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What's 🔥 in Enterprise IT/VC #204
☁️ is the future of open source, lessons learned from Timescale
There are two important posts from the week that caused me to 🤔 and dive deeper. The first is Timescale’s (OSS time series database) post on how they are going all in on the ☁️. The second is from Kevin Kwok on Mike Speiser’s (Sutter Hill Ventures) incubation playbook (Snowflake), an unusual and highly effective model with compounding effects (more in the Scaling Startups section).
The Timescale post goes back 2 years when a number of open source companies updated their licenses to protect from cloud providers forking and modifying code to host and sell their own versions (AWS). It was certainly a scary time for many of these companies like Elastic who many thought would get crushed. More importantly this was a wake up call for the whole open source market to understand the true power of the ☁️ as a consumption model. 2 years later, these updated cloud licenses seem to be working as Elastic still has a market cap over $9 billion and companies like Timescale just announced it is going all in on the ☁️ and getting rid of their open core model. 😲No more open core and all in on SaaS! I know many founders have been thinking about doing this for a long time and Timescale, IMO, will help unleash a new era of cloud-only OSS.
By going “all-in” on cloud, our choice becomes simpler: make all features available for free, so that we can invest in our community. Users can then either self-manage for free (including use our open-source k8s helm charts), or use our managed cloud.
But this easy choice – and our ability to “support our community” while preserving Timescale’s long-term viability – exists precisely because we have the Timescale License, which restricts cloud vendors’ ability to offer TSL software unless they first establish a business relationship with us.
While revenue is important, this message starts with supporting their community. Successful OSS companies cannot exist without a vibrant community, and no matter how big or successful one becomes, investing in and supporting the community must come first.
One other huge and important thought from this post is that their second core revenue model is selling software on-prem!
But this year, we have increasingly focused on our managed cloud service as our primary commercialization strategy, and selling an enterprise edition of TimescaleDB for on-premise deployments (either on customers' own physical hardware or on their own cloud VMs) as our secondary commercialization strategy.
Isn’t on-prem dead? Well if you go back to last week’s newsletter, you’ll see Grant Miller’s take on why kubernetes is enabling a whole new world of modern on-prem (cloud native) and how a number of the Cloud 100 have an on-prem offering.
As always, 🙏🏼 for reading and please share with your colleagues!
👇🏼This is so good on so many levels; a deep dive into how Mike Speiser got Snowflake started and his model for incubating companies. Mike’s model is not for every founder but for those who may not want to be CEO, he is clearly a great choice.New essay up. The Mike Speiser Incubation Playbook - Advantages of being interim CEO - Betting all-in on secular transitions - Optimizing only for incubations - Local maximas of venture and function not form - Breaking the wall of VC-company engagement
A key enabler of all of this is the nature of enterprise startups.
Unlike consumer, traditional enterprise markets lend themselves more naturally to deterministic and repeatable success. There’s a small handful of VCs who have clearly shown they can succeed repeatedly and whose approaches and playbooks are legible enough to imply it’s not a fluke. Speiser is one of them.
So what does this mean for venture in general? Kevin rightly points out that it’s all about the “value add above replacement to portfolio companies” and how can a “firm help increase the likelihood and magnitude of success.” Most importantly, Kevin recognizes that there are many ways to “incubate” and add value.
Incubations have far more degrees of freedom than investing, since investors are more closely involved in many more aspects of the company—especially at the proto-formation stage before many core decisions have calcified. If you look across the current landscape, there are very different strategies across the taxonomy of firms that incubate. Some of the investors that incubate include Asheem Chandra (Greylock), Aneel Bhusri (Greylock), Jim Goetz (Sequoia), Kevin Ryan, SciFi VC (Max Levchin’s fund), Thrive Capital, BoldStart VC, 8VC, Unusual Ventures, and many others. Just looking at this list there are many axes they all differentiate on in approach, what they think should be centralized by the incubating firm, and where they think value is generated. And the types of companies they incubate and the dynamic range of their outcomes is equally wide.
