AI transcript
0:00:05 The content here is for informational purposes only, should not be taken as legal business
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:18 For more details, please see a16z.com/disclosures.
0:00:22 Hi, and welcome to the A16Z podcast.
0:00:27 I’m Doss, and in this episode, we pull Mike Kelly, CIO of Red Hat, into a hallway style
0:00:33 conversation with A16Z General Partner, Peter Levine, as part of our annual A16Z Innovation
0:00:36 Summit, which happened late last year.
0:00:38 We cover a lot of ground.
0:00:43 They finish with M&A, given Red Hat has both been acquired and been an acquirer.
0:00:48 Along the way, though, they touch on open hybrid architectures, when an open-source project
0:00:52 becomes a product, and where services come in for an open-source startup.
0:00:57 They start with a quick take from Peter on his classic post from 2014, why there will
0:01:00 never be another Red Hat.
0:01:09 Red Hat did such a great job in pioneering what I call open-source 1.0, the free and support
0:01:15 model that their scale and capacity really made them a one-off.
0:01:21 As a startup, to be able to go and create the same back-end infrastructure is quite expensive
0:01:25 to go and do, so let me go one step further here.
0:01:31 I don’t believe there will be another Red Hat with the Red Hat business model.
0:01:37 However, I believe that there will be many, many, many successful open-source companies
0:01:45 into the future that have different business models from Red Hat, that are further unlocking
0:01:49 the potential of open-source, specifically open-source as a service.
0:01:54 If we look at the history of open-source, as soon as the economics come into balance
0:02:00 with the technology, we see entrepreneurs flourish, and the community flourishes because
0:02:02 there’s sustainability.
0:02:08 I think this whole SaaS open-source as a service has unlocked a whole new economic model.
0:02:13 Peter’s article ended with maybe even Red Hat should think about becoming the next Amazon,
0:02:17 and I think alluding to this kind of SaaS era that we’re in.
0:02:21 How has that changed how you’re approaching open-source and open-source communities?
0:02:25 Well, I think that our model started off as an on-prem subscription, which was pretty
0:02:31 unique at the time, and as the public cloud has taken home, one of the benefits that we
0:02:36 see is all of those technologies are built on the core asset that we have, which is Linux,
0:02:41 and the different providers have different instantiations of that technology, different
0:02:45 distributions of it, but our approach was to make sure that our technology runs on all
0:02:49 of them because, to us, it doesn’t really make a difference.
0:02:53 We have partnerships with all of the major cloud providers, and we obviously have our
0:02:55 on-prem capabilities as well.
0:02:59 The idea of this hybrid world is the one we placed a lot of bets on, the one that actually
0:03:02 fortunately has evolved to be the dominant design.
0:03:04 You talk a little bit about the dominant design.
0:03:07 How do you view this emerging enterprise architecture?
0:03:11 Where are we in that open or hybrid future?
0:03:19 There was this view about five years ago, I would say, that the cloud takes over.
0:03:21 There would be no more on-prem.
0:03:25 There would only be one cloud provider, and now what we’re seeing is that there are multiple
0:03:33 cloud providers, and the pendulum has sort of swung back to where there’s a right place
0:03:40 for certain on-prem software and infrastructure and applications, and there’s the right use
0:03:43 of the cloud.
0:03:51 There are many tools now that makes the integration of public and private, i.e., hybrid, seamless
0:03:54 across these different domains.
0:03:58 Once we have that, there’s really no edge or core, there’s just compute.
0:04:03 When we first started studying cloud and all of its different instantiations of what it
0:04:08 was going to be and the hype that surrounded it, it was a binary thing.
0:04:11 It was either you’re all public or you’re all on-prem, and it’s just like, “Come on,
0:04:13 that doesn’t make any sense.”
0:04:18 What has come to fruition now, I think, is everybody starting to recognize all the choice
0:04:23 that’s available, all the just incredible amount of innovation that’s taken place, that for
0:04:28 someone in a job like mine, it’s our responsibility and our job to take advantage of it.
0:04:35 The means by which I can manage it is almost as important as the means in which I can just
0:04:36 use it.
0:04:43 Here in my job, your partners and other functions in the company shouldn’t care what’s underneath
0:04:44 the solution.
0:04:48 All they should care about is that the solution is correct, and it’s optimized both for agility
0:04:51 and cost purposes for whatever problem you’re trying to solve.
0:04:55 Peter, you’ve said software as a service has really cracked open-source in terms of its
0:05:01 valuations and its potential, but at the same time, the end customer doesn’t really know
0:05:03 if it’s open-source or not.
0:05:09 From a development standpoint, we get all the innovation, the community, the bug fixing
0:05:15 that open-source has been great at for the past 30, 40 years, but really we can monetize
0:05:21 open-source at the full value of that software because people don’t care.
0:05:23 All they want is the service.
