very, very bad. Because at least you hope someone maintains a level of engagement, but that is a way to actually capture track. Remember like I said earlier, this open sources open you can see everything there's nothing is hitting. That is a very tangible way to actually measure the degree to which this is happening, and by the way you can feel it. You can feel these communities if you're not getting a response communities, not actually they are the communities just of mob asking questions very different feeling. In addition to this community aspect, which I'm just endlessly interested in think is a powerful concept to be deployed in lots of different ways not just in software. Are there other elements of this business model or this building approach that you think more traditional companies could successfully apply whether that'd be mindsets or best practices into their own businesses It's a tough question. Well. Let's pointed him for a second while we turn this around segment ask me questions you have a model involves the word share learn build share repeats that right. Yeah so this is an idea I don't think anyone would call. Oh Salmon Open source business, but there certainly is an open source element to what you're doing. You just have this idea of like knowledge and by making that available by making that raw material available, you are creating an extra analogy from the work that you do. You're inviting other people to participate and observe and draw conclusions and. Maybe agree with you and maybe disagree with you. I, think your challenge in some sense if you want to apply not just the open source ideal to that. But the business ideal to that is to figure out as we said earlier, what job do you provide? What do you do by virtue of the fact that you are the curator of all that information and how do you deliver that? You really can't see this idea that by looking for compounding effects other fly wheels within a business. You don't have giveaway little source code to have an open source everything they were talking about work for you. You just have to find ways to involve people and bring them into an ecosystem constructive way. Of Thinking about this recently, which is a simple litmus test where something is. I'll call it low cost or free to produce and free usually to share. So marginal cost of distribution. That by definition, it should be free and I just wonder the implications of this. So obviously, like a Netflix show which is free to distribute should still call them because it's really frigging expensive to make. But that if something falls in that category at least mentoring your question Jeremiah I'm trying to come up with a standard with an operating principle for when we decide whether or not to share something because my experience teaches me that. The best things to share are the ones that you have to think hard about whether or not you want to because they feel like they give you an advantage of their proprietary or their ip or something like that. But almost every time that we've always made the mistake if we try to keep it close to the vest I share, it falls in that category of really low cost to find or produce free or or near free to. Distribute. So I'm curious if that's a litmus test that may be more traditional businesses might try to inject more value into the overall ecosystem of their industry versus keep something proprietary I. Think it comes back to the same idea of what is the value provide, and again trying to extend this we don't need to stay in the open source world. We could talk about completely close source business as well but really not what value is and knowing what? You are providing your customers is critical and helps you make decision obviously in an open source context has massive permanent ramifications as well. 'cause you're actually GONNA make available. We sort of said, this isn't strictly true but in some sense are GonNa Forego. Your opportunity to profit from what you open source gonNA profit in a different way for skipping it starts into selling access to it. So in our case, this is the knowledge of what is for. workflow management, we're going to open that and what is for insurance we're GONNA keep that as a product that we selling that we provide and drawing that line I won't lie to you. There's moments as we choose what we're gonNA open source who what we're working on fraught moments. There is a very permanent decisions that we have to make an and you worry a little bit is this thing people are paying for? Are we about to release the? Completely misjudged our customers are we about to give away that thing they're paying for? The goodness you don't have to actually wonder the thing you can ask people we did I. Know exactly what someone thinks they pay for when they purchase are software and I know exactly what they learn that they're paying for when they offer and by the way they're not the same with, which is frankly a challenge. We have our business how we align those things that we better educate value. We can deliver at the time of the purchase, but that understanding and knowing what you produce that is value and then second order. How does your customer? That value received that utility I think it's a really critical question for any business I think it's a little bit harder to hide from it in the open source context. And I think that every business that is engaging in public learning are open learning ends up. Deriving, tons of benefit if you think about it talked about sort of the explosion and sort of open source communities especially on the software side in the late two thousands and early two thousand, Ten's one of the companies that engaged with open source very early on was Google and they simply were putting out these white papers that we're talking about all these proprietary technologies that they had come up with internally and I think if you think about what value that ended up creating to those companies. And we've talked about before is that it turns out that engineers and this is fairly obvious thing to say is that engineers want to work on really interesting problems and really challenging problems and I think that not only applies to engineers but most of us that are engaged in our jobs that we want to work on interesting problems in sort of engaging in this open learning system and open feedback system where you're putting your workout in, you're putting out sort of the ideas that you're exploring. Really then encourages really great and bright people to engage with you as a company and engage with your ideas and I think. The sort of open source ethos if you will of sort of putting ideas out there