Benchmark and Investing in Open Source with Eric Vishria and Chetan Puttagunta

Hey everybody, it's Eric Thornberg, co-founder partner of Village Global, a network-driven venture firm, and this is Venture Stories, a podcast covering topics relating to tech and business with world-leading experts. Hey everybody, and welcome to another episode of Venture Stories with Village Global. I'm here today with two very special guests, Eric Vishria and Chetan Pedigunta, Benchmark, also known as BBB, not Big Baller Brand, the Brown Boys of Benchmark. Chaython, Eric, welcome to the podcast.

Thank you for having us.

I just really want my BBB sweater. I feel like we should really lean into that branding.

Eric, who can we get?

Can we get Eric something? We came up with that because we joke the number of times that Chaython and I have been confused for one another since he joined about a year ago. It's been I like it.

Speaking of, let's get into it. Where is Benchmark in 2019, almost getting into 2020? Obviously, it's one of the best, if not the best firm around. Is it comfortable at Benchmark? You know, it's only 5 partners, you know, it's the same as it's always been in some ways, but it's different in other ways. New partners, you know, Chetan, Sarah, you know, you've been 5 years now, Eric. So, Eric, why don't you give some context? Where is Benchmark today?

I mean, the nice thing is we're where we were 10 years ago in many ways. One of the really special things about the firm and the way the founders of Benchmark set the firm up is it's a focused strategy. We do Series As. We're probably 80% Series As. We don't dabble in seed and we don't do growth. So, we either focus on an investment and do everything in our power to help that company win.

Yeah.

and be really special or we don't invest. And then the kind of small, flat, equal structure of 5 of us ends up helping, I think, in a lot of ways because I think one of the really easiest ways to think about it is we're not trying to scale Benchmark.

Right.

We're not trying to scale the firm. We are absolutely trying to be part of and support the companies that are going to scale the most. You know, every decade there's a handful of companies that really transform the industry and are really impactful, and our goal is to be part of those companies and help them in every way. And I think what's happened over the last 10 years in the bull cycle is a lot of venture firms have really focused on scaling the venture firm, um, and adding more products and, and many partners and a lot of, and a lot of other things. And that strategy totally is fine and, and can work, but Our strategy has been the opposite, which is we don't try to scale ourselves at all. We try to scale and help the entrepreneurs we work with scale.

Yeah. And how do you stay hungry? How does a firm stay hungry when it's won so much?

Oh, that's easy. Every morning, I don't know if Chasen feels this way, every morning I wake up and I am absolutely terrified at the prospect of being the beginning of end for this storied franchise. And so I think for every partner and every new person we add, it's our responsibility to carry the flag forward and to continue to build on what the founders of Benchmark set up. And that's a responsibility and a thing that we take very seriously. Motivates me, and I think all of us every single morning. You cannot like no, I do not want it written that we were the begin. Well, benchmark was going great and absolutely crushing it, and then they got the brown boys. Holy shit! So like you don't we don't I mean and I think that that's a real thing, and it's it's a really powerful motivator, and and it's it's an important. I think take it very seriously to have the responsibility, frankly, to a franchise.

I mean, I joined summer of 2018. And, you know, just from the outside, before you join Benchmark, you're aware of how closely the firm works together and how it moves as a group and how the partners of Benchmark, when they get interested in an investment, and once they invest in helping that company grow and prosper, And you see that group dynamic from the outside. And I was lucky enough to actually be on a board with Peter Fenton for several years before joining Benchmark. And I saw the impact and the effort that Benchmark as a firm would put against Elastic. And when you're outside, you're just simply in awe of how well and how hard the group works.

Yeah.

And, you know, I absolutely— like Eric said, you absolutely feel this responsibility to our LPs and to the group and to each other of carrying that tradition of excellence forward. And so that starts with a great deal of respect for the craft itself.

Right.

And a great deal of respect for the partnership that you establish with an entrepreneur. And you take it super seriously. And as a group, we, we work really hard every single day to exert maximum effort in helping our entrepreneurs scale and succeed and prosper. And there's really nothing better than, you know, Peter and I are still on the Elastic board, and today they've been public for a little over a year and really thriving as a company. There's nothing better than to see that through as business partners.

Yeah.

And so every single day, we as a group are waking up to do exactly that. And You know, we're all interconnected regardless of where we are geographically. We talk to each other constantly. We're constantly in communication. We're constantly in touch. It's a really tight-knit group that takes the responsibility to the LPs super seriously.

Yeah. Let me just comment on that for a second. It's widely known that a majority of, or many venture firms are sort of messes in terms of their partnership dynamics. And Benchmark is famous for having a great partnership dynamic. Part of that is the way that, you know, it's economically split and so everyone feels like an equal. Is there anything else that you think y'all do exceptionally well that other firms can learn from in terms of building great partnership dynamics?

I actually think the structure really, really ends up mattering and driving it. Just, you know, Charlie Munger said, However old he is, he's 92. He's 92, I think. And he said maybe 5 or 8 years ago, he said, I consider myself top 1 percentile in terms of understanding the power of incentives and I still underestimate them every single day. And I think the structure, for those who don't know, is the partnership is divided exactly equally. So, every partner has equal control and equal economics. And it doesn't matter if you've been here for a year or 20 years, it's the same. And the value of doing that is it just promotes teamwork. Like, that discussion—

Yeah.

