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June 25, 2019
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Cloud Foundry ❤ Kubernetes

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Cloud Foundry, the open source platform-as-a-service project that more than half of the Fortune 500 companies use to help them build, test and deploy their applications, launched well before Kubernetes existed. Because of this, the team ended up building Diego, its own container management service. Unsurprisingly, given the popularity of Kubernetes, which has become somewhat of the de facto standard for container orchestration, a number of companies in the Cloud Foundry ecosystem starting looking into how they could use Kubernetes to replace Diego.

The result of this is Project Eirini, which was first proposed by IBM. As the Cloud Foundry Foundation announced today, Project Eirini now passes the core functional tests the team runs to validate the software releases of its application runtime, the core Cloud Foundry service that deploys and manages applications (if that’s a bit confusing, don’t even think about the fact that there’s also a Cloud Foundry Container Runtime, which already uses Kubernetes, but which is mostly meant to give enterprise a single platform for running their own applications and pre-built containers from third-party vendors).

“That’s a pretty big milestone,” Cloud Foundry Foundation CTO Chip Childers told me. “The project team now gets to shift to a mode where they’re focused on hardening the solution and making it a bit more production-ready. But at this point, early adopters are also starting to deploy that [new] architecture.”

Childers stressed that while the project was incubated by IBM, which has been a long-time backer of overall Cloud Foundry project, Google, Pivotal and others are now also contributing and have dedicated full-time engineers working on the project. In addition, SUSE, SAP and IBM are also active in developing Eirini.

Eirini started out as an incubation project, and while few doubted that this would be a successful project, there was a bit of confusion around how Cloud Foundry would move forward now that it essentially had two container engines for running its core service. At the time, there was even some concern that the project could fork. “I pushed back at the time and said: no, this is the natural exploration process that open source communities need to go through,” Childers said. “What we’re seeing now is that with Pivotal and Google stepping in, that’s a very clear sign that this is going to be the go-forward architecture for the future of the Cloud Foundry Application Runtime.”

A few months ago, by the way, Kubernetes was still missing a few crucial pieces the Cloud Foundry ecosystem needed to make this move. Childers specifically noted that Windows support — something the project’s enterprise users really need — was still problematic and lacked some important features. In recent releases, though, the Kubernetes team fixed most of these issues and improved its Windows support, rendering those issues moot.

What does all of this mean for Diego? Childers noted that the community isn’t at a point where it’ll hold developing that tool. At some point, though, it seems likely that the community will decide that it’s time to start the transition period and make the move to Kubernetes official.

It’s worth noting that IBM today announced its own preview of Eirini in its Cloud Foundry Enterprise Environment and that the latest version of SUSE’s Cloud Foundry-based Application Platform includes a similar preview as well.

In addition, the Cloud Foundry Foundation, which is hosting its semi-annual developer conference in Philadelphia this week, also announced that it has certified its first to systems integrators, Accenture and HCL, as part of its recently launched certification program for companies that work in the Cloud Foundry ecosystem and have at least ten certified developers on their teams.

How open source software took over the world

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It was just 5 years ago that there was an ample dose of skepticism from investors about the viability of open source as a business model. The common thesis was that Redhat was a snowflake and that no other open source company would be significant in the software universe.

Fast forward to today and we’ve witnessed the growing excitement in the space: Redhat is being acquired by IBM for $32 billion (3x times its market cap from 2014); Mulesoft was acquired after going public for $6.5 billion; MongoDB is now worth north of $4 billion; Elastic’s IPO now values the company at $6 billion; and, through the merger of Cloudera and Hortonworks, a new company with a market cap north of $4 billion will emerge. In addition, there’s a growing cohort of impressive OSS companies working their way through the growth stages of their evolution: Confluent, HashiCorp, DataBricks, Kong, Cockroach Labs and many others. Given the relative multiples that Wall Street and private investors are assigning to these open source companies, it seems pretty clear that something special is happening.

So, why did this movement that once represented the bleeding edge of software become the hot place to be? There are a number of fundamental changes that have advanced open source businesses and their prospects in the market.

David Paul Morris/Bloomberg via Getty Images

From Open Source to Open Core to SaaS

The original open source projects were not really businesses, they were revolutions against the unfair profits that closed-source software companies were reaping. Microsoft, Oracle, SAP and others were extracting monopoly-like “rents” for software, which the top developers of the time didn’t believe was world class. So, beginning with the most broadly used components of software – operating systems and databases – progressive developers collaborated, often asynchronously, to author great pieces of software. Everyone could not only see the software in the open, but through a loosely-knit governance model, they added, improved and enhanced it.