putting projects out there and sort of engaging the community at that sort of level of here's something that we've tried the pretty interesting here. Some lessons we learned then collecting feedback ends up creating immense value, not only in terms improving the businesses, products and offerings, but it also has. The second revenue effect of being an enabler of attracting really great talent to the company because you are now essentially showcasing really interesting problems that you're contemplating publicly, and I think that's more and more companies are starting to realize that and you see companies that maybe fifteen years ago you would have never imagined engaging with an open source community being huge proponents of it. There's perhaps no better example of this and Microsoft which famously call Lenox a cancer many years ago. But is now one of the biggest contributors in the open source world. I think that shift that we're all experiencing, which is the sort of learning in public learning very openly in open source is a great way to do that ends up being not only a way to improve your products and services, but also ends up becoming a great source of talent for the company itself. One of the things that I've experienced for sure that everything you guys have said rings true for me is this you could always think about building a magnet versus building a megaphone sort of create this inbound gravity through community building and through open learning it's hard strategy to pursue in the early days because the returns don't show up quickly takes a couple of years for that convex payoff curve to really be visible and be felt. But ultimately is way more powerful than even the most powerful megaphone because stuff's rolling downhill in your direction I was thinking that metaphor within that taught me the go slow to go. Fast. I. Think that describes this extremely clearly. I see that in our business, we say our job is to deliver value to to extract it, and it's just trying to bring that community those and obviously we are a business and we do need to deliver and receive value intern I should've mentioned this earlier way didn't come to mind. We actually named ourselves strategy open source sales because we try to bring some of the learnings from our open source engineering effort into our sales effort. So that manifest in some ways in chafing Douglas's you'll be horrified like. Doesn't doesn't really call people back. They say very genuinely they say, no, I'm. Not going to hear from me again under some circumstances, this is horrifying to or has sales as well. The first thing we came, but we can point again, we can draw a line to customers that resulted from that from that. Obviously, we need to be smart about that. We need to be part of our strategy, but looking for ways to bring this idea seems so silly to say comes on to be nice but we'll give the levers that elsewhere has mattered. Can you take too far? Can you be really stupid about yet you absolutely can we try not to be but finding that balance isn't anything finding that balance critical? That's. What major aspects of open source the philosophy or the business model have we not touched on that? You think it's important for entrepreneurs and investors to consider when looking at these businesses. The sort of opportunity said that's available to businesses at the moment is much greater than it's ever been and I think new industries and new workflows are unlocking and I think it's the macro transformation that were a part of which is that we're seeing a previously sort of locked up spend and core functions coming online. Now, where enterprises large and small are now of the mindset of well, if it's been done that way for twenty years, why has it been done that way and we do it better faster cheaper and there's just much more openness to think about new tooling new. Solutions etc. The number of opportunities that are available to open source companies just sort of rewrite fundamental infrastructure components and address them in really unique ways I think frankly has never been greater, and so what ends up happening is that you're seeing just really unique solutions and really unique projects come out of not only sort of your traditional policy of technical talent but they're really coming out all over the world from an investment perspective I. Think Investment Opportunity is massive and I'm certainly very optimistic that some of these projects will end up becoming really incredibly big businesses in the future. One of the more frustrating questions that we get is, how do you compare to X. The reason that's a frustrating questions not because I can't be answered because it rests on such a subjective need at the user has and we don't know what that is now. We've got in the habit of saying us us US X. and you decide which everyone feels right to. You just use that which everyone solve your problem just use that we're not gonNA waste time trying to pretend that we know we have this diagram features and you've been diagnosed features and we overlap here and we differ here, and if the thing that we differ in his critical to you, then you don't have a choice to make and if the thing that we overlap in his critical to you then. I can't defend the choice that you have to make because I don't know what's valuable to you, and so that's one of the things that I think is challenging for those of us with younger companies in the space is it can be very tempting to say, Oh, these six companies do x y or Z. But if we're all honest especially because we're open source and that creates a very rapid pace at Aleutian I, don't think any of us know precisely what ex wires the are as companies as entrepreneurs, and it'd be quite a stretch to think that are used to. So people are always going to look for the best. Tool that meets their needs and the challenge is to again. I guess this really is my drum beat challenges to really know what problem you solve and not be seduced by the expanding circle of well customer Xer user y once this let's build it it would be easy for us to both it on. I, think instead you want think in the opposite competition if we all pretend as a business gophers I'd competition is a good thing because it makes companies focused on what differentiates makes companies stronger unless they can't they die. This idea is something that we think about a lot as a young project that's emerging that is evolving. That looks like other projects. How do we maintain our competitive advantage from defensibility perspective from a utility perspective from a value perspective is challenging but part of the game. I closing question for each of