Intro

Michael: Hello and welcome to Open Source Underdogs. I’m your host Mike Schwartz, and this is episode 58, an interview with Armon Dadgar, Co-Founder and CTO of HashiCorp, the company behind the Uber successful open-source projects Terraform and Vault.

In addition to writing one of the pillars of cloud infrastructure with over 100 million downloads, HashiCorp IPO-ed in December of 2021, with over 250 million in trailing 12-months revenue.

So, without further ado, let’s just cut to the interview with Armon, and let him tell you about how HashiCorp built this amazing business. Armon, thank you so much for joining the podcast today.

Armon: Yeah. Thank you, Mike, pleasure to be here.

Common Theme Of Products

Michael: HashiCorp has a number of great products, and we could probably fill three thirty-minute podcasts just talking about Terraform, Vault and Consul, but at a high level, what’s a common theme of business problems that these products solve and how do they fit together?

Armon: All of them are coming motivated ultimately by the same problem, which is, how do we actually build modern applications in a cloud environment. It sounds like a simple statement, but once you double-click into that, there’s a reason we have so many products. It’s really looking at, “Hey, if we think about what it means to build a modern cloud application, we want it to be automated in the delivery end-to-end, and we want to bake in security-by-default. We’re sort of changing our application architectures to be much more sort of microservice or smaller units rather than they become monolithic applications.

And so, once you sort of bring all those requirements and you end up with a whole bunch of challenges around, how do I provision that infrastructure, how do I secure it, how do I connect it all together, how do I deploy and manage the runtime of those applications. So, collectively, that ends up being the focus of our broader portfolio.

What Is Commercial?

Michael: I was reading the S-1, there’s a great sentence that describes open-core where it says, “We sell proprietary commercial software that builds on our open-source products with additional enterprise capabilities.” What are some of the examples of those enterprise capabilities?

Armon: Sure. I’ll just pick one product to make it a little bit easier. If we’re talking about our Vault product, as an example, you know, the open-source version really designed around kind of a single-data center, single-deployment use case, if we look at the enterprise features, there is a whole class of them just based around things like multi-data center.

If I want to do replication of my data across multiple data centers, if I want to be able to do a horizontal scale out from just one active node to multiple active nodes and do a sort of a horizontal scaling, if I want to do a disaster recovery sort of a replication, where I have a different hot/cold set up effectively, where I have our hot/warm I should call it, and have a different site that I can flip over for disaster recovery purposes. It’s all of those different kind of capabilities for us, sort of classified enterprise, but you have to have a license too. And that’s why we sort of describe that assignment as open-core approach.

License Enforcement

Michael: With open-source software customers get used to deploying it without any license enforcement mechanism, are you using license enforcement for the enterprise distribution? If you are, how’s that going?

Armon: Yeah. The enterprise binaries for us do require a license. We’ve tried to make it super easy so that operationally it’s not a big lift, as people go from open-source enterprise. So, effectively, you swapped open-source binary for enterprise binary – it’s configured the same operates the same.

And then, alongside the binary, you basically put the license file there. And then, the enterprise version autoloads the file. So, it’s really meant to be a very low lift in terms of doing the transition between them, but we do have a license file and it doesn’t force some level of what’s the term of your license, what’s the maximum number of entitlements. And that’s baked into the license.

Tension Between Free and Commercial?

Michael: Is there ever any tension in the product team when you think of a new feature about whether there should be an open-source feature or a commercial future?

Armon: Occasionally, I think one of the things we did early on, HashiCorp history was to articulate the framework on how do we think about what is open source, first what isn’t. And so, for us, the delineation has always been “if it’s a feature that enables our technical practitioner”, meaning, you’re the end-user of Terraform or Vault. And this feature is kind of core to that workflow of the problem you’re trying to solve with the product. Then, it really should be open source. The tool shouldn’t feel like crippled in any sense to the end-user. So, whether you’re managing one VM or a million VMs, great, it’s not scale limited, or crippled in any way.

Then, on the other side, we have a set of what we call organizational complexity, where it’s really not a feature of an individual user needs. It’s an artifact of running it in a larger organization.

And a large organization cares about things like single sign-on, role-based access control, 2FA, audit logs, security and compliance. Those are not things any individual user would care about, it’s only in the context of an organization that you run into those requirements or those challenges. So, those more cleanly fall into what we would consider enterprise capabilities.

Because we have this framework, by and large most features are pretty clear – it kind of falls into one bucket or the other. Every once in a while, you sort of get that tension of a feature, where it’s not entirely obvious which bucket it should go into, then, it turns into a bit more of a discussion. But for the most part it’s usually clear-cut.

Accounting For Support V. License

Michael: I was looking at HashiCorp FQ, and I noticed that you break out revenues by category and support was roughly three-quarters of the revenue. And I’m wondering if you have customers who are using enterprise features? Is there something about the support subscription that is easier to mark it, or why is that?

Armon: Yeah. It’s a super common misconception when people look at our public filing. And this has to do with sort of the vagarities of 606 accounting rules. So, certainly I’m not an accountant, but at a high level effectively, we sell one product. We sell an enterprise subscription to our software. That has support included. We do not sell support separately. You can’t buy an open-source only support license from us.

So, the disaggregation that you see between a license and support line, whether it’s on our 10-Q or 10Ks or S1, is purely a sort of accounting artifact forced by 606 rules. We’re forced to make some determination on what’s considered license and what’s considered support. And that assessment is actually done by a third party, by PWC for us. So, it’s entirely strange accounting artifact. You actually have to add those two-line items together, because, effectively, we only sell one thing, which is an enterprise skew, and those two-line items are combined.

Market Segmentation

Michael: You know, infrastructure product, that’s very horizontal and has practically universal appeal. It can be both a blessing and a curse, because when your product appeals to everyone, who do you actually market to or sell it to?  Does HashiCorp segment the market, and if you do, does that lead to any schizophrenia for the marketing teams or any of the other teams?

Armon: This is, I think, in some sense the best question. And I think if I could know what I know now and go back to founding HashiCorp again, the most valuable lesson I think I’ve learned — if I go back to early HashiCorp, and you ask me the exact same question, I would have said, “No. We sell to everybody. Everybody is our customer.” What we learned is that that’s a mistake. If you say everyone’s your customers, kind of the same as a nobody’s your customer, frankly.

Because the buying motions, what people want, how you would actually build a go-to-market team, are completely different between saying “I care about the Global 2000.”, the world’s largest enterprises, and “I care about the long tail of SMP.” We have almost nothing in common, frankly, from a go-to-market perspective. So, I think early on, we tried to do both. I think we quickly realized that that doesn’t make any sense.

So, it was really a kind of early 2016 that we made the decision to say, “You know what, we’re going to focus on enterprise as our initial segment.” So, we did split the market and we effectively said, “It’s the world’s Global 2000 top organizations. That’s who we care about from a commercial perspective.” Because that’s going to then tailor what are the products for building, what does our pricing and packaging look like, who are we hiring for a sales and marketing teams. And so, that was roughly our focus