0:05:29 Just give me whatever that software provides, and I don’t really care whether it’s open-source
0:05:35 or not, and oh, by the way, I’m willing to pay full value for that stack.
0:05:42 In the 1.0 era, the economic problem, and I ran an open-source company in the 1.0 era,
0:05:49 I know the economic problem, is a buyer would compare, would say, “Okay, you’re giving away
0:05:56 your software for free and charging for support, and I’m going to go compare you to your proprietary
0:06:04 counterpart,” and the proprietary counterpart charges 80 cents for the software and 20 cents
0:06:05 for support.
0:06:10 Therefore, we’re going to only pay you 20 cents because all you’re doing is providing
0:06:11 support.
0:06:18 Now, if it’s run as a service and support and the service of the software is all built
0:06:25 in together, it’s 100 cents, and let me also add that going from open-source bits, the source
0:06:34 code to creating a reliable, manageable service, there’s a lot of work in that.
0:06:38 It’s not like you have open-source, and all of a sudden, you cobble this stuff together
0:06:41 and you get open-source as a service.
0:06:46 There’s a huge difference between a project and a product, and that is really, really
0:06:53 important, especially if you’re in my role in a company and you are inevitably going
0:06:58 to have members of your team saying, “Well, we’ll just get the free version,” and it’s
0:07:01 like, “Okay, well, who’s going to patch it?
0:07:07 Who are we relying on to provide feature function updates, integration, et cetera, et cetera,
0:07:08 et cetera?”
0:07:13 The notion that people don’t care because it’s a service, I think is true to a certain
0:07:18 extent, but the person that’s ultimately responsible ought to care on who’s behind the scenes.
0:07:23 The good thing is all this innovation that’s happening, especially in the software, in
0:07:26 the infrastructure and cloud space, it’s all user-driven innovation.
0:07:31 It’s all people that are practitioners that have a problem, and they try to go solve the
0:07:37 problem, and there’s a group that rallies around it, and the dominant design forms, and then
0:07:41 it would take the upstream project and create products.
0:07:45 You mentioned this idea of the difference between a project and a product.
0:07:49 How do you evaluate or think about that difference?
0:07:53 What tells you something is no longer just a project, it’s a fully-baked product?
0:07:55 You as an IT buyer might want to invest in.
0:07:59 Well, I think when a company stands up and puts some service around it, anybody can go
0:08:05 get the community version of a piece of software and use it as they see fit.
0:08:10 The minute it becomes a product is when a company says, “We offer a business model around
0:08:12 that particular project.”
0:08:16 It’s interesting what happened with the role of IT in a lot of companies.
0:08:21 For the longest time, what is our core competency was the discussion, and we said, “Well, we’re
0:08:30 really not great at IT, so we should try to run that at an optimal cost and look for partners
0:08:34 that can run it better than we end because we’re not in the IT business.”
0:08:38 Back in that time, open source was mostly a commodity play.
0:08:41 That’s how Red Hat got put on the map, was we were commoditizing a product.
0:08:47 Nowadays, where every company is all of a sudden a technology company, and companies are looking
0:08:52 to IT as, “Oh, we’re going to use technology to disrupt our competitors.”
0:08:57 People are in a job like mine, have to sort of retool ourselves, having the capability
0:09:03 for one individual team to run a distribution of open source software if the community version
0:09:08 is more tricky than having a trusted advisor partner with you and do it side by side.
0:09:13 As a buyer, I encourage everybody to inspect pretty heavily what’s behind the scenes there,
0:09:16 and how do I know who’s hand to shake when everything goes really well?
0:09:19 Let’s say I start an open source company.
0:09:24 When does Red Hat say, “We’re going to grab those bits and put them into our distribution
0:09:27 versus we’re going to allow that company to exist?”
0:09:33 There’s always the self-rationalized argument, which I would do if I were Red Hat to say,
0:09:37 “Look, our customers want one stop, and for anything infrastructure, we’re going to go
0:09:41 off for that because that’s what our customers are asking for.”
0:09:45 Maybe help me and us to understand how you think about that.
0:09:49 First and foremost, you’ve got to look through it through the filter of what is our strategy?
0:09:50 What are we going after?
0:09:56 There are lots of parts of the enterprise where we have not played historically, and
0:09:59 there are parts where we play and we would try to play well.
0:10:00 So we’re always looking at the portfolio.
0:10:01 What’s the right mix?
0:10:03 What’s the right value proposition for us?
0:10:04 It’s interesting.
0:10:12 Just from an entrepreneur’s viewpoint, if I start company A versus B, what’s the likelihood
0:10:19 that Red Hat is either going to want to partner with me or adopt that technology?
0:10:26 From my lens, if the company that’s founded is the founder of the project is the CEO and
0:10:31 the five people that he worked with on the project, maybe there’s seven or eight employees
0:10:36 total, I’m probably going to scratch my head about that in terms of the longevity and just
0:10:38 the sustainability of it.