you is to ask what has you most excited about the future in this space maybe Jeremiah, we'll start with you. I have benefited so much from open source software in my career I mean my career spans risk management and machine learning. So I was building models in two thousand eleven when you say machinery and somebody can ask you what, what's that? That was based on open source software that progression has exploded as a research scientist. Open source availability open-source Research Open source tooling. The explosion of a applications is grounded in this idea that we can. Learn cool things. Build cool things and share them. And build on top of them. In this amazing way I love seeing the research I love keeping up with the latest research that's coming out. It's built on open source tools that has code available Ben lets me if I choose replicate these otherwise unreachable algorithm advances on my laptop, just because someone was kind enough to share and make that available and so I have loved seeing that I would forward to continuing and I think that that is just in its infancy. I would say that the main thing that I'm continuing to be really really excited about is very similar to what Jeremiah talked about, which is that one we've seen over the last couple of years infrastructure components start to change. We're seeing cloud happen in a real way, and then what's also happened behind that is that data has exploded within sort of enterprises. So data across applications, data across servers, data across infrastructure, etc tooling in new components of infrastructure to handle all that data whether it's at the storage layer at the database. Layer, at the analytics layer or at the processing layer, and then how all of that enables machine learning and how that enables faster and more efficient processes are all opportunities available to open source software and to people that are looking to build open source projects right now, and I think that the opportunity said is also really valuable because enterprises are very ready to engage new solutions to help them solve these problems. If you look at enterprise workflows, still today in how many of them are done manually and how many of them take. A really unreasonable number of hours to accomplish. You can just quickly zoom out and realize that the opportunity said is quite large all these components offer. Huge opportunity for new companies and in addition to that, and it's something that I've talked about on twitter is we're starting to see the new trend of what I like to call quote Unquote Super Infrastructure which is essentially API enable infrastructure that enables you to outsource a core function to an API call and in the world of E-commerce, we've seen that with sort of new components like shop Affi- and Patrick Toby on and that was absolutely fantastic. You see it with Chop. With Stripe and you're starting to see with brand new components, we have companies like. Content. Full and commerce layer, which are both open source companies that then enable API super infrastructure for companies to then go leverage so much like we saw in terms of super applications where these applications did. Tons of stuff for the user. We're now starting to see these new generation of what I like to call superstructure companies, which are really being developed to do lot more than a single infrastructure thing they're starting to do lots of things with one API call. It's a really fascinating trend that. Companies can really really take advantage of that. I'm pretty excited about. Anything else to add your my there on the API. So you can tell like I'm honing around this same API first business concept as one of the most fascinating business models out there. Any closing thoughts on that you're my. What this represents is certainly the epitome of everything we've talked about today where open source says about delivering more than winds of code about delivering a convenience or solving a problem or something like that van the API call represents a way to bundle up what might otherwise be disparate open source winds code and turning them into business logic. And potentially that's the negative space that if you have an open source business where Patrick you and I've talked a lot about the metaphor. Work focuses bunch of lego bricks. So that's great if all the Lego bricks are open source but someone needs to I come up with them and follow the instructions to create something with them, and that can be something that someone can choose to do themselves fully particularly open source, or that's something that someone might want a company to provide an API. In simple sense is a way for us to take that business logic. Take those instructions bundle up the building blocks behind them and expose something that is semantically aligned with businesses objective as opposed to asking the business to. Learn at themselves but that to me is what the API represents it's not just the fact that you can hit an point and get something done. But in an open source context, it's more than matched. To layer semantic knowledge and expertise in domain expertise over the otherwise individual components. As somebody that is again, not technical but using a lot of these tools and building software I can attest to end the conversation in a very tangible place. It is amazing how fast and efficiently you can build stuff now with a relatively small team to accomplish your business goals without having to recreate the wheel each time, and I think I think fundamentally that is why I wanted to have an hour and a half long conversation with you guys on something like open source, which can appear to be a sort of wonky topic but I think is in many ways unlocking creativity in the business world in ways that nothing else before has it's a remarkable thing. Well, thanks for having US Patrick. This is so much fun. This has been great patrick the three of us talked quite often, and so I'm glad that we're able to do this podcast. It's awesome. Really take a learning in public to a a whole new level. You know you're my go-to references on all things in this area. So I, appreciate your time today I learn more as always. Thank you so much. Thank you. Thank you. If you enjoyed this episode, you can sign up for a new email newsletter sent out. Called inside the episode each week I convinced that weeks episode to my favorite big ideas, quotations and more. I've been recommending books to members of this email is for years and we'll keep doing. So in this weekly email, you can sign up at investor field guide, dot. COM FORWARD SLASH Book Club.

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