The software was originally created by and for developers, which meant that at first it wasn’t the most user-friendly. But it was performant, robust and flexible. These merits gradually percolated across the software world and, over a decade, Linux became the second most popular OS for servers (next to Windows); MySQL mirrored that feat by eating away at Oracle’s dominance.

The first entrepreneurial ventures attempted to capitalize on this adoption by offering “enterprise-grade” support subscriptions for these software distributions. Redhat emerged the winner in the Linux race and MySQL (thecompany) for databases. These businesses had some obvious limitations – it was harder to monetize software with just support services, but the market size for OS’s and databases was so large that, in spite of more challenged business models, sizeable companies could be built.

The successful adoption of Linux and MySQL laid the foundation for the second generation of Open Source companies – the poster children of this generation were Cloudera and Hortonworks. These open source projects and businesses were fundamentally different from the first generation on two dimensions. First, the software was principally developed within an existing company and not by a broad, unaffiliated community (in the case of Hadoop, the software took shape within Yahoo!) . Second, these businesses were based on the model that only parts of software in the project were licensed for free, so they could charge customers for use of some of the software under a commercial license. The commercial aspects were specifically built for enterprise production use and thus easier to monetize. These companies, therefore, had the ability to capture more revenue even if the market for their product didn’t have quite as much appeal as operating systems and databases.

However, there were downsides to this second generation model of open source business. The first was that no company singularly held ‘moral authority’ over the software – and therefore the contenders competed for profits by offering increasing parts of their software for free. Second, these companies often balkanized the evolution of the software in an attempt to differentiate themselves. To make matters more difficult, these businesses were not built with a cloud service in mind. Therefore, cloud providers were able to use the open source software to create SaaS businesses of the same software base. Amazon’s EMR is a great example of this.

The latest evolution came when entrepreneurial developers grasped the business model challenges existent in the first two generations – Gen 1 and Gen 2 – of open source companies, and evolved the projects with two important elements. The first is that the open source software is now developed largely within the confines of businesses. Often, more than 90% of the lines of code in these projects are written by the employees of the company that commercialized the software. Second, these businesses offer their own software as a cloud service from very early on. In a sense, these are Open Core / Cloud service hybrid businesses with multiple pathways to monetize their product. By offering the products as SaaS, these businesses can interweave open source software with commercial software so customers no longer have to worry about which license they should be taking. Companies like Elastic, Mongo, and Confluent with services like Elastic Cloud, Confluent Cloud, and MongoDB Atlas are examples of this Gen 3.  The implications of this evolution are that open source software companies now have the opportunity to become the dominant business model for software infrastructure.

The Role of the Community

While the products of these Gen 3 companies are definitely more tightly controlled by the host companies, the open source community still plays a pivotal role in the creation and development of the open source projects. For one, the community still discovers the most innovative and relevant projects. They star the projects on Github, download the software in order to try it, and evangelize what they perceive to be the better project so that others can benefit from great software. Much like how a good blog post or a tweet spreads virally, great open source software leverages network effects. It is the community that is the source of promotion for that virality.

The community also ends up effectively being the “product manager” for these projects. It asks for enhancements and improvements; it points out the shortcomings of the software. The feature requests are not in a product requirements document, but on Github, comments threads and Hacker News. And, if an open source project diligently responds to the community, it will shape itself to the features and capabilities that developers want.

The community also acts as the QA department for open source software. It will identify bugs and shortcomings in the software; test 0.x versions diligently; and give the companies feedback on what is working or what is not.  The community will also reward great software with positive feedback, which will encourage broader use.

What has changed though, is that the community is not as involved as it used to be in the actual coding of the software projects. While that is a drawback relative to Gen 1 and Gen 2 companies, it is also one of the inevitable realities of the evolving business model.

Linus Torvalds was the designer of the open-source operating system Linux.

Rise of the Developer

It is also important to realize the increasing importance of the developer for these open source projects. The traditional go-to-market model of closed source software targeted IT as the purchasing center of software. While IT still plays a role, the real customers of open source are the developers who often discover the software, and then download and integrate it into the prototype versions of the projects that they are working on. Once “infected”by open source software, these projects work their way through the development cycles of organizations from design, to prototyping, to development, to integration and testing, to staging, and finally to production. By the time the open source software gets to production it is rarely, if ever, displaced. Fundamentally, the software is never “sold”; it is adopted by the developers who appreciate the software more because they can see it and use it themselves rather than being subject to it based on executive decisions.