0:10:42 It might be good for some experimental stuff I’m doing in my shop, but for production type
0:10:43 stuff you’ve got to think twice about it.
0:10:44 Yeah, for sure.
0:10:49 But those companies that are small, they start out that way and then they get a tailwind
0:10:51 and then now they’re 50 people.
0:10:59 At that point, as was with the company that I ran, we got to be of a scale where customers
0:11:02 actually trusted us and we could go do things.
0:11:05 As somebody in IT who’s kind of evaluating these different projects, maybe the first
0:11:11 ones to test things out, as you mentioned, how do you decide which bets are worth making
0:11:13 from a technology perspective?
0:11:14 What are you looking for?
0:11:16 Every CIO on the planet is trying to do this.
0:11:21 You’re trying to balance operational excellence and running the business with innovation and
0:11:23 driving the business forward.
0:11:28 Again, if much of the innovation is coming from the open source community, then a lot
0:11:34 of the bets that you’re placing for new technologies are rooted in solutions that are born there.
0:11:38 For me, I always try to think about how are we balancing those two things because it’s
0:11:40 really important.
0:11:45 If all you do is focus on keeping the lights on and making sure everything hums, you’re
0:11:49 going to miss opportunity to drive the business forward.
0:11:53 To me, it’s all about striking a balance and our team, we spend a lot of time thinking
0:11:55 about what are the strategic priorities of the company?
0:11:57 How do we want to translate those in IT?
0:11:59 Where can we take some calculated risks?
0:12:05 Really curious to just hear how that has informed product development within Red Hat and what
0:12:09 sort of advice you might have for others in terms of using their own software to advance
0:12:10 it.
0:12:11 We have a program within Red Hat.
0:12:14 It’s called Red Hat on Red Hat.
0:12:17 I made it pretty clear from the beginning that that doesn’t mean by default we’re just
0:12:18 going to choose our products.
0:12:20 I mean, they have to work.
0:12:27 We had to create some bridges and some trust with engineering and try to demonstrate that
0:12:31 we could be that customer zero and drink our own champagne.
0:12:35 What advice do you have, I guess, for somebody who’s in that process of trying to build that
0:12:36 feedback loop?
0:12:43 What does it take to get trust between IT or your internal customer and engineering to
0:12:45 actually get them to listen to that feedback?
0:12:49 You have to prove that what you’re really hired to do, which is make sure the company
0:12:53 runs, is happening really, really well and garner some respect and some credibility that
0:12:54 way.
0:12:56 Then you can start to build trust.
0:13:00 If all you’re focusing on is giving feedback and the servers go down every five minutes,
0:13:01 you can have a problem.
0:13:06 To me, I’ve always viewed the ability for us to deploy Red Hat’s product and give feedback
0:13:08 is a privilege.
0:13:12 We have to earn that because if you don’t, you’re just a noisy distraction.
0:13:16 Let’s talk a little bit about mergers and acquisitions because I think that’s an example
0:13:21 where often you’re looking to buy innovation or core functionality.
0:13:27 How do you then as an IT department approach integrating that in?
0:13:34 Every acquisition and coming together of companies or divestiture or whatever, they’re all different.
0:13:35 I’ve been through a lot of them.
0:13:40 To me, the common denominator in all of them is a deep understanding of the culture of
0:13:44 each company because that will determine how close you want to be and how far apart
0:13:49 you need to remain with the focus on the original thesis for why you’re buying the company in
0:13:50 the first place.
0:13:53 In a lot of cases, open source companies, it’s about the people.
0:13:57 If you buy a company for the people that are there and you try to integrate things, people
0:14:00 don’t want integrated, you destroy all the value while you bought it the first place.
0:14:04 There’s a spectrum of M&A.
0:14:12 If you’re acquiring a small organization and it’s the few technical people, that’s very
0:14:18 different than acquiring a much larger company that has a full sales, marketing kind of whole
0:14:19 energy around it.
0:14:27 I mean, you guys were just acquired by IBM, so there you go, tiny companies swallowed
0:14:31 by a giant.
0:14:34 There was a lot beyond the technical capabilities.
0:14:39 There’s a lot of channel and go-to-market capabilities, and you all are pretty independent
0:14:46 from IBM, so that’s an example of full independence because I would imagine the two cultures when
0:14:52 integrated together might have really hampered the technical and go-to-market capability
0:14:56 of Red Hat, and so therefore, in that case, you leave it alone.
0:15:03 In other cases, you would combine things to where, let’s say, in my company, we were acquired,
0:15:08 and we leveraged the sales organization of the acquiring company, but we’re standalone
0:15:14 from a technical standpoint because it was believed that our product fed into a much larger
0:15:20 sales organization would increase the traction as opposed to us doing it alone.
0:15:26 From a spreadsheet standpoint, when the two companies meet initially, everything looks
0:15:27 wonderful.
