Jan 2, 2019 · 29m · a16z
a16z Podcast | Monetizing Open Source (Or, All Enterprise Software)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this a16z podcast episode, Sonal Chokshi, Martin Casado, and Pivotal's James Waters examine how open source software companies can build multi-hundred-million-dollar commercial businesses. They analyze why monetization requires targeting enterprise buyers and architectural megatrends rather than relying solely on low-margin support contracts or commoditization strategies.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. The host holds 12.8% of the talking time here. How this is scored →
The host as informed peer 5.2 Guest teaching 4.3 Guest disagreement 1.2 The host pushing back 2.7
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 5:16 Rejecting the Commoditization Business Model
James forcefully rejects the industry consensus that open source is primarily a commoditization strategy, calling it a false horizon and pointing to global software history.
Hardest push from the host ▶ 19:28 Sonal Refuses the Pure Software ThesisSonal explicitly interrupts to challenge both James and Martin, refusing the premise that open source doesn't have inherent developmental and community advantages.
Biggest teaching moment ▶ 23:15 The Open Solaris Revenue CollapseJames educates the hosts on the cautionary history of Sun Microsystems, explaining how executive mandates to make Open Solaris free instantly wiped out hundreds of millions in existing revenue.
The host holds their own ▶ 16:04 Martin's ACV Valley of Death TheoryMartin articulates a detailed, highly authoritative breakdown of enterprise sales economics, explaining why software contracts between 30k and 150k fail to sustain direct sales forces.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Enterprise Buyers vs. Developer Community Focus | 3 | 5 | 1 | 2 | James explains his core thesis that open source companies fail when they cater to developer users rather than enterprise buyers. Sonal asks clarifying questions and gently questions how companies can balance both community and revenue. | |
| Catching Megatrends vs. The Commoditization Trap | 5 | 4 | 2 | 3 | James reframes open source history, claiming big companies catch megatrends rather than relying on commoditization. Martin contributes well-informed context regarding ceiling caps on commoditizing existing sales dollars. | |
| Delivery Models, Service Experience, and UI Packaging | 7 | 3 | 1 | 2 | Martin demonstrates deep domain expertise with an extended monologue separating consumption models (as-a-service) from deployment locations (on-prem vs off-prem). James outlines keeping UIs closed-source to aid procurement packaging. | |
| Procurement Strategy and Avoiding Open Source 'Dog Piles' | 6 | 4 | 1 | 2 | James explains how procurement officers seek comparables and why open source companies must avoid dog piles. Martin strongly validates this, restating the necessity of maintaining sole-supplier status. | |
| Managing Competition and Justifying Large Enterprise Deals | 4 | 5 | 1 | 3 | Martin poses a direct question asking why an enterprise would pay $10M for a contract when open source code is free online. James explains that large checks buy extended team relationships and architectural advisory rather than raw software. | |
| Enterprise Sales Metrics and Strategic Account Control | 8 | 4 | 2 | 3 | Martin presents his detailed sales economics theory on the valley of death between $30k and $150k ACV. James reframes the goal from sales margins to securing strategic account control with $400k+ deals. | |
| Cloud Disruption and the Driving Forces Behind Open Source Growth | 5 | 4 | 2 | 7 | Sonal directly pushes back on James and Martin, arguing that rapid iteration and community experimentation are inherent advantages of open source. James holds his ground, arguing macro shifts drive value over open source mechanics. | |
| Analyzing Red Hat's Limits and Lessons from Past Failures | 4 | 6 | 1 | 2 | James educates the hosts on the limitations of Red Hat and details the historic collapse of Open Solaris revenue at Sun Microsystems when support-only models were mandated overnight. | |
| Top-Down Product Vision and Vendor Lock-in Protection | 5 | 5 | 1 | 2 | Martin and Sonal reframe top-down product direction, while James explains how enterprise buyers utilize open source as insurance against predatory vendor pricing structures like Oracle ELAs. | |
| Startup Advice and Conclusion | 5 | 3 | 0 | 1 | The exchange concludes collaboratively as James advises founders to ride emerging architectural trends, and Martin emphasizes first-principles thinking over copying legacy VM patterns. |
Statements from this episode (22)
Casado: Massive investment in open source yields few successful companies
“There's been a ton of money that's been invested in open source. But almost no examples of successful companies built around it.”