That is just taken off the table. And what it also means is that when we hire and when we add a new partner, we're really careful about protecting the group dynamic. That's actually the thing that we're most protective of. There's tons and tons of competent people in the world. There are tons and tons of great investors. There are tons of people who have great reputations and great insights, but that isn't enough. We need someone who has that but also contributes uniquely to the team dynamic and enhances it. And, um, and so that's, that's one of the big things that we, we look for. Um, and, and I think, you know, again, it's just there are all of these kind of benefits that come from that. And then, you know, the other thing I'd say is like, it's just partnerships historically just don't scale that well. Like, they're not— you can't— it's really hard to have a partnership scale to 20 partners or 40 partners or 50 partners or whatever, because it's just interpersonal dynamics. Like, that's why, that's why companies are arranged, you know, hierarchically, because it's helpful to actually move things forward. And so, um, I think that, that ends up being one of the nice things because we're small and focused, you know, it ends up being straightforward.

Yeah.

What Eric said is extraordinary, is on the first day you sign this document and you ceremoniously, you know, write a check to buy your ownership interest of Benchmark. And on your first day, you were an equal owner of the franchise. And, you know, if that isn't motivation enough.

Yeah.

No, totally. To wake up on the second day super energized. I mean, it's incredible, right? It's, it's a, it's a genius structure that the founders of Benchmark set up.

Yeah.

And, you know, the 5 active general partners today at Benchmark, none of us are founders, but we are all beneficiaries of that genius structure. And, you know, on day one, by being an equal owner of the franchise, you feel an immense amount of pride of ownership and responsibility of what you're doing every single day. And part of that also goes to how we invest also, right? Every time we invest, we take a board seat. And part of that, and Bill says this a lot, which is that we don't let our brand walk around on our behalf. It's that when we invest, we take a board seat, we take that commitment seriously.

Responsibility.

We take responsibility when we invest. And so that culture and that orientation, And having gone through the Benchmark recruiting process a little over a year ago, like, you spend so much time understanding the interpersonal chemistry amongst you and the other partners, and you just realize that investing has a lot to do with trust in each other.

Yeah.

And with 5 partners, you know, when you're doing diligence or when you're investigating an opportunity, the 5 of us are the ones doing the work. It's not being outsourced to anybody else. And we collectively have to do everything. And so as a result of that, we spend a lot of time together building that interpersonal trust, and when we see something we like, we can move as a team really, really well.

So Benchmark has largely stayed the same, but some of the dynamics in venture have changed. Like, we've seen a lot of later-stage firms now take seed rounds. You know, companies skip seed rounds entirely. Do you see yourself going earlier. We also see Andreessen, Greylock, and stuff going later. How are you thinking about earlier and later in the process?

It's really interesting. Like a full probably third or 35% of the investments that we've made over the years are literally first check. Nextdoor was like that. Discord was like that. Elastic was like that. Confluent was like that. Cerebras was like that.

Sketch is like that.

Sketch is like that in a very different way. And so there's all these investments. Those were those were the first checks into those companies.

Yeah.

Um, and so it's a, it's a really, um, it's, it's always been kind of part of the ethos. If you can find that, you know, those, those founders and that idea that you can get excited about, you know, capitalize and partner with them early. We love doing that. I think one of the things that's been really nice over, over the last, whatever, 15 years is it's a lot easier to start a company now. and get going. So you have a lot of like SaaS applications and other things where they can raise, you know, a couple million dollars and actually build a product, get to some customers and things like that. You can't do that, you know, if you're building a semiconductor company, but you can do that if you're, if you're a SaaS application. And so I think, you know, in those cases we tend to do the Series A's. I mean, the way I describe it is we're probably 80% Series A's, 15% Series B's, And 5% exotic, you know, like Sketch or something like that. And, and, and, and the Bs that we do are really where we should have done the A, and, you know, and missed it for whatever reason.

And there's some firms that are now doing— there's some of the best firms— Cs and Ds a little bit later stage. And what they— the way they justify it is the outcomes are now bigger too. That's probably—

I think it's true that the outcomes are bigger. The outcomes are bigger, and the markets are bigger. I think for us, And some of those growth investing could certainly be economic, but for us, we're not trying to maximize our economics in that way. I think our goal is to be part of the really special companies. And we believe the focus gives us the ability to do that best.

And the focus makes the discussion every Monday much more straightforward. Because every Monday that we all get together, I mean, we spend the entire day together— breakfast, lunch, and dinner, basically.

Wow.

And you're just talking about company? You're just—

Everything. Everything's on the table. In fact, sometimes we talk about what we watched on TV that weekend too.

Politics.

Wow.

Everything. It's like— and it's— and so when you're focused, there's muscle memory, there's, there's a practice. The areas that you really develop Really good expertise on, especially you know we spend a ton of time helping our companies recruit, especially in the early days when you're making the first VP of Engineering hire, the VP Marketing hire, the VP Sales hire. Those first VPs, the first executive hires, there's a lot of muscle memory that goes into like finding those candidates, building the top of the funnel, creating a structured process, and then closing the candidates because as you know there it's a Very competitive labor market for talented people. And so you build all this expertise and all these practices internally, and this is where the focus is a huge differentiator. And what I think our entrepreneurs really benefit from is because every day we're talking about the exercise and the craft of early-stage company building, and it works.