0:15:31 It’s one plus one equals three, everything’s accretive, we’re going to go do all these
0:15:37 great things, and a lot of times it doesn’t quite work out that way, and a lot of it has
0:15:44 to do with integration and how you think about the operating framework of the two organizations
0:15:45 post-acquisition.
0:15:51 My view is, if you take the time and study that and you get it right, the spreadsheet
0:15:57 model that was produced will be proven to be incorrect because you’ll beat it by so much.
0:16:05 My advice to entrepreneurs I gave myself this advice was if you are considering an acquisition,
0:16:10 think about the level of autonomy that you are comfortable with once you’re inside the
0:16:17 new organization, because let’s say I’m the CEO of my company, even if there’s five people
0:16:22 in my company, I’m the one who’s making all the decisions, and then you’re acquired by
0:16:27 a larger organization, in the new company you might be a director in the engineering group
0:16:33 with five direct reports, so I would really think about your own level of happiness inside
0:16:38 this big company, am I going to be able to really do what I need to do?
0:16:39 That’s fascinating.
0:16:42 That’s not something I’ve heard talked about a lot, because usually people are thinking
0:16:47 about the dollar amounts, the valuations, and that’s a very human component to it.
0:16:51 The dollar part, of course, is a factor.
0:16:58 The company that’s acquiring the small company wants that team to stay, so they may negotiate
0:17:03 a deal where you get paid out over three years, and you don’t get it all up front.
0:17:08 If you’re making a commitment to the buying organization that me and my team, we’re going
0:17:13 to stick around, and the day after you get your payday you leave, that’s a credibility
0:17:14 issue.
0:17:19 I think it’s very important to make sure that if you are committing to stay, or let’s even
0:17:27 say financially, you are incented to stay, make sure it’s a job that you’re able and
0:17:30 willing to go and do, otherwise stay independent.
0:17:34 But don’t fool yourself into believing that if it’s a miserable environment that you’re
0:17:38 going into, that you’re just going to be happy because you happen to get paid.
0:17:40 It’s like basic relationship advice.
0:17:42 If it’s bad now, it’s probably going to be bad later.
0:17:43 Right.
0:17:47 As an entrepreneur, as a CEO, you have an obligation to your team.
0:17:52 They’re going to trust that you’re going to make the right decision, put that team in
0:17:58 a reasonably good place in the new organization, and those are the discussions that I would
0:18:04 have with the acquiring organization to make sure that everything aligns beyond just the
0:18:06 financial numbers.
0:18:11 It is a negotiation with the acquiring company because if I’m, let’s say, an entrepreneur
0:18:15 and I have a couple of hundred people and I have a sales organization, the best case
0:18:21 for me is that we’re left as an independent company, and all we do is get funding from
0:18:22 the mother ship.
0:18:28 Now, the acquiring company may say, “Well, wait a minute, we have this tremendous go-to-market
0:18:36 engine with 3,000 salespeople and marketing and all that, and we believe that it’s better
0:18:43 for your sales to actually be incorporated into our sales so we don’t have confusion
0:18:46 at the customer’s side.”
0:18:52 That’s a negotiation, and then whatever you come up with, you want to make sure that it’s
0:18:57 durable and that everyone is reasonably happy with the outcome.
0:19:03 For me, it was all about establishing the guiding principles upfront, knowing that there’s
0:19:08 probably somebody who’s done something like this before, and you should go talk to them.
0:19:14 If a large company is acquiring a small company, chances are that large company has done many,
0:19:16 many, many acquisitions.
0:19:22 There are plenty of people to go talk to inside the company to say, “Hey, how did it go?
0:19:24 What would you do differently?”
0:19:28 Furthermore, these acquisitions have to be successful.
0:19:34 There are big deals, and some manager is on the hook to make them work successfully, maybe
0:19:36 all the way up to the CEO.
0:19:42 If there are elements that the acquiring company can improve relative to their overall process
0:19:48 or org design or whatever, they’re happy to go and make those changes.
0:19:54 I think that goes back into community and how you’re treating the communities that you
0:19:55 become the custodians of.
0:19:59 What advice do you have for somebody who’s managing an open-source project to be good
0:20:02 custodians of the community?
0:20:06 My advice would be stay focused on the problem you’re trying to solve, be a good citizen
0:20:11 of the community, build partnerships, and continue to recognize that it’s not about
0:20:12 you, it’s about us.
0:20:13 I think that’s a great note to end on.
0:20:15 I just want to say thank you, Mike.
0:20:16 Thank you, Peter, for joining.
0:20:17 Sure.
0:00:10 tax or investment advice or be used to evaluate any investment or security and is not directed
0:00:14 at any investors or potential investors in any A16Z fund.
0:00:18 For more details, please see a16z.com/disclosures.
0:00:22 Hi, and welcome to the A16Z podcast.