In other words, open source software permeates itself through the true experts, and makes the selection process much more grassroots than it has ever been historically. The developers basically vote with their feet. This is in stark contrast to how software has traditionally been sold.

Virtues of the Open Source Business Model

The resulting business model of an open source company looks quite different than a traditional software business. First of all, the revenue line is different. Side-by-side, a closed source software company will generally be able to charge more per unit than an open source company. Even today, customers do have some level of resistance to paying a high price per unit for software that is theoretically “free.” But, even though open source software is lower cost per unit, it makes up the total market size by leveraging the elasticity in the market. When something is cheaper, more people buy it. That’s why open source companies have such massive and rapid adoption when they achieve product-market fit.

Another great advantage of open source companies is their far more efficient and viral go-to-market motion. The first and most obvious benefit is that a user is already a “customer” before she even pays for it. Because so much of the initial adoption of open source software comes from developers organically downloading and using the software, the companies themselves can often bypass both the marketing pitch and the proof-of-concept stage of the sales cycle. The sales pitch is more along the lines of, “you already use 500 instances of our software in your environment, wouldn’t you like to upgrade to the enterprise edition and get these additional features?”  This translates to much shorter sales cycles, the need for far fewer sales engineers per account executive, and much quicker payback periods of the cost of selling. In fact, in an ideal situation, open source companies can operate with favorable Account Executives to Systems Engineer ratios and can go from sales qualified lead (SQL) to closed sales within one quarter.

This virality allows for open source software businesses to be far more efficient than traditional software businesses from a cash consumption basis. Some of the best open source companies have been able to grow their business at triple-digit growth rates well into their life while  maintaining moderate of burn rates of cash. This is hard to imagine in a traditional software company. Needless to say, less cash consumption equals less dilution for the founders.

Photo courtesy of Getty Images

Open Source to Freemium

One last aspect of the changing open source business that is worth elaborating on is the gradual movement from true open source to community-assisted freemium. As mentioned above, the early open source projects leveraged the community as key contributors to the software base. In addition, even for slight elements of commercially-licensed software, there was significant pushback from the community. These days the community and the customer base are much more knowledgeable about the open source business model, and there is an appreciation for the fact that open source companies deserve to have a “paywall” so that they can continue to build and innovate.

In fact, from a customer perspective the two value propositions of open source software are that you a) read the code; b) treat it as freemium. The notion of freemium is that you can basically use it for free until it’s deployed in production or in some degree of scale. Companies like Elastic and Cockroach Labs have gone as far as actually open sourcing all their software but applying a commercial license to parts of the software base. The rationale being that real enterprise customers would pay whether the software is open or closed, and they are more incentivized to use commercial software if they can actually read the code. Indeed, there is a risk that someone could read the code, modify it slightly, and fork the distribution. But in developed economies – where much of the rents exist anyway, it’s unlikely that enterprise companies will elect the copycat as a supplier.

A key enabler to this movement has been the more modern software licenses that companies have either originally embraced or migrated to over time. Mongo’s new license, as well as those of Elastic and Cockroach are good examples of these. Unlike the Apache incubated license – which was often the starting point for open source projects a decade ago, these licenses are far more business-friendly and most model open source businesses are adopting them.

The Future

When we originally penned this article on open source four years ago, we aspirationally hoped that we would see the birth of iconic open source companies. At a time where there was only one model – Redhat – we believed that there would be many more. Today, we see a healthy cohort of open source businesses, which is quite exciting. I believe we are just scratching the surface of the kind of iconic companies that we will see emerge from the open source gene pool. From one perspective, these companies valued in the billions are a testament to the power of the model. What is clear is that open source is no longer a fringe approach to software. When top companies around the world are polled, few of them intend to have their core software systems be anything but open source. And if the Fortune 5000 migrate their spend on closed source software to open source, we will see the emergence of a whole new landscape of software companies, with the leaders of this new cohort valued in the tens of billions of dollars.

Clearly, that day is not tomorrow. These open source companies will need to grow and mature and develop their products and organization in the coming decade. But the trend is undeniable and here at Index we’re honored to have been here for the early days of this journey.