What did you see in Chetan, or why'd you say, hey, we need to have Chetan's perspective on the table? Maybe these 5 or 6 people.

Oh, I think it's super, super unusual to have someone who is 30-something, under 30, whatever, 30, 32, 30, 33 now. So, in their early 30s to have the kind of experience going from MuleSoft early days through public company, through acquisition for Salesforce, $6.5 billion, from Mongo early days through IPO, through public company, through reinvention as a cloud company. And Elastic from the early days through like whatever, $8 billion public company. Just to have someone at that stage of their career, that early, having seen these massive, massive outcomes in terms of those all 3 happen to be open source, but open source infrastructure is just incredibly unusual. And, you know, and the lessons that he had from that and the patterns that he'd seen from that came out. And then I just tell you, the references of those founders pounding the table that he was their most valuable board member, you know, over and over again is just really special. Like when you hear that over and over again, you know, for someone who would have been whatever in their late 20s at their time, and you have super experienced, super successful founders pounding the table saying that that person More than people who are 20 years older than and more experienced than them added more value in our boardroom as we were pricing the IPO. Like, that's a big deal.

And so, there are 5 right now. There are 5. It's you 2, Sarah, Bill, and Peter.

That's right.

So, why don't we just one by one, maybe a minute each, what is— you mentioned Bill and Peter give drastically different perspectives or approaches. Define those different perspectives and approaches, then we can get into Sarah too.

Look, I think, you know, before we jump into that, like from an outsider's perspective, when, you know, as I mentioned before, I knew Peter from the Elastic board. But as I went through the discussion process with Benchmark and met Eric and Sarah and spent time with them, and as an outsider, you know, when you realize that you want to pick a group that you want to spend the next 20 years of your career with and you see the 4 of them, I mean, it's a dream scenario, right? Like, if you talk to the entrepreneurs that have worked with Eric and the unbelievable references that he gets about how he is just the most influential board member, and the founders that work with Sarah and the incredible product insights she provides.

Yeah.

And, you know, of course, I saw Peter in action, and he's been an incredible mentor and an example of how to be a great board member for me. And we all know Bill and the impact that he's had in the industry and everybody that he's worked with. And so when you, as someone that has a chance to join that group, and when you're thinking about the next 20 years of your career and who you want to build that with, it becomes pretty obvious pretty quickly. And it was for me that if I had the opportunity to partner with these 4, it would be an incredible chance to do something at a very, very different level. And, and I had to jump at it. And so, so that was, that was the perspective I came in with. And, you know, each of us, I would say the strength of the partnership and why the Monday meeting works so well is that all 5 of us can look at the same thing and have a different view on it. And, you know, when we make an investment decision, we decide as a group. And as a result of that, Everybody brings their knowledge, their experience, their deep understanding in a particular motion that the company is about to go through. And I'm thinking about the company that we talked about on Monday, which, which has got a lot of business models that they're thinking of. And each of us had a unique perspective on what could work and what, what might not work. And the decision-making process and the discussion that you have is so deep and so rich. And as somebody that, that is dedicated to the craft and you want to practice at the highest level, there's literally nothing better than that.

Yeah, it's interesting. I, you know, just to, to answer the question, I think that Sarah has, has been one of the most analytical marketplace minds that I've encountered. She's, um, she just is, she's rigorous.

What does she uniquely get about marketplace?

She's, she's, she's You know what the thing that's different about Sarah is? She's truth-seeking. And it's really hard to be intellectually— to like force yourself to be unemotionally intellectually rigorous and honest.

And not just excited about a deal.

And not just excited about an investment. I tend to get carried away if I get excited about an entrepreneur. I'm willing to look past a lot of problems. And, you know, and she doesn't have— like, she's very like rigorous, clear-eyed, truth-seeking. In that looking at things, exactly. And so I think that ends up being a really valuable strength. And Peter and Bill, there's been a million things written about them and they're well known, so I'll leave them. But I think that ends up being like those kinds of different perspectives put together is part of what makes a group work.

If someone hasn't read Sarah's blog on hierarchy of engagement, I would encourage them to hit pause and go read it right now. I mean, just in terms of like a framework for building, you know, products that last and that create real loyalty amongst users, that is probably, if not the best, one of the best posts that are out there about how to build really great products. And so when someone has such depth of knowledge of what that really takes and the amount of effort that it takes to actually build proper products, You know, what ends up happening is because we're this equal partnership and the 5 of us are wanting every one of our companies to succeed equally, a lot of our founders that come across Sarah's blog post want to talk to her directly.

Yeah.

And in fact, and then just email her and have a session with her in terms of like, hey, we're thinking about, you know, we've got this fork in the road and we're trying to think about the product this way and how does that— how do we go from here? You know, if they have— Eric has got an incredible operating experience having been a former CEO. Like, he understands challenges of operating companies that I've never had to deal with ever. And so, so when it comes to that, like, Eric is, as a mentor to young founders that are trying to scale for the first time, is just an unbelievable resource. And so because of that genius structure that our founders came up with, We're all equally incentivized to make every single portfolio company win, because we share in the rewards.

Yeah, Eric, I'm waiting for your hard thing about hard things. In the meantime, I'll just have to—

I was there for that one.