0:00:27 I’m Doss, and in this episode, we pull Mike Kelly, CIO of Red Hat, into a hallway style
0:00:33 conversation with A16Z General Partner, Peter Levine, as part of our annual A16Z Innovation
0:00:36 Summit, which happened late last year.
0:00:38 We cover a lot of ground.
0:00:43 They finish with M&A, given Red Hat has both been acquired and been an acquirer.
0:00:48 Along the way, though, they touch on open hybrid architectures, when an open-source project
0:00:52 becomes a product, and where services come in for an open-source startup.
0:00:57 They start with a quick take from Peter on his classic post from 2014, why there will
0:01:00 never be another Red Hat.
0:01:09 Red Hat did such a great job in pioneering what I call open-source 1.0, the free and support
0:01:15 model that their scale and capacity really made them a one-off.
0:01:21 As a startup, to be able to go and create the same back-end infrastructure is quite expensive
0:01:25 to go and do, so let me go one step further here.
0:01:31 I don’t believe there will be another Red Hat with the Red Hat business model.
0:01:37 However, I believe that there will be many, many, many successful open-source companies
0:01:45 into the future that have different business models from Red Hat, that are further unlocking
0:01:49 the potential of open-source, specifically open-source as a service.
0:01:54 If we look at the history of open-source, as soon as the economics come into balance
0:02:00 with the technology, we see entrepreneurs flourish, and the community flourishes because
0:02:02 there’s sustainability.
0:02:08 I think this whole SaaS open-source as a service has unlocked a whole new economic model.
0:02:13 Peter’s article ended with maybe even Red Hat should think about becoming the next Amazon,
0:02:17 and I think alluding to this kind of SaaS era that we’re in.
0:02:21 How has that changed how you’re approaching open-source and open-source communities?
0:02:25 Well, I think that our model started off as an on-prem subscription, which was pretty
0:02:31 unique at the time, and as the public cloud has taken home, one of the benefits that we
0:02:36 see is all of those technologies are built on the core asset that we have, which is Linux,
0:02:41 and the different providers have different instantiations of that technology, different
0:02:45 distributions of it, but our approach was to make sure that our technology runs on all
0:02:49 of them because, to us, it doesn’t really make a difference.
0:02:53 We have partnerships with all of the major cloud providers, and we obviously have our
0:02:55 on-prem capabilities as well.
0:02:59 The idea of this hybrid world is the one we placed a lot of bets on, the one that actually
0:03:02 fortunately has evolved to be the dominant design.
0:03:04 You talk a little bit about the dominant design.
0:03:07 How do you view this emerging enterprise architecture?
0:03:11 Where are we in that open or hybrid future?
0:03:19 There was this view about five years ago, I would say, that the cloud takes over.
0:03:21 There would be no more on-prem.
0:03:25 There would only be one cloud provider, and now what we’re seeing is that there are multiple
0:03:33 cloud providers, and the pendulum has sort of swung back to where there’s a right place
0:03:40 for certain on-prem software and infrastructure and applications, and there’s the right use
0:03:43 of the cloud.
0:03:51 There are many tools now that makes the integration of public and private, i.e., hybrid, seamless
0:03:54 across these different domains.
0:03:58 Once we have that, there’s really no edge or core, there’s just compute.
0:04:03 When we first started studying cloud and all of its different instantiations of what it
0:04:08 was going to be and the hype that surrounded it, it was a binary thing.
0:04:11 It was either you’re all public or you’re all on-prem, and it’s just like, “Come on,
0:04:13 that doesn’t make any sense.”
0:04:18 What has come to fruition now, I think, is everybody starting to recognize all the choice
0:04:23 that’s available, all the just incredible amount of innovation that’s taken place, that for
0:04:28 someone in a job like mine, it’s our responsibility and our job to take advantage of it.
0:04:35 The means by which I can manage it is almost as important as the means in which I can just
0:04:36 use it.
0:04:43 Here in my job, your partners and other functions in the company shouldn’t care what’s underneath
0:04:44 the solution.
0:04:48 All they should care about is that the solution is correct, and it’s optimized both for agility
0:04:51 and cost purposes for whatever problem you’re trying to solve.
0:04:55 Peter, you’ve said software as a service has really cracked open-source in terms of its
0:05:01 valuations and its potential, but at the same time, the end customer doesn’t really know
0:05:03 if it’s open-source or not.
0:05:09 From a development standpoint, we get all the innovation, the community, the bug fixing
0:05:15 that open-source has been great at for the past 30, 40 years, but really we can monetize
0:05:21 open-source at the full value of that software because people don’t care.
0:05:23 All they want is the service.
0:05:29 Just give me whatever that software provides, and I don’t really care whether it’s open-source
0:05:35 or not, and oh, by the way, I’m willing to pay full value for that stack.