SAP agrees to buy Qualtrics for $8B in cash, just before the survey software company’s IPO

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Ryan Smith of Qualtrics speaks onstage during TechCrunch Disrupt SF 2015

Enterprise software giant SAP announced today that it has agreed to acquire Qualtrics for $8 billion in cash, just before the survey and research software company was set to go public. The deal is expected to be completed in the first half of 2019. Qualtrics last round of venture capital funding in 2016 raised $180 million at a $2.5 billion valuation.

This is the second-largest ever acquisition of a SaaS company, after Oracle’s purchase of Netsuite for $9.3 billion in 2016.

In a conference call, SAP CEO Bill McDermott said Qualtrics’ IPO was already oversubscribed and that the two companies began discussions a few months ago. SAP claims its software touches 77 percent of the world’s transaction revenue, while Qualtrics’ products include survey software that enables its 9,000 enterprise users to gauge things like customer sentiment and employee engagement.

McDermott compared the potential impact of combining SAP’s operational data with Qualtrics’ customer and user data to Facebook’s acquisition of Instagram. “The legacy players who carried their ‘90s technology into the 21st century just got clobbered. We have made existing participants in the market extinct,” he said. (SAP’s competitors include Oracle, Salesforce.com, Microsoft, and IBM.)

SAP, whose global headquarters is in Walldorf, Germany, said it has secured financing of €7 billion (about $7.93 billion) to cover acquisition-related costs and the purchase price, which will include unvested employee bonuses and cash on the balance sheet at close.

Ryan Smith, who co-founded Qualtrics in 2002, will continue to serve as its CEO. After the acquisition is finalized, the company will become part of SAP’s Cloud Business Group, but retain its dual headquarters in Provo, Utah and Seattle, as well as its own branding and personnel.

According to Crunchbase, the company raised a total of $400 million in VC funding from investors including Accel, Sequoia, and Insight Ventures. It had intended to sell 20.5 million shares in its debut for $18 to $21, which could have potentially grossed up to about $495 million. This would have put its valuation between $3.9 billion to $4.5 billion, according to CrunchBase’s Alex Wilhelm.

This year, Qualtrics’ revenue grew 8.5 percent from $97.1 million in the second-quarter to $105.4 million in the third-quarter, according to its IPO filing. It reported third-quarter GAAP net income of $4.9 million. That represented an increase from the $975,000 it reported in the previous quarter, as well as its net profit in the same period a year ago of $4.7 million. Qualtrics grew its operating cash flow to $52.5 million in the first nine months of 2018, compared to $36.1 million during the same period in 2017.

In today’s announcement, Qualtrics said it expects its full-year 2018 revenue to exceed $400 million and forecasts a forward growth rate of more than 40 percent, not counting the potential synergies of its acquisition by SAP.

Qualtrics’ main competitors include SurveyMonkey, which went public in September.

Google steps back from running the Kubernetes infrastructure

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Google today announced that it is providing the Cloud Native Computing Foundation (CNCF) with $9 million in Google Cloud credits to help further its work on the Kubernetes container orchestrator and that it is handing over operational control of the project to the community. These credits will be split over three years and are meant to cover the infrastructure costs of building, testing and distributing the Kubernetes software.

Why does this matter? Until now, Google hosted virtually all the cloud resources that supported the project, like its CI/CD testing infrastructure, container downloads and DNS services on its cloud. But Google is now taking a step back. With the Kubernetes community reaching a state of maturity, Google is transferring all of this to the community.

Between the testing infrastructure and hosting container downloads, the Kubernetes project regularly runs more than 150,000 containers on 5,000 virtual machines, so the cost of running these systems quickly adds up. The Kubernetes container registry has served almost 130 million downloads since the launch of the project.

It’s also worth noting that the CNCF now includes a wide range of members that typically compete with each other. We’re talking Alibaba Cloud, AWS, Microsoft Azure, Google Cloud, IBM Cloud, Oracle, SAP and VMware, for example. All of these profit from the work of the CNCF and the Kubernetes community. Google doesn’t say so outright, but it’s fair to assume that it wanted others to shoulder some of the burdens of running the Kubernetes infrastructure, too. Similarly, some of the members of the community surely didn’t want to be so closely tied to Google’s infrastructure, either.

“By sharing the operational responsibilities for Kubernetes with contributors to the project, we look forward to seeing the new ideas and efficiencies that all Kubernetes contributors bring to the project operations,” Google Kubernetes Engine product manager William Deniss writes in today’s announcement. He also notes that a number of Google’s will still be involved in running the Kubernetes infrastructure.