Yeah, exactly. Benchmark CEO. Let's talk about infrastructure and open source investing. And so, you know, Benchmark has done a lot of that. You both have done a lot of that over the years. Why don't you get into a little bit about your, your investment thesis in the space? And then I'm curious how that has evolved About open source.

So what really pulls Benchmark towards open source is the potential of helping the builders and the creators. And in this case, it's developers that are creating and building. And there's a, there's a lot of magnetism to that that attracts us as a firm. For me personally, I'm attracted to opportunities in open source because I didn't do great as a developer myself. And so when you see these technologies that are enabling a new wave of creativity, it's super attractive to us. And so the firm has been historically involved in open source really from the inception of the firm. You see examples like Red Hat and MySQL during the early days of Benchmark, and of course Peter has an incredible track record in open source. And Eric, the first investment that he did at Benchmark was open source infrastructure in the form of Confluent, which is the company behind Kafka. And of course, we've talked about my time in open source and my interest in open source, of course. So open source, we think, is, if it isn't already, it is the future way to create great infrastructure companies. It is an incredibly efficient way to get distribution. It's a great way to build a really, really strong community early on. And as a result of that, you can build really industry-changing infrastructure very, very efficiently. And there's so much innovation happening now. And the innovation is really happening all around the world, especially in open source. As an example, Confluent is California, but Elastic started in the Netherlands.

Yeah.

As an example. And today, while Confluent is largely centralized, they've got offices all over the world, Elastic continues to be a distributed company. And so there are lots of ways to build really great big open source companies too. And as a partnership, we've been through that journey now so many times that there's also a natural muscle memory that we've built in terms of what works and what doesn't as you try to scale open source companies. Of course, each time that you try to do it is going to be different. And you can't rely on pattern recognition. And you can't say, well, this worked last time, so it's going to work again. It's a brand new play. But there's a lot that you learn scaling over and over again.

And let's get into that, some of that muscle memory. Like, how do you separate, or what other, what mistakes do other investors make when investing in open source or infrastructure? What separates the really successful companies from From the ones that don't make it, but seem like they might?

I think if you look at the— like there was a period of time where it was Red Hat and MySQL that had actually made it. And there was a whole period of time where the prevailing wisdom was that you shouldn't do open source because developers are really hard to monetize and you should never invest in developer tools. And it's a bit laughable to look at that perspective, especially now because open source and developer tools are so popular. What I think has been taken for granted though is that monetization here is actually really, really hard. You are literally giving away all the code open. It's open. And if a customer wanted to, they can download open source infrastructure and use it as infrastructure to power their entire company and never pay you a dime.

Yeah.

And so monetizing that is actually really difficult. And it only works if you build a really broad and wide distribution of that open source project and then create proprietary offerings that are actually value-add services on top of that open source project that help running that infrastructure. You know, it's more efficient, it's cheaper, it's faster. If you tried to do it on your own, it would take you 3 months. If you, you know, buy this value-added module that we built for you, you're up and running tomorrow. That kind of differentiation and creating the monetization paths in open source is actually really, really difficult. And the vast majority of open source companies don't figure that out. And as a result, you know, you have some of the most popular projects in open source infrastructure that simply can't monetize.

Yeah.

And so that challenge of creating a business around open source is actually really hard, and it's something that we talk about a lot.

Yeah, I think one of the things that's really interesting, there was a meme that went around a few years ago that, like, is AWS going to kill all our enterprise customers, companies, which has obviously turned out not to be anywhere close to the truth. The number of actually enterprise success stories and infrastructure success stories, even software infrastructure success stories, in spite of AWS strip mining open source, which they certainly do, Why has that been the case? I think the market is so much bigger than we expected. So much bigger. And, you know, the delivery model is so much more powerful, but you have just an exponential growth in the number of applications, an exponential growth in the amount of data, the exponential growth in the number of data-producing devices. Just the market is so, so much bigger than we ever expected. And I think if we think of Jay Kreps, the CEO of Confluent, has this thing that he says, which actually really makes a lot of sense, where we used to think of software as like, hey, this is an application that a human interacts with. But now, actually, a huge portion of software is software talking to software with no human involvement.

Yeah.

And it's just the sheer amount of it has just proliferated. And so, I think that the overall market is really big, and I think that the cloud delivery model is going to turn out to be a huge actual advantage for open source companies.

There's 3 large cloud vendors in the United States today, which are Amazon, Microsoft, and Google. And what's been amazing to watch is Microsoft and Google have actually gone the opposite direction of Amazon in terms of partnering with the open source companies and have made them first-class citizens. So, you know, for example, Elastic's offering or Confluent's offering on the different clouds You know, they get the great experience from the creators of those open source projects. And so, you know, Amazon has taken a very combative approach to open source and they're not particularly, you know, I don't think they've ever actually contributed significantly to open source. And for a company as big as Amazon, just think about the open source projects that they've come up with, you know, versus Microsoft and Google. who historically have put out so much open source work out there, so much great open source work out there. And so as a result, I think they've taken a very competitive approach and that's fine, they can. But Google and Microsoft have taken a very different approach. And as a result of that, you know, customers today want the best experience possible.

Yeah.

And they understand that they're gonna go with the best possible experience. They're gonna look at the cost, they're gonna look at the economics. And because you have, as Eric said, a cloud delivery model where you can literally pick your delivery method and you can pick your vendor and you can pick who you get the service from, it has really, really leveled the playing field where simply just having the distribution nodes isn't enough.