0:05:42 In the 1.0 era, the economic problem, and I ran an open-source company in the 1.0 era,
0:05:49 I know the economic problem, is a buyer would compare, would say, “Okay, you’re giving away
0:05:56 your software for free and charging for support, and I’m going to go compare you to your proprietary
0:06:04 counterpart,” and the proprietary counterpart charges 80 cents for the software and 20 cents
0:06:05 for support.
0:06:10 Therefore, we’re going to only pay you 20 cents because all you’re doing is providing
0:06:11 support.
0:06:18 Now, if it’s run as a service and support and the service of the software is all built
0:06:25 in together, it’s 100 cents, and let me also add that going from open-source bits, the source
0:06:34 code to creating a reliable, manageable service, there’s a lot of work in that.
0:06:38 It’s not like you have open-source, and all of a sudden, you cobble this stuff together
0:06:41 and you get open-source as a service.
0:06:46 There’s a huge difference between a project and a product, and that is really, really
0:06:53 important, especially if you’re in my role in a company and you are inevitably going
0:06:58 to have members of your team saying, “Well, we’ll just get the free version,” and it’s
0:07:01 like, “Okay, well, who’s going to patch it?
0:07:07 Who are we relying on to provide feature function updates, integration, et cetera, et cetera,
0:07:08 et cetera?”
0:07:13 The notion that people don’t care because it’s a service, I think is true to a certain
0:07:18 extent, but the person that’s ultimately responsible ought to care on who’s behind the scenes.
0:07:23 The good thing is all this innovation that’s happening, especially in the software, in
0:07:26 the infrastructure and cloud space, it’s all user-driven innovation.
0:07:31 It’s all people that are practitioners that have a problem, and they try to go solve the
0:07:37 problem, and there’s a group that rallies around it, and the dominant design forms, and then
0:07:41 it would take the upstream project and create products.
0:07:45 You mentioned this idea of the difference between a project and a product.
0:07:49 How do you evaluate or think about that difference?
0:07:53 What tells you something is no longer just a project, it’s a fully-baked product?
0:07:55 You as an IT buyer might want to invest in.
0:07:59 Well, I think when a company stands up and puts some service around it, anybody can go
0:08:05 get the community version of a piece of software and use it as they see fit.
0:08:10 The minute it becomes a product is when a company says, “We offer a business model around
0:08:12 that particular project.”
0:08:16 It’s interesting what happened with the role of IT in a lot of companies.
0:08:21 For the longest time, what is our core competency was the discussion, and we said, “Well, we’re
0:08:30 really not great at IT, so we should try to run that at an optimal cost and look for partners
0:08:34 that can run it better than we end because we’re not in the IT business.”
0:08:38 Back in that time, open source was mostly a commodity play.
0:08:41 That’s how Red Hat got put on the map, was we were commoditizing a product.
0:08:47 Nowadays, where every company is all of a sudden a technology company, and companies are looking
0:08:52 to IT as, “Oh, we’re going to use technology to disrupt our competitors.”
0:08:57 People are in a job like mine, have to sort of retool ourselves, having the capability
0:09:03 for one individual team to run a distribution of open source software if the community version
0:09:08 is more tricky than having a trusted advisor partner with you and do it side by side.
0:09:13 As a buyer, I encourage everybody to inspect pretty heavily what’s behind the scenes there,
0:09:16 and how do I know who’s hand to shake when everything goes really well?
0:09:19 Let’s say I start an open source company.
0:09:24 When does Red Hat say, “We’re going to grab those bits and put them into our distribution
0:09:27 versus we’re going to allow that company to exist?”
0:09:33 There’s always the self-rationalized argument, which I would do if I were Red Hat to say,
0:09:37 “Look, our customers want one stop, and for anything infrastructure, we’re going to go
0:09:41 off for that because that’s what our customers are asking for.”
0:09:45 Maybe help me and us to understand how you think about that.
0:09:49 First and foremost, you’ve got to look through it through the filter of what is our strategy?
0:09:50 What are we going after?
0:09:56 There are lots of parts of the enterprise where we have not played historically, and
0:09:59 there are parts where we play and we would try to play well.
0:10:00 So we’re always looking at the portfolio.
0:10:01 What’s the right mix?
0:10:03 What’s the right value proposition for us?
0:10:04 It’s interesting.
0:10:12 Just from an entrepreneur’s viewpoint, if I start company A versus B, what’s the likelihood
0:10:19 that Red Hat is either going to want to partner with me or adopt that technology?
0:10:26 From my lens, if the company that’s founded is the founder of the project is the CEO and
0:10:31 the five people that he worked with on the project, maybe there’s seven or eight employees
0:10:36 total, I’m probably going to scratch my head about that in terms of the longevity and just
0:10:38 the sustainability of it.
0:10:42 It might be good for some experimental stuff I’m doing in my shop, but for production type
0:10:43 stuff you’ve got to think twice about it.
0:10:44 Yeah, for sure.
0:10:49 But those companies that are small, they start out that way and then they get a tailwind
0:10:51 and then now they’re 50 people.