“Google’s significant financial donation to the Kubernetes community will help ensure that the project’s constant pace of innovation and broad adoption continue unabated,” said Dan Kohn, the executive director of the CNCF. “We’re thrilled to see Google Cloud transfer management of the Kubernetes testing and infrastructure projects into contributors’ hands — making the project not just open source, but openly managed, by an open community.”

It’s unclear whether the project plans to take some of the Google-hosted infrastructure and move it to another cloud, but it could definitely do so — and other cloud providers could step up and offer similar credits, too.

SAP’s SAP.io Foundry debuts the graduates of its second women-focused accelerator

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SAP, the German-based enterprise software giant, has unveiled the New York-based cohort from its SAP.io Foundry accelerator programs focused on women-led technology companies.

The first program was launched in San Francisco in July 2017, and while the company has launched additional accelerator programs in Berlin and Tel Aviv (with plans for a Paris accelerator in the Fall), it’s SAP’s San Francisco and New York programs that have a specific focus on women and founders of color, according to Vanessa Liu, a vice president in charge of the New York program.

“The first one launched last summer, with San Francisco that was in July. Berlin launched in the fall with TechStars as a partner, Tel Aviv launched with The Junction,” Liu said. 

The partnerships with Techstars in Berlin and The Junction in Tel Aviv were designed solely to gain exposure to those markets, while the San Francisco and New York programs focused on diversity — as well as building out the SAP network among startups.

The Foundry accelerator programs are independent from the company’s $35 million Foundry fund, according to Liu. Companies that progress through the program give up no equity and receive no capital. Rather, the companies involved get access to the SAP network of partners and customers and the companies various technical and support services, Liu said.

“This is more about how do you work together with SAP and customers like GE, Coca Cola, and Stanley Black & Decker,” said Liu. 

For the New York cohort that demoed their wares yesterday, eight of the nine companies that participated were also based in New York, with one group of founders making the trek up from Georgia for the program.

And while there’s been no instance yet where companies that graduate from the accelerator receive a capital commitment later from the Foundry fund, Liu did not rule out the possibility.

That Foundry fund typically will invest between a quarter of a million and one million dollars into companies focused on machine learning, big data, and other enterprise software related applications. Checks are typically $250,000 at the seed stage increasing to $1 million as a company grows into a Series A investment.

In some ways, Liu said, the Foundry fund was a way for SAP to build on the work it had done with startups through its (now independent) Sapphire Ventures fund. That had been the vehicle SAP had previously used to connect with the startup world and early stage tech companies and entrepreneurs.

“We’re definitely not the first to market,” said Liu. “But we’re looking at it not just only in making investments and thinking about how to do that but it’s also about cultivating investments and making sure that we do that right.”

For the Foundry accelerator programs in the U.S. doing it right means focusing on gender and racial diversity. The criteria for the program is that at least one c-suite executive and member of the founding team be female. And of the nine companies in the cohort, only two companies were admitted where women were not serving in the chief executive role, Liu said.

These are the executives and companies that went through the SAP.io Foundry Accelerator in New York.

Tongtong Gong, founder and COO of Amberdata, a provider of monitoring and analytics for blockchain infrastructure and smart contract applications.

Margaret Martin, founder and CEO of CN2, a software service that transforms the CAD, 3D and 2D content they create everyday into compelling mobile X-Reality (AR+VR=XR) applications.

Ariadna Quattoni and Paul Nemirovsky, founders of DMetrics, which enables non-developers to build machine learning algorithms to extract insights from any text, in mere hours, and with zero coding.

Kate Brandley Chernis, co-founder & CEO of Lately, is selling a machine learning-based marketing dashboard to provide more consistent marketing messages across large platforms.

Shirley Chen, founder & CEO of Narrativ, sells a contextually relevant smart linking and ad placement technology

Lisa Xu, co-Founder & CEO of Nopsec, a provider of threat prediction and cyber risk remediation solutions for enterprises to prevent security breaches.

Jade Huang, co-founder & CEO of StyleSage,  which enriches product listings with attributes and then maps those products to eCommerce sites.

Jag Gill, founder & CEO of Sundar, a software service connecting apparel brands and retailers with suppliers of textiles, raw materials and garments.

Susan Danziger, Co-founder and CEO of Ziggeo, an embeddable video recorder/player that captures video and provides insights.

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