Right.

The experience itself is really, really important. And so you've, you've really commoditized the distribution network and really leveled the playing field on distribution itself. So as a result of that, these open source companies can really compete. And it's been great. It's been really great.

If you find that you pass on a deal in the space that a Spark or an Index or a Lightspeed or Dreesen ends up doing, is there— is it because largely because of monetization, or why are you passing on deals that look good that maybe other firms might be doing?

I think, look, there are certainly many companies that will be humongous and great that we're not part of. And so, you know, that sucks. This is one of the downsides of venture capital is—

There's no better way to put it than it sucks.

It sucks. It sucks. And we hate it and we kick ourselves for it.

And we feel really bad.

Yeah, we feel it is a business of regrets in that way. Um, and, you know, no one— we have our own list of, of misses of companies we saw that we should have— should have invested in.

But I'm saying maybe even you're right, you pass on it at the A or something, some other great firm takes it, or the B, but you think, hey, we just don't think it's going to scale. Or like—

Yeah, it could be, it could be any one of those things. It could be we're not clear on how it monetizes, or like if it, if it's valuable enough. I think one of the big things with the open source companies that have worked and have turned out to be big businesses is actually the use cases or where they get used tends to be mission critical to the business. So if you look at where Confluent gets used or Elastic gets used or Cockroach or whatever, they're mission critical use cases, which means an enterprise is going to part with money because it's so important to them. And there's tons and tons and tons of open source projects that are super, super successful as developer projects, which get used on the periphery or not mission critical or not particularly large and complex, which enterprises will use and love, but not pay for. And so, I think that ends up being a big driver too. And then sometimes it's people. And so, there's a lot of different factors. I mean, just to give you a sense of the funnel, every one of us probably looks at 200 new companies a year, of which we invest in one.

Wow.

Right.

Each-ish a year. So it's, you know, it's really, uh, it's a steep funnel. And, and I think it's, it's not fair to say that it's a high bar. Um, I think people describe it that way, which never sat right with me. My partner Mitch describes it as, um, it's a love affair. And you fall in love with this, you fall in love with the story, you fall in love with the founders, you fall in love with the potential. And, and, and when you're, when you're in love, you see past all of these imperfections. The imperfections actually turn into little, you know, delights. Um, and so I think, I think that is really the process of, of these companies and, and that we get to work with.

Totally.

So across the firm, you know, we're, we're looking, we're meeting thousands of entrepreneurs a year to make 5 to 10 investments.

Yeah.

And so, as analytical as we may wanna be, a lot of it is instinctual and gut-driven, you know, and it's about the chemistry of the group with that founder. And so, as a result of that, there's gonna be, at times when we decide not to partner with somebody, it's usually not a mutual fit also.

Right.

And sometimes you're wrong and that, that just sits with you forever.

Totally. Totally. So where's the white space right now in open source? If you two were, you know, went back out on your entrepreneurial paths and were starting a company in this space and you had any sort of skill set possible, where would you build? Or if you're putting together a request for startups where you wanted other entrepreneurs to focus, where's the white space?

So if you look at the large enterprise software companies today, they are still really, really big. So if you look at the market cap of IBM, Oracle, SAP, etc., they still generate billions and billions. We're talking tens of billions of dollars of revenue every single year on infrastructure that was originally created in the 1970s.

Yeah.

And it is, it is incredibly robust and mission-critical software. But it is still built in the 1970s. And so you see large infrastructure components that run the world systems still have a terminal and a green screen in front of them. I encourage those that have not looked recently to look at how many mainframe computers IBM still sells on an annual basis. It's staggering.

Yeah.

And so while open source and the new wave of infrastructure has permeated a bit, I still think that 90% of the market is still not transitioned to the next generation of infrastructure. And so the opportunity set is frankly limitless at this moment. And as companies are starting to think about the new cycle of applications, that's when you get to go in and replace the entire IT stack.

Yeah.

Right? So we've had this booking app that was built in '85, and we've just been you know, rewriting it and upgrading on the same infrastructure for the last 25 years. We've made a decision to rewrite it. We want to make it work with all the new devices. We want to make it work with all the new browsers. We want to push it out and we want to make it cloud. We want to make it work in the browser, etc. That gives you a chance as an entrepreneur to intercept that enterprise with your brand new infrastructure. And that's happening literally every single day with the largest of companies. And so, frankly, like, one of the easiest exercises you can do is go look at the big business lines of large enterprise infrastructure providers, and those will eventually move to open source.

Yeah, I'd add one other big area is deep learning is changing the surface, is changing a lot of arenas, and there are areas that people had had pushed against for a really long time, whether it's machine translation, natural language, you know, natural language processing, security, whatever, where like now deep learning is having really, really big impact in these areas. And so, and, and if I look at the software stack for a deep learning practitioner or researcher, it sucks.

Yeah.

Um, and so I think there's a lot of infrastructure software which will likely be open source That is, is, is going to go to those, to those folks.