I’m grateful that Kevin included Boldstart in his list as we have our own unique way of “incubating” and partnering with founders at inception. By inception, this in many cases, means waiting for founders to get their company incorporated before we can even send a term sheet to avoid triggering issues with 83b elections. And it always starts with technical founders and helping accelerate their path to product market fit. As you can imagine, the last is a loaded word and so much goes into that from helping recruit key hires to making customer intros for product feedback and sales and working closely on gotomarket. If we can help a founder get their faster by 3 or 6 months, to avoid costly mistakes we’ve experienced with other founders, then that’s less cash burned and a faster time to an A round at a higher price which means less dilution in the long run.
This model has allowed us to partner at company formation with startups like Snyk, BigID, Kustomer, Superhuman, Security Scorecard, and many new unannounced companies. And every once in awhile we’ll just partner with outstanding founders like Rob Bailey at Backbone.ai with more of a classic incubation approach. Irrespective of how we do it, the key is that this has to be embedded in a firm’s DNA.. And while Speiser has absolutely crushed it with his own unique style, it’s imperative for everyone to find their own path to success.
While not enterprise, building the right culture and constantly being able to reinvent oneself transcends business models. One of the best at doing so is Reed Hastings from Netflix and with the release of his new book, No Rules Rules, Reed talks about what culture is and how he builds one that allows for constant reinvention. This a16z podcast is a great listen as Reed lays out his big ideas on culture.
I think company culture is the behaviors that get you promoted or get you let go. So everyone, when they go into a company has to figure out what's the real culture? What are the values and behaviors that are rewarded and which ones are violations? And sometimes there's a written culture, and sometimes companies follow that written culture. Other times there's a written culture like Enron famously had, you know, respect, integrity, you know, as to four big words. But there was actually what got promoted, and what got them promoted was trading profits. And, you know, then people cut corners to do that, and eventually the company blew up. So, you know, in any company the real culture is again shown by who gets rewarded and who gets pushed out right?
Must read from Shreyas at Stripe! (🎩 Shomik Ghosh) . And IMO, one of the missing links in many a customer interview is this nugget buried in this thread:
After talking to each customer about the problem of support costs, he should have asked them to stack rank that problem vs. all the other problems they were trying to solve for their business & for their organization. THAT is where the real truth could have emerged.
Accel has launched their Open 100 celebrating the fastest growing OSS companies based on “community growth, commercial evolution, and innovative approaches to driving OSS adoption in new markets.” Great to see portfolio cos Snyk & Replicated here. We also have 3-4 more waiting to be added to this list 😃One important point is the balance between community and revenue which Guy from Snyk (a portfolio co) describes in further detail (more here)
“The challenge we all face daily is, when developers are both the buyers and the users, you have this duality of looking at every user in your community and saying ‘on the one hand I want to make you successful, and on the other I want to make you buy.’ There is always some element of trade-off.”
What are the biggest factors driving forward multiple for software companies? Tomasz Tunguz from Redpoint shares what the data from analyzing 60 publicly traded SaaS cos says:
The answer: revenue growth and sales efficiency dominate the model. Cash flow margins, net income margins (profitability), gross margins, and many other metrics are largely irrelevant.
So yes, folks pay for growth and more importantly efficient growth.
The importance of online…
Microsoft going after Twilio with Azure Communication Services
Google Tables is out - like Monday.com, Asana, and Jira plus some AirTable in there - interesting timing considering Asana is listing this week
Jamin Ball from Redpoint breaks down Q2 SaaS earnings in one post! And he nails the point on continued IT spend and move to the cloud citing this Credit Suisse report
👇🏼💯 Many post Series C companies still not doing audits which needs to change. Speaking of SPACs, there are about 140 of them around, all looking for acquisition targets and to also raise more capital to fund these acquisitions - will be an interesting next few months! To date, many companies sold have been more energy related like autonomous vehicles or batteries which require tons of capital, but we will see more enterprise software companies sold to SPACs in the future.