0:10:59 At that point, as was with the company that I ran, we got to be of a scale where customers
0:11:02 actually trusted us and we could go do things.
0:11:05 As somebody in IT who’s kind of evaluating these different projects, maybe the first
0:11:11 ones to test things out, as you mentioned, how do you decide which bets are worth making
0:11:13 from a technology perspective?
0:11:14 What are you looking for?
0:11:16 Every CIO on the planet is trying to do this.
0:11:21 You’re trying to balance operational excellence and running the business with innovation and
0:11:23 driving the business forward.
0:11:28 Again, if much of the innovation is coming from the open source community, then a lot
0:11:34 of the bets that you’re placing for new technologies are rooted in solutions that are born there.
0:11:38 For me, I always try to think about how are we balancing those two things because it’s
0:11:40 really important.
0:11:45 If all you do is focus on keeping the lights on and making sure everything hums, you’re
0:11:49 going to miss opportunity to drive the business forward.
0:11:53 To me, it’s all about striking a balance and our team, we spend a lot of time thinking
0:11:55 about what are the strategic priorities of the company?
0:11:57 How do we want to translate those in IT?
0:11:59 Where can we take some calculated risks?
0:12:05 Really curious to just hear how that has informed product development within Red Hat and what
0:12:09 sort of advice you might have for others in terms of using their own software to advance
0:12:10 it.
0:12:11 We have a program within Red Hat.
0:12:14 It’s called Red Hat on Red Hat.
0:12:17 I made it pretty clear from the beginning that that doesn’t mean by default we’re just
0:12:18 going to choose our products.
0:12:20 I mean, they have to work.
0:12:27 We had to create some bridges and some trust with engineering and try to demonstrate that
0:12:31 we could be that customer zero and drink our own champagne.
0:12:35 What advice do you have, I guess, for somebody who’s in that process of trying to build that
0:12:36 feedback loop?
0:12:43 What does it take to get trust between IT or your internal customer and engineering to
0:12:45 actually get them to listen to that feedback?
0:12:49 You have to prove that what you’re really hired to do, which is make sure the company
0:12:53 runs, is happening really, really well and garner some respect and some credibility that
0:12:54 way.
0:12:56 Then you can start to build trust.
0:13:00 If all you’re focusing on is giving feedback and the servers go down every five minutes,
0:13:01 you can have a problem.
0:13:06 To me, I’ve always viewed the ability for us to deploy Red Hat’s product and give feedback
0:13:08 is a privilege.
0:13:12 We have to earn that because if you don’t, you’re just a noisy distraction.
0:13:16 Let’s talk a little bit about mergers and acquisitions because I think that’s an example
0:13:21 where often you’re looking to buy innovation or core functionality.
0:13:27 How do you then as an IT department approach integrating that in?
0:13:34 Every acquisition and coming together of companies or divestiture or whatever, they’re all different.
0:13:35 I’ve been through a lot of them.
0:13:40 To me, the common denominator in all of them is a deep understanding of the culture of
0:13:44 each company because that will determine how close you want to be and how far apart
0:13:49 you need to remain with the focus on the original thesis for why you’re buying the company in
0:13:50 the first place.
0:13:53 In a lot of cases, open source companies, it’s about the people.
0:13:57 If you buy a company for the people that are there and you try to integrate things, people
0:14:00 don’t want integrated, you destroy all the value while you bought it the first place.
0:14:04 There’s a spectrum of M&A.
0:14:12 If you’re acquiring a small organization and it’s the few technical people, that’s very
0:14:18 different than acquiring a much larger company that has a full sales, marketing kind of whole
0:14:19 energy around it.
0:14:27 I mean, you guys were just acquired by IBM, so there you go, tiny companies swallowed
0:14:31 by a giant.
0:14:34 There was a lot beyond the technical capabilities.
0:14:39 There’s a lot of channel and go-to-market capabilities, and you all are pretty independent
0:14:46 from IBM, so that’s an example of full independence because I would imagine the two cultures when
0:14:52 integrated together might have really hampered the technical and go-to-market capability
0:14:56 of Red Hat, and so therefore, in that case, you leave it alone.
0:15:03 In other cases, you would combine things to where, let’s say, in my company, we were acquired,
0:15:08 and we leveraged the sales organization of the acquiring company, but we’re standalone
0:15:14 from a technical standpoint because it was believed that our product fed into a much larger
0:15:20 sales organization would increase the traction as opposed to us doing it alone.
0:15:26 From a spreadsheet standpoint, when the two companies meet initially, everything looks
0:15:27 wonderful.
0:15:31 It’s one plus one equals three, everything’s accretive, we’re going to go do all these
0:15:37 great things, and a lot of times it doesn’t quite work out that way, and a lot of it has
0:15:44 to do with integration and how you think about the operating framework of the two organizations
0:15:45 post-acquisition.