Yeah. Is there a particular space that if you two were starting a company today in the space that you'd say, I think this is—

I don't, you know, I don't, we're not tops down like that. I don't know. Like, it's funny. We're, it's so organic. I think one of the genius things, one of the things that I know when an entrepreneur comes in and pitches and tells a story and provides an insight, Which normally happens by like slide 3, right? But they provided insight that makes you think about the world differently. That's when I get really, really excited. That then it's like, wait, everyone's saying like this, but like actually if you look at it like this way and tilt your head kind of crooked, you know, it, it actually all this shit lines up and you can just do it this way. And it's like, whoa. Um, and so I think that's where our That's why it's really hard to be like top-down, and I don't think we tend to be particularly thesis or kind of top-down driven that way.

I think one of the things is that we have prepared minds in that we are constantly in the exercise of building companies and helping our entrepreneurs scale and talking to customers and figuring out exactly what's happening. At the same time, like as Eric said, we're not thesis-driven because we want to be surprised.

Right.

And we ultimately want to be open for ideas. And the ideas that end up working in a really, really big way tend to be very non-consensus. And to be able to be receptive to those non-consensus ideas, you have to actually be very open-minded. And part of being open-minded, and it justifies my laziness for not having to come up with a new thesis, is that you can't have a very strong view on how this particular component is going to evolve.

Yeah.

You might say this particular component will evolve, and therefore you're open to the possibilities of somebody coming in and, and sort of telling you, like as Eric said, tilt your head this way and this is the way the world's going to work in 15 years.

Yeah.

And, and just being able to be open and receptive to being surprised to those new ideas. And especially ideas that are really left of center are what ends up becoming really great businesses.

Yeah. How should investors differentiate between investing in infrastructure open source businesses versus investing in traditional SaaS or enterprise businesses?

I think what has worked in open source historically has really been the infrastructure software layer. Like, you know, most of what we're talking about, whether it's MySQL or Elastic or Docker or Confluent or Pachyderm or whatever, these are all They're kind of databasey, like, in large parts. So, they're sticky and software infrastructure-y. I think most of the SaaS stuff that's worked is actually like an application. Whether you're talking about Salesforce or Workday or Zendesk or even like a New Relic or Amplitude, these are applications that are kind of oriented towards an end user and And piece like that. So I think the dynamics tend to be a little bit different. There's a lot of network effects in terms of the developer dynamics community in the infrastructure software world. They get integrated together, they get sticky, more data goes in, they get stickier. Whereas like with the applications, you know, they mostly tend to be in very competitive markets where like you're dogfighting. There's a lot of go-to-market. You know, there's a lot of go-to-market expertise that's required to make them work. And so I think that, so I do think the dynamics end up being a little bit different.

Right. Is anything different as it relates to pricing?

Well, the pricing is totally different and it's different per application too. Like, you know, there's, I don't know that there's any like real consistency. We have SaaS businesses that we work with, which are very enterprise. you know, hundreds of customers at 6 or 7 figures. And then we have SaaS companies that, like, if you take a Zendesk or a New Relic, where it's like, you know, 10,000 customers, you know, at a much, much lower price point. So like, I think, you know, one of the things that I would just say is like, SaaS is just like saying software now.

Yeah.

So like, it kind of doesn't mean anything. And to some extent, like, open source is also like a very, very big category of stuff. And so, I'm not sure that the patterns within each of those things is that meaningful anymore.

But is there a reason why application— why SaaS companies have mostly been application and open source have mostly been infrastructure?

Oh, I think it goes to what Chetan said at the beginning, which is open source is powerful because developers like it and developers use it and engage with it. And so, by its nature, like, it tends to be something that a builder takes and builds something with versus an end user.

And the only one that really is right on the edge is something like a GitHub, which is like Git that, that in the hub itself was a bit of an application, but that's really, you know, right on the border. But, you know, on the application side, you are selling to an end user who is literally has a function.

Right.

And you are, you are, it is not a canvas. You're selling a poster. And open source is very much a canvas and you're providing the paintbrushes and the palette and all that. And you're saying, you know, create and build what you're looking to do. And it's applicable to 1,000 different applications. Whereas with software, especially SaaS, you are selling to a particular user who's trying to go from point A to point B every single time. And creating an application that can do that very, very efficiently. And that doesn't lend itself as much to this open source idea of, you know, build whatever you want, create your own path, create your own journey. It is very much all about let's accomplish this task that you're already doing and let's, let's make that a lot faster.

And say a few more words about monetization. What business models tend to work or don't tend to work? Or what are mistakes that founders or investors make when thinking about monetization?

You know, we talk a lot internally about pricing and monetization that really encourages engagement, and really prices along value. And so you see a lot of pricing models that discourage usage, that it's like you actually force the user to think about the marginal unit that they wanna add into the product, And the minute that the user is contemplating, is it really worth it to add this next thing in, is the minute you start creating the churn. And so how do you create pricing that encourages engagement and usage and lets you just expand virally and create this real effect inside of an enterprise where you're basically telling every one of your coworkers and every one of your friends, like, I'm really using this thing that's making life a lot better. And so pricing has to very much orient towards value. And, you know, a lot has been written online about this benchmark of, you know, think about creating pricing that basically delivers 10x value.

Right.

So if you're gonna charge $1, it's gonna be worth about $10 to your customer. That's probably right, like the right framework to be in when you're thinking about pricing. And so creating that alignment with your customer where you're not discouraging discouraging usage and making them afraid to put in the next thing is one that we talk about a lot internally.