Casado: Pivotal Cloud Foundry reached $270M in software license sales
“Pivotal Count Foundry went from zero to two hundred and seventy million dollars in license. Not support.”
VMware bought open-source SpringSource for over $400M
“SpringSource is like the most popular Java programming framework in the world, bought by VMware for pretty famous money, over four hundred million dollars as an open source project.”
Waters: Early MongoDB sold $4,000 support contracts to thousands of users
“And I remember meeting MongoDB when they were early in their rise and they were selling, you know, a 4000 dollar support contract to thousands of users.”
Waters: Multibillion-dollar software companies succeed by catching megatrends, not commoditizing incumbents
“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 mega trends.”
Waters: Open source is now a required buying criterion for enterprise IT initiatives
“Open source is now both a necessary part of almost any major software company strategy because it's a buying criteria that, you know, enterprises have for major new initiatives.”
Casado: Delivering software as a service diminishes enterprise concerns about open source
“Once you're talking about something as a service, questions around open source kind of diminish. Because they're not actually dealing with the code itself, they're dealing with the service.”
Waters: Pivotal kept its user interfaces closed source while open-sourcing infrastructure
“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 and that last mile of experience built off the APIs. Closed source.”
Waters: Proprietary UI components help open-source companies differentiate in enterprise procurement
“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 near comparable. And so when you start t…”
Casado: Open source creators must retain sole supplier status for pricing power
“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.”
Waters: Upselling support for active open source deployments is unsustainable
“If you're coming in and upselling support only, and they're already installed, And all you're upselling is the support model. That's going to be a lot more difficult because they already have it running. They already have it working at their scale. And all the…”
Waters: Open source 'dog piles' destroy potential for $500M revenue
“If you're in an open source dog pile, as I mentioned in order 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.”
Casado: Enterprise software sales faces a $30k to $150k 'valley of death'
“In direct enterprise software sales, it seems to be this valley of death between like, say, 30 K and a 150. If you're 20 K or below, you know, it, you can call somebody up and they can pay for it. And let's say if you're 200 K and above, then you have a hopes …”
Waters: Enterprise software startups should target $400k to $1.5M annual contract values
“I think a hundred is too low. Like I would try to get to. 400 to 1.5. And the critical thing that happens at that 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…”
Waters: Open source companies fail by selling support instead of targeting C-level buyers
“So many open source companies have died because they transact around the edges with like director level or technician level with, for support. And they never got to the CTO, the CIO and true strategic account control like the big players had.”
Casado: Open source success is driven by developer shifts, not open source itself
“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.”
Waters: High enterprise software pricing reflects outcomes and trust, not support
“It's expensive because you know, the trust model of enterprise buyers is you're really going to take care of them, advise them, ensure outcomes. You're not just providing support.”
Waters: Red Hat benefited from a rare Unix-to-Linux platform shift
“Red Hat kinda got lucky and find a commoditizing change, which was Unix to Linux. That's an rare event to have a major, you know, chip system re platforming see change.”
Waters: Sun lost hundreds of millions overnight making OpenSolaris free
“Well, what happened was that overnight, like hundreds of millions of dollars of revenue evaporated.”
Waters: Open source communities must align with enterprise buyer priorities
“Community development's really important, but if you just develop a little community, and it doesn't change a CIO, a CTO, anyone that's writing as serious as checks priorities, like by definition, you didn't build a software company that had an opportunity to …”
Waters: Enterprise buyers use open source to guard against Oracle lock-in
“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 the…”
Waters: Avoid founding closed-source software startups without a unique niche
“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.”