0:15:51 My view is, if you take the time and study that and you get it right, the spreadsheet
0:15:57 model that was produced will be proven to be incorrect because you’ll beat it by so much.
0:16:05 My advice to entrepreneurs I gave myself this advice was if you are considering an acquisition,
0:16:10 think about the level of autonomy that you are comfortable with once you’re inside the
0:16:17 new organization, because let’s say I’m the CEO of my company, even if there’s five people
0:16:22 in my company, I’m the one who’s making all the decisions, and then you’re acquired by
0:16:27 a larger organization, in the new company you might be a director in the engineering group
0:16:33 with five direct reports, so I would really think about your own level of happiness inside
0:16:38 this big company, am I going to be able to really do what I need to do?
0:16:39 That’s fascinating.
0:16:42 That’s not something I’ve heard talked about a lot, because usually people are thinking
0:16:47 about the dollar amounts, the valuations, and that’s a very human component to it.
0:16:51 The dollar part, of course, is a factor.
0:16:58 The company that’s acquiring the small company wants that team to stay, so they may negotiate
0:17:03 a deal where you get paid out over three years, and you don’t get it all up front.
0:17:08 If you’re making a commitment to the buying organization that me and my team, we’re going
0:17:13 to stick around, and the day after you get your payday you leave, that’s a credibility
0:17:14 issue.
0:17:19 I think it’s very important to make sure that if you are committing to stay, or let’s even
0:17:27 say financially, you are incented to stay, make sure it’s a job that you’re able and
0:17:30 willing to go and do, otherwise stay independent.
0:17:34 But don’t fool yourself into believing that if it’s a miserable environment that you’re
0:17:38 going into, that you’re just going to be happy because you happen to get paid.
0:17:40 It’s like basic relationship advice.
0:17:42 If it’s bad now, it’s probably going to be bad later.
0:17:43 Right.
0:17:47 As an entrepreneur, as a CEO, you have an obligation to your team.
0:17:52 They’re going to trust that you’re going to make the right decision, put that team in
0:17:58 a reasonably good place in the new organization, and those are the discussions that I would
0:18:04 have with the acquiring organization to make sure that everything aligns beyond just the
0:18:06 financial numbers.
0:18:11 It is a negotiation with the acquiring company because if I’m, let’s say, an entrepreneur
0:18:15 and I have a couple of hundred people and I have a sales organization, the best case
0:18:21 for me is that we’re left as an independent company, and all we do is get funding from
0:18:22 the mother ship.
0:18:28 Now, the acquiring company may say, “Well, wait a minute, we have this tremendous go-to-market
0:18:36 engine with 3,000 salespeople and marketing and all that, and we believe that it’s better
0:18:43 for your sales to actually be incorporated into our sales so we don’t have confusion
0:18:46 at the customer’s side.”
0:18:52 That’s a negotiation, and then whatever you come up with, you want to make sure that it’s
0:18:57 durable and that everyone is reasonably happy with the outcome.
0:19:03 For me, it was all about establishing the guiding principles upfront, knowing that there’s
0:19:08 probably somebody who’s done something like this before, and you should go talk to them.
0:19:14 If a large company is acquiring a small company, chances are that large company has done many,
0:19:16 many, many acquisitions.
0:19:22 There are plenty of people to go talk to inside the company to say, “Hey, how did it go?
0:19:24 What would you do differently?”
0:19:28 Furthermore, these acquisitions have to be successful.
0:19:34 There are big deals, and some manager is on the hook to make them work successfully, maybe
0:19:36 all the way up to the CEO.
0:19:42 If there are elements that the acquiring company can improve relative to their overall process
0:19:48 or org design or whatever, they’re happy to go and make those changes.
0:19:54 I think that goes back into community and how you’re treating the communities that you
0:19:55 become the custodians of.
0:19:59 What advice do you have for somebody who’s managing an open-source project to be good
0:20:02 custodians of the community?
0:20:06 My advice would be stay focused on the problem you’re trying to solve, be a good citizen
0:20:11 of the community, build partnerships, and continue to recognize that it’s not about
0:20:12 you, it’s about us.
0:20:13 I think that’s a great note to end on.
0:20:15 I just want to say thank you, Mike.
0:20:16 Thank you, Peter, for joining.
0:20:17 Sure.
In 2014, in “Why There Will Never Be Another Red Hat,” Peter Levine argued that Red Hat’s open source business model of commercializing support and services was highly difficult to replicate. Instead, he predicted the future of open source companies would be open source-as-a-service. And today SaaS has emerged as the dominant business model.
In this podcast, recorded as a hallway-style conversation as part of the a16z Innovation Summit last year, Peter chats with Red Hat CIO, Mike Kelly, about what it means to be an open source CIO today – and how even Red Hat is evolving in the open SaaS era. They cover everything from why open hybrid has become the dominant enterprise architecture to how CIOs should think about adopting new technologies to what it takes for an M&A to be successful, beyond the spreadsheets.