Yeah. Let's give an example. You mentioned you like being surprised by sort of unique insight that the founder has. Let's give an example of one. Maybe it's Confluent, maybe it's Elastic. Why don't you give an example of a unique insight that one of your founders had?

Oh gosh. I mean, literally for every one of the 8 boards I sit on, there's a story where Like the founder said something and I was like, huh?

Let's pick one that didn't exist before maybe, or they were the first of their category, or they had some really unique insight that changed the way you think about the market.

Yeah. I mean, I can give you the Confluent examples is a really interesting one. So, at the time there was a project Apache Kafka, and this was the founders or the authors of Apache Kafka, which was this, at the time, I guess it was a pipeline product, a streaming pipeline. Now, today, we call it an event stream, but at the time, I think it was really considered like a pipeline. And the founders, Jay Kreps, and Neha, and Jun, they came in and they articulated that, like, hey, this isn't— people think that this is a pipeline that then data comes through Kafka and then dumps into Hadoop, which was a decent number of use cases. And they were like, that isn't how it works at all. This is actually going to be the central nervous system of all data moving through an enterprise. And all the data is going to exchange on the central nervous system. And it is actually, and there may be some like long-term data warehouse, but there's actually going to be current state, some historical state, and some forward state all on the central nervous system. And it was like a complete, like, holy shit. This is like a, what you're saying is like, Companies have never had a central nervous system of data before. They've never had that interconnectivity before. Everything's been application silos, and then you ETL data from one to another one time or periodically. But to have a real-time central nervous system where something happens over here and you can react automatically over here, no one's ever had that before. So, it was just this thing, which is the world viewed it as this very narrow thing. that solved a very tactical problem. And they saw how by solving that tactical problem and 10 others, you would actually build this event streaming platform that would end up being incredibly valuable. And here we are 5 years later. It's been 5 years since that. It was the 3 of them, the 3 founders at the time, and a project, and a popular open-source project in Kafka. 5 years later, I think it's a 900-person company doing—

Wow.

you know, doing well over $100 million in revenue and many other kind of cool metrics. So I think it just, it's an example of this, like, and it really has, the timing hasn't played out exactly as they articulated or they thought it would. But overall, if you look at that Series A deck, it's pretty close to how it played out. And so I think that was just an example of where something happened.

And then, you know, you look at Elastic, which Peter did the Series A in 2012, and I partnered with the company in 2014. What Shai and Steven talked about originally with Elasticsearch and search on data was a concept that was tried over and over again over a 20-year period. And the prevailing wisdom, which was sensible and proven over and over again, is that selling search into proprietary data was terrible. And Google had built this incredible business with like search on the open internet, and that was the way to do it. That was the only business model that was available. So you want to do something for the enterprise, like forget about it. And they had come up with this insight that actually that, that in the last 25 years that people had tried, there wasn't enough data and enough variety of data for it to matter. Search really becomes powerful when the data that you want to search on Either there's tons of it or there's lots of varieties of it or it takes weird shapes. And so something that can make sense of it really fast is only important if you've got all these things happening and that this was only going to happen in the next 5 years and it didn't happen for the last 25, 30. And they had come up with this project that they talked about, which they saw this potential that it could be used for so many different use cases. They said, you can, you can use it to analyze logging data. You can use it to create really cool frontend experiences with maps. You can really use it to do application monitoring. You can use it to do security. And they had this view that the minute that you could really make sense of data over lots and lots of data silos and create this meta reverse index over it, Yeah. that it would be a really, really powerful piece of infrastructure. That was incredible insight.

Yeah.

You know, that was a— this is a trend that didn't exist, and everybody that had tried it before, it didn't work because the moment wasn't right. And we've created this new infrastructure that is actually gonna work. And what you saw kind of right out of the gate for that project was widespread adoption for a piece of infrastructure software that I don't think was seen before, just in terms of like cumulative downloads that would show up every month. And it hit 1 million downloads really fast. It hit 10 million downloads even faster. And now it's hundreds of millions of downloads total cumulative. And, and so you get to that, that sort of momentum that you start seeing in adoption in a way. And then you, you basically kind of say like, wow, like that, that is surprising. And so if you come in with a closed mindset of, you know what, you know, enterprise search or search across data, that's a, that's a broken market. It's never worked before. So why would you do that? You just aren't receptive to these ideas.

Yeah. So, you know, it's late 2019. If we're here 5 years from now, talking about the same conversation, the state of open source infrastructure investing, Benchmark stayed the same as a firm, but what's changed in the market?

I think that you're just gonna see the number of public companies that are large infrastructure enterprise software providers that are fundamentally open source companies is going to be a huge number of them. So, you know, already you've seen several go public. You've seen companies like MongoDB, MuleSoft, Elastic go public. And of course, MuleSoft got bought by Salesforce. You're going to see more of the established players adopt open source as a central part of their infrastructure story, I think.

Right.

And also you're going to see a lot of independent vendors that are big and public. And being public is a really important step for all these companies because it is a way of validation, frankly, for the entire customer base and for the business itself that you can really be part of a new tier of companies because not many make it. And especially in the open source world, so few have made it that those that can get all the way there, How do independent maintainers get paid in the future?

Is there some version of like a Patreon for maintainers? How do open source contributors—

I think it goes back to what we were talking about, which is that monetization of open source is fundamentally really, really hard. And the vast majority of open source projects will not monetize because it's so difficult. And that's the risk that you take as a creator when you make your infrastructure open source to people to use.

And I think what honestly motivates most of them isn't that. Like, I think that's just a big thing. Like, we, you know, like, people build that software and they write that software for various reasons. And I think a lot of it has to do with them being excited about their creation getting used by tens of thousands or millions of people, which is cool.

I want to switch a little bit to bio. I know, Eric, you've been looking at that space and you've are excited about it. Why don't you talk about why you're uniquely excited about it and maybe what types of things you've been looking at or looking for in the space?

Yeah, you know, a couple years ago, um, I met a company called Benchling, and, um, the, the founders, Sagi and Ashu, came in, and it was— it's a vertical SaaS company. It's a—

it's—

they provide SaaS for biopharma companies and become the system of record for biopharma research, basically. If you think about it, just in bio, what's happened is there's been the same kind of explosion of data that we've been talking about has happened in bio too. Now, you went from chemistry-based drugs to these really long genetic sequences, and the genetic sequences then produce some very large protein. It's a lot of data. It's a lot of variants. If you have a 10,000 base pair sequence and 50 variants of that sequence, that's a ton of data and a ton of complexity. Benchling goes after that. What I didn't realize then, and, and that kind of aha, or that with, with that, that one was there's this massive shift underway in the world where most of the drugs over the last 50 years have been chemistry-based. Like, it's like mixing chemicals together and getting another chemical, um, another chemistry out. And, and if you look at like what the FDA approved last year of the new drugs, Half of them were biology-based. And what does that mean? It's like literally you're feeding a cell or a yeast, like a, or, you know, a microbe or a mammalian cell, like a, they're, they're, they're basically getting fed, quote unquote, fed a genetic sequence, and then they're producing a protein. That's just, it's just like a completely different world than the chemistry world. We've moved from chemistry to biology. And so I think there's a lot of change happening there.

Yeah.

And a lot of the really cool stuff about personalized medicine or therapeutics, or most excitingly for me right now, is like the cancer immunotherapy stuff, uh, where we're literally like curing, curing various types of cancer, which is just— which was unthinkable even 10 years ago. Um, it's so cool, um, and it's such a really exciting frontier, and there's so much happening there. We unfortunately are not qualified Um, to, to go invest in like the new drug or the new therapeutic or the new whatever. We just don't know enough to go do that. Um, and so, um, but there are, but there are associated software companies that are getting built around this and, um, that are enabling some of these transitions. And it's a really exciting thing to be part of. And it's, and it's one of the coolest things to see.

Yeah. And there's all this sort of SaaS, I mean, Veeva is the most famous example.

Yeah, Veeva. Medidata just got bought for $6 billion. You know, I think there'll be others.

Yeah. And you guys have made a few bets in healthcare broadly over the past couple years. Stitch, Solve. What are the big lessons or how are you guys thinking about healthcare?

You know, I mean, Bill in particular and Sarah are definitely the most in terms of thinking about the healthcare dynamics. But I think that one of the big lessons is, Just these— it's so regulated and so screwed up in the United States that, you know, these startups kind of tilting against it is really difficult, um, in, in a lot of cases. Um, I think Solve is doing some really interesting work to, to, to make healthcare and services— healthcare services more accessible for everybody and helping consumers price shop and price compare and helping kind of small service providers get new customers.

Yeah.

So I think it's a really interesting play. On the pharma side and biopharma side, as I mentioned with Benchling, I think there's a really interesting opportunity to be kind of a new system of record that's getting created. But I think just the regulatory framework in the United States is really difficult for even things that unquestionably make sense, like using deep learning for images, like medical images and medical record analysis. Like, it unquestionably makes sense. It'll unquestionably be better. But it's just like, who has the economic incentive to spend money on that? Like, is a really tough question.

So maybe in closing, we'll close with the open source infrastructure question. How do we think about startups versus incumbents in the space? You know, will incumbents innovate in the same way that they have, you know, consumer perhaps, Facebook and Amazon and others? Or is it totally a startup market? And then how do startups, especially when there's problems, monetization, or when monetizing is hard, think about exits. Do you go public? Is there enough profitability there? Do you sell to these companies? How do you think about that?

Well, I think for us, one of the things that we aspire to with every single one of our founders and every single one of our companies is that we want to help them build an enduring, lasting, and more importantly, independent company. And so we are— we encourage founders to build for the long term and for for creating a great company that people want to work at and want to build their careers at over a long, long period of time. And so especially— and this is especially important in open source because you have to really build value in the open source project, get a lot of distribution, and then and only can you think about monetization on top of that. And so you have to go really slow for quite a long time before you can run at it.

Yeah.

And, you know, when Mongo went public, it was a 10-year-old company. And, you know, when Elastic went public, it had been around for quite a long time. And so these companies take a long time to start monetizing. And when they do start monetizing, they're great and they grow quickly and they're efficient. But, but it takes a while. And so you have to be very patient in the early days and really think about customer value, what you're delivering, how you're going to gain distribution, how you're gonna create community, how you're gonna create adoption. So there are a lot of these problems that you're working yourself through, and the only way to do that is to be patient and be very diligent and really go about it in a patient and slow way.

My guests today, Chetan Pedigunta and Eric Vishria. Guys, thank you so much. It's been a wonderful episode.

Thank you for having us.

Thank